Skip to main content

The Caisse de depot et placement du Quebec (CDP) building is seen in Montreal, February 26, 2014.

CHRISTINNE MUSCHI/REUTERS

The Caisse de dépôt et placement du Québec is taking the long view in its latest deal to buy an acquisitive insurance-brokerage business from private equity backer Onex Corp.

The Quebec-based pension fund and private equity firm KKR & Co. said Friday that they would jointly acquire USI Insurance Services in a deal valued at $4.3-billion (U.S.), including debt .The company is among the largest property- and casualty-insurance brokerages in the United States and is focused on small and medium-sized businesses.

It's a transaction that exemplifies the ongoing shift in the Caisse's private-equity strategy toward more direct investments. But more broadly, the deal also underscores the rising interest of Canadian pension funds in insurance investments, where private equity funds have built up a strong presence in the years since the financial crisis.

Story continues below advertisement

Onex was part of that trend in 2012, when it bought Valhalla, N.Y.-based USI in a deal worth about a total of $2.3-billion, with the private-equity fund and its affiliates putting in $610-million in equity. The acquisition was a bet on USI's ability to be a consolidator of other regional brokerages, as well as the potential to benefit from an economic recovery that would fuel insurance-rate increases. Onex, which had been watching the insurance brokerage space for years before it bought USI, ensured the business made acquisitions at high speed – more than 30 deals in the last five years.

It paid off handsomely. Onex said Friday that the investment earned a 34-per-cent gross rate of return and brought in $2.1-billion in proceeds, including prior distributions of $181-million. Scott Chan, analyst with Canaccord Genuity, called it "another big win" for the private-equity firm, which took a large portfolio company public earlier this year. Mr. Chan added in a note to clients that USI's publicly traded peers have also posted strong returns.

USI is worth its price, according to Roland Lescure, the Caisse's chief investment officer.

"What we like on the brokerage part of the [insurance] story is that there's no balance sheet exposure, there's no sets of liabilities, there's no asset exposure, there's not much of a market risk," he said, adding that the Caisse has been making other investments in insurance and financial firms over the last few months. "There's something nice about being in a trend that's growing, without necessarily being exposed to the market risk, because … the risk of a correction is certainly there more than it was five years ago."

USI still has some runway to get bigger, Mr. Lescure said, since the pace of the company's acquisition bonanza has actually been more measured than some industry peers. And USI's consolidation strategy could benefit if a market downturn forces smaller and weaker brokerages to sell at a discount.

The Caisse has been overhauling its approach to private equity in the past few years, looking toward direct investments and taking a more hands-on approach to its holdings. The pension fund has been looking to invest in businesses that are either defensive plays that generate a healthy amount of cash, or growth stories where a sector or region is booming or consolidating. USI is a bit of a hybrid of the two, Mr. Lescure said.

Other types of insurance-related investments also became appealing to private equity firms over the last few years. Sun Life Financial Inc., for example, sold its volatile U.S. annuity business to a company connected to Guggenheim Partners LLC for $1.35-billion in 2012 – a deal the company's chief executive officer Dean Connor has said he's always been glad he did.

Story continues below advertisement

Some Canadian pension funds have been stepping up their focus on insurance more recently, either drawn to the steady returns of the business that fit well with their own long-dated liabilities, or the potential to grow these businesses in new markets.

This year, The Ontario Municipal Employees Retirement System hired Sharon Ludlow, who had previously served as an insurance industry CEO in Canada, to build a portfolio of investments around the world. The pension fund took a 21-per-cent stake, worth $1-billion, in Fairfax Financial Holdings Ltd.'s deal to acquire Zug, Switzerland-based Allied World Assurance Co. Holdings AG.

And in 2016, The Canada Pension Plan Investment Board bought specialty property and casualty insurer Ascot Underwriting Holdings Ltd., and a related business, from U.S. insurance giant American International Group Inc. for $1.1-billion.

In USI, KKR and the Caisse are bringing together pension-fund timing and private-equity growth priorities. KKR is buying its half of USI through its own balance sheet, rather than through funds, for added flexibility on how long it will hold the investment, which was critical to the Caisse.

"We are not hostage to what I call 'the treadmill of fund investing,'" said Mr. Lescure, referring to being forced out of an investment because a partner needs to sell its stake. "We are probably willing to give back a bit of the return, compared with the usual [leveraged buyout] stuff, for a safer return."

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies