Canadian Underwriter

Joining Forces

May 1, 2016   by Janice Deganis, Canadian Insurance Leader; and Ron Stokes, Canadian Financial Services Transactions Leader, EY

Print this page Share

The fragmented property and casualty industry in Canada continues on its consolidation track. This has implications for all of the players in the industry, whether they are acquiring, divesting or simply trying to compete with increasingly larger competitors.

Canadian p&c carriers operate in an ultra-competitive market, with ongoing pressure on margins. Competition on price, the continuing outlook for low investment yields and other factors impacting profitability have once again put the spotlight on expense efficiency.

Ron Stokes, Canadian Financial Services Transactions Leader, EY

Ron Stokes, Canadian Financial Services Transactions Leader, EY

Many business models will not be sustainable unless management teams can find ways to cut costs. This pressure is leading many groups to improve margins by merging.

The results of Ernst & Young (EY)’s latest Capital Confidence Barometer, indicates Canadian executives overall report renewed optimism about the Canadian economy and a healthy sustainable outlook of the mergers and acquisitions (M&A) market. With 61% of Canadian respondents expecting to pursue acquisitions in the next 12 months, Canada is the most bullish in the Americas and well ahead of the 50% of global

respondents. Further strengthening the outlook on the Canadian M&A market is that 54% of respondents report that acquisitions are on the agendas of their boards of directors compared to only 5% from six months ago.

Looking at the insurance sector, based on 2014 direct premiums written, Canada’s five largest insurers accounted for approximately 47% of the market – fragmented in comparison to Canada’s banking and life insurance sectors. The combined share of the top five players in those businesses ranges from 65% to 75%. Consolidation in the Canadian p&c market will continue in 2016 and beyond. Over the last three years the market has been consolidating as the largest players continue to acquire competitors and the trend continues in 2016.


Insurers need to think about where they might have gaps in their business and if filling those gaps with M&As is possible. Recent acquisitions have shown that large insurers, rather than starting from scratch, are looking to add to their distribution channel mix through acquisitions. The goal of those buyers is to have an omni-channel approach. Through M&As, insurers can improve product offerings or underwriting teams; improve data collection activities; and add run-off operations to leverage stronger balance sheets and claim settlement capabilities.

Companies that develop well-thought-out integration plans can reduce costs and achieve back-office synergies through acquisitions.

Janice Deganis, Canadian Insurance Leader; and Ron Stokes, Canadian Financial Services Transactions Leader, EY

Janice Deganis, Canadian Insurance Leader; and Ron Stokes, Canadian Financial Services Transactions Leader, EY

Some p&c carriers are acquiring other firms in order to increase economies of scales, diversify geographic concentration, enter into new markets and product lines, acquire new distribution channels, sell unprofitable businesses and create new alliances.

EY’s Capital Confidence Barometer notes that Canadians are being more disciplined and prudent in their evaluation of acquisition opportunities, with 88% of respondents reporting that they have walked away from a proposed transaction. When looking at recently completed transactions, Canadian respondents cited failure to achieve synergies as the primary reason for a transaction not meeting expectations.

To counter this, there is an increased focus on due diligence and pre-closing integration work, as buyers look to get it right before completing a transaction.

Whatever the purpose of the acquisition, it is vital that a company has the right expertise to properly weigh its options, plan and execute seamless integration, and preserve value by avoiding business disruption.


Carrying out a transaction, even a mega-deal, does not, in and of itself, create transformation. Transactions simply create the conditions for transformation to occur.

why use fintechTransformation requires a fundamental re-evaluation of how the combined businesses will operate after the deal. It is a lot more than a standard acquisition and integration process. These challenges are multiplied when M&A activity crosses borders or regulations change during an acquisition. That is why the creation of a sound integration plan – weaving together finance, IT, legal, actuarial and other internal processes – is just as important as choosing the right target in an insurer’s M&A strategy.

A successful M&A depends on having the right due diligence team involved throughout the transaction lifecycle. This includes actuarial support to identify the key risk areas, financial expertise to identify risks and items impacting enterprise value, an appropriate tax team to structure the deal effectively, IT experts to allow for proper integration, regulatory experts aware of upcoming changes and future considerations across all countries involved, support during the negotiation phase, integration planning and management assistance, and financial and operational restructuring experts. It is imperative that, post-merger, management teams continue to look closely at the strategic objectives of the deal and ensure that they are pulling all of the levers available to achieve the target end state.

results of survey

Face it: not every insurer can jump on the M&A trend. Whether it is better to build than buy, a lack of capital, or lack of appropriate gap-filling targets, insurers that do not acquire other firms will need a strategy to compete more effectively against larger, better capitalized companies.

Hiring people will become paramount, as will accessing distribution that provides high-retention, profitable business.

Smaller insurers will be forced to cut costs to compete against larger insurers. Examples of cost-containment strategies could include system upgrades, process automation and claims strategic sourcing.

Focusing on improving the customer experience is also an important growth lever. Accelerating growth begins by moving from a transactional to a relationship view of the customer. Rather than focusing on the number of products customers buy, insurers should weigh the strength and length of their customer relationships.

Personalizing sales and marketing strategies and enriching the customer experience is critical to making this shift, which insurers are driving through better use of data and analytics.


Traditional insurance firms can also learn from the approach of fintechs in the customer proposition and using technology to deliver value and convenience. Identifying which customers are most at risk from the new competition – and developing new products and services to retain them – is a must.

It is important to note that although some insurers will be seen as vulnerable to takeovers given all of the M&A activity in 2016, others should look to take advantage of it. Companies that divest of non-core areas could potentially be seen as a good fit for an acquirer. This could help raise the capital required to employ a more effective competition strategy. But in order to be successful, companies that diversify their businesses, with options other than M&As, need to be just as well-thought-out as companies that are acquiring – from planning, to implementation, to tracking progress and financial results.

Insurers have many competing priorities in this rapidly evolving environment. The M&A strategy is just one of those components. Ensuring a company has the organizational capacity to take on another initiative is critical to the success of whichever M&A strategy is selected. Reviewing all company priorities and building the capacity to be able to effectively handle each of these conflicting priorities is paramount.

Print this page Share

Have your say:

Your email address will not be published. Required fields are marked *