The Travelers Companies, Inc. (NYSE:TRV) has agreed to acquire The Dominion of Canada General Insurance Company from E-L Financial Corporation Limited for $1.1 billion.  The transaction is expected to be completed in the fourth quarter of 2012. The Dominion is a Canadian property and casualty insurer, the twelfth largest in the country with a market share of 2.9%.  The acquisition will allow Travelers to expand in the Canadian property and casualty market, particularly in the automobile section where the Dominion has a market share of 4%.
In its press release, the company suggested that it plans to fund the deal with a combination of debt, preferred stock and internal resources and does not expect it to impact 2013 earnings or its share repurchase program. The board expects a positive impact on 2014 earnings from the deal.
Our price estimate of $94 for Travelers implies a premium of 10% to the current market price.
About The Dominion
According to the E-L Financial Corporation Limited’s annual reports, the Dominion earns about $1.3 billion in revenues per year, with around $1.2 billion coming from premium income. The combined expense ratio, or the ratio between expenses and premiums is quite high, around 107% in 2012 and 108.3% in 2011. This implies an underwriting loss for the company from its insurance operations. In contrast, Travelers is well known for maintaining underwriting discipline and reported a combined ratio of 97% in 2012, despite high claims and expenses from storm Sandy.
The Dominion operates primarily in the automobile insurance domain, which accounts for more than 60% of its premium income. Personal property and commercial property insurance account for 20% of the premiums each. The loss ratio (claims to premiums, not including commissions and other operating expenses) for the automobile division is around 80%, whereas the personal property and commercial sector have maintained loss ratios around 55% and 65% respectively.
Geographically, the Dominion’s operations are concentrated in Ontario, which accounts for three quarters of the company’s premiums. Western Canada and Atlantic Canada account for 15% and 10% of the premiums respectively.
In terms of capital, the company has around $850 million in shareholder capital, well above the minimum adequate capital required by the Insurance Companies Act of Canada. Half of the capital is invested in common stocks (mostly publicly traded large cap stocks) and the rest is invested in bonds. Due to the low-interest environment, the yields from investments have been largely suppressed, with annualized investment yield around 3.5% in 2012.
The P&C market in Canada has seen some growth over the last few years. The premium volume grew at a compound annual growth rate (CAGR) of 3.4% from 2006 to 2011.  Automobile premiums account for more than 45% of the total premium volume and have also been growing at a CAGR of 3.4%. The Dominion has a market share of close to 3% in the Canadian P&C market and 4% in the automobile market.
The acquisition of the Dominion follows the 2010 acquisition of Brazilian insurer J. Malucelli Participacoes em Seguros e Resseguros SA. We will incorporate the deal into our analysis once the transaction has been completed.Notes: