Consolidators expect acquisition activity to accelerate

By Donna Glasgow | May 26 2010 05:04PM

Consolidation of the managing general agency (MGA) channel is expected pick up, especially if regulatory demands on MGAs increase as many in the industry are anticipating.

When asked where he thought the regulators' current study of MGAs would lead (see page 16), Jim Virtue, President of Financial Management Group of Companies (FM), a leading MGA consolidator, stated that the answer to this question is very simple. "In the near future we are going to see a new regulatory regime for MGAs. What that will look like remains to be seen, but it will be a significant change and one that will be very difficult for the smaller MGAs to deal with... Not only will there be increased resources required by MGAs to deal with the regulatory bodies, but the insurance companies will also be looking to the MGAs for increased regulatory efforts."

Rene Pereux, Co-CEO of Daystar Financial Group also anticipates that more regulation would bring more consolidation. "I believe that it will create a situation where some MGAs will decide it is time to sell."

Mr. Pereux says that his company certainly has its eyes open to new opportunities, particularly in the Toronto area and Western Canada.

The company has also recently obtained its registration and licensing in Quebec. "If the right opportunity comes along, we'll seriously look at it."

Mr. Pereux adds that Daystar has increased its capability for expansion by hiring a new President, Ken Rousselle, whose 25 year career in financial services includes positions as President and CEO of IQON Financial Management and President of Professional Investment Services.

Bruce Hammond, President of Performins Canada, a Toronto-based MGA that has purchased six MGAs since 2004, says the pace of consolidation activity has slowed lately, but he believes it is inevitable that acquisitions will pick up speed. In recent years, there was a first wave of consolidation during which many of the smaller MGAs were bought, he explains. A second wave of sales is coming, Mr. Hammond believes.

In addition to potentially increased regulatory demands, factors such as insurers' preferences of working with bigger firms will also lead to more MGA sales, he adds. "At the end of the day, it is clear that a larger MGA provides more services... They are a lot easier for life insurance companies to deal with because they have the [up-to-date] systems and they have specialists.

What explains the current slowdown in MGA sales? Mr. Hammond believes that there have been a number of "inappropriate" valuations. "I think the valuations in certain circumstances seem way off."

He says one particular sale where an MGA was sold for much higher than what Mr. Hammond believes it was worth helped drive valuations upward. This sale set the bar higher in the eyes of other MGAs who were also in the market to sell, he explains.

When prices are too high, he adds, "sometimes you just have to step back from it."

Eventually, he believes the market will readjust to more realistic valuations and acquisition activity will increase. "It takes a bit of time and then everyone takes a deep breath, comes back to their senses and we'll start talking again. I'm starting to see that now."

In fact, Peformins recently acquired Millenium Financial in Toronto, a small firm working with 45 advisors. It was the first acquisition Mr. Hammond's firm had done in a couple of years. "I'm very optimistic that in the next year we'll have another one," he adds.

When it started acquiring MGAs, Mr. Hammond says that Performins' intention was to expand across Canada, but so far it has stayed in Ontario because of the greater opportunity offered by this market. "Most of the MGAs are in Ontario. When we look around, that's where we see all the potential."

In the next five years, Mr. Virtue of Financial Management says he foresees continuing consolidation driven by both increased competition from the larger MGAs and by forces external to the MGA. In addition to regulation, these forces include "pressure from insurance companies to increase the production requirements for each MGA and technology. Another factor that will favour larger MGA's is their ability to assist brokers with managing their business better."

Significant event

Last February, Financial Management and PPI Financial Group announced a deal in which PPI took a 50% equity stake in FM. Does Mr. Virtue believe this alliance will have an impact on the MGA channel generally? "We believe that the combination of PPI and FM is a significant event in the MGA marketplace in Canada. The companies combined represent 12 to 14% of the Canadian market... There is no question that this has increased our strength and resources in the MGA community... We intend to continue to grow, both through organic growth and through acquisitions."

Mr. Virtue says that a new national brand for FM is scheduled to be unveiled in June. "We feel that our new branding will better present our company as the forward-thinking national organization that it is."