Insurance mergers and acquisitions are deals that unfold in the insurance industry that result in fewer companies that make up the category. When two companies come together, however, it makes one larger entity that might be able to better compete. Depending on the economic and market conditions at the time of the deal, insurance mergers and acquisitions could be accomplished with stock, debt, or cash.
Consolidation can occur across different types of companies. For instance, it could happen amongst companies that focus on life insurance, health insurance, or large financial institutions with insurance divisions. Sometimes, a large insurance company takes over 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 to be so large that it includes multiple business lines including different types of insurance services. If one of those divisions is not a core focus and failing to drive in the type of revenues required, the parent company may decide to sell the business. Another insurance company that might be devoted to the business line that is being sold could make the acquisition and strengthen its focus and industry position. In turn, the larger financial entity can use the revenues from the divestiture to invest in its more streamlined business.
Insurers sometimes respond in a similar fashion based on economic conditions. So, there may be a wave of consolidation in the insurance industry for a season followed by a different common theme in the next cycle. Also, political and legislative requirements impact insurance mergers and acquisitions. A government requires that insurers must maintain a certain level of solvency, that is capital in relation to liabilities, so that the insured will be paid. Companies that have 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 stock price coupled with a solid economy and cash on a balance sheet are all signs of a financially sound insurance firm. This strong position could lead an insurance company to a position where it seeks to grow by acquisition, thereby igniting a flurry of possible merger and acquisition activity in the industry. It might also allow the acquiring company to make an acquisition using cash or stock as opposed to borrowing money from investors to accomplish a deal.