And while there were sparks of cheerfulness among attendees, a careful reading of the room – and some additional acumen – would lead any careful observer to conclude that rationalism has superseded optimism.
Commentaries from participants in the conference were largely in line with expectations laid out in our previous reporting, as the fallout of InsurTech’s top venture debt lender will likely mean an acceleration in the increasingly challenging headwinds for the sector.
In December, this publication wrote that raising venture debt had become increasingly popular among InsurTechs, as sky-high private InsurTech valuations cratered amid a combination of pulled IPOs and punishing market conditions for the public cohorts.
And in the aftermath of SVB, sources have said that the dwindling of available debt could push companies to crowd an already hard equity market, leading to more supply and demand imbalances.
Now, it is understood that this sentiment has largely remained unchanged, even after North Carolina-based First Citizens agreed to buy SVB’s assets, after a run on deposits wiped out the bank.
Both conference attendees and sources speaking separately with Inside P&C have said that there was “absurd panic” following the collapse of SVB. Anecdotally, one InsurTech MGA CEO attending the conference said that private equity funds have been “invisible” for the last two weeks.
“That is why I am here,” he said, adding that he had been “ghosted” by funds he had been in negotiations with.
Just looking at investment figures for the most recent quarter, Global InsurTech investment fell to $1.01bn in Q4 2022, its lowest level since Q1 2020 and a 57% drop from Q3 2022, according to the latest edition of Gallagher Re’s Global InsurTech Report.
Due to the drop recorded over the final quarter of the year, InsurTech funding in 2022 was down 49.5% on 2021, taking the total raised throughout the year to $7.98bn. Notably, InsurTechs attracted $6.51bn less in mega-round funding, equating to a 66.7% year-on-year drop.
But it is important to remember that the retrenchment of venture capital in InsurTech is not new and has been going on since last year. Last year’s collapse of public market valuations happened on the back of a record-breaking prior year for global InsurTech invesment, amid a wider growth-stock tech correction and interest rate hikes.
As the cost of capital increased, investors were forced to assess their loss-making companies, and unit economics – until then neglected – were more heavily scrutinized. And with the SVB debacle, it is expected that the cost of capital is set to increase even further.
Against such backdrop, the two dynamics discussed below were made clear by conference attendees.
1) Investors think valuations still need to further drop
It is understood that many in the market still believe that valuations for InsurTech have not yet bottomed out, considering both market conditions and the exorbitance of their priced-for-hype days. For instance, if your last round valued you at 10x more than you are worth, and your valuation is down 90%, you are still not cheap.
Conference attendees echoed this sentiment, with several InsurTech executives present saying that investors are still questioning valuations.
“VCs are trying to read the room,” one executive said. “Investors are smart, but we are all in an emotional time, with a lot of fear.
“There was absurd panic following the SVB collapse, and VCs were saying: ‘everybody, pull out now’”.
One InsurTech CEO, who heads an MGA, agreed that investors are saying that valuations are still too high, but cautioned that at this level of dilution, there are a lot of founders that will face pressure.
Further, there is a point to be made around the discrepancy between public and private InsurTech valuations. While intertwined, InsurTech valuations in the public and private spheres are not perfectly correlated.
Where you once saw a valuation delta in favor of public markets, you now see an inversion, and private InsurTech valuations are still much higher – despite the cratering of last year.
That is a function of abundant dry powder coming from the princely sums raised by private equity and venture funds for both InsurTech and fintech companies at large. Dry powder which still exists, despite overarching fears.
“The publics had already faced public market carnage, and SVB marked a moment of reckoning on the private side,” one executive attending InsurTech NY said.
There still isn’t much clarity by how much further valuations will collapse and when they will finally bottom out. Our earlier reporting suggested we could potentially see valuations reach a bottom in 2024 or 2025. However, that was before SVB.
2) ‘Disruption’ has been replaced by ‘partnership’
This dynamic is also not entirely new. Already at the last InsurTech Connect Vegas – the world’s largest InsurTech event – there was less talk of disruption, and more conversations around underwriting fundamentals and profitability milestones.
But just by walking around the exposition hall of InsurTech NY last week, and observing the companies present, you could see how the entire value proposition – and the pitches – have changed. You hardly saw anyone promising to re-invent the wheel.
What you heard were executives pitching specific products or platforms that support underwriting. The discussion was all around partnership, be that with incumbent carriers, brokers or other InsurTechs.
It is important to discern between two InsurTech “buckets”: The start-up technology and service companies, which are not in the business of selling insurance; and the MGAs or full-stack challengers.
Most companies with booths at the expo hall were data services/Saas InsurTechs.
In fact, InsurTechs on the “services” bucket are the ones still carrying the more robust valuations, finding easier access to capital, and are the ones more likely to be acquired by incumbent carriers – and those could be reasonably healthy plays, sources said.
Case in point, technology-focused investment firm Vista Equity Partners in January closed an all-cash deal to buy P&C software provider Duck Creek Technologies for $2.6bn. The takeover is expected to be completed in Q2, subject to regulatory approvals and customary closing conditions. Vista will fund the transaction with equity financing.
Moreover, insurance tech provider Roadzen is to go public after it agreed to merger with special purpose acquisition company (SPAC) Vahanna Tech Edge Acquisition I Corp in a $965mn deal.
Yet, the concept of partnership can be somewhat challenging as there are a lot of “me-too” InsurTech companies that offer similar services, and only so many companies willing to partner with them.
"Carriers don’t want to be caught refueling their plane mid-air"
Secondly, insurance incumbents are notoriously known for being somewhat unreceptive to third-party technology providers, and many choose to develop their own tech infrastructure in-house.
While many participants agreed that there is now greater receptivity among incumbents to partnering with InsurTech compared to before, a lot of these SaaS companies are still struggling to find partners – even if they are not being outright rejected.
“Carriers don’t want to be caught refueling their plane mid-air,” one CEO that runs a SaaS platform InsurTech said. “If they are already in contract with a telematics InsurTech provider, for example, they will stick with until at least that contract is finished”.
“We don’t hear a lot of ‘no’, but a lot of ‘not yet’”, the executive said.
On the collaboration/disruption discussion, one attendee highlighted that the change of rhetoric goes back to the retrenchment of capital, and on companies having to tweak their entire value proposition to attract investors who once rewarded hype – and who were seduced by the idea of revolutionizing an industry they felt was ripe for disruption.
“Companies tweak their rhetoric to their audiences,” the source said. “They will tell investors what they want to hear, which is unit economics and path to profitability.”
Yet, sources agreed that now it is harder to get away with rhetoric and buzzwords alone.
“What has really changed is the level of knowledge Silicon Valley has – so your pitch now must be different,” one InsurTech executive attending said.
"Companies tweak their rhetoric to their audiences,” the source said. “They will tell investors what they want to hear, which is unit economics and path to profitability"
Where do we go from here?
There is a general consensus that we are now at a significant transition point for the InsurTech industry. Market headwinds have shown that while it may be easy to be a disruptor, being a profitable disruptor is a whole other story – and investors are demanding to see at least a path to profitability before signing checks.
Ultimately unsophisticated operators are going to leave the market and lessons from predecessors will need to be learned. But that doesn’t mean it is the end of the line, as it could also provide an opportunity for founders to exit the space and potentially return with more economically viable ideas.
As for who is doing well? Attendees pointed out that companies that focus on loss ratios and other fundamentals, “play where there is a gap”, or present innovative solutions that support underwriting are more likely to survive.
“The value add is two-fold: profitability and technology,” one executive said, adding that modelling, risk selection, and relationships with capacity providers are highly coveted – especially as reinsurance hardening has trickled down to InsurTech.
At the end of the day, some companies will have to wind down and others be acquired at a significant discount. But there is still capital for companies with strong fundamentals and truly innovative ideas, even if they have to raise capital at lower valuations.
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