Unaffiliated share of MGA premium has grown in recent years: AM Best report.

AM Best

The release of the report follows AM Best last week releasing a draft methodology with the intent of assessing MGAs, MGUs, program administrators, coverholders and other DUAEs to provide transparency to the market and inform the industry of a DUAE’s ability to perform services on behalf of its insurance partners.

The new report noted only a muted Covid-19 impact on DUAEs. It said DUAEs have generally been insulated from the financial distress inflicted by Covid-19 because their specific niches were not vulnerable to the related economic downturn.

Types of authority most oftengranted to US P/C MGAs, 2019

AM Best believes that managing agents should remain a popular and efficient business model as the effects of the Covid-19 market disruptions ease and the economy recovers.

“Along with tightening capacity at Lloyd’s, MGAs, MGUs, and program administrators may find the availability of highly rated capacity providers strained, but many will still be able to use small insurers for capacity,” the report said.

“As we enter 2021, multi-line commercial insurers, particularly troubled lines of coverage, may be affected by further capacity restrictions. As the business of insurance evolves, the value a carrier may seek may be rooted in a DUAE’s other qualities or advantages, such as the ability to effect strategic changes via distribution partners providing access to a profitable book of business.”

Increased MGA DPW

AM Best said that US MGA annual direct premium written (DPW) grew from $43.0bn in 2017 to $44.0bn in 2019. This data was compiled from that filed by companies in their NAIC annual financial statement and so it does not include business written on behalf of Lloyd’s syndicates.

US P/C industry – managing generalagent direct premiums written

“Premium growth opportunities have been plentiful for MGAs, particularly because of problems in several lines of coverage - most notably, commercial automobile - that have changed the program market,” the report said.

The increase in premium is tied in part to the growth in the number of MGAs, which rose from 577 in 2017 to 688 in 2019, based on NAIC annual statement data. The number of insurers using MGAs in that time has been relatively consistent.

AM Best said the increase in the number of MGAs “may be due to new players taking advantage of a market on the upswing given that established MGAs have grown their premium to 5 percent or more of their insurer partners’ policyholders’ surplus”.

The report added: “Sizable capital investments from reinsurers and fronting insurers, among others, are also sparking growth, as well as transforming the MGA market. These constituents have different reasons for using MGAs, but more direct access to the ultimate customer/policyholder is a common one. Startup operations, particularly those offering technological advantages, are also helping generate premium volume.”

The overall MGA DPW data includes that generated by multiperil crop MGAs, which was between $2bn and $3bn each year between 2017 and 2019. AM Best noted that crop is a very specialized line of business and not often included in reports about MGAs, but the ratings agency included crop MGA premium in its data for a fuller understanding of the market.

Affiliated versus unaffiliated

Unaffiliated MGAs accounted for 512 of the 688 of the total number of MGAs in 2019, AM Best said, but affiliated MGAs accounted for about two thirds of DPW in each of the past three years.

US P/C industry – affiliated vsunaffiliated MGA direct premiums written

However, unaffiliated MGAs’ share of DPW has grown. In 2019 they accounted for 38 percent of DPW compared to 33 percent in 2017. AM Best noted the share has increased “as insurers have sought different external avenues to achieve organic growth”.

In 2019, 20 MGAs accounted for a little more than a third of the direct premium generated by unaffiliated agents. Eight of these 20 wrote business with a single insurer while another five generated their listed premium total through only two insurers.

Tokio Marine’s Philadelphia Indemnity Insurance Company generated the highest DPW for any company using MGAs. The Tokio Marine subsidiary’s nearly $3.5bn in DPW came from an affiliated MGA and was more than $2.0bn higher than the DPW for Florida personal property insurer Universal Property & Casualty.

US P/C industry – MGA direct premiums written by insurer, 2019

Reinsurers and fronting carriers

AM Best noted that sizable capital investments from reinsurers and fronting insurers, among others, are also sparking growth and transforming the MGA market.

Traditional reinsurance arrangements generally involve a ceding insurer producing a book of business through its captive agency or independent brokers, and using its staff to underwrite the business.

A different type of structure involves fronting arrangements in which a ceding insurer bears little, if any, risk and reinsures all or almost all of the risk to the reinsurer.

AM Best said the 100 percent fronting model has long been exemplified by Markel’s State National. Another company following the pure fronting model is relatively recent startup Clear Blue, which writes in all 50 states focusing on organic growth through their relationships with MGAs and reinsurance partners.

“Given the underwriting risk associated with fronted business that is transferred to the reinsurance companies supporting each program, the key risk for pure fronting companies such as State National and Clear Blue is the credit risk associated with the reinsurer’s ability to meet the financial obligations of the reinsurance contracts,” the report said.

State National Group – Ten largest US P:C MGAs Ranked by 2019 direct premiums written ($ thousands)

DUAEs share in the underwriting profit or loss on underwritten business and are generally entitled to a contingency commission on all business written in their territory.

AM Best said that DUAEs historically have received roughly 12 percent to 15 percent commissions regardless of the program’s profitability. Many DUAE agreements now incorporate sliding scale commissions that take into consideration the book’s profitability.

MGAs’ elevated multiples

DUAEs, and especially specialty MGAs, have been the subject of considerable interest for acquisition by private equity firms, insurance carriers and brokers.

MGAs have been acquired at elevated earnings multiples, with some estimated to be in the high teens. AM Best noted that historically these types of businesses have sold in the range of 8x to 12x earnings.

“Limited growth opportunities in other areas of the insurance markets have led to a spotlight on the few fertile areas of growth, specifically insurance agents and brokers, including DUAEs - with interest particularly high among insurance carriers. Insurers have been making some of these purchases, although financial buyers (including the private equity firms) are responsible for some of the more recent higher-valued specialty MGA acquisitions,” the report said.

AM Best said M&A interest is likely to result in acquisitions of specialty brokers and MGAs, on the expectation of rising rates as a result of tighter market conditions. Insurtechs also remain attractive investment and acquisition targets for large insurance companies.

“Perhaps the most compelling new M&A phenomenon is the acquisition of insurance companies by MGAs, specifically by insurtech MGAs,” said the report.

Examples include insurtech Hippo in September 2020 completing its acquisition of New Jersey-based Spinnaker, and Hilltop Holdings and MGA Align Financial Holdings completing the sale of Hilltop’s subsidiary National Lloyds Corporation to Align in June last year.

The DUAE of the future

AM Best believes the DUAEs of the future will need to be leaner, more cost-effective, and tech-enabled.

“Product innovation, actuarial capabilities, and full confidence and authority in claims handling are paramount,” the report said. “Paper providers demand alignment with these partners as they adapt to their own challenges. The desire to launch a new DUAE remains, but new entrants must be mindful that carriers’ expectations will be higher than ever.”

Discussing the Lloyd’s market, AM Best noted robust remedial actions to improve performance in recent years from both the Corporation and individual managing agents. This has led to better underwriting discipline and a reduction in capacity in certain lines of business.

“Nevertheless, AM Best believes that coverholders with a good track record remain attractive to Lloyd’s managing agents, particularly those writing quality specialist risks,” the report said.

Smaller players managing programs with poor claims experience or high expense ratios will struggle to prove their value, AM Best said. “Because of the trepidation of some carriers, as well as related capacity limitations, renewing programs with the same structure may be a challenge for managing agents,” the report added.

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