Private equity-backed deals in the insurance sector have been proliferating this year, and Lovell Minnick Partners has been active in the sector. In January, the Philadelphia private equity firm invested in Warner Pacific, a Westlake Village, California-based company that provides insurance agents with sales assistance, innovative technology and back-office support; Warner has made numerous add-ons, among them Beta Health in June. In October, LMP added insurance industry veteran Ron Austin to its advisory council; Austin previously served as president of former LMP portfolio company Worldwide Facilities. PE Hub caught up with partner Jason Barg to discuss LMP’s approach to the insurance industry as well as trends driving deals in the sector.
What is LMP’s investment approach in the insurance sector?
The ecosystem around insurance carriers is an important focus for us and has been for many years. We invest in the broad insurance ecosystem but not in carriers directly. Within the insurance sector, we invest in three broadly defined buckets – insurance services, insurance distribution, and insurance technology. Given the complexity of the insurance industry, carriers rely on networks of third-party providers that assist in everything from distribution to claims and from specialty services to data and software. We seek out investment opportunities that are providing carriers with these types of solutions and doing so in a way that is differentiated, best-in-class, and resilient.
How is the current macroeconomic environment shaping your investments?
We look closely at the underlying health of the clients that our portfolio companies and prospective portfolio companies serve and also look at the clients’ clients. For us, that means we are looking at the strength of [property and casualty] carriers and healthcare carriers, and to a lesser extent the life segment. If you look at the P&C carriers in this environment, they tend to be very resilient. P&C insurance is not a discretionary spend; for the most part, it is a mandatory spend. Carriers are still selling policies in this inflationary environment and the P&C side of the business is one where they have the ability to reprice their policies on a more frequent basis, often annually. If you would like to take it even a little deeper to the buyers of insurance, the backdrop that we are all living in right now has a lot of risks around it. There is a lot going on in the world, and insurance plays a very critical role in keeping the financial system on its tracks.
How do events in the world come into play? How do they shape your approach?
There are many challenges and risks in the world. Just some examples are the conflict in Eastern Europe, cyber-attacks on a frequent and unrelenting basis, and unpredictable weather conditions. Insurance is a key risk management tool. It’s not something that a company or an individual is likely to pull back on. It’s something that they require.
What other interesting trends are you seeing in the sector?
Insurance companies are looking very deeply at how to invest in technology and how to ensure that they are innovating. Carriers see strong competition for clients, and they want to differentiate, be it on distribution, underwriting, or service. Carriers often look to invest in technology or partner with technology and data providers to ensure that they are staying current or, better yet, getting ahead.
Let’s talk about the battle for talent, it’s one of the pinch points in the financial services sector. How is it affecting PE investments in the insurance sector?
Carriers and service providers have a great need for labor, talent and resources to innovate. We are fortunate to work with some great leaders in this space and we have collaborated with them to create attractive and innovative cultures with economic incentive plans that have led to strong recruitment and retention across talented workforces. Many of our companies are also successful acquirers and have brought terrific leaders and personnel into the family by means of M&A.
In terms of valuations, we have heard reports about wide variances between the ask and bid. What are you seeing?
Again starting with the clients, insurance carriers – particularly P&C carriers – have held up really well. If you even look at the public market on the insurance side, it’s been a sector that has held up relatively well for the reasons mentioned previously. That healthy dynamic extends to the [profit-and-loss]-driven companies in the space too, and we believe there are long-term tailwinds in the sector.