September 8, 2021 - Last week, Definity Financial Corporation filed a preliminary prospectus with the intentions to list on the TSX Index under the symbol "DFY". Terms of the IPO have yet to be determined.
This IPO is a little unique in that Definity will be a newly created corporation which will fall under the Insurance Companies Act (ICA). The offering is being made as a result of Economic Mutual Insurance Company transitioning from a mutual insurance company to a company with share capital pursuant to the ICA - this is what is known as "demutualization". Here is an exert from Economical Mutual that explains it:
Unlike most companies which are share companies, mutual companies do not have shareholders who own shares of the company. Demutualization is the process where a mutual company converts into a company with shareholders. We will continue to provide home and auto insurance for personal and business needs, but after demutualization we will no longer have mutual policyholders and our shareholders will have governance rights.
One of the major benefits of this type of move, it will increase the company's financial flexibility. As a mutual insurance company, it is subject to higher leverage restrictions. Once the move is finalized, Definity expects that it will be able to add upwards of $600M in incremental financial leverage to its balance sheet. With a targeted MCT ratio of around 200% (comparable to others in the industry), it had excess capital of ~$437M which could be returned to shareholders, or re-invested back in the company.
Definity will be the parent holding company of Economical Insurance.
Economical Mutual Insurance Company is one of the leading P&C insurers in Canada. It has more than one million policies in force and has a national presence with operations in all provinces and territories. Ontario is its largest market which accounts for 59% of gross written premiums (GWP).
According to the company, it is the seventh largest provider of P&C insurance in Canada, with a market share of 4.3%. It had approximately $3.0 billion in GWP for the 12 months ended June 30, 2021. Of that, 74% stems from personal lines which include auto, property, liability and pet insurance.
As a P&C insurer, it competes directly with current Bull List company Intact Financial (TSX:IFC).
Beyond Economical Mutual, brands under Definity include Sonnet Insurance Company, Family Insurance Company and Petline Insurance Company.
Worth noting, two major shareholders will emerge as part of this offering. The Healthcare of Ontario Pension Plan (HOOPP) will purchase an amount of shares equal to 19.9% of the issued and outstanding common shares on a non-diluted basis. Swiss Re Investments Holding Company has agreed to purchase US$200M worth of shares. The number of shares will be determined by the offering price.
Having two major investment partners is a pretty big vote of confidence. Especially from HOOPP which is one of the best capitalized and performing defined benefit pension plans in the country.
The Canadian P&C Insurance Industry is a mature industry but has still provided consistent organic growth to the tune of a 5.1% CAGR over the past decade. Nothing flashy, but consistent and reliable growth.
TO spur additional growth, the company expects to expand its digital direct insurance offerings through Sonnet's online platform. It also wants to increase its share of the broker channel market by leveraging Vyne, its end-to-end digital broker system it launched back in 2018. Since the industry is still highly fragmented, acquisitions will also be a part of Definity's strategy.
Historically, Economical Mutual hasn't been too active with its last acquisition coming in 2017 when it picked up Petline insurance. We expect the company to be more active here now that it will have added financial flexibility. \
Finally, Definity also expects to pay a dividend - which at this point is a necessity to compete with other publicly traded peers. Details have not yet been released and may not be released until the final prospectus is filed.
Overall, we like the space and Intact Financial is the only other Top 10 P&C Insurance company currently listed on the TSX Index. That makes Definity an interesting IPO, especially for those looking for an alternative to Intact Financial. We like industries which have limited options in terms of publicly traded companies. It is one of the reasons we were attracted to Intact Financial and Park Lawn Crop as Bull List additions - both of which have fared quite well.