Anticipated regulatory and compliance measures will likely spur the ongoing consolidation of small and medium-sized managing general agents (MGAs) in 2014 across Canada, with larger MGAs eyeing possibilities in Ontario, Quebec and Western Canada.At the heart of the regulations is a set of recommendations issued in late 2012 by the Canadian Council of Insurance Regulators (CCIR) to ensure insurance companies have adequate controls and oversight over MGAs. Currently, the Canadian Life and Health Insurance Association (CLHIA) is working with regulators to help come up with a set of standards that will not only satisfy regulatory concerns but also be workable for insurers and MGAs.

While it’s not known when and what exactly the eventual rules will state, MGAs know that some sort of supervisory role will be placed on their shoulders, adding another layer of complexity and work that they’ve never done before, said Byren Innes, senior strategic advisor with PwC Canada in Toronto.

In the days of captive sales forces, it was up to insurers to supervise, motivate and train life insurance agents and brokers. Then came the dramatic growth of MGAs – but those building MGAs lacked the ability or knowledge to take on this compliance job, said Innes.

It means MGAs with little will to take on this role may well sell out to bigger MGAs. “If I am an MGA and don’t have those skills and capabilities, I might ask myself: do I have the margins to add on this layer of cost? I might decide this is not for me anymore and retire to Florida and sell it to somebody. Some think it’s more fun to be an advisor and not have the same kinds of compliance headaches they would have as an MGA.”

Companies like Calgary-based PPI Solutions have already acknowledged the expected regulatory changes. Last year, his MGA added a full-time compliance officer, said president and CEO Jim Virtue. “We want to be proactive in helping advisors understand the rules and be sure they are compliant,” Virtue said.

Whether consolidation in 2014 will match the pace set in recent years is anyone’s guess, especially since many of the smaller firms have already been bought out, but many say there are still good possibilities out there.

Hub buys Daystar

In 2013, one of the largest acquisitions was Hub Financial Inc.’s purchase of Winnipeg-based Daystar Financial Group and its 2,000 advisors. That deal closed at the beginning of December, bringing the total number of Hub’s advisors to about 4,000 independent advisors in Canada. Hub, a subsidiary of Chicago-based global insurance brokerage Hub International Ltd., is now looking to ensure the integration of the two companies moves smoothly.

“We are travelling across the country meeting with many advisors, making sure that when we’re integrating, we’re taking the best of both worlds and offering a picture to both Hub and Daystar advisors that will complement their practices and help them grow those practices,” said Terri DiFlorio, president of Hub Financial. “It’s a bit of a slow-controlled approach. We don’t want or need to move very quickly but we will have one integrated operation that operates as one company as we go forward.”

Hub brings a strong back office and an emphasis on the use of technology to the deal, in addition to its Hub Masterworks program, a variety of courses that allow both new and experienced advisors to develop their businesses and identify their best customers, said DiFlorio.

While there are always discussions and possibilities of future acquisitions, DiFlorio said Hub will probably spend most of this year concentrating on the Daystar integration rather than actively pursuing other MGAs.

On the lookout

The past year also saw Kitchener, Ont.-based Financial Horizons Group busy completing a series of acquisitions that included Edmonton-based Optio Financial Facilitators, Winnipeg-based Audis Canada Ltd. and Whitby, Ont-based Savin Insurance Limited, said president and CEO John Hamilton.

Now with about 6,000 brokers across Canada, Financial Horizons still is on the lookout for three or four other MGAs in Ontario, Quebec and Western Canada, said Hamilton.

Despite the fact that markets remain sluggish and regulations will make it harder for smaller MGAs to maintain their businesses, he believes 2014 will be a good year.

“The MGA network is the largest distributor of life insurance products in Canada now and it will get stronger,” said Hamilton. “I think it’s better value for the advisor and I think that will become even stronger in 2014 and beyond. It’s fun to be part of it.”

That doesn’t mean there aren’t any challenges, he said. One of the biggest ones is the lack of succession planning, both among advisors themselves and MGAs.

With many advisors in Canada pushing the 60-year mark, there is great urgency in the industry to bring in younger advisors and train them. Financial Horizons, among other MGAs, has training modules especially for the younger brokers and encourages them to get into disability and group insurance to make them more rounded and give them a better start to their careers, said Hamilton.

Owners of MGAs being courted by their larger counterparts have to take a number of considerations into account, including the fit and the relationship they have with the acquiring company, said Innes.

“Sometimes the seller will stay on for two or three years as part of the sale agreement with the acquisitor,” said Innes. “So if I really don’t like the company that is buying my MGA and I stick around for a couple of years, that’s not going to be a happy thing for me. So a lot of this is relationship-based as well. I also ask whether my brokers and advisors fit with the organization. So they need to keep the principal engaged and happy and maybe he or she will stay on to make sure this is a successful acquisition.”

Probably as large a consideration for smaller MGAs is to determine whether they want to take on the regulatory and compliance burdens expected to come, or sell to their larger competitors.

“Many MGAs have to decide if they are going to be buyers or are they going to be sellers,” said Hamilton. “We are definitely buyers. We want to expand and we feel we have an excellent value proposition for advisors. My competitors, too, are all very good.”

Pressure for increased regulation and consolidation comes at a time when life insurance is a mature market and sales are relatively flat, but there are still markets out there that can be had, said Paul Brown, chairman and CEO of IDC Worldsource Insurance Network Inc.

“I think the challenge is that because of the intergenerational wealth transfer there is still lots of business being done at the high net-worth end of the market, which certainly brings in lots of money to insurers and MGAs,” said Brown. “But trailing that, studies show that there is a definite reduction in ownership in that middle market – the generations after the baby boomers. I’m not going to lose sleep over it in 2014, but over the long term that’s a challenge for the industry.”

On the segregated fund side, insurers who withdrew from the guaranteed minimum withdrawal products are now re-engineering some of their products and this may lead to a resurgence of seg funds this year, said Brown.

Bigger footprint

As MGAs seek a larger footprint, many are looking to expand geographically rather than by product, said Innes.

Larger MGAs are game to look anywhere where there is an MGA with a good fit to their philosophy and programs. Quebec has recently become a big drawing card because it represents 35 per cent of the population.

“If I’m not in Quebec, it’s a big part of the market that I’m not getting, so there is interest there,” Innes said. “It’s tricky because Quebeckers tend to be more regional and provincially focused, but there have been some good acquisitions there too.”

Toronto-based Qualified Financial Services (QFS) was early to the gate in Quebec in 2014, buying St. Laurent, Que.-based Le Groupe Goldman, effective Jan. 1, 2014. QFS has been in Quebec for a number of years. Last year, QFS also purchased Concord, Ont.-based PerformINS Canada Inc.

Virtue said PPI Solutions didn’t make any acquisitions in 2013, having already done a number of buyouts and building a national MGA with operations in eight cities across the country. “The truth is we were a little sooner to the consolidation party than most. Over the last 10 years we have been very active in the acquisition business when we did about 15 transactions,” he said.

Organic growth

PPI’s plans for this year include expanding through organic growth, launching a new toolkit to help advisors grow their business and a series of training programs aimed at how to get into the business market. In particular, PPI will be helping advisors increase their average premium amount.

“Where before they were writing average premiums of $2,000-$3,000, with our help we can get them to write premiums of much higher amounts,” he said. “There likely will be some opportunities from smaller and medium-sized MGAs and we will join in those discussions. If it makes sense we’ll be at the table, but we’re more focused on dealing with the right advisors as opposed to just another group of advisors.”

Virtue said he sees big growth opportunities for both PPI Solutions and PPI Advisory – which sells to the high net-worth market – in working with business-owner baby boomers now in the midst of selling their companies. “This presents a ton of opportunities for insurance planning both before they sell their business and upon the sale of their business. I think there are great opportunities in this market.”