Financial giant Desjardins Group is acquiring the Canadian arm of U.S. mutual insurer State Farm Life Insurance Co., in a move that will transform Desjardins into Canada's second-largest property and casualty (P&C) insurer.
The deal for State Farm Canada, which has a sizable auto insurance business and also provides home and life insurance among other services, will nearly double Desjardin's annual premiums written to $3.9-billion from about $2-billion, according to a statement from the Montreal-based company Wednesday.
Upon completion of the deal in January, 2015, Desjardins, already the country's largest co-operative organization, will have close to 9 per cent share of Canada's P&C insurance market, roughly double its current level.
Because both Desjardins and State Farm are co-operative groups, owned by their users rather than shareholders, they do not need to disclose the price paid in the deal. Tom MacKinnon, analyst at BMO Nesbitt Burns estimates the amount at $1.35-billion based on a calculation related to the P&C business's book value.
To make up for the capital paid to State Farm, three groups will contribute capital back into the mutual business. Desjardins Group and its subsidiaries will contribute $950-million. State Farm will invest $450-million in non-voting preferred shares in the combined P&C business, and Crédit Mutuel, a France-based co-operative bank insurer, will add $200-million.
"We came to the conclusion that our preference would be to consider partnerships and transactions within the co-operative movement," said Monique Leroux, chief executive of Desjardins Group, in an interview. Desjardins is now in the position to create an insurance leader in Canada, she said.
One of Ms. Leroux's strategic goals for the company is to develop a stronger presence outside Quebec. More than half of Desjardins's group and business insurance is already outside its home province.
State Farm has a network of 1,700 employees spread across Ontario, Alberta and New Brunswick. It has been in Canada since 1938 and has about 1.2 million customers here. Desjardins intends to continue operating the company under the State Farm label for an undisclosed period.
State Farm Canada is primarily a P&C company, with 92 per cent of annual premiums coming from that business line. The mutual insurer has struggled to achieve underwriting profitability in recent years, but returned positive results in 2012, Desjardins said. "They've made a lot of progress," Ms. Leroux said.
The transaction does not pose an immediate threat to Intact Financial Corp., Canada's largest P&C insurer, which has a 17 per cent market share, analysts said. State Farm would not have been an ideal fit for Intact, according to a research note by Geoffrey Kwan, analyst at RBC Dominion Securities.
Desjardins is positioning itself as the first choice for credit unions or mutual companies looking for partnerships in areas such as business banking.
The investment from Crédit Mutuel was an important part of Wednesday's deal, Desjardins said in its release. Desjardins formed an alliance with the group in 2011 with the aim of working on "mutually beneficial business ventures."
Desjardins favours deals that would keep credit union members from being moved to non-co-operative business models through acquisitions. Its alliance with Crédit Mutuel and State Farm could lead to more opportunities to work together on other projects, Ms. Leroux noted.
The State Farm Canada transaction still depends on regulatory approval and other closing conditions.