Why MGAs will be top M&A targets in 2024
Why MGAs will be top M&A targets in 2024 | Insurance Business Canada
Insurance News
Why MGAs will be top M&A targets in 2024
As dealmaking slowly rebounds, these firms will have an edge
Insurance News
By
Gia Snape
Specialty distribution firms, especially managing general agents (MGAs) and managing general underwriters (MGUs), are expected to be highly attractive acquisition targets this year.
While the overall mergers and acquisitions (M&A) outlook for the industry could remain subdued, Kelly Maheu (pictured), VP of industry solutions at Vertafore, sees a huge opportunity for high-performing MGAs in 2024.
“Property and casualty (P&C) insurers are going to continue to look to specialize and expand their product offerings and are going to be acquiring those distributors who have a good track record, particularly those who have already proven that they can underwrite profitable business,” Maheu said. “Most experts expect this trend to continue as retail brokers continue to expand in our wholesale and delegated authority space.”
‘All-weather distribution channels’ – what makes MGAs attractive to acquirers?
While various industries grapple with diminished revenue growth and operational margin challenges due to escalating costs, MGAs continue to thrive. Reports from Conning and Deloitte underscore the remarkable growth of MGAs in 2022, surpassing the overall P&C market.
According to Vertafore, there are several factors that make MGAs attractive to carriers, private equity investors, and even retail brokerages. These benefits include:
High annual revenue retention growth and margins
Growth powered by micro-niche lines of business
Lower operating and regulatory costs
Modern technology and talented employees
“As carriers continue to move away from underwriting all risks to focusing on specialization, they need to rely on specialized MGAs, which helps drive deal activity in the sector,” said Maheu. “MGAs have leaner operations and lower overheads, and they tend to see higher margins compared to retail agencies.
“Their focus on niche insurance products often means they have more power over premium and policy terms – these are factors that often add up to strong, consistent profits.”
Moreover, MGAs’ streamlined processes are often bolstered by strategic technology investments, adding to their profitability.
Maheu stressed that only MGAs with a proven track record, strong customer and carrier relationships, and robust financials will command attention in the market.
“Some carriers are seeking to reclaim capacity as capital costs decrease. This will further incentivize MGAs to keep their strong financials and remain appealing,” she said. “They bring a unique value proposition, sophisticated and specialized underwriting skills, and their market expertise to new and emerging risks that carriers need help focusing on.”
Finally, MGA’s resilience amid a hard market paints a compelling picture for acquirers.
“It’s very important that MGAs have shown that they can withstand both hard and soft market conditions,” Maheu said. “They’re an all-weather distribution channel, and they are equally valuable to insurers in a soft market as they are in a hard market like we’re in now and probably will be for at least another year or so.”
Insurance M&A outlook for 2024
In the past few years, deal activity in the distribution subsector has been driven primarily by the consolidation of P&C brokers and an increase in the acquisition of specialty MGAs, according to Maheu.
Data from Optis Partners has shown that insurance M&A declined 34% year-over-year in the third quarter of 2023. Deal volume was 24% below the previous five-year Q3 average, primarily due to rising capital costs.
Maheu noted that continued economic uncertainty, higher interest rates, accelerating inflation, and greater regulatory scrutiny have impacted insurance M&A activity.
Moreover, increased concern about cyber risks has made due diligence even more significant and influential in M&A considerations.
“2024 is still uncertain. Some macro events could impact the volume of transactions, and we don’t know how they will play out, whether it’s interest rates, potential tax increases, or election outcomes,” Maheu said.
“Although most experts believe the worst of that economic downturn has passed, at least in most parts of the world, and we will continue to see an increase in M&A, that volume may still decline from those highs we saw in recent years.”
What are your thoughts on MGAs and the insurance M&A market this year? Please share them in the comments.
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