“Que sera, sera Whatever will be, will be The future's not ours to see Que sera, sera What will be, will be" – Doris Day, from The Man Who Knew Too Much
2022 is turning out to be another challenging year for the InsurTech cohort. Apart from the problematic stock performance of the publicly traded names, there seems to be much discussion on how this will spur consolidation in the non-public space. We are still in the early innings of this alternate scenario which seems more likely as hopes of a public listing dim.
At the end of February, Travelers announced that it had acquired the "technology assets" of Trov. A few days later, Hub and Bold Penguin announced the acquisition of Insureon Holdings on the distribution front.
Do these acquisitions signal an acceleration of M&A in this space? Is this a realization that a go-it-alone strategy might not be enough?
First, a step back. Trov was founded in 2012 by a serial entrepreneur. Although the initial hook was an on-demand insurer, the company pivoted to a B2B offering after not getting the required traction. The idea was solid, but as is the case, sometimes “if you build it, they will come” turns into a longer wait before funding dries up. With its $29bn equity, Travelers is a good home for Trov, although a likely different outcome from Trov’s initial launch as a disrupter and a winner of design awards for its app.
On the other hand, Insureon has been around for longer as a direct-to-business marketplace. An insurance agency such as Insureon has relationships with several insurers. In addition, there has been meaningful consolidation in the agency space in recent years, especially from PE-funded Acrisure. On its own, Insureon is a minor player in a crowded space on the lower end and competing with other InsurTech-centric agency players. But its acquisition by Hub, the largest agency player, plucks it out from this crowded field.
These deals would likely be precursors to several other deals to follow over the next few years. Again, we are not trying to be Debbie Downers, but if the proof of the pudding is in the reported quarterly earnings results, we have not seen it yet. So many of these companies can continue going solo and risk losing relevance, or they can find a partner and address capital and investor concerns.
But how did we get here? Much talk about disrupting a marketplace which is slow to change and adapt is now in the background. Many InsurTechs now face questions about capital and funding adequacy and concern surrounding their ability to build a profitable franchise.
Some InsurTechs have been around for a while now and continue to report volatile results. However, the profitability advantage of building a book of business using AI and machine learning is still not discernible.
First, a quick step back. In our previous notes on InsurTech, we had discussed the Gartner slope of enlightenment. Although less used in insurance, Gartner's cycle is often employed to illustrate where technology is in its lifecycle. Hype and visibility for the new product first rise to a peak of inflated expectations before dropping when investors are disillusioned with the effect of the technology. Market expectations finally stabilize as the technology matures into a productive niche in the disrupted industry.
Many of the InsurTech players were between the first two points for quite some time. However, it is only over the last year that the reality is beginning to sink in that a regulated industry such as insurance might seem easy to get in but turning a profit or stemming the cash bleed is a whole another gamble altogether.
Many companies over the last 12 months, including Root, Metromile and Lemonade to name a few, have crossed or are going to traverse the trough of disillusionment, as shown above. The good thing is that it could turn into a catalyst in bringing many of the other names to the deal table vs. trying to go it alone.
As the initial class of InsurTech matures and misses its expectations, it holds important lessons for the remaining class to develop alternate plans if they seek to remain relevant in the long run.
The note below looks at InsurTech funding levels, InsurTech stocks vs. property-casualty stock performance, and thoughts on de-SPAC exits.
Firstly, fintech funding is still growing, but InsurTech’s share of it declines precipitously
Fintech funding has been having a moment over the past few years, including being spurred by Covid-19 and developing alternate technologies. Apart from broader trends, InsurTech funding has also grown meaningfully over the past few years. Funders continue to look for the next Square or PayPal in the insurance space. But even when there have been breakthroughs in the broader space, InsurTech breakthroughs are still hard to come by.
The recent CB insights data shows funding has continued to climb. But the focus has changed. For example, InsurTech made up 35% of US fintech funding in 2020, but this has declined to only 24% of all fintech funding for 2021. So even though the chart below shows an increase of 90% for the year for the InsurTech space to $15.4bn, overall fintech funding was up 171% to $62.9bn in the US.
Even more surprising is that the mix of deals is changing. Early-stage funded deals continue to decline while still dominating the overall landscape. This trend could translate into additional pressure on InsurTechs to accept a takeout vs. fight for a shrinking piece of the pie.
The chart below shows consolidation is growing. Yes, this includes smaller deals that might not be familiar to everyone. But is it likely that consolidation could pick up vs. the IPO or de-SPAC route?
Secondly, results and price performance for the publicly traded group don’t inspire confidence
It's easy to mix up good companies with good stocks, and there have been many cases where the stock price has languished vs. the company's performance over time. Recently, we saw one of the value creators exit the public market after being acquired by Berkshire Hathaway.
The stock price can point toward how the investors perceive a company's results. Unfortunately, InsurTech has disappointed on this front. The table below looked at InsurTechs’ quarterly earnings misses vs. beats and then compared to the broader P/C group (excluding brokers). InsurTechs missed Wall Street estimates often. However, the wider property-casualty group (non-InsurTech) beat street estimates by three quarters in many cases. This continued trend of missing street estimates could have an unintended consequence of scaring away potential future investors.
The stock prices have been clobbered due to this performance. The chart below shows InsurTech stock performance since the IPO vs. various indices such as S&P Insurance Group, Russell 1000 Value and Russell 1000 Growth. Even more interesting is that numerous InsurTechs have underperformed vs. the Russell Growth index, so the miss is relative and on an absolute basis.
Separately, InsurTech's short interest, a simplistic measure of a bet against a given company, has continued to grow vs. the broader space. So not only are these companies disappointing on the earnings front, short investors are actively betting against them to stumble materially.
These factors will have a chilling effect on future investors or de-SPAC demand for this space. If there is no demand from the traditional base, the remaining option is to get acquired by more prominent players or merge with another InsurTech and remain relevant.
Thirdly, the route via a de-SPAC continues to narrow
Root, Metromile and Hippo are some examples of names that went public through a de-SPAC. However, as shown above, many are now in a materially different place vs. their IPO price.
With a glut of SPACs and greater SEC scrutiny, an exit route via a de-SPAC has narrowed. Further, D&O lawsuit-focused firms have started circling this space apart from dissatisfied investors.
This litigation trend is critical as even though overall securities class actions filed in 2021 were less than in 2020, SPAC-related filings were up sixfold in 2021 vs. 2020, as per Cornerstone Research.
With private and public sponsors looking at the same data, an appropriate exit valuation might no longer be within reach. This development will result in many names looking for willing buyers or merging with other entities in the hope of staying afloat.
This development does create an interesting problem in the SPAC world itself. SPACs typically have a set time horizon to find a target and merge or liquidate. Although the deadline can in theory be extended a bit, this is not an indefinite process. Liquidations haven’t jumped yet, but with many SPACs struggling to find willing partners, increasing liquidations will put additional pressure.
The chart below shows that 610 SPACs are still searching for a target. Unfortunately, many of these could end up coming back empty-handed.
In summary, the window of opportunity for InsurTechs to pursue a traditional exit route is closing. It might be a smart strategy to get ahead of the trends. It’s about making your choices, or your choices will be made for you.
Inside P&C provides unparalleled market intelligence on the entire US P&C market – from small commercial and personal lines right through to reinsurance and Bermuda. Redeem your complimentary 14-day trial for more premium content from Inside P&C.
Scan here to download the app