Insurtech investment downturn | Business Insurance
Investment in insurtech companies plummeted in the second quarter compared with the explosive growth in the same period last year, but interest in the sector remains high as companies continue to look for ways to make better use of technology throughout the insurance industry.
While second-quarter funding dropped by about 50% from last year’s record levels, it was still the second-highest second-quarter investment total on record, illustrating the stresses on the sector and pointing to a possible inflection point for capital flow, sources say.
Looking forward, investors and market participants will likely focus more on profitable growth, they say.
Insurtech stock price drops also wiped billions of dollars in value from publicly traded companies (see chart), but those losses should be seen in the context of the wider sharp fall in technology stocks, they say.
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A report last month from Gallagher Re, a unit of Arthur J. Gallagher & Co., that showed a sharp decline in funding in insurtechs sounds a warning for the sector, but it will likely recover and remain promising for investors, experts say.
“Insurtechs are being forced to reevaluate their growth strategies. In some cases that may mean having less lofty growth goals and actually focusing on things like revenue and profitability if they want to survive,” said Andrew Johnston, Nashville, Tennessee-based global head of insurtech at Gallagher Re.
Mr. Johnston said there has been a relative drying up of capital that has previously funded losses. “Companies are going to have to start generating their own income to that extent,” he said.
“There are macro factors and market factors that have driven more of a shadow, and I do think that has impacted the level of activity,” said Emmalyn Shaw, managing partner with Flourish Ventures, a San Francisco-based venture capital firm with interests including insurtech and data and analytics.
“I don’t like to focus on any one particular quarter, but second quarter has had the strongest early warning signs of an inflection point at which valuations become more realistic and there is a greater focus on revenue and profitability,” Mr. Johnston said.
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Still, most sources agree that there is ample capital flowing into the sector.
Parker Beauchamp, founder and managing partner of Boulder, Colorado-based Markd VC LLC, a venture capital firm focused on insurtech that launched a $100 million investment fund in March, said he has deployed about $20 million of capital across 12 deals either completed or committed to, mainly early-stage investments.
“Maybe this year people are working less with later-stage startups with high (cash) burns and lofty expectations. Those are the opportunities catching more grief this year than they would have last year,” he said.
Macroeconomic factors, such as persistent inflation, are causing uncertainty for investors, but that is not unique to insurtech or technology in general. “They’re off like everyone else,” Mr. Beauchamp said.
Mr. Johnson noted that trillions of dollars of value had been wiped off public markets worldwide and said the crunch has taken a toll on the insurtech sector. “What we’re seeing is some insurtechs are laying off staff, and there are some clear strategies in place to try to preserve capital,” he said.
Amelia Gandara, senior investment professional in Columbus, Ohio, with Nationwide Mutual Insurance Co.’s venture capital team, said that with second-quarter funding of $2.4 billion, “there’s still capital flowing into insurtech.”
In 2021, with capital ample, “boards focused on growth, which requires and burns a lot of capital,” she said. Concerns about a possible recession “can make folks more conservative” and make them more likely to try to preserve capital.
Some insurtechs are raising extra capital as a hedge against deteriorating market conditions, and this can allow investors to potentially invest at more favorable valuation than previously, Ms. Gandara said.
Last year, Nationwide substantially increased its commitment to the insurtech sector, expanding its venture capital fund to $350 million after starting in 2017 with $100 million.
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The commitment to insurtech is also expanding at Axa XL, a unit of Axa SA, said Rose Hoyle, Irvine, California-based head of construction innovation.
“What we started here in construction we’re expanding now across all of our other business units,” Ms. Hoyle said. Customers from across Axa XL’s business lines are looking to make better use of technology, she said.
Axa XL usually tries to connect a client with a specific technology that may enable the insurer to offer more favorable terms, she said.
While premium savings will never cover the cost of the technology, she tries to emphasize to policyholders that future saving can be significant in terms of reducing or even preventing claims.
Water mitigation is one of the most tangible technologies with which to prove a return on investment, as potential extensive water damage can be mitigated or avoided using sensors and automated shut-off, Ms. Hoyle said.
Other technologies, such as scheduling analytics, are far harder to measure, she said.