Desjardins’ push into Ontario auto insurance a credit negative: Moody’s

In a new report, the credit rating agency says that Desjardins’ move to acquire State Farm Canada’s businesses, including its property and casualty and life insurance operations, is credit negative for Desjardins General Insurance “because it will expand its property and casualty insurance business in the competitive Ontario personal auto market, where profitability has been volatile.”

Moody’s, which doesn’t currently rate Desjardins, notes that, while the acquisition will effectively double the size of Desjardins General Insurance, it is still “not material” to the overall company, and won’t impact its strong capital ratio.

However, it says that Desjardins General Insurance will face a “challenge” in restoring State Farm Canada’s P&C business to profitability. It notes that about 65% of State Farm Canada’s business is concentrated in the Ontario auto insurance market, which it calls “a competitive and higher-risk market”, citing litigation trends and regulatory intervention in setting rates “that make achieving profitability challenging.”

While State Farm has struggled to achieve profitability in recent years, Desjardins has been profitable and outperforming the industry generally, it reports.

“Somewhat mitigating these challenges are the deal’s structural features that provide Desjardins with meaningful downside protection as it re-underwrites the acquired portfolio,” Moody’s notes. “The continued use of the State Farm brand in Canada for an agreed licensing period, as well as State Farm’s $450 million investment in non-voting preferred shares into Desjardins General Insurance, align the interests of both parties and allow for a smooth transition.”

Ultimately, Moody’s concludes, “The acquisition of State Farm Canada will boost Desjardins General Insurance Group’s presence in a consolidating Canadian market where size and scale are increasingly important.”