Why investors love Definity's big acquisition, helping the home and auto insurer extend its hot run

Globe and Mail

29-05-2025

Expected industry consolidation is forcing Canada's auto and property insurers to choose between eating or being eaten, and Definity Financial Corp. DFY-T is leaving no one guessing where it stands.
On Tuesday the company, which predominately operates in Ontario, shelled out $3.3-billion for the Canadian operations of U.S. insurance giant Travelers Companies Inc., a deal that amounted to 40 per cent of Definity's stock market value.
In most circumstances, taking such a big bite would be considered a risky bet. Yet Canada's auto and property insurance market has become very lucrative for the industry's best operators, and investors are so intrigued by the growth opportunity that they scrambled to buy more Definity stock on Wednesday, both through an upsized share sale that helps finance the takeover and in the open market.
By day's end, Definity's stock jumped 11.3 per cent. Its total return, including dividends, since going public in November, 2021, is now 198.1 per cent, trouncing the 46.9-per-cent total return for the S&P/TSX Financials Index over the same period.
Travelers, meanwhile, made the opposite call. The American insurer expanded to Canada in 2013 and 12 years in, its 1.85-per-cent market share remains muted. The company's Canadian business also accounted for just 2.3 per cent of its total property and casualty – that is, home, auto and commercial – premiums in 2024.
While Travelers' shares have been on a run of their own and the company is in good financial standing, fighting Canadian rivals would take more capital, because the company would likely need to grow by acquisition. Instead, management decided to sell while home and auto insurers are trading at premium valuations. Travelers declined to comment.
The sector is scorching hot for multiple reasons. To start, home and auto insurers are seen as defensive stocks amid the stock market volatility. Banks often struggle with surging loan losses during economic downturns, but property and casualty insurers do not face the same threats.
Pricing conditions have also been favourable to insurers. Across the industry, executives often talk about 'soft' and 'hard' markets – the former is when insurers drop their prices and increase their risk tolerance in hopes of gaining market share, and the latter is when companies drop clients and hike premiums.
Canada's P&C insurers have been operating in a hard market for a few years now, and there aren't many signs of it changing. When Definity reported first-quarter earnings in early May, chief executive officer Rowan Saunders said the hard market helped premiums grow 9.6 per cent over the same quarter in the prior year.
The industry's best operators have also invested in technology that improves their risk models which, in turn, help them determine which clients are worthy of underwriting.
This means rising prices and better profits. It also means a lower combined ratio for an insurer, which is a measure of claims to premiums earned. In 2018, Definity's combined ratio was 111.8 per cent, meaning it was paying out more in claims than it was bringing in through premiums. In the first quarter, the ratio had fallen to 94.1 per cent.
Having proven its operating prowess, Definity became quite vocal over the past year about wanting to make an acquisition. The company was sitting on excess capital, and its balance sheet was in such good shape that it was comfortable adding debt to fund a large deal.
By combining with Travelers' property and casualty business – Travelers' surety business in Canada will remain with the American company – Definity vaults into fourth place, ranked by market share, and its new heft will offer the scale Mr. Rowan believes is necessary to compete in a rapidly changing technology environment. Because Definity will have more revenue, it can spread its technology expenses – to upgrade its risk systems and to transform its claims operations – over a larger pot.
And by growing, Definity can mimic the expansion strategy that has been so successful for Canadian rival Intact Financial Corp. Once known as ING Groep NV's Canadian arm, Intact rebranded in 2009 after ING sold the business to public investors. Intact then went on an acquisition spree in Canada, the United States and, most recently, in Britain with its deal to buy RSA Insurance Group. The growth abroad has impressed investors, because Intact has successfully integrated its takeover targets and increased profits in the process.
In an interview Tuesday, Mr. Saunders said his immediate focus is to integrate the Travelers' business, but he added, 'We still have capital to keep deploying.' It's not yet clear who else would consider selling, but the more the industry consolidates, the better it is for top operators, because pricing power will only increase.