InsurTech funding strong in 2020 despite COVID-19 disruptions
As long as InsurTech valuations remain robust, compelling opportunities to acquire traditional insurance companies at lower valuations will continue.
This has been a crazy year so far. But InsurTech fundamentals remain strong in 2020, and the outlook for the sector is positive.
The year started well for InsurTechs. Funding activity was robust in January and February, and valuation multiples were rich compared to historical levels.
Investments in fintech, of which InsurTech is a subsector, hit an all-time high in February. Many of my venture capitalist peers, while bullish on InsurTech’s long-term prospects, wondered if InsurTech valuations had gotten ahead of the business accomplishments.
By mid-March, everything in our VC world had changed. Offices closed across the tech and finance sectors, and everyone was working remotely. The stock market cratered. Funding rounds got delayed. Private company fintech/InsurTech valuations quickly went down by up to one-third.
Erratic market conditions
In the second quarter of 2020, smaller InsurTechs focused on government PPP loans instead of venture rounds. Higher profile InsurTechs mostly declined PPP funding but were wary about raising capital during a pandemic. VCs were preoccupied with COVID-related issues in their portfolio company.
Nevertheless, while fintech venture activity slowed to its lowest level since 2016, it did not go to zero, and a number of rounds got closed. Most second-quarter funding rounds consisted of companies that VCs had met in person prior to mid-March. InsurTechs that had digital solutions for tasks traditionally done in person were particularly in favor, for example, digital property underwriting tools in lieu of a physical inspection.
Private funding levels bounced back in July. The third quarter of 2020 was all about public market activity, including IPOs, and M&A. The quarter began with Lemonade’s IPO pricing above its expected range and, for the next two months, trading at levels double or more than the IPO price.
One success seeds more InsurTech IPOs
Prior to Lemonade’s IPO, the InsurTech sector was nervous as there were no publicly traded tech-first insurance companies, and substantial uncertainty was in the air about how public investors (who traditionally care about profitability more than VCs) would react to an unprofitable insurer. While Lemonade’s share price has fallen substantially from its July high, it is clear the IPO was a success.
Hippo, Root, and a few others are good candidates to follow Lemonade’s groundbreaking public offering. It is important to point out that, among several thousand InsurTech startups, only 1% are licensed insurers. Overall, InsurTech reflects a wide variety of technologies and lines of business, so the entire sector should not be judged solely by the successes (or setbacks) of a few high-profile, tech-enabled P&C insurers.
All eyes on trading performance
Second in importance to Lemonade’s IPO, but closely related, was the overall trading performance of public technology companies, particularly those in fintech. Large-cap tech stocks outperformed since the COVID-19 pandemic began; for example, Apple and Amazon were each up over 50% during the six months ending August 31.
However, fintech leaders like Square did even better, having nearly doubled over the same time period. As InsurTech is still a nascent subsector of fintech as far as public companies go, fintech stocks are the closest comparable industry group.
M&A: Not to be ignored
Third in importance was M&A activity. Most interestingly, in September, a leading InsurTech, Hippo, closed its acquisition of Spinnaker, a more traditional licensed insurer. As long as InsurTech valuations remain robust, compelling opportunities to acquire traditional insurance companies at lower valuations will continue.
In my opinion, the Spinnaker acquisition is a glimpse of the future. The most successful InsurTechs will start to look more like traditional insurers, from establishing substantial regulatory/compliance departments to embracing agent distribution.
Likewise, traditional insurers are learning from the InsurTechs. Incumbents will improve customer experience, become more digitally proficient, and partner with the best InsurTech service providers.
While today Lemonade seems quite different from, say, State Farm, in five years it will be difficult to distinguish the current InsurTechs from traditional insurers. And then, without a doubt, another generation of InsurTechs will disrupt the new status quo.
Andrew Lerner (andy@iacapgroup.com) is a managing partner at IA Capital Group. These opinions are his own.
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