Canadian insurers are starting to look beyond traditional mergers and acquisitions (M&A) to execute transformational deals that will help them achieve sustainable and profitable growth. They’re up against a fast-evolving marketplace full of technology and endless data insights, and many have come to the conclusion that they cannot achieve a sustainable competitive advantage alone, hence the global uptick in M&A activity.
According to a recent KPMG report entitled ‘Accelerated Evolution: M&A, transformation and innovation in the insurance industry,’ the transformational deals pursued by successful insurers will “satisfy both the evolving needs of their customer base, and demands from shareholders and investors for strategic capital deployment to enhance enterprise value.”
Of the 200 insurance executives surveyed by KPMG around the world, “the majority […] are actively seeking M&A, partnerships, and investment opportunities to transform their business and operating models, and to gain access to innovation capabilities and emerging technologies,” said Laura Hay, global head of insurance and Ram Menon, global head of insurance deal advisory at KPMG. That trend also rings true in Canada.
In 2018, there were approximately 550 insurance M&A deals in Canada, where primary carriers, brokers or MGAs were either the target, acquirer, or both. Interest in the market came not only from insurance companies, but also from private investors who are looking to acquire insurance entities for strategic reasons.
Speaking at A.M. Best’s Canadian Insurance Market Briefing in Toronto early in September, A.M. Best financial analyst Dan Heitlinger commented: “M&A activity [in Canada] over the years has been pretty diverse in terms of the size of the emerging entities, the company’s line of business and the geographic footprint. We believe the activity has increased in recent years due to a number of factors.
“Some organizations are looking to solve recurring cash flows from an insurance operations standpoint. [They’re hoping M&A] will offer some relief in this low interest rate environment. Some companies are attempting to increase the profitability of their distribution network through greater scale and efficiency. A third key point is that companies are attempting to reduce distribution and risk concentration through greater network diversification.”
2019 continues to be an active year for Canadian insurance M&A. On August 15, Intact Financial Corp. agreed to buy The Guarantee Co. of North America and Frank Cowan Co. Ltd. from Princeton Holdings Ltd. for $1 billion in cash. Excluding that major deal, most activity in 2019 has mirrored the size, scope and geographic footprint of the transactions in 2018.
When announcing the billion-dollar deal, Intact chief executive Charles Brindamour said something that supports KPMG’s commentary about transformational transactions. He stated: “The acquisition of The Guarantee Co. of North America and Frank Cowan Co. is strongly aligned with our strategic and financial objectives. We are delivering on our objectives to grow in Canada and build a leading North American specialty platform. I’m enthusiastic about what we will accomplish by leveraging the combined expertise of our teams and our expanded offering.”
In the near term, Heitlinger said A.M. Best expects M&A activity to “remain elevated” due to competitive pressures and the low interest rate environment. He said: “An additional market driver we can see impacting M&A activity going forward is the limited international exposure of these regional carriers or brokers. If a private investor is looking to part with capital somewhere, it may be more inclined to invest in the insurance company today than they might have been a few years ago or two months ago. Just given the current global trade climate, it may well be conducive for businesses that are more dependent on the international supply chain long term.”
