Definity Financial Corporation has increased its ownership interest in Ontario-based brokerage McDougall Insurance from approximately 25% to 75%, “building a broker partnership with proven M&A expertise.”
The partnership is for a cash consideration of $217 million (subject to post-closing adjustments), bringing Definity’s total investment to $251 million when the deal completed, the insurer said in a press release Oct. 3.
The long-standing partnership between the two companies began with an initial equity investment in 2017. Since then, McDougall has completed 14 brokerage acquisitions and more than doubled its annual premium base to approximately $500 million.
Founded in 1946, McDougall is one of Ontario’s largest P&C insurance brokerages, representing more than 50 carriers. With more than 450 employees and operations across more than 40 branches, McDougall offers a variety of home, auto, commercial, recreational, farm and life insurance.
Combining McDougall’s operating income with Definity’s other broker investments, Definity expects to generate operating income before taxes and minority interests from them in excess of $40 million annually (versus $8 million for the 12-month period ending Dec. 31, 2021). “The transaction is expected to be immediately accretive to operating ROE and operating earnings per share,” Definity said in the release.
Distribution partnerships are a key area of focus for Definity’s corporate strategy, given the diversification benefits they can provide as a complementary source of income, said Definity, the parent company of Economical Insurance.
“Regulations do not prevent Definity from owning 100% of a broker,” Definity told Canadian Underwriter. “With growing revenue and robust operating margins, McDougall is a strong franchise and the shared ownership model of 75/25 ensures alignment and participation in the growth of McDougall going forward.”
Rowan Saunders, Definity’s president and CEO, said that the insurer admires the brokerage’s “entrepreneurial culture, their ability to attract talent and their capacity to grow the business, both organically and via proven acquisition capabilities.”
The strengthened partnership with Definity “will enable us to accelerate our growth plans and further our ambition to reach an annual premium base of $1 billion,” added Ross McDougall, the brokerage’s CEO. “The unique structure of this partnership will allow us to maintain and expand the McDougall operations, providing a home for more brokers to join us and keep equity in the business going forward.”
The acquisition was financed by Definity’s excess capital position. Definity has stated its intention of becoming a Top 5 insurance company through a combination of organic growth and M&A activity. Definity has “built a business model where we think that we can grow at about twice the rate of the industry, so on average, a 10% growth rate, and to do so in the mid-90s [combined ratio],” Saunders said at the Barclays Global Financial Services Conference on Sept. 12.
Definity has already started its growth path with partnerships earlier this year. In March, it entered into a strategic partnership with digital broker and MGA Apollo Insurance Solutions Ltd. to complete an initial minority equity investment in Apollo.
Economical announced a partnership in February with peer-to-peer car sharing marketplace Turo. Economical was selected as the “insurer of choice” to provide commercial auto coverage (including up to $2 million in liability) for Turo’s host and guest community in Ontario, Quebec, Alberta and Nova Scotia.
Definity is the 7th largest P&C insurer in Canada by net premiums written according to Canadian Underwriter’s 2022 Stats Guide, using stats supplied by MSA Research. It has more than $3.4 billion in gross written premiums for the 12 months ending June 30, 2022.
Feature image by iStock.com/filo
