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March 25, 2021

Investment Mania: Understanding Why

Summary:

Not only is capital abundant, but the pandemic and insurtech maturity kicked up the pace of takeovers and IPOs. There are no signs of slowing.

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The past six to 12 months in insurance have seen a historic level of activity for mergers and acquisitions, new investments and public offerings. It seems like every type of entity in the insurance world has been swept up.

The M&A trend in the distribution space accelerates. Insurtech investments were at highs in 2020 and picked up steam throughout the year; that trend continues into 1Q21. Initial public offerings (IPOs) and SPACs (special purpose acquisition companies) are being used as vehicles for investment by incumbents and startups alike.

A few prominent examples:

  • Hippo is merging with Reinvent Technology Partners Z via an SPAC that values the company at $5 billion.
  • Bold Penguin was acquired by American Family Insurance in a deal with important implications for the small commercial lines space.
  • Incumbent tech company CCC Information Services is going public via an SPAC that values the company at nearly $7 billion.
  • Chubb offered to buy the Hartford for $23 billion.

And these are just some of the deals in the first quarter of 2021! IPOs of Root Insurance and Lemonade and multiple $100 million-plus investment rounds in tech companies have occurred during the pandemic, not to mention a huge M&A wave in the agency marketplace.

It is easy to document the “what” (i.e., the list of transactions in various categories). However, it may be more useful to explore why this flurry of activity is underway… and why more is likely to come.

Naturally, primary reasons are the ready availability of large capital and the eagerness of investors to deploy their funds to capture growth. The rebound of the markets after the initial pandemic drop has resulted in huge amounts of cash sloshing around the system looking for a home. During these periods, some entities always see an opportunity to cash out, while others see possibilities to pick up strategic assets and, in some cases, immediate revenue streams accretive to earnings.

But there is more going on here than just the financial transaction and ROI parts of the equation. There are two other factors at work that, when combined with the financial climate, create a perfect storm for investment: insurtech maturity and the pandemic.

Insurtech Maturity

In the first days of the insurtech movement (early 2010s), there was much talk of disruption and revolutionizing the industry. Many in the industry dismissed this talk as hyperbole, and the early entrants often had little impact on the industry. But as the movement matured, leading companies gained momentum via partnering and a deep industry experience to address critical industry pain points. Moving into 2020, the insurtech movement had become a real catalyst for industry transformation, and scores of companies were demonstrating their potential, not only to affect the industry but to continue on a fast growth path.

See also: Insurance Outlook for 2021

Pandemic Implications

The second factor was the pandemic. The insurance industry was collectively on the path to digital transformation. Even before the pandemic, many industry veterans thought that insurers were moving faster than ever to inject innovation into their organizations and spread digital activity across the enterprise. Enter the pandemic and the resulting lockdowns, work-from-home mandates and dramatic shifts in everyday life and work patterns. Insurers quickly discovered the digital gaps that needed to be addressed to enable remote digital interactions with policyholders, agents, employees and claimants. In addition, the need to accelerate the digitization of operations, increase the levels of straight-through processing in underwriting and claims and hasten the automation of tasks was underscored.

To address these requirements and compress digital roadmaps into shorter timeframes, insurers and distributors alike took three actions:

  • They reprioritized internal projects and refocused resources.
  • They sought insurtech solution partners to help them deploy solutions and fill the digital gaps faster.
  • They looked for acquisitions that would help them scale faster and bring new capabilities to the enterprise.

All these factors and the actions being taken by insurers are likely to continue through 2021 and beyond. To those who think the investments and M&A activity will slow now that the prospect of getting past the pandemic is pending – think again. If anything, digital transformation and the uber-competitive environment will continue to result in blockbuster headlines as the industry is reshaped.  

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About the Author

Mark Breading is a partner at Strategy Meets Action, which helps insurers develop and validate their IT strategies and plans, better understand how their investments measure up in today’s highly competitive environment and gain clarity on solution options and vendor selection.

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