Expertise Matters
Q&A with Matthew Jones, Head of Ventures, Transverse
While insurtech startups have faced a challenging funding environment in recent years, insurers and reinsurers are finding a wealth of interesting ideas for investment.
Matthew Jones, head of ventures at fronting carrier Transverse, discusses how new ideas are changing every step of the insurance value chain, from customers through brokers to carriers.
Q
Discuss Transverse’s approach to investing in insurtechs.
A
At Transverse, we have a slightly different approach to investing than you might find at other insurance companies. Because of the unique spot that we occupy in the value chain as a fronting carrier—being at the center of it, essentially, working with the MGAs on one side and the reinsurance and capital markets on the other—we end up almost manufacturing a range of incredibly interesting investment opportunities as well as being presented with opportunities that don’t go to other traditional venture investors.
Transverse Ventures is a venture unit within the firm that is investing not just Transverse capital but also gives the opportunity to other insurance companies and other insurance executives to come into the fund and be part of what we are doing. Fund I was designed as an almost exclusive club of insurance companies and executives that are interested in the future and direction of the insurance industry. The key thing is that all of those individuals are like-minded industry players that have got a curiosity around new ideas and who are interested in exploring partnerships with the companies in the portfolio. Overall, they are organizations and individuals that bring more than just money. We bring those people together to catalyze value creation with the portfolio. That’s very different from the approach you will see from traditional venture funds that might have insurance as one of the many, many different sectors that they look at.
Q
Why is this an interesting time to invest in insurtechs?
A
The truth is that there has probably never been a better time to be investing in this space. First and foremost, there is a really exciting pipeline of interesting ideas and businesses that are being built. If we zoom out a bit and look at the broader environment and market, many people will realize that the number of deals that are being done, and the number of dollars being invested, have dropped significantly since 2021. But just because there is less capital doesn’t mean that there is less demand in this market.
There is a very strong cohort of companies that have great technology but are absolutely going to need to raise again before they get to profitability. I think those businesses have been materially de-risked and that capital scarcity has definitely shifted dynamics in favor of investors. That makes it a super interesting time to be deploying.
The other thing that I have observed is that a lot of management teams are really frustrated after the last few years with having to deal with investors that really don’t understand the insurance industry. I joined Transverse in May, I previously worked at an MGA, I’ve previously worked in insurance investing, and I previously worked for a reinsurance company as well. My team has a really deep understanding of not just the insurance industry as a space, but also things like how these businesses run on the inside, what the levers are that these management teams have to be able to change their businesses. We’ve also got a deep understanding of things like insurance valuation frameworks and thinking about how these businesses are built, ultimately in many ways to be sold further down the line to other industry players. We think this expertise not just gives us an edge in terms of getting into interesting companies but also gives us an edge in working with management teams long term. It’s really all about being on the same page as them.
Q
We’ve seen companies with big valuations encountering problems; what does this mean for the market?
A
Startups can die from one of a couple of things. One is not having enough cash and the other is having too much cash, indigestion if you like. A lot of companies raised a lot of money at very high valuations because interest rates were very low and the money was there. In some ways you can forgive entrepreneurs and management teams for getting carried away and grabbing that cash when it was available. The problem is that a lot of them didn’t have a plan to deploy that cash in a sensible way. So, they raised that money at high valuations and now as they come to the end of their runway they need to raise again, and they have to think really carefully about what’s important to them. We’ve come to the end of the era where there was a lot of money available and now people have to be a little bit more realistic about how their company is valued and what that company is worth.
If we start with the front of the value chain—the market-facing side of things—in many ways brokers have had a bit of a raw deal from the insurtech space.
Q
You’ve said that no part of the insurance value chain is immune from improvement by technology. Walk us through that.
A
If we start with the front of the value chain—the market-facing side of things—in many ways brokers have had a bit of a raw deal from the insurtech space. What I mean by that is in many cases what has happened is management teams have taken a product that was perhaps designed for an insurance company, they’ve gotten frustrated with the long sales cycles when it comes to carriers, and they’ve taken that exact piece of software and tried to sell it to brokers. Unsurprisingly, that doesn’t really work.
What I’m noticing is a kind of shift toward more specialized and well-thought-through propositions specifically for brokers. Brokers have demonstrated that they can be really adept, savvy adopters of technology when the solution is actually solving a real problem. In the past what we have seen in too many cases is companies that are not really solving a problem. They’re more starting with a solution and looking for a problem.
People have been predicting that direct[-to-consumer insurance sales], for example, will become more and more important, for years, and it just hasn’t happened. There’s a reason for that. That reason is that brokers are experts when it comes to risk management, and I am very confident that they will remain the gateway to the insurance industry.
Fronting carriers are a really interesting part of the value chain, and of course carriers more generally, because carriers have been traditionally buyers of technology developed for the insurance industry. If you think about fronting carriers, in particular, they are dealing with a large number of MGAs on one side of the equation and typically a large number of reinsurance partners and the capital markets on the other side of the equation.
There are a number of solutions coming through that help organizations like Transverse…manage all of those different relationships and better understand, for example, the flows of funds going from one particular broker in one part of the country all the way through the value chain to the reinsurance market. Those efficiency plays are particularly interesting. For the first time in a long time, we are beginning to see the replacement of spreadsheets with specialized tools in certain kinds of use cases.If we talk a little about policyholders, they in many ways are used to a certain experience when it comes to insurance companies. But the really interesting thing is that of course policyholders, i.e., you and me, are interacting with other businesses every day—whether it’s our bank or our utility company or something like Netflix, for example—and our expectations are going up and up because of these experiences, often driven by technology, that we’re having elsewhere in other industries. Insurance companies are learning lessons from and taking inspiration from some of these other industries and bringing some of these experiences to bear within the insurance industry which I think is really exciting.
Q
You’ve been on both sides of the table, as an investor and as an insurtech looking for capital. What did you learn from those experiences?
A
The first thing I would say is that there aren’t a ton of investors out there that I think truly understand the insurance industry. I’ve seen firsthand that that can be an incredibly frustrating experience for the CEOs of insurtech businesses that are looking to raise capital.
Another observation is that the era of growing at any cost has thankfully and rightfully come to an end. People know that in insurance you can sell $10 bills for a dollar every day of the week but that comes home to roost eventually. What investors are beginning to appreciate is that there is a delicate balance between growth and profitability that comes with being a company that is venture-backed. That’s a really exciting challenge but not every team is equipped for that.
One of the things that we look for are teams that have got a blend of not just insurance industry expertise but have also got an understanding of what it means to be in a high-growth tech company. What I’ve learned personally is that blend of the two is what is really, really important and that’s what distinguishes the companies that we invest in from the rest of the market.Insurtech investing rebounded strongly in the second quarter of 2024 as the average deal size nearly doubled to about $18.5 million from $9.8 million in the first quarter, according to the Gallagher Re Global InsurTech Report. Overall global funding rose to
$1.27 billion in the second quarter, the highest level since first-quarter 2023 and up about 40% from $912 million in the preceding quarter. The second quarter also brought the reappearance of a mega-round with a $165 million Series D funding deal for health insurer Sidecar Health. The 82 deals in the second quarter were down sharply from 107 in the first quarter and at the lowest level since 2020. That was due to a pullback in seed stage deals, according to the report.
That Dreaded Blue Screen
Air travelers nationwide were left staring at the infamous “blue screen of death” instead of flight information at airport counters this summer after a balky update to widely used CrowdStrike antivirus software shut down millions of Microsoft Windows devices. The massive outage disrupted airlines, banks, emergency services, hospitals, hotels, and a host of other operations. Microsoft estimated it affected 8.5 million Windows devices, or less than 1% of all machines using the operating system.
The outage underscored the danger posed by widespread reliance on a few software vendors or cloud services, following the disruptions to U.S. hospitals caused by a ransomware attack on UnitedHealth Group’s Change Healthcare business and to auto dealers nationwide by a strike against software provider CDK.
“The potential for a cyber attack or systems outage, such as these, raises concerns about the potential for further large systemic losses,” Joshua Motta, CEO of cyber insurtech Coalition, wrote in a blog post.
The direct financial loss to Fortune 500 companies could reach $5.4 billion, not including Microsoft itself, cloud outage MGA Parametrix estimated. However, “[t]he portion of the loss covered under cyber insurance policies is likely to be no more than 10% to 20%, due to many companies’ large risk retentions, and to low policy limits relative to the potential outage loss,” Parametrix said. Leading airlines were looking at costs of about $860 million, according to Parametrix. For its part, Delta Air Lines estimated that a five-day service disruption caused by the outage cost the airline $500 million.
While a cyber attack was not behind the outage, coverage under cyber policies would depend on what the policy actually says, Motta wrote. Business interruption losses could involve other policies, depending on the circumstances.
Beazley, a leader in cyber cat bonds, said in its first-half earnings results that CrowdStrike notifications had been lower than other systemic cyber events, including the Change Health and CDK attacks.
“This is exactly the sort of scenario that we model, and we underwrite to, but one of the smaller ones, and I’m pleased that we were able to understand the impact that it would have on our business quickly
and update the market within days that this would not, in and of itself, impact our full year results in a material way,” Beazley CEO Adrian Cox said during the company’s results conference call in August.
“However, I think what this incident has done is give a data point to the world of the sort of thing that can happen and the impact that it can have,” Cox said.
