The Intelligent Quarterly from the publishers of The Insurance Insider

Autumn 2017

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Shooting stars

Catrin Shi

Few phenomena in the London market have attracted as much attention this year as the increasingly prolific formation of MGAs.

With multiple launches, M&A deals and eye-wateringly expensive private equity buy-ins, the MGA space has made the headlines on numerous occasions during the course of 2017.

Seasoned observers of the (re)insurance sector will argue that delegated authority business is nothing new in this industry, and therefore perhaps not worth the column inches, but the rate of increase in the number of these agencies in London alone has been enough to raise the question of whether the humble MGA has the potential to change the shape of the market for good.

It is thought that there are now in excess of 300 MGAs across the UK, underwriting gross premiums in the region of £5bn.

But while they may have previously carried the stigma of loose underwriting, poor record-keeping and the unnecessary loading of cost and complication onto naïve capital providers, that image problem is now receding.

The new breed of MGA is capital-light, cost-efficient and uses technology and data to its advantage to target niche product lines and distribution channels.

"The days of a delegated authority business held by brokers burning a syndicate or an insurer I think are gone," says Peter Staddon, managing director of the Managing General Agents' Association. "They are much more professional, much more intelligent."

But the easing of the old MGA stigma has only played a part in encouraging new MGAs to the sector. And while many would call the rise in the number of MGAs a symptom of the prevailing soft market, there are other factors at play which have contributed to this trend.

"There have been a number of success stories in the MGA space recently: Dual, Pioneer, CFC and Nexus being the more high-profile," explains Colin Thompson, executive chairman and founder of Nexus Underwriting. "The MGA model provides a framework for innovative and entrepreneurial underwriters to create value for themselves and for their underwriting partners."

Entrepreneurial streak
The MGA model offers a fast-track route to market with low barriers to entry, as well as the chance to hold an equity stake in your own firm. MGAs are also cash-generative and debt-friendly - an attractive combination for underwriters with an entrepreneurial streak.

Current market forces have made it extremely difficult for start-ups to build sufficient critical mass for a balance sheet business, which also comes with an extra regulatory burden.

Meanwhile, London market success stories such as cyber-specialist CFC - which secured a 15x forward Ebitda valuation in its 40 percent buy-in from private equity house Vitruvian - have demonstrated that MGAs and fee-generating businesses can command rich multiples at the deal table.

"I think certainly in my years working in the insurance market there are some routes entrepreneurs would have traditionally gone down which are less attractive now, as there is more red tape to go through and it takes much longer," says Mark Birrell, CEO of MGA incubator Castel.

"The speed to market is very appealing to these entrepreneurs, and an MGA offers the opportunity for them to be judged on their own performance of their book, rather than being part of something bigger."

However, for an MGA to be effective, it must be able to provide its capacity providers with a route to niche products and distribution that they would otherwise find difficult to access, Birrell explains.

This could be in the form of niche underwriting areas, new customer bases or targeting business too small for traditional carriers to write economically - and is certainly the formula MGA start-ups in the London market have followed in the first half of 2017.

Examples include superyacht-focused Yachtpod Risk Partners, led by former MS Amlin underwriters Iain Cotton and Vladimir Mirosevic-Sorgo, and two M&A insurance-focused MGAs - Acquinex and Capital Risks - which have chosen to home in on warranty and indemnity cover for smaller deal sizes currently underserved by the traditional market.

Other specialist MGAs known to be in the pipeline include a cyber reinsurance-focused start-up, led by former Hiscox Re specialty head Rob Ashton in collaboration with Fidelis, as well as a Novae-backed bloodstock MGA and an airline MGA led by former AIG airlines head Andy Trundle.

Rise of the incubator
However, not all underwriters with a good idea and big ambitions can successfully launch an MGA.

"There are lots of very, very good underwriters out there - but very few know how to run a business," explains Staddon. "And that's where incubators start to play."

With the rise of the MGA has also come the rise of the MGA incubator - platforms designed to give entrepreneurs a financial and logistical leg-up in the market.

A growing number of incubators have been launched to feed the demand for MGA or cell start-up services, which, in the case of traditional carriers, can provide a welcome additional stream of fee income in a soft market.

Tom Milligan's venture capital launch Beat Capital started backing MGAs in January this year, with Geoff Pryor-White's cyber launch Tarian marking its first investment.

Pine Brook's Vibe also launched an MGA incubator in June. It will compete with the likes of Pioneer, Castel, Nexus, Acappella, Eaton Gate and service-focused offerings such as those from Asta and Capita.

Using an incubator allows the entrepreneur to leverage the platform's regulatory approval and infrastructure to launch their business more quickly and cost-effectively than going it alone.

The incubator will often look to invest in the start-up, with a view to exiting via a capital event at a later date.

"If you go your own route, it can take six to 12 months just to get Financial Conduct Authority sign-off," explains Birrell. "In parallel with that you have to create all the infrastructure, get your capacity on board and the capital behind you to do it.

"In our incubator model we are very keen for the entrepreneur to get equity in the business from day one, and we provide them with the infrastructure so they can get trading very quickly."

Entrepreneurs also benefit from being around other innovative and ambitious types, Birrell adds.

"Whenever you start up a business you have incredibly high highs and incredibly low lows. What we like to think is that with the Castel model - having all our underwriting cells under one umbrella - we can help smooth out those highs and lows."

Entrepreneurs usually present their own business plan to incubators, or are introduced to an incubator by brokers, capacity providers or headhunters.

The business plan is then scrutinised by the platform on its financial merits, the market appetite for the proposed business and also on whether it aligns with the incubator's own interests.

"For me the MGA still really is about the individual," explains Danny Maleary, CEO of Vibe MGA Management. "There are a lot of MGA teams that I see that are not MGA underwriters. The MGA underwriter is typically a developmental underwriter who sees innovation around product, who isn't looking to create an empire, and is looking to make a difference to the customer experience."

Capital events
Many of the underwriters behind the start-up MGAs will ultimately be looking for a capital event, and recent deals have shown private equity is ready with money to spend.

CFC's 15x forward Ebitda valuation is often highlighted as an example, but this hefty multiple does not necessarily set a precedent for other MGAs looking to secure private equity funding, explains KMPG UK head of financial services M&A Mark Flenner, who advised on the deal.

"What the CFC deal indicated is that for the right size, good management and good results you can command a good price," he says. "It also reinforces the view that private equity is attracted to the non-risk carrying segment of the UK and US insurance market, which they see as high-margin and high-growth."

At the small end, private equity will look to invest £10mn-£20mn of capital in MGAs, but this can go up into the hundreds of millions, he explains. For a £10mn-£20mn investment, a business would need to have a value of about £20mn-£30mn.

To gain the attention of the private equity houses, a certain scale is needed - a difficult feat to achieve organically at the current stage of the soft market. This desire to secure a capital event could push the market to consolidate, explains John Holm, MGA investments executive at Asta Underwriting Management.

"M&A gets you up to critical mass and makes you more attractive to sale," he said. "But more generally I expect more consolidation among MGAs - you are seeing it already. We also saw it in the broker market, where founding executives were reaching retirement and wanted to cash in their equity."

Nexus' Thompson also claims the MGA space is "definitely ready" for consolidation. He points to the US, where there are a number of MGAs each writing over $1bn in premium.

"This puts them in a more powerful negotiating position and also delivers economies of scale," he says.

MGA peak?
Does that mean then, that the London market has reached peak MGA?

MGAs will always have a certain level of vulnerability, as they are dependent on their capacity providers for business. Asta's Holm notes that after the 9/11 terror attack, capacity was quickly withdrawn from the space, which pushed many MGAs to the brink.

Holm and others concur that the MGA model is here to stay - however, it will continue to evolve, with some even starting to take on risk themselves.

"Those MGAs who do embrace technology and have control around data will become more confident around the risks they are seeing," says Vibe's Maleary.

"I believe they will start to retain risks themselves in addition to traditional delegated authority business with third-party capital." He adds: "If I was a chief underwriting officer of an insurance entity I would absolutely be embracing the world of delegated authority alongside my traditional open market platforms, especially when you think that cost reduction is such a huge focus at the moment."

MGAs can also evolve by sourcing reinsurance for their own portfolios, which is then ultimately purchased by their underwriting partners, giving MGAs more control over the coverage offered by the reinsurers and therefore more consistency going forward, Thompson at Nexus notes.

But the executive chairman also believes MGAs must embrace InsurTech to be seen by the market as forward-looking and relevant at every level of the transactional process.

Thompson says: "Overall I think it will be a blend of MGAs operating as a 'virtual' insurance company, underwriting at greater capacity, offering a more varied product range, and all underpinned by leading technology, to remain cost-efficient and competitive."

This article was published as part of issue Autumn 2017

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