SPAC-Mania, M&A, and InsurTech Investment: Understanding the “Why”

M&A

The past six to twelve 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 in this trend. The M&A trend in the distribution space accelerates as it continues. InsurTech investments were at all-time highs in 2020 and picked up steam throughout the year, and that now 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.

SPAC blogA few prominent examples:

  • Hippo is merging with Reinvent Technology Partners Z via a SPAC vehicle that values the company at $5B.
  • InsurTech 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 a SPAC that values the company near $7B.
  • As of this writing, Chubb is rumored to be in talks to acquire The Hartford in a deal valued at $23B.

And these are just some of the deals in the first quarter of 2021! IPOs of Root Insurance and Lemonade, and multiple $100M+ investment rounds in tech companies have occurred during this pandemic period, 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, it is always true that some entities 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 impact the industry, but to continue on a high growth path.

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 out 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 that think the investments and M&A activity will slow down now that the prospect of getting past the pandemic is pending – think again and fasten your seatbelts. 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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