Insurance MGAs: Opportunities And Considerations For Investors … MGAs play crucial roles in the insurance distribution chain; better understanding helps investors recognize opportunities.
Private equity has shifted its focus from insurance intermediaries like retail brokerages to managing general agents (MGAs) in the US and Europe.
This has increased competitiveness and valuations, requiring investors to understand MGAs’ role within the insurance ecosystem, their differences from other intermediaries, and their potential investment opportunities.
What is an MGA?
MGAs are insurance intermediaries granted binding authority from insurance partners, allowing them to quote and bind policies within agreed-upon risk parameters.
They differentiate themselves by expertise in nonstandard, niche, or specialty lines or privileged access to specific customer segments.
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Role within the value chain
MGAs play a crucial role in the insurance distribution value chain, providing a unique value proposition for all parties involved.
MGAs have relationships with specialized insurance carriers, allowing retail brokers to expand their coverage.
Their expertise in their niches helps brokers structure risk appropriately for insureds. MGAs make the value chain more efficient and offer enhanced policy management, quotation, and claims management technology.
They also make market entry easier for insurance carriers, as they can leverage MGAs without building their own infrastructure.
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Among the top 100 US property and casualty insurers, 43% have at least one MGA relationship to source new premiums.
The amount of premiums sourced through MGAs varies significantly, with some sourcing new business around margins, while others maintain a hybrid model with in-house underwriters and MGAs.
Some insurance carriers rely on MGAs for most or all of their distribution and underwriting, acting as capacity providers or intermediaries between reinsurers and MGAs.
Assessing market size
The United States and the UK are the two most developed MGA markets, with around 600 MGAs in the US and $47 billion in premiums, respectively.
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There are three types of MGAs:
Affiliated MGAs, Nonaffiliated MGAs, and Crop MGAs. Affiliated MGAs generate premiums while being wholly-owned or majority-owned by an insurer, with an average annual growth of 7.7% since 2012.
Nonaffiliated MGAs are third parties with multiple insurers, with a growth rate of 3.3% since 2012. In the UK, over 300 MGAs place over 10% of the country’s £47 billion in general insurance premiums. Lloyd’s is the largest global market for MGAs.
MGAs have attractive financial profiles with high EBITDA margins, low capital intensity, and high free-cash-flow conversion.
They generate revenue through insurer commissions, profitability contingents, and additional services, accounting for 60-80% of an MGA’s revenue.
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Tracking industry trends
Investors must understand industry trends when evaluating MGAs.
MGAs offer specialized underwriting skills and market expertise for emerging risks, such as Native American casinos, cannabis, and cyber risk.
The cyber-insurance market is expected to grow from $6 billion to over $20 billion within five years. MGAs also focus on specialty coverage in personal lines, improving underwriting quality, customer experience, and access to specialized risks for capacity backers.
Digital MGAs have gained significant venture funding, targeting end customers and offering specific insurance lines. Initially backed by insurance carriers and reinsurers, some digital MGAs retain some risk on their balance sheets through partner insurer acquisitions. They continue to partner with other carriers for flexibility.
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The private-equity investment opportunity
Private-equity investors are drawn to MGAs due to their financial characteristics, compression of the distribution value chain, and potential value creation through data, analytics, and technological streamlining.
However, MGAs have unique management, relationships with insurance carriers, and reliance on independent agents.
The primary investment thesis for MGAs must be based on expertise, distribution, insurer relationships, diversity of earnings, and operational synergies, rather than multiple arbitrage-fueled acquisitions.
MGAs offer private-equity investors high growth, exposure to a balance sheet-free insurance ecosystem, and margin expansion through analytics and technology. However, competition for high-quality assets requires investors to deliver ambitious value-creation plans.