COVID-19 could drive private equity-driven M&A in insurance sector

Q: “An insurer may act as a safe haven for private equity firms, offering a more stable investment opportunity when pitted against other industries experiencing wide-spread supply chain disruption.” Ravi Arps, managing director, Stonybrook Capital.

Once investors can evaluate the market impact, deal activity should regain momentum.

The impact of COVID-19 means that it is market uncertainty that poses the biggest threat to M&A activity. With volatility in the equity markets making it increasingly difficult to determine cost capital, the current landscape is hardly conducive to deal activity.

“I’ve been in discussions over the past few days and in light of the current environment, many are putting discussions on hold. It’s not that they think their company is in trouble but there is a general unease and nervousness in the air,” Ravi Arps, managing director, Stonybrook Capital, told Intelligent Insurer.

If the virus causes companies’ profits to decline, both through underwriting losses and as a result of zero-bound interest rates putting pressure on insurers’ earnings, then this could impact M&A. What’s more, buyers typically react quickly to market changes and they could lower their offers. Whereas sellers, who are typically slower to respond, would likely want their original price, leading to a discrepancies between the two players, Arps said.

But, according to a press release from law firm White & Case, published on March 10, 2020, dealmakers are also planning to “lean into a downturn”, particularly if valuations come down as a result.

"Once dealmakers feel they can evaluate the market impact of the virus and the situation has stabilised, it's likely that we’ll see renewed enthusiasm and M&A executives are likely to lean in,” said John Reiss, global head M&A at White & Case.

A key characteristic of insurance M&A activity in recent years has been the interest of private equity investors in the sector, who have been utilising their investment expertise to operate in low interest environments for some time.

Arps noted that rather than being deterred by the current economic landscape, private equity investors may now look to insurers more than ever as they offer a safer alternative to other industries.

“An insurer may act as a safe haven for private equity firms, offering a more stable investment opportunity when pitted against other industries experiencing wide-spread supply chain disruption,” said Arps.

“We are in unprecedented territory on so many fronts. It’s affecting people's lives, oil markets, equity market exposure, it’s causing broad economic slowdown due to closure of business and impacting communities across the globe.”

But, Arps affirmed that companies with strong balance sheets should weather the storm while companies that were already struggling before COVID-19 will feel the largest impact.