Mergers in the Canadian insurance industry have been trending upwards since 2009 and there is every indication that 2012 will continue the pattern, says PwC in a new report.
In 2009 there were 12 announced deals, compared to 21 in 2010 and 29 in 2011. The Spring 2012 Insurance Review notes that not all deals are disclosed so these figures represent only a proportion of transactions — the actual number of deals is in fact significantly higher.
“Aside from broker to broker M&A, most of the activity in the sector is coming from strategic insurance companies that are turning to M&A as a way to scale up and gain efficiencies, specialty services, and/or lock up distribution channels,” says Allan Buitendag, leader of PwC’s National Insurance Consulting practice.
While many of these deals were undisclosed, the majority of deal activity last year was driven by the brokerage and managing general agents (MGA) sector. Entrepreneurs and aging owner-managers are seeking an opportunistic exit to benefit from the strong current demand and pricing. On the other hand, many of the larger insurance companies are seeking to secure a larger share of the distribution market by acquiring additional broker/MGA channels.
“In a soft market, top line growth is difficult to achieve organically; if the insurance companies are not growing by acquiring distribution, the only alternative is to carve out a book from a competitor or to actively consolidate in the insurance company arena to increase scale or augment its direct distribution model,” says Phil Heywood, a director in PwC’s advisory and deals practice.
A good example of this consolidation is the $2.7 billion sale of AXA’s multi-line operations to Intact Financial Corp last year which accounted for the vast majority of deal value for the Canadian insurance industry as well as Intact’s most recent acquisition of JEVCO for $530 million. These deals are indicative of demand for quality insurance targets in Canada to build scale. However, there continues to be a lack of willing sellers among carriers.
“The landscape is changing quickly and those companies caught in the middle — too large to be niche players but too small to reap economies of scale — will have to rethink their strategies. The nature of the Canadian market limits organic growth opportunities, and many carriers are feeling pressure in their distribution channels as competitors -through their own acquisitions—expand their broker concentration. The only way to aggressively grow the top line in this market is via acquisitions,” adds Buitendag.
The driving force for an active M&A market in the Canadian insurance industry going forward will be the availability of willing partners and the stability of financial markets in Europe, says Buitendag.