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M&A in the Insurance Industry: Trends and Strategies

08.29.2019

Certain market trends, such as low cost of capital and decreasing yields on debt securities, continue to fuel an increased appetite for merger and acquisition (M&A) activity within the insurance marketplace. This is particularly prevalent within the property and casualty (P&C) insurance sector – which typically, reports one of the lowest costs of capital metric across all industries. Other factors increasing the anticipated M&A activity within the P&C sector are (1) lack of succession planning for small and mid-size niche insurance companies, (2) the increase in cost of compliance, (3) the need for costly upgrades to information technology solutions and (4) the use of “demutualization" or the formations of up-stream holding companies to provide flexibility on potential capital transactions.

Information provided by the S&P Capital IQ Database suggests that the number of transactions in the insurance space are increasing over a 5-year period.

[1][2]

If you’re considering an acquisition or merger, retaining experienced insurance industry and transaction advisory professionals can provide a wealth of experience to evaluating the impact that business acquisitions and combinations can have on your organization, from both a reporting and operational standpoint. Whether you’re anticipating an acquisition or beginning to develop an exit plan for your business, consulting a team of seasoned transactional and insurance industry advisors is crucial to achieving your goals.  

A few of the services and strategies to consider include:

  • Valuation and Sale Preparation. Determine what the business is worth based on current market conditions and start preparing for the sale process. A quality of earnings review will not only help uncover hidden surprises that could be discovered during a buyer’s due diligence, but it can also ensure the seller is getting the right value for the business. 
  • Business Process Evaluation. Develop a consistent approach when evaluating historic data for significant estimates. In certain instances, the differences in process and procedures of newly acquired or combined entities could provide significant conflicts to operational results if not assessed appropriately.
  • Loss Portfolio Transfers in Business Combinations. Conduct a detailed review of existing lines of business to provide the potential values or detriments when novating the risk via loss portfolio transfers. Typically, loss portfolio transfers are utilized to exit a line of business or as a mechanism to transfer risk outside of the organization, which in turn allows an organization to carve out risk they may not have the infrastructure to support.

If you have questions about the impact that mergers and acquisitions may have for your insurance entity, please contact Todd Goldenhersh, Audit Services Partner, at tgoldenhersh@bswllc.com or 314.983.1205.

For more information about our services for the insurance industry, contact Alan Fine, Tax Partner and Insurance Industry Group Leader, at afine@bswllc.com or 314.983.1292.

[1] Brown Smith Wallace evaluation of S&P Capital IQ Database for Property and Casualty Insurance (Primary) industry classification, as of 8.22.2019

[2] Duff and Phelps Valuation Handbook for Fire, Marine, and Casualty Insurance (SIC 633)

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