The Canadian Property and Casualty (P&C) insurance market has been witnessing an upward trend in mergers and acquisitions in the last three years.
In its new client newsletter, “Capital Markets Flash and Insurance Review”, PwC says as the battle for distribution channels and scale to leverage efficiencies continues, so too will more merger and acquisition possibilities.
In 2009, there were 12 announced deals. In 2010, there were 21, and in 2011, there were 29. The report 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.
Much of the M&A activity is from broker to broker, but there’s a prevalence of insurers turning to M&As as a way to scale up and gain efficiencies, specialty services and/or lock up distribution channels, said Allan Buitendag, Leader of PwC’s National Insurance Consulting practice.
On the brokerage and managing general agents side, entrepreneurs and aging owner-managers are seeking an opportunistic exit to benefit from the strong current demand and pricing.
“Interestingly,” says the report, “this spark in activity was ignited by the acquisition of Western Financial Group by Desjardins in December 2010, following which, Western went on to announce a further six acquisitions in 2011. Another serial acquirer in Canada, Hub International, drove a further three brokerage transactions.”
From the insurance company side, a soft market means top line growth can be 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,” said Phil Heywood, a director in PwC’s advisory and deals practice, in a statement.
PwC points to 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 $530 million. “These deals are indicative of demand for quality insurance targets in Canada to build scale,” says the report.
Another trend explored by PwC is the increase in “Buy Canadian” acquisitions. In 2010 and 2011, five of the top six announced insurance deals (by value) were to Canadian buyers. The sale of Sun Life to Berkshire Hathaway in 2010 was the only sale involving a foreign owner. (PwC says the April 2010 sale of GCAN Insurance Company to RSA Canada involves RSA Canada’s UK-based parent company, the insurer’s Canadian operations are significant and as such, the acquisition is considered a Canadian acquisition.)
Looking through 2012, PwC says it expects M&A deal volume in the Canadian insurance sector to continue to strengthen in 2012.
“The landscape is changing quickly and those companies caught in the middle—too large to be niche players but too small to reap economies of scale—will have to rethink their strategies. The nature of the Canadian market limits organic growth opportunities, and many carriers are feeling pressure in their distribution channels as competitors -through their own acquisitions—expand their broker concentration. The only way to aggressively grow the top line in this market is via acquisitions,” added Buitendag.
The full report can be read online. (PDF)
Top six insurance deals involving Canadian targets
Source: Capital IQ (deals involving a foreign buyer in red)
|Sector||Seller / Target||Buyer||Value ($ millions)||Date|
|Multi-line||AXA Canada, Inc||Intact Financial Corporation||2,700||5/31/2011|
|P&C||GCAN Insurance Company||RSA Canada||420||10/4/2010|
|Brokerage||Western Financial Group (Network), Inc.||Desjardins Financial Corp.||415||12/23/2010|
|Life and Health||AXA Canada, Inc.||SSQ, Life Insurance Company Inc.||300||9/26/2011|
|P&C||JEVCO Insurance Company||Kingsway Financial Services||259||1/25/2010|
|Life Reinsurance||Reinsurance business of Sun Life||Berkshire Hathaway Life Insurance||240||10/27/2010|
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