Crossing the Floor

The recent acquisition of broker network consolidator Canada Brokerlink by insurance company Allianz Canada appears to have set off a series of fireworks on the insurance industry’s skyline — an event which could result in a significant change in the current balance of power on the issue of client ownership. As one industry insider source observes, the news of the Brokerlink/Allianz deal had many insurer CEOs running for the phone.

The obvious question that jumps to mind from all of this is why all the noise? Simply put, the Brokerlink/Allianz agreement has set a new precedent in the Canadian market to what insurers believe they can “ethically do” in terms of controlling the brokerage market through ownership stakes. Prior to the Brokerlink/Allianz announcement, insurers had been content with acquiring relatively small equity positions in the publicly traded broker networks. As the industry source referred to above points out, “Allianz crossed the line when it purchased Canada Brokerlink outright. Suddenly, Allianz has become a significant player in the Canadian market by buying the $180 million in premiums vested in the broker consolidator. A great number of insurance company CEOs are looking at the deal as a changing of the rules, simply having a minority stake in a broker network is no longer good enough.”

It is believed that over 30 potential buyers (mostly insurers) had been lined up to acquire Canada Brokerlink — the initial run on the network having been sparked off by rival broker consolidator Equisure Financial network through a failed hostile takeover bid. Allianz emerged from these proceedings as a “white knight”, and clearly the highest bidder among the interested parties wanting to step into the ownership shoes of the broker consolidator.

While the Canada Brokerlink/Allianz deal was not the sole motivator behind Equisure’s subsequent announcement that the much larger network was looking for a rich parent of its own, president George Hutchison admits that it was a factor. The rules of the game have been changed, he concedes, and with Equisure’s share price greatly undervalued, the objective of the company was to ensure that it did not become the target of a hostile takeover.

With Equisure currently involved in confidential discussions with potential buyers, further details of a deal are unlikely for another month at least. That said, Hutchison says a number of insurance companies have stepped forward as interested parties. The rumor on the street has it that more than 70 potential acquirers have expressed interest in Equisure with the bidding price likely to start at around $10 a share with expectations of the price moving to $15 a share — a stark contrast to the company’s $4.50-$5 share price prior to the announcement (the share has been trading in a $6-$7 range over recent weeks). In addition to the Equisure announcement, one of the other large national broker consolidators, Vector Intermediaries, is rumored to be in buyout discussions with an insurance company (based on the price set by the Canada Brokerlink deal, the acquisition of Vector would likely be valued at between 50 to 60 a share). Vector’s management were not able to reveal current developments at the time of writing this editorial, but did state that an announcement concerning the future of the company will be released in coming weeks (which may well have occurred by the time this issue of CU is released).

As mentioned above, Hutchison was not in a position to disclose the identity of potential buyers of Equisure, nor provide any indication of the expected price. He did, however, express hope that the eventual victor in the bidding will continue to operate the broker network in line with its existing growth strategy — essentially, he expects the company will remain an independent broker operator and not a “captive agent”. Whether that same future lies in wait for Canada Brokerlink and Vector remains to be seen. That said, once the dust has settled on the bidding for Equisure, there will be no doubt in the minds of those in the industry that the rules on insurer ownership of brokers will have changed forever.