Market volatility might be suppressing potential mergers within Canadian insurance industry

Market volatility, a consequence of the U.S. subprime issue, may be suppressing mergers and acquisitions (M&A) activity in the Canadian insurance market, Pierre Ozendo, the chairman and CEO of Swiss Re America Corporation says.
“To the extent that market volatility from [the subprime crisis] has increased the cost of equity-raising, it makes raising capital more expensive,” Ozendo told reporters after giving a speech at Swiss Re’s 23rd annual Canadian Insurance Outlook Breakfast Meeting held at the National Club in Toronto. “By definition, that slows down the economics of transactions, and yes, there is a linkage in the slowdown of potential M&A activity because of it.”
Ozendo said the Canadian market is more fragmented than some. He also noted analysts have been predicting for some time that there might be an imminent increase of consolidation within the Canadian market.
“There’s been some slow-down in the economic benefit of [M&A activity], only because the cost of capital to raise equity has increased because of the volatility of the markets,” Ozendo said. “But we are see that easing off, and I think then the fragmentation of the market in Canada may accelerate the M&A activity here. And so Canada may be a forerunner, possibly.”
Ozendo said the suppression of potential M&A activity is not unique to the Canadian insurance market. “If you just take a look at the merger and acquisition activity over the last couple of quarters, relative to the past, it’s slower. It’s all economics.
“Volatile markets cost everybody more money. With more uncertainty, you need more safety, so capital costs go up, capitalraising goes up. And so today, when companies can be valued more meaningfully, that makes a big difference in the [M&A] equation.”