Who’s acquiring Canadian P&C brokerages?

Private equity (PE) and insurer-backed brokerage acquisitions appear to have surged in recent years, but it’s difficult to get a true number as not all transactions are reported, business advisory and consulting firm Smythe LLP said in a new report.

Reported acquisitions by PE-backed consolidators rose from approximately 37% before the onset of the COVID-19 pandemic to more than 65% of all transactions in 2020 and 2021, Smythe said in its 2023 Property & Casualty Insurance Brokerage Report. However, 2022 saw insurers or insurer-backed brokerage acquisitions jump to nearly 40% from only 11% in 2020.

One notable insurer-backed acquisition last year was Definity Financial Corporation’s majority stake acquisition in Ontario-based brokerage McDougall Insurance. The deal increased Definity’s ownership interest in McDougall from about 25% to 75%.

Last month, McDougall merged with another large Ontario brokerage — McFarlan Rowlands. McDougall also expanded into Alberta through the acquisition of brokerage Drayden Insurance earlier this month.

Between 2018 and 2021, the number of publicly announced brokerage transactions in Canada increased slightly year-over-year, from 37 deals in 2018 up to 55 by 2021. By 2022, 65 transactions were completed. As of May 2023, there were already 23 publicly announced acquisitions, Smythe reported.

But Smythe stressed it’s important to note figures representing transactions completed by independent brokerages might be distorted, as not all transactions are reported. While the majority of publicly reported transactions are made by national consolidators, transactions between local and regional brokerages often go unannounced.

“In our observations, regional brokerages are either not willing to or are not able to compete on pricing with the national consolidators,” the report said. “Instead, they cater to a segment of brokerage owners that would rather transition their business to an acquirer with a similar cultural fit or set of values. This includes smaller independent brokerage owners that merge with each other in order to increase scale, consolidate resources and alleviate the pressures of being a smaller brokerage in a consolidating industry.”

Smythe largely attributes the recent surge in acquisition activity to the “low cost of debt over the past four years coupled with a robust pool of investor capital that is looking to achieve a healthy rate of return in a period of heightened uncertainty.” And with 23 brokerage transactions already announced in the first five months of 2023, M&A activity will remain resilient for the foreseeable future, Smythe predicted.

That said, some factors will shift market dynamics in relation to valuations and/or terms, Smythe said. This including concerns over inflation, the “war for talent” and market sentiment indicating a recession, resulting in economic tightening and a higher cost of debt. But as there are still record highs of dry powder, acquirers relying on debt facilities to fund acquisitions will likely be more selective with their acquisition targets.

When it comes to acquirer focus, there has been a diversification from traditional P&C brokerages into other verticals such as group benefits and wealth management, Smythe observed.

“We believe this is mainly due to companies’ growth objectives and their desire to increase a customer’s wallet share by cross-selling products to create a moat around the customer relationship,” the report said. “As a result, we anticipate more M&A activity in other verticals and other parts of the value chain going forward, especially as the number of property and casualty brokerages available for sale shrinks.”

Feature image by iStock.com/Parradee Kietsirikul