September 26, 2018 by Jason Contant
What impact do rising interest rates have on P&C companies conducting mergers and acquisitions?
We’re about to find out, as the Bank of Canada is widely expected to raise the interest rate target at an Oct. 24 rate announcement.
“The premise is that a rising interest rate environment [will help] them in terms of their overall return [and] allow them to build capital to make further acquisitions in the space,” said Ron Stokes, national transaction leader of financial services with Ernst & Young Canada. “I think it is something we expect to see and continue to see – consolidation in the sector.”
Higher interest rates could also affect brokerage mergers and acquisitions in that large insurers could afford to pay more multiple for a particular business. However, there has not been a lot of large insurers buying other insurers or brokerages recently.
“I think if you break it up into the broker channel, we are seeing a lot more activity in that space,” Stokes said of brokerages buying other brokerages. “I think you are seeing consolidation in the brokerage space as brokers look to increase in scale and you’re also seeing the acquisition of brokers by the [carriers] to help sell the product.”
Generally, both life and P&C companies would look to rising interest rates to help them in terms of the interest revenue they would earn on their invested assets. There is a larger impact on the life side, but P&C companies are starting to be affected.
“On the P&C side, after periods of time where the interest revenue has not been there, you’re starting to see the interest revenue helping a lot of the P&C companies,” Stokes said. “It’s causing the overall value of the P&C and other insurance companies to raise in the sector.”
Is the higher overall revenue creating a significant difference for P&C insurers? “It’s hard to talk about it in generalities, because each of the individual companies will have a different investment portfolio and the interest rates would affect the valuation of their bond and other portfolios,” Stokes said. “Generally, rising interest rates are good for P&C companies because it helps the overall return of that particular entity.”