DBRS Morningstar Comments on Acquisition of IAS Parent Holdings, Inc. and its Subsidiaries by iA Financial Corporation Inc.

DBRS Limited (DBRS Morningstar) notes that on December 4, 2019, iA Financial Corporation Inc. (iA or the Company) announced that it has entered into an agreement to purchase Innovative Aftermarket Systems Parent Holdings, Inc. and its subsidiaries (collectively, IAS) for USD 720 million. IAS is headquartered in Austin, Texas, and serves as a provider of property and casualty (P&C) insurance products, including extended warranties for vehicles, reinsurance services, protection plans, and other ancillary products, targeting the needs of the automobile dealership market in the U.S.

The acquisition of IAS is expected to be complementary to iA’s existing car dealer businesses. The Company has operated in the Canadian dealer services space in Canada for many years, offering multiple products, including creditor insurance, auto loan financing, and other complementary products, including extended warranties. In January 2018, the Company made its first foray into the U.S. extended-vehicle-warranty space with the acquisition of Dealers Assurance Company and Southwest Reinsure Inc. (DAC) for USD 135 million, generating USD 375 million of sales from extended warranties and other ancillary products in 2018. DBRS Morningstar expects the acquisition of IAS, being materially larger, to increase sales significantly (gross written premiums for IAS were USD 540 million in 2018), partially because of IAS’s relationships with a sizable proportion of the U.S. auto dealership market. Both DAC and IAS are diverse in terms of geography, operating in all fifty U.S. states and distributing their products primarily through a network of independent agents and automobile dealerships.

The good capital position of iA relative to many of its competitors in the fragmented extended warranty market in the U.S., may provide it with a competitive advantage in succeeding in this niche space. The Company’s prior expertise in this business line through its operations in Canada may also be helpful, although differences may exist between the two geographic markets. Lastly, the additional growth in this business line aligns with the Company’s strategy of reducing the proportional exposure of sales of products with longer dated liabilities, including of traditional individual insurance.

The acquisition is expected to materially decrease iA’s regulatory solvency ratio to reach a pro forma value of 117% (as calculated by iA) from the Q3 2019 value of 134%. The lower ratio aligns more closely with iA’s publicly stated operating target range between 110% to 116%. Since the acquisition is funded by existing capital rather than through the issuance of new debt, the Company’s leverage and fixed-charge coverage ratios remain strong, with iA maintaining good financial flexibility.

Notes:
All figures are in U.S. dollars unless otherwise noted.

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