By Ana Badour and Ian C. Michael

Insurance M&A activity, in both the Canadian market and globally, has been on the rise since the 2008 financial crisis, and is expected to continue to increase. Deloitte recently reported that there were 399 insurance M&A transactions in Canada and the United States during 2014, an increase of 27% over 2013. The consulting firm Optis Partners reported that the first half of 2014 was the most active M&A period since they started tracking transaction information in 2008. In a survey published in 2014 by the professional services firm Towers Watson, over 85% of North American insurance executives said that they expected insurance M&A volume to grow over the next one to three years, and 78% of such executives stated that they were actively considering acquisitions.

Recent Canadian insurance M&A activity has involved various segments of the industry, including life insurance companies, property and casualty insurers, and insurance brokerages, and includes some very large transactions, such as the $4-billion purchase by Manulife Financial Corp. of the Canadian operations of Standard Life PLC, the acquisition by Desjardins Group of State Farm Canada’s businesses, the sale by E-L Financial Corporation of Dominion of Canada General Insurance Company to The Travelers Companies, Inc. for $1.07 billion, and the $2.6 billion purchase by Intact Financial Corporation of the Canadian home, auto and business owned by AXA.

Certain acquirors in the brokerage segment in particular have been very active. For example, Western Financial Group Inc., Canada’s largest Canadian-owned insurance brokerage, completed 18 M&A transactions from the beginning of 2011 through the first half of 2014. Also in 2014, RSA Canada sold its Canadian brokerage network, Noraxis Capital to Arthur J. Gallagher & Co. for $500 million. M&A activity involving insurance brokerages is expected to remain especially active as the principals that own these brokerages approach retirement. With the recent issuance of draft regulations for the possible demutualization of certain property and casualty insurers we could see further industry consolidation. Finally, capital requirements imposed by regulators continue to have the potential to lead to additional M&A activity.

Given this level of activity, it is helpful to keep in mind which issues are particularly relevant to due diligence in insurance M&A transactions, in particular given the highly regulated nature of the insurance industry. Due diligence for transactions involving the insurance industry should among many other matters include a review of the following key issues:

  1. Capital adequacy – Insurance companies are subject to stringent capital adequacy requirements, which vary depending on the type of insurance company (for example in Canada different capital requirements apply to property and casualty insurers as opposed to life insurers) and the applicable jurisdiction of the insurance company. Both the purchaser and the seller therefore will want to ensure that the transaction will not affect their capital ratios in a way which could potentially result in either of them being at risk of not meeting applicable capital requirements.
  2. Reserves adequacy – Insurance companies are required to maintain loss reserves, which are calculated based on actuarial principles. The purchaser will need to review the loss reserves of the target and the target’s loss reserve methodology to understand whether the reserves the target has been maintaining are sufficient to account for anticipated losses and to meet regulatory requirements following the completion of the transaction.
  3. Risk management approach – The purchaser will need the opportunity to fully assess the target’s risk management approach to determine whether the target’s approach is compatible with the purchaser’s business goals, and to understand, quantify and mitigate the impact of any differences in approaches between the two companies.
  4. IT systems – The insurance business is very IT-intensive and IT system integration between different companies can potentially require significant investments of time and effort. For this reason, the purchaser will want to closely examine the IT systems of the target to determine whether they are adequate and whether they can be successfully integrated with the acquiror’s systems.

Many other due diligence subject areas would always be covered of course, including particular issues on employment matters relating to agents and brokers and the transfer/assumption of policies.

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About Joseph Doonie

Joe has over 35 years of experience in management and as a recruiter. He also maintains extensive experience in financial reporting, investment evaluations, financial systems applications, process reviews, and corporate governance. Joe has also assisted numerous clients by completing special studies relating to claims and underwriting performance. For the last 20 years he has been offering his professional recruiting and Resource Consulting services for his clients. He holds a Bachelors degree in Business Administration, Chartered Insurance Professional and is a Certified General Accountant.

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