The managing general agency (MGA) channel is continuing to undergo increasing consolidation, say some players in this market. MGAs interviewed agreed that many factors are contributing to consolidation in the industry. One of them is insurers' sales volume demands.

Insurance companies regularly raise production levels required from MGAs in order to keep their contracts, a factor that plays a part in some consolidation decisions, says Allen Wong, President of Thornhilll-based Allen Wong & Associates Insurance Agency Ltd and Secretary and Chair, Company and Industry Compliance at the Canadian Association of Independent Life Brokerage Agencies (CAILBA).

This marks a change from earlier years when insurers tolerated less active MGAs. "In the past, they left those MGAs alone," he says. Now, however, low-producing MGAs are being told "We can't afford to keep you guys. We have to let you go," he says, suggesting that the frequency of such encounters has increased. "If you don't have enough volume we'll terminate you," he says, paraphrasing such an encounter. The trend had started before the financial crisis, he adds.

In a typical scenario an insurer's sales executive will inform an MGA at the end of the business year or beginning of a new business year that failure to achieve a specified production level will mean some combination of termination of an MGA contract, reduction in bonus payments, or conditions attached to some bonus payments, says Mr. Wong, adding that during March, one insurer terminated at least three contracts.

Harsh realities

An MGA who loses a contract with a major insurer faces several harsh realities including unhappy advisors, reduction to Associate General Agency status or consolidation. "Going forward I think a lot of MGAs that have particular companies are going to have to consolidate to get access to those companies," he says.

As well as boosting production levels, insurers want to simplify their relationships in much the same way as some advisors and even retail clients look to streamline business arrangements. "[Insurers] are starting to look at their business relationships as we are starting to look at ours - they're starting to look at focusing - consolidating their business relationships a little bit more," which means dealing with fewer MGAs, says Jeff Botosan, Executive Vice President of Toronto-based Hub Financial and Hub Capital.

"Having a large distribution network or a number of distributors is costly to the insurance companies so they definitely want to look at ways to consolidate that," he says.

Hub is actively consolidating, he says. The company made approximately 20 major acquisitions last year. This figure includes MGAs and blocks of business from other MGAs.

At time of writing, Hub had begun the process of integrating its most recent acquisition, Toronto-based Best Advice Financial Services Inc., its first completed acquisition for 2009. Mr. Botosan has several potential acquisitions at various stages of the process underway.

Hub looks for acquisitions that it sees as accretive to its margins, possibly having a large group of brokers that it does not currently deal with who are selling product of insurers with whom it has not maxed out its margins to the highest payout level. Hub also prefers acquisitions with a strong mix of business and what Mr. Botosan describes as a "fairly high service fee base as a percentage of total revenue."

Has the market crisis led to more consolidation? Generally, the factors behind consolidation had operated before the current financial crisis, says Mr. Botosan. "I believe that there are always issues in business and economic situations that really force you to examine all potential opportunities or avenues that you're going to pursue...I think the issues were there."

Robert Frances, President of Montreal-based Peak Financial Group, which has three subsidiaries including an MGA, a Mutual Fund Dealers Association platform and an investment dealers platform, points to costs of compliance, technology and succession planning as other factors driving consolidation. In the latter scenario, a number of MGA owners of sole proprietorships are reaching retirement age and looking to sell.

Another factor, which Mr. Frances describes as the one currently growing most in importance, flows from demands by advisors for better service on a kind of one-stop shopping basis. "Advisors are finding it very expensive and time consuming to deal with many different firms," he says. "They'd rather have one place where they can get their segregated funds, mutual funds, insurance, securities and be well treated," instead of maintaining multiple relationships, he believes.

Different approaches

MGAs have several approaches to consolidation, Mr. Wong explains. Each approach has several advantages and disadvantages.

In one approach, one MGA takes over another one entirely and integrates the acquisition completely under a single brand.

This approach means clear reporting relationships and consistent and well-defined lines of responsibility, says Mr. Botosan of Hub. He adds that Hub fully integrates its acquisitions. "Our business strategy, our culture, our lines of responsibility and all of those things are clearly defined so a broker can have the same experience dealing with us whether they deal with the Vancouver office or Quebec office," he says when asked about the Hub model. "I really don't know how you achieve that when your offices are widely dispersed and you have different ownership and each owner has a potentially different vision," he stresses, referring to other models.

In a second consolidation scenario, the acquiring MGA leaves the acquisition somewhat intact and allows it to keep its original name, branding, and identity for at least several years after the acquisition. In a recent example, Calgary-based Financial Management Group Inc. acquired Winnipeg-based Burns Financial Group Inc. in a transaction that closed in January 2008.

In the third type of consolidation, individual MGAs do not consolidate their companies, but consolidate certain functions in co-operative arrangements.

In one example, Bridge Force Financial Group consolidates major technology, marketing and broker education costs, as well as errors and omissions insurance costs, explains Mari-Jayne Woodyatt at WCS Financial Services Inc., a member company of Bridge Force. "The partners operate independently," she says.

Some MGAs do not see consolidation as inevitable, however, nor even a solution for all problems. "I don't think that it's as widespread nor as successful as the acquisitors or the acquirers would lead us to believe," suggests Peter Lamarche, president of Windsor-based Blonde & Little Financial Services Ltd. Mr. Lamarche is incoming president of the MGA association, the Canadian Association of Independent Life Brokerage Agencies (CAILBA) effective next month.

Mr. Lamarche argues that MGAs who assemble a coherent business model, and who identify and service their market will remain competitive and survive irrespective of consolidation. "I think there's a myth that's perpetuated in the business - that perhaps the larger firms perpetuate - [about] modest or smaller sized firms - that it's inevitable that they be merged or acquired," he says, stressing that he speaks as president of Blonde & Little, not as the incoming CAILBA president.

In Quebec, the outlook for consolidation appears limited, according to Michel Kirouac, Vice President of Montreal-based Groupe Cloutier Inc., which has not made any acquisitions recently. The MGA channel there appears well-established and stable, factors working against consolidation. "Everybody seems to be happy by themselves and nobody wants to sell for now," he says.

In Ottawa the near-zero number of possible opportunities limits the potential for consolidation, according to Allan Bulloch, President of Ottawa-based IPG Insurance Inc., a subsidiary of Independent Planning Group Inc. "There are situations that are overpriced," he says.

AGA approach

Meanwhile some MGAs find a viable alternative to consolidation due to production requirements by pooling production and acting as Associate General Agencies for each other, according to Mr. Wong.

In this scenario, two MGAs enter into a contractual agreement that one will act as an AGA for the other for purposes of pooling volume for one insurer. The second MGA will act as AGA for the first to pool volume for another insurer. This approach appeals to MGAs who do not want to consolidate because of production requirements, he explains.