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Intact Financial buys U.S. specialty insurer for C$2.3 billion | Canadian Insurance
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Intact Financial buys U.S. specialty insurer for C$2.3 billion

The company also announced a significant decline in first-quarter operating income

Intact Financial Corp. announced on Thursday it is paying C$2.3 billion for U.S. specialty insurer, OneBeacon Insurance Group Ltd., as it is also reporting that its net operating income for the first quarter (Q1) of 2017 declined by more than one-third year-over-year.

Under the terms of the all-cash deal, OneBeacon shareholders will receive US$18.10 cash per common share, a 14% premium based on OneBeacon’s closing stock price on the New York Stock Exchange of US$15.89 as of May 1, 2017 and a 15% premium to the volume weighted average price over the last 30 days. This represents an aggregate cash consideration of approximately US$1.7 billion or C$2.3 billion. In addition, OneBeacon debt of approximately US$275 million will remain outstanding, according to Intact’s announcement.

“We’ve been looking to grow our business outside of Canada, and identified the U.S. small to mid-size commercial and specialty market as an attractive entry point,” said Charles Brindamour, CEO of Intact, during a conference call following the announcement. “The key was finding the right company – not only from a strategic, operational and financial perspective, but also for overall fit. I’m very pleased to say that OneBeacon checks all those boxes.”

Expect cross-border sharing of products

The acquisition is expected to help Intact compete more effectively against international insurers and bolster its business with new products and cross-border capabilities, explained Brindamour.

For example, Intact would likely be able to make use of OneBeacon’s products in technology, entertainment and environmental insurance, according to Alain Lessard, senior vice president for Intact’s commercial lines. And Intact could share its expertise in contract surety and farm insurance with the OneBeacon organization.

Brindamour also noted that the representation of Intact’s business lines would be more balanced with the acquisition. Currently, specialty insurance comprises 8% of the Canadian company’s business but that would grow to 23% with the addition of OneBeacon’s business.

The transaction is expected to close in the fourth quarter of 2017 and is subject to satisfaction of customary closing conditions, including OneBeacon shareholder approval and receipt of required regulatory approvals.

Intact announces lower year-over-year operating income

In addition to announcing this new venture, Intact’s executive team also had to explain a significant decline in its operating results. Net operating income fell to $123 million, a decline of 38% from the result of $197 million in Q1 2016. The company’s combined ratio hit 98.2%, higher than the 92.5% it achieved during the same period last year.

The decreased net operating income is a consequence of “elevated catastrophe losses and higher non-CAT weather claims frequency [that] obscured a solid underlying performance, especially in the property lines of business,” said Louis Marcotte, chief financial officer at Intact, during the conference call.

The firm also experienced elevated catastrophe losses of $88 million net of reinsurance, which is four times higher than historical averages for first quarters.

However, the company also saw increased financial results through certain channels. “Our distribution activities delivered $24 million to our pre-tax operating earnings in the quarter, $10 million higher than last year primarily due to growth in our broker network and improved margins,” said Marcotte. “Our investment portfolio delivered consistent investment income at $105 million, slightly above last year.”

Overall, Marcotte stated the company’s balance sheet “remains very strong” with total excess capital exceeding $1 billion and the minimum capital test standing at 223%, which he described as a “good position to be in” as Intact goes forward with its acquisition.