Insurtech: From Disruptor to Target?
As insurtech valuations decline, these firms may become attractive acquisitions of the very companies they were originally touted to replace.
Several highly discussed insurtech firms that went public via IPO in the past couple of years on the basis of a digital transformation of the insurance industry have not fared well in the stock market, seeing their billion-dollar valuations tumble.
An example of this ongoing trend is Lemonade, which went public at a valuation of $4 billion ($69 per share), peaked at $11 billion ($183 per share) in early 2021, and is now valued by the public market at $1.1 billion ($19 per share at press time). While Lemonade’s valuation remains over a billion dollars, many insurtech valuations are only in the hundreds of millions, making them potential M&A targets for established insurers and brokerages looking to strengthen their digital presence and attract digitally savvy customers.
The recent war in Ukraine, however, may have the opposite effect on M&A activity for the remainder of the year. In fact, many international firms, including large established insurers and brokerages (like Zurich, Aon and WTW), have pulled their business operations in Russia. By doing so, these firms are giving up millions of dollars of potential revenue, which—in a standard political and economic environment—could have served as funding for M&A activity.
With the current economic and political environment, are public insurtech firms potential M&A targets in 2022?
To find out, Leader’s Edge spoke to a panel of McKinsey financial services and insurance experts: Ramnath Balasubramanian, Matthew Scally, Grier Tumas Dienstag, Doug McElhaney, and Katka Smolarova. The answers reflect their consensus.
Q
As insurtech valuations decrease, can these firms become M&A targets for large/established insurers?
A
“Insurtech” is really a catch-all term. While it is true that balance-sheet focused insurtechs’ valuations have decreased, it is not universal across all insurance disruptors or tech-driven insurance assets.
In particular, given the sky-high valuations from which they started, most insurtech firms are still valued above traditional insurers. Therefore, an acquisition may be dilutive to a large/established insurer (e.g., comparing the EV/revenue multiples, you can see established insurers trading around 1.4x and some of the balance-sheet focused insurtechs at around 10.5x). That said, the valuations are moving closer to a range where M&A becomes more palatable to large/established insurers that are looking to gain specific capabilities.
The bigger question on our minds is if the target provides meaningful capability differentiation or branding to a non-core market that the acquirer wants to enter. We do not see the insurtech landscape as equivalent to the retail brokerage roll-up strategy.
Q
From an acquirer’s perspective, what aspect of insurtech firms is most valuable?
A
When we speak with both insurtechs and incumbents, there is continued belief that the technology built is valuable to the broader insurance ecosystem. For large incumbents looking to quickly accelerate their capabilities and finding off-the-shelf software too rigid, this can be a quick way to infuse capabilities. In fact, some insurtechs are realizing that there is significant value in their technology and are considering white labeling to other insurers.
Digital talent with insurance-specific knowledge is also very valuable and relatively rare in the industry, especially in the personal lines market.
Q
Can insurtech valuations cause any long-term issues in regard to innovation for the insurance industry?
A
We see innovation happening with many other types of players, beyond the direct-to-consumer insurtechs that have taken the largest hit. Enabling insurtechs (those that partner or serve carriers and brokers) have not seen a dip nearly as large as those for direct-to-consumer insurtechs, and we continue to see venture capital, growth equity, and private equity funding being robust in the space.
Q
What market implications could arise if established insurers were to purchase insurtechs?
A
Similar to other segments of financial services (e.g., wealth and asset management), acquisitions can raise additional questions about the sustainability of a pure digital offering relative to an omni-channel experience that incumbents are able to offer. Other incumbents are likely to fast-follow or look for acquisitions as well in order to enhance their digital capabilities and talent.
When talking about balance-sheet focused insurtechs, however, their market share is not scaled. Therefore, any single acquisition will probably not change the trajectory of acquirers in the near term.
Q
What are some of the lessons learned from this ongoing insurtech cycle (from disruptor to target)?
A
The pattern is similar to what we have seen in some other parts of financial services (e.g., wealth management as mentioned above).
A) Insurance is a very complicated, regulated industry, and it is not easy to get it right.
B) The direct/digital model works well now for a small segment of customers in targeted states. While other global markets have seen this model scale effectively, the fragmented nature and distribution of the U.S. insurance market makes it more challenging.
C) There is significant complexity to profitable growth in insurance (as evidenced by the combined ratios of insurtechs).
D) Technology investments create competitive advantage but may not have ROI when used by only a single insurer.
