September 8, 2020 by Jason Contant
Canadian brokers considering an upcoming merger or acquisition may understandably be concerned given the economy during the ongoing COVID-19 pandemic, but one property and casualty brokerage M&A expert says his firm’s advice is the same as it’s always been.
“That is, make business decisions based on the facts in front of you rather than trying to predict how current events might impact your business in the future,” Mike Berris, partner at British Columbia-based Smythe Advisory, wrote in a blog published last week. “The fact is we can’t predict how the pandemic will impact the future. So, if you are considering an upcoming M&A transaction, the best strategy is to make your decisions based on the facts and market conditions in front of you.”
For example, brokerages dealing in specialty areas that are finding their limited markets unstable or at risk might consider selling or merging specialty with a larger brokerage. “On the other hand, if your brokerage is dealing with the hard market conditions but your books’ performance is good, you may want to hold off,” Berris wrote. “If there is no burning platform, you do not have to jump.”
It’s plausible and makes sense that both profits and valuations of brokerages will fall because of the effects of the pandemic, Berris wrote in The Impact of COVID-19 on M&A in the P&C Insurance Industry, published Sept. 3. The economy shut down for part of the year, quarterly GDP had the worst decline in history and there is unprecedented government spending, resulting in billions of dollars in additional public debt.
“Based on this, a broker might land on two possible courses of action: One, hold off and wait for better times; or two, sell now before things get worse,” noted Berris. “Our answer? Not so fast!”
While profits in the P&C insurance industry may have dipped in March and April, brokers have, for the most part, made up for lost ground and profits have been very comparable year-over-year, Berris said.
COVID-19 continues to negatively impact certain segments of the economy, while others have been left relatively untouched. Most important for brokers is that there hasn’t been a change in the fundamental demand for insurance over the medium to long-term.
“We are not saying the health crisis is not impacting brokers, especially in hospitality, certain specialty areas and lower-end products, but what we have found is the quick rate in which our P&C insurance clients [brokers] have reacted,” Berris wrote.
He told Canadian Underwriter Thursday that some of the things he’s noticed include a “quick and effective” shift to servicing clients remotely, drive-through kiosks, introduction and roll-out of online renewals, and wider use of DocuSign and other touchless renewals.
In some cases, the pandemic has spurred brokers to make financial and operational changes that were long overdue, Berris said. He cited cuts to unnecessary expenses and acting to deal with underperforming employees as two examples. “Wages are the big one. We have also seen tremendous acceptance and customer transition to online quoting and renewal capabilities being offered through brokerages.”
While what is unnecessary is in the eye of the beholder, Berris said, there have also been reductions in advertising budgets, promotion and entertainment expenses and telecommunications. And he’s seen a shift to online and cheaper professional development courses.
The markets’ reaction to the pandemic has been very interesting, Berris wrote in the blog. “While some purchasers understandably paused, others have continued to actively pursue acquisitions, albeit cautiously at first.” Based on discussions with brokers across the country, Berris expects M&A activity to resume to normal levels this fall.
Feature image via iStock.com/utah778