A property-casualty industry flush with cash from a benign loss year has kept merger and acquisition firms pretty prosperous themselves taking care of an industry mired in another softening market, looking for expansion at a time when organic growth remains a challenge.
The program business administration niche is no exception, as top-line insurers look to purchase those entities to which they may have been merely providing underwriting backing before.
Kevin Donoghue, a managing director with New York-based insurance specialty investment banking firm Mystic Capital, said most program administrators are independent managing general agents, but some are embedded in wholesale brokerage firms.
In 2005, he reported, there were an estimated 10 deals involving program administrators and wholesaler niches. In 2006, the number tripled to 30.
"And [so far] this year, there have been about 20 or so, and we expect the number to be well north of 30," he said. "And you also have to take into account that some of the deals have not been announced."
The primary buyer of these MGAs, he said, is insurance carriers, because "the program administrator is already a great back room for an insurance company to begin with."
An MGA specializing in, say, rental car dealerships, through a single appointment "could easily fit into the rhythm of the acquiring insurer itself without much disruption," he said.
Thus far, April has proven to be a relatively active month this year for program manager acquisitions.
In one case, a subsidiary of New York-based insurer American International Group–Risk Specialists Companies Inc.–purchased SRO Napa, a managing general underwriter that produces and underwrites excess casualty and other casualty insurance products through three U.S. regional offices.
The acquirer saw an opportunity to buy an exceptional underwriting group and move it to AIG's current surplus lines market insurer subsidiary, Lexington, M&A specialists observed.
Risk Specialists President Matthew Power said the move expanded his company's geographic footprint and product offering for its middle-market clients.
For the seller–Toronto-based Fairfax Holdings, an insurance holding company–the business was a non-core operation written through another company, and was therefore ripe for selling, specialists observed.
Mr. Donoghue said Fairfax was not shopping the property but was interested when Mystic came calling. "We have gotten pretty good at identifying those opportunities that are not [openly] for sale," he said.
Also in April, Southfield, Mich.-based insurer Meadowbrook Insurance Group purchased (for $23 million in stock and cash) the Cleveland-based program administrator USSU, which focuses on excess workers' compensation for self-insureds in the health care industry and public schools in 29 states.
Meadowbrook President Robert Cubbin said the move helped beef up its existing public-entity business.
The market today belongs to the sellers, Mr. Donoghue suggests, with business going for multiples of six- to eight-times-EBITA (Earnings Before Interest, Taxes, Depreciation and Amortization). A buyers' market, he added, would see that figure dwindle to about four.
One of the major issues in any program business merger is integration of personnel, according to Mr. Donoghue–something Mystic Capital leaves to the merging parties to resolve.
Sometimes, he said, there are no personnel to consolidate because the business is in fact the people themselves and their valuable relationships, "and you don't want to lose the key people."
Meanwhile, if the acquisition is a perpetuation strategy for the seller, and a principal is looking to retire, he or she will usually work for a transitional period of up to five years. That can be shorter if the former owner cannot adjust to being an employee.
"And sometimes those key managers with a minority stake looked forward to becoming owners one day and could be bitter," Mr. Donoghue said. "But that is not the buyer's fault."
Another issue that may surface is cultural differences, which for the most part will center on underwriting philosophies.
"The thing you ask about program administrators is, are they making money for their companies? So the ones that achieve the highest transactional prices will be those who are making money for their carriers first," Mr. Donoghue pointed out. "They will not be sacrificing an underwriting profit for their own personal gain."
A major motivation for an MGA looking for a buyout is the softening market, he said, combined with growth challenges.
"A buyer such as a large carrier can consolidate these units," observed Mr. Donoghue. "Say you purchase three different program administrators. What you have now is a more diverse platform, and you should therefore be worth more."
Jim Amen, president of the Stamford, Conn.-based investment banking firm Philo Smith, said there has been "a lot of interest in companies with specific underwriting and marketing expertise, and companies that have built a competitive position in the marketplace."
Thus, a large carrier has the opportunity to build a large portfolio of specialty lines.
For the seller, "there are synergies that come with partnering with an underwriter that will allow him to grow his business at a faster pace than he could alone."
In addition, an MGA could find that the market he had been working with decided to exit that field. "Now he can focus on the long term and not have to lay awake at night and worry about the market leaving him," he said.
Like Mystic, Philo Smith specializes in insurance deals, and program business administrators are one of the areas of greatest interest.
"It is a bigger universe of companies, so the number of transactions that get done on a relative basis is larger," he said.
Mr. Donoghue said the recent interest of private equity buyers in purchasing wholesalers has also helped fuel the market for program administrators.
In addition, he noted, "wholesalers are some of the natural acquirers of MGAs."
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