Broker Networks PAUSE FOR BREATHER

Although the public broker networks almost overnight captured 5% marketshare of Canada’s property and casualty insurance market in a stunning succession of acquisitions, the recent poor results of many of the operators, combined with a more wary investor attitude to non-blue chip stock offerings, has left many industry observers wondering to the long-term viability of the national broker consolidator concept.

The slump in the share markets last fall had the hardest impact on new stocks and consumer sensitive sectors such as financial services which, for several years, had been run hard by the investment-hungry public through mutual funds.

The lack of market script meant that virtually anyone looking to raise public capital in this so-called “hot house” environment would receive high demand for their paper, regardless of a lack of solid trading history. This, essentially, is the story of the public broker networks, their entry to the property and casualty insurance industry with heavy war chests of public money sparking a massive acquisitional and consolidation drive in the independent brokerage community.

Today, however, the share prices of the networks have tumbled, acquisitions have generally slowed almost to a dribble, financial results have in some instances slipped into the red, no new entrants have emerged in the market, and no new paper has been offered to the public in an attempt to raise cash. Several of the networks have recently announced plans of group restructuring and streamlining of operations, with all of the players having entered into equity-financed alliances with insurers over the past year (as a substitute to public cash raising).

Does this mean that the concept of the public broker consolidator was merely a flash in the pan, the by-product of less-than-cautious stock market investors? No, according to George Hutchison, CEO of Equisure Financial Network Inc., but the sector does have a long way to go in restoring investor confidence, he comments. As Hutchison phrases, the term “broker consolidator” has almost become a dirty word on Bay Street.

Crystal ball time

Hutchison does believe that the future of the networks is solid, at least in terms of the role they will play in financial services and the p&c insurance industry in particular. Which is not to say that all of the existing players will make it to the finishing line, he adds, the market having moved into a phase of “supplying the proof” of the value added. And, like many of the network CEOs, Hutchison does not expect any new public-listed players will be coming onto the Canadian stage in the current environment.

Among a host of consolidators having recently disclosed new developments, Equisure announced a new national insurance company, Northbrooke General Insurance Company of Canada (application for licensing is currently in the works), which will underwrite specialty programs for the network’s members. The first of the consolidators in the market, Equisure has remained at the top of the ranks in terms of performance, sticking to a steady acquisitional growth strategy while structuring operations to retail a broad mix of financial service products, underwritten inhouse and out of house.

West-coast network Hi-Alta Capital Inc. has also disclosed restructuring of operations into business units with Western Insurance Network Inc. to form its base p&c operation — the purpose of the restructuring to streamline operations, according to president Scott Tannas. This follows on the recent deal through which Canada Brokerlink Inc. acquired control of troubled Vector Intermediaries Inc., marrying the west and east-coast operations of the two networks which Jon Ouellette, vice president of operations, says provides the necessary diversity and critical mass for the combined operations to succeed.

Toronto-based The Hub Group, with close shareholder relations with Fairfax Financial, has presented a daring strategy of expanding south into the U.S. having recently acquired Mack & Parker of Chicago as a launching point. Eventually, Hub’s U.S. operations will likely be double in size of its Canadian network in terms of revenue, comments president Rick Gulliver.

Moving separate ways

A study of the recent activities of the networks, says a market analyst, illustrates that the players are beginning to move in separate directions, with each entity at different development stages. However, what is becoming glaringly obvious is that the Canadian network sector has matured, leaving little for new entrants. Furthermore, the sector is unlikely to enjoy the excess capital availability of past years, which will encourage a more disciplined growth strategy approach, the individual adds.

This view is shared by Doug Davis of research consultants Davis Consulting Inc. He expects further consolidation among the existing networks, but does not rule out the possibility of one or two additional players coming onto the scene. The networks will also most likely follow Hub’s move into the U.S. market, thereby diversifying their exposures, he speculates.

Tannas is convinced that the days of raising capital through the stock markets are over. Although share prices of the networks are fairly valued relative to the sector’s performance, he does not see the markets as being a viable cash source until investors see a significant improvement in results. “Insurers will most likely be the future source for funding the sector’s growth.”

Hence the decision to structure Hi-Alta’s operations into business units, he adds. “With the number of office locations that have been brought into the network, we felt the need to create focused operational leadership to handle day-today activities. This enables us to concentrate our energies into the different areas of operational versus strategic planning.”

Tannas admits that Hi-Alta has not yet delivered the “added value” expected of the broker consolidator concept. He expects, however, that the network’s restructuring plans will produce the necessary benefits in the year ahead.

Although each network appears to be at a different development stage, the sector has entered into a consolidation phase, notes Hutchison. This period will likely see fewer acquisitions occurring, particularly as the prices of brokerages has risen significantly as the networks have vied for them. That said, Equisure has stuck to its long-term growth strategy, which includes further purchases in 2000, he comments.

And, while the share prices of the networks have taken a pounding, Hutchison points out that this decline is not out of line with the general slump in financial service stocks. “If you look at a top performing company like Kingsway Financial Services, its share price is currently trading at a 52-week low. Everyone is getting killed on price at the moment.”

Ouellette says the current share values are specific to the results of the sector. “The future share prices of the sector will depend on its results. The [broker] consolidators are now focussing on streamlining their operations with this objective in mind. Those that achieve the necessary efficiencies will see an improvement to their results which ultimately will feed into the share price.” Overall, Ouellette believes the network sector does have the ability to deliver on its shareholder promises.