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More SPACs may consider deals in 'exciting' insurance industry

Traditional insurance carriers might not make for the primary targets many special-purpose acquisition companies seek to identify for their initial business combinations, but that could be changing as business dynamics evolve.

SPAC sponsor Andrew Poole, speaking at the recent S&P Global Market Intelligence 11th Annual Insurance M&A Symposium, observed that emerging factors such as high rates of growth in premium rates across many commercial property and casualty business lines mean that insurance is becoming "one of the most exciting sectors all of the sudden" for the vehicles.

"innovation is coming to our industry at a breakneck pace," said Poole, who serves as chairman and CEO of Delwinds Insurance Acquisition Corp.

High-profile initial public offerings of full-stack insurtech companies Lemonade Inc. and Root Inc. were the biggest stories of 2020 in the new issues market as it pertains to insurance. That said, the rise of SPACs has been the dominant theme of the U.S. IPO market, overall, as S&P Global Market Intelligence data show that the aggregate amount raised by the former exceeded that generated by the latter during the third quarter by a margin of $31.50 billion to $24.70 billion.

Through the first 10 months of 2020, a total of 76 U.S.-based entities classified as blank-check companies completed IPOs, raising aggregate gross proceeds of $56.94 billion, fueled by the record third-quarter activity. In all of 2019, 52 blank-check company IPOs closed, raising $13.31 billion in the aggregate.

Co-head of SPAC coverage at RBC Capital Markets Amir Emami, speaking during the panel, indicated that SPACs historically target EBITDA stories as opposed to the balance-sheet stories that investors typically associate with an insurance carrier.

That has not dissuaded SPACs from pursuing insurance-related targets, however.

In the most-notable initial business combination for a SPAC in the insurance industry, CF Corp. merged with Fidelity & Guaranty Life in a $1.84 billion November 2017 transaction. CF Corp. was co-founded by former The Blackstone Group Inc. senior managing director Chinh Chu and Fidelity National Financial Inc. Chairman William Foley II. In raising $600 million in a May 2016 IPO, the company cast a wide net for potential merger targets across the financial, technology and services sectors. After striking out in its initial pursuit of a financial technology database company, a software company, an insurance brokerage business, a financial technology company and a processing business, a Blackstone-managed fund approached CF regarding a potential transaction with FGL.

The panelists said that CF Corp., through its Blackstone ties, brought "unique value" to the transaction with Fidelity & Guaranty Life. As part of the merger, the insurer agreed to form a long-term strategic investment management relationship with Blackstone with a goal of accelerating the target's growth and enhancing its portfolio yield.

The resulting public entity, FGL Holdings, ultimately sold to Fidelity National Financial in June 2020.

In addition, Poole's Tiberius Acquisition Corp. acquired International General Insurance Holdings Ltd. in March, two years after the SPAC completed a $172.5 million IPO. Tiberius' pursuit of an initial business combination was much more targeted in nature than CF's as it sought out middle-market insurers with an enterprise value on a pre-transaction basis of between $250 million and $800 million.

Insurance Acquisition Corp. completed its initial business combination with Shift Technologies Inc. in October, 19 months after raising $150.7 million in an IPO to target potential transactions involving providers of insurance or insurance-related services, particularly those focused on technology. It entered letters of intent for potential transactions with an independent specialty managing general agent and a private-equity sponsored provider of services to the nonstandard auto insurance market, but disclosures in an SEC filing show that those deals fell apart in early this year. SPAC IPO filings typically indicate that the companies' searches for potential targets do not have to be limited to specified industries. That was demonstrated in this case as Shift Technologies is a used-car e-commerce platform.

Other insurance-focused SPACs that have completed or filed for IPOs set the stage for further M&A activity in the sector, including two successor vehicles to Insurance Acquisition Corp. All three of the entities are sponsored by a Cohen & Company Inc. subsidiary.

INSU Acquisition Corp. II raised $230 million in gross proceeds in a September IPO. INSU Acquisition Corp. III filed its IPO registration statement on Nov. 12. Both vehicles indicated that their respective searches for initial business combinations will focus on providers of insurance or insurance-related services, with particular emphasis on insurance distribution businesses, regulated insurance or reinsurance businesses and insurance-related technology businesses.

Another vehicle led by Poole, Delwinds Insurance Acquisition Corp., filed its IPO registration statement in September, focused on targets in the insurtech, traditional insurance and insurance-related products and services sectors. The company believes those sectors are attractive for investment given COVID-19-related acceleration in the role of technology in insurance, the potential for "outsized, and in some cases, extreme growth" driven by hard commercial lines pricing, pressures caused by COVID-19-related losses and low interest rates, as well as the fragmented nature of the insurance industry.