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By Cyril Tuohy
For property/casualty managing general agents (MGAs) dedicated to underwriting and distribution of specialized coverage, it’s a seller’s market as insurance companies look to acquire blocks of premium as low interest rates persist, according to a new report.
Fixed-income portfolios have been hurt by low rates, declining property-catastrophe rates and too much insurance supply relative to demand. As a result, property/casualty carriers in the hunt for new premium dollars welcome the profitability that comes with the specialty underwriting skills that MGAs bring, a report from insurance consultancy Conning & Co. concludes.
“The current market is positioned in favor of sellers, as valuations have moved to (and in some cases above) the high end of the historical valuation multiple range,” according to the report titled “The World of MGAs: A Look at the MGA Specialists.”
Carriers and large MGAs benefit from buying other MGAs as it diversifies revenue sources, Conning assistant vice president Bill Broomall said in an interview with InsuranceNewsNet. It is Conning’s first analysis of the MGA market.
Commissions pegged to a sliding scale also reward the agencies for meeting specific performance goals, he said.
“The broad trend we're seeing that we highlight in this study is that insurers are going out and buying MGAs to bring in-house and get more control over that block of premium that they are acquiring,” Broomall said.
MGAs are insurance wholesalers granted underwriting authority by the insurance carriers in exchange for sharing the premium revenues.
MGAs underwrite specialized risks that underwriters would rather not underwrite themselves. MGAs either underwrite a class of business, such as oil and gas wells. Or they underwrite insurance lines like errors and omissions coverage or medical malpractice.
When carriers are not comfortable underwriting the risks in-house, either because they don’t have enough expertise in them or because MGAs don’t fit into a carrier’s business model, carriers give MGAs underwriting authority.
Because carriers are buying the underwriting expertise provided by the MGA, underwriting profitability for carriers that own MGAs can often be very high as long as carriers exert tight control over underwriting parameters issued to MGAs.
Losses on poorly underwritten MGA coverage, however, can also prove costly. In the past, carriers have lost billions of dollars after “rogue” MGAs underpriced risks, and after disputes ensued between carriers and MGAs.
“The evolution of industry practices appears to have created a more stable business model and helped limit the extent an MGA relationship can adversely affect an insurer’s underwriting results,” Broomall wrote in the report.
Premium growth generated by MGAs has outpaced the broader commercial property/casualty industry in seven of the past 10 years, the report said. Composite average direct premium growth over the past decade for MGAs outperformed the broader commercial property/casualty industry by 5.1 points, the report also said.
Over the past 10 years MGA combined ratios, have also been 6.7 points lower on average than that of the broader property/casualty, the report said.
Combined ratios, the sum of incurred losses and operating expenses measured as a percentage of earned premium, is a measure of an insurance company’s profitability. Combined ratios exclude investment performance. The lower the combined ratio, the more profitable the company.
Some of the notable MGA transactions over the past few years have involved property/casualty brokers as well as insurance carriers.
In 2011, the Dayton Beach, Florida-based-based broker Brown & Brown bought Arrowhead General Insurance for $400 million. Arrowhead dealt with 3,100 retail agencies in nearly 6,000 locations around the country.
Early last year Charlotte, North Carolina-based wholesaler AmWINS Group completed its acquisition of Gresham & Associates, an MGA that placed $340 million in premium in 2012, according to an AmWINS news release.
In November 2012, Peoria, Illinois-based RLI Corp. bought Rockbridge Underwriting Agency, a specialty medical malpractice MGA.
In January 2012, New York-based AmTrust Financial Services announced it was buying California-based Builders & Tradesmen’s Insurance Services, not long after AmTrust said it was buying the workers’ compensation business of CardinalComp, a disability insurer with more than $90 million in annual premiums.
None of the recent mergers and acquisitions deals reveal any purchasing tendencies toward particular kinds of MGAs, Broomall also said.
“It's more company-specific and strategy specific,” he said.
Total premiums generated by MGAs are between $26 billion and $30 billion, or about 9.7 percent of all property/casualty industry premiums, the report said.
About 75 percent of MGAs in the property/casualty market offer some type of commercial coverage, according to the report. MGAs that write only commercial lines produce 70 percent of all premium, the report also found.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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