Property and casualty insurer EGI Financial Holdings Inc. recently followed Canada’s biggest player in the non-standard auto insurance business, Toronto-based Kingsway Financial Services Inc., into the lucrative U.S. market.

In December, Toronto-based EGI signed an agreement to provide reinsurance to Atlanta-based AssuranceAmerica Corp. for up to US$15 million in gross premiums. This is EGI’s first step in establishing a U.S. presence, says EGI CEO Douglas McIntyre, and hopefully not its last. EGI is focusing on acquisitions in the U.S. southeast, Midwest and California markets, and recently hired vice president of business development John Czerwinski to spearhead this initiative.

A major incentive to expand south of the border is the size of the U.S. market. It’s big, not just because of its population, but also because non-standard — also known as high-risk — insurance is 20% of the P&C market there, vs 10% in Canada. (In Canada, standard auto insurers move in and out of the non-standard space by lowering underwriting standards when profits in the sector are high.)

But there is a second reason: the U.S. is free of the government involvement and interference that shackles the Canadian industry.

In British Columbia, Manitoba and Saskatchewan, government agencies provide full auto insurance. Quebec provides bodily injury coverage. Alberta, where non-standard auto insurance is currently unprofitable, has capped premium rates. And Newfoundland and Labrador has banned the use of almost all the critical rating and risk selection factors, including age, marital status, gender, age of vehicle, use of NSF cheques, no-fault accidents and lapses in previous coverage. New Brunswick has just demanded a 9% drop in premium rates, which could make non-standard insurance unprofitable there.

That leaves only Ontario, Quebec, Nova Scotia and Prince Edward Island as potential growth areas.

EGI has not ruled out acquisitions in Canada, but these would probably be specialty books of business or managing general agents at which the principals were approaching retirement.

In the more coveted U.S. market, EGI’s target is US$110 million in gross premiums by the end of 2006. It’s looking for acquisitions in the US$55 million-US$220 million range. As with AssuranceAmerica, EGI may start by providing reinsurance to a company it is interested in acquiring. (AssuranceAmerica’s principals, who are more than 65 years of age, are not currently interested in selling but may be in the foreseeable future. EGI would certainly look at buying the company should it go on the market.)

“We are looking for a great company with a good management team,” says McIntyre. “We feel we can add capital and strict management discipline. We are very good at taking things that are not working well and fixing them.”

After all, McIntyre and his team successfully turned EGI into a profitable firm. EGI’s roots go back to 1997, when Guelph, Ont.-based Co-operators General Insurance Co. established Echelon General Insurance Co. to provide non-standard auto insurance for its agents. But Echelon didn’t have the underwriting expertise it needed for this market and, as a result, didn’t do well. Co-operators sold half of Echelon to EGI Investments Inc. in 2001; non-standard underwriting experts were brought in and EGI Financial was set up to be the holding company for Echelon.

In 2002, Canadian Insurance Marketing Inc. bought out EGI Investments and acquired Co-operators’ interest through a share exchange, which lowered Co-operators’ equity interest to 43%.

CIMI also added subsidiaries EGI Insurance Managers Inc. , an underwriting manager and insurance agency that works with MGAs to develop and market specialty insurance products, and Barbados-based CIM Reinsurance Co. Ltd. , which is currently inactive but will be used when EGI enters the U.S. market as an owner.

McIntyre, who had previously been with Toronto-based Pafco Insurance Co. , a non-standard insurance company bought by U.S.-based Allstate Corp. in 1998, came on board at EGI in 2002. It is his team, which includes other ex-Pafco executives, that turned EGI around.

Gross premiums written are expected almost to triple to $110 million in 2006, from $37.9 million in 2002, and assets have more than tripled to $282.9 million as of Sept. 30, 2006, from $94 million as of Dec. 31, 2002. There is no debt.

Net income before unusual or non-recurring items was $11.7 million in the nine months ended Sept. 30, vs $8.2 million in the same period a year earlier and only $1.3 million in the first nine months of 2003. The increase is mainly the result of strong underwriting success. EGI’s combined ratio — losses and operating expenses as a percentage of net premiums earned — was 86.2% in the first nine months of 2006, way down from 96.8% in 2005 and 106% in 2003.

@page_break@EGI went public in December 2005 at $10.50 a share, with the company issuing 1.67 million shares from its treasury and Co-operators selling 1.67 million shares, resulting in 9.6 million shares outstanding. The share price hovered around $10 until this past June, then bottomed at less than $8 this past September, following disappointing second-quarter financial results. The shares were back up around $10 in early January, reflecting better third-quarter results and the AssuranceAmerica announcement.

Although disappointed that the stock is currently trading at lower multiples than comparable companies, McIntyre is confident it will go back up. “The market will recognize our growth and profit potential as investors become more familiar with us,” he says.

With the IPO, Co-operators’ equity interest has fallen to 18%. A labour-sponsored fund, Covington Fund II Inc. , owns about 10%, and management and directors own another 16%.

Personal lines insurance, which includes motorcycles as well as non-standard auto, accounts for 90% of EGI’s business. The specialty niche programs (see below) are small, at 10%, but developing. McIntyre believes they could account for as much as half of EGI’s revenue in another seven to eight years.

Here is a look at EGI’s businesses and their prospects:

> Non-Standard Auto Insurance. The big growth will come from U.S. acquisitions, but EGI believes it can also grow market share in Ontario, Quebec and the Maritimes. In Quebec, Echelon is contracting new brokers and introducing new products, such as motorcycle insurance. Premiums are higher in Quebec, so the average premium for collision insurance tends to be almost equivalent to bodily injury plus collision in Ontario. Echelon’s non-standard auto premiums in Quebec were up about 50% to $4.7 million in the nine months ended Sept. 30, compared with the same period a year earlier.

Like all non-standard auto insurers, Echelon believes it can identify drivers who are good risks from among those who don’t qualify for standard insurance. The trick, says McIntyre, is to identify the drivers who are sincere about wanting to change and then make sure the risks are properly rated.

EGI is financially and physically able to take on a lot more business. It is very well financed, with a capital solvency test margin of 345% of capital required, vs the industry average of 240%. Its net written premiums are at 1.4 times equity, vs the 2.5 times that it could be writing.

Non-standard auto is a tricky field because it is not formula-based. A company needs experienced underwriters who can distinguish good risks from bad ones. As a result, there aren’t a lot of competitors, and EGI believes it is “measurably better on service.”

Kingsway, Pafco and Toronto-based Perth Insurance, which is owned by Economical Insurance Group of Waterloo, Ont., are also in this market. McIntyre believes the Pafco model — a subsidiary owned by a standard insurer — isn’t the best one because the subsidiary is always fighting to get resources from a parent that isn’t deeply familiar with its business, a problem Echelon faced when it was wholly owned by Co-operators.

Perth, on the other hand, is rural-based and sold only by brokers who represent Economical.

McIntyre also notes that Kingsway and Pafco are both saddled with old computer operating systems, while EGI is moving to a new one.

EGI’s non-standard auto insurance is sold 20% through Co-operators’ agents and 80% through independent brokers.

> Motorcycle Insurance. This is a new business for EGI, but it started with a bang by becoming the insurer for Riders Plus, the largest motorcycle brokerage in Ontario, which had previously used Kingsway but was interested in a higher level of service. Riders Plus will bring in about $10 million in gross premiums a year to EGI. EGI also plans to offer motorcycle insurance in Alberta and Quebec.

EGI’s target market is motorcyclists who are good, experienced drivers — for example, a 50-year-old orthodontist who has taken a motorcycle riding course and rides only on Sundays.

> Non-Standard Home Insurance. EGI plans to introduce non-standard home insurance this year. Unlike for auto insurance, most people qualify for standard home insurance. Those who don’t are those who own very old homes that have had too many claims. The people who purchase non-standard auto insurance, on the other hand, have had too many traffic tickets or collisions. There are far more traffic tickets and auto accidents than home claims.

EGI views non-standard home insurance primarily as a service to brokers who occasionally have clients needing this type of insurance rather than as a growth opportunity.

> Specialty Niches. This line of business was started from scratch in 2003. It takes time to build and a lot of due diligence is required. MGAs with expertise in a given area propose a niche product and, if approved, the MGA runs the program. EGI has to make sure that the proposed insurance has sufficient demand, that Echelon has the expertise to underwrite it and that the MGA has the ability and systems to run the program. EGI looks for MGAs with good business-management skills who are underwriting-oriented and have good internal systems and controls.

EGI turns down one in three proposals because it does not meet these criteria.

EGI currently has 54 specialty niche programs up and running, with 24 others in development. Examples include game prizes, such as “hole-in-one” car prizes for which the sponsor needs coverage in case more than one contestant makes a hole in one.

Another program is home warranty insurance, aimed at first-time homeowners who don’t have savings to cover something major going wrong with their homes, such as a furnace breaking down or an electrical system developing problems. Cov-erage is offered through mortgage originators, such as Toronto-based Xceed Mortgage Corp. , which pays for the insurance in the first year.

Other programs include truckers’ downtime insurance and employee health stop-loss insurance.

EGI’s specialty niche business is around the break-even mark. It is expected to be very profitable in the future; the infrastructure is now in place and there is sufficient staff to run many more programs than the company currently offers. IE