Regulation is one factor driving the consolidation trend

By Megan Harman | June 2017

Winnipeg-based Great-West Life Assurance Co.'s (GWL) acquisition of Kingston, Ont.-based Financial Horizons Group Inc. (FHG) could mark the beginning of a shakeup in the life insurance industry that will see carriers take a definitive step back into the distribution business.

The deal raises questions about the future of the independent distribution model. This deal is not the first time an insurance carrier has taken ownership of a managing general agency (MGA), and likely won't be the last.

"It's concerning," says Terri Botosan, president of HUB Financial Inc. "I think [the carriers] recognize the importance and the strength of advisor independence and consumer choice, but I think they also want to have a closer influence on distribution."

The acquisition of FHG was announced in mid-May and is expected to close on June 30. The deal brings one of Canada's largest MGAs, with a network of approximately 6,600 active independent insurance advisors, under the ownership of one of the country's largest insurance carriers.

Quebec City-based Industrial Alliance Insurance and Financial Services Inc. (IA) was the first insurer to make a foray into the MGA market with its acquisition of National Financial Insurance Agency Inc. in 2008. IA since has acquired more MGAs, including Ten Star Life Insurance Brokers Inc. and, recently, HollisWealth Inc., the latter of which expands IA's independent distribution activities.

"I would predict that [the GWL/FHG deal] is the beginning of a domino effect," says John Hamilton, president and CEO of FHG. He notes that many companies expressed interest in acquiring FHG after its majority stakeholder, San Francisco-based private-equity firm Genstar Capital LLC, revealed plans to sell its 72% stake in FHG last year. (FHG's executives own the other 28%.)

"It will come down to who can afford to buy the MGAs," Hamilton says.

Regulation is one factor driving this trend, according to Hamilton. Although insurance companies outsource many of their compliance responsibilities regarding independent distribution to their MGAs, he notes, the insurers are ultimately responsible for ensuring compliance. Owning the distribution channel is one way for carriers to take more control of compliance oversight at a time when regulation is growing.

"The regulators want more oversight," Hamilton says. "And, as the manufacturers of the products, the life companies are charged with having proper oversight."

Owning an MGA also provides a carrier with an extra layer of profit on the products that it manufactures, as well as some revenue on the sale of competitors' products through the MGA.

"It's probably a smart acquisition, looking at it from the insurance company's point of view," says John Jordan, an independent certified financial planner in Waterloo, Ont. who has a distribution contract with FHG. "They're double-dipping: they're paying the MGA - but if they own the MGA, it's coming back to them."

Although distribution is not new territory for carriers, with captive sales forces having dominated life insurance distribution prior to the rise of MGAs in the 1990s, the ownership of an advisor force that is free to sell other carriers' products is a concept that raises eyebrows in the insurance industry.

"I just don't see the independent advisor believing that this is a fabulous thing," says Botosan.

Under the FHG acquisition agreement, GWL states, the MGA will operate as a separate entity with its existing management team remaining in place.

"FHG will operate independently from our distribution channels," Stefan Kristjanson, president and chief operating officer, Canada, at Great-West Lifeco Inc. (GWL's parent), stated in an email to Investment Executive. "We'll continue to provide the same level of support to all of our affiliated partners. Our working relationship with FHG will remain at arm's length and on commercial terms."

Says Hamilton: "It will be exactly the same."

With a growing regulatory focus on the fair treatment of consumers and product suitability, Hamilton adds, the ability for advisors to access a wide variety of products is likely to become even more important.

"The independence [of advisors] is critical. I think GWL sees that [it needs] to show to the regulators that [it respects] the fact that the end consumer must have choice."

However, advisors such as Lorne Curry, president of Curry Financial Group Ltd. in Peterborough, Ont., who has a contract with FHG, say it's hard to imagine FHG remaining entirely independent under its new ownership.

"As long as GWL continues to operate FHG as an individual entity and it does what it's designed to do - to be an MGA for everybody to access all of the different insurance companies - then I don't have a problem with it," says Curry. However, he suspects that GWL may eventually require FHG advisors to sell a certain volume of GWL's products.

The acquisition could prompt some advisors to consider switching MGAs. In the days following the announcement, Botosan says, HUB received a higher than usual number of inquiries from advisors about the process of switching MGAs.

"If people aren't actually going to take action and move, they are, at least, considering their options right now," she says. "I think [the deal] will make them ask questions about who they want their partners to be."

The GWL/FHG transaction also creates an uncomfortable new dynamic for MGAs such as HUB, Botosan says, as the deal aligns one of HUB's competitors with one of its industry partners.

"We're very interested in MGA acquisition, and now I would have to believe that this [deal] is a signal that GWL is, too," Botosan says. "So now, they're one of my largest carriers, they're my competition for advisors, and they're my competition for acquiring other MGAs."

Indeed, GWL's commitment to expansion is a key reason it is the best fit for FHG, Hamilton says. The MGA has made 30 acquisitions in the past five years, and Hamilton expects to match that pace in the next five years: "We'll be double the size we are today."

The acquisition comes as GWL has announced a variety of structural changes to its distribution activities in recent months. However, Kristjanson says the FHG deal is unrelated to those changes.

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