Mid-sized insurers seeking scale should consider merger opportunities: PwC report

Mid-sized Canadian insurance companies seeking greater scale would do well to contemplate mergers and acquisitions (M&A) opportunities, states a PricewaterhouseCoopers (PwC) client newsletter.

The battle for channels and scale to leverage efficiencies is such that “the only way to aggressively grow the top line in this market is via acquisitions,” advises Allan Buitendag, leader of PwC’s national insurance consulting practice. “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,” Buitendag says.

“A continued low-interest rate environment and sluggish improvements in soft premium rates continued to squeeze margins and drive many players to seek scale,” PwC notes in the newsletter.

Mergers have been trending upwards and 2012 shows no signs of breaking the pattern. There were 12 announced deals involving a Canadian insurance target in 2009, 21 in 2010 and 29 in 2011. Since not all deals are disclosed, the numbers may actually be 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,” Buitendag says.

Last year’s $2.7-billion sale of AXA’s multi-line operations to Intact Financial Corporation and Intact’s recent acquisition of JEVCO for $530 million is a good example of consolidation, the newsletter notes. “The activity (and pricing) surrounding the departure of AXA is indicative of the pent-up demand for quality insurance targets in Canada.”

With the demand for quality insurance targets, competition and pricing have been driven to new heights, it states. “There has been a general trend towards higher valuation multiples over the last five years.”

Although M&A deal volume in the Canadian insurance sector is anticipated to strengthen into 2012, activity will be affected by issues such as Solvency II, low yields this year, demutualization of Canadian property and casualty insurers and uncertainty surrounding legislation and federal regulation in the United States.