Some acquisitions are simply too enticing to pass up, and for Intact Financial Corp. CEO Charles Brindamour, swallowing Britain’s RSA Insurance Group PLC ticks this box – even if he has to write his biggest corporate cheque to date, in the middle of a pandemic.
Intact’s chief executive has a rich history of successful deals, but this time around, he is more than doubling the price tag, relative to previous major takeovers, for a storied insurer with substantial operations in Scandinavia, Canada and Britain.
Even in the best of times, the pivot could be troubling. The Empire building across the Atlantic is fraught with risk.
Yet the early reaction to Intact’s joint takeover proposal for RSA, with Danish insurer Tryg as a partner, is rather positive. Key to this optimism is the unique chance for Intact to bulk up in its highly fragmented home market. “Buying RSA Canada is an obvious win,” CIBC World Markets analyst Paul Holden wrote in a note to clients Friday. RSA Canada is a division of the parent company.
Intact is already the largest player in Canadian automobile and property insurance with an estimated 17-per-cent market share. Buying RSA Canada would add 5-per-cent more, and it is widely regarded as a well-run business.
To justify the 48-per-cent premium that Intact has proposed paying for the entire company, the Canadian insurer will have to deploy its data expertise, which provides an edge over rivals when pricing premiums and deciding which books of business to underwrite.
And, more importantly, Intact will have to convince investors that the extra geographical risk is worth it. Intact has long admired RSA Canada, but it was never clear if inheriting the foreign divisions made sense. In fact, the geographic footprint has been a major hurdle for multiple speculated suitors of RSA over time.
"The barrier for M&A in the past has been the complex nature of splitting up the group,” RBC Dominion Securities analyst James Pearse wrote in a note to clients Friday.
By teaming up with Tryg, which will take full ownership of RSA’s operations in Sweden and Norway, as well as half of the Danish division, Intact found an elegant solution.
Yet the split leaves Intact responsible for RSA’s British and international division, and this group has largely scared investors away from RSA’s shares. The company endured an accounting scandal in its Irish division in 2013, and more recently, had to navigate a profit hit and a management shakeup in its British arm in 2018.
The hope has to be that Intact can keep turning the British division around. Since new leadership was installed in 2018, the business has exited less-profitable business lines and also improved its combined ratio – a measure of costs to premiums – to roughly 97 per cent.
Intact’s own ratio is estimated to be below 90 per cent – for this metric, the lower it is, the better for the company – and the expectation is that RSA’s will fall closer to this as time passes.
To this end, Intact has already shown it is capable of such a feat, CIBC’s Mr. Holden noted. “The story was similar with OneBeacon, which Intact has proven to be a success,” he wrote.
The unknown is why Intact felt the need to act now. If the deal is so lucrative, why not pounce a year ago, before a pandemic was even on the radar?
Intact declined to comment, citing continuing discussions with RSA, but the timing of mergers and acquisitions is not an exact science.
For one, Intact has been busy integrating OneBeacon, and the insurer also bought The Guarantee Company of North America and Frank Cowan Company Ltd. last year for a combined $1-billion. Those deals did not close until December, 2019. Only so many takeovers can be handled at once.
Intact’s current share price is also a crucial variable. The pandemic actually has been good to the insurer because there have been fewer auto claims, and there also haven’t been major weather-related events.
With Intact’s share price doing well, the company can now finance a large equity raise, estimated to be just shy of $4-billion, and sell fewer shares in the process, which makes the deal more profitable.
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