A new type of deal

Montreal-based Peak Financial Group announced in mid-January that its insurance dealer arm, Peak Insurance Services Inc., is joining forces with Customplan Financial Advisors Inc., a Vancouver-based MGA.

Customplan serves more than 300 independent financial advisors in British Columbia, Alberta, Saskatchewan, Ontario and Newfoundland and Labrador. Under the terms of the deal, those advisors will join Peak’s network of about 1,000 independent advisors in Canada, including about 300 active insurance advisors.

The two firms will share technology and back-office systems to save costs, and their insurance contracts will be pulled together under one roof. The MGAs’ ownership structures, however, will remain unchanged.

“This is not a conventional transaction or just a straightforward acquisition,” says Robert Frances, president and CEO of Peak Financial. “This is more of a coming together of two independent MGAs.”

The deal follows a wave of consolidation in the MGA space that took place last year. Kitchener, Ont.-based Financial Horizons Group, for instance, completed three acquisitions in 2012, the latest being Alberta-based MGA Optio Financial Facilitators in December. Financial Horizons is now the largest MGA in Canada in terms of the number of advisors it serves – more than 6,000 advisors across Canada.

In another recent example, Mississauga, Ont.-based IDC Worldsource Insurance Network Inc. (IDC WIN) acquired the MGA business of Calgary-based Strategic Brokerage Services LP.

Such acquisitions appeal to firms such as Financial Horizons and IDC WIN because these deals enhance profitability.

“It increases our revenue and decreases our costs on a national scale. So, it makes [us] more efficient,” says John Hamilton, president and CEO of Financial Horizons. “We’re wanting to get bigger, and we want to grow across the country. We’re always looking for profitable, well-run MGAs.”

The confluence of different factors is driving the consolidation trend. One contributing factor is the increasing age of MGAs’ owner/operators: as they approach retirement and explore succession strategies, selling their business to a large, established MGA is often an appealing option.

The insurance sector’s growing compliance burden is also playing a role, driving up costs for MGAs. Says Hamilton: “Compliance and regulation changes are coming, and some of the smaller [firms that] haven’t invested in that area are looking at perhaps a significant investment. It may make better sense to join another national firm as opposed to investing in it themselves.”

@page_break@ Another factor is the push among insurers to trim their rosters of MGA contracts. Many insurers have raised the production requirements that MGAs must meet to maintain a contract so that the insurers can focus their resources on a smaller number of agencies that are generating the highest volume of business.

These factors put smaller MGAs at a disadvantage in competing with their large counterparts – especially as some of their biggest competitors continue to get bigger.

“With consolidation,” says Paul Brown, chairman and CEO of IDC WIN, “it becomes more difficult for medium-sized MGAs to compete in the marketplace, because they don’t have the carriers to represent, they don’t have the margins or they can’t invest back in their business in terms of technology or compliance. So, I think that’s why you’re seeing a proliferation of M&A activity now.”

The new partnership between Peak and Customplan represents an effort by those firms to gain enough scale to compete with their larger competitors without forfeiting their independent ownership.

“The advisor is independent,” says Karl Krokosinski, CEO of Customplan. “We took that one step further and said, ‘Why can’t the entity – the firm, the MGA – be independent as well?’ It’s like a joint venture. We’re sharing technology; we’re sharing administration platforms.”

The partnership is mutually beneficial for the firms, according to executives at both firms. The deal gives each MGA a bigger geographical footprint, as advisors affiliated with Peak will gain access to the services and support that Customplan offers – such as its professional development and training programs – and vice versa.

In addition, both MGAs will be able to leverage each others’ strengths. Customplan advisors can tap into Peak’s established securities and mutual funds platforms, while Peak advisors will benefit from Customplan’s core strength in insurance, including its group insurance products.

So, the deal means more cross-selling opportunities for advisors at both firms, says Byren Innes, senior vice president and director with NewLink Group Inc. in Toronto, a consultancy in the sector: “Customplan advisors will do more mutual funds than they would have, and Peak advisors will do more insurance than they would have. I think business will go up overall.”

Peak Financial’s Frances believes that other MGAs could enter into similar partnerships: “It’s a new era in which MGAs now have an alternative with this type of arrangement. They don’t have to be consolidated or be closed into another entity. They have an opportunity to have access to a national platform while retaining their independence.”

Brown, for one, is doubtful that this kind of partnership is sustainable. He notes that in the past, most companies that have teamed up in this manner have either parted ways eventually or merged completely – often because of a power struggle that can emerge at the executive level.

“You can’t have too many cooks in the kitchen,” he says. “Those kinds of arrangements are probably attempts by smaller or medium-sized MGAs to remain relevant. But I don’t think it’s going to be a trend overall.”

Another potential problem is the ambiguity regarding the way insurer contracts will be structured. This issue, Krokosinski says, is being worked on by Peak and Customplan. He suspects that rather than having two separate contracts, some carriers will maintain a contract with just one of the MGAs, with the other conducting business through that contract – a practice similar to that used by associated general agencies.

“The insurance companies are trying to get their heads around what we’re doing, because this is so new and different,” Krokosinski says, adding that the reaction from insurers has been generally positive.

But Brown suspects that this contract arrangement could face resistance from insurance carriers: “Insurance companies are not going to be welcoming with open arms when it comes to that kind of thing.”

© 2013 Investment Executive. All rights reserved.