Growth strategies through MGAs:
Opportunities and challenges
Insurance companies write policies directly in
areas where they can achieve volume and have
the knowledge and experience to make effective
underwriting decisions. Large property and casualty
insurers tend to focus on products that have high
volumes, but if a customer needs insurance for a
more uncommon reason — or for any reason outside
the insurer’s major business lines — then managing
general agents (MGAs) and program administrators
(PAs) can help bridge the gap.
MGAs and PAs are wholesalers who can offer
specialty types of insurance outside the main lines
offered by insurers. The insurers may not have the
in-house expertise to handle these products, so MGAs
are brought in to properly underwrite the risks,
service the policies and handle claims. In some cases
the insurers may have the expertise for a particular
line of business; however, they may look to expand
their coverage into other regions or territories where
the MGA has a strong network of brokers. When an
insurer works through an MGA, the MGA performs
such functions as subcontracting with independent
agents for placement of business, negotiating
commissions, handling claims, issuing policies,
processing endorsements, collecting policy premiums,
or being responsible for completion of regulatory
reports for state or federal agencies.
Insurance companies don’t usually own PAs and
MGAs — at least not initially. They most often start a
relationship by partnering on specific types of policies,
using a service-level agreement (SLA) to define the
business agreement. In these types of arrangements,
premium and commission terms can vary; however,
the premium is generally a 75/25 split, with 75% of
the premium going to the insurer (who takes on 100%
of the risk) and 25% going to the PA or MGA.
Growth strategies through MGAs: Opportunities and challenges
In a recent interview with Rough Notes magazine,
Mike Schofield, president and CEO of insurance
agency MiniCo, said, “There are many, many classes
mainstream carriers don’t have an appetite for.” He
also notes: “The agent can access a heightened level
of expertise through MGA programs. Expertise and
focus add significant value. Many times, products
the retailer can offer through an MGA are actually
enhanced, because of these specialty coverages.1”
Some examples of policies where the average insurance
company wouldn’t necessarily have an established line
could include such things as fine instruments, highend vessels, construction, and high-value possessions
like jewelry or fine art.
A celebrity’s legs have been insured more
than once
Every few decades, a movie or television studio gets
the idea to insure a pretty celebrity’s legs. In the 1940s,
it was Betty Grable. In the 1970s, it was Suzanne
Somers. Recently it was Taylor Swift — in a recent
article in the New York Daily News, it was reported that
she is insuring her legs for $40 million, saying “the
singer has reportedly taken extreme measures to make
sure that she doesn’t lose everything if she was unable
to dance on stage.2”
MGA and PA activity is increasing
Insurance companies are working with MGAs and
PAs more and more over the past couple of years.
We’ve seen the pace increase dramatically for some
of our clients, with some acquiring or entering into
SLAs with multiple MGA or PA partners across
various product lines. A recent InsuranceNewsNet.
com article reported on an industry study by
Conning & Co., saying: “Fixed-income portfolios
have been hurt by low rates, declining propertycatastrophe 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.3”
Grant Thornton LLP believes the pace is increasing
for several additional reasons, including:
• It’s a good time to be doing acquisitions. Low
interest rates mean insurance companies can
acquire specialized types of business at a relatively
cheap price.
• These products can be more profitable. Adding
these higher profits to a property and casualty
insurer’s bottom line is important in times of
heavy price competition in traditional markets.
• People are doing better economically. Customers
have rebounded along with the economy and are
buying bigger-ticket items that need to be insured.
1
Willis, Dave. “Partnering With an MGA: Do Your Homework,” Rough Notes, May 2011. See roughnotes.com for more information.
2
anMetre, Elizabeth. “Taylor Swift Insures Legs for $40 Million Ahead of Her World Tour: Report,” New York Daily News, March 9, 2015. See nydailynews.com
V
for more information.
3
Tuohy, Cyril. “For MGAs, a Seller’s Market,” InsuranceNewsNet.com, April 28, 2014. See insurancenewsnet.com for more information.
2 
Growth strategies through MGAs: Opportunities and challenges
CASE STUDY
Using MGAs to expand
A Grant Thornton insurance client expanded their
property and casualty line of business by insuring
high-value homeowners (HVHO) through program
administration agreements with several MGAs. The
client was seeing favorable loss ratios in their HVHO
line of business, so they considered expanding their
footprint. This client’s MGAs have traditionally issued
HVHO policies in coastal states such as Florida, North
Carolina and South Carolina, but over the past two years
they have engaged us to perform due diligence reviews
of additional MGAs and PAs into other geographic
areas such as Alabama, Massachusetts, New Jersey
and Rhode Island. We are also seeing this trend with
other clients and expect this to continue, especially as
insurance companies look to grow their books through
diversification into nontraditional lines of business.
MGA and PA premium growth is outpacing
traditional insurance lines. According to a piece in
InsuranceNewsNet.com, MGAs have had higher
premium growth than property/casualty over the
past 7 to 10 years, outpacing the broader market by
5.1 points in total. “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 Conning & Co. report said.4 Combined ratios are
a measure of an insurer’s profitability, taking the sum
of incurred losses and operating expenses measured
as a percentage of earned premiums, with lower
combined ratios indicating higher profitability.
MGA deals
Insurance industry M&A activity was extremely busy in
2014. According to M&A advisory firm MarshBerry5,
there were 220 acquisitions in 2014 for the total U.S.
broker sector, with 49 of them in the much smaller
sector of wholesale brokers and MGAs and managing
general underwriters. This disproportionate amount of
wholesale deals (22% of the deals being made by a
small percentage of the industry) demonstrates that this
sector is very active. Some examples include:
• In 2015, American International Group acquired a
controlling stake in NSM Insurance Group.
• In 2015, Arthur J. Gallagher (AJG) acquired UK MGA
Evolution Underwriting Group.
• In 2014, Capita Insurance Services completed
a transaction to finance the startup of Pardus
Holdings by taking a minority stake.
• In 2014, AJG acquired Florida-based MGA
Insurance Group.
• In 2013, AmWINS Group acquired Gresham &
Associates, an MGA that placed $340 million in
premiums in 2012.
• In 2012, RLI Corp. bought Rockbridge Underwriting
Agency, a specialty medical malpractice MGA.
• In 2012, AmTrust Financial Services bought
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.
• In 2011, broker Brown & Brown bought Arrowhead
General Insurance for $400 million.
4
Ibid.
5
MarshBerry. “Specialty Distribution: Pricing Retail vs. MGA,” The Dealmaker’s Dialogue, December 2014. See marshberry.com for more information.
3 
Growth strategies through MGAs: Opportunities and challenges
Potential growth
When insurers decide to expand their product
offerings via PAs and MGAs, they can expand both
sides of the business. Larger insurance companies get
the specialized business of the acquired MGA, and
then can use their established infrastructure to help the
MGA achieve scale and get their services in front of a
wider audience. Also, an MGA’s smaller size, coupled
with its knowledge and expertise, enables them to be
more responsive to customer questions/needs, which
can be an advantage.
Other significant advantages that can come from
working together include:
• Expanded geographic reach. An easier way to enter
new geographic markets is to partner with MGAs
and PAs that are already doing business there.
• Expanded products and services. Insurers can
focus on their core products while adding to their
product lines through MGAs.
• A
ccess to new business classes. Insurers get
access to niches that it might not make sense to
pursue on a large scale due to thinner markets,
higher risk of exposure, or a lack of experience
and marketing depth.
• Access to expertise and industry knowledge.
It takes money and time to build profitable
products, and partnering or acquiring them can
be more cost-effective.
• The ability to offer tailored products. An MGA’s
specialized experience allows the insurance
company to confidently price its product offering
based on a better understanding of the risks
involved in that line of business; also, a tailored
product will meet a customer’s specific needs.
4 
CASE STUDY
Geographic growth
After Grant Thornton performed a due diligence
review, our client executed a services agreement with
an MGA. Using their networks and relationships, the
client explored writing general liability insurance for fire
suppression and roofing contractors. Since the MGA
is licensed in all 50 states and has a deep network of
brokers, our client was able to quickly execute business
in multiple geographic areas. The partnership allowed the
client to expand its products and services, and increase
its premium revenues from this one partnership by
approximately $4 million. The MGA is now forecasted to
generate net premiums of more than $6 million in 2016.
Mitigating risk
Insurers considering partnering with or acquiring
an MGA or PA must be aware of potential risks and
exposures, and take steps to mitigate them. These risks
and exposures include:
• Control over who is actually doing the work.
MGAs or PAs may subcontract substantial
portions of the work or perform tasks offshore,
where different regulations may be driving their
behavior. If the insurer is not aware of when this is
occurring, risks can multiply.
• Risk to reputation. Insurers build their business
and reputation for quality over a long period of
years. If their customers are not well-served and
complain publicly (or privately), the insurer can
ultimately lose business.
• Reporting issues. Without adequate controls
in place at the MGA as well as monitoring and
oversight controls by the insurance carrier, the
insurer is relying solely on the information
provided by the MGA or PA. If there is inaccurate
or late reporting of results, the insurer’s reporting
will in turn be inaccurate and may affect
management decisions.
Growth strategies through MGAs: Opportunities and challenges
To mitigate potential costs and exposures, insurers
should conduct a thorough due diligence review prior
to entering into an agreement with an MGA or PA.
The insurer’s underwriting or programs department
should be involved in the due diligence process, and
the finance and accounting, actuarial, claims, and
compliance departments should participate in the
decision-making process.
If the insurer decides to move forward after the initial
due diligence by the departments listed above, then a
formal financial, controls and IT due diligence audit
should be performed by the carrier’s internal audit
department or by an independent firm.
The relationship between the insurer and the MGA
or PA is defined in the SLA. A successful SLA defines
key provisions, duties and oversight. It should include
such critical terms as a right to an audit clause, access
to systems that show underwriting and claims activity
and reporting, and the detailed responsibilities of
the MGA or PA. The SLA should also clearly spell
out key terms like underwriting authority limits
and authority and controls surrounding premium
collections, remittances to carriers, authorization
of claim payments, and the level of reporting to the
insurance carriers.
Further, the SLA should include provisions that
define how and how often insurers can monitor the
MGA or PA’s operations and books, and it should
include a schedule of periodic audits by the insurance
company’s internal audit department or by an
independent firm.
6
Moving forward
Many insurers have found that it’s a good idea
to partner with an MGA or PA before buying
one. It’s an efficient way to assess whether the
agreement is leading to the right volume and includes
complementary products. In the right deal, the
advantages include more than just growth on both
sides — MGAs and PAs also benefit from partnering
with or getting acquired by insurance companies via:
• Cheaper capital. The MGA or PA gets access to
much-needed working capital to achieve scale.
• Better financial reputation. The right deal
can demonstrate strong financial backing and
will reflect the partnering/acquiring company’s
credit rating.
• Improved reputation with regulators.
The right deal can give regulators greater comfort
(by association) of the size and viability of MGAs
or PAs.
Customers may benefit too. In a recent interview in
Risk & Insurance magazine, Scott Burton, a partner
with Sutherland, Asbill & Brennan in Atlanta, said,
“Ultimately, the effects of consolidation on resulting
scale and the continued gains in efficiency and
expertise should result in better rates and terms for
many clients.6”
Ireland, Antony. “Pros and Cons of Specialty Consolidation,” Risk & Insurance, May 6, 2015. See www.riskandinsurance.com for more information.
5 
Growth strategies through MGAs: Opportunities and challenges
Acquiring an MGA versus partnering
Conclusion
After a typical period of partnering, insurers start
to consider ways they can keep 100% of the profits
while permanently diversifying their product
offerings. In fact, staying separate means the insurer
is cutting their profit margin by the percentage of
the split, and also might be giving up even more
due to the fact that MGAs can command higher
commissions and fees.
As insurers look to increase their profits in a time
of intense competition, as well as diversify their
product offerings and cross-sell to existing customers,
partnering with or acquiring an MGA might make
sense — MGA products might be the entry point
that gets a customer in the door, providing later
opportunities to cross-sell other lines of insurance.
According to a recent article in IBISWorld 7, “The
ability to cross-sell products to existing customers
increases revenue in the short term, but also tends to
improve client retention rates, providing a long-term
boost to an insurer’s policies in force.”
If the relationship with the MGA or PA is working
well, the next step may be acquisition. Acquiring
MGAs or PAs provides insurers with more control
over the business that’s being acquired, plus
purchasing the MGA can help build volume and
allows the insurer to offer access to niche products
their customers may want. The insurer not only gets
100% of the profit, but it also gets greater ownership
of more diversified revenue streams.
Thinking about acquiring or partnering with
an MGA? According to Rough Notes magazine,
these are some of the questions you should
be asking8:
• What knowledge does the MGA bring to the table?
• What is its specialty?
CASE STUDY
• How long has it been writing the class/segment?
Acquiring can appeal to both sides of
the transaction
• What does the MGA provide that is more valuable
• What relationships does it have within the segment?
than markets that you could otherwise access?
• What is the quality of the product and services it offers?
A Grant Thornton client saw an opportunity to acquire
an MGA that they had previously engaged to sell a
specialized type of health care coverage. The MGA
was a startup operation and, as they began to rapidly
grow, they did not have the organizational structure
to continue to grow organically. Our client has the
expertise to support operations and back-office
functions in order to allow the management to focus on
the continued growth of the business.
• Are other agents who’ve done business with the
MGA satisfied?
• What is their general marketplace reputation?
• What is the MGA’s claim-handling reputation?
• How long has the MGA been writing with the carrier?
• How many carriers has the program been with?
• If the program has changed carriers, why?
• Does an agency need to be appointed before
submitting business?
• What technology exists to drive ease of
doing business?
• How is billing handled? Is it agency billed? Direct
billed? What premium finance options exist?
• What other services after the sale does the MGA offer?
• How are claims, loss control, audits, etc., handled?
7
IBISWorld. Global Direct General Insurance Carriers: Market Research Report, April 2015. See www.ibisworld.com for more information.
8
Willis, Dave. “Partnering With an MGA: Do Your Homework,” Rough Notes, May 2011. See roughnotes.com for more information.
6 
Growth strategies through MGAs: Opportunities and challenges
How Grant Thornton LLP can help
Contacts
Looking to an independent firm for specialized
services related to evaluating, partnering with, or
acquiring an MGA or PA may be the most efficient
and thorough solution. Our professionals include
results-driven former insurance executives who
have broad industry knowledge coupled with deep
functional and technical experience in such areas as:
John Swanick
Partner, National Insurance
Advisory Practice Leader
C +1 610 246 2156
T +1 215 814 4070
E [email protected]
• Audit
• Internal audit
• Due diligence and transaction advisory
• Valuation
Joe Hayes
Senior Manager Business
Advisory Services
T +1 215 376 6005
E [email protected]
Chris Richard
Manager Business
Advisory Services
T +1 617 848 4863
E [email protected]
This content is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information about the issues discussed,
contact a Grant Thornton LLP professional.
Connect with us
grantthornton.com
@grantthorntonus
linkd.in/grantthorntonus
“Grant Thornton” refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not
a worldwide partnership. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another
and are not liable for one another’s acts or omissions. Please see grantthornton.com for further details.
© 2015 Grant Thornton LLP  |  All rights reserved  |  U.S. member firm of Grant Thornton International Ltd