Canadian Underwriter

How brokerage buyers are reacting to COVID market conditions

September 11, 2020   by Jason Contant

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Demand for Canadian property and casualty insurance brokerages remains strong during the COVID-19 pandemic, but potential brokerage purchasers are becoming more targeted in their approach, a P&C transaction advisor observed.

“For most potential transactions, the list of potential purchasers has narrowed,” Mike Berris, a partner at British Columbia-based Smythe Advisory, wrote in a blog on the impact of the pandemic of P&C mergers and acquisitions published earlier this month. “This does not mean that the demand is not there, but rather purchasers are more targeted.”

When asked to elaborate, Berris told Canadian Underwriter that purchasers are not just interested in adding books of business. “They are targeting areas of business that they have expertise in or can deliver effectively,” he said. “For example, those brokers who have online capabilities or are agents for underwriters are still interested in personal lines, but many of the private equity brokers are focusing on commercial lines.

“Large automobile books are not in demand,” Berris added. “Some acquirers won’t buy an underperforming book, where in the past they would have gone for it. They are carefully looking at the wage structures and performance of individual producers” where this would have been done less so in the past. Didkivskyi

As well, vendors must be open to changes in the transaction landscape, including pricing and other deal terms that purchasers might be looking for in a COVID-19 environment, Berris wrote The Impact of COVID-19 on M&A in the P&C Insurance Industry. He told Canadian Underwriter this includes:

  • Earn-outs based on growth targets
  • Additional proceeds tied to retention
  • Sticking by working capital requirements (where purchasers would have backed off from that in the past)
  • More discipline by purchasers when stipulating vendor covenants and other representations and warranties (R&W)
  • In some cases, lower prices but bigger potential pay-outs if certain goals are met

“The markets’ reaction to the pandemic has been very interesting,” Berris wrote in the blog. “While some potential purchasers understandably paused, others actively pursued acquisitions, albeit cautiously at first.”

In March, when the novel coronavirus was declared a global pandemic by the World Health Organization, Smythe Advisory had four ongoing M&A processes. “In each case, we had long conversations with both our clients, who were the vendors and numerous potential purchasers. I would say that every process paused for at least two weeks and approximately one-third of potential purchasers dropped out immediately,” Berris said.

“By mid-April, half the parties that dropped out showed some interest in coming back to the process. And in the end, we had competitive offers similar to what we would have expected in 2019 for all four mandates. That is not to say that vendors did not have to make some concessions in terms of hold-backs, representations and warranties, but in general, the results have been good from a vendor perspective.”

Related: Thinking of selling your brokerage during COVID-19? Here’s how to proceed

Berris said his firm remains “very active” in the P&C insurance market throughout Canada (it recently merged itself with accounting firm Morgan & Company LLP). Other observations of the current M&A environment include:

  • Size, composition and quality of the underlying book have never been more important.
  • Vendors should be able to demonstrate a good understanding of how the pandemic has impacted their business and what they are doing about it
  • Given the current pricing of brokerages, combined with perceived risks of COVID-19, purchasers will be very focused on growth potential and prices will be higher for those brokers who can effectively demonstrate this
  • It has never been more important to understand the underlying value of your brokerage. A pre-sale pricing and/or operational analysis is a good investment
  • There are alternatives to a full divestiture. Understanding what you want and then looking at a variety of possible options can be useful
  • While auctions generally result in the highest prices and best terms, it is important to know there are alternatives worth exploring

“We are positive about the state of the P&C Insurance industry in terms of M&A given the current facts in front of us,” Berris concluded in the blog. “The dynamics are more complicated, but with proper planning there continue to be good deals to be had from both a vendor and purchasers’ perspective.”


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