Despite all of the economic challenges triggered by COVID-19 and the sustained low interest rate environment, which has depressed investment yields worldwide, investors continue to turn to the insurance industry to source and support attractive merger and acquisition (M&A) deals.
One area of the marketplace that is garnering particular attention is the insurtech space. According to Vikram Sidhu, partner at Clyde & Co, there has been “robust deal activity” on the insurtech side of the business in 2021, with investors putting their money behind tech firms with proven business cases. They’re also backing growing insurtechs who are seeking M&A opportunities themselves.
“Investors are coming in more and more to back the insurtech companies,” said Sidhu. “They’re arming them with funding for their deals. And we’re seeing that in a lot of different spaces [within the insurance industry] where investors continue to want to fund different kinds of deals.”
The type of investment capital coming into the insurance industry amid these uncertain economic times has “not changed dramatically,” according to Sidhu, but there have been some growing trends over the past year or two.
“There are a lot of venture capital funders, who have been coming into the insurance space, but more via the managing general agents (MGA) and insurtech start-ups,” he said. “That, to me, is an example of a type of investor that historically wouldn’t have been in the insurance space because that’s just not the play they were in.
“Insurance tends to be [an industry] where [investors] have to go in for the long-haul, but the backing of a promising insurtech business, and doing so for a focused period of time, has ended up being an entry into the insurance industry for venture capital players, or an expansion of their existing play in insurance.
“That’s not a story that is isolated to 2021. We’ve seen that trend going on an upward slope for the past three to five years. That continues, and to me, that’s interesting to see.”
Aside from insurtech, private equity players continue to remain very active in the intermediary space in both Canada and the United States. Sidhu said it’s worth noting that neither the insurtech nor the intermediary side of the business are particularly capital intensive. They typically do not include underwriting operations that require a lot of parked capital, and as such, they make attractive investments for venture capital and private equity players.
Both private equity investors and venture capital funds are looking to take advantage of the current capital market and spend the money they saved due to the pandemic. The hard insurance market has also geared investors’ attention towards intermediaries because premiums are higher, and more commission is coming into the space. Related to their interest in insurtech, investors are particularly attracted to brokerages that are innovating, embracing technology, and bringing new products to the market on a regular basis.
As for the insurance companies themselves, Sidhu said they “still have a fair bit of cash” that they can use for strategic deals as and when they come up. Although, many organizations are being “understandably cautious,” the Clyde & Co partner added. “They’re not just going on buying sprees; insurance companies tend to be cautious and strategic,” he said. “Also, in the run-off space, we continue to see a lot of major investors – pension funds and so on – that have come into the industry to back major acquirers of legacy books of business.
“And then if we step back and look at [the industry with a 30,000 foot view] there are so many different aspects of insurance that we’ve not built up, and opportunities for investors to find their niche – so much more so than they could have 10 or 15 years ago. From that perspective, the interest level remains high.”
