Insurance company-owned brokerages: The great debate continues
One of the biggest property and liability (P&C) insurers in Canada, Definity Financial Corporation, recently purchased the majority of McDougall Insurance, one of the biggest P&C brokerages in Ontario.
Economic Insurance, Sonnet Insurance, Petline Insurance, and Family Insurance Solution’s parent company, Definity, announced on October 3, 2022, that it had increased its ownership interest in the brokerage from about 25% to 75% for cash consideration of $217 million (subject to post-closing adjustments), bringing its total investment in the company to $251 million.
McDougall, which was established in 1946, is a major player in the Ontario P&C distribution market, representing more than 50 insurance providers and running over 40 branches with more than 450 staff members.
At the Insurance Brokers’ Association of Ontario (IBAO) Annual Convention in October, Rowan Saunders, president and chief executive officer of Definity, said, “This is a broker that is widely known.” It’s a fantastic organization, and they excel at giving back to their communities and expanding their clientele through organic growth and, more recently, some inorganic activities. Like many brokers, they have reached the point where they are searching for a partner for the next stage of their journey.
Since nearly five years ago, Definity and McDougall have been partners. In 2017, the insurance company made its initial equity investment in the brokerage. It has now acquired 14 additional brokerages, more than doubling its yearly premium base to reach roughly $500 million.
Continue reading to learn how Definity increased its stake in P&C broker McDougall Insurance.
According to Saunders, the chance for Definity to acquire the majority of McDougall came at the “ideal” time. He called the agreement “a logical extension of our cooperation.”
“We have money to spend,” he declared. “We wanted to deploy it,” we told our investors. As an insurance company, we want to grow, so we’re trying to participate in what we predict will be a market that consolidates over time—and it already has, if you look at the past 10 to 20 years. Additionally, we’ve stated that we wish to finance distribution. For a business like ours, that is a really good supplementary source of money. This expansion made sense to us because we like the channel and are positive about it.
In terms of the organization’s future philosophies, “we see a wonderful leadership team there, and they’re going to continue to be as entrepreneurial as they’ve ever been.” “We’re thrilled to be a part of it and to be able to assist,” they said. “They’re going to continue to run their business under an independent broker model, and they’re going to continue their expansion.”
On the CEO panel at the IBAO Annual Convention, Saunders referred to the McDougall acquisition as “not forging new ground.” He sat next to Louis Gagnon, CEO of Canada at Intact Financial Corporation, Carol Jardine, head of Canadian P&C Operations at Wawanesa Insurance, and Matthew Turack, group president at CAA Insurance.
An insurer purchasing or investing in a broker “is hardly breaking new ground,” according to the Definity head. In truth, BrokerLink, a national network of insurance brokers with more than 200 branches and 3,000 workers, is owned by Intact Financial Corp. The “vote of confidence” that investors have in the broker channel was emphasized by both Saunders and Gagnon.
According to Gagnon (seen above right), “the value of the brokerage is a solid financial proposition right now” (pictured above right). “It’s a resource that a lot of people highly desire.” Few brokers are currently in the market to acquire other brokers; instead, businesses, private equity firms, and venture capital firms are interested in doing so. It is the capital there. Why? I believe it is as a result of the excellent returns.
Who will cooperate with brokerages owned by insurers?
The distribution environment in the Canadian market, according to Gagnon, is exceptional because it is “extremely flexible and very approachable,” with “space for all types of brokerages, all sorts of direct writers, and all sorts of different methods of doing things.” An excellent illustration of that is Intact Financial Corp., which operates both direct-to-consumer and broker-based operations. It works with more than 2,000 independent brokerages across Canada as well as close to 200 brokerages with whom it has financial relationships because it owns BrokerLink. Gagnon said, “That gives you a feel of what’s going on in the market.”
Read more about how automation and artificial intelligence are changing personal lines underwriting from BIG’s Stephen Billyard.
Carol Jardine (seen below), who represents the Wawanesa Mutual Insurance Company on the CEO panel, only uses broker distribution. As an underwriter, Wawanesa, according to Jardine, has “solid ties” with all of the brokerages that are controlled by insurance companies.
Most significantly, we always inquire as to the extent of the company’s influence over you. She said, “Depending on the circumstances, we’ll either have that chat with the brokerage or the underwriter if we find an undue influence on behalf of the underwriter who controls the brokerage.” The individual brokerages’ ability to remain independent, advocate for their clients, and stand by their value proposition is crucial.
Some insurers won’t operate with company-owned brokerages, including CAA Insurance. In 2017, CAA Insurance began distributing through brokers, making good on its pledge to work with only genuinely independent brokerages.
There is no contest between one broker partner and another.
When we entered the broker channel, we promised our broker partners that we would not partner with insurance company-owned insurance brokerages, and Turack (seen above) commented that this was really living up to that promise. Since Turack promised the company would do so, CAA Insurance has already given notifications of termination to broker partners who have sold to insurance companies.
What do you think about brokerages that are owned by insurance companies? Please leave your comments here, whether you’re an insurer seeking broker partners or a broker testing the M&A waters.