Pat Ryan: Unique specialties
Rachel Dalton speaks to Ryan Specialty Group and Aon founder Pat Ryan about the need for something more than just entrepreneurial spirit when building an underwriting platform
The popularity of the managing general agent (MGA) model has yet to wane. The Managing General Agents’ Association (MGAA) put the number of MGAs in the UK this summer at around 300, bringing in £10bn in gross written premium.
In the past year, a number of firms have entered the MGA space. Willis Towers Watson backed former Acappella CEO David Thomas in his transatlantic venture, Innovisk. Meanwhile, rival Marsh & McLennan Companies, through programme manager Victor O Shinnerer & Co, acquired the MGA business of Icat, and Aon has its MGA business, Aon Underwriting Managers.
Outside the big players, smaller MGA operations are starting up or growing. Nephila-backed MGA platform Volante secured a $900mn multi-class capacity deal with three global carriers in June. In May, it emerged that Richard Brindle’s Fidelis attracted two new MGAs onto its Pine Walk Capital incubator platform. Berkshire Hathaway backed Texas-based managing agency Kemah Capital, run by former PartnerRe head of direct and facultative Dom Tobey. Acquinex, with capacity from Arch, launched in August last year, while Towergate unveiled a London market specialty MGA in the same month.
In the US, the picture is similar. The number of active MGAs has increased by 35% to 610 between 2011 and 2015, while the amount of premium written directly by US MGAs increased by 27% to $41.6bn over the same period.
The growth of MGAs is a by-product of the soft market, as carriers and brokers consolidate and individuals look to strike out on their own, according to industry veteran Pat Ryan.
However, entrepreneurial spirit alone is not enough to sustain a business, he adds.
“You read about companies that are backing start-ups and giving equity to underwriters and that’s all fine, but there has to be a reason why that underwriter is needed,” he explains.
“It can’t be just because they want to be an entrepreneur, they want to own equity and they have a lot of friends who have given them business over the years. That is not enough to build a sizeable business.”
And he should know. Ryan’s career has focused on growing sizeable businesses. He is the founder and was formerly the chairman and CEO of Aon, the broking giant that was formed following a merger in 1982 between his company Ryan Insurance Group and W Clement Stone-headed Combined International Corporation. After spending 41 years at the helm of Aon, developing it into the behemoth it is today, Ryan retired in 2008, and two years later founded Ryan Specialty Group (RSG), the company he now leads as chairman and CEO.
RSG specialises in wholesale brokerage, managing general underwriter (MGU)/MGA underwriting management and other specialty services to agents, brokers and carriers. Since its foundation, RSG has bought 31 businesses and launched 13 start-ups.
“We achieved scale, in both our underwriting and broking divisions; significant scale,” says Ryan.
“We’re the third-largest wholesale broker in the US, and the fourth-largest MGU, but, in terms of sizeable businesses, we’re growing much faster than anyone else.”
Accordingly, RSG’s M&A strategy follows a “disciplined pattern”, Ryan says.
“That’s finding companies that we fit together with culturally, that we fit together with strategically, and where we’re able to establish an agreement where both sides get a good, fair deal,” he says.
“I’m very proud of the fact that, of those 31 acquisitions, 31 of the principals are still with us, which means that people sold their business to us, with the intent to stay with it and help grow it and see what they had built coming to fruition because of being part of a bigger platform.”
Spoke and hub
Ryan says RSG is “agnostic” about whether it buys broking or underwriting businesses, however. To join the RSG stable, firms must have “unique specialties” and the potential to help the company expand its scope.
“When I say ‘expand scope’, that often means new product lines and new geography,” says Ryan.
“If you appropriately expand the scope, the scale will follow. As you expand the scope, more opportunities fall out of that.”
He points to RSG’s acquisition of Navigators’ insurance agencies in Sweden and Denmark in January last year as an example.
“We established ourselves in the Nordic countries, and with that success in professional lines came the opportunity to expand into other lines. We will be doing the same thing in other parts of Europe,” he says.
“In our US wholesale business, we started with what we called a hub strategy, where we opened up de novo in the major metropolitan areas in the US: Chicago, New York, Houston, Dallas, LA and San Francisco.”
Within six years, RSG began developing ‘spokes’ around these major hubs, Ryan explains.
“We are moving into markets that are smaller-sized cities. There are multiple cities in many of those states that are of interest,” he says.
Ryan adds that the focus in the US had been on expanding its binding authority businesses, having now obtained binding authorities in 50 states.
“The binding authority business also has the added benefit of being stickier business; it renews at a higher rate. That size risk tends to stay with the retail broker longer, and doesn’t get moved by the retail broker through markets as often as the larger risks do,” he says.
Part of RSG’s focus on binding authority business is to reduce costs through the use of technology.
“Binding authority business is going to be the first to consolidate the use of electronic trading,” says Ryan, who adds that RSG is already investing in the technology.
Specialise to survive
Given his long career in the sector, Ryan is well aware of the particular challenges that MGAs or MGUs bring. He argues that specialisation and a strong focus on MGAs’ fiduciary duty to carriers are necessary in order for them to survive.
“MGAs have burned markets; there’s no doubt about that,” he says. “If you want to be in that business long-term, you have to start with the fact that you’re a custodian, you have a fiscal responsibility and moral responsibility to the capital provider to produce profitable business for them. Your first allegiance cannot be the growth; it has to be the profitability.”
Growth is necessary, he says, but this can only be done by striving to increase the amount of profitable business on the books and not by underwriting risks for the sake of achieving volume.
“We are zealots on that and as a result we have very strong support from insurance carriers giving us the pen.”
While RSG has bought a number of businesses with long histories, Ryan reiterates that the lifespan of an MGA is often “under ten years”.
The point at which MGAs fail is when “there hasn’t been a reason why people should not deal directly with the insurance carrier”, he adds. “That really comes from developing an expertise in a product and/or an industry. We have specialists in construction, healthcare, property and professional lines, and these people all have different skills and, in some cases, they are very strong go-to markets because there aren’t that many competitors.”
Ryan maintains his long-held belief that brokers that have both a retail and a wholesale operation face a fundamental conflict, noting that in the past six years a number of retailers have disposed of their wholesale operations.
“There are three significant retailers in the US that own wholesalers and the others have all either never had one or have disposed of it. Those three would argue passionately that we’re making too much out of that conflict,” he says.
“Two of the big three brokers are heavily focused on binding authority. In binding authority, the smaller broker doesn’t really feel the same competitive conflict issue that larger brokers do. But outside of their binding business, when you own a wholesaler, it’s hard to expect that your competition is going to be anxious to feed you the business.”
The next phase for RSG is to create a reinsurer to offer capacity to the primary paper providers of its MGUs – a plan that was revealed by sister publication Insurance Insider in June.
Ryan confirms the plan is under way, albeit, he says, it is “in the very early stages”.
The new project is about “eating your own cooking” in terms of sharing interests with carriers, he adds.
“We’ve had carriers who have asked us to get what they would call a better alignment of interest with them. We are at risk with them and ergo they are more comfortable that we’re not going to let growth get in the way of profitability,” he explains.
He says RSG’s dealings with carriers more widely will not be coloured by whether or not they support the reinsurance MGU.
“We will say: ‘If you don’t want to participate, we’re still going to do business with you.’ There’s going to be no discrimination in that,” he concludes.
This article was first published in the Autumn 2018 issue of Insider Quarterly