Briefing: Are capacity deals earmarking potential M&A?

By Editor Katie Scott

Mergers and acquisitions (M&A) are always a hot topic within the insurance industry, especially following the ongoing spate of broker consolidation – most notably including Howden’s purchase of independent broker Aston Lark this month.

But where should the sector’s spidey senses be tingling with regards to potential upcoming deals? From what parts of the market should we be anticipating the next batch of buying?

Chatting to an industry contact over lunch last week, he suggested that the next round of M&A deals will come from firms that have secured multiyear capacity deals, for example five-year agreements – M&A within this prospective pool, he added, will be more likely among brokers that have an MGA arm to their business.

Explaining his thinking, my lunch companion told me that firms which demonstrate they can obtain long-term capacity deals with A-rated insurers therefore make themselves more attractive to potential buyers.

Capacity agreements can also work to bump up a firm’s value – useful if the leadership are looking to sell and get more bang for their buck.

Scouring our news archives, recent capacity deals reported by Insurance Times include Zurich’s five-year agreement with niche motor MGA KGM Underwriting, part of A-Plan and Howden Group, as well as the insurer’s long-term deal with farm insurance specialist AIUA, part of The Ardonagh Group. Both deals were agreed last month.

With Howden’s recent purchase of Aston Lark keeping both firms busy with integration work and leaving the industry scratching its head over the potential ramifications of the transaction, Ardonagh could, therefore, be gearing up for its next spending spree.

Service dilemma?

While on the topic of MGAs, last week I shared insights from Insurance Times’ BrokerFest 2021 conference which indicated that MGAs were fulfilling brokers’ needs in lieu of poor service from insurers.

However, Ann Manning, managing director of Henley-on-Thames-based broker Manning UK, subsequently told me that this has not been her experience and that the industry desperately needs to “wake up”.

She said: “From the experience at Manning UK, the service is even worse from the majority – not all – MGAs. Even worse, we are totally reliant on their staff being professional and ensuring the ultimate insurance company is aware of the correct information relating to our clients’ risk.

“When documents are received sometimes three months after renewal - in fact I am still waiting for some renewal documentation from June - they are rarely correct and have certainly not been checked.”

She describes the insurance industry as being “in a complete mess” that “does not seem to be getting any better”.

Manning’s feedback raises the question of whether MGAs are really making the most of the opportunity presented by lagging insurer service.

With the second batch of the FCA’s pricing changes due to come into effect from 1 January 2022, insurance firms cannot afford to ignore how their service levels are perceived in the new era of fair value.