Intact Financial Corp Update

Intact Financial Corp Update

After a decade of buying up rivals to become Canada’s largest property and casualty insurer, Intact Financial Corp. is looking across the Atlantic with its biggest deal yet.

Intact sealed an agreement Wednesday to buy the Canada, U.K. and international operations of London’s RSA Insurance Group Plc as part of a $12.3 billion (US$9.4 billion) transaction. Denmark’s Tryg A/S is taking RSA’s Swedish and Norwegian operations.

Intact’s portion of the deal is $5.1 billion and brings it into entirely new markets in Europe while bulking up its core Canadian business. It supercharges an acquisition spree that has turned the Toronto-based company into the dominant force in Canada’s non-life insurance industry, a little more than a decade after it was cast off by Dutch insurer ING Groep NV.

The RSA deal also will be a major test of whether Chief Executive Officer Charles Brindamour, 50, can replicate the firm’s success in digesting acquisitions on a larger scale and farther afield that it has ever attempted before.

“We have an established track record of integrating companies,” Brindamour, said during a press conference on Wednesday. “We’ve done that many times in the past. We feel that we are in a strong position to tackle that challenge.”

Spinoff Success

Intact traces its roots back to 1809, when a group of businessmen formed the Halifax Fire Insurance Association. That firm was acquired in the 1950s by a Dutch insurer that eventually became part of ING. In 2009, ING divested its 70 per cent stake in ING Canada Inc., which changed its name to Intact.

Brindamour, who had become CEO about a year earlier, wasted little time in bulking up the newly independent insurer. Intact bought French insurer Axa SA’s Canadian business in 2011, bolstering its domestic premiums by almost 50 per cent.

Intact went on to make 12 more deals with a total announced value of about US$3.1 billion before the RSA acquisition, according to data compiled by Bloomberg. The firm serves about one in five families and one in four small- and medium-sized businesses in Canada, Brindamour said.

So far, the strategy has been rewarded. The company’s shares have risen more than fourfold since since May 19, 2009, the day its listing as Intact became official. That compares with a 68 per cent gain for the S&P/TSX Composite Index. Intact’s market value of about C$21 billion is up about fivefold in that time.

Intact has benefited from being an independent, publicly traded company competing against policyholder-owned insurers that can’t make deals the same way, said Victor Adesanya, an analyst with DBRS Morningstar. The company also has a track record of making its acquisitions profitable by spotting trends in the market and exiting unprofitable business lines, he said.

“They’re able to deploy advanced data analytics when it comes to risk selection, segmentation and identifying risk,” Adesanya said in an interview. “They do this better than others in the industry.”

The RSA takeover -- the largest ever by a Canadian property and casualty insurer -- will put that system to the test. For one, it will add significant bulk to the company, increasing annual premiums in Canada from $10 billion to about $13 billion and boosting total premiums about 67 per cent to $20 billion.

Intact’s workforce will balloon 63 per cent to 26,000, its specialty-insurance business will grow by 30 per cent, and it will be navigating unfamiliar regulatory environments in the U.K., Ireland and Denmark.

Brindamour says he has admired RSA for a long time and has thought deeply about the complexity of an acquisition. He said he’s comfortable with the deal now because RSA’s businesses have leadership positions and Intact’s existing operations are in “very good shape.”

He noted that his company’s net operating income per share has grown at a 10 per cent compound annual rate over the past decade and revenue growth has exceeded the industry’s by about 4 per cent a year over that time.

“The reason why acquisitions make sense for us is because we’re an outperformer in the markets where we operate,” Brindamour said.

Sources

https://www.bnnbloomberg.ca/intact-caps-decade-long-buyout-spree-with-12-3b-rsa-deal-1.1524536

Reinsurance is set to grow

Reinsurance is set to grow

At various points over the past decade, we have considered expanding our asset management business to include reinsuring obligations related to long-term annuities, as the capital is of long duration and our investing skills can add value in the investing of the capital. We previously had two misgivings: the first was our strong belief that interest rates might decline, which made it unattractive to lock in long-dated liabilities at high interest rates. The second was the fact that much of the capital from reinsurance activities would need to be invested in credit instruments, and we were concerned that our credit platform was not sufficiently large to take on the scale of capital involved.

Fast forward to 2020: interest rates globally have dropped to near zero, and while rates could go negative, in our view the odds do not favor that for any significant length of time. As a result, we believe the risk involved in reinsuring long-tail liabilities is the lowest it has ever been. Furthermore, our recent partnership with Oaktree has significantly added to the scale of our credit capabilities. Together, these developments have meaningfully changed the nature of the opportunity for us.

Our first step in preparing for this opportunity was to establish our reinsurance business, and we have received a number of licenses over the past few years. The ownership of the business and its operational oversight will be conducted through our newly created Bermuda company for this purpose called Brookfield Asset Management Reinsurance Partners (BAM Reinsurance).

As a next step in building the business, we announced a strategic partnership with American Equity Investment Life (AEL) under which BAM Reinsurance will reinsure annuity policies. We have agreed to take on $5 billion of existing policies in our reinsurance company and take an additional $5 billion of future policies as they are written. The simple story is that we will receive up to $10 billion of cash, invest those funds in our alternatives and income-oriented investment strategies and, if we can out-earn the rates we pay on the liabilities, we will do very well.

In order to set up this business for the long term but continue to have this reinsurance entity benefit from everything that exists at overall Brookfield Asset Management Inc., we are planning to replicate the success we have had pairing corporations and partnerships for each of our businesses. Thus, we will split off to all shareholders of Brookfield Asset Management a fractional share of Brookfield Asset Management Reinsurance Partners. Each new whole share of BAM Reinsurance, once assembled from fractional shares on distribution to you, will be equivalent in value to a current BAM Class A share. For those of you who follow our listed partnerships, you will know that we have done comparable distributions of “paired” securities in the past. In all cases, the “paired” corporate shares have traded in tandem with the partnership units, thanks to their equivalent distributions and exchange features.

Subject to the receipt of regulatory approvals, we plan to complete the distribution of BAM Reinsurance shares in the first half of 2021. The distribution will amount to a dividend of approximately $500 million of capital, or approximately a $0.33 for each BAM share you own.

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management Inc.

November 12, 2020

Postscript

Insurance companies sell contracts not "products". Products are manufactured goods. Insurance companies like the term product as a sales gimmick to make it seem as though it is a solid object. These contracts are agreements to assume risks. The insurance company gets regular payments for this risk. If there is a claim they have lawyers on staff to negotiate low pay, slow pay, or no pay on claims. The claim language is twisted in legal terms so avoidance of payment or redefining what the contract specifies as payment can be manipulated by the insurance company.

Brookfield is wise to get into this business. Buffet saw an insurance company as a basis for his empire too. It's free money to invest with inflation, actuaries, and lawyers on the side of the insurance company.

Alternatives are the solution

Alternatives are the solution

Low interest rates have been a tailwind for Alternative assets over the last 20 years. Once considered a complementary investment to a traditional fixed income and equities portfolio—and concentrated amongst the largest institutional investors, Alternatives today are an essential and growing part of most investment portfolios. The trend is also accelerating as a result of the recent moves to even lower rates and by the broad range of investments and products across Alternatives now available to investors.

As demand for Alternatives has grown, so too have the breadth and variety of investment offerings. Twenty years ago, investments in Alternatives represented roughly 5% of institutions’ investment portfolios and were largely concentrated in hedge funds and private equity. Today, that number is closer to 25%. Over the same period, the number of investible strategies has grown significantly with the emergence of private credit and real asset investing (real estate, infrastructure, and renewable energy, as examples). Going forward, our clients tell us that these allocations are increasing towards 60%.

The benefits of real assets in a normal economic environment are clear: they offer stable yield underpinned by high-quality contracts. The investments are often private in nature—and are therefore not subject to mark-to-market volatility—and returns are inflation-protected. A low-interest rate environment amplifies these benefits, and is now forcing more investors to either consider Alternatives for the first time or increase their existing allocations.

The reason for this is simple; pension plans, sovereign wealth funds, insurance companies, and many other investors have medium to long-term risk adjusted return targets that can’t be satisfied in the public equity and bond markets. A decade ago, an investor could hold a 10-Year German Treasury bond and earn a 4% yield; today the return stands at negative 1%. And while a select few large institutional investors have built out direct real asset investing capabilities, all have seen the benefits of partnering with asset managers like us who are able to leverage investment expertise and operating scale to drive investment performance and provide access to quality assets.

Across Alternatives, there are many categories of investment across the risk-return spectrum, and these numbers continue to grow to meet the demand of clients. Today we offer private investors over 15 different strategies across five different asset classes, which enables them to build a balanced real asset portfolio that can be tailored to meet their investment objectives. Our listed affiliates are an amalgam of these for public market investors. Beyond the traditional flagship funds, we offer our clients perpetual core private funds, private debt funds, listed credit products and region-specific funds. As we have grown, we have attracted new clients, and their commitments to our funds have grown, as has the average number of funds our clients invest in. From our own experience, it is clear that the allocation to Alternatives is growing faster now than it ever has, and we don’t see any reason for it to slow down.

With interest rates likely to be anchored at close to zero for the next several years, we expect this will also translate into strong support for asset valuations. Our partner, Howard Marks, recently published a letter titled “Coming into Focus” that discusses in depth how lower risk-free interest rates increase asset valuations, which we encourage you to read. We are at the very early stages of this playing out in the private markets, but as transaction activity returns, we fully expect to see higher valuations for the best assets. The recent sale of one of our office buildings in London at 10% higher than the price we paid for the property 12 months ago is a perfect illustration of this point, where lower interest rates increased the discounted cash flow value of the asset. While it could take time for transaction activity to fully ramp up, and contrary to the sentiment that has existed in the market, this sale provides us with clear evidence that the high-quality real asset portfolio we own is today worth even more than it was just nine months ago. 

Bruce Flatt

Chief Executive Officer

Brookfield Asset Management Inc.

November 12, 2020