Up to five new insurance companies worth $20-$50 million each could be started up in Florida in the next six months with capital from private equity firms, John Butler, senior vice president at Houlihan Lokey Howard & Zukin’s financial institutions group told Corporate Financing Week. In the last week and a half, several insurance company executives have been calling bankers, saying they’re in trouble after the hurricanes and looking for options to either gain new capital or to sell assets, according to Butler.
The private equity firms are considering buying the assets and existing policies of insurance companies that are facing downgrades or distressed situations. They would form new companies with new balance sheets and write policies that charge high premiums, Butler said.
Since all insurance companies are required to keep reserves that can cover all of their potential claims, the new company would not be responsible to cover those costs, and would write new policies. Other options under consideration include acquiring a company, which can be riskier, or starting one from scratch, which can be more time-consuming.
Sponsors are looking to capitalize on the opportunity to make large profits while the premiums are high. In general, most private equity firms tend to stay away from catastrophe insurance companies because of the high risk of more storms, and the companies’ lack of diversification, said Butler. The other danger in the sector is the rising cost of re-insurance the insurers face. Still there are 20-30 firms that are always hoping to leverage their expertise in the area to reap healthy gains, he said, declining to name companies.
Warburg Pincus, Capital Z Partners, and Wand Partners are all New York-based private equity firms that have made big investments in insurance companies in the past. John Struck, managing director at Wand, said his firm has been evaluating the Florida market for some years now, and though it is not particularly focused on the state right now, it leaves open the possibility to either acquire a company there, or do an add-on acquisition if the opportunity presents itself. “The hurricanes haven’t necessarily changed our view of the market,” he said.
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