What’s on Dec? | Episode 16 | M&A: State of the industry
Canada’s inflationary environment looks a lot different than one year ago, when the Bank of Canada repeatedly raised interest rates amid fears of a recession.
In Canadian Underwriter’s latest What’s on Dec? podcast, Western Financial Group president and CEO Kenny Nicholls discusses the impact of recent interest rate cuts on M&A. He also looks at how M&A activity in general has changed throughout his career and how it could evolve.
The war for talent is always a hot topic in the industry, and Kenny will give his take on the competition landscape. Given his upcoming retirement at the end of the year, Kenny will also share his own plans for the future.
Audio transcript
Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject matter experts throughout the year.
Pete Tessier:
Hey, everyone. Welcome to another edition of What’s On Dec?, the Canadian Underwriter podcast. I’m Pete Tessier and Curt Wyatt with you from the Insurance Podcast. And we’re going to discuss an always hot topic today, and that is mergers and acquisitions. And we’ve got Kenny Nicholls from Western Financial Group joining us soon. Curt, this topic always gets eyebrows raised, but Kenny’s going to share some interesting thoughts on a few perspectives.
Curt Wyatt:
Kenny’s been in the driver’s seat now for a number of years over there at Western and has taken it through a number of these M&As. As he’s seen all sort of aspects of it, like large corporate side right down to the onboarding of small ones and two operation brokerages that have now joined the ranks of Western, just like we’ve seen with other family-run brokerages that have also joined the ranks of some of these larger multi-provincial brokerages.
Pete Tessier:
Yeah, look, there’s not a week that goes by when we don’t see a new merger or acquisition and as we speak it’s happening right now. We’ll get Kenny’s perspective on a few things like the number of consolidators, how they’re looking at what they’re doing and how they find growth. I think we’ll also talk about where the funding’s coming from. There’s a lot of money out there in the marketplace now for these mergers and acquisitions. Where’s that coming from? Who’s providing it?
And I think we want to get into a little bit about the effect of interest rates. Even though we’ve had a couple of cuts recently, interest rates are much higher than they were three, four years ago. So how is that affecting options for people to do the kind of business deals they want to do? Kenny, as you said, he’s been at this since I think 2010 or 2011 with Western Financial. He’s seen all sorts of changes. I think the best part is Kenny’s also retiring, so he’s looking backwards with an interesting lens and we’ll talk to him a little bit about what his plans are as well when it comes to next steps. And is he going to stay in the industry? So what do you think? Should we go grab him?
Curt Wyatt:
You bet. Let’s get Kenny on.
Pete Tessier:
So Kenny, thanks for joining What’s On Dec? It’s great to have you on. And of course I think some of the news that people are going to want to talk about is your impending retirement, but we’ll get to that in a little bit. Let’s talk a little bit about your view and what you’re seeing when it comes to mergers and acquisitions.
Kenny Nicholls:
Well, thanks for the invite, guys. Always great to spend some time with both of you.
Pete Tessier:
We have some interest rate cuts. And obviously financing is a big issue when it comes to mergers and acquisitions. Do you think it’s going to affect them right now? And what’s changed since you started your career when we had different interest rates to where we are now?
Kenny Nicholls:
If I maybe switch around here and talk about when I joined Western, that was back in 2011, so it’s only been 13 years ago. But man, in those 13 years did things change. At that time there were only about three consolidators of which Western had been the pioneer since 1996 when Scott acquired his first brokerage. If we go into multiples, multiples were around six to eight times EBITDA, about two to three times revenue. And most brokerages I’d say would be ranging from one to five locations. You had these odd, maybe 10, 12 location ones. But for the most part, brokerages were relatively small, much less competitive.
And I think with the emergence of private equity money from the States mainly, for some reason they feel they found a gold mine in Canada with brokers. The multiples have almost doubled and in some cases even higher. For the majority of one to five branch or location brokerages, we’re looking at still maybe between 10 to 12 times EBITDA and that would be probably 4, 5, 6 times revenue. That’s what we’re essentially seeing.
But there’s an emergence now of what they call platforms. And so, this money coming into the country where there’s no brokerage or insurance expertise, they want to grab hold of a larger group that has a support system that they will invest in, that will become their investment arm. And through them they will acquire other brokerages. That would be maybe a brokerage that has maybe 15, 20, 25 locations, has somewhat of a structure with IT, accounting people, HR people and whatever. And then through that platform they just grow.
They’re willing to pay a strategic premium for that type of brokerage. And we’ve seen some go from 15 to 20 times EBITDA. Now financially, when we’re looking at interest rates, we would’ve thought we would’ve seen a decrease in M&A activity because the cost of financing is becoming a little too expensive. I can’t say that we’ve seen any real slowdown. And so now with decreasing rates, I can only think that there’s going to be an even bigger pickup.
If you’re looking at a brokerage that right now is generating let’s say 10 million of EBITDA, now that’s a relatively large brokerage I admit, but just bear with me. And someone picks it up at 15 times EBITDA, that would be $150 million price tag. In order to generate what a diversified fund would provide you today, which would be anywhere from eight to 10% return, they have to immediately increase EBITDA from 10 to maybe 12 or 13 million.
Where do you think that’s going to come from? It’s not going to come from instantaneous increase in revenue. It’s going to come from cost-cutting. We remain active in the M&A stage at Western, but we’ve also realized that we’re having a field day now just picking up licensed people and customers who are coming to us from brokerages that have been acquired.
And unfortunately, many of our competing consolidators are focused so much on acquiring and what comes after that they’ve lost touch with the customer and their own people as well. And the people and customers are feeling it. And so they are shopping more, they’re going across the street. If they’re not coming to us, they’re going to someone else’s. And that’s been what we’ve noticed right now.
You’re bringing up the interest rate piece. I am an accountant myself. I’m not an economist, but I’ve been dealing with M&A now for over 20 years. And I’m just not able to understand why someone would be able to justify the high multiples being paid right now. There’s so much you can give on or you can put as a strategic value.
Curt Wyatt:
Kenny, it’s Curt here. And great to get online with you here. It’s interesting that we get to talk about this as I met you through an M&A. And in fact, we worked together for the better part of a year. And now, you’re getting to the end of your career like I was as a retail broker at that time.
And it’s like the industry evolves. And before we came online, you hit some numbers. And we’re talking about them now and we’ll get into some of the nitty-gritty here, is that there’s a point where brokers get themselves to a level of success. And they see that success and they realize, “Hey, you know what? Everyone has an expiry date.” And we need to someday say, “You know what?” Like you just said a minute ago, “Let’s move out and let the new group in and they’ll figure out how to make a 5% interest rate work. Or they’ll figure out how to manage teams of people different than we manage them today.”
And we’re seeing masses of people in addition to the challenge with hiring is the challenge with baby boomers retiring and taking that intellectual property with them. The consolidation in conjunction with that is an interesting time. And it leaves behind a group of smaller brokerages that, Pete and I like to describe it as have come in behind the wake. We have very loyal customers and they like the idea of maybe finding the small guy. We’re not the U.S., let’s face it. And we’re following a U.S. model when it comes to M&As. What’s your thoughts on the small brokerages in Canada and how they’re doing now with the last five, 10 years of M&As?
Kenny Nicholls:
Yeah, well, that’s a good question, Curt. I mean obviously there’s been tremendous activity in the M&A and so there are way less brokers available now than there were a few years ago, even like when both of you sold. But when I’m looking at it today, I believe there continues to be a need for small brokers because despite the fact that it might be challenging for a small broker today to survive because there’s a lot of investments needed in technology, you have to follow the paperless environment we’re trying to build. Customers are requesting transactions to be done much smoother.
And so there’s a lot of investments needed. And not every single owner is either willing to or able to. And that’s what’s creating a lot owners to reflect and say, “You know what? I don’t want to spend that amount of money or risk or whatever attached to that so I will try to sell.” But I think there continues right now to be a need for smaller brokers for the same reason I explained before. Unfortunately, a lot of the big guys have just taken their eyes off the customer and even taking good care of their people. As long as that continues, there will be a need for customers to be served, to be cared for.
Pete Tessier:
One of the things that’s interesting is you brought up earlier the aspect of where you find return when you pay a lot of money for a brokerage. And you’ve made a mention of your culture, you’ve made mention of the importance of retaining people. What are some of the problems you’ve seen when it comes to middle management to move them up and retain them when they have to take on a bigger role they’ve never experienced before because now they’re in a bigger organization and that new organization needs a different kind of skill set and responsibility that trickles down into a bigger role for the person who never really planned to be there?
Kenny Nicholls:
I’d say, Pete, your question, what I would look at your question, I turn the question slightly different in saying what I am realizing in our industry is it’s not just a question of demographics, but it’s more gender balance. Our industry is about 70% women and 30% men. You’ve got that on the front lines and probably very low level managers, but once you hit a director level, a VP level, an executive level, or even an owner level, that gets switched around completely where you’ve got about 70% men and 30% women.
We’re puzzled. Why is that? Why? What’s happening between the level of manager right up to the owner? What’s making it that we’re seeing less women? Now there’s an improvement. There are more and more women that are being elevated and we’ve done a lot of research on that. I mean we’ve got some anecdotal stuff that came out of it, but nothing really conclusive. I think what’s very important is it’d be nice for this industry to be more deliberate. I’ve seen, if I’m looking at the last two years of VPs we’ve either promoted or hired, the majority of them are women. We should see more.
Curt Wyatt:
And Kenny, Hey, let’s face it, this is definitely the case. I think we had Traci Boland, we just interviewed her recently and stepping down as IBAC chair. And I mean you can count on two hands I suppose, how many past presidents of our national association were women. So, I completely agree.
And it does also speak to the challenge of recruitment and how to recruit and how to bring people into the industry. As Pete and I have heard on multiple shows, people fall into the industry, as it’s said. And you could say that about a lot of industries, whether it be finance or what have you. Speaking of that, how do you see within your time serving as CEO, the role of a brokerage and what it’s done to acquire talent? Because there is a war on talent. And not just on that upper management as we’ve been talking about for the last few minutes, but rather, what do you think can happen to help people find their way to insurance?
Kenny Nicholls:
Yeah. Well, I mean you said it earlier on, Curt, that essentially this war on talent has been brought or has been created through a few things, obviously even pre-pandemic. So, from an industry perspective, we keep on hearing the fact that a lot of people are not attracted to the insurance industry, see insurance as some type of monster. But when you really, everybody who’s spent a decent amount of time in insurance knows, as far as I’m concerned, it’s the most rewarding and most caring of all financial services.
We protect people’s future and we help. In the most awful time of their lives, brokers and carriers together are there to help people out and to help them get back on their feet. I don’t see a more rewarding industry than ours, but yet people still talk negatively about it. And I think it’s about time for us to be positive. Even ourselves sometimes we start out by saying, “Well, yeah, we know that people don’t like…” We shouldn’t even be saying that. We should all be saying how wonderful the insurance industry is.
And I’d say even more being a broker, because you’ve got the customer right in your face. You’re the one wrapping your hands around the customer, making sure that they’ve got the right protection that, in case they need it, is going to ensure financial viability for them and their family. And we give back to communities. Everything we do is all around community improvement and helping out people. It’s extremely rewarding.
Pete Tessier:
So, Kenny, what happens next then? Are you going to keep working in the industry? Are you going to follow in some footsteps of some well-known other insurance executives and come back in a consulting role, or are you going to just take some time? What’s on the horizon for you?
Kenny Nicholls:
It’s funny. My kids, we were talking about it a few weeks ago and they said, “You won’t last three months.” On retirement that is. Let’s be truthful here. My wife and I decided to make the jump, join Western back in 2011. We’ve been away from the family for 13 years. We try to keep our kids close. Our son at that time was in Vancouver. Our daughter came with us in Calgary, but we are still away, quite far away from the rest of the family. Our parents are aging. They need some help. And we’re quite tight to our family, so it’s important for us to be there.
This said, I’m not done giving. I think I still have a lot to share. And as a consultant, an advisor, mentor, a coach, a board member, whatever it is, I haven’t decided yet, but I keep on telling people, “I’m retiring, I’m not dead.” So any opportunity that comes by, I will definitely look at it as long as it allows me to spend the majority of my time next to the family.
Curt Wyatt:
Well, Kenny, speaking on behalf of two individuals that chose to twilight before they were too long in the tooth, as you’re saying, at a young 58, there’s a lot in industry for people to do when they choose to leave their Monday to Friday position. And I’m sure you’ll find that the industry will provide that opportunity to you. So, thanks so much for coming on What’s On Dec?
Kenny Nicholls:
It was a pleasure.
Curt Wyatt:
And we look forward to bumping into you at events when you choose what that role will be. A pleasure.
Kenny Nicholls:
Absolutely. Well, thanks for having me, guys. It was a pleasure.
Pete Tessier:
Well, it’s almost like we’re saying farewell to a legend, Curt, as Kenny plans his departure now. But hey, a few things that I think the audience needs to be aware of that’s really important. One thing I took away, and the biggest one for me was there’s a lot of great talent out there because of these mergers and acquisitions. And obviously, Western has found a way to tap into it, and that’s something everyone should be looking at. Not everyone wants to be a part of a giant company.
Curt Wyatt:
Yeah, Western is tackling the HR challenges. I mean, hey, let’s face it, we all know we’re seeing the baby boomers that have dominated this industry peel back. And with that change, you’ve got to see the large players like Western and the others step up and bring in talent from outside the industry. Let them learn this business from the ground up. And Kenny gets into that. I mean he also gets into the challenges that we face when we do bring companies together. And you see some legacy individuals stick around and some not. Those are unique challenges that they faced and he shares that with us throughout the interview.
And I like how he dives into the issues around the M&As and how that’s evolved in the last 10 years. It’s not what it was before and it’s not going to continue the way it’s been. Even Kenny can’t predict because he is retiring is what is it going to look like in five years from now? We don’t know that. I think we will still see the entrepreneurship of brokerages in Canada continue to evolve. And you’re going to see people who can come out through this change and have a substantial play in what is the service model for Canadian consumers when buying insurance. It doesn’t have to be through a large broker.
Pete Tessier:
No, it doesn’t. And I think the other part here that’s very interesting is we’re looking…When Kenny talks about the number of consolidators, where they’re coming from, that adds some perspective too. And I wouldn’t be surprised if new entities come in, they see value in the broker channel and they create a different model of aggregation and consolidation. This one’s maybe, is it mature? Is it aging out? Is it sunsetting? I’m not sure. It all depends.
The other thing I think that we have to really take to heart with what Kenny said was look at where you can find talent. He talked about some of the opportunities they had to grow in new areas and how they could acquire talent. I don’t think there should be brokerages out there, Curt, that should be afraid of finding growth opportunities when these large changes have happened and some of these seismic shifts of acquisitions have happened.
The staff doesn’t find out until the very end. We’ve seen it. We’ve been a part of it, whether we bought it ourselves or we’ve sold and we know how that goes. There are people there who sometimes will just say, “This isn’t a culture I want to know of.” They maybe know of cultural challenges in those new larger companies that already exist. They know that they’re looking for change.
And right now, when we have an increased demand on high-skilled, high-quality insurance professionals, there’s a lot of opportunity out there for people to find a landing spot and maybe with a company like Western, simply because they’ve understood that they want to attract that talent and build it into their process and give people a path forward to grow. Curt, also, we heard from Kenny, his blinds are wide open when it comes to opportunity once he retires. Obviously he wants to spend some time with his family, but there’s a guy who’s got some knowledge. He was putting out a request to contact him, but if you’re looking for some expertise, the doors are wide open with him.
Curt Wyatt:
Hey, no question. It would be great to see Kenny, especially within the ranks of what we’re seeing with changes in digital, with migration to APIs, that people like Kenny who had his fingers on the pulse of the large picture of insurance, what was happening, how it needs to evolve. There’s a lot of our trade organizations that are going through this process of determining the standards. His background in accounting gives him some insight into the numbers and how those work when it comes to our sector.
To have someone like that who’s still willing to step forward, like you said, Pete, and make himself available to make sure that there’s a history here that continues, that what he started with Western and the brokerages that became part of Western continues and becomes viable for the Canadian marketplace. I said earlier that there’s going to be new entrants as well to go along with that. And they too need help in determining how do you connect, how do you properly communicate and keep those controls in place?
So at the end of the day, the Canadian consumer is protected as much as the insurance company is. And that is extremely important to this country. And I think Kenny is an individual who could help in that regard in a big way. We wish him all the best in his future endeavors, and it was great getting him on Canadian Underwriter.
Pete Tessier:
Yep. Hey, thanks again, everyone, for listening to What’s On Dec? We’ll be back with some more content soon.
Outro: Thanks for listening to What’s On Dec?, the Canadian Underwriter podcast.
