Desjardins Shakes Up Market with State Farm Canada Buy
In a move that will catapult a credit union to become one of the largest providers of property and casualty insurance in Canada, Desjardins Group said it plans to purchase those divisions from State Farm Canada, along with its life insurance operations and Canadian mutual fund, loan and living benefits companies.
The transaction is expected to close in January 2015, subject to approval from regulators and compliance with customary closing conditions, the $210 billion cooperative Desjardins Group in Lévis, Québec, and State Farm in Bloomington, Ill., said on Jan. 15.
Following the closing, Desjardins will operate the newly acquired State Farm Canada businesses under the State Farm brand for an agreed license period, the companies said.
As part of the agreement, State Farm said it will make a $450 million investment in non-voting preferred shares into Desjardins’ post-closing property and casualty insurance business, which will include the newly acquired State Farm Canada property and casualty operations.
In addition, Crédit Mutuel, a major European cooperative financial group and long-term partner of Desjardins, will invest $200 million. Desjardins said it will allocate capital of approximately $700 million to support the growth of its P&C business.
Desjardins Group’s Life and Health Insurance subsidiary, Desjardins Financial Security and other units will allocate $250 million for the life insurance, mutual fund, loan and living benefits components of the agreement.
Desjardins will become the second-largest P&C insurance provider in Canada with annual gross written premiums of approximately $3.9 billion, up from approximately $2 billion, according to Desjardins. The transaction also strengthens Desjardins’ position as the fourth-largest life and health insurer in Canada, the company noted.
Once the transaction is finalized, State Farm’s 1,700 Canadian employees and more than 500 Canadian agents will continue to serve more than 1.2 million customers in Ontario, Alberta and New Brunswick, the companies said.
Desjardins said it expects the transaction will lead to job creation in the coming years in Canada, including Québec. The company said it will also continue to operate its other insurance brands separately across the country.
With assets near $200 billion, Desjardins is the largest cooperative financial group in Canada and the fifth-largest cooperative financial group in the world, the financial institution said.
State Farm and its affiliates are the largest provider of car insurance in the U.S. and a leading insurer in Canada, the company said. In addition to providing auto insurance quotes, its 18,000 agents and more than 65,000 employees serve 81 million policies and accounts – more than 79 million auto, home, life and health policies in the United States and Canada, and nearly two million bank accounts.
Here in the U.S., the Desjardins acquisition of State Farm Canada isn’t expected to impact State Farm operations, André Chapleau, Desjardins media relations strategic adviser, told Credit Union Times. “We do feel however, from a Canadian perspective, that by concluding this deal with mutuals such as State Farm and the Crédit Mutuel, from France, along with Desjardins Group, the largest financial co-operative group in Canada, we do help the co-op movement gaining more awareness and positioning it as a viable alternative to traditional banks,” Chapleau said.
Indeed, Desjardins is looking at the long-term implications of such a pivotal acquisition, according to
Monique Leroux, board chair and president/CEO of Desjardins.
“It also provides a foundation for exploring additional opportunities for even greater collaboration in Canada in the future,” Leroux said in a statement. “This transaction is clearly aligned with Desjardins’ strategic objectives to expand insurance distribution across the country and develop business opportunities with mutual and cooperative organizations.”
Edward B. Rust Jr., State Farm chairman and CEO, reiterated just how far the purchase will go.
“The transaction will create a well-positioned, Canadian-focused provider of property and casualty, life and financial services products that will expand on the operations State Farm’s Canadian employees and agents have built in Ontario, Alberta and New Brunswick,” Rust said.
State Farm certainly has strong connections to credit unions in the U.S. In October 2006, the 12 credit unions that serve the company’s employees made history when they merged into one $2.84 billion financial institution at the time. State Farm Federal Credit Union in Bloomington, Ill., is now a $3.9 billion cooperative serving more than 130,000 members.
Credit Union Times contacted Tom DeWitt, president/CEO of State Farm FCU, for a reaction to the Desjardins pending acquisition of State Farm Canada’s insurance business. DeWitt referred questions to Phil Supple, State Farm’s director of public affairs.
“We still need to proceed through the customary closing details and regulatory review. That said, we have shared, generally, that we do not expect this transaction to have any impact on State Farm U.S. operations,” Supple said.
At the time of the 12-way State Farm credit union merger, there were also concerns on whether the newly merged State Farm FCU would eventually merge with State Farm Bank, a $14.9 billion financial institution that received a thrift charter from the Office of Thrift Supervision in November 1998. Just as those claims were emphatically denied back in 2006, Supple said a merger will not occur.
“It is still our position that the two entities, State Farm Federal Credit Union and State Farm Bank, will remain separate,” Supple noted.
Meanwhile, the pending acquisition by Desjardins makes the company truly a national P&C player in Canada, outside of just Quebec and western Canada, with greatly increased distribution capabilities in important geographies like Ontario, said Todd Eyler, research director for Boston-based Aite Group’s insurance practice.
“For property and casualty lines of business, by becoming the second largest P&C writer in Canada, Desjardins should benefit significantly from scale-related advantages (including) discounts and high service guarantees from their claims supply chain vendors – auto repair shops, rental car providers, and other types of contractors and service providers,” Eyler said.
Within life and annuity-related businesses, interest rates and interest margins remain at historically low levels so spreading fixed costs over a larger asset base helps margins, Eyler explained.
“Increased distribution scale with life and annuity benefits will also allow Desjardins to benefit more from baby boomer-related purchases of these kinds of products,” he said. “Increased scale will also make it easier to invest in technologies to meet the direct channel needs of millennial customers.
Looking even further down the road, the transaction sends “a powerful signal reinforcing the long term economic value of stitching banking and insurance into a one-stop financial services shopping experience for consumers,” said Jeff Chesky, president/CEO of Insuritas, an East Windsor, Conn.-based provider of outsourced insurance agencies based that counts credit union among its clients.
“This will remind credit unions in the U.S. how vital non-cyclical fee income will be to their long-term financial success,” Chesky offered.