Integration of PPI into iA “more complex than anticipated,” says Denis Ricard

The acquisition of Managing General Agency PPI Management Inc. by iA Financial Corporation (iA) had a negative effect on the insurer’s results in the third quarter of 2019. The net negative impact on the results amounted to $8.5 million, or minus $0.08 EPS.

The acquisition brought in less than anticipated, said Denis Ricard, president and CEO, iA, during a phone conference on Nov. 6, organized by the company to present its results to financial analysts.

Reduced value of goodwill

The situation is comparable to the aftermath of the acquisition of CTL. iA reduced the goodwill as well as the earn-out that was supposed to be payable, based on the projections PPI should have achieved.

In finance, goodwill is the practice of identifying the gap between an identified financial value during an acquisition and its market value after a certain period.

During Q3, iA reduced the market value of the final acquisition of PPI. “This quarter, we agreed on a final settlement of the purchase price. And at the same time, we reviewed the financial projections supporting goodwill. The outcome was a negative impact on third quarter results of $8.5 million or minus $0.08 EPS.”

“Another way to look at it is that we wish we would pay the full earn-out. But the reality is that we protected the company by having that earn-out,” says Ricard. “And because the results were not as great as, let’s say, the seller said that there would be, well, we’re protected. But at the end of the day, in the balance sheet, you need to shave both sides of the equation. This time, the numbers were not equal.”

Consolidation: an administrative challenge

Ricard went beyond mathematical calculations. He explained the $8.5 million loss was also the result of the challenge of integrating other MGAs within PPI.

“The slight deviation from the acquisition plan is mainly due to the fact that until recently, PPI needed to integrate several MGAs. This exercise was more complex than anticipated, and the expected strong growth was temporarily delayed,” he says.

“Since 2012, we’ve acquired a dozen of smaller MGAs. A lot of them were integrated, but still a few of them needed to be integrated within PPI, namely HollisWealth and others,” says Renée Laflamme, executive vice president, individual insurance, savings and retirement, iA.

These challenges were more than technological, they were administrative. “Making sure that we have all the advisers settle well with, behind the scenes, it’s a little bit of complicated work to be done. Keep in mind that right now an advisor can work with multiple MGAs and some advisers were with multiple MGAs,” says Laflamme, in response to financial analysts’ inquiries.

Lower than expected commission income

The integration may have taken longer than expected, but it also required more efforts from iA. “It took a little more time than expected, and, of course, took a bit of the attention off growth […] making sure that things are solid and stand on good ground,” says Laflamme.

PPI performed less well than anticipated, which had consequences on the results declared by iA in individual insurance. This sector saw a gain of $0.04 per share in Q3 2019, excluding adjustments made to PPI’s purchase price and value.

While these gains can be attributed to a favorable lapse and morbidity experience, they were “partially impaired by lower commission income from PPI,” says Jacques Potvin, executive vice president, CFO and chief actuary, iA. These commission revenues were lower than expected, having a negative impact of $0.02 per share in individual insurance.

“It is to be noted that we expect a similar negative impact of $0.02 on earnings per share for the next quarter,” says Potvin.

PPI plays a “key role”

“Now that the integration process is complete, we can focus again on rapidly growing this distribution business,” says Ricard.

“PPI is a sound business, one of the top MGA consolidators in Canada. It is well positioned to play a key role in our distribution strategy and actively contribute to high success in the coming years.”

Announced in February 2018, PPI’s acquisition raised concerns among MGAs regarding the future of the independent distribution channel.

The goal of the financial results conference call was to allow iA’s leaders to explain to analysts the reasons behind their overall growth in Q3, for which the company posted net earnings of $183.7 million, up 11.4 per cent compared to Q3 2018.