How managing general agents are adapting to challenging market conditions

An agile and lean managing general agent (MGA) market may help insurers respond to a soft market which makes finding profitable growth a challenging quest. While the MGA players are optimistic about the growth prospects, not all companies are performing well, as data aggregated by Intelligent Insurer show.

The historically low interest rate environment has attracted investors looking for yield to the insurance sector, increasing the capacity in the market and putting pressure on rates. The absence of large losses has further reduced rates and impacted underwriting profitability.

“The problem insurers have is that their operational cost ratios are so high,” says Peter Staddon, managing director of the Managing General Agents’ Association (MGAA).

“MGAs may be able to help insurers grow in a more efficient way. They can effectively be the regional footprint of an insurer without the company having to spend huge amounts of money,” Staddon says.

A great Lloyd’s export

MGAs are predominantly a UK phenomenon with some occurrence in the US as growth of the industry was driven by the Lloyd’s market. MGAs operate in a variety of arenas such as standard commercial products, package commercial and consumer business, using underwriting capacity from traditional insurer.

In principle, MGAs work in a similar way to brokers, except that a broker’s fiduciary duty is to its customers whereas the MGA’s fiduciary duty is to the capacity provider. This has in the past raised some suspicion from regulators as they suspected clients were being given a worse deal from MGAs than from brokers, but this is no longer an issue, Staddon claims.

The January 2017 MGAA Matters, the research-based partnership between the MGAA and MGA startup specialists Castel Underwriting Agencies shows that the impact on growth resulting from a lack of understanding of the MGA’s role moved from just over 20 percent in 2014 to 12 percent.

The survey looked at the sector’s main strategic priorities and how these have changed over the last three years.

According to the survey, the soft market is also an increasing worry for the MGA sector. More than 65 percent of survey respondents placed soft market conditions at the top of the list of factors affecting growth, compared to 46 percent in 2014.

MGAs can arguably deal better in a soft market than insurers as their cost ratios are significantly lower.

“An insurance company is like a supertanker,” Staddon says. “If you want to stop a supertanker going from full speed to stop, it takes about nine miles. MGAs are more like jet skis. If the market is turning and they see an opportunity, they are able very quickly to adapt. That is their real strength,” he explains.

This agility allows MGAs to find growth opportunities in difficult market conditions and to include them in their operating strategy. Insurers are taking advantage of this quality of MGAs as providers of underwriting capacity.

“When you look at insurance capital providers and their business plans for the next three to five years, whether it is a Lloyd’s syndicate or an insurance company, an increasing number are using delegated authorities as a way of accessing potential untapped customers,” Staddon says.

Different camps

Growth has different drivers in the two camps the MGA market can be divided into, namely the generalists and the specialists.

The latter includes cyber insurance, insurtech solutions and digitally driven products and operations, Staddon explains.

“Players in this field may grow quite dramatically because they are innovators and disruptors, but the pool they are fishing in is comparatively small,” he says.

“The generalists operate in the standard small and medium-sized enterprises (SMEs) commercial policies field, which is an established market. They are trying to grow within this arena by providing a better conduit for the capital provider to access clients,” he explains.

As rates are under considerable pressure for SME products, insurers are finding it increasingly difficult to earn a profit in this segment, whereas the MGAs can do that because their cost ratios are much lower, Staddon notes, adding that a lot of the business MGAs are looking at may actually be untapped in today’s environment.

Forty-eight percent of respondents of the MGAA survey disagreed or strongly disagreed with the question of whether the UK’s MGA sector will be unable to sustain the current levels of growth and success over the next three years. Just over 21 percent said they agreed.

“The survey reveals that MGAs expect a further period of sustained growth for the sector,” says Mark Birrell, CEO of Castel Underwriting Agencies.

According to the survey, the MGAs’ main strategic priority is to increase business development and marketing activities.

“MGAs often have far superior technical ability, IT and back office and data capture abilities to that of many insurers,” Staddon claims.

“This allows MGAs more efficiently to capture data and information, mine it, and refine the target audience to create a market opportunity,” he explains.

The MGAA represents around 120 members, but the MGA market overall comprises around 300 players with gross written premiums (GWP) of around £5 billion ($6.15 billion), Staddon estimates.

More accurate numbers on firms and GWP are hard to come by because under the regulatory regime MGAs are classified as intermediaries, which also includes brokers, for example.

A mixed picture

It is clear that not all MGAs are thriving, as the research by Intelligent Insurer reveals. The dataset aggregating financial information on 60 of some of the leading UK MGAs and based on latest available data, shows that the sample group’s pre-tax profit improved to £27 million (excluding DUAL) in 2015 compared to a pre-tax loss of £77.6 million (excluding DUAL in 2014.

The results are, however, skewed due to loss-making Towergate Underwriting Group, which is the largest company within the sample with a turnover of £195.9 million ($241 million) in 2015. The total results of the sample improved because Towergate reduced its losses over the period. Excluding Towergate the pre-tax profit of the sample group was £74.8 (excluding DUAL) in 2015, a decline from the £85.7 million (excluding DUAL) recorded in 2014.

“Towergate is probably one of the most unusual animals within the MGA space,” Staddon says, “because of its size, its complexity and its footprint.”

Towergate Underwriting was set up in 1997. Its products, which include agriculture, marine and travel, are backed by large insurers such as Allianz, AXA and Aviva. It produced a pre-tax loss of £47.9 million ($59 million) in 2015, an improvement from a pre-tax loss of £163.3 million ($201 million) in the previous year.

The group, which also includes a broker, is reorganising the business, hoping that it will result in higher profitability. The underwriting division was in the first half of 2016 impacted by ongoing headwinds from the financial restructure and continues to be impacted by challenging market conditions, according to Towergate’s third quarter 2016 report.

As a result, adjusted earnings before interest, taxes, depreciation and amortisation have decreased by 35.5 percent to £6.5 million ($8 million) between January and September 2016.

Towergate noted, however, that actions are underway to ensure long-term sustainability of the business.

“The business is evolving. There will be a massive change,” says Staddon (the company did not wish to comment).

The new board will be shaping things differently in a company he describes as having “extremely valuable” components within a megastructure. Staddon’s explanation for the unsatisfactory performance is that all the various components may have been run as individual businesses and that the group couldn’t capitalise on the economies of scale. But Staddon is convinced that now they will.

Not only Towergate is changing, but the whole MGA landscape is on the move, driven in part by mergers and acquisitions (M&A) activity.

In February, for example, specialist insurer Beazley acquired MGA Creechurch Underwriters.

In January, Ryan Specialty Group (RSG) acquired transportation MGA Interstate Insurance Management in the US.

In the MGAA survey, 60 percent of participants said they expected increased levels of M&A and consolidation activity.

Drivers for the M&A trend are diverse. Buyers might be interested in an existing MGA that has a certain knowhow and products that would be complementary to what the purchaser is already transacting, Staddon explains. Other acquirers may be interested in removing a competitor or gaining critical mass.

There is also significant investor interest in financing the creation of new players. “Investors want to deploy money in insurance because there are no better opportunities,” Staddon says.