Commercial MGAs: Evolving the Distribution Landscape

Commercial managing general agents (MGAs) are gaining prominence within the insurance distribution landscape globally, capturing share due to their use of technology, attractiveness to underwriting talent and increasing capacity from carriers, including fronting carriers. Within this arena, L.E.K. Consulting has been working with clients to develop their MGA strategies.

MGA direct written premium has grown significantly over the past 10 years, exemplified in the US by an 11% p.a. growth in statutory insurer filings from 2012 to 2022 (see Figure 1).

The segment’s strong growth has fostered the emergence of several flavours of MGAs, but the sector remains relatively fragmented, offering investment opportunities to brokers and strategic buyers as well as private investors. However, while MGAs are adjacent to brokers in the value chain, their economic model and quality of earnings are different.

A changing value chain

MGAs act as intermediaries within the distribution layer of the value chain, conducting activities often fulfilled by insurers, such as reserving, binding coverage, pricing, risk selection and claims handling (see Figure 2).

While some flavour of delegated authority and MGAs have always existed historically in the insurance value chain, their role and prominence is increasing, driven by several factors.

Brokers are expanding their value chain participation.
Brokers are deepening their involvement in the value chain as they leverage their scale following continued broker consolidation. Starwind (US) and Dual (UK) are some notable examples of how brokers are capitalising on growth in commercial MGAs. Developing MGA capabilities offers several advantages, including:

Improving the service offering to clients and increasing the share of wallet by developing better suited products with improved wordings
Capturing a greater share of commission through complementary activities (e.g. claims handling, pricing), which could form part of a wider placement and carrier management strategy
Enhancing expertise in specialised markets, lines and geographies, as well as informing on potential broker M&A targets
Achieving low-capital-intensity expansion with recurring earnings and high margins when done at scale

MGAs are providing much-needed innovation in new areas and offering their panel insurers diversification and access.
MGAs are coming to the fore in new risk classes in the insurance sector as well as providing innovation in both product offerings and operational dimensions. Product examples include cyber, warranty and indemnity, carbon credit, and nuclear — the list of niches in insurance is very long. While less obvious, several MGAs are also rethinking distribution paradigms — either through direct to customer or being able to project capacity to multiple markets in a tech-enabled manner. Primary insurers and fronting carriers (fronts) backing these MGAs can use these as innovation triggers to observe and learn from, while also buying diversification exposure.
Alternative capacity is increasingly accessible through fronting carriers.
Fronts are important in the MGA market, contributing to each other’s expansion. Fronts are offering an alternative route for capacity, with active fronts providing a small proportion themselves and providing the remainder from other low-cost capital sources, e.g. from reinsurers or insurance-linked securities funds, which do not have licences to offer capacity directly. This extends the reach of capacity providers and improves capital available for MGAs. The US has exhibited growth in this area, with Europe expected to follow suit.
MGAs are attracting key underwriting talent.
The fast-growing MGA segment is increasingly backed by venture- or growth-oriented private equity capital. This has been key to attracting entrepreneurial talent from across the insurance landscape, offering underwriters an opportunity to add an equity compensation capability. This is tightening the already constrained availability of talent.

Market structure supports growth through M&A

Distribution providers have invested in MGA capabilities, generating c.45% of the revenue of the top 300 MGAs globally. However, a further c.45% is produced by a long tail of independent MGAs, indicating that there is still headroom for inorganic expansion and consolidation. This degree of fragmentation broadly holds across the more mature US and UK markets, indicating there remains potential for disruption and share gain (see Figure 3).

Concentration of MGA revenue 2022 (top 300 firms globally)

The attractive business fundamentals of MGAs (potential for high EBITDA margins, recurring revenue, low capital intensity, etc.) and their ability to gain share have resulted in an increasingly active M&A market, as a near adjacency to the broader commercial insurance broker M&A segment. In the more mature markets of the US and UK, EBITDA multiples have risen steadily over 2017-23 from c.12x to c.15x, albeit with significant spread dictated by their degree of differentiation (see Figure 4). Despite the high interest rate environment, M&A activity is expected to remain high, and the expected reduction in capacity available to MGAs due to the hardening of the market has not noticeably impacted growth.

Selected UK and US MGA* M&A deals' EBITDA multiples

Flash in the pan or a sustainable position?

The underlying drivers for growth in the MGA space are unlikely to be materially different in years to come — innovation continues to be a focus in insurance, brokers continue to explore capacity management capabilities and there continues to be availability of capital chasing entrepreneurial talent. While it is entirely possible that some specific failures may occur in the MGA space for a number of reasons, on balance it is our perspective that MGAs are here to stay and continue to be viewed as attractive complements to participation in insurance broking.

How L.E.K. can help

L.E.K. has deep expertise and experience working with clients across the insurance value chain, and we continuously support our clients with growth strategies and commercial and operational excellence projects. We support investors in identifying credible targets and growing companies with value creation strategies.

For more information, please contact us.