June 17, 2015 by Angela Stelmakowich, Editor
Enhanced operational efficiency among players in the Canadian property and casualty insurance space – including through disciplined and discerning underwriting – is key in light of emerging competition and a changing landscape, Greg Belton, Toronto-based executive chairman of HKMB Hub International, suggested during a panel discussion in Toronto Tuesday.
“The industry is moving around,” Belton told attendees of a luncheon hosted by the Property Casualty Underwriters Club. In some cases, “reinsurers are moving down into what has been the traditional domain of the primary insurers” while on the primary side, “insurance companies are now migrating down into the broker space,” he said.
With regard to the reinsurance market, “what I see as an outside interpreter, as a broker, is just the increasing competition from the new sources of underwriting capital,” including cat bonds, hedge funds and pension funds looking for ways of deploying their capital. “Each of these is trying to find more efficient ways to transfer balance sheet and hazard risk, the result being that reinsurers, traditional market share, is being negatively impacted,” he pointed out.
On the primary insurer scene, Belton said that “we’re seeing some of the same phenomena, both in Canada and globally.”
Noting that he never gets “wound up” over such changes, Belton suggested that things will happen and the market will correct itself. “New forms of competition come in. The banks came in, the direct writers came in and they took their market share. We all react to it. I don’t take it personally, but it does mean we have to be more efficient in how we operate our businesses in the face of new and emerging competition,” he emphasized.
“I think the entrance of private equity into the business has been a real impetus to more balance sheet discipline,” Belton suggested. “We do see a far more discerning underwriting approach in many regions, particularly residential and commercial properties, and I think that’s a broader trend, which we also see globally,” he pointed out.
There have always been consolidations, as well as mergers and acquisitions activity, in the insurer and reinsurance space, although it has perhaps been somewhat sped up over the last five years or so, Belton (pictured below) said. This is likely regarded as a means to achieving scale and enhancing efficiencies.
Stock market analysts “will tell you that the expectation of further acquisitions and further consolidations is already baked in (to carrier share price),” he told attendees. It is likely that “what the market expects is that there will be consolidation of the Canadian mutual insurers once (the Office of the Superintendent of Financial Institutions) and (the Financial Services Commission of Ontario) figure out what the rules are surrounding that,” he noted.
While consolidations on the insurer and reinsurer sides seem to have increased somewhat over the last few years, “I think it’s perhaps evident more in the independent insurance broker space than anywhere else,” Belton said.
Looking at the last 24 months, he said, “I would say that M&A activity is absolutely at an all-time record high.” Some reasons behind the high rate of consolidation in the brokerage business, he suggested, include the following:
• Lifestyle – A broker can “just milk the business,” not reinvesting, and have a comfortable life. “I think these firms, the ones that don’t reinvest (into the business), are sort of running on fumes and they tend not to invest into long-term growth initiatives.”
• Lack of perpetuation – There may be a vague indication from the brokerage owner that the business could be sold to employees, but there is no written plan and no funding to make things happen.
• Concentration of ownership – Concentration in general, as well as concentration among people aged 50 years and older, are problems. Ideally, there should be staggered ownership, so the business is not owned by people of the same age group.
• Valuation gap – There is a gap between the internal valuation and external valuation. If an external buyer plans to eliminate certain non-insurance functions, improving economies of scale, it can achieve a higher EBIDA (earnings before interest, depreciation and amortization) and pay a multiple of that higher EBIDA, meaning sellers can make more money selling externally. “An insurance brokerage should run their business as though they’re going to sell it. They should have the same discipline in running the business,” even if no plans to sell.
As a purchaser, HUB is “looking for people to stay around and run the business and continue to grow the business,” Belton said. “And these people, of course, are looking at our business and saying they have capital and resources that we don’t have that will allow us to continue to grow our business, expand our geographical reach and so on.”
Despite the record consolidations among brokerages, Belton said he does not believe brokers are going anywhere, adding there are still 3,000 independent brokerages in the country. “There’s a lot of consolidation going on. It doesn’t mean people still can’t have start-ups, and people do every day. I don’t think it means that there is not an opportunity to having small independent brokers.”
Whether broker, insurer or reinsurer, Belton said he does not necessarily think consolidation is a bad thing. “Despite all its consolidation, it’s still a highly fragmented business. There’s 35,000 independent insurance brokerages in North America, there’s hundreds and hundreds of insurance companies, about 100 reinsurance companies. There’s no lack of choice for consumers,” he said.
“Through the consolidation, people become more efficient and they have resources that allow them to operate in a more sophisticated way with larger scale, and I think we’re better able to withstand market-moving events such as natural catastrophes or stock market calamities,” Belton argued.
Still, “we should never become complacent in the face of new forms of very sophisticated capital, which are entering our market, which we probably don’t even know about yet,” he emphasized.
More coverage of the Property Casualty Underwriters Club luncheon