After 16 months of negotiations, Desjardins has taken hold of State Farm’s Canadian operation, largely for the benefit of its subsidiary, the Desjardins General Insurance Group (DGIG), although the deal will have an impact on its life and health insurance business as well.This transaction will make Desjardins the second largest property and casualty insurer in Canada. In an interview with The Insurance and Investment Journal on Jan. 15, the day the transaction was announced, CEO Sylvie Paquette pointed out that it will also make Desjardins the largest P&C insurer in Ontario.
With the transaction she is realizing a goal she had previously set for the company, namely to make Desjardins one of the top three insurers in Canada. By acquiring State Farm’s Canadian business, Desjardins is nearly doubling its premium volume in property and casualty insurance in Canada, going from $2 billion to $3.9 billion.
State Farm’s Canadian business was not for sale, but Desjardins had been eyeing it. In September 2012, the insurer decided to contact State Farm leaders to discuss a potential transaction, says Ms. Paquette
“Denis Dubois, our vice president of claims, acquisitions, and general manager of our business in English Canada, left a voicemail for the CFO of State Farm, Paul Smith, one Friday morning. To our surprise, on the following Monday, he returned the call. While the Canadian business represents only 3% of State Farm’s volume, the CFO (Smith) was very aware of what was going on,” explains Ms. Paquette.
Two weeks after the call, DGIG executives went to Chicago, Illinois. At the headquarters of the largest mutual insurer in the United States, they met with five of State Farm’s senior executives, including its COO and CFO. “We came to tell them why we had approached them and why they should agree to consider our approach,” she says.
The head of DGIG admits that the State Farm executives were difficult to convince, but she emphasizes that the mutual insurer has an “exceptional” business culture. “This is why we came to an understanding. We were proposing a better solution for their Canadian operations,” comments Paquette.
Injecting $450 million into a transaction that totals $1.6 billion, State Farm also won the right to sit on DGIG’s board. “With all the changes occurring in the industry, including telematics and driverless cars, this is an incredible opportunity to be able to say that we can sit down and discuss things with them, given the expertise they have developed in the United States. I feel privileged in that regard,” added Paquette.
The transaction also involves the European Crédit Mutuel group, which is paying $200 million into the transaction. As for Desjardins Group, it is contributing $700 million.
Ms. Paquette also believes that the transaction will create jobs in both English Canada and Quebec. “State Farm had a significant presence in Ontario. However, they had only delegated operations people. Everything was done from the United States, including actuarial. So it will be necessary to repatriate all of that from down there. So we will be creating jobs in Ontario, but there will also be some in Quebec,” she says.
The transaction is scheduled to close in January 2015. Before that date, Desjardins can make use of State Farm’s Canadian business under the latter’s name, for a period agreed upon by both parties.
Once the transaction has been completed, Desjardins will bring State Farm’s 1700 Canadian employees into its network of over 500 agents. State Farm has 1.2 million customers in Ontario, Alberta and New Brunswick. Furthermore, the Desjardins Group will continue to operate its other insurance brands separately across the country.
Impact on life insurance
The transaction will also have an effect on life insurance. Desjardins Financial Security will take over State Farm’s Canadian business in individual life insurance, mutual funds, loans, and living benefits. For this business, the insurer is paying $250 million in the transaction.
Desjardins used to be neck and neck with Industrial Alliance Insurance and Financial Services for the fourth place ranking in Canadian life insurance. This transaction allows Desjardins to take the lead over its Quebec-based rival.
Portrait of an American giant
State Farm and its affiliates are the largest providers of car insurance in the United States. In addition to providing auto insurance quotes, the 18,000 agents and more than 65,000 employees of the company are responsible for 81 million policies and accounts, including more than 79 million auto, home, and life insurance policies in the United States and Canada, and nearly 2 million banking accounts. The company is number 34 in Fortune magazine’s list of the 500 largest companies.
The mutual insurer was founded in 1922 by a retired farmer. It now offers more than 100 different products and handles an average of more than 35,000 claims per day through its 17,000 branches.