By Dale A. Myer, senior vice president, Gill and Roeser Holdings, Inc.

Merger and acquisition activity began heating up in the managing general agency (MGA) and managing general underwriting (MGU) sector during 2010. The continuing soft market, the long and steady decline in insurance rates plus the effects of the recent recession have led to reduced exposures, smaller books of business and lowering premium prices for many property and casualty insurers. The combination of these factors is forcing insurance company executives to explore new ways to improve top-line growth, while maintaining underwriting discipline, generating adequate profits, and putting underutilized surplus to work effectively and efficiently. MGAs and MGUs are increasingly being viewed as targets for mergers and acquisitions because of their perception as "virtual insurance companies" and their ability to generate underwriting profits.

Today, many insurance companies are sitting on balance sheets that carry extremely low underwriting leverage (premiums/surplus) and relatively low levels of ROE (return on earnings). To compensate, insurers are keeping higher net retention levels at the primary level. Reinsurance pricing continues to be weak and the current low premium/surplus ratios are forcing reinsurance markets around the world to aggressively price their products and services to deploy their capacity. Even in light of minimal catastrophe losses in the U.S., reserve takedowns have in all probability run their course. Going forward, it's doubtful that reserve takedowns will continue to be a viable tool to enhance bottom-line performance. Finally, with extremely anemic investment returns, the asset side of an insurance company's balance sheet is not able to offset poor underwriting results.