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Buyer to shift structure of US surety target following C$1B acquisition

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Buyer to shift structure of US surety target following C$1B acquisition

Intact Financial Corp. plans to accelerate the growth of a U.S. surety business that was already set to nearly double in size as part of a recently announced C$1 billion acquisition of Guarantee Co. of North America and Frank Cowan Company Ltd.

Documents released by the Michigan Department of Insurance and Financial Services show that Intact Financial will integrate the business of the Toronto-based target and Southfield, Mich.-based unit Guarantee Co. of North America USA into its existing portfolio of insurance offerings through a post-closing reorganization.

Though the Guarantee Co. of North America organization generated approximately 80% of its 2018 gross premiums written from Canada, its U.S. subsidiary maintains a sizable presence in the domestic surety market. Its $86.6 million in surety direct premiums written during the trailing-12-month period ended June 30, ranked 21st among U.S. property and casualty groups and stand-alone entities for which quarterly statutory data was available at publication of this article. OneBeacon Insurance Group Ltd., Intact's existing specialty P&C platform in the U.S. market, by virtue of a September 2017 acquisition, ranked No. 19 in the domestic surety business with $94.1 million in direct premiums written during the same trailing-12-month period.

Intact in the Michigan filing said the combined expertise of the two organizations would aid in accelerating growth after the merger closed. Guarantee Co. of North America USA is licensed in all 50 states. It writes construction performance and payment bonds, maintenance bonds, and related license and permit bonds for small to mid-sized contractors. It also writes commercial surety products such as license and permit, court and probate bonds.

While the company's parent describes itself as Canada's oldest surety bond writer, the U.S. entity traces its roots to separate acquisitions of Atlantic Alliance Fidelity and Surety Co. and Mid-State Surety Corp. in 2001 and 2003, respectively.

The Michigan documents indicate that Intact intends to place Guarantee Co. of North America USA into runoff as part of the reorganization and write all of the company's new and renewal business in the Atlantic Specialty Insurance Co. subsidiary of OneBeacon. Intact said it has a track record of "working hard to find opportunities" for employees of acquired companies, and it intends to do so for any employees who may be affected by the reorganization. The resulting OneBeacon group would stand to rank No. 8 on a pro forma basis in U.S. surety direct premiums written, behind seventh-ranked Hartford Financial Services Group Inc. but supplanting IAT Insurance Group Inc. in the eighth spot.

Rankings at the group level as consolidated by S&P Global Market Intelligence differ from those based on groups' combined annual statements. This distinction is particularly meaningful in the surety business as S&P Global Market Intelligence consolidates subsidiaries of CNA Financial Corp. and Tokio Marine Holdings Inc. that file distinct combined annual statements.

The top of the U.S. surety market share rankings remains in something of a state of flux given the structure of Liberty Mutual Holding Co. Inc.'s May 31 acquisition of the domestic portion of AmTrust Financial Services Inc.'s surety business. Travelers Cos. Inc. ranks as the nation's largest surety writer based on its $903.4 million in direct premiums written for the trailing-12-month period ended June 30.

A note posted on the website of the former AmTrust Surety business indicates that business would be written on AmTrust and Liberty Mutual paper for a "transition period" of an unspecified duration as the transaction did not include the transfer of an underwriting entity. The bonds would subsequently be written solely on Liberty Mutual paper.

To the extent all of AmTrust's U.S. surety business ultimately makes that shift, the combination of its direct premiums written for the trailing 12 months ended June 30 with those of Liberty Mutual would total $913.1 million on a pro forma basis. The total would be just below that of Travelers at $900.2 million if only the surety business written by AmTrust's Insco/Dico Group of Developers Surety & Indemnity Co. and Indemnity Co. of California is involved.

Guarantee Co. of North America USA wrote more surety business in the trailing-12-month period ended June 30 than those two AmTrust entities on a combined basis, and the AmTrust U.S. P&C group as a whole.

The company generated net premiums written of $63.7 million in 2018, reflecting cessions of $20.4 million under its proportional and excess-of-loss reinsurance treaties. Intact said it is considering changes to the reinsurance program that would shift certain cessions to affiliates or consolidate them within existing third-party agreements.