Mounting pressures drive consolidation of smaller MGAs

par La rédaction | February 19 2013 08:50PM

Do recent acquisitions in the market indicate that consolidation in the managing general agency channel is intensifying? MGAs interviewed by The Insurance and Investment Journal expressed varying opinions on this issue, but what they did agree on is that smaller MGAs are facing increasing challenges which are causing many to consider their options.John Hamilton, president and CEO of Financial Horizons Group, says he believes acquisition activity in the MGA market is likely to continue at a steady pace and probably speed up. “We’re certainly going to be very active in 2013.”
In December, Financial Horizons acquired Optio Financial Facilitators of Alberta and Mr. Hamilton says a couple of other deals are nearing completion.

He suspects some of his MGA colleagues are also near deals because there is a lot of talk in the industry about acquisitions. “Most MGAs are making the decision to buy or be bought,” he summarizes.

At the same time, he does not anticipate that these will be large scale transactions. “I don’t know that there will be any blockbuster deals left to make. It is more that smaller MGAs, that are more regional, are joining national firms.”
Jim Virtue, president and CEO of PPI Solutions, also doesn’t foresee any blockbuster deals. “I think there aren’t a lot of major transactions left to be done because if you’re looking at the MGAs in the marketplace today; at this time, they are not for sale.

For this reason, he would not describe acquisition activity in the market as heating up, athough he does expect continuing consolidation of smaller MGAs who are challenged by the need to provide appropriate support to advisors in areas such as compliance, IT, education and sales tools.

He adds that PPI Solutions is in acquisition talks – at various stages – with several MGAs. “We’re hoping to close on one very shortly…”

Paul Brown, chairman and CEO of IDC Worldsource Insurance Network said his company’s acquisition in December of Strategic Brokerage Services, was aimed at expanding in the west. “Prior to that acquisition, IDC WIN had no representation in the prairie provinces so it has kind of filled out our footprint so to speak. It gave us strength in Alberta, which is one of the top insurance markets in Canada and then access to the rest of the prairie provinces.”
Is IDC WIN looking to make more acquisitions? Mr. Brown replied “Possibly.” The company does not yet have direct representation in Winnipeg, a fairly large insurance centre and does not currently operate in Quebec, a very large market, he notes. “That being said, we’re not gearing up to try to make acquisitions in those markets. But certainly, if opportunities arose that fit strategically, those are the kind of things we’d consider.”

Western expansion

In January, Peak Financial Group announced its acquisition of Customplan Financial Advisors, an MGA based in Western Canada. Robert Frances, president and CEO of Peak said this acquisition enables the company to become a national player. Before, Peak was viewed as a regional player due to its strong focus on the Quebec market.

This is the third acquisition that Peak has made in the past five years. Mr. Frances says he is open to making another acquisition in the insurance market. “We would really like to acquire an employee benefits firm. That would complement our offering.”

Does he believe that the consolidation of the MGA market is accelerating? Mr. Frances says not necessarily. “Many firms are not interested in being bought. This is not what they are looking for. They want to keep their independence and not be swallowed and forced to leave immediately. We’ve been working with the people at Customplan for five years. So, it was easier to join forces. We also bring them mutual fund and securities business, which they did not have before,” he added.
Mr. Frances, acknowledges, though, that size is becoming more and more important for MGAs. “Volume allows an MGA to get the maximum commission from insurers. With this acquisition, we will reach the maximum.” He adds that insurers are also requiring minimum production levels to retain their MGA contracts. If an MGA does not have all the insurers in its portfolio, it will be at a competitive disadvantage.

Mr. Hamilton of Financial Horizons agrees that losing contracts with insurers is a major pressure on smaller MGAs. He points to the example of RBC Insurance that slashed its MGA contracts from more than 80 to 14 MGAs last summer. Other major carriers have also trimmed their MGA contracts, he added. “They are being particular about who they deal with…I believe it is very rare for a new MGA contract to be given out now.”

Mr. Virtue of PPI Solutions believes that the MGA market is likely to see many smaller MGAs selling or just leaving the business. “There will be larger MGAs just in essence ‘buying the advisors’ from the smaller MGAs, I think you’ll see some of that. You’ll also see some of them will just close shop. They won’t be able to keep their contracts.”

However, Mr. Virtue believes that regional players will continue to have a place in the market. “There’ll be some larger national players, but there will always be some pretty good regional players that do a good job for their advisors. It’s not going to come down to five MGAs.”

Regulation and demographics

Mr. Hamilton adds that increased regulation and the aging demographic of MGA owners looking for a succession plan are also factors driving the consolidation of this channel. “When I’m talking to an MGA, we talk about these factors. This is how the dialogue begins.”

Mr. Brown of IDC WIN agrees that demographics is playing a big role in driving acquisition activity in the MGA market. “Many MGA owners are at or nearing retirement, so they’re considering their succession issues.”

Another issue is that because of the consolidation that has already taken place in the market, there are large national MGAs with a lot of resources. This makes it more difficult for smaller regional MGAs to compete, he adds.
“The bar has been raised quite significantly for what’s required to be an MGA. Twenty years ago if you had a phone and a fax and a list of brokers you could be an MGA.” This is definitely not the case today, he comments.

Mr. Brown, who is also the president of MGA association CAILBA, says he would not describe the consolidation of the MGA market as a concern for the industry. Instead, he calls it a fact of life.
“The increase in consolidation and strategic alliance activity is because most MGAs are smart operators, so they recognize what they’ve got to do to survive in the future...Really, it’s just the natural evolution of the business.”

Other sectors of the financial service business have undergone consolidation, he observes. “I think we’re just sort of following the same path. You’ll see consolidation, because the capital required, the infrastructure required to run these organizations is increasing, so you’re just going to see the insurance distribution system follow the same path…”
Mr. Virtue of PPI says an important element that constantly gets left out when discussing consolidation in the MGA market is how it affects the insurance carriers and what they want. “What our goal has been, in any acquisition, is to help us deliver what we call net sustainable market share to those insurance carriers. They’re looking to work with organizations that can provide them with not just business today if they have the absolute lowest price, but good sustainable, long-term business with long-term growth.”

To achieve this, it is not enough to make an acquisition, adds Mr. Virtue. The acquirer must have the ability to provide added value to the advisors who work with the acquired firm and “keep adding value so they continue to grow their businesses.”