Is broker ‘independence’ capital-agnostic? Or is broker independence truly a function of who owns the brokerage, be it a broker, an insurance company or a private equity partner?
This question has been the source of a longstanding debate between brokers and their insurer partners, with insurers historically taking heat from independent brokers over owning a controlling interest in brokerages. But, in an age of highly valued brokerages and plenty of willing private equity acquirers, it seems a more capital-agnostic view of brokerage ownership is taking hold.
The debate reared its head again during the CEO Panel of 2022 Annual Convention of the Insurance Brokers Association of Ontario, held in Toronto last week.
The CEO panel featured Louis Gagnon, CEO of Intact Insurance (Canada), Rowan Saunders, president and CEO of Definity Financial, Carol Jardine, president of Canadian P&C operations at Wawanesa Mutual Insurance Company, and Matthew Turack, group president of insurance with CAA Club Group.
An audience member asked where the executives stood on partnerships with company-owned brokerages. The context is that a large portion of recent brokerage M&A in Canada has been driven by private equity players, and to a lesser degree by insurance-company backers.
Intact owns one of Canada’s largest brokerages, Brokerlink. And Gagnon observed that owning a brokerage these days requires a significant capital investment. That’s because acquirers are valuing brokerages highly, sometimes at four times earnings, which means owning them requires deep pockets.
“The value of the brokerage is a pretty strong financial proposition right now,” Gagnon noted. “I mean, it’s a very coveted asset by so many people. Not very many brokers are buying another broker, right? There are a few, but now it’s [insurance ] companies, PE [private equity] and VCs [venture capital firms] that are in the market to buy brokerages. I mean, that’s where the capital is. And that where the returns are…
“I find it very difficult, being in that business, not [to] take advantage of those opportunities. On top of that, I think when you look at Canada, compared to the rest of the world, we have a very flexible, very approachable market environment that gives room for all sorts of brokerages, all sorts of direct writers, all sorts of different ways of doing things.”
Saunders discussed Definity’s purchase early this month of a controlling interest in the Ontario brokerage McDougall Insurance. Definity upped its share ownership in the full-service brokerage from 25% to 75%, raising its total investment in the brokerage to $251 million. Saunders saw this as “a logical extension” of the investment partnership with the brokerage that first formed in 2017.
“We like the [broker] channel, we’re bullish on the channel, and so for us this was a logical extension,” he said. “I think with respect with our philosophy going forward, what we see in that organization [McDougall] is a great leadership team and they’re going to continue to be as entrepreneurial as they’ve ever been. They’re going to continue to run the business in an independent broker model….
“So, I think the question is, ‘What’s your view on this?’ Well, this is not breaking new ground. We are partners.”
Jardine suggested Wawanesa, which only sells through the broker distribution model, takes a capital-agnostic view toward its brokerage partners, for the most part. She observed broker independence is more about the value of the brokerage to its community (whether the brokerage provides choice, advocacy and advice), and less about the capital backing them.
“I always say to brokers, it really depends on what your personal goals are for your business and the people who are working for you,” Jardine said. “It’s a strategic decision each entrepreneur needs to make. If you want to continue to be an entrepreneur and own your business, good on you, we are there to support you. We’ll lend you money, we’ll do other things to help you. If you feel you need to go to a consolidator, that’s a decision you have to make for the reasons that you are making it.….
“I think the most important piece for every broker in this room is, ‘What is the value that you’re providing to your community, to your customers, and to the people for which you’re responsible? If you’re providing the value that you are bound by regulation to provide, which is [to] advocate for the consumer, we’re good to go. So, we have strong partnerships with all the company-owned brokerages as an underwriter.”
But if there are signs of ‘undue influence’ from non-broker owners in the daily business decisions or strategy of the brokerage, Jardine added, Wawanesa would be having conversations with the executives of that brokerage.
For Turack, rather than having those types of conversations, CAA would prefer a clean break with brokerages that are not owned by brokers.
“When we launched into the broker channel [in 2017], we made a clear commitment to our [brokerage] partners that…we won’t partner with insurance company-owned brokerages,” Turack responded. “And [because of] that, when a brokerage gets bought by an insurance company, or an insurance company-owned entity, we will give that broker notice of termination and a period of time upon renewal to move the book…..
“We have done that with BrokerLink or with the recent acquisition of [McDougal by] Definity [through the 75% investment for controlling interest]. We do that continuously. It is part of our strategy. But more so, it’s part of the commitment we made to the brokers and the partners we have in the room, or partners that we have across the country. That is what we said, and we are absolutely living up to that.”