A small concord, Ont.-based company has quietly been consolidating managing general agencies in the fragmented Canadian insurance industry, gathering some 2,300 advisors within its operations.

In less than three years, Per-formINS Canada Inc. , a private company whose majority shareholder is industry veteran Bruce Hammond, has bought together five MGAs in Ontario. The company’s advisor policies now bring in more than $2 million in service fees annually.

“Initially, I wanted to bring 10 of these companies under one roof and one back office,” says Hammond, an insurance advisor and former chief financial officer at Prudential Assurance Co. Ltd., “and really increase value-added services to the advisor, as well as make the business more profitable than it has been in the past.”

Hammond is midway through that strategy and admits it’s been a slow process. PerformINS has tied together five MGAs: Oakville, Ont.-based Wise Riddell Financial Corp. ; Markham, Ont.-based AFG Canada Inc. ; Mississauga, Ont.-based Pinnacle Financial; Toronto-based the Leading Edge Insurance and Financial Services Groups Inc.; and the MGA services of Toronto-based PanFinancial Group.

PerformINS’s strategy is part of a wider trend over the past few years in the insurance industry toward consolidation of smaller MGAs, the conduits through which advisors sell insurance carriers’ policies.

Every “mom and pop” insurance shop in Canada has a relationship with an MGA, which has contracts with one or more carriers. The contract clarifies the commissions and service fees paid to advisors, as well as the volume bonuses paid to MGAs for the business they generate.

The logic of consolidation is that greater numbers of advisors working under larger MGAs will provide greater economies of scale. In turn, the MGAs can invest in stronger technology and services for advisors, who are facing increasing competition from the rest of the financial services industry.

WIDENING MARGINS

A consolidator will typically widen margins by lowering costs. It can reduce redundant back-office staff and commercial space. Additionally, in PerformINS’s case, it also has licensed Web-based software that performs some of the back-office services and gives advisors a more efficient business model.

“We can produce insurance processing cheaper than most people can. So, we get some of that margin back by reducing cost,” says Hammond. “Now, we provide a platform for the advisor, so he or she has access to his or her business 24/7. The advisor can see what’s going on with his or her applications at any time.”

New technology makes life easier for advisors, Hammond adds. Rather than making calls and leaving voice-mail messages with the carrier’s back office, the underwriting and application process is clarified daily and uploaded for them.

Hammond admits there have been glitches in making it happen. Carriers need to agree to allow access to their processing, and systems must be matched with PerformINS. It’s finicky programming work.

“Four or five insurance companies are now giving us downloads every day on any case we have,” he says, and more are to come.

As PerformINS looks for MGAs to add to its shop, it faces stiff competition. Hub Financial Inc. , a division of Hub International Ltd., has been an active consolidator in the past, says Hammond. Other recent players include British Columbia’s Abex Value and Bridgeport Finan-cial Inc. in Quebec. Daystar Finan-cial Group Inc. of Manitoba is also on the acquisition hunt.

“Just about every MGA in the business says it’s a consolidator,” Hammond says. “The question is: where do they get their financing?”

Financiers won’t lend money to businesses they can’t analyse financially, and most small MGAs are not tightly run from a business perspective. And most lenders don’t understand the insurance industry. “Banks can’t tell if they’re good businesses or not,” Hammond says.

For PerformINS, the question of financing was answered to some extent by Toronto-based VentureLink Financial LP, a labour-sponsored fund that holds 40% of the firm’s equity in its VentureLink Financial Services Innovation Fund Inc.

LEAP OF FAITH

VentureLink provided acquisition funding based somewhat on an educated “leap of faith,” in the Canadian MGA industry, says Geoff Horton, the fund’s managing director. Third-party financial analysis of the MGA industry’s profitability isn’t widely available. Instead, VentureLink spoke to software providers in the industry to understand the potential that software innovation could bring to margins.

@page_break@The mutual fund industry has demonstrated there is profit to be had by increasing scale and volume; Horton says, theoretically, that should apply to insurance distribution. Those factors, as well as the possibility for M&A activity, attracted VentureLink to PerformINS’s business strategy.

Apart from MGA/MGA mergers, VentureLink speculates Per-formINS could become a takeover target by insurers looking to get into the distribution business. “And if you reach a certain size, you may attract a planning firm that has some interest in owning its back office,” says Horton.

Hammond, founding president of Security Life Co. Ltd. before it was bought by Co-operators Life Insurance Co., understands acquisitions in the insurance industry. He led Mississauga-based Investment Planning Counsel’s acquisitions team on at least 10 deals before it was acquired by IGM Financial Inc. of Winnipeg.

He says MGAs and insurers must make a joint effort to bring new advisors into a sector suffering the effects of aging advisors more than any other in the financial services sector. The average insurance rep is over the age of 55, he notes. MGAs that are strong financially will be able to hire new advisors, train them and provide value-added services.

MGAs have few ways to grow profitability. They can attract new advisors by offering more margin, or they can take advantage of better technology and band together.

Hammond is always looking for more targets and, Horton says, there is room for more consolidation if the market isn’t too pricey. “As long as we can buy [an MGA] at an attractive price,” he says, “and improve margins enough to make a return on the investment, there will be [more acquisitions].” IE