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Brokerages on the acquisition warpath

By Carine Sroujian | April 20 2004 02:16PM

The pressure on bottom line profits and market availability has brokerages travelling down the buying warpath once more. Brokerages surveyed by The Insurance Journal agree that 2004 is a good time to buy other brokerages.

Western Financial Group, a brokerage that ranked number four in our Top 50 brokerage agencies of 2003 table, is at the most active consolidation stage in all of its history. “We’re very active right now. We are going to hopefully add 20 new locations this year through acquisitions,” reveals president and CEO, Scott Tannas.

Mr. Tannas is hoping to complete these acquisitions before the middle of the second quarter in order to focus the rest of the year on integration.

Western Financial has already announced four acquisitions in the last couple of months. Barker Agencies marked its first insurance agency in Manitoba in February. Meston’s Agencies and Mirror Lake Agencies in Alberta and Wilford Agencies in Saskatchewan were purchased in January.

“We have been relatively inactive for a year and a half while we launched our bank and worked on our common branding initiative. Now we have signalled that we want to get out and begin growing again, we raised some money that’s sitting in our bank account, we need to get it invested. An enormous amount of my time right now is focused on acquisitions,” he adds.

Mr. Tannas says the company is well-positioned to acquire. “Demographics are on our side, we’ve got an aging population of owner and managers in the insurance brokerage business in Canada. All of those people eventually need to do something both in terms of getting their capital out and in terms of providing a legacy for the business and the customer.”

Jon Ouellette, president of Canada Brokerlink, a brokerage that ranked number two in our Top 50 brokerage agencies of 2003 table, agrees that this is a very good time to buy especially for Brokerlink because of its centralized back office.

Brokerlink is currently looking to acquire more brokerages in South Western and South Eastern Ontario. The company is in discussions but there is nothing concrete as of yet. The brokerage finished 2003 with $300 million in premiums and its goal is to double its premiums in the next four years.

“We’ve looked at brokerages worth $40 to $50 million. We have about $300 million of growth we’re looking for.” The brokerage’s premiums increased by 11% in January from last year, which Mr. Ouellette says is not so bad considering the auto rate freezes in Alberta and the uncertainty in Ontario.

Mr. Ouellette says there is also a downward pressure on the pricing for brokerages today because of the uncertainty in the Ontario and Alberta auto markets. “There’s a question whether brokerages will have the same markets, about what’s going to happen with commercial. The market is starting to level off; if it softens it means the rates will be going down again.” The pressure on bottom line profits does not usually bode well for high multiples, he adds.

Hub International, a brokerage that ranked number one in our table, would like to expand in Ontario and Quebec. “We want to create larger hubs like tuck-ins as opposed to separate entities,” reveals Craig Barton, president of Hub International’s Canadian operations and of its hub, Barton Insurance Brokers.

The Hub Group, one of ten hubs that make up Hub International, acquired a brokerage in Ontario, Martin Kir, for an undisclosed amount in January. The brokerage, which will be folded into Hub’s Leamington, Ontario office, generates an annual revenue of approximately US$270,000.

B.F. Lorenzetti & Associates, a brokerage that ranked number three, is also in acquisition mode. The firm is currently looking at opportunities in Toronto and Vancouver, together with investing in a Lloyd’s brokerage firm in London, England.

“We feel the market is changing into a buyer’s market in 2004,” says Barry Lorenzetti, President of B.F. Lorenzetti. “Some of the smaller brokerages are going to be having a tougher time maintaining the revenue growth and it will create more opportunities for mergers and consolidations.”

He adds that the market will become very competitive in 2004 and that rates will go down making small brokerages a target.

Better time to sell?

Jeff Brandham, president of CG&B Group, a firm that ranked number five in our table, says the company did most of its acquiring before the turn of the market and agrees that in 2004, there will be a lot of brokerages looking to sell.

“Some brokerages were hanging on during a hard market trying to grow. Now the prices have gone up and there will be plenty of brokerages in 2004 trying to take advantage of that growth.”

Although Mr. Barton says it is a good time to buy if the deal is right, he agrees that people would be more interested right now in selling.

Even though Hub International is watching out for more prospective buys, the company is concentrating more on organic growth and bringing in new sales throughout the company. Larry Lineker, president of Hub’s TOS Insurance Services subsidiary in Vancouver, was recently appointed chief sales officer for Hub International, with the responsibility of directing Hub’s overall sales initiative.

Trend for all sizes

Ross Totten, president and CEO of Totten Insurance Group, a specialty brokerage, sees a real acquisition trend in 2004 especially for small brokerages. “This year, there will be more acquisitions than there have been in the last couple of years.” He says that now that the market has levelled off, some brokers who had a tough time over the past couple of years will start selling, and others will see that as an opportunity to grow.

Totten recently acquired August Group Risk Management Ltd., a brokerage located in Toronto, Ontario that underwrites policies only for Aviva Canada. August Group is a $20 million brokerage. With this purchase, Mr. Totten, hopes to increase Totten Group’s total premiums to $30 million by the end of this year. The president didn’t want to reveal Totten’s exact premiums but he said if you calculate, it would be a $9 to $10 million brokerage.

Mr. Totten says he definitely wants to acquire more brokerages. “Totten Group is growing very rapidly. We’ve expanded our writings out of Ontario to do more business in Western and Atlantic Canada. About five per cent of our business comes from Western Canada. We would hope to double that to ten per cent of our book if not more. Right now, Atlantic Canada is also about five per cent of our book and it will stay the same but our volume of business as a group will be much larger this year than last year.”

Totten Group has only been in business for about a year and had only figures to show for nine months of operation in 2003. Therefore, Mr. Totten wanted to wait until next year to participate in our table in order to give a more accurate picture of his company’s situation.

Model still effective

Mr. Tannas stresses that the consolidation model is still successful today. The reasons he says are two-fold. “Number one is I think we have proven that consolidation can be as profitable as functioning independently today. We also believe that consolidation for the future, the size, the scale, the scope, the ability to build a strong brand name and to bring new products forward through research and development is going to be critical in the future environment. So we’re hedging our bets for the future, we think we’re prepared to react to future challenges but we’re doing it also in a profitable environment today.”

He explains that the bits and pieces of work flow that have been consolidated over time were done cautiously and carefully, with some amount of consensus and trial and error.

“We didn’t do like some of the others, pretend like we had a silver bullet of management brilliance to bring to the table that was going to elevate the profitability or elevate efficiency rate off the bat. It’s been a slow evolutionary process for us,” says Mr. Tannas.

Mr. Ouellette explains that the consolidation model is more effective right now than it has ever been. “There’s constant pressure on IT and bottom line profit. The human resources training aspect of an insurance brokerage is getting more and more difficult. It’s hard to find good people, to keep up with the training, keep them professional, and the limited availability of the markets.”

Partnership model

Mr. Ouellette affirms that the consolidation model is evolving; there is much more cooperation in the markets today. Companies are now focusing on building strong partnerships. “We’re still working at being independent as far as representing multiple markets and not using size as a lever for additional commission.”

He adds that there was an idea before that as a brokerage got bigger, it would have more power and authority over the markets. “The reality is that it’s a double-edged sword. The larger we get and the larger volume we have in the individual markets, the more difficult it would be for us to move that business the same as an insurance company will be worried if we did move it.”

He says that there is no benefit in threatening insurance companies. “It’s really about establishing really strong solid partnerships. By having significant volumes with markets, you get their attention and you are able to strike those long-term relationships.”

When the agency started as a small group of rural colleagues that had pulled their equity together and matched it up with outside capital, Mr. Tannas says they did not have a clear and unbending strategy of how they were going to knit their network together.

“It really has evolved based on time circumstance and the personalities that we’ve collected over that period. The one thing that we did all share always was that we were not going to lose money and we were going to be profitable. We were not going to be like we saw others too, rolling out big numbers of offices without profitability thinking that they would figure that out later.”

Mr. Barton highlights that there is no longer an agenda to make acquisitions for the sake of making acquisitions. “We did five years ago and now we’re looking for the right strategic fit. We turned down a lot of inquiries because they were not right for us.”

Easier to integrate

Mr. Ouellette asserts that integrations have become much smoother than before. “Understanding the technology and having worked with a number of brokerages over the years, I think the technical aspect of it is pretty straight forward and we’re paying much more attention to the people part.”

To centralize service support for all its branches, Brokerlink developed in-house a new telephone technology in January that allows the transfer of calls between branches using an internal four-digit dialling system for the entire company.

Mr. Tannas explains that the brokerage gets better at integrating every time it does an acquisition. “But they’re always messy and they’re always fraught with the unexpected. Nothing ever works the way you plan it and no two businesses, even though we’re in the same industry, seem to operate the same way. And people are who people are and there’s always resistance to change and there’s always sacred cows that need to get slaughtered in order to move on.”

Challenges for 2004

Access to capital and, market and insurer availability are some of the challenges consolidators need to overcome in 2004. “We have to keep an eye on market consolidations that could have significant effect if you’re in the process of buying a brokerage,” explains Mr. Ouellette, “and the markets they have consolidated may change the relationships you have. That creates more uncertainty for smaller brokers acquiring other small brokers.”

Even though most brokerages will be embracing different challenges, Mr. Tannas explains that theirs will be to finish what they have started. “We’re at the mid-point in a lot of major initiatives: financial services and the selling of banking products and investment products from our offices. The branding, the bringing together of a culture, all of these are preoccupations today.”

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