Mergers and acquisitions in the insurance industry are a big deal. Insurance companies range from small, regional private companies to large, international publicly-traded corporations with market capitalizations in the billions of dollars. When two companies decide to merge, or one company purchases part of another company, transactions can reach multi-billion dollar levels.
In a fiercely competitive industry with mature and established businesses, such transactions can be quite attractive because of the growth they offer the acquirer (and the capital they offer the seller). However, the insurance industry is highly-regulated, subject to numerous legal statutes and centuries of case-law, and sometimes faces heavy political pressure. Industry participants can help ensure M&A success by understanding how to navigate these challenges.
Growth is often the main driver for insurance M&A transactions. They provide an opportunity to expand market presence into another province, fast-growing region, or new line of business, such as commercial risk. Purchasing similar lines of business from a competitor can also be an attractive way of adding new customers and increasing total volume of business. In addition, an insurance company's ability to scale its infrastructure across newly acquired lines of business increases the value of an M&A transaction to the acquirer, as it allows for proportionately greater profits over expenses, thereby improving margins and the bottom-line.
Despite these promising sources of opportunity, according to a Boston Consulting Group study (BCG Study) conducted in 2009, only 46% of insurance industry M&A transactions in North America and Western Europe created value for shareholders of the acquiring company. The reasons for this low success rate vary, but every case could be improved with more preparation. In particular, the BCG Study notes that M&A participants should first define a clear rationale for a potential M&A transaction, ensure they have the capabilities and resources to integrate the acquired business, and conduct thorough due diligence and risk assessment before completing the transaction.
The BCG Study is a sobering reminder that although some opportunities may appear attractive to a potential acquirer, ensuring a good strategic fit is essential. This includes evaluating the target's financial and legal condition, and corporate culture. Moreover, integrating the acquired business after an M&A transaction is a lengthy and resource intensive process that companies often struggle with, but if done correctly it can be a transformative and rewarding source of growth.
Regarding Canadian M&A activity in this industry, there have been a number of high-value transactions in the past few years. But according to a January 2014 study from PwC, most deal volume comes from small and mid-market private transactions that are often not publicly-disclosed. As PwC reports, many of these transactions occur in the insurance distribution channel. In addition to the growth-driven factors listed above, one of the key issues for brokers and managing general agents in this segment is succession planning. As a July 2013 article from Canadian Underwriter notes, the "demographics of the broker distribution channel means that more aging brokers are looking for an exit strategy".
Although forecasts vary, the expectation is that M&A in the Canadian insurance industry will continue at healthy levels for the near and medium term, as industry players ranging from small to large seek growth or divestiture opportunities.
Norton Rose Fulbright Canada LLP
Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.
Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.
Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.
Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.