The MGA consolidation wave rises again

By Carine Sroujian | March 20 2004 02:26PM

The heightened pressure on small managing general agents to produce premium volumes and the lack of market availability has agencies turning back to consolidation.

Despite the different methods used to consolidate, all the managing general agents (MGAs) The Insurance Journal contacted revealed that they are back in the market to acquire. Some are waiting on the sidelines for the perfect fit, and others are hunting for companies that simply cannot stand the pressure from insurance companies.

“The insurance companies are making it easier for us to acquire. The pressure from the insurance companies is huge right now to do extra volume,” reveals Jim Britton, senior vice-president of insurance operations at MGA Partners in Planning Financial Services (PIP).

“Every time they raise the bar, then it gets harder for our independent associates to hit their numbers. Some of them have joined us because they don’t like hitting this bar anymore,” explains Mr. Britton.

Mr. Britton says the company currently has two MGAs that want to join PIP and is in discussion with two more.

Since insurers are moving their production targets up, Mr. Britton argues that the companies are turning independent agencies into “career” agencies. “What they’re saying is, if you want to get the MGA override and be profitable, you have to give us $500,000. And then two years later: $1 million. And then the next year it’s a million and a half. And because they keep raising the bar, they force the rep to represent one company, and independents really don’t like that.”

MGAs want to avoid being told where to place their business. That is the biggest objection this year, stresses Mr. Britton. The only way MGAs can remain independent is to consolidate and become bigger, otherwise they become career shops, he adds.

Joseph Pettinicchio, president of MGA iForum Financial Services, explains that it is becoming increasingly difficult to obtain and maintain contracts from insurance providers because certain insurers have increased the premium required on an annual basis in order to maintain a contract.

“For the larger MGAs who have been in business for many years, it’s less of an issue. But for the mid-sized or the small MGA, it becomes difficult to maintain several contracts. So you either have to make a decision on pairing down the number of companies you represent or look at merging or consolidating with other MGAs.”

Mari-Jane Woodyatt, president of MGA WCS Insurance Agencies, agrees that because of insurer demands, MGAs are being forced out of business earlier than expected. “There’s a lot of pressure from insurers to produce; the numbers are growing every year. In order to stay in the business, you do have to have a variety of companies because you never know who’s going to be left standing at the end of the day.” She states that you need to consolidate to build a solid foundation and grow a bigger block of business.

WCS is currently looking at acquiring two MGAs, which she says should be enough for 2004. The last acquisitions WCS made was five years ago when it bought two MGAs. Why the company is going back into acquisition mode? Ms. Woodyatt responds that when you find the perfect fit, it is always a good time to buy.

Mr. Pettinicchio maintains that finding the right fit at the right price will in fact be a challenge that life consolidators will face in 2004.

Mr. Pettinicchio reveals that there are better opportunities in the market right now for MGAs. “It’s probably better timing today than several years ago because the market’s starting to come back. The consolidation model is still a good model because margins are quite thin, whether it’s on the insurance side or the mutual funds side. You need to add assets or premiums and be efficient in the back-office in order to make money.”

IForum is currently looking to acquire one MGA in Ontario and one in Quebec. The company is mainly looking to make acquisitions on the mutual fund side, but if good opportunities in life present themselves, iForum will not hesitate to jump on.

“We’re looking at a firm that is two to four million dollars in premiums, not the large ones. We’re still a relatively small firm and the problem with the insurance industry – differentiating it from mutual funds and securities – is the reps are still allowed to place business with any MGA they choose. If you acquire a large entity, you are not solid enough to integrate it and to make the transition smooth.”

Most of the acquisitions at MGA Hub Financial were done between 1998 and 2001. There have been no acquisitions since then. Then why would Hub be on the lookout for potential acquisitions in 2004? “We have spent 2002 and 2003 actually consolidating the back-office and integrating all of the brokerages,” says president Terri DiFlorio. And since the MGA is done integrating, now is the perfect timing for the company to acquire, she exclaims.

“There’s a lot of competition right now in a lot of aspects of our business with some of the focus on technology and the margins,” explains Ms. Diflorio. “MGAs are being squeezed from both sides, the carriers want you to do more and the brokers want you to pay them more. It’s really a tough business compared to what it was like five to ten years ago. Some of the smaller MGAs are finding it very very difficult to compete.”

Hub Financial would be interested in acquiring MGAs in British Columbia and Quebec, and fold them in as opposed to creating new entities. “We’re not interested in keeping any space: we would really bring it right into our existing operations.” Ideally, she adds, Hub would look for an agency whose principle would want to get out of the business within six to 12 months.

However, acquisitions are not on Hub’s top priority list since it is focusing mainly on its sales and marketing effort in 2004. “We’ve put together an excellent package to assist brokers in moving to the next level of business. If someone comes along, absolutely we’ll look at it,” states Ms. Diflorio.