Insurtech Insights panel: Converging valuation expectations to drive more M&A interest
Tough insurtech funding conditions have narrowed the gap between buyer and seller valuation expectations, which in turn is expected to push M&A deal activity higher, executives at the Insurtech Insights Conference in New York said Wednesday.
Panelists from investment bank Perella Weinberg, VC fund Ping An Voyager Partners, and management consulting firm Oliver Wyman were speaking during a session to discuss the M&A landscape, where they said interest in transactions has begun to rebound.
“What we’re seeing is market sentiment, CEO and board confidence - which are key drivers of M&A - start to improve a little bit,” Perella Weinberg managing director Andy Tam said.
“There’s still a ways to go, but we’re seeing activity pick up, we’re seeing more announcements more recently [and] we’re seeing an uptick in dialogue,” Tam added.
The investment banking executive acknowledged that higher interest rates “have certainly had a profound impact” on M&A activity more broadly, as he cited a figure showing M&A deal volume fell 40 percent in 2022 from record levels in 2021, a trend he said has continued into 2023.
But, Tam said he is “cautiously optimistic” that M&A activity is on the rise, as he predicted that in 2024 “and beyond”, technology M&A in particular will “really come back in a big way”.
“Digital transformation trends are a long-term trend, it’s not a cyclical trend,” Tam explained.
“And so I'm pretty confident about where the M&A market is going into the future,” he added.
Commenting specifically on insurtech deal activity, Tam noted that the private capital markets - which play a critical role in supporting younger, fast-growing, and largely unprofitable firms - have been “very challenging” in the last 6 to 8 quarters.
“And that's actually driven a more dramatic increase in M&A activity - more so than broader M&A markets - from our vantage point,” he said.
To that end, Tam said that larger and better funded firms have been active as buyers and “opportunistic” in acquiring businesses for new capabilities, building scale, and also as a catalyst for generating additional funding.
“A lot of boards are taking notice and being more open-minded than they were a couple years ago when obviously, funding was rampant and folks just didn't feel the desire to explore M&A as a path for liquidity,” he explained.
“It's shaping up - if you look at the supply side and demand side dynamics - as continuing to be a very active M&A market,” Tam continued.
He also said corporate buyers have “remained active”, but added that those firms have become “much more disciplined and much more selective”.
“Given the narrowing of the gap between seller expectations and what buyers are willing to pay for assets - that [will be] another driver of global M&A,” Tam added.
Oliver Wyman’s head of insurance for the Asia-Pacific region Tek Yew Chia said the shift to a more digitized economy is “real” and is motivating incumbent players to look more closely at M&A to make up for failing to invest in a digital strategy up until now.
“Those who have not spent enough time before this to get ready for the digital economy are now saying that they have to do so right away and there’s almost pent up demand” to make up for lost time, Yew Chia said.
Recent insurtech M&A track record “catastrophic”
Donald Lacey, the chief investment officer at Ping An Voyager Partners, teased his management consulting and investment banking colleagues as he offered a contradicting point of view.
“Listening to you fellas I kind of feel like…these updates I get from these real estate brokers where it's ‘always a great time to buy and a great time to sell. I’m getting that vibe from you fellas” Lacey said, as he “respectfully” put forward an alternate point of view.
“It's pretty hard to look at the trajectory of the insurtech industry over the last, say three years, as anything short of just catastrophic,” Lacey explained.
“I think anyone who did a significant acquisition of an insurtech in the last three years is really regretting it right now,” Lacey added.
“Anyone who invested around the time of an IPO of virtually any insurtech that has gone public in the last three years is sitting on losses that range from bad to really, really, really, really bad,” he continued.
“I think that that really is leading to a pretty profound reset of expectations,” Lacey said.
The Ping An investing executive said a “good thing” that has come out of the stretch for the insurtech segment in recent years is that potential acquirers have become more cognizant of the potential to overpay for assets that could ultimately need to be written down on their balance sheet.
“It’s like,“Oh my gosh, like I'm gonna pay $3bn for this thing, and it's gonna be like a $3bn hole on my balance sheet because there's no tangible book [value] there,” he said, while referencing the possibility of goodwill impairments.
“I think that that kind of cold, hard accounting identity prevented a lot of deals from getting done that might have been strategically additive to incumbents,” Lacey said of increased buyer discipline.
“It feels to me like now, one good thing, if you are an incumbent, is that the valuation environment is so dramatically different that the math is maybe a little more palatable,” he added.
“If you can acquire an insurtech that has invested $700mn in building really cool technology for $120mn, well, then you know what, maybe that makes sense,” Lacey explained.
“So I think that that might provide a catalyst for some transactions that I think would be additive,” Lacey said of the improved M&A market conditions.
Perella Weinberg’s Tam echoed Lacey’s comments in saying that it would be unlikely to expect incumbent firms to undertake sizeable deals that are valued at $1bn or more moving forward, but that he nonetheless expects insurtech M&A activity to increase.
“The large corporates are being very selective about engaging in M&A activity, and certainly they are very careful about how they value some of the assets that they're pursuing,” Tam explained.
Oliver Wyman’s Yew Chia said regulators in Asia have shown an increased interest in attracting insurtechs into the region, in instances where the start-ups can partner with established firms.
“If the incumbent can actually use the insurtech for their business and build a good relationship, then an acquisition will happen, but an insurtech is unlikely to disrupt the incumbent,” Yew Chia explained.