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Merger and acquisition activity heats up in MGA channel

By Donna Glasgow | July 07 2011 04:59PM

Consolidation in the managing general agency channel is accelerating with major merger and acquisition deals announced in recent weeks. A number of factors are driving this new level of consolidation including the need to obtain scale to remain profitable, the expectation of increased regulation in this sector, as well as the age of MGA principals – many of whom are looking for a succession plan.John Hamilton, president and CEO of Financial Horizons Group, sold his 100% equity stake in his managing general agency to Granite Global Solutions (GGS). Headquartered in Kitchener, Ontario, Financial Horizons is an MGA with 11 regional offices in Ontario, Quebec and Atlantic Canada.

The Insurance and Investment Journal learned the news after obtaining a copy of a letter distributed to the MGA’s supplier companies in May. Mr. Hamilton, will stay on to run the company and he has a strategy to grow the MGA through venture-capital backed acquisitions.

Rumours circulating in the industry pegged the selling price between $110 and $125 million. In an interview, Mr. Hamilton said he is not allowed to reveal the price. “I’m neither confirming nor denying…but I think I could be safe in saying I don’t think there’s been a larger transaction in history (of the MGA market).”

In his letter to suppliers, he stated that as part of this deal, he will obtain a significant equity stake in GGS Holdings, a subsidiary of Genstar Capital, LLC, a U.S.-based venture capital company. Headquartered in Toronto, Granite Global provides risk mitigation services to insurance and corporate clients.

In another major transaction, in early June Guardian Capital Group announced that its indirect subsidiary, Worldsource Insurance Network (WIN) is merging with IDC Financial to become IDC Worldsource Insurance Network (IDC WIN).

The deal, expected to close on or about July 1, will see Guardian subsidiaries acquire 67% of the merged company. Paul Brown, currently president and CEO of WIN, will be the chairman and CEO of IDC WIN, and Ron Madzia, currently president of IDC Financial, will be president. The current management of IDC will continue to hold a significant stake in IDC WIN. Mr. Madzia told The Insurance and Investment Journal that this new entity will also be looking to acquire other MGAs.

At press time, The Insurance and Investment Journal learned of another MGA acquisition. In a memo to advisors and staff dated June 9, Kevin Cott, CEO of Qualified Financial Services (QFS) announced that QFS had signed a letter of agreement to purchase Ontario-based Marketing Concepts Group (MCG). The deal, expected to close June 30, will add 200 advisors to the QFS roster, says the memo.

The purchase of MCG will enable QFS to expand its reach in Ontario and attain access to a new market in Atlantic Canada. More information on this deal will be published in the August edition of The Insurance and Investment Journal.

Mr. Hamilton said that in many ways it is business as usual for Financial Horizons. He has signed a long-term employment agreement to remain the MGA’s president and CEO. I’m still the one driving the bus.” He adds that there will be no staff losses or office closures and the MGA’s name will stay the same.

What is likely to change, however, is the size of the organization. Backed by a venture capitalist, he now has his sights set on acquiring medium to large MGAs. Without going into specific amounts, Mr. Hamilton says he has “in the tens of millions” to finance “several” potential acquisitions. “We’re being set up as a new division in Granite to grow and develop the MGA market. The purpose of doing this is to grow rapidly the MGA model and to get mass in the short term.”

At present, Financial Horizons Group works with a roster of about 2500 brokers. He would like to grow this number to 10,000 within two to three years.

Mr. Hamilton added that he is already in talks with a number of MGAs and expects that some acquisition deals may come to fruition in the short term. “I would be surprised if there isn’t a couple of major announcements before the end of the year.”

He says acquiring an MGA in western Canada is a priority since Financial Horizons does not yet have a physical presence in the west, although it is licensed in every province. However, the most important criteria is the strength of the MGA, whether it is a regional operation or in downtown Toronto.

What are his criteria for an acquisition?  He says he is looking for well run organizations with a very good reputation with the supplier companies; a strong business model and the desire to continue to grow and be part of a growth organization that will increase their value in the future.

Mr. Hamilton adds that an important criterion will also be a strong EBITDA (earnings before interest, taxes, depreciation, and amortization).  EBITDA, a cash flow valuation measure. is often little understood when it comes to the sale of MGAs, he adds. In this business channel, owners often valuate their businesses in terms of assets under management and service fees. However an EBITDA calculation shows how well an organization is run. “If you want to get equity investors, they don’t care about your assets. They want to know your EBITDA.”

In recent years, Mr. Hamilton says there has been a lot of talk about consolidation in the MGA channel but little action, with the exception of some smaller deals. “But now we’re seeing it at a different level. It’s more significant sized MGAs.” He points out that in February 2010, there was a major deal announced between PPI Financial Group and Financial Management Group, leading to the creation of PPI Solutions and now there is the very recent sale of his own company and the merger of IDC and WIN.

Mr. Hamilton expects the consolidation trend to continue. “It’s not stopping. The landscape in my opinion will look very different a year from today. You’re going to see more major mergers…It’s going to be major MGAs bolting together to get more strength.”

He adds that presently there is a great deal of talk among MGAs about selling. “Everyone is in play, let’s put it that way. Many of the principals of MGAs are in their 50s nearing 60, and looking at ways and means to perhaps have a succession plan.”

The decision to sell is a tough one, adds Mr. Hamilton. Having gone through it, it’s not an easy decision. So I understand as I’m talking to my colleagues who are perhaps in similar situations to me. It takes a little while to get your head around it. You’re taking your life to a different stage is what you’re doing.”

The sale of Financial Horizons to Granite Global is part of Mr. Hamilton’s own succession plan, he says, although he remains committed to the business. “This is not a succession plan to have me get out. It is a succession plan to make us bigger.”

Looking for scale

While succession planning is important, Mr. Madzia of IDC says the primary reason his company is merging with Worldsource is to get bigger and continue to be a predominant player in the MGA distribution marketplace. “In our distribution channel, you have to have scale. You have to have size to be competitive going forward.”

Pre-merger, IDC would rank as one of the top five to seven largest MGAs in Canada, he says. “With the merger with Worldsource Insurance Network, it’ll probably put us in the top three or four in size.”

The other reason he decided to merge with WIN was to attain a national presence. For the past couple of years, IDC has been seeking an acquisition or partner to obtain shelf space in Western Canada. “Considering that WIN’s home office is in Vancouver, it was a tremendous fit for us.”

A secondary reason that Mr. Madzia decided to merge with WIN is that he now has a partner not only with WIN, but also with its parent company, Guardian Capital. This could allow access to financing to eventually look for other MGA opportunities for acquisitions, he says. “This one merger is not going to be the be-all, end-all. We’re going to continue to grow to be a predominant player in the business.”

Mr. Madzia believes the MGA channel will consolidate for the same reasons that life insurers did in recent decades. “If you go back 25 years, there were probably a hundred insurance companies. Now it’s down to predominantly 15 to 20 major players in the country…They had to get scale for the same reasons we have to get scale,” which is to gain market share to be profitable.

For MGAs he says it is getting increasingly difficult to maintain profitability and provide the types of services and value propositions that advisors need unless you have scale. “I’m sure that smaller players in our industry are starting to feel that and they’re going to have to make really tough decisions in the near future. They’re going to have to get bigger themselves or they’re going to have to partner up, merge with, or become part of an acquisition to be able to survive...”

Currently, regulators are in the process of reviewing the MGA distribution model and many expect increased regulatory oversight as an eventual result. This also adds pressure to grow, he says. “To be able to provide the proper service and supervision that is going to be required for advisors going forward, you have to have scale to be able to do that.”

Mr. Madzia adds that he feels that insurance carriers and regulators will be more comfortable with organizations that have the size to develop compliance departments and other services, but also to maintain them and keep them current and active.

How big should an MGA be in terms of premium? “You could probably ask 10 different MGAs that question and get 10 different answers,” said Mr. Hamilton, “but certainly I would think five million of annual life premium per year would be the minimum.”

Perhaps the bigger question, he continues, “would be how many life contracts would you need to be considered a major MGA?” The answer is “you pretty much have to have them all, is my opinion” with the possible exception being some regional insurer contracts if you are located outside of their region. Having all the major contracts gives an MGA “more clout and more credibility with your brokers,” Mr. Hamilton explains.

How far does he think consolidation will go? Mr. Hamilton estimates that there are about 100 MGAs of various size in Canada. He doesn’t have an estimate of how far this number will shrink, but he does estimate that there will be a lot of merging activity in the next 18 months among the top 10. He expects this will leave five or six major players who will control the majority of the market share.

At the same time, Mr. Hamilton thinks there will still be room for well run regional players. “It’s never going to be just five MGAs across the country…You’re going to have some regional ones and they’re going to be very successful…I draw the comparison to the banking system. You’ve got five major banks, but you still have lots of credit unions and banks that are not top five, but in niche markets in certain areas. It would be something similar to that.”

Donna Glasgow

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