Consolidation in Canada's property and casualty insurance sector could gain speed in the coming months as European players sell assets in this country, while a government move to allow demutualization next year could flood the market with targets. Both Fairfax Financial Holdings and Westaim Corp - which owns insurer JEVCO - are seen as likely buyers of assets in the near term, bolstered by improved industry profits over the past two years.
Larger rival Intact Financial Corp may have its hands full integrating last month's C$2.6 billion acquisition of AXA Canada but could reenter the fray next year. "What we could see more short term is the possibility of more divestitures by European financial institutions," said Paul Holden, an analyst at CIBC World Markets. Holden expects the insurers will have plenty of targets as large foreign insurers hurt by the financial crisis sell off subsidiaries to strengthen their balance sheets.
Such thinking may have factored into Intact's purchase of AXA Canada from its Paris-based parent, as well as by Fairfax's recent purchase of a stake in troubled Bank of Ireland. While a small group of P&C insurers are publicly traded within Canada, many more are owned by foreign companies or by the policyholders themselves, who vote on big decisions and receive some profits in the form of distributions.
The federal government launched consultations on a framework for P&C demutualization - the process of taking the policyholder-held companies public - during the summer, and is expected to have rules in place by early next year. "We believe that other mutual insurers could demutualise which in turn may lead to a period of consolidation, similar to what occurred in the life insurance industry over a decade ago," GMP Capital analyst Stephen Boland said in a note.
Canadian life insurers went through the process beginning in the late 1990s, triggering several years of consolidation that has resulted in a sector now dominated by three players, the biggest of which is Manulife Financial. By demutualising, P&C insurers could receive a windfall from the sale, as well as greater access to capital.
While it's unclear how many mutually held insurers will go public, Economical Insurance Group is already preparing to demutualise, and will make a sizeable player when it hits the market, said Gavin Graham, president of Graham Investment Strategy in Toronto. "If you do the enterprise value, it's C$1 billion or thereabouts," he said, noting that the company could decide to pursue an initial public offering, or a sponsored demutualization, in which another company would buy all or part of the insurer.