Undercurrents

The friendly bout gloves seem to have been removed in the latest acquisitional match of industry consolidation, namely the less-than-friendly bid made by listed Equisure Financial Network in the beginning of this year for its public-traded rival, Canada Brokerlink Inc.

This was later followed by a friendly offer by Allianz Canada, a deal supported by the Brokerlink board despite conditions attached against the proposed merger with Vector Intermediaries. However, the unsuccessful attempt by Equisure to buy out its competitor (the outcome of which will have been decided by the end of market trading on February 24, after this editorial was completed) is irrelevant to the purpose of this commentary, the point being that the undercurrents which developed around the hostile bid are typical of the “political interference concerns” many with the industry have expressed over the future direction and independence of the brokerage community.

In the Editorial and Cover Feature sections of the October 1999 issue of CU, I emphasized the potential long-term fallout which could occur if a significant portion of personal property and casualty premiums were to fall under the influence of any large distribution organization either directly or indirectly influenced by an underwriter. This, by the way, is not intended to be a negative reflection of Equisure’s intent of acquiring Brokerlink, but rather to address the political motivations of the players that emerged in the proceedings.

For reasons known only to Equisure, the company stood opposed to the earlier announced merger between Brokerlink and financially troubled Vector Intermediaries. Equisure openly stated in its first bid announcement to gain control of Brokerlink that shareholder voting rights gained would be used to block the proposed merger between the two smaller networks. Naturally, the Brokerlink board of directors opposed the intent of the Equisure bid, presumably on the basis that the public offer to acquire shares was undervalued. In response, the Brokerlink board activated a “poison pill” clause to prevent Equisure from blocking the merger planned with Vector. The clause was later conditionally dropped after Equisure filed protest to the Securities Commission and also issued a public statement revealing the fact that certain Brokerlink directors stood to make significant personal financial gains if the merger proceeded.

The very cooperative withdrawal of the Brokerlink poison pill was shortly followed up with heavy investment in Brokerlink by The Dominion Of Canada General Insurance Company, which at the point of writing this commentary, had gained up to 16% of the company’s ordinary voting shares. This seemed a strange development for an insurer which has openly stated not having an interest in acquiring a controlling stake in brokerages. When asked to what the Dominion’s intent was with regard to the equity position taken in Brokerlink, president George Cooke was non-committal, stating that purchase had been “a good investment opportunity”. He was unprepared at that point to say whether Dominion would oppose the Equisure bid or for that matter, stand against the latter’s intent to prevent the Brokerlink/Vector merger proceed. Subsequently, the offer for Brokerlink of 120 cents a share was made by Allianz. But, research of the market revealed some interesting rumors concerning the Equisure and Dominion involvement, that being Dominion stood to lose a significant amount of business vested in Brokerlink and Vector in the event of a successful takeover by Equisure. Street-wise speculation is that Dominion has no real interest in acquiring a controlling interest of Brokerlink, but rather to present a formidable presence against Equisure in voting on the proposed merger between Brokerlink/Vector (the shareholder meeting to finalize the merger was set for February 24). The point of the Dominion stand in Brokerlink seems to have been to strike a “backroom deal” with Equisure ensuring Dominion’s current level of business with the said operations. Time would have since seen conclusion to the Equisure/Brokerlink/Dominion saga. Which brings me back to the focus of this debate, should insurers be allowed to interfere in the natural market forces influencing the distribution channel — and thereby “buy up books of business” wholesale-style regardless of the client duties resting with the intermediary?

My very open position on this subject has been that brokers should represent the client first and foremost in all matters. However, I have also taken cognizance of the market’s reality and the need for consolidation, and therefore accept the need for insurer investment in the traditional distribution market. However, the line between “investment and support” and control of the brokerage market by underwriters is becoming increasingly blurred. The real issue is not what my thoughts might be on the subject, but rather how the regulators and consumer representative groups might view such developments, particularly at a politically sensitive time as this when the murky waters of tied-selling and cross-selling are under the microscope.