In a 2015 article, we reported that global M&A in the insurance sector was on the rise again after a number of quiet years in the aftermath of the financial crisis. Deal activity in the European market was hit particularly hard by the financial crisis, but a steady stream of transactions in the United States helped the Americas’ deal activity remain stable and eventually showed signs of recovery in 2013.
Earlier this year, we followed up to discuss a report which stated that 2015 had been a record year for North American insurance agency M&A. The question we are asking now is whether we can expect the good news – or, perhaps more specifically, growth – to continue?
In a 2013 report Insurance 2020: A quiet revolution – The future of insurance M&A, PwC answered that question with a soft, but confident yes. The report predicts several factors that will drive insurance M&A over the next five to ten years:
- Weak profitability tied with low investment yields: Which may encourage insurers in mature markets to plan international expansions and domestic deals.
- The power of technology: Acquiring or developing technological expertise will become an increasingly important goal for insurance M&A.
- Demographic effects: Aging populations are straining markets and social security programs. This may accelerate the demand for insurance in different market levels.
- Changing hurdle rates: Transactions will be assessed against changing expectations for rates of return which will result in possible regional shifts in bidding power.
This growth-oriented prediction is echoed by others, such as Towers Watson and Willis whose latest report found that there was little data to suggest that the recent strength in insurance M&A activity would not continue into the future. 82% of companies surveyed plan to acquire in the next three years and over 90% in emerging markets, while only a third of all companies had plans to divest. Also, more than 40% of those who have completed three or more deals over the past two years stated that they had plans for at least three deals in the next three years.
North America has recently been a key driver of global M&A activity, particularly in the insurance industry and Canadian insurance providers have been involved in a number of these transactions. Looking forward, Ernst & Young sees further scope for Canadian insurance M&A activity, identifying the property & casualty insurance sector as a potential space for further consolidation its 2016 EY Canadian property and casualty insurance outlook.
While only time will tell for sure how the predictions for continued strength in insurance M&A activity will bear out, both in Canada and more broadly, it will be interesting to watch in the coming months to see how the fluctuating Canadian dollar, the call of international markets, foreign players and the changing competitive landscape combine to affect M&A activity this sector.
The author would like to thank Justine Smith, summer student, for her assistance in preparing this legal update.
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