Hub Financial Inc., Canada’s largest managing general agency, has swooped in to buy a large competitor in Ontario, making the latest consolidation in a corner of the insurance industry that has been buzzing with activity.

Toronto-based Ontario Eastern Insurance Ltd. , which is owned by its managing director, David Juvet, and his wife, has agreed to be acquired by HUB, whose Canadian operations are based in Woodbridge, Ont. The deal is set to close on Nov. 30. Previously a lawyer, Juvet is also a registered advisor for Partners in Planning Financial Services Ltd. , the Regina-based mutual fund dealer.

The price for Ontario Eastern is in the range of $5 million, an eyebrow-raiser in the Canadian MGA business, which is usually privately owned by entrepreneurs. The deal delivers between 300 and 400 advisors to HUB’s wheel, which already counts about 3,000 insurance advisors on its roster. Ontario Eastern also brings in about $800,000 in service fees a year.

HUB, which has offices in Al-berta, British Columbia and Quebec as well as Ontario, is a subsidiary of HUB International Ltd., based in Chicago. The private-equity firm Apax Partners and Morgan Stanley Principal Investments teamed up to buy the parent company earlier in the year, taking it private. Hub International provides property and casualty and life and health insurance and other services to the insurance industries in Canada and the U.S. through more than 200 offices.

Neither Hub Financial nor Ontario Eastern is speaking about their deal, which was described by several industry executives as “the worst-kept secret” in the industry.

“[HUB] has been doing this for years,” says Rene Pereux, principal and president of Winnipeg-based Daystar Financial Group, one of a handful of MGAs that have been on the acquisition hunt lately. “I say, ‘All the power to them’.”

Pereux, whose firm is expanding again by adding an office in Nanaimo. B.C., says that no matter who is the consolidator, consolidation will be a benefit to advisors in the long run.

Mergers might involve short-term disruption, but in the end, the merged firm has more critical mass with which to provide more value to advisors in the areas of training, technology and overall back-office support.

Byren Innes, senior vice president and a director at NewLink Group Inc. , agrees. The Toronto-based firm provides broad-based consulting on products, distribution and strategy for many parts of the insurance, banking and brokerage industries.

“There’s a certain level of production that’s needed to afford the technology, compliance and regulatory checks on issues such as privacy,” says Innes. “Many of those [firms] doing the consolidation are still in the growth stage of their plans.”

On the revenue side, every insurance shop in Canada has a relationship with at least a couple of MGAs, which, in turn, have contracts with insurance manufacturers — often a handful of them. These contracts clarify the commissions and service fees paid to advisors and the MGA. Larger MGAs receive volume bonuses from the carriers whose products they sell.

Most of the major banks, as well as large integrated planning firms such as Toronto-based DundeeWealth Inc. and Mississauga-based Investment Planning Counsel, own their own MGAs. But, Innes says, there are more than 400 independent MGAs across the country, ranging from those with just 20 advisors under contract all the way up to the bigger fish such as HUB.

Apart from scaling up for efficiency, there are several more reasons for the M&A trend at MGAs, starting with personal ones. The so-called “graying” of the industry is well known. The average insurance advisor has reached his or her 50s, and some of the owners of the MGAs themselves are ready to sail off into the sunset.

Juvet, for example, who had headed up the legal team at Aetna Life Insurance Co. of Canada before it was acquired by Maritime Life Assurance and, subsequently, by Manulife Financial Corp. , had built Ontario Eastern on his own as a second career.

“He built a good business; now he wants to move on,” says Innes. “I know a number of people who are at that point in their lives. So, there’s that succession issue going on. There’s no question about that.”

On the operations side, production targets, set by insurance carriers in their contracts with the MGAs, are also motivating the consolidation among the smaller agencies. As many as two-thirds of MGAs aren’t hitting their so-called “validation” targets. “That could be profitability or production targets, or both,” says Innes.

@page_break@Bill Maclean, vice president of corporate accounts at Manulife in Waterloo, Ont., acknowledges that every carrier will enforce certain levels of production.

“There’s a certain element that, if an MGA cannot do the business with the carrier, then it is going to lose the contract,” says Maclean, noting that Manulife does business with about 50 MGAs. “So, either you lose the contract with the carrier or you bulk up in order to retain the contract.”

GREATER MARGINS

The search for greater margins is probably the greatest factor for MGAs in the M&A game, Maclean adds. Starting 20 years ago, the manufacturers themselves merged to reduce unit costs, he says: “And it’s no surprise that the MGAs are falling into the same pattern.”

Bruce Hammond, president and controlling shareholder of PerformINS Canada Inc. , which has tied together five firms in southern Ontario over the past three years, says MGAs are especially motivated because consolidation genuinely works in the industry. He compares the economics of consolidating MGAs to those of merging member firms of the Investment Dealers Association of Canada, as opposed to the relatively poor financials that occur when fund companies merge.

With a scalable business of the MGA type, says Hammond, when you merge back offices and administration, “the synergies are amazing.” In a previous job, he had led IPC’s acquisitions team on at least 10 deals before it was acquired by IGM Financial Inc. of Winnipeg. “In the mutual fund industry, that never happened for anyone.”

In addition to HUB, PerformINS and Daystar, B.C.’s Abex Group of Companies and Bridgeport Financial Inc. of Montreal are looking to acquisitions for growth. Indeed, it seems as if every month, notes Manulife’s Maclean, an MGA merger of some size is news on the Street.

All signs point to much more consolidation on the horizon and changes to the distribution network in the insurance industry.

“It’s been going on for some time,” says Daystar’s Pereux, “and it will probably go on for another two or three years is my best guess.”

Many in the insurance industry say that it’s only a matter of time before the insurance manufacturers start taking an interest in the MGAs as acquisitions. Advisors everywhere in the wealth-management business don’t need to be told that product manufacturers and distribution groups make for cosy bedfellows these days.

“While the trend so far is heavily weighted toward the mutual fund industry, we would expect it to tilt toward the insurance manufacturers buying distributors over time,” says Innes. “It’s only a matter of time before that shifts over the [MGA] marketplace.”

In some sense, that move would represent a full circle, says Hammond. Years ago, most insurers owned captive agencies. While insurers wouldn’t return to that model, they might turn to MGAs that aren’t capitalized well enough to add new advisors, inject the MGAs with some cash and ensure themselves a healthy distribution system.

“To a certain extent, the carriers can start to develop new advisors in that channel — they can afford the costs — and enjoy some privileges of ownership,” says Hammond. “So, when the first guy jumps, the next will jump right after him.” IE