Hello levd,
I discussed your scenerio with senior engineers.
Can i simply install a new management server and delete server1?
----> Yes it's possible.
This approach should work because you already have failover & loadbalancing between both the SEPM's.
Only make sure while running management server you will select 2nd option i.e. Install an additonal management server to an existing site & point it to an existing SQL database.
Note: Before decommisoning SEPM1 remove SEPM1 entries from the SEPM2 server.
Remove from local site of SEPM2.