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

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

While 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 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 mentioned. “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 enticing to acquirers?

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

According to Vertafore, there are a number of components that make MGAs enticing to carriers, personal fairness buyers, and even retail brokerages. These advantages embody: 

• High annual income retention progress and margins
• Growth powered by micro-niche traces of enterprise
• Lower working and regulatory prices
• Modern expertise and gifted staff

“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,” mentioned Maheu. “MGAs have leaner operations and decrease overheads, they usually are likely to see greater margins in comparison with retail companies.

“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 sometimes bolstered by strategic expertise investments, including to their profitability.

Maheu burdened that solely MGAs with a confirmed observe document, robust buyer and provider relationships, and strong financials will command consideration out there.

“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 mentioned. “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 tough market paints a compelling image for acquirers.

“It’s very important that MGAs have shown that they can withstand both hard and soft market conditions,” Maheu mentioned. “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 previous 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% 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 higher regulatory scrutiny have impacted insurance coverage M&A exercise.

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

“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 mentioned.

“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.”

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