Why MGAs can be scorching M&A targets in 2024

Specialty distribution corporations, particularly managing common brokers (MGAs) and managing common underwriters (MGUs), are anticipated to be extremely enticing acquisition targets this 12 months.

Whereas the general mergers and acquisitions (M&A) outlook for the business might stay subdued, Kelly Maheu (pictured), VP of business options at Vertafore, sees an enormous alternative for high-performing MGAs in 2024.

“Property and casualty (P&C) insurers are going to proceed to look to specialize and increase their product choices and are going to be buying these distributors who’ve a superb observe report, significantly those that have already confirmed that they’ll underwrite worthwhile enterprise,” Maheu stated. “Most consultants count on this pattern to proceed as retail brokers proceed to increase in our wholesale and delegated authority area.”

‘All-weather distribution channels’ – what makes MGAs enticing to acquirers?

Whereas varied industries grapple with diminished income development and operational margin challenges because of escalating prices, MGAs proceed to thrive. Studies from Conning and Deloitte underscore the exceptional development of MGAs in 2022, surpassing the general P&C market.

Based on Vertafore, there are a number of components that make MGAs enticing to carriers, non-public fairness traders, and even retail brokerages. These advantages embrace: 

• Excessive annual income retention development and margins
• Progress powered by micro-niche strains of enterprise
• Decrease working and regulatory prices
• Trendy expertise and proficient workers

“As carriers proceed to maneuver away from underwriting all dangers to specializing in specialization, they should depend on specialised MGAs, which helps drive deal exercise within the sector,” stated Maheu. “MGAs have leaner operations and decrease overheads, and so they are likely to see increased margins in comparison with retail companies.

“Their concentrate on area of interest insurance coverage merchandise typically means they’ve extra energy over premium and coverage phrases – these are components that usually add as much as sturdy, constant earnings.”

Furthermore, MGAs’ streamlined processes are sometimes bolstered by strategic expertise investments, including to their profitability.

Maheu burdened that solely MGAs with a confirmed observe report, sturdy buyer and service relationships, and strong financials will command consideration available in the market.

“Some carriers are in search of to reclaim capability as capital prices lower. This may additional incentivize MGAs to maintain their sturdy financials and stay interesting,” she stated. “They bring about a novel worth proposition, subtle and specialised underwriting abilities, and their market experience to new and rising dangers that carriers need assistance specializing in.”

Lastly, MGA’s resilience amid a tough market paints a compelling image for acquirers.

“It is essential that MGAs have proven that they’ll stand up to each onerous and gentle market circumstances,” Maheu stated. “They’re an all-weather distribution channel, and they’re equally precious to insurers in a gentle market as they’re in a tough market like we’re in now and possibly can be for at the least one other 12 months or so.”

Insurance coverage M&A outlook for 2024

Up to now few years, deal exercise within the distribution subsector has been pushed primarily by the consolidation of P&C brokers and a rise within the acquisition of specialty MGAs, in response to Maheu.

Information from Optis Companions has proven that insurance coverage M&A declined 34% year-over-year within the third quarter of 2023. Deal quantity was 24% beneath the earlier five-year Q3 common, primarily because of rising capital prices.

Maheu famous that continued financial uncertainty, increased rates of interest, accelerating inflation, and higher regulatory scrutiny have impacted insurance coverage M&A exercise.

Furthermore, elevated concern about cyber dangers has made due diligence much more important and influential in M&A concerns.

“2024 continues to be unsure. Some macro occasions might impression the amount of transactions, and we do not know the way they’ll play out, whether or not it’s rates of interest, potential tax will increase, or election outcomes,” Maheu stated.

“Though most consultants imagine the worst of that financial downturn has handed, at the least in most elements of the world, and we’ll proceed to see a rise in M&A, that quantity should decline from these highs we noticed in recent times.”

What are your ideas on MGAs and the insurance coverage M&A market this 12 months? Please share them within the feedback.