As dealmaking slowly rebounds, specialised companies may have an edge
Specialty distribution companies, particularly managing common brokers (MGAs) and managing common underwriters (MGUs), are anticipated to be extremely engaging acquisition targets this yr.
Whereas the general mergers and acquisitions (M&A) outlook for the trade may stay subdued, Kelly Maheu (pictured), VP of trade 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 broaden their product choices and are going to be buying these distributors who’ve a very good observe report, notably those that have already confirmed that they will underwrite worthwhile enterprise,” Maheu mentioned. “Most consultants count on this development to proceed as retail brokers proceed to broaden in our wholesale and delegated authority area.”
‘All-weather distribution channels’ – what makes MGAs engaging 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.
In response to Vertafore, there are a number of components that make MGAs engaging 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 traces of enterprise
- Decrease working and regulatory prices
- Trendy know-how and gifted staff
“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,” mentioned Maheu. “MGAs have leaner operations and decrease overheads, they usually are likely to see greater margins in comparison with retail businesses.
“Their give attention to area of interest insurance coverage merchandise usually 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 know-how investments, including to their profitability.
Maheu pressured that solely MGAs with a confirmed observe report, sturdy buyer and service relationships, and sturdy financials will command consideration out there.
“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 mentioned. “They convey a singular worth proposition, subtle and specialised underwriting expertise, 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 will stand up to each exhausting and delicate market circumstances,” Maheu mentioned. “They’re an all-weather distribution channel, and they’re equally helpful to insurers in a delicate market as they’re in a tough market like we’re in now and possibly will probably be for a minimum of one other yr 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 line with Maheu.
Data from Optis Partners has proven that insurance coverage M&A declined 34% year-over-year within the third quarter of 2023. Deal quantity was 24% under the earlier five-year Q3 common, primarily because of rising capital prices.
Maheu famous that continued financial uncertainty, greater rates of interest, accelerating inflation, and larger 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 remains to be unsure. Some macro occasions may affect the amount of transactions, and we do not know the way they are going to play out, whether or not it’s rates of interest, potential tax will increase, or election outcomes,” Maheu mentioned.
“Though most consultants consider the worst of that financial downturn has handed, a minimum of in most elements of the world, and we’ll proceed to see a rise in M&A, that quantity should still decline from these highs we noticed lately.”
What are your ideas on MGAs and the insurance coverage M&A market this yr? Please share them within the feedback.
Sustain with the most recent information and occasions
Be a part of our mailing listing, it’s free!