2014 Canadian Insurance M&A Outlook

2014 Canadian Insurance M&A Outlook
Momentum continues to build

2
Contents
Overview 3
2013 in review 4
Key catalysts for insurance M&A in 2014 9
1. Modest economic growth 10
2. Continued low interest rates 11
3. Multiple regulatory changes 14
4. Increased extreme weather 15
5. Recognizing the power of data analystics 16
6. Consolidating distribution 17
7. Potential market bifurcation 18
8. Building excess capital 19
M&A preparedness 20
Contacts 22

2014 Canadian Insurance M&A Outlook The momentum continues to build 3
Overview
1
Office of the Superintendent of Financial Institutions.
2
Total Canadian P&C premiums excluding Lloyd’s, government insurers (Saskatchewan Auto Fund (SAF) and Insurance Corporation of British
Columbia (ICBC), and mortgage insurers (Genworth Financial Mortgage Insurance Company (Genworth) and Canada Guaranty Mortgage
Insurance Company (Canada Guaranty)).
In 2013, the Canadian insurance industry generated premiums
of approximately $95 billion1
, representing about 2% of global
insurance premiums. Property & Casualty (P&C) insurance
represents nearly 59%1
of Canadian insurance premiums with
the balance represented by Life & Health premiums.
While operational drivers vary by sub-sector and line
of business, in aggregate the insurance sector is highly
correlated to the overall economy. This is particularly
true for P&C insurers, either Canadian or foreign-owned,
which operate substantially within Canada. Conversely,
the largest Canadian-owned life insurers (notably
Manulife, Great-West Life and Sun Life Financial) have
substantial global platforms, and generate significant
portions of their earnings outside of Canada.
M&A activity is significantly influenced by global factors
in both Life & Health and P&C insurance. Canadian life
insurers dominate the domestic market, with the top
three insurers representing over 90%1
of life and health
premiums, and seek growth largely in adjacent sectors
such as asset management or wealth management, or
outside Canada. The Canadian P&C insurance market
remains heavily influenced by global themes, as 31%2
of P&C premiums are written by companies with
non-Canadian ownership.
In this report, Deloitte assesses Canadian M&A activity
in the context of both historic domestic and global
trends. We review the Life & Health, P&C, and insurance
brokerage sectors, examining strategic and operational
issues facing the industry, including economic growth,
regulatory changes, extreme weather, the impact of data
analytics, distribution, market bifurcation, excess capital,
and M&A preparedness.

4
M&A activity in the Canadian insurance sector was
relatively modest in 2013 (Exhibit 1), with approximately
$1.9 billion reported in aggregate M&A deal value,
represented by 12 transactions.
Aggregate deal value was the lowest the industry has seen
since the 2008 financial crisis, and was dominated by one
large inbound insurance deal – the Travelers’ $1.1 billion
acquisition of Dominion.
The remaining domestic deals were small at less than $50
million each. There were three outbound transactions,
including Fairfax’s $358 million acquisition of American
Safety. However, there was more activity in insurance
distribution in terms of volume of deals. From a valuation
perspective, while many deals do not disclose financial
terms, price to book value multiples for insurance
underwriters remained fairly consistent from 2010 to 2013
at approximately 1.9 times, with an exception in 2011 due
to a large international asset management purchase.
2013 in review
Exhibit 1: M&A trends – Insurance underwriters
Price/book value multiples
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Number of deals 13 8 11 8 17 16 13 15 19 11 7 12
Inbound 1 1 1 0 1 3 0 0 1 3 2 1
Outbound 2 1 3 1 5 4 0 4 5 1 1 3
Domestic 10 6 7 7 11 9 13 11 13 7 4 8
Source: SNL Financial, Capital IQ and Deloitte analysis
• Transactions represent Canadian life insurers and Canadian P&C insurers making acquisitions on a global basis. Transactions also include foreign
acquirers purchasing Canadian life or P&C insurers.
• Transactions include Canadian life Insurers acquiring asset managers on a global basis.
• Transactions grouped by the year they were announced.
• Deal multiples represent closed multiples, unless the transaction is still pending close.
• Analysis as of 12/31/2013.
4,319
2,713
1,264
1,638
1,206
568
3,135
3,348
4,363
3,385
1,868
0.00x
1.00x
2.00x
3.00x
4.00x
5.00x
6.00x
7.00x
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 AverageP/BV
Aggregatedealvalue($M)
Aggregate Deal Value Average P/BV
bit 1

Exhibit 2: M&A trends – Life insurers
In Life & Health underwriting, there was limited domestic
M&A activity in 2013 (Exhibit 2) with just one notable
transaction – Manulife’s acquisition of RBC’s travel
insurance business. The remaining M&A transactions
were in the area of asset/wealth management that, in
aggregate, reported $99 million of deal value. From a
valuation perspective, there was limited activity in the Life
& Health space in 2013. While few deals disclosed financial
terms, price to book value multiples in the life space
increased slightly, mostly driven by life insurers acquiring
asset managers.
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Number of deals 8 7 5 3 11 9 6 7 9 7 2 4
Inbound 1 1 2 0 1 3 0 0 1 3 1 0
Outbound 1 1 0 1 5 3 0 2 2 1 1 1
Domestic 6 5 3 2 5 3 6 5 6 3 0 3
• Transactions represent Canadian life insurers making acquisitions on a global basis. Transactions also include foreign operations purchasing
Canadian life insurers and Canadian life insurers purchasing asset managers.
3,728
2,205
837 833
1,069
12
718
431
1,660
412
99
0.00x
2.00x
4.00x
6.00x
8.00x
10.00x
12.00x
14.00x
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
AverageP/BV
2013

6
• Transactions represent Canadian life insurers making acquisitions of asset managers on a global basis.
Exhibit 3: Acquisitions of Canadian asset/wealth managers
The asset/wealth management sector is an area of focus
for Canadian life insurers given the relatively light amount
of capital required. Exhibit 3 shows deal activity by life
insurers in the Canadian asset/wealth sector. Two recent
notable domestic transactions by Canadian life insurers
include Industrial Alliance’s $99 million purchase of Jovian
Capital in July 2013, which added $5.4 billion in assets
under management (AUM) and $1.6 billion in assets
under administration; and Sun Life Financial’s buyout
of the minority shareholders of McLean Budden (with
AUM of roughly $30 billion), which was subsequently
integrated into the firm’s US-based MFS Investment
Management subsidiary.
Valuation levels for asset/wealth managers in Canada vary
depending on factors such as whether assets are managed
or administered, and whether AUM is retail, which tends to
be more valuable, or institutional with its higher fees.
It’s important to note that Canadian life companies’ asset/
wealth management businesses are not solely focused on
the Canadian market as each of the large life insurers have
an international focus with sizable operations in the United
States. Manulife Financial has John Hancock Investments in
the US; Sun Life Financial’s US operations are through MFS
Investment Management; and Great-West Life has Putnam
Investment Management. We expect that future growth of
life insurers’ asset management platforms will continue to
have a global focus.
527
1,251
251
3,946
2,600
597 706
264
2,615
88
276
12
24
112
99
0
1,000
2,000
3,000
4,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
DealValueinC$mm
Acquired by Cdn life insurer

The story in P&C insurance M&A is much more robust
(Exhibit 4). Contrary to the US, where P&C deal value has
declined by 43% from 2008 to 2013, Canada has seen a
steady increase in transaction value and activity in the past
five years, reflecting the return of large transformational
deals. In June, Travelers announced the acquisition of
Dominion of Canada General, expanding its Canadian
platform to personal lines and adding further scale to its
commercial business. Travelers is now a top 10 P&C insurer
in Canada, with a 3.2%3
market share of aggregate direct
written premiums (DWP)3
.
The recently announced acquisition of State Farm Canada
by Desjardins vaults the Quebec-based cooperative to
the number two position in Canadian P&C DWP, with
an estimated 8.7%3
pro forma market share. These two
transactions are very significant for the industry, creating a
stronger concentration of premium volume by larger, well
capitalized insurers. The top three P&C underwriters –
Intact, Aviva and Desjardins/State Farm Canada –
represent 33.5%3
of industry DWP, with the top 10
representing 68.1%3
.
Exhibit 4: M&A trends – Property & Casualty insurers
Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Number of deals 5 2 6 5 6 7 6 8 10 4 5 8
Inbound 0 0 0 0 0 0 0 0 0 0 0 1
Outbound 1 0 1 0 0 1 0 2 2 1 0 2
Domestic 4 2 5 5 6 6 6 6 8 3 5 5
3
Excludes Lloyd’s, government insurers (SAF and ICBC), and mortgage insurers (Genworth and Canada Guaranty).
• Transactions represent Canadian P&C insurers making acquisitions on a global basis. Transactions also include foreign operations purchasing
Canadian P&C insurers.
591
0
569
427
805
136
568
2,417
2,917
2,703
2,974
1,769
0.00x
0.50x
1.00x
1.50x
2.00x
2.50x
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
AverageP/BV

8
Exhibit 5 : M&A trends – P&C and life brokers
Source: Capital IQ and Deloitte analysis
• Transactions represent Canadian life and P&C insurance brokers
making acquisitions on a global basis. Transactions also include
foreign operations purchasing Canadian life or P&C insurance
brokers.
5
7
14
6 7
24
13 14 14
27
24
22
0
5
10
15
20
25
30
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Numberofdeals
Number of deals
hibit 5
The theme of non-insurance owners divesting of
non-core businesses continued to play out in 2013.
British Columbia-based credit union Coast Capital sold its
insurance distribution business, Coast Capital Insurance
Services, to Western Financial Group in July 2013. This
is an important extension of Western Financial Group’s
brokerage network to BC, and a logical strategic shift for
Coast Capital as it focuses on its core banking business.
The rise in private equity-backed insurance acquisitions
has included Canadian content recently, notably in
Westaim’s announcement of its $75 million investment
of a 42.5% interest in Houston International Insurance
Group, Ltd; and CPPIB’s announced US$1.8 billion
acquisition of Wilton Re Holdings Ltd.
Consolidation in the insurance distribution sector is also
accelerating as brokers and managing general agents
(MGAs) look to monetize their investments and plan
for succession. Activity in the P&C and life insurance
brokerage sectors remained healthy in 2013 (Exhibit 5)
with 22 deals. This trend is expected to continue. In fact,
there have already been several brokerage and MGA
transactions in 2014.

Key catalysts for insurance
M&A in 2014
M&A activity should remain robust in the year ahead,
particularly in P&C underwriting and distribution as the
market leaders look to gain scale and efficiencies.
While the market has seen significant consolidation, there
remains considerable fragmentation in the broker channel
and many smaller underwriters are still actively creating a
platform for significant consolidation. Several key factors
will likely drive M&A activity in 2014 and beyond.

10
Modest economic growth
1Real Canadian GDP growth recovered to 2% in 2013
from 1.7% in 2012 (Exhibit 6), largely reflecting increasing
consumer spending and strength in the energy sector.
From a fiscal perspective, Canada has recovered well from
the financial crisis, with the federal deficit at $16.6 billion4
for fiscal 2014, down from $55.6 billion4
in fiscal 2009.
Economists are predicting further growth going forward as
US demand strengthens and the Canadian dollar weakens.
The unemployment rate improved to 7.1%5
in 2013,
from 7.3%5
in 2012, and headline inflation remains low
at 1.1%6
.
All of this bodes well for economic growth, suggesting
increased activity by consumers and businesses, and
greater insurance demand. That said, economists are
forecasting only modest economic growth in the near
term, while both public and private investors are targeting
earnings growth and value gains. As a result, we are
likely to see further M&A activity as a means of achieving
profitable growth.
Exhibit 6: Canadian Real GDP annual change
Source: Statistics Canada. 2014 and 2015 Forecasts are from the Bank of Canada.
Analysis as of 12/31/2013.
4
Government of Canada Department of Finance.
5
Statistics Canada.
6
Bank of Canada.
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F
exhibit 6

Both the level of interest rates and equity market
performance impact insurance earnings largely through
their investment portfolio returns. Interest rates are
particularly relevant to Life & Health insurers, given the
long term nature of their liabilities. Canadian interest rates
remain low (Exhibit 7), and the Bank of Canada continues
to guide to a neutral stance, reflecting the expectation
for inflation to remain below target in the near term. The
Bank of Canada’s overnight rate is forecast to remain at
1% through 2014 with the potential for a slight increase
in 2015. On the long end, 10-year Government of Canada
bond yields are forecast to increase by about 100 basis
points over the next year from current levels of just below
2.5%. Rising rates should help improve earnings for both
Life & Health and P&C insurers.
Canadian equity markets performed reasonably well in
2013 on an absolute basis in that the S&P/TSX Composite
Index increased by 13%. However, results paled in
comparison to global markets which posted significant
rebounds – the MSCI World (Net) Index and the S&P 500
were up 30% and 21% respectively in 2013 – as weak
commodity prices continued to weigh on the materials-
heavy Canadian market.
For the Canadian life companies, aggregate earnings in
2013 totaled $7.9 billion, having fully recovered from
depressed levels throughout the financial crisis (Exhibit 8).
Continued low interest rates
2
Exhibit 7: Bank of Canada overnight target interest rate
Source: Bank of Canada. 2014 and 2015 forecasts are the average of CIBC, Scotiabank, TD, and BMO period
ending 2014 and 2015 forecasts.
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014F 2015F

12
Exhibit 8: Aggregate financial performance of Canadian Lifecos
Exhibit 9: Aggregate financial performance of Canadian P&C insurers
Source: OSFI.
Source: OSFI.
Bigger doesn’t necessarily mean better when it comes
to individual company results. Some of Canada’s largest
P&C insurers reported a combined ratio above 100%
(Exhibit 10). Canada’s largest insurers Intact and
Aviva reported underwriting profitability in this
challenged market.
Conversely, P&C insurance underwriters reported a
38%7
reduction in net income in 2013 (Exhibit 9), driven
largely by lack of underwriting profitability reflecting
weather-related losses, amid very modest net investment
income. The combined ratio for the industry as a whole
deteriorated to 100.3%7
in 2013 from 96.0%7
in 2012.
As a result, the industry ROE declined to 6.1%7
in 2013
from 10.5%7
in 2012. The biggest contributor to these
lackluster results was the jump in property loss ratios owing
to extreme weather events. According to the Insurance
Bureau of Canada, insured losses related to severe weather
totaled $3.2 billion in 2013, up from $1.2 billion in 2012.
7
5.5
5.2
6.6 7.1
3.2
5.9
3.5 3.6
6.0
0.0
2.0
4.0
6.0
8.0
10.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
C$billions
Net income
7.9
2.2
4.2 4.5 4.9
1.7
2.2 2.4 2.7
3.9
2.4
0.0
2.0
4.0
6.0
8.0
10.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
C$billions
Net income

Exhibit 10: Canadian top 30 insurers by combined operating ratio
Source: MSA Research (excludes Lloyd’s, SAF, ICBC, Genworth and Canada Guaranty).
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
FMGlobal
Chartis
CAAOntario
LibertyMutual
Allstate
Aviva
Northbridge
Desjardins/StateFarm
GreenShield
RBC
Intact
Continental
AmericanBankers
Gore
Zurich
Economical
LaCapitale
SGI
Co-operators
RSACanada
Dominion/Travelers
IndustrialAlliance
Wawanesa
Chubb
Portage
AlbertaMotors
GCNA
ACE
TD
Allianz
COR Average
Bigger doesn’t necessarily mean better when it
comes to individual company results. Some of
Canada’s largest P&C insurers reported a
combined ratio above 100%.

14
Multiple regulatory changes
3Recent years provide ample evidence of how new
regulations impact M&A activity in the insurance sector.
In November 2013, the Office of the Superintendent of
Financial Institutions (OSFI) released its final Guideline
E-19, Own Risk and Solvency Assessment (ORSA), in
which insurers are expected to fully comply with new
requirements, including the comprehensive identification of
risks and their relation to capital, by December 31, 2014.
The more stringent guidelines may adversely impact M&A
activity in the sector as capital becomes scarcer, prompting
insurers to either gravitate away from capital intensive lines
of business, which may no longer be generating adequate
returns, or look for ways to diversify their existing books
of business.
Given the global nature of the Life & Health, P&C insurance
and reinsurance markets, Canadian insurers should pay
attention to international developments as they look to
grow their business nationally and abroad.
As Ontario Auto represents 27.6%8
of Canadian P&C
DWP, its operating results in this product line are critically
important to most of Canada’s P&C Insurers. In 2013, the
Ontario government introduced mandated rate reductions
– 15% on average over two years by August 2015. The
industry appears on course to achieve cumulative 8%
rate reductions by August 2014 in alignment with the
government’s mid-term target. The critical determinant
of near-midterm profitability will be whether these rate
reductions match declining claims costs, most notably
driven by minor injury guidelines. There could be some
mismatching of claims reductions over the next 12-24
months as these measures are introduced.
Developments in auto rate regulations highlight the
importance of cost containment in this extended low
growth, low interest rate environment. The objective of
scale in underwriting, through reduced claims costs, may
be best achieved through acquisitions, with sub-scale auto
insurers or those with limited pricing advantages electing
to divest personal lines and re-allocate capital to more
profitable or core lines of business.
The more stringent guidelines may adversely
impact M&A activity in the sector as capital
becomes scarcer.

Canada experienced extreme weather in 2013 and suffered
related insured losses. The June 2013 Alberta floods were
estimated to cost the industry more than $1.7 billion9
in insured losses; the July 2013 Lac Mégantic explosion
incurred over $200 million; the July 2013 Toronto floods
cost $940 million9
; and the December 2013 ice storm,
which hit southern Ontario and eastern Canada, cost an
estimated $225 million9
. The impact of these weather
events is notable on the personal property results for
the sector where most insurers are struggling to achieve
underwriting profitability. Loss ratios for personal and
commercial property spiked to 71%8
and 76%8
respectively
in 2013, up from under 60%8
and 66%8
respectively in
2012. Insurers are taking measures to improve product
profitability by revising policy wording and improving
claims management.
Exhibit 11 shows that losses from catastrophic events
in Canada, mostly weather-related, have increased
significantly in recent years. The frequency and severity of
weather-related losses is a critical concern of the industry,
and highlights both the fragility of our aging infrastructure
and the inadequacy of our individual preparedness to
adapt to changing weather patterns.
Moreover, ongoing negative impacts of escalating
losses on individual insurers may be catalysts for capital
reallocation decisions, potentially resulting in M&A activity.
Increased extreme weather
4
Exhibit 11: Catastrophic insurance losses
8
9
Insurance Bureau of Canada.
Catastrophic losses
302
427 322
1,042
158 156
374
990
915
1,707
1,190
3,200
-
500
1,000
1,500
2,000
2,500
3,000
3,500
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: IBC.

Recognizing the power of
data analytics5
16
With continued low interest rates, the P&C industry will
remain focused on underwriting profitability by ensuring
pricing adequacy and improving claims management.
With the advent of advanced analytics and predictive
modeling, the benefit of capturing and mining data for
more precise risk measurement purposes is clear. Analytics
can reduce cognitive bias in decision making and support
more robust modeling. Its applications to underwriting,
claims management, and distribution management are
boundless. Insurers with access to large databases will
develop more robust pricing models and therefore improve
underwriting profitability.
Leveraging data analytics and pricing tools in new markets
was a key strategic driver for Travelers’ acquisition of
Dominion. If access to big data and analytics capabilities
become prerequisites for profitable underwriting,
particularly in personal lines, then so does access to capital
to fund these projects. Those with neither the financial
means nor appetite to employ more sophisticated pricing
tools may ultimately refocus on lines of business for which
these tools are less obviously critical to success.
Data analytics is being embraced not only by existing
underwriters, but also by new entrants. While predictive
analytics have historically been used by insurers in personal
lines pricing, many are now extending these techniques to
other areas, including commercial lines pricing, distribution
management and claims management. In its 2012 report,
the Ontario Automobile Insurance Anti-Fraud Task Force
cited a study that estimated auto insurance fraud to cost
between $770 million and $1.6 billion each year. Effectively
tackling this cost requires a coordinated approach, which
is the very essence of the new not-for-profit organization
CANATICS that will use sophisticated analytics to identify
fraudulent claims activity.
Indeed, the emergence of telematics in the Canadian
insurance sector is expected to create significant
opportunities for insurers to mobilize data analytics
initiatives. Four Canadian insurers currently offer
telematics programs for personal automobile insurance
customers. The Insurance Brokers Association of Ontario
has also developed a program; others are expected to
launch programs in 2014. Telematics devices will capture
significant customer data that can be used to improve
underwriting capabilities, pricing, and safety while
also acting as a powerful tool in fraud detection and
loss prevention.

Consolidating distribution
6In 2013, M&A activity also appeared in the distribution
segment as brokers faced increasing costs associated
with operational efficiencies, technology improvements,
connectivity to insurers and succession planning. There
were 21 disclosed M&A transactions in the P&C distribution
industry in 2013, continuing the trend observed since 2010
when M&A activity rebounded following the financial crisis.
We believe that M&A activity within insurance distribution
will continue as participants improve operating economics
and plan their succession. The first quarter of 2014 has
already produced five broker deals.
Financial terms for P&C insurance broker transactions are
typically not disclosed as the majority of companies are
private. Of deals that have been disclosed, valuations have
increased. EV/revenue multiples are now mostly more
than three times, and EV/EBITDA multiples are over nine
times. The potential sale of Noraxis by RSA Canada could
establish a new valuation benchmark.

18
Potential market bifurcation
7Scale in underwriting and claims management is
increasingly becoming a prerequisite for underwriting
profitability in standard personal lines. In a data-driven
world, as the big get bigger, so should their comparative
advantage in underwriting. Industry results for 2013 point
to continued bifurcation of the market.
The top 30 insurers in Canada control 91%10
of the market,
with the top 10 largest general insurers accounting for
67%10
of total DWP. While the market has seen significant
consolidation over the past 10 years, there are still many
smaller players in the industry including niche specialty
insurers and numerous national and provincial mutual
insurers. However, these smaller players are challenged
to capitalize on growth opportunities and the high cost
of technology required to remain competitive in today’s
personal lines market puts them at a disadvantage.
More than 100 insurers with different ownership structures
reported results in 2013 highlighting that there are still
many opportunities for consolidation in the market. Their
desire to gain scale and drive earnings growth will lead
to continued consolidation in the industry with several
players expected to be active. Industry leader Intact has
now fully integrated both AXA Canada (acquired in 2011)
and Jevco (acquired in 2012), with synergy realization for
both on track. With a strong market position (16.4%10
of
the market) and access to capital through its highly valued
common shares, Intact is likely to continue to be acquisitive
domestically and abroad. Other potential consolidators
will emerge both domestically and internationally as
opportunities develop within the market.
10
More than 100 insurers with different
ownership structures reported results in 2013
highlighting that there are still many
opportunities for consolidation in the market.

Building excess capital
8The Canadian lifecos have rebuilt their capital positions since the financial crisis by increasingly shifting their offering to
focus on capital-light products, notably asset management. By changing their respective business mix, the lifecos have
improved their operational leverage. The aggregate MCCSR ratio for the industry, which ended 2013 at 239%, was well
above both the 213% reported as of 2012 and the 218% reported as of 2007 (Exhibit 12).
Similarly, Canadian P&C insurers remain well capitalized.
The domestic industry as a whole reported an average
minimum capital test ratio of 237% for 2013, suggesting
a potential aggregate excess of capital of at least $16.5
billion. This is up significantly from 2008, when the industry
was operating at 222% and excess capital was closer to
$12.3 billion. Moreover, we have seen several insurance
companies tap the public markets for capital in 2013.
In its February 2014 budget, the federal government
proposed to introduce legislative and regulatory changes to
establish a P&C demutualization framework. The potential
demutualization of federal P&C companies, and perhaps
eventually provincially-regulated companies, increases
the prospect of further access to capital to fund growth,
including through acquisitions.
Exhibit 12: Aggregate capital levels of Canadian lifecos
Source: OSFI.
210%
220%
230%
240%
0.0
25.0
50.0
75.0
2007 2012 2013
Total capital required Total capital available MCCSR ratio (RHS)
218%
213%
239%

20
M&A preparedness
Mergers and acquisitions can be important growth tools for
any organization. In recent years, insurers have addressed the
challenges of shrinking investment returns and volatile markets
with cost cutting initiatives.
As economic conditions improve, strategic focus is
turning to profitable growth, both organically and
through acquisition. Insurers will increasingly review
their operations, assess capital allocations and refine
strategic priorities. Determining the role M&A might play
in achieving targets and growth strategies will become an
agenda topic in many boardrooms in 2014 and beyond.
Successful M&A strategies should align with a company’s
overall growth strategy and targeted end state, have
clear performance objectives, such as topline growth
or value, and consider organizational limitations, such
as capital constraints, management mindshare and
geographic dispersion.
Developing a playbook
M&A playbooks can help organizations bridge business
development activities from strategy to implementation.
Playbooks should:
• Formally document a clear and disciplined M&A
decision framework
• Develop repeatable, predictable and efficient processes
• Include appropriate checklists, tools and standard
templates
• Provide guidelines for specific M&A transaction
functions, such as target screening, due diligence,
integration, divestiture management, and
change management
• Assign responsibility for each M&A transaction
function to members of a virtual team which advise
the business development leaders when an M&A
opportunity arises
Resources
Insurance company M&A teams, now typically armed
with fewer resources, must be proactive to capitalize
on emerging opportunities and should look to use
both internal and external resources to ensure effective
deal execution. Increasingly, insurance companies are
augmenting full time corporate development staff with
part time, as-needed subject matter specialists from
impacted functional areas. They are also looking for
ways to use technology and data analytics to learn more
about the strengths and weaknesses of their targets and
what product, service and capability gaps an acquisition
might fill.
Determining your M&A triggers
Companies exploring M&A opportunities are taking a pulse
of the market by not only actively communicating their
desires to grow through acquisition, but also by engaging
external firms to identify likely targets, build relationships,
conduct due diligence and determine how to integrate
acquisitions into their operations.
To obtain a complete understanding of the M&A
landscape, it’s important to identify the triggers that could
accelerate M&A activity. Many of the issues discussed in
the paper could likely trigger M&A activity and should be
included in an organization’s strategic scenario planning
exercises. These triggers can be classified in two ways:
1. Higher probability events that could have a
moderate impact
2. Lower-probability events that could have a
major impact

In addition, the following higher probability events could
have a moderate impact on insurance sector M&A activity
in Canada:
• Strategic management of business portfolios:
Competitive pressure within specific segments of the
industry cause larger organizations to divest non-core
businesses or acquire capabilities (e.g., channels,
technology) they believe may strengthen their long
term position.
• Growth pressure reaches a tipping point: Pressure
builds on insurers to reach growth expectations from
the investment community and other shareholders.
Given the lack of organic growth opportunity,
particularly in auto markets, insurers turn more
aggressively to inorganic growth strategies.
• Innovation alters the competitive landscape: The
launch of more widespread telematics programs
increases competition in the auto market, putting
pressure on top and bottom line performance of
weaker players and prompting them to make a
transaction to maintain scale. For insurers that lack
technical sophistication, this may trigger exit strategies
from the market.
• Demutualization: The Department of Finance
finalized regulatory changes that would allow some
of Canada’s federal mutual insurance companies to
demutualize. Provincial regulators, concerned about
capital adequacy of their insurers, may initiate similar
legislative and regulatory changes.
• Private equity makes a bold play: A PE investor,
prompted by an ability to raise capital and deliver
strong investment returns, consolidates a number of
midsize organizations (especially in the P&C sub-sector)
and builds a strong organization capable of taking
market share.
• Pressure on foreign parents triggers Canadian
divestitures: Foreign parents facing challenges in
their domestic or other international markets consider
divesting their Canadian businesses to appease
investors and assist with capital management.
These catalysts are likely to play out in 2014, and cause
an increase in insurance sector M&A, particularly in P&C
insurance. Several large transformational deals have
concluded in the past four years, and another major deal
has been announced in 2014. This activity alone will
prompt strategic and transaction responses from others.
M&A readiness checklist
An organization’s M&A readiness plan should:
• Align M&A strategy with corporate growth goals
• Define a decision-making process
• Determine governance and performance
expectations
• Codify M&A procedures, tools and templates
• Communicate roles and responsibilities to the
organization and external consultants
• Provide training to internal and external
team members

22
Contacts
Mark Jamrozinski
Canadian Managing Partner, M&A
Toronto
mjamrozinski@deloitte.ca
416-601-6499
Catherine Code
Senior Advisor, Financial Advisory
Toronto
ccode@deloitte.ca
416-643-8780
Clayton Spahn
Senior Manager, Financial Advisory
Toronto
cspahn@deloitte.ca
416-874-4395
Stephen King
Manager, Financial Advisory
Toronto
steking@deloitte.ca
416-202-2232
Jessica Goldberg
Partner, Consulting
Toronto
jgoldberg@deloitte.ca
416-874-4477
Sati MacLean
Senior Manager, Assurance & Advisory
Toronto
416-775-7451
samaclean@deloitte.ca
Michael Rizvanovic
Manager, Financial Advisory
Toronto
mrizvanovic@deloitte.ca
416-874-3764

www.deloitte.ca
Deloitte, one of Canada's leading professional services firms, provides audit, tax, consulting, and financial advisory services. Deloitte LLP, an
Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited.
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal
structure of Deloitte Touche Tohmatsu Limited and its member firms.
© Deloitte LLP and affiliated entities.

2014 Canadian Insurance M&A Outlook

Recomendados

Recomendados

Más contenido relacionado

La actualidad más candente

La actualidad más candente (18)

Similar a 2014 Canadian Insurance M&A Outlook

Similar a 2014 Canadian Insurance M&A Outlook (20)

2014 Canadian Insurance M&A Outlook