2023: MGA outlook positive but not without its challenges
Earlier this month AM Best assigned a positive outlook to the MGA sector – or the delegated underwriting authority enterprise (DUAE) sector as the firm characterizes it.
The factors it cited are familiar to anyone reading this publication or that has read the ratings agency’s recent coverage of the space around the introductions of its performance assessment framework.
At the core of the rationale behind the firm’s outlook is its belief that the DUAE distribution channel will continue to strengthen on growing interest from capacity providers, along with the emergence of specialty expertise, as AM Best puts it.
While those factors and others cited by the ratings agency certainly appear to put MGAs on a strong footing for 2023, there are a range of challenges and potential shifts in market dynamics that will influence the fortunes, strategies and futures of some participants. Here are some of the key topics to watch next year in the programs space:
The capacity question
Capacity is king is a well-used phrase among MGAs and other DUAEs and the sector does not operate in a vacuum.
The dominant subject for any MGA with a book of cat-exposed business – especially post-Ian has been the availability of capacity for 2023. The 1 January renewal for reinsurance is running late in the US and the connectivity from retro down through reinsurance to cat aggregate that can be deployed at the insurance level is all too clear to see.
The lack of clarity has left a number of MGAs reluctant to quote business past the end of the year until the position of their carrier panels has been resolved. The key question going past the New Year will be how that impacts appetite, budgets, and ultimately supply of MGA product through to the mid-year, and what that means for pricing in an already hard property cat insurance market. For some the challenge may be existential.
The M&A question
After much speculation the sales process for K2 did complete in the fourth quarter with the MGU platform acquired by PE firm Warburg Pincus.
The reported multiple in the mid teens showed there is still appetite from PE for developed platforms with a strong track record of organic growth. But the price paid looks to have been low compared to some of the multiples in the high teens of recent times and may have been slightly below expectation for the seller.
Deal volume in the MGA space is significantly lighter than in the retail agency space. In that area a big slowdown has been seen in M&A activity from the record numbers of deals reported in 2021.
The well documented drivers are the impact of higher interest rates on the debt market and the knock-on effect on broker consolidators that are more leveraged.
The balance of demand and supply is quickly changing and that will inevitably lead to a reset on price and terms, with some evidence already being seen – and some buyers pulling back significantly from their acquisition sprees.
Some observers believe the MGA sector has different dynamics, with a greater scarcity value as well as niche specialty focus that draws more interest from acquirers – both PE and trade. The E&S market shows no sign of slowing down and the connectivity is significant with the MGA space as a hotbed of activity.
The recession question
Of course one macroeconomic threat that is yet to play out is a true recession.
The growing expectation however is that a recession for the US and globally is on the way in 2023 as tight monetary policy aimed at controlling inflation stifles growth into negative territory with central banks and governments left with little or no room for maneuver.
Although some aspects of the industry are seen as comparatively recession resilient the Covid dip proved the damage to segments of the economy like hospitality, hotels and events from a downturn and the knock effect on specialty programs and MGAs operating in those spaces.
Other areas like construction that have been booming could also see a negative impact.
Growth in the insurance industry is tied to GDP. But loss activity also can be closely linked to economic activity in some areas – take the impact on the frequency of auto losses during the pandemic.
The talent question
Two areas dominate the MGA landscape in the context of talent.
One is the quest to attract and retain a generation of new blood to the sector and to diversify its workforce.
The other is the secular trend of top level underwriting talent moving from traditional insurers to seek out entrepreneurial opportunities with a greater influence on their financial destiny in the MGA space.
The first is clearly a long game. But amid increasing job insecurity in other areas of the economy the sector could seize on the opportunity to pitch itself as a safe haven – as well as a dynamic space that is a force for good in a world of growing risk and existential threat.
The second talent trend looks to be showing no sign of letting up, with a strong flow of underwriting talent continuing to make the journey from carriers to MGAs, and plenty of platforms (including incubators) actively competing to sign them up.
Various dynamics could change that trajectory, however, including economic uncertainty that might make underwriting executives more risk averse when it comes to making the leap into the unknown.
The fronting question
The wave of start-ups in the fronting sector over the last five years means there are now around 25 operators.
Some – such as Clear Blue and Trisura – have been on a rapid growth trajectory. Others have taken a slower pace for a host of reasons, some voluntary and others arguably less so.
But for a few of the players it appears that cracks are beginning to show – especially where there has been parental uncertainty.
That could be compounded by a fast hardening reinsurance market – which fronting carriers are entirely reliant on.
There has already been retrenchment from supporting cat-exposed MGAs by some fronting carriers for fairly obvious reasons.
The question is whether reinsurers that are being increasingly selective in the deployment of their capacity retrench from other areas of delegated authority business where fronting carriers are providing their paper.
Those fronting carriers that retain more business may argue that their greater alignment with reinsurers puts them in a stronger position.
But any headwinds for the fronting sector will raise questions over the strategies of some players looking still to grow to critical mass and will inevitably raise the prospect of meaningful consolidation among participants.
The carrier or MGA question
For some MGAs, an affiliation with a carrier balance sheet has been viewed as a valuable mitigating force against one of the biggest threats to participants – the risk of losing capacity from an insurer or panel of reinsurers.
The hybrid model has been deployed by several players, including Align Financial prior to its acquisition by Dual, and Applied Underwriters.
Meanwhile others, such as Ambac and Accelerant, are employing a model where carrier balance sheets are available to either affiliated or member MGAs. But an interesting trend is also emerging in the carrier side.
News that Fidelis is separating its underwriting operations from its balance sheet with separate MGA and carrier platforms has been viewed as a landmark move that could be adopted by other insurers.
It addresses the relative mismatch between the way balance sheet carriers and fee-producing distribution and underwriting platforms such as MGAs are valued.
It also potentially provides a more entrepreneurial environment for underwriting talent – which could help reverse the recent exodus of underwriters from traditional carriers to MGA operations. Whether the Fidelis play will be widely replicated as questionable, but certainly one to watch in 2023.
There will of course be plenty of other topics of interest we will cover next year – until then, enjoy the read and Season’s Greetings!