Newly public ing Canada Inc. — the country’s biggest property and casualty insurer even before it bought most of Allianz AG’s Canadian operations in December — expects to keep growing by acquisitions.

Claude Dussault, ING president and CEO, says the company could double its size in as few as five years, depending on the pace of industry consolidation.

Currently, the top five P&C insurers command a market share of 34%, compared with the top five mutual fund companies which have more than a 50% share of their industry market; the top five life insurers which have 75% of their market; and the banks, with more than 80% of that market. “We expect 60%-65% [in the P&C sector] with the top firms at 20%-25% each.
We can be one of those,” Dussault says.
Toronto-based ING’s share in 2004 was 9.8%, without Alliance Insurance Co. of Canada and Trafalgar Insurance Co. of Canada, which were acquired from Munich-based Allianz. With the Allianz businesses, its share goes to 11.5% .

ING says it has both the financial capacity to make many more acquisitions and a competitive advantage in making them work.
Financing would come from cash, then from debt — the debt/capital ratio is only 5.5% —– and lastly by issuing more stock. Its competitive advantage is scale and integration experience: it has completed 10 acquisitions since the late 1980s.

“We prefer medium-sized to large acquisitions,” says Dussault. The Allianz operations, with $604 million in direct premiums written in 2004, is considered a medium acquisition.

ING looks for companies or books of business in its core competencies in the personal and small and medium-sized commercial markets. P&C insurance for large firms requires global players, and parent ING Groep, which owns 93.6 million or 70% of ING Canada’s 133.7 million common shares outstanding, only does P&C in Canada, Mexico and the Benelux countries (Belgium, Netherlands and Luxembourg).

ING’s strategy is to integrate acquisitions as quickly as possible. “It’s difficult to understand the culture until it’s within our business,” says Dussault. “We’ve learned integrating quickly works best. It tends to nullify fears and foster a common purpose.
Waiting too long emphasizes differences.”

Consolidation in the P&C industry started in the 1990s but slowed in early 2000, as the capital of potential acquisitors declined in the equity market downturn. It has recently heated up as it emerged from what Dussault calls “by far the worst financial cycle.”

But more consolidation is needed to increase profitability. “The industry has averaged a 10% return on equity for a long time,” says Dussault. He believes it will meet the 13%-15% financial services sector average, once consolidation ends and is in place long enough to produce benefits of scale and synergies.

ING has done much better than the industry when it comes to ROE, averaging 15% for its insurance subsidiaries over the past 12 years vs a 9.2% industry average. Its goal is to be at least 500 basis points better than the industry. With acquisitions, it expects to bring the loss ratio — that is, loss on claims as a percentage of net premiums written — of the acquired firms down to its level and push the expense ratio 200 bps lower.

ING’s combined ratio (losses on claims plus expenses) has also outperformed the industry average. It dropped to 86% in 2004, from an average of 100.7% in 1993-2003.
The industry as a whole reported a 90.7% ratio in 2004 and 105.9% for the earlier period. (A combined ratio less than 100 indicates an underwriting profit.) In the 1993-2003 period, ING’s combined ratio stayed within a tighter range — 98.1% to 103.2% — than the industry (98.7% to 111%). Dussault says lower volatility is a result of a disciplined approach as well as pricing and claims expertise. “With each acquisition, we add to our knowledge,” he says.

The past year’s big drop in combined ratios was the result of lower claims costs after governments in Alberta, Ontario and the Atlantic region stepped in with reforms aimed at reducing fraud and containing settlements. Auto premiums started declining last year but, because policy renewals are spread throughout the year, the bottom-line impact lags. It will probably show up in lower profitability this year.
British Columbia, Manitoba and Saskatchewan have government-run auto insurance systems and bodily injury is covered by a government agency in Quebec.