Why MGAs will probably be sizzling M&A targets in 2024

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

Whereas the general mergers and acquisitions (M&A) outlook for the business may 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 develop their product choices and are going to be buying these distributors who’ve an excellent monitor document, notably those that have already confirmed that they’ll underwrite worthwhile enterprise,” Maheu stated. “Most specialists anticipate this development to proceed as retail brokers proceed to develop in our wholesale and delegated authority house.”

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

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

In response to Vertafore, there are a number of elements that make MGAs enticing to carriers, personal fairness traders, and even retail brokerages. These advantages embody: 

• Excessive annual income retention development and margins
• Development powered by micro-niche strains of enterprise
• Decrease working and regulatory prices
• Fashionable 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 greater 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 elements that always add as much as sturdy, constant income.”

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

Maheu harassed that solely MGAs with a confirmed monitor document, sturdy buyer and service relationships, and strong financials will command consideration out there.

“Some carriers are searching for to reclaim capability as capital prices lower. It will additional incentivize MGAs to maintain their sturdy financials and stay interesting,” she stated. “They carry 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’ll stand up to each onerous and gentle market situations,” Maheu stated. “They’re an all-weather distribution channel, and they’re equally priceless to insurers in a gentle market as they’re in a tough market like we’re in now and possibly will probably be for at the least one other yr or so.”

Insurance coverage M&A outlook for 2024

Prior 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 keeping with Maheu.

Knowledge 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 as a consequence 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 vital and influential in M&A concerns.

“2024 remains to be unsure. Some macro occasions may affect the amount of transactions, and we do not understand how they may play out, whether or not it’s rates of interest, potential tax will increase, or election outcomes,” Maheu stated.

“Though most specialists imagine the worst of that financial downturn has handed, at the least in most components of the world, and we are going to 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.