6 August 2024

There were no signs of a slowdown in the fronting market in 2023 as the sector’s premium volume hit north of $15bn, with the 27 percent growth rate supported by underlying MGA trends, demand for capacity, and continued expansion of the E&S segment, according to Conning.

The $15bn premium volume is somewhat short of the fronting market’s actual size, Conning noted in a newly published report.

“The actual size of the fronting market is greater than our reported amount, as several participants do not disclose their fronted premiums,” Conning said in ‘Fronting sector: more complex than meets the eye’.

All but two of the 19 fronting carriers tracked by Conning in the study grew their direct premiums written in 2023.

Individual growth rates varied widely among the fronts, Conning noted, with Sutton National leading the pack after it expanded by over 150 percent in 2023.

Fronting carriers that booked growth of more than 50 percent last year were Transverse, Redpoint, Southlake, Everspan, Palomar, Concert and Obsidian, according to Conning.

Q1 figures suggest growth will continue

The growth seen last year has continued into 2024, with premium volume up 26 percent year on year in Q1 2024.

“If the fronting market were to maintain a 26 percent growth rate for the full year 2024, total premiums could approach $19bn,” Conning said.

“This is a possibility, but a $17bn to $18bn fronting market for 2024 seems more likely.”

Growth in the fronting market is closely tied to the fortunes of the MGA market and the expansion of that sector. MGA premium volume grew by 13 percent in 2023, according to Conning.

The E&S market is another good barometer for the fronting market. That is because approximately 54 percent of fronting premiums flow through the surplus lines channel.

“Total US E&S premiums grew at a very strong 19 percent rate in 2023,” said Conning.

“E&S premiums grew by 10 percent in the first quarter of 2024, still strong growth, albeit a deceleration from 2023,” it added.

Conning’s data shows that fronted premiums accounted for 20 percent of non-crop MGA premiums last year, and the expectation is that will increase in 2024 based on figures for Q1 2024.

As evidence of the MGA market’s growing relevance to the fronting sector, as recently as 2020 fronted premiums totalled only 12 percent of total non-crop MGA premiums.

Limited M&A continues

While many market commentators have suggested that the growth of the fronting sector would result in consolidation among its carriers, that has to date failed to materialise.

One notable deal was the sale of Accredited to private equity firm Onex Partners, which was completed in June.

“Closing of this transaction was a positive development for the fronting sector, in our view,” Conning said.

“It was also a positive for Accredited, as the deal removed it from the cloud and uncertainty associated with its former parent Randall & Quilter,” it added.

There has been little else in the way of deals within the fronting market, however, a state of affairs which suggests two possibilities, acording to Conning.

“One is that the Vesttoo fallout remains an overhang for investors/buyers, and two is a valuation gap between buyers and sellers,” it said.

In the wake of the Vesttoo collateral scandal, Conning said “we expect buyer diligence is heightened, everywhere from reinsurance recoverables to risk management practices”.

“The fronting universe is heavily reliant on collateralised reinsurance and, as we have said previously, not all collateralised reinsurance is the same,” Conning noted.

“We suspect this could be a significant diligence issue,” it added.

Fronting carrier business model evolving

“We suspect that the realities of the changes in the fronting business model have set in,” said Conning in relation to valuations.

The fronting carrier business model “has shifted”, Conning said, “and is more complicated than initially thought”.

Indeed, Conning believes the fronting carrier valuation metric has evolved from being based on earnings to now being based on book value.

At the same time, Conning noted that fronting company retentions are generally on the rise owing to reinsurers’ demands for greater alignment.

“As a result, the economic model is shifting from fee-based (fronting fees) to one that more closely resembles a specialty insurer,” said Conning.

At some point, Conning said buyer/seller dynamics “need to and eventually will reach an equilibrium”.

“However, it is safe to say the sale of Transverse to MS&AD at 3.7x surplus will remain the high-water mark for fronting transactions,” it added.

View this article here: https://www.program-manager.com/news/conning-fronting-market-grows-27-in-2023/

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