There are a number of reasons why we feel insurance is an attractive sector for investing, including the following:
Attractive Risk Adjusted Returns — Insurance related investments in companies run by high quality management teams, typically generate attractive risk adjusted returns for investors.
Insurance is the Backstop for All Industries — Although a mature industry, insurance is the backstop for all industries, and as new products or industries develop, insurance products typically are created as a tool to mitigate certain related risks.
Complex Accounting and Regulatory Oversight — Complex financial statements and regulatory oversight often deters investors without specialized knowledge of insurance from actively targeting the sector for private equity transactions. Additionally, to effectively invest in the insurance sector requires an understanding of the complexities surrounding the various lines of coverage.
Attractive Business Models —
- Unique economics of risk bearing companies or the concept of Float;
- An ability to create wealth using the float generated from insurance premiums;
- Niche services businesses that generate attractive margins; and
- Interaction between the insurance industry and capital markets solutions (securitizations) which improve economics of businesses.
Mergers & Acquisitions Activity — The insurance sector consistently exhibits transaction activity with periodic peaks in M&A and IPOs. Since 2001, excluding insurance broker-related M&A, the insurance industry has averaged 80 M&A transactions per year, with an average annual aggregate transaction value of $34.9 billion.
Attractive Demographics — The advent of the Baby Boom Generation reaching retirement age should drive an increased interest in tax efficient savings vehicles including life and annuity products.
Increased Demand — Rising property values, the continued threat of terrorism, product innovation, and a recognition of under-insured assets are all driving an increased demand for insurance across many deficient insurance coverages.
