Canadian carriers increasingly targeting insurers and brokerages for M&A

Canadian P&C companies are increasingly targeting insurers and brokerages for mergers and acquisitions, although the interest in targeting insurtechs is rising, according to a new report from ratings firm A.M. Best Company.

A.M. Best released its market segment report for Canada Tuesday. It said insurer- and broker-related transactions increased compared to last year. “Insurers and brokers remain the primary targets, accounting for 67% of recorded transactions in 2017, up 17 points from the prior year,” the ratings firm wrote in its report, Outlook for Canada’s P/C and Life Segments Remains Stable, as Economy Continues to Grow.

Insurtech companies continue to draw attention, albeit less than 2016, accounting for 11% of transactions in 2017. Most insurtech M&A highlights the growing interest in usage-based insurance products and companies.

“Insurers may be moving away from direct investments in insurers and brokers, toward a greater exploration of insurtech assets,” the report said. “As innovation and operational efficiency become more important differentiating factors, with potentially favourable implications for companies’ overall operating performance and business profiles, insurtech targets may become more attractive in the near future.”

A recent article from the U.S. National Association of Insurance Commissioners found 70% of carriers south of the border were expected to use UBI telematics by 2020. “We generally believe a similar rate of adoption is likely in Canada, given the similarities of the two markets.”

In 2016, non-insurance related transactions accounted for 52% of all deals by Canadian P&C insurers, but only 2% of all transaction value. Of the remaining 48% of transactions, 24% involved brokers and insurers.

Last year, insurance-related transactions jumped to 75% of transactions and 98% of recorded transaction values. Broker and insurer deals accounted for half of the transactions.

“The greater emphasis on insurance-centric transactions may highlight companies’ favourable outlook on the industry, as they find new opportunities to complement their current operations,” A.M. Best said.

The ratings firm examined completed and pending transactions of domestic and international targets since 2016, insurance-related or otherwise, to provide some insight into current trends and potential opportunities. It further dissected insurance-related target transactions and separated activity into four broad buckets:

• book of business
• insurer and broker
• operations
• insurtech.

Generally, M&A and other investment activity in Canada’s P&C industry remained relatively healthy in 2017. However, A.M. Best expects the rate and size of transactions to continue to decline in the near future as interest rates rise to more historical levels – a trend evidenced by the generally lackluster activity in the first half of 2018, when both the number and value of deals declined significantly.