A raft of start-ups and scale-ups have taken off in the (re)insurance sector in recent years as management teams seek to take advantage of opportunities in the hard market. And a common theme amongst these ventures has been the decision to favour private capital over public listings when seeking financial backing.
The latest arrivals include newly launched Bermudian reinsurer, Vantage, and recent Lloyd’s entrant, Inigo, which are both backed by private equity capital. Meanwhile, last October, White Mountains poured $605mn of fresh investment into Lloyd’s insurer Ark to support its substantial scale-up, which included converting its Bermudian entity into a class 4 reinsurer.
One reason companies prefer to go down the private route is the procedures and expense involved for public entities. Public listing is often more expensive as companies must comply with stricter regulations, oversight and reporting requirements.
Of course, going public opens up to a much wider range of investors and an evergreen pool of capital, whereas in the private markets there is usually just one or a small pool of players involved.
And there could be other benefits to going public, too, according to Marius Strydom, chief executive officer at ALG.
“(Re)insurance companies are highly regulated entities that are exposed to onerous solvency and capital regimes,” says Strydom. “As such, it is desirable for them to have access to highly liquid capital markets and not to obtain a significant portion of capital from private equity/venture capital investors.”
However, because (re)insurance is a niche sector, the types of investors that are usually interested may be more willing to allocate to private funding, as it gives them more flexibility to match allocations to their investment horizons.
Seeking thematic opportunities
Romulo Braga, CEO of BMS Capital Advisory, says private equity and venture capital are “categorically” a good fit for (re)insurance ventures because these investors seek thematic opportunities led by experienced management teams with domain expertise. This often means companies benefit not only from capital, but also from strategic guidance and professional investment experience.
“A great deal of opportunities in the (re)insurance segment reside within private companies, ranging from insurance companies to risk managers/aggregators to associated service providers,” he says. “These private companies are looking to create and enhance shareholder value through strategic optimisation, operational synergies, and business efficiencies, all of which can be delivered by knowledgeable private equity or venture capital partners.”
Lauren Honeyben, counsel at Freshfields Bruckhaus Deringer, says the law firm is continuing to see a high degree of interest in the insurance sector from its financial sponsor (private equity) clients, covering a range of targets in the life, non-life, Lloyd’s and broker sectors.
And Freshfield’s clients are not alone. US private equity firm KKR recently acquired Goldman Sachs-backed annuities and life insurance group Global Atlantic, while in June last year, Carlyle completed its takeover of multiline legacy reinsurer Fortitude Re from American International Group. In November 2020, New York-based private equity firms Pelican Ventures Group and JC Flowers & Co revealed they were acquiring Ariel Re, a property and casualty reinsurer.
“Financial sponsors with capital to deploy are attracted by the solid growth potential on offer and, in some cases, the large asset pools for permanent capital,” says Honeyben. “Many also now have good track records of gaining regulatory approvals for acquisitions of (re)insurance companies in many jurisdictions around the world and have also been successful in exiting insurance businesses having made a good return.”
Investment horizons
But are their investment horizons compatible with the likely rate of growth in a (re)insurance business?
Braga says while one would expect the overall (re)insurance industry’s long-term growth to mirror overall global economy activity, private equity and venture capital typically focus on specific sectors of the market that are less capital intensive and have potential for higher growth.
“Additionally, because the (re)insurance industry is by definition subject to shock losses, such as the recent global pandemic and natural catastrophe, PE/VC investors are able to deploy capital opportunistically, which could lead to above-average growth and risk-adjusted returns,” he adds.
The compatibility of investment horizons depends on the fund that is investing, says Honeyben.
“Some funds with shorter horizons will be looking for faster growth from new business and premiums (which is more difficult in this prolonged low interest rate environment), and may also be interested in insurtech start-ups,” she explains.
Insurtechs are attracting more interest from venture capital funds in the early stages of funding rounds.
Braga says institutional investors have recently actively traded in the (re)insurance distribution and insurtech sectors – a trend “which should continue as the industry becomes more digitalised and efficient”.
For example, in March, AI-powered cyber insurer Cowbell closed a $20mn Series A funding round led by Brewer Lane Ventures, as it looks to scale its offering for continuous underwriting and closed-loop risk management.
Stumbling blocks
Investments in (re)insurance companies have, for the most part, delivered good returns to the financial sponsors and should continue to do so, says Honeyben.
These success stories have sometimes been driven by management’s interests being aligned with those of the sponsor – but it does not always work out.
“Stumbling blocks that are sometimes encountered relate to regulators’ attitudes to the amount of leverage that financial sponsors often want to put into insurers’ models,” she says.
In a boon for (re)insurance ventures, there is growing appetite from private capital providers for longer term relationships, which will create more strategic alignment between businesses and investors.
“We are also now starting to see some financial sponsors establish specific longer-term funds that are looking for a longer hold period for insurance companies, which is more suited to some (re)insurance and broker businesses,” says Honeyben.
However, others are sceptical that this is the best way for start-up (re)insurers to raise capital.
Strydom explains successful start-up insurance companies have large capital needs that can be ongoing and increasing, especially for those that deliver strong growth in premiums.
“Private equity or venture capital backers of insurance companies must have a very intimate understanding of insurance, sufficient capital available to not just fund the business at the outset but continue to fund it as it grows and must have a long-term commitment to the business,” he says. “This is a rare combination, and most start-up insurance companies would be better served by obtaining funding from capital markets or from insurance-funded or bank-funded incubators.”
