After more than a decade in which private equity has made strong returns by focusing on intermediaries in the insurance sector—notably retail brokerages—attention in the United States and Europe has turned to another compelling niche play: managing general agents (MGAs). Private-equity investment in MGAs has accelerated in the past two years, increasing the competitiveness of each deal and pushing valuations higher.
Investors have been looking to understand how MGAs fit within the insurance ecosystem, how they differ from other insurance intermediaries such as retail brokers and wholesalers, and how MGAs compare with other parts of the ecosystem as an investment opportunity. In this article, we provide an introduction to MGAs and an overview of the major trends affecting their competitive dynamics. We conclude with a perspective on MGAs as an investment opportunity for private-equity investors.
What is an MGA?
MGAs are insurance intermediaries, but unlike retail and wholesale brokers, they are often granted binding authority from insurance partners. This means they can quote and bind policies that fit within the agreed-upon risk parameters of their insurer relationships. This feature distinguishes MGAs from other insurance intermediaries. MGAs often further differentiate themselves either by having expertise in nonstandard, niche, or specialty lines of insurance or by having privileged access to specific customer segments.
Role within the value chain
MGAs can play an integral role in the insurance distribution value chain, often sitting between other intermediaries, such as retail or wholesale brokers and insurance companies, providing a unique value proposition for all parties.
MGAs typically have relationships with insurance carriers that focus on more specialized businesses and risks. Thus, retail brokers can expand the number of insurance carriers through which the final client can obtain insurance. MGAs’ expertise in their specialist niches also helps brokers structure risk appropriately for insureds.
MGAs can also make the value chain more efficient, given that they operate without the type of legacy placement platforms seen elsewhere in the sector. MGAs also tend to have lean operations because they are often smaller, younger, and unencumbered by the operational complexities found at insurance carriers. They may also offer enhanced technology for policy management, quotation, or claims management, making binding and policy management processes more seamless.
For insurance carriers, MGAs provide expertise and underwriting sophistication for specific lines of business, such as cyberrisk. They also make market entry easier because insurance carriers can leverage MGAs to enter new markets without having to build their own infrastructure, which typically involves hiring an underwriting team, building new pricing models, sourcing external data relevant to specific risks, and incurring the new development costs associated with an in-house build. Some MGAs also handle loss-mitigation strategies for insureds and process claims.
Among the top 100 US property and casualty (P&C) insurers, 43 percent—including seven of the top ten—have at least one MGA relationship through which to source new premiums.1 However, the amount of premiums sourced through MGAs varies significantly. Some may leverage MGAs to source new business around the margins—typically representing less than 5 percent of their overall premiums. Others maintain a hybrid model, with certain programs maintained by in-house underwriters and others by MGAs (typically 25 to 75 percent of the overall premiums). Also, some insurance carriers rely on MGAs for most, if not all, of their distribution and underwriting. In this case, the insurance carrier acts purely as a capacity provider or, as in the case of some fronting insurers, as intermediaries between reinsurers and MGAs.
Among the top 100 US property and casualty (P&C) insurers, 43 percent—including seven of the top ten—have at least one MGA relationship through which to source new premiums.
Assessing market size
The United States and United Kingdom are the two most developed MGA markets. Several MGAs operate in both, which may involve placing US-originated risks in the London market, maintaining London outposts for US MGAs, or expanding London-based MGAs into the United States.
In the United States, there are about 600 MGAs, which collectively place $47 billion in premiums—equivalent to roughly 7 percent of the overall commercial and personal insurance markets.2 There are three types of MGAs in the United States:
- Affiliated MGAs ($26 billion in direct premium written, or DPW) generate premiums while being wholly owned or majority-owned by an insurer. The DPW at these MGAs has been growing at an average of almost 7 percent annually since 2012.3
- Nonaffiliated MGAs ($16 billion in DPW) are third parties and can establish relationships with multiple insurers. The DPW at these MGAs has been growing by about 3 percent since 2012.4
- Crop MGAs ($5 billion in DPW) are niche MGAs that participate in the Multi-Peril Crop Insurance Program (MPIC), which is tied to the agricultural sector. The DPW has fallen since 2012.
In the United Kingdom, there are more than 300 MGAs placing more than 10 percent of the United Kingdom’s £47 billion in general insurance premiums.5 Lloyd’s is the largest global market for MGAs; in 2020, Lloyd’s had 76 syndicates managed by 50 general agencies.6
Like other parts of the insurance distribution value chain, MGAs maintain attractive financial profiles, with EBITDA margins in the high 20s to low 30s, low capital intensity, and high free-cash-flow conversion. MGAs generate revenue through three sources:
- Commissions paid by insurers, which typically constitute 60 to 80 percent of an MGA’s revenue. These are often called “overrides” to distinguish them from retail agents’ commissions.
- Profitability contingents, which are are performance-based commissions paid by insurers based on the underlying performance of the risk that the MGA placed. They typically account for 20 to 30 percent of an MGA’s revenue.
- Additional services (for example, claims administration and inspection), which can generate the final 5 to 10 percent of an MGA’s revenue.
Tracking industry trends
Investors must be aware of today’s industry trends when evaluating MGAs.
One of the core value propositions of MGAs is their ability to bring their specialized underwriting skills and market expertise to new, emerging risks. Examples of these new risks include casinos on Native American reservations, cannabis, transactional liability insurance for smaller deals, and cyberrisk. The increased frequency, severity, and ongoing threats of cyberattacks have given rise to the fast-growing cyber-insurance market. According to our estimates, the cyber-insurance market is set to grow from about $6 billion in premiums to more than $20 billion within the next five years. As a result, several cyber-focused MGAs have emerged, touting superior risk identification and prevention. Another area in which MGAs are increasingly active is specialty coverage in personal lines. This is driving better underwriting quality, customer experience, and access to specialized risks for MGAs’ capacity backers. One example of this is pet insurance, with leading brands in this sector in the United Kingdom and the United States both employing the MGA model.
The increased frequency, severity, and ongoing threats of cyberattacks have given rise to the fast-growing cyber-insurance market.
The past several years have seen the rise—and significant venture funding—of digital MGAs. These often target specific end customers (for example, small businesses and homeowners) and provide certain lines of insurance, including pet, auto, homeowners, and small-commercial insurance. While several digital MGAs initially started as MGAs backed by insurance carriers and reinsurers, we have seen multiple instances of digital MGAs retaining a portion of the risk on their own balance sheets, often through the acquisition of a partner insurer, enabling them to control some of the capacity they place. Still, many continue to partner with other insurance carriers to retain flexibility, especially in admitted lines.
Mergers and acquisitions
The MGA M&A market is increasingly active. While the level of acquisitions pales in comparison to the more than 1,000 completed in 2021 in the US retail brokerage market, there were 39 acquisitions in 2020—the latest year for which data are available. This was an all-time high at that point.7 As a result of fierce competition, valuations have grown significantly, with recent acquisitions valued in the mid to high teens in terms of EBITDA multiples. Three types of buyers have emerged:
- Insurance carriers, which are acquiring high-performing MGAs that operate in desirable markets and have exhibited enhanced underwriting expertise or maintained unique customer access.
- Retail and wholesale brokers, which are looking to expand the volume of business they can source through the added relationships and expertise of acquired MGAs.
- MGA aggregators, often backed by private-equity investors, which are seeking diversification across multiple lines of business and creating multiline propositions to capacity providers, thereby minimizing risks associated with the cyclicality of certain types of business.
Verticalization and assumption of balance sheet risk
In the current climate of significant claims inflation across multiple lines of business, some insurance carriers have started to restrict balance sheet capacity, which has in turn divided the fortunes of MGAs. Some MGAs have been forced to exit or reduce their presence in certain asset classes, such as catastrophe-exposed property or cyber. Others have started to explore raising their own capital to assume some of the balance sheet that typically had been provided by insurers, effectively building “verticals” into their business models. They may also tap into alternative sources of capital, such as pension funds or Lloyd’s syndicates with diverse capital backers. This step, however, has significant implications for risk management and investment capabilities, as well as for the overall operating model of MGAs. Nevertheless, this “verticalization” has boosted the resilience and capacity of MGAs.
In the current climate of significant claims inflation across multiple lines of business, some insurance carriers have started to restrict balance sheet capacity, which has in turn divided the fortunes of MGAs.
The private-equity investment opportunity
Private-equity investors are attracted to MGAs for at least three reasons. First, MGAs have financial characteristics that typically attract investors: high EBITDA margins, low capital expenditure, high free-cash-flow conversion, and relatively high recurring revenue. Second, private-equity investors that own other insurance intermediaries find value in acquiring MGAs to compress the distribution value chain and capture more of the economics. Third, the opportunity for significant value creation through data, analytics, and technological streamlining is meaningful, including digitalizing distribution via “legacy-free” placement platforms, more efficient quote-to-bind processes, and underwriting processes that leverage semiautomated pricing models.
Yet there are critical distinctions between MGAs and other insurance intermediaries. First, while management of any portfolio company is important, investors must pay particular attention to management’s underwriting history and expertise in the lines being written. Second, investors must evaluate the MGA’s relationships with insurance carriers. While retail brokers may leverage hundreds of insurer relationships to source capacity, MGAs typically have two or three relationships per program. The single biggest risk for an MGA remains the loss, or reduction, of an insurer relationship due to performance or insurers scaling back capacity. Last, MGAs rely on independent agents to source premiums. Continued concentration in the number of agents could increase competition among MGAs.
Perhaps the largest distinction, however, lies in the value creation thesis. With about 36,000 retail brokerages in the United States, private equity–backed consolidators have numerous acquisition targets with which they have been capturing a “multiple arbitrage” opportunity. By contrast, there are around 600 MGAs in the United States, meaning that the primary investment thesis needs to be different.
While retail brokers may have similar customers or risk needs, these will vary significantly among MGAs. This means that multiple arbitrage-fueled M&A is unlikely to be effective. Instead, investors’ value creation thesis must stem from the expertise, distribution, insurer relationships, diversity of earnings, and operational synergies offered by each MGA.
MGAs provide private-equity investors with access to an industry with high growth, exposure to balance sheet–free pockets of the insurance ecosystem, similarities with already-familiar private-equity insurance investments such as retail brokerage, and margin expansion via advanced analytics and technological innovation. However, the opportunity has already been recognized by many, creating real competition for high-quality assets. This means that it’s vital for investors to be confident in delivering an ambitious value-creation plan in their approach to MGAs.