Canadian Underwriter

2014 an ‘extremely active period’ for insurance agency M&A in Canada, U.S.

August 11, 2014   by Canadian Underwriter

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Consulting firm Optis Partners is predicting “robust” activity in mergers and acquisitions of insurance agencies in Canada and the United States, noting that High River, Alta.-based Western Financial Group Inc. has done 18 transactions from the beginning of 2011 through the first half of 2014, while the eighth most active buyer during that time was a subsidiary of Toronto equity firm Onex Corp.

“From the historic high level of M&A activity in 2012 followed by a very slow start in 2013, 2014 has emerged as an extremely active period for agent-broker acquisitions,” Chicago-based Optis said in a report released Aug. 5, titled Agent Broker Mergers and Acquisitions Statistics June 2014: The New Normal?

“The first six months of 2014 was the most active first-half period since tracking began in 2008, and second only to the 181 deals announced in the second-half of 2012.”

One major transaction announced in the first half of 2014 was the sale, by Roins Financial Services Ltd., of Canadian insurance broker network Noraxis Capital Corp. to Arthur J. Gallagher & Co. That transaction closed in early July.

The Optis report was based on transactions, in the U.S. and Canada, in the insurance distribution sector, retail property and casualty, employee benefits and life/financial services, wholesale firms (including managing general underwriters and managing general agents) and third-party administrators.

“We predict there will be robust M&A activity going forward as more agencies owned by retiring Baby Boomers continue to go to market,” Timothy J. Cunningham, managing director of Optis, said in a press release on the report.

Optis noted there were 165 transactions during the first six months of 2014. Of the buyers, 67 were firms backed by private equity, 54 were privately owned, 27 were public brokers, nine were banks and eight were other.

Optis included Western Financial in the bank category. Western Financial — which owns more than 160 brokerages in Western Canada and is itself owned by Desjardins Financial Group — had 18 transactions from 2011 through to June 30, 2014, Optis noted. Wells Fargo & Company had six over the same time period.

Chicago-based Hub International Ltd., which was formed in 1998 through the merger of 11 Canadian brokerages, was the most active buyer, with 94 transactions in 2011 through the first half of this year. Owned by Hellman & Friedman LLC, Hub was categorized as a private equity-backed buyer.

Of the buyers that Optis classifies as banks, Only Western Financial Group and Wells Fargo have done more than five transaction since the beginning of 2011, Optis noted.

The sale by Wells Fargo of 40 offices, to USI Insurance Services LLC of Valhalla, N.Y, was “treated as one transaction” for the report. USI Holdings, which Onex bought in 2012, was the eighth most active buyer from 2011 through June 30, 2014, Optis reported, with 32 transactions during that period.

USI Holdings had five transactions in first six months of 2014, while Hub had 16.

“It looks like the first half of 2014 is the start of a prolonged active period for agent-broker M&A transactions,” Cunningham said. “The agency-brokerage business is awash with Baby Boomer principals. It’s estimated that more than 30% of all the equity in the system is owned by them. The industry has not adequately addressed perpetuation/succession planning. Without a sound perpetuation plan in place, the only option for many of aging principals will be to sell to a third party,” often backed by private equity and public brokers.