The insurance sector is large and complex, with many different subsectors and service businesses. It has become a highly competitive sector for investors who know where and how to look and can find interesting and differentiated opportunities. Professional investors from traditional private equity firms to family offices are showing a growing interest in deploying capital within this industry, often via “copycat” strategies that fail to recognize and consider the sector’s complexities.
In this article we will look at the evolution of private equity’s interest in insurance-related investing, the sector’s myriad complexities, and the factors that make it a target-rich environment for both entrepreneurs and strategic, well-educated investors.
Table of Contents
The Evolution of Private Equity and Insurance
Exploring the Subsector Diversity in Insurance
Investment Capital Deployment in the Sector
Case Studies: Real-World Examples of the Opportunity
The Evolution of Private Equity and Insurance
About 25 years ago, private equity and family offices found potential in the insurance sector, particularly in insurance distribution. The strategy was straightforward: roll up, acquire, and consolidate. However, as these large organizations expanded, they often led to frustration among employees, driving a new wave of entrepreneurs to leave and start their own niche businesses. These spin-outs frequently resulted in dynamic, growth-oriented companies, offering fresh investment opportunities.
Private equity and alternative investment sources have also capitalized on “hard markets” in the insurance sector – periods when available capital for (re)insurance shrinks due to previous losses, leading to higher costs for (re)insurance coverage. Over the past 30 years, hard markets have been triggered by events like 9/11, the 2005-2006 Katrina-Rita-Wilma hurricanes, or prolonged soft markets where coverage was underpriced. However, exploiting these opportunities has become more challenging. Hard market periods have shortened, as significant capital quickly floods in, reducing the opportunity. Additionally, the capital required to participate has increased to billions, and alternative forms of capital have sought access to (re)insurance as a diversified portfolio contributor.
Investment opportunities also exist in non-balance sheet services within the insurance sector, across various business sizes. Over-consolidated roll-ups often lead frustrated entrepreneurs to exit and build their own businesses. The democratization of technology has further generated investable opportunities. Once the exclusive domain of large corporations with hefty IT budgets, insurance-focused technology for underwriting, systems, and processing is now accessible to smaller firms. These smaller businesses often deploy technology with greater creativity and agility, leveling the playing field. For investors, this democratization of technology presents a rich landscape for discovering nimble, tech-savvy companies ready for growth, where sector-leading operating margins can be achieved with much smaller revenues and capital.
Exploring the Subsector Diversity in Insurance
The insurance industry is vast, with many distinct subsectors. These include property and casualty (P&C), life and health insurance, businesses that take on balance sheet risks, and various specialized service providers. Some of these service providers are traditional P&C retail agencies, wholesale agencies, managing general agents (MGAs), managing general underwriters (MGUs), third-party claims administrators (TPAs), captive managers, subrogation companies, reinsurance brokerages, specialized asset managers (such as insurance-linked securities (ILS) managers), specialty audit and actuarial firms, and “run-off” liability management specialists. Each subsector operates with its own unique dynamics, including differences in risk, distribution, capital needs, competition, profitability, value realization, and market cycles.
At any point, several of these subsectors may be facing specific challenges or opportunities – whether it’s market-driven growth, a significant lack of investment, technological shortcomings, or a shortage of entrepreneurial innovation. For informed investors, these situations can create valuable opportunities.
Investing in the insurance sector isn’t straightforward – it demands specialized knowledge and the humility to recognize when outside expertise is needed. Success hinges on understanding the nuances of each subsector and knowing how to tap into the right expertise. At STS Capital Partners, we excel in connecting with professionals across the diverse subsectors of insurance. Our extensive network, often likened to the “six degrees of Kevin Bacon,” is instrumental in identifying and assessing the most promising investment opportunities.
Investment Capital Deployment in the Sector
Many insurance service businesses operate on “capital-light” models, meaning they don’t require significant or ongoing capital to grow. On the other hand, traditional balance sheet insurance businesses are “capital-intensive.” For these companies, the more successful they become in providing risk coverage, the more capital they need to support that growth. This capital-intensive nature makes traditional (re)insurance investing challenging for most family offices and venture capitalists, who are more accustomed to business models where success doesn’t demand more capital and who often avoid investment opportunities that require billions to execute. In capital-light models, success typically doesn’t lead to a need for additional funding.
These capital-light insurance businesses eventually become self-sustaining because of the cash flow they generate. This cash flow can either fund further growth directly or support borrowing from a well-established network of lenders, which in turn helps the business grow without needing to continuously raise new equity. As these businesses grow, they achieve greater scale, diversify their offerings (in terms of geography, customer base, or products), attract high-quality executives, and see an increase in valuation multiples. For example, insurance service businesses generating less than $10 million in cash flow or less than $5 million often attract single-digit cash flow valuation multiples. However, similar businesses generating more than $20 million in cash flow are often sold in competitive auctions, fetching mid-teens cash flow multiples.
The concept behind this “financial alchemy” is straightforward – acquire a $5 million EBITDA insurance service business at an 8x multiple (which could involve $10 million in debt and $30 million in equity), grow the business to $20 million in EBITDA through organic growth and M&A, and then sell it at a 15x multiple for $300 million. Assuming $30 million in debt at the time of sale, this could translate to $270 million for equity holders or a 9x return on investment. Of course, the challenge lies in the details – identifying, acquiring, managing, and growing the right type of insurance service business that will attract a higher exit multiple as it scales.
In short, a well-managed insurance services business can generate venture capital-type returns.
“The competition for acquiring insurance service businesses is intense, especially 
for those with cash flows exceeding $10 million. Larger players often bid aggressively, leveraging their scale to offer attractive deals. To succeed in this environment, investors must be willing to consider smaller or niche opportunities, including team lift-outs or building new ventures from the ground up. These strategies require a keen eye for potential and a willingness to invest in the right entrepreneurial talent.” – STS Managing Director, Harry Dugan.
Case Studies: Real-World Examples of the Opportunity
Transforming a Family-Run TPA
Consider a family-run third-party administrator (TPA) with $2.5 million in cash flow. This business faces several challenges, including succession issues, customer concentration (with 75% of revenue from one client), and geographic risk. To unlock its potential, the business needs to be combined with other platforms and managed by a skilled operator. While the larger private equity-funded platforms are likely not interested in smaller EBITDA businesses, there is a significant opportunity to find an entrepreneur-in-residence who can consolidate and scale such operations. As shown above with the financial alchemy summary, the upside associated with growing this business via diversifying M&A is positively venture capital-like.
Building an MGA from the Ground Up
A Managing General Agent (MGA) acts as an outsourced insurance underwriting entity for insurance companies. For example, a recent spin-out of a property MGA from a major P&C agency grew significantly, managing $40 million in premiums and just breaking even, to handling $230 million in premiums with double-digit million-dollar EBITDA in just a year and a half. This rapid growth was fueled by a management team with deep industry connections and a proven track record, a robust tech platform designed for scalability, and – most importantly – by timing the investment during a hard market cycle in the U.S. property insurance market. Successfully investing in or building MGAs involves finding underwriters who have both the entrepreneurial drive and the technical skills to thrive independently.
Conclusion
“The insurance sector presents a target-rich environment for investors willing to dig deep and understand its complexities. With numerous subsectors, each presenting unique challenges and opportunities, navigating this terrain requires expertise, strategic insight, and a willingness to delve into niche markets. Those willing to make the trip, though, can generate significant excess returns and multiples of their deployed capital.” – STS Advisor, Robert Glanville.
At STS Capital Partners, we combine our network, industry expertise, and strategic insights to identify and capitalize on the most promising investments. We help investors navigate this complex landscape and unlock the hidden potential within the insurance sector, enabling entrepreneurs to achieve maximum value on the sale of their business and make an Extraordinary Exit.
