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K2 Insurance Services LLC's majority-stake acquisition of workers compensation underwriter Midwestern Insurance Alliance Inc. may be a sign of more things to come for insurance markets.
The recently announced deal also may be a sign of an improving economy overall, a potential for continuing increases in insurance market pricing, and renewed private equity interest in managing general agencies, including those writing workers compensation.
San Diego-based K2 formed last August with funding from Endeavour Capital, a private equity group.
K2's mission is to build a national insurance program business franchise by investing in managing general agencies across the country and Midwestern Insurance Alliance was its first purchase.
Midwestern is a Louisville, Ky.-based MGA specializing in underwriting workers comp coverage for the transportation industry. MGAs typically sell specialty or program insurance policies that they are authorized to underwrite on behalf of insurers they contract with.
Private equity investors were purchasing MGAs before the economic meltdown, said K2 President Bob Kimmel. But they backed off during the financial crisis and are now back again looking for MGA investment deals.
Increased economic activity across the country is one reason to invest in an MGA that underwrites trucking companies, Mr. Kimmel said. Transportation companies are among the first to take off with economic improvement.
“If you look who is hiring…it's drivers,” Mr. Kimmel said. “They move the goods across America before (industry) starts building” or entering other lines of business. So we are excited about the transportation business.”
Another reason to invest in MGA's is that Mr. Kimmel expects commercial lines insurance coverage pricing to continue increasing, including rates for workers comp coverage across the country.
“We are actually trying to acquire auto liability and general liability MGAs in the transportation space so we can cross sell the work comp product,” Mr. Kimmel added.
Midwestern, with annual gross written premiums of $35 million, previously underwrote business in Arkansas, Georgia, Indiana, Kansas, Kentucky, Missouri, South Carolina and Tennessee.
But with new capital it has expanded its workers comp offerings to Texas and California Alabama, Nevada, Utah, Louisiana, Mississippi, North Carolina and Virginia.
QBE Insurance Group Ltd. provides the coverage underwritten by Midwestern.