Turning a Corner
Insurtechs go through a wave of consolidation and in some cases merge with each other as they move into their next stage of development.
- Terrence Dopp
- January 2021
- Situation: Insurtechs are attracting big investments, going through mergers and launching IPOs.
- Reason: The deals are spurred by the need for new technology and capabilities, in part highlighted by the COVID-19 pandemic.
- Funding: Worries persist about excess capital artificially pushing up valuations for fledgling companies.
As someone with an eye on the burgeoning insurtech world, Adrian Jones sees a parallel between the startups that attempt to merge technology with the world of insurance, and the U.S. auto industry.
Through the Great Depression, there were as many as 300 U.S. auto manufacturers. But by the 1960s, the Big Three in Detroit controlled 90% of the market, after others died or were gobbled up by competitors.
Similarly, it's only been a few years since the word insurtech became part of the industry's lexicon. Yet today, said Jones, deputy chief executive officer of P&C Ventures for Scor, a current round of mergers and acquisitions in that space seems to follow a similar path as those earlier auto companies.
It's partly a coming-of-age story. It's also a tale of a large number of companies, most focused on solving specific problems rather than being self-contained carriers in their own right, he said.
“You're at the age where the girls are taller than the boys, but some of the boys have beards and deep voices and some are still squeaky and quite boyish,” Jones said. “You're starting to see more variation amongst the insurtech companies. Investors are forcing some of that distribution as well, because they are plowing enormous amounts of money into the growth stages of what they believe to be highly successful companies.”
As an example he cites managing general agent and property/casualty carrier Hippo Enterprises.
The company in November saw a $350 million investment from Mitsui Sumitomo Insurance Co. Hippo also recently acquired former partner and fronting carrier Spinnaker Insurance Co. in a deal that expanded its geographic footprint.
The common theme, Jones said, is that capital markets are bursting at the seams. Couple the availability of investment dollars with the maturation of insurtechs, and you get an environment ripe for incumbent players to put their money where they think it will pay serious dividends.
“It's going to become an active space soon because it's at that point in its maturity cycle,” Jones said. “Investors are going to start putting money toward the winners. People are going to want to start taking money off the table as well—both founders and investors. For many, what better way to do it than monetize the asset through a trade sale.”
P&C Ventures has deployed €40 million (US$49 million) into the market since it was created with an eye to creating the insurers of the future by investing in technology companies that benefit Scor and its customers.
When I think about the M&A space, what I think is most interesting is that it’s now insurtechs thinking about acquiring and being inquisitive as opposed to where it was historically.
Buy or Sell?
Roughly five years ago the first wave of insurtech startups hit. As that class has grown up, mergers and acquisitions have become common. Some companies were bought, others used M&A to find scale, and a few clawed their way to stand-alone status.
The traditional M&A model goes something like this: Scrappy insurtech identifies a problem with the conventional insurance model, develops a fix, then gets scooped up by a legacy carrier.
Consider the acquisition of CoverWallet by Aon plc, the second-largest global broker in 2019 with $11 billion in total revenue, according to Best's Review's Top Global Insurance Brokers ranking. Aon said the deal would expand its footprint in the growing smaller-business market through CoverWallet's technology and data analytics.
Yet something else has been happening: The babies have grown up and have their own plans now.
In October, commercial lines insurance platform Bold Penguin agreed to acquire RiskGenius in a deal that brings together two insurtechs. The deal—no terms disclosed—was the second acquisition this year for Bold Penguin and brought together that company's focus on using technology to expedite quoting and bidding for small commercial agents with RiskGenius's expertise of using artificial intelligence to analyze policy language.
Past deals speak for themselves. In 2017 Allstate Corp. closed a $1.4 billion acquisition of personal device warranty provider SquareTrade. Prudential Financial Inc. in 2019 paid $2.35 billion to purchase direct-to-consumer platform Assurance IQ, a move it said would expand its margins by as much as $500 million by 2022, as well as bring cost savings of $50 million to $100 million.
Along the same lines as the Aon and Prudential deals, broker Brown & Brown Inc. in November said it would acquire substantially all assets of insurtech CoverHound to ramp up customized quoting. The firm said it intends to operate CoverHound, which was founded in May 2010, as an independent subsidiary.
Also that month, Root Inc. launched its initial public offering, with both a selling price and number of shares that were higher than announced in advance of the IPO. It was an example of an insurtech being able to stand on its own.
Perhaps the most high-profile example came in the form of Lemonade, the insurtech that focuses on renters and homeowners insurance. In July, the company raised its target price for an IPO expected to generate as much as $319 million.
Jay Weintraub, chief executive, founder and connector at InsureTech Connect, said that in 2016 through 2019, the new industry made headlines primarily through a round of large-scale funding injections. In 2019 and early 2020, it entered a phase of M&A transactions driven primarily by incumbents, but by the second half of 2020 some insurtechs had become large enough to be the ones with hungry eyes.
“If we think historically about M&A in the insurtech space, you think of these large one-off deals,” said Weintraub. “When I think about the M&A space, what I think is most interesting is that it's now insurtechs thinking about acquiring and being inquisitive as opposed to where it was historically.”
Investors are going to start putting money toward the winners. People are going to want to start taking money off the table as well—both founders and investors. What better way to do it than monetize the asset through a trade sale.
It’s simply not the case that when you have a record number of deals that each new additional entrant is bringing the same degree of innovation that earlier entrants brought. That’s just how capitalism works.
University of South Carolina’s Darla Moore School of Business
Not everybody sees only upside.
Robert Hartwig, director of the Center for Risk and Uncertainty Management at the University of South Carolina's Darla Moore School of Business, said the interest in many insurtechs by incumbent insurers is tantamount to outsourcing their research and development functions.
The insurtech space, like all startup sectors, is Darwinian in that most will fail and very few will reach IPO status. Fewer still will become a unicorn—a privately held startup with a valuation over $1 billion. Along with the aforementioned auto industry, he points to waves of consolidations and mergers throughout history in industries such as telecommunications, railroads and airlines.
He cited a record 104 funding rounds in the insurtech sector during the third quarter of 2020 that totaled about $2.5 billion as proof of just how frothy the market has gone. In many cases, the valuations of the companies are not sustainable, according to Hartwig.
“As the number of insurtechs proliferate, almost by definition the marginal degree of innovation with each one diminishes,” Hartwig said. “It's simply not the case that when you have a record number of deals that each new additional entrant is bringing the same degree of innovation that earlier entrants brought. That's just how capitalism works.”
Hartwig's view isn't a blind skepticism of the insurtech space. He points to Lemonade.
The company posted a $30.9 million net loss for the third quarter, compared to a $31.1 million net loss a year earlier. Despite these losses, the company's share price has more than doubled since its July IPO, and its market capitalization as of Dec. 1 exceeded $3.5 billion.
Pradip Patiath, who tracks technological and other disruptive developments as a senior partner of McKinsey & Co.'s global digital financial services team, said incumbent firms turn to M&As for several reasons: to acquire a “bolt-on” capability they don't have, to expand geographically, to pivot to businesses with higher multiples, to defend against a competitor, or to gain scale.
The urgent need to expand technology capabilities in the current pandemic has accelerated the trend, he said. Companies are doubling down to make sure five-year plans to go digital are substantially sped up.
“Most insurance companies are awash in capital,” Patiath said. “All of a sudden in this moment of COVID-19, people have started to say, 'What can I do to buy a bolt-on capability?' If you look at all the M&A that's happening in insurtech, a lot of it by count is bolt-on capabilities.”
In some instances, he said, the consolidation is driven by private equity firms that have assets within their portfolios and see companies that are unlikely to make it separately, but by combining them, they are able to make a better combined business model or proposition. The model of this transaction, he said, doesn't lie in purely combining to make it A plus B, but rather in a bet that A plus B will equal A-squared.
“On one hand you've got buyers with deep pockets and on the other end, you've got newer attackers with the realization that the organic build is a much more circuitous and tortuous route to go,” he said. “I don't think that insurtechs have, yet, reached a level of maturity. But they play a very important role in pushing boundaries, creating new frontiers, innovating fresh models.”
The need to capture a larger piece of the market is also driving the rush toward M&As, he said.
Jones, of P&C Ventures, said the movement in the number and size of transactions isn't hard to figure out. And skyrocketing price tags make sense.
“Valuations are quite robust right now. That's for a very valid reason,” he said. “Growth is hard to come by in our business, whereas capital is very easy to come by.”