Why MGAs might be sizzling M&A targets in 2024

Specialty distribution companies, particularly managing basic brokers (MGAs) and managing basic 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 increase their product choices and are going to be buying these distributors who’ve a great monitor document, notably those that have already confirmed that they will underwrite worthwhile enterprise,” Maheu mentioned. “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 engaging to acquirers?

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

In keeping with Vertafore, there are a number of components that make MGAs engaging to carriers, personal 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
• Fashionable know-how and proficient 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, and so they are likely to see larger margins in comparison with retail businesses.

“Their deal with area of interest insurance coverage merchandise typically means they’ve extra energy over premium and coverage phrases – these are components that always add as much as robust, 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 monitor document, robust buyer and provider relationships, and sturdy financials will command consideration available in the market.

“Some carriers are searching for to reclaim capability as capital prices lower. This can additional incentivize MGAs to maintain their robust financials and stay interesting,” she mentioned. “They create 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 crucial that MGAs have proven that they will face up to each laborious and mushy market circumstances,” Maheu mentioned. “They’re an all-weather distribution channel, and they’re equally priceless to insurers in a mushy market as they’re in a tough market like we’re in now and doubtless might be for no less than 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 accordance with 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 resulting from rising capital prices.

Maheu famous that continued financial uncertainty, larger 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 vital and influential in M&A issues.

“2024 continues to be unsure. Some macro occasions may influence the quantity 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 imagine the worst of that financial downturn has handed, no less than 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.