Despite these hurdles, Mark Bernacki (pictured), director of underwriting and chair of the alternative risk team at Amwins, remains optimistic about the continued growth of the delegated model.
“We expect a downward trend in terms of valuations going forward for some of these delegate models, but I’m still very bullish on the segment,” Bernacki said.
As CUO, Bernacki oversees the underwriting performance of Amwins’ delegated authority business. This includes investments in actuarial capabilities, claims, portfolio management and underwriting supervision.
“Investors like the segment because it’s a high free cash flow model and quite scalable, so while it’s going to be down compared to years past, I’d say it’s getting back to where the price should be for some of these goods,” he said insurance business.
What factors are influencing MGA and MGU valuations?
Limited capacity is the first major factor impacting MGAs and MGUs in today’s environment, particularly in the real estate catastrophe space.
“When you look at a prospectus for an MGA purchase, you typically see this hockey stick growth curve,” Bernacki said.
“I think this will cause investors to significantly challenge those growth assumptions as they look ahead, putting downward pressure on multiples and EBITDA. [earnings before interest, taxes, depreciation, and amortization] basis they are using for their valuations.
The increase in interest will also increase the cost of debt for MGAs and MGUs. One of the factors that drove the higher valuation of these companies was their ability to borrow capital at almost zero interest, Bernacki said.
But investors may soon look to other, less risky investment opportunities, again adding downward pressure on prices.
“If you’re doing a leveraged buyout deal and you start paying more than 12 times EBITDA on some of these transactions, it could lead to negative cash flow in the early years,” Bernacki said.
“That is something that investors will not tolerate.”
Finally, the potential for a recession or economic slowdown will likely lead to slower AMS growth than in previous years. Still, Bernacki gave several reasons for optimism.
“I think we will still be in an environment where entrepreneurial underwriters are starting to get frustrated with insurers, so talent will continue to move from the insurer to the MGA model,” he said.
While capital and capacity face more challenges, Bernacki noted “an evolution” in the way MGA capacity is built, enabled by the number of hybrid frontier markets.
“There are over 20 of these on the market that can provide paper and reduced balance sheet risk,” Bernacki said.
“It has helped bring reinsurance capacity to the delegated segments and absorb some of the capacity challenges.”
With the delegated model maturing significantly over the past decade, capital and capacity providers are now looking to MGAs and MGUs to take on niche underwriting and specialty segments, the CUO said.
‘Soft market’ for P&C not on the horizon
speaking to insurance business Talking about his predictions for the insurance industry this year, Bernacki also highlighted the ongoing difficult market in cat property.
Double-digit year-over-year rate increases for the past several years have been challenging for policyholders, particularly amid reduced capacity.
“It’s not going to be a tough market forever. But my personal opinion is that we are not moving into a weak market anytime soon,” Bernacki said.
“From an underwriting perspective, every year we have to expect at least one ‘unexpected’ event per season to keep pace with what we’re seeing,” he said.
“I don’t see any signs of weakening in the P&C market in the next 12-18 month period.
“It will be in a hardening state or, at best, flat for the foreseeable future.”
Despite this, racers will be able to overcome difficulties with a little extra diligence and a pinch of creativity. Bernacki encouraged brokers to “scour the entire market to find capital or capacity” or look to alternative methods of risk transfer, such as parametric insurance.
“I think being very open and creative in creating solutions for clients will be the most important thing for brokers,” he said.
“My second piece of advice is to be resilient and pick rocks to look for capacity, because especially in some of the larger risk segments, it will take multiple carriers to adequately serve the insurance needs in this market.”
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