Travelers to Buy E-L’s Dominion of Canada for $1.1 Billion
Dominion will be combined with Travelers’ operations in Canada and have headquarters in Toronto, the New York-based buyer said today in a statement. The deal is expected to be completed in the fourth quarter, according to the statement.
“We view Dominion as a turnaround story,” Barclays Plc analysts led by Jay Gelb said in a note to clients today, citing underwriting losses in the past five years and pressure on the operation selling auto coverage. “Our sense is Travelers would have been better off repurchasing more of its own stock.” Gelb has an overweight rating on the buyer.
Travelers, led by Chief Executive Officer Jay Fishman, 60, has been seeking growth outside the U.S. The insurer in 2010 struck a deal to take a stake in Brazil’s J. Malucelli Participacoes em Seguros e Resseguros SA.
“This transaction is consistent with our strategy to make thoughtful investments in attractive markets outside the United States,” Fishman said in the statement.
The transaction will be “slightly accretive” to earnings per share in 2014 and won’t have a significant effect this year, Travelers said. The insurer said it may fund the deal with a combination of debt, preferred stock and internal resources and doesn’t expect a large influence on share repurchases.
“Financial flexibility is provided by insurance subsidiaries that can pay approximately $2 billion of dividends by the end of 2013 to the holding company without prior regulatory approval,” Fitch Ratings said in a note today affirming the insurer’s credit ratings.
Travelers slipped 0.2 percent to $83.30 at 4:15 p.m. in New York. Toronto-based E-L gained 9.5 percent to C$647.99.
The deal will help E-L narrow its focus to life and health coverage and savings products such as mutual funds and annuities through Empire Life Insurance Co. E-L said it hasn’t determined a plan for the sale proceeds.
Brigid Murphy, CEO and president of Dominion, will hold both roles at the combined Canadian operation. George Petropoulos, who leads Travelers Canada, will become vice chairman of the new organization.
Dominion was founded in 1887 and was initially led by Sir John A. Macdonald, Canada’s first prime minister. The company got about 60 percent of its policy sales last year from auto coverage and the remainder from personal property and commercial property-casualty policies, according to a filing. Three-quarters of its sales came from Ontario.
The purchase price is about 27 percent higher than Dominion’s shareholder capital of C$882.6 million ($866.4 million) at the end of March. The E-L unit had net income of C$40.3 million in 2012, the filing shows. Its investment portfolio was valued at more than C$2.6 billion as of Dec. 31, led by fixed-income holdings including Canadian corporate debt and government securities.
E-L joins Canada’s Sun Life Financial Inc. in agreeing to divest operations to U.S. buyers in the past year. Sun Life struck a deal in December to sell a variable annuity business to a firm owned by shareholders of New York-based Guggenheim Partners LLC. Toronto-Dominion Bank and Canadian Imperial Bank of Commerce are among firms that expanded after the 2008 financial crisis by acquiring assets from struggling U.S. firms.
Travelers has been among the most stable U.S. property-casualty insurers. Fishman, as CEO of St. Paul Cos., built the company by engineering a $17.9 billion takeover of Travelers Property Casualty Corp. in 2004 and kept it profitable through the financial crisis by shunning mortgage-linked investments that hobbled rivals such as American International Group Inc.
More recently, Fishman has said he is focusing on boosting the prices Travelers charges customers to improve returns. U.S. property insurers have faced pressure in recent years as low interest rates hurt income from bond portfolios and natural disasters increase claims costs.
“We are a no-excuses company in a no-excuses industry,” Fishman said in an April letter to shareholders, explaining his actions to boost returns. In the middle of 2010, “we embarked on a deliberate, carefully calibrated strategy of selectively but actively raising rates.”
Skadden, Arps, Slate, Meagher & Flom LLP and Gowling Lafleur Henderson LLP provided legal advice to Travelers.
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