Andrew Beecroft, Managing Director, GC Securities, and John Rowlands, Senior Vice President, GC Securities
- Challenging market conditions are fueling growth and merger and acquisition (M&A) activity in the managing general agent (MGA) space
- Recent acquisition multiples have been extremely high compared to historic values
- Should markets harden, MGAs will need to continue to prove their value through differentiation
Challenging insurance market conditions will continue to drive growth and M&A activity in the MGA market, according to John Rowlands, Senior Vice President, and Andrew Beecroft, Head of M&A Advisory, GC Securities*.
"In the continuing competitive market, it's difficult for insurance companies to grow premiums organically," explains Rowlands. "Therefore, insurers value MGAs' specialist product and geographic expertise and distribution, which give the MGA the ability to opportunistically take advantage of market conditions. Insurers are able to strategically grow and diversify with lower execution risk and costs."
"Coupled with the emergence of new risk classes such as cyber, this creates an attractive growth environment for MGAs that provide a differentiated offering," he adds.
The arrival of new MGA incubators such as Soros-backed Vibe MGA Management, which launched in June, has further stoked activity in the sector.
According to Beecroft, this strong growth environment continues to fuel M&A activity in the MGA market. "Brokers are the most active buyers. Insurance carriers continue to seek vertical integration and private equity firms are currently far more interested in investing in distribution via MGAs than in balance sheet companies. All three types of participants are competing for deals, pushing MGA acquisition multiples up to heightened levels," he says.
Beecroft notes that while historic multiples for MGA deals were generally in the range of 8 to 12 times EBITDA, some recent acquisition multiples have hit the high-teens.
"Because of growth and cost synergies, trade players tend to pay higher multiples than private equity buyers," Beecroft explains. "However, the ultimate buyer will often be determined by the MGA management's desire to retain independence. Even in these situations, if the asset is sufficiently desirable and competition strong enough, such as the recent sale of CFC Underwriting where only financial buyers participated, the sales process still achieved a very high multiple."
Beecroft warns, however, that while MGA growth is likely to continue in the enduring competitive market, only MGAs with sufficient specializations will succeed should markets harden. "The key question around the sustainability of the MGA model is whether the MGA business can continue to secure sufficient underwriting capacity behind it in a hard market," he says.
"In the current challenging market, it's easier for MGAs to get capacity; but if the market eventually hardens, insurers will be better able to service their capital through opportunities in lines of business in which they have in-house expertise, rather than outsourcing," says Beecroft. "MGAs will therefore have to offer something genuinely different and add sufficient value to the chain to be successful in the long-term."
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.