Why McFarlan Rowlands decided to sell

A desire for scale, coupled with a rapid succession of shareholder retirements, compelled McFarlan Rowlands to sell to a subsidiary of Definity earlier this year, a senior exec told the Insurance Brokers’ Association of Ontario’s annual convention in Toronto.  

Despite being owned by an insurance company, the brokerage has been able to maintain its independence, in the sense that it hasn’t fundamentally changed the way it does business, Christa O’Neil, chief operating officer of McFarlan Rowlands, shared in a panel discussion about broker ownership models at IBAOcon’23.  

McDougall Insurance Brokers Limited, a subsidiary of Definity Financial Corporation, merged with McFarlan Rowlands Insurance Brokers Inc. in May 2023. Definity acquired a 75% stake in McDougall months before the deal. McDougall then purchased 100% of the shares of McFarlan Rowlands.  

Established in 1896, McFarlan Rowlands was at the time of the deal an Ontario-based brokerage with more than 200 employees in 18 office locations across southwestern Ontario. The combination of McDougall and McFarlan Rowlands represents more than $700 million in annual premiums, 670 employees, 56 office locations.

O’Neil said the brokerage’s decision to sell in part boils down to the importance of scale in today’s P&C marketplace. 

“To achieve scale, we have focused on a balanced growth strategy of acquisition and organic,” she said. “But in the M&A space, rising interest rates and rising multiples made it that much more difficult for us to maintain a competitive position in a place for acquisitions. That was the first factor in what was truly the perfect storm for McFarlan Rowlands. 

“We also faced the challenge of multiple shareholders with significant holdings looking to retire in a short period of time,” O’Neil said.  

With a large volume of shares changing hands, combined with steadily climbing interest rates and sky-high multiples, the brokerage decided to weigh its options.  

“We reviewed our shareholder or employee appetite for financing share transitions at fair market value versus a sale,” O’Neil said. “In the end, the majority of our shareholders voted to explore the opportunity to sell.” 

The brokerage searched for the right partner, eventually settling on McDougall, with which it already had an established relationship. 

Even with Definity’s substantial investment in McFarlan Rowlands, O’Neil says the brokerage’s independence comes down to its ability to remain trusted advisors to its clients.  

“The change in our ownership structure — including financial investment from Definity — hasn’t changed the way we do business,” O’Neil said. “It hasn’t shifted our priority focus from our clients, and it hasn’t impacted who is making operational decisions day-to day-for the brokerage.” 

The discussion around what makes a brokerage independent has bubbled to the surface in recent years. 

“We thought that being 100% employee-[owned] was part of what made us special. And you know, it was, I agree,” O’Neil said. “But I have to humbly admit that it didn’t necessarily make us better brokers than those who have [benefited from] financial investments by insurers.” 

Of course, brokerages operate under a variety of ownership models. 

“Independent in our context is an owner [who is an] employee-operator,” Brooke Hunter, president and CEO, founder of Hunters International Insurance said during the panel discussion.  “And by that, I mean one owner, or 10, or 50. But definitely owners working in the brokerage.”   

Under the owner-operator model, the business owner also participates in and runs the daily operations of the brokerage. Hunter says this ownership model makes brokerages free to be nimble.  

“We are free from the inherent conflict of insurer ownership,” she said. “We are free from the quarterly shareholder pressures required to be publicly traded. We are free from the synergy pressure [that] private equity firms and other asset managers insist upon to fulfill their investor ROI promises. 

“We are Canadians serving Canadians in our local communities.”

Other models — such as franchisers, groups or broker networks — evolved large because of the trend toward brokerage consolidation.  

SurNet, for example, provides brokers with “economies of scale” that they couldn’t otherwise achieve without their network, said Kelly Thompson, president of SurNet Insurance Group during the panel discussion.  

“Thirty-some-odd years ago, there was a lot of market consolidation,” she said. “[Brokers] were finding themselves in the situation of either having to sell or merge with another broker. SurNet was created, and we provided them with that solution. 

“We provide them with the tools they need to succeed, such as technology, company contracts, E&O, back-office admin support, and industry association memberships.” 

Feature image by iStock.com/guvendemir