Northbridge angling for acquisitions

By Stéphane Desjardins | August 19 2004 08:15PM

Northbridge Financial is eyeing one or more acquisitions in Canada. The insurer has its sights on firms active in business insurance. This project may spark the forecast wave of property and casualty insurance (P&C) mergers and acquisitions in Canada.

Byron Messier, president and CEO of Northbridge Financial, unveiled his acquisition plans during an exclusive interview at The Insurance Journal offices. Mr. Messier, like rival Igal Mayer, president and CEO of Aviva Canada, confirmed the imminent arrival of a series of mergers and acquisitions in the industry.

Northbridge owns Lombard, Federated (Federated’s life division was resently sold to Western Financial), Markel and Commonwealth.

Mr. Messier revealed that he will not dip into his reserves to finance this transaction. Instead, he will opt for share issues or debt instruments. At year-end 2003, Northbridge held $426.9 million in liquidities, on top of $125 million in unrealized gains on investments. “Our liquidities are used to fuel our organic growth”, he stated.

Mr. Messier sees a soft market on the horizon, marked by less disciplined underwriting than in 2003 (see The Insurance Journal, June/July 2004).

He lamented that, “Last year, the P&C insurance industry earned its first technical profits (profits on insurance activities alone) in 25 years. With a return on equity (ROE) averaging 11%, compared with 2% in 2002, we will not reach a ROE of 15% for the industry. All the same, insurers say they are happy with 11%. I think they should increase their rates even more to achieve a higher ROE, because the environment is riskier than before. Instead, they are lowering premiums.”

Northbridge, too, plans to raise its premiums, this year by an average of between 10% and 15%.

ROE of at least 15%

Mr. Messier is optimistic about the industry’s capacity to boost its ROE. “It’s always better to attain an ROE of 15% than to gain market share to the detriment of profitability. If it’s up to me, I would rather lose 50% of my portfolio and keep a satisfactory ROE.”

The insurer seems to be sticking faithfully to this tack. In the first quarter of 2004, it obtained a return on equity of 22.8%, in line with the 2003 ROE of 23.6%. This figure is a substantial gain from the return of 10.3% in 2001. Mr. Messier promised that he will reach the 15% mark this year, and possibly beyond.

Northbridge already posted a combined ratio of 92.8% in first quarter 2004. Here again the insurer substantially shaped up its situation. In 2003, its combined ratio was 92.6%, down sharply from 97.4% in 2002. Mr. Messier envisions a combined ratio of 95% or lower by the end of this year.

He pinned his 2003 performance on Northbridge’s being a specialized insurer. “About 90% of our risks come from business insurance. Commonwealth targets megarisks on the Fortune 500 scale. Federated is active with SMEs (small and medium enterprises), as is Lombard. Only Lombard has a personal insurance portfolio.”

Was he caught up in the Ontario auto insurance fiasco? He replied that even if his auto insurance portfolio, representing $250 million in premiums, is 80% concentrated in Ontario, he was spared by his strategy of targeting mainly affinity markets like golden age. “Drivers age 50 and up are not the biggest risks on our roads,” he continued.

What’s more, Mr. Messier pointed out that 90% of Northbridge premiums are concentrated in business insurance. “An area totally deregulated from a pricing standpoint.”

Success despite setbacks

Although he is not looking forward to the return of the soft market, Mr. Messier said he benefited from “the longest hard market cycle in his 35-year career.” Not only did he experience his fourth consecutive year of premium increases, less generous coverage and higher deductibles, but he also saw claims shrink by an average of 20% in 2003.

Is Northbridge considering divesting from Hub Financial? Mr. Messier confirmed that that there is no question of touching what he considers strictly an investment.