Canadian Underwriter

Why you’re not seeing as many carrier acquisitions as expected

January 5, 2018   by Jason Contant

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The lack of “domestically sizeable targets” coming to market is one factor contributing to a less-than-expected number of acquisitions for Canadian carriers, an industry analyst says.

And whenever a sizeable acquisition opportunity does arise, there is heated competition among multiple interested parties actively looking to acquire that asset. Since only one suitor will land the big deal, the others are left to wait longer for another opportunity to arise, thus suppressing M&A activity generally.

“The larger domestic insurance carrier deals seem to occur when somebody wants to exit the market,” said Philip Heywood, partner, transaction services and financial services due diligence leader with PwC Canada. “If there were more assets coming to market, you would see more deals getting done. Canadian carriers haven’t needed to sell; there is still a surplus of capital in the system.”

There have been several examples in Canada of a market exit leading to a new player in the P&C space, whether through a merger or otherwise. Among them:

  • ING’s exit from the market and the subsequent creation of Intact Insurance.
  • The exit of RBC General Insurance Company and its sale to Aviva Canada.
  • Arguably, the deal between Western Financial and Desjardins could be perceived as Desjardins retracting from Western Canada.

“It’s still quite a fragmented market, although there is a lack of supply of assets to acquire,” Heywood told Canadian Underwriter.

In the broker space, even when assets do come to market, it’s difficult to acquire large, geographically diverse brokerages (or a network of brokers). “There aren’t sizeable transactions happening because there aren’t necessarily sizeable companies coming to market, so it’s requiring multiple regional acquisitions to really gain that presence,” Heywood said.

The focus for a lot of P&C carriers has been to acquire brokers, managing general agents (MGAs), and specialty MGA and agencies, with the strategic goal of locking up distribution, as opposed to acquiring other books of business or other carriers, Heywood observed.

What is prompting the carriers’ interest in brokerages? “I think the low interest rate environment,” Heywood responded. “Bond yields have come up a little bit in late 2017 and the beginning of 2018, but they are still at historic lows. A lot of the carriers need to generate both better returns due to underwriting, and also drive greater economies.”

When sizeable acquisition targets do come to market, there are many interested parties. What does that mean for the larger Canadian P&C domestic writers who do not close the deal?

“We’re starting to see them invest dollars overseas,” Heywood said. “They’re still looking to put their money to work. There’s still excess capital in the P&C market in Canada.”

Generally, M&A activity in the Canadian P&C market is going to be for strategic reasons, whether because companies are looking to exit the market, expand geographically or enter into a new line of business.

Regardless of the reason, if an opportunity arises, “there’s going to be a line of buyers there waiting both domestically and overseas,” said Heywood. “If there are good assets coming to market, it’s not just going to be the domestic carriers interested in that. I think we are going to see interest from the U.S. into Canada as well.”

But if overseas investors are looking to come into the Canadian market through a carrier acquisition, it’s going to be a challenging proposition. “The regulatory process approval process necessary to acquire a financial institution does make it a little more challenging than in other industries, particularly around certainty to close,” Heywood said.