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Active M&A market for Canadian p&c insurers shows no sign of slowing, A.M. Best says


June 26, 2015   by Canadian Underwriter


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Ongoing performance pressures in Canada’s property and casualty market, combined with the need for scale and long-term strategic positioning continue to drive consolidation in the sector, says a new report from rating agency A.M. Best Company.

Market consolidation has been a hallmark of the p&c market over the past several years

Released on Friday, the Best’s Special Report, titled Active M&A Market for Canadian P/C Insurers Expected to Continue, notes that market consolidation has been a hallmark for this market over the past several years. Gaining access to additional distribution channels has also driven insurers and brokers alike to strategically align resources. In 2014, Canada’s top 10 p&c writers, as ranked by A.M. Best, generated 66.2% of the market’s direct premium, compared with 56% in 2007, the report noted.

“Canada’s Property/Casualty industry has posted solid, if unspectacular, results, with the industry’s capital base expanding annually due to consistent underwriting profitability,” A.M. Best added in a statement. “While 2014 got off to a rough weather start, there were far fewer weather-related catastrophes for P/C insurers to manage. As a result of the improved property performance, the overall combined ratio was several points better than break-even at approximately 97.5%, an improvement of approximately 1.6 points from the prior year.”

The report also noted that while the property loss ratio improved in 2014, the auto loss ratio continue to “deteriorate somewhat” as insurers continued to work under a government mandate in Ontario to reduce rates by an average of 15% by August 2015. “The average rate reduction now stands at roughly 7%, not quite halfway to the targeted 15% with only a couple of months to go. In the absence of additional loss containment initiatives, continued significant rate reductions appear to be less likely going forward,” the report said.

The top 5 companies in the market represented 35% of the market in 2007, with approximately 56% concentrated within the top 10. By 2014, the top 5 grew to represent more than 44% of the market, with over 66% concentrated within the top 10 insurers

Although the market has produced favourable, albeit somewhat volatile results, there are ongoing performance pressure events, including market and broker consolidation trends. For example, the report notes that the top 5 companies in the market represented 35% of the market in 2007, with approximately 56% concentrated within the top 10. By 2014, the top 5 grew to represent more than 44% of the market, with over 66% concentrated within the top 10 insurers. “At the same time, mid to small insurers are slowly being pressured by their larger competitors, as evidenced by the shrinking market share of companies that hold the #11-#20 positions,” the report said.

Related: Draft federal demutualization regulations show need for vigilance, relationships at provincial level: OMIA

Looking ahead, A.M. Best said that as the industry moves into the third quarter of 2015, it “anxiously awaits the next merger that is likely around the corner. While time will tell when the next big deal goes from a mere discussion to a full blown announcement, there are a myriad of factors that could lead to continued activity over the near- to mid-term. In addition to the competitive market pressures, the desire for scale and access to additional distribution channels as well as regulatory developments will likely influence how quickly the market consolidates.”

First, the Canadian government released its long-awaited proposed framework for the demutualization of p&c insurance companies. With the comment period now closed, the industry awaits the publication of the final regulations. And second, the continued prohibition of banks from selling insurance in branches could cause additional merger and acquisition activity, A.M. Best suggested.

“Yet given the overall market dynamics, ongoing weather volatility, competitive market pressures and low interest rate environment, additional consolidation within the Canadian P/C market remains highly likely, showing no signs of slowing,” the statement concluded.


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