By CYRIL TUOHY, managing editor of Risk & Insurance®
Program administrators (PA) and managing general agents (MGA) are more interested in buying one another to fuel top-line growth and capture market share than they are in buying wholesale brokers, according to this month's Guy Carpenter & Co. LLC's Fifth Annual Specialty Insurance Program Issuing Carrier Survey.
The survey found 72 percent of respondents showed an interest in growing through acquisition, up slightly from 70 percent in 2008. In addition, 59 percent of respondents expressed an interest in acquiring other PAs/MGAs, up 5 percent from the 2008 survey, while 44 percent would prefer to acquire carriers, also up 5 percent from the year-ago survey.
Interest in wholesalers, by contrast dropped, with only 13 percent of respondents targeting them this year, compared with 23 percent of respondents in 2008.
"There's been more of a move toward recognizing there's quite a difference between being a wholesaler and a program administrator," said Bill Kronenberg 3rd, president of the Target Markets Program Administrators Association (TMPAA). "The purity on the program administrators' side with underwriting is different than being a wholesaler. It's not better or worse, just different."
Program administrators work with carriers to underwrite, sell and administer insurance products targeted at niche markets or classes of business placed through one carrier. All environmental risks, for example, or all public-entity coverage risks represent different classes of risks.
These two different classes of risk are placed through a carrier. The carriers write the checks when a loss ensues, but rely on program administrators to help carriers structure an insurance program.
By contrast, wholesalers act more like superbrokers. They are not directly involved in underwriting. The risk is eventually underwritten by the carrier.
WHOLESALE+PA = TOO MUCH TO HANDLE
Companies trying to be program administrators and wholesale brokers at the same time, however, are biting off more than they can chew. A program administrator that merges with a wholesale broker increases the new company's operational risk, Kronenberg said.
"It's an execution risk," said Kronenberg. "The reason might be you are trying to do two things under the same roof."
The latest Guy Carpenter survey results show that program administrators and managing general agents are making decisions about who they want to be, Kronenberg added, and that decision is that, "You can't be all things to all people."
Assuming a program administrator is interested in buying a competing administrator, where would the buyer find the money? It would dig into its own company coffers or fund a would-be merger using its own company stock, the survey also revealed.
Where program administrators would not be likely to go look for money is at the bank.
In 2008, 27 percent of respondents indicated an interest in working with private-equity partners, while another 8 percent listed banks as a financing source, according to the survey. This year, the same funding sources only garnered only 3 percent and 5 percent, respectively.
With prices flat and the lack of growth in either premium income or bottom-line profits, mergers-and-acquisitions remains one of the key methods for PAs and MGAs to grow, according to John Barrows, program manager solutions in Guy Carpenter & Co.'s specialty insurance practice.
While there had been "some buzz" that there might be some merger activity before the end of the year, according to Kronenberg, any such action will likely come next year, according to Barrows.
"In what is currently a buyer's market for insurance, M&A activity among program administrators and MGAs merits close attention for the remainder of the year as we move into 2010," said Barrows, in a statement.
Kronenberg admitted that many people in the industry had by now expected prices to harden. Yet, because prices are still relatively soft, program administrators are in a "wait-and-see" holding pattern, and there's very little M&A taking place, Kronenberg said, in an interview with Risk & Insurance® during the 9th Annual TMPAA Summit in Scottsdale, Ariz.
October 27, 2009
Copyright 2009© LRP Publications