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Consolidation wave expected to continue

By Matt Bell | November 01 2016 07:00AM

In recent years, increased regulation, compliance demands, technology, slimming margins and other pressures have resulted in a wave of consolidation in the managing general agency channel through mergers and acquisitions. Industry players do not expect this wave to subside anytime soon.

Terri Botosan, president of HUB Financial – one of Canada’s largest MGAs – predicts we’ll see consolidation come from principals (owners) who are also very active producers. These sellers may no longer want to worry about the growing challenges of operating an MGA.

Kevin Miller, president and CEO of ABEX Brokerage Services says that increasing compliance requirements have put pressure on MGAS. Technology demands, he adds, have also played a big role in forcing many cash-strapped MGAs out of the business.

“You can’t really run an MGA without a back office anymore. The cost of creating a back office is significant and with the decreasing margins, very significant for smaller MGAs,” says Miller.

Benefits of consolidation

Jim Virtue, president and CEO of PPI Solutions, sees benefits to the MGA consolidation trend for both buyers and sellers.

“On the acquiring side, there are advantages of scale, both from an administrative point of view and from a contractual point of view, with the insurance companies,” says Virtue.

“On the sell side; the services that are offered by firms like PPI are pretty considerable to what the smaller firms can do, because they simply do not have the scale.”

MGA owners are an aging demographic and may see selling as their best succession plan option. Through selling to a larger MGA, they may still be able to stay on with their firm, while gaining access to more resources.

“They don’t want to invest the capital required to continue to grow like (investing in) technology, or compliance costs, staffing...It’s a much more complex business than it used to be,” he says.

Some MGAs, who have reached a certain size, see consolidation as their only choice to grow, says Botosan.

“They’ve either grown to a size, where they’re starting to burst at the seam or perhaps realized they’ve got to make a big investment to take it to the next level of success. For them, it’s a decision point in their lives.”

 “We’ve just closed an acquisition in Edmonton. We’ve got two or three discussions in the works. There’s always a pipeline or acquisition discussion we’re having…” Botosan adds.

“We went through an intense (consolidation) period two to four years ago. It’s going to continue, but I’m not sure if intensify is the right word, partly because most of the attractive acquisitions have already been made,” says Paul Brown, IDC WIN, chair & CEO.

Brown sees his MGA growing organically and by acquisitions.

“I think any larger MGA is always looking at acquisitions. Our approach is to look for strategic opportunities, whether it’s regional or situations where our culture is a fit with the culture of the MGA,” he says.

Virtue of PPI Solutions says when looking for acquisitions, his MGA is more focused on the quality of the network as opposed to the geographic location. Already having a national footprint in place allows PPI Solutions to be more tactical as its expands, he adds.

“What we’re looking for are firms who see the value we bring in areas, like our advanced marketing tools, underwriting, planning services, IT departments, etc. We want to continue to be strategic and tactical in building on our footprint.”

Botosan says there are some areas in Canada that HUB has a very strong interest in, but also wouldn’t turn anyone away from a conversation since the HUB’s number one guiding principle is culture fit.

“We’ve done so much work to have a company with 16 offices across the country that has a good strong culture that is all growing in the same direction, trying to do the same things…It’s so important that the companies have the same level of beliefs,” she explains.

Botosan says HUB’s recent acquisition in Edmonton had a big location component since they wanted an office there. She adds that HUB is having conversations with another firm in a market where it has a big geographic interest.

In terms of potential consolidation, the industry is also waiting to learn who will acquire Genstar Capital’s 75% stake in Financial Horizons Group – one of Canada’s leading MGAs. For more on this, go to The Insurance and Investment Journal’s website: bit.ly/2dLaz7q

Miller of ABEX Brokerage, which is a mid-sized MGA, says organic growth holds the best value for the firm, compared to acquiring many firms like the bigger MGAs do.

“Are we a consolidator? No. Are we growing organically? Absolutely, because we see tremendous opportunity in our own business,” he says.

However, Miller says ABEX always has its ears open about potential buying opportunities, but isn’t looking to acquire unless it’s the right firm. ABEX plans to grow organically by possibly taking on advisors that are not satisfied or looking for a new MGA home, and by working with its existing advisors to help grow their practices by discovering new opportunities and approaches.

He adds that ABEX has been approached several times by larger MGAs about selling, but is not interested. “My older brother started the company, so it’s really a family business to us. At this point in time, we know there are challenges in the industry, but I don’t see why we would ever sell our business.”

Integration

Depending on the size of the MGA, integrating an acquired MGA can be pretty straightforward or more complex, but most MGAs say the key to good integration is being on the same page and being a good fit. Botosan says it’s important to get their people out working with the new advisors to introduce them to the new resources and software.

Miller says when ABEX has acquired a firm, they’ve managed to have good success with keeping advisors by maintaining consistency.

“When we bought the office in Vancouver, one of the partners stayed on, so the staff stayed on. There was day to day consistency, so they (advisors) didn’t feel anything more than a name change,” says Miller.

Brown says IDC WIN’s approach is to look for a company that will integrate and fit seamlessly within the MGA. He adds that the challenge, over time, is to get the benefits into your existing business.

“We look to retain the staff and the culture of that business, so we’re not making drastic changes to any business that we purchase,” he says.

Smaller MGAs

Miller of ABEX believes that while the consolidation wave will continue over the next few years, he believes that smaller MGAs can stand their ground.

“Is there a place for small MGAs? YES! Is it going to get tougher and tougher? Absolutely!”

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