Some of the reasons private equity investors generally avoid the sector are well founded, while others are based on misconceptions. It is true that insurance companies can be complex, and the statutory accounting models used by underwriters are unfamiliar to most investors. The industry is highly regulated, which can make it more time consuming and difficult to complete transactions. Additionally, the concept of taking and managing principal risk is an integral part of insurance underwriting, and most investors cannot get comfortable with that type of risk. Because the property and casualty insurance market is also cyclical, some investors who only chase momentum have mis-timed past entry into the sector and are reluctant to reengage. 

Those concerns can be real, and they are particularly daunting for private equity firms that lack specialized expertise and experience in the sector. Additionally, a number of misconceptions about insurance continue to keep investors away. For example, many investors assume that there are no growth companies in the sector, and that the fundamentals of the sector make rapid growth impossible. This is not true, particularly among technology-enabled insurance distribution, BPO, and administration businesses. Some people also believe that the best entrepreneurs are only found in more traditional growth sectors, such as technology, but this is untrue. The good entrepreneurs within insurance tend to be some of the best managers across all industries, as they are accustomed to operating under a high level of regulatory scrutiny, and they focus on risk management in a way that is more akin to the thinking of growth equity investors. As an example, Summit backed a very experienced and highly-regarded management team in the creation of SeaBright Holdings, a specialty workers’ compensation insurer.  The SeaBright team saw an opportunity to build a new competitor in the workers’ comp sector during a cyclical upswing in the market and selected Summit to assist them with capital formation, building a board of directors and ultimately completing a successful IPO.

In recent years, much of the insurance distribution and underwriting industry has suffered from a protracted soft pricing cycle, compounded by the negative impact that macroeconomic trends have had in compressing exposure bases directly and insurance revenues indirectly. The low interest-rate environment and broadly depressed yields have also pressured investment income for carriers, further straining overall profitability and limiting growth. These broad and sustained pressures have pushed carriers to seek more efficient means of distribution and administration, while also diminishing their tolerance for costly product development and testing. This has created substantial opportunities for the small universe of companies that can bring heightened efficiency to the distribution, administration and underwriting of insurance products.

Summit Partners has invested broadly across this sector, including in pure underwriters, retail and wholesale brokers, third-party administrators, and technology providers. We look for businesses with scalable models that can grow quickly and become category-defining companies. This means making efficient use of capital, such as through intelligent application of reinsurance or in pure distribution businesses. In a sector that has historically been slow to embrace technology, we tend to focus on businesses that use technology and automation to enhance the efficiency of their distribution and underwriting. Technology-savvy companies and technology providers to insurance companies tend to be capable of meaningful outperformance. 

Summit Partners has invested in more than 30 financial services companies during our 26-year history, including 10 in the insurance sector. We come to the table with a strong understanding of insurance company models. 

We have guided insurance businesses through every stage of the recapitalization process, including regulatory filings, discussions with state departments of insurance, and communications with A.M. Best and other ratings agencies. Summit understands the risks, including the direct balance sheet exposure that insurance companies often manage as part of their business model, as well as the complexities of investing in mixed-model businesses with varying degrees of risk-taking and fee-based income within a single enterprise. For entrepreneurs operating in this complex and regulated industry, partnering with an experienced sector investor tends to dramatically streamline the investment process and provides a foundation for a true partnership with management following the recapitalization.

Finally, in a sector where intelligent consolidation can create enormous value, we bring significant corporate development resources through our more than 85 investment professionals, multibillion-dollar capital base, and 26-year history. We can help companies in distribution, administration, underwriting and technology grow through acquisition by assisting them in the identification, structuring, negotiation and financing of add-on transactions.

For example, we recently assisted one of our insurance services portfolio companies with an important acquisition in support of its efforts to expand into wholesale brokerage. We helped our portfolio company identify and acquire a transaction-based wholesale broker and surplus lines general agency. The acquisition not only enabled our portfolio company to broaden its distribution platform, but also improved the foundation for further growth into new geographic markets and product segments.

While it is true that the insurance sector can be complex, cyclical and regulated, we believe that it can also offer very compelling opportunities. At Summit Partners, we have the experience and resources to navigate the sector’s complexity. To that end, we actively look for exceptional management teams running businesses that are capital efficient, technology enabled and poised to become category-defining companies with the support of the right financial partner.