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Insurance mergers and acquisitions result in fewer companies in the industry, but can create larger entities that are better able to compete. Consolidation can occur in different types of companies, and economic, market, political, and legislative factors can influence M&A activity.
Insurance mergers and acquisitions are operations that take place in the insurance industry and result in fewer companies making up the category. When two companies combine, however, it creates a larger entity that may be better able to compete. Depending on economic and market conditions at the time of the deal, insurance mergers and acquisitions could be accomplished with equity, debt or cash.
Consolidation can occur in different types of companies. For example, it could happen among companies that focus on life insurance, health insurance, or large financial institutions with insurance divisions. Sometimes, a large insurance company buys out a smaller organization, while other times two companies combine to strengthen a competitive position.
In some insurance mergers and acquisitions, one company’s loss is another company’s gain. For example, a financial conglomerate might grow so large that it includes multiple lines of business including different types of insurance services. If one of these divisions is not a central focus and fails to determine the type of revenue required, the parent company may decide to sell the business. Another insurance company that may be dedicated to the line of business being sold could make the acquisition and strengthen its focus and position in the industry. In turn, the larger financial entity can use the proceeds from the divestment to invest in its leaner businesses.
Insurers sometimes respond similarly based on economic conditions. Hence, there may be a wave of consolidation in the insurance industry for one season followed by a different common theme in the next cycle. Additionally, political and legislative requirements impact insurance mergers and acquisitions. A government requires that insurers must maintain a certain level of creditworthiness, i.e. capital in relation to liabilities, in order for the policyholder to be paid. Companies with a weak balance sheet may not meet the solvency standard and may be a prime target for insurance mergers and acquisitions.
Another factor that could influence insurance mergers and acquisitions is the stock market. A rising share price coupled with a solid economy and cash on a balance sheet are all signs of a financially sound insurance company. This strong position could lead an insurance company to a position where it seeks to grow by acquisition, thus kicking off a flurry of possible M&A activity in the industry. It could also allow the acquiring company to make an acquisition using cash or stock instead of borrowing money from investors to close a deal.
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