The MGA market is ripe for consolidation with factors such as insurer volume requirements, thin profit margins and technology demands driving the need to achieve scale, say various sources interviewed by The Insurance Journal. But the pace of this consolidation has been rather slow this year, most report.

Terri DiFlorio, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and president of Hub Financial, says she believes the consolidation trend will continue, but hasn’t seen much of it this year. "We hear a lot more talk than actual deals."One MGA, however, that is actively making acquisitions is Financial Management Brokerage Group. "Our most recent acquisitions were Simon L. Jackson Insurance Brokers in Toronto and The Burns Financial Group in Winnipeg. In both cases, the existing owners are significant equity partners and management," says Jim Virtue, president of Financial Management Brokerage.

Mr. Virtue agrees that while the market is ripe for consolidation there are factors that are slowing down the pace.

First, he believes that unless they are planning to retire, MGA owners often do not see the need to sell. He thinks this will change as insurers tighten their standards for obtaining and retaining an MGA contract.

Second, he thinks the industry is moving more to electronic data exchange and major advances are being made in information and transactional exchanges between carriers and MGAs. "We expect this will prompt more consolidation as it will be difficult for smaller MGAs to make the necessary investment in technology."

Daystar is another MGA actively expanding. At press time in early May, Keith Brown, co-president of Daystar confirmed that his company had acquired Calgary Brokerage Life Marketing. Daystar also opened offices in Nanaimo and Edmonton last year. His company acquired a Mississauga MGA in 2006 and is continuously looking for new opportunities in Ontario. It has also looked at firms in Montreal. In fact, the company went to the point of due diligence with two Montreal firms, but didn’t come to an agreement. He says the company came close to buying one of those firms, but the high price prevented a deal.

Overpriced

Mr. Brown added that Daystar has also looked at a couple of MGAs in Ontario, but "prices were just too high." He believes overpricing is an issue that is preventing some consolidation from taking place.

Mr. Virtue also thinks that some MGAs overestimate the worth of their businesses. "I do agree that some MGAs interested in selling have unrealistic expectations about the value of their business. We believe that the only sensible valuation is based on a multiple of earnings."

Mr. Brown says that he expects the pace of consolidation will quicken as many smaller agencies are forced into selling. In particular, he pointed to insurers’ increased volume requirements as a factor that would come into play, with "Manulife leading the charge" in this regard. He adds that a lot of these MGAs would love to stay in business…but I think you’re going to see a lot of reluctant sales."

Mr. Virtue anticipates that a great deal of consolidation will take place over the next few years and that five years from now the MGA market will be a very different place. "You will see the emergence of three to six large national MGAs. These MGAs will be better resourced and will provide a superior value proposition, including enhanced administration platforms and broker services."

But this doesn’t mean that Mr. Virtue expects the demise of all smaller players. "When all is said and done, this is still a relationship business and some of the smaller regional MGAs will continue to thrive."