06/10/2013 09:34 EDT | Updated 08/10/2013 05:12 EDT

U.S. insurer Travelers expanding Canadian footprint with Dominion acquisition

TORONTO - U.S. insurer Travelers Companies Inc. is moving to greatly increase is presence in Canada by acquiring Dominion of Canada General Insurance Co. for $1.125 billion.

"I think this deal gives them a degree of size and scale that would have taken them a long time to build from scratch," Mark Dwelle, an equity analyst at RBC Capital Markets, said Monday.

The acquisition will give Travelers (NYSE:TRV) a slice of the personal automotive and homeowners market north of the border, an area where they have had no meaningful presence until now, Dwelle said.

In 2012, Dominion's product mix was 62 per cent automobile insurance and 21 per cent personal property insurance. The remaining 17 per cent was commercial property and casualty insurance.

Analysts said Travelers is hopeful that it will be able to use its predictive modelling technologies to boost Dominion's profitability.

Although Dominion has been making money overall on the back of its investments, the company's combined ratio — which measures how much it makes on premiums versus how much it pays out on claims — has been showing at a loss for several years.

"Travelers anticipates being able to use its considerable resources in systems and data analytics to improve the underlying combined ratios of Dominion," BMO analyst Charles Sebaski said in a note.

"Travelers believes it can transition this operation to an underwriting profit, as is consistent with Travelers overall business philosophy."

Doing so may involve demanding higher premiums from higher risk customers without being afraid they may take their business elsewhere, said Dwelle.

Following the acquisition, Dominion will be integrated with Travelers' Canadian operations and the combined business will remain headquartered in Toronto.

Dominion president and CEO Brigid Murphy will take on the same role at the combined organization, while George Petropoulos, president and CEO of Travelers Canada, will become vice-chairman.

Dominion had 1,353 employees at the end of 2012.

Travelers said in a statement that the deal, which is expected to close in the fourth quarter and add to its earnings next year, is consistent with a strategy of investing outside of the United States.

"The Dominion is a great franchise and this is a very good opportunity for Travelers to significantly improve its market position and scale in a meaningful market," said chairman and chief executive Jay Fishman.

Dominion Insurance traces its history to 1887, when its first president was Sir John A. Macdonald — Canada's first prime minister.

Despite its long history, Dominion has been a relatively low-profile provider of property and casualty insurance.

In addition to its headquarters in downtown Toronto, Dominion has regional offices in Vancouver, Edmonton, Calgary, Halifax and Ottawa.

E-L Financial, Dominion's parent company, said it hasn't decided what to do with money from the sale, which requires regulatory approvals.

E-L said it will continue to own 80 per cent of Empire Life Insurance, which underwrites life and health insurance policies and provides investment products.

"We are extremely proud of what the Dominion team has achieved over the years. We could not be happier that Travelers, a highly respected and well capitalized firm, will be the platform for future growth and success," said Duncan Jackman, E-L Financial's president and chief executive officer.

Shares of E-L Financial were up $56, or 9.46 per cent, to $648 on the Toronto Stock Exchange Monday afternoon.