Insurance distribution deal activity in Canada and the United States “reached unimaginable highs” in the fourth quarter (Q4) of 2020, according to a report by OPTIS Partners. In Q4, there were 290 mergers and acquisitions (M&A) involving brokers, managing general agents (MGAs) and third-party administrators in North America, compared to 173 in the same period of 2019. In total, OPTIS Partners recorded 774 transactions in 2020, up from 649 in 2019.
The investment banking and consulting firm has attributed these deal heights to “a combination of pent-up demand as we learned to live and work in a pandemic world,” as well as a rush by firms to “avoid an expected increase in capital gains tax by selling before year end”.
Speculation in Canada about a potential increase to the capital gains tax rate has been high for some time as Ottawa seeks ways to pay down a soaring deficit amid billions in spending on pandemic-relief measures. As such, OPTIS Partners expects that insurance brokerage sellers will “continue to push to close [transactions] as a hedge against a possible increase in capital gains tax” in the early months of 2021.
There are other factors driving brokerage M&A in Canada. The COVID-19 pandemic has forced brokers to engage in digital transformation and conduct more of their business through virtual settings. Those who haven’t been able to adjust to the new business environment spawned by COVID-19, or those who simply haven’t engaged with it (either by choice or lack of means), might be looking to sell to or partner with a larger brokerage firm or network where they can gain access to those capabilities.
Buyers, on the other hand, are interested in the brokerage/agency space for its resiliency, which has been proven through tough economic times like the Great Recession and the current pandemic. Insurance distributors have been able to produce predictable and consistent revenue streams coupled with high margins, making them attractive from an investment perspective.
While insurance distribution M&A trends are arguably amplified in the United States, Canada has seen its fair share of transactions over the past few years. Serial acquirers like Hub International keep making the headlines with deal after deal, and there’s been more movement towards large brokerage networks, like BrokerLink.
Earlier this month, BrokerLink announced it had acquired six Ontario and Alberta-based brokers since December 01, 2020. Now with over 150 branches and 2,000 employees, BrokerLink has grown into one of Canada’s largest property and casualty insurance brokerages – and that growth has been accelerated significantly by M&A.
Read more: How to successfully drive M&A during COVID
This heightened deal activity is having an impact on the distribution landscape in regional insurance markets. Shelly Willick, president and CEO at Saskatchewan Mutual Insurance Company (SMI), has been watching the consolidation of brokerages in the Prairies for the past 10-years.
She commented: “In 2012, our top 10 broker groups accounted for 32% of our premium, and about 60% of that group was independently-owned. By the end of 2019, the top 10 group accounted for 43% of our premium, and 60% are now either owned by another broker or a credit union.”
The executive, who has been with SMI for her entire career, has seen a shift in succession planning among local brokers, with fewer independent brokerages passing down to family members, and more selling to larger broker networks
“There are some really good reasons for independent brokers joining larger networks,” said Willick. “They get more leverage in the market, and they get access to new technology. By being part of a larger brokerage network, they can consolidate some of their needs together, and really enhance their customer experience.
“As an insurer, we see that as an opportunity. As we are moving along our own digital journey, if we can mirror that with the broker’s digital journey and work together to provide solutions that help brokers conduct their business easier, then that’s a win-win for everyone. If we can free them up from some of the more repetitive mundane aspects of the business, brokers will be able to focus on providing advice and support for policyholders.”
With such a win-win situation available, it’s more than likely that insurance distribution M&A will continue to soar through 2021.
