The MGA-carrier hybrid strategy

News this morning that Ambac has agreed a deal to buy MGU Xchange as part of its two-pillar fee-business and carrier platform strategy is the latest example of evolution in the US program sector as distribution players look to access stable sources of capacity.

Stonybrook Capital acted as exclusive financial advisor to Xchange, while UBS Investment Bank acted as financial advisor to Ambac on the transaction.

Ambac – the rehabilitated financial guaranty insurer – earlier this year began the process of pivoting its carrier business towards the specialty program market with the repurposing of its admitted Everspan Insurance Company subsidiary as a fronting carrier that will retain risk on programs it provides its paper to.

The group has hired seasoned program and MGA executives in Wyatt Blackburn and Steve Dresner and has also set up a non-admitted carrier Everspan Indemnity Insurance Company with both insurer subsidiaries domiciled in Arizona.

But unlike many of the other hybrid program fronting carriers launched in recent years that are partnering with third party MGAs and MGUs, the group is building an underwriting business inhouse that will see it acquire and build organically.

The two-pillar structure means that Ambac will provide access to permanent capacity to MGAs that join its underwriting platform at a time when shifting appetites in the space from carriers has proved challenging for program administrators in the last couple of years.

It has the potential to earn fee income for fronting on third party MGA business for reinsurers, as well as the economics of its own underwriting platform including the business that it retains on its balance sheet.

Emerging trend

Of course, Ambac is not alone in this strategy, as other players look to better align the interests of MGAs, fronting carriers and reinsurers looking to access program business.

Other developments this year have included Align Financial Holdings and its move to build out a carrier platform with the acquisition of National Lloyds and American Summit under the new umbrella of ReAlign Capital Strategies. The group has since added an E&S carrier.

PE-backed program and MGA platform AFH also manages program underwriting and claims admin services for the new carrier platform and owns MGUs including Align General and Catalytic.

Also this year transactions including Hippo’s acquisition of Spinnaker and Orchid’s joint venture with Homesite to create a reciprocal exchange insurer have highlighted the trend for MGUs to seek access to balance sheets – with several further examples in the insurtech space.

And this week, this publication reported on Accelerant’s launch of a US carrier platform with an A- AM Best rating and a series of high-profile hires in the program space.

The Accelerant model is different, but it also seeks to closely align with MGAs and MGUs to provide long-term capacity backed by its panel of reinsurers and with significant retention on the programs it writes.

In a hardening insurance market where traditional carrier appetite for program business continues to shift, the trend for closer relationships between hybrid program fronting insurers and MGUs is likely to continue into 2021 and beyond.