By Chris Munro

Jan 27 - (The Insurer) - Stonybrook Capital & Risk Management has forecast further MGA spin-offs as investors look to leverage the arbitrage in valuations between distribution and balance sheet businesses.

Paul Kneuer, an equity partner at Stonybrook who recently joined the company’s board, told Program Manager that the investment banking firm is engaged in regular conversations with carriers considering transactions to unlock the value in their underwriting operations by spinning them off into separate MGAs.

Joe Scheerer-led Stonybrook has worked on such transactions before, having been the exclusive financial advisor to Conifer Holdings when it sold its MGA operation Conifer Insurance Services to RedBird Capital-backed Bishop Street Underwriters last year.

As Kneuer explained, there are numerous reasons why a company could be interested in spinning off all or part of its underwriting operations.

One is that a company may have more opportunity within a certain part of its underwriting operation but does not have the capital to support that growth.

Raising external capital to get the funds needed to support the growth would cause dilution in the value of the business, or may not even be available at all.

However, as Kneuer noted, by carving out the underwriting operations and extracting them into a standalone unit, the parent could recognise the value in that platform and leave it in a much better position to execute on what remains.

“For the sellers, their capital goes up, the premium goes down, and they’re less exposed – they're in a stronger place,” explained Kneuer.

Kneuer said another reason a company could undertake a similar transaction is because the business has a strong growth trajectory and wants to rebirth itself as a new brand.

Hiving off the underwriting operations and repackaging them as a standalone MGA, possibly with a new parent, would mean it could maintain its strong growth but without the potential drag from the market’s perception of the former owner’s capital or rating challenges.

“[These MGA transactions] might be the best way to achieve value,” said Kneuer. “The math can be very compelling,” he noted.

Such a transaction could also appeal to a company that has what Kneuer described as “a marginal” AM Best rating or negative outlook, but which the market believes has good people working for it and a strong product.

Splitting off the live underwriting unit and selling it as a standalone MGA would mean the parent could take advantage of the high multiples that such operations continue to trade at.

And the former balance sheet carrier operation could be placed into run-off and the entity sold to a legacy specialist like Enstar or RiverStone.

According to Scheerer, this “sum of parts” math often produces a far greater number for shareholders than “the whole”.

Regional interest

When it comes to where Stonybrook sees the greatest potential interest for such transactions, Kneuer suggested regional companies.

“The leadership of those tends to be very loyal, very smart and very good at what they do. Sometimes they have a need but don’t know their options.”

As Kneuer noted, Stonybrook visits these companies and presents them with a list of options.

For a company that has certain challenges, for example the shareholders need to find a new capital partner on a tight timeframe, the Stonybrook team can present the client with a list of possible capital partners or acquirers.

“Or it might just be the company needs to dust itself off, get a surplus note, figure out how to pay that back in five years, and go on down the road.”

But, Kneuer said, another option is to split off all or part of the underwriting operation.

While interest in creating a standalone MGA unit has grown, and Stonybrook is currently in active talks with around six to 10 different parties, Kneuer said “there’s nothing that's close” to being concluded, although he predicted deals would be completed by the end of 2025.

“We’re in discussions – it’s something that often makes sense for a lot of companies. It’s a very useful thing in the toolkit,” he said.

Deals completed

The market has already seen several deals where balance sheet carriers have separated out all, or part of, their underwriting operations.

This publication revealed last September that Bishop Street Underwriters was to acquire Conifer Insurance Services, the commercial insurance-focused MGA operation that Michigan-based Conifer Holdings had spun off into a separate entity in 2023.

Other companies have also spun off their underwriting operations for various reasons.

Fidelis Insurance Holdings in 2023 formed a new MGU platform that was separate from Fidelis Insurance Group. As Fidelis founder Richard Brindle noted at the time, the MGU focuses on core competencies in underwriting, claims handling, reinsurance structuring and innovative new products.

Elsewhere, in late 2023 Bain Capital acquired the operational platform of GuideOne Insurance Company, which was then used as the cornerstone business for The Mutual Group.

And more recently, Crum & Forster sold its credit insurance division to MGA platform Amynta Group.

As previously reported, Fairfax Financial subsidiary Crum & Forster will continue to provide capacity to the credit insurance business under its new ownership.