How the M&A market is affecting brokers in Canada

Published: August 14, 2019

Updated: September 1, 2019

Author: Luke Jones

CATEGORY:

Share:

In recent years, many have predicted the insurance industry will become defined by merger and acquisition (M&A) activity. However, how does that prediction hold up for the Canadian brokerage network?

Well, according to one report, underwriters and PE investors are driving the M&A activity in the insurance industry in Canada.

“The current market is primarily being driven by underwriters and private equity (PE) investors,” wrote Mike Berris, partner and practice group leader with Smythe Advisory in the firm’s recently released Property & Casualty Insurance Brokerage Report 2019. “While underwriters have had significant impact on the pricing of P&C books of business, it is our view that PE investors are increasingly becoming significant players, at least as far as new transactions are concerned.”

“The PE strategy is different from those of your typical broker or underwriter consolidator and can be very attractive to a vendor in the right circumstances,” Berris wrote in the report.

Berris says PE investors will be more likely to acquire several smaller brokerages and pool their revenue to a more than a sum of their parts result. For example, PE investors will purchase five brokerages with $5 million revenue each and together the $25 million revenue will be worth the investment. This also means if one brokerage sees a dip in revenue, it can be offset by the others.

“I think this is a good strategy,” he told Canadian Underwriter Wednesday. “In addition, they often require or offer a chance to roll over some equity, which potentially gives the divesting party a chance to get another payday.”

“Underwriters have made a conscious decision to tie up more premiums and they are aggressively buying and financing book acquisitions,” Berris said. “I think they are factoring in their underwriting profits and this allows them to pay more as the required return on investment includes underwriting profit. This has had the effect of seeing prices drift up.”