Insurtech Faces ‘Leveling Out Period’ Amid Market Challenges

June 20, 2022 by

The insurtech industry is facing what experts say is a “leveling out period” after investment in the space accelerated during the pandemic due to changes in the workplace and a greater focus on the use of technology.

“We’re in this leveling out period,” said Chris Cheatham, product evangelist at Bold Penguin. “I don’t know what to call this period yet, because I think we’re still seeing the market shake out. This period right now is different. This is not pandemic. I don’t even know what to call it because I don’t want to try to name this particular economic moment, but you’re seeing valuations come down.”

Cheatham was speaking during a session on mergers and acquisitions in InsurTech for Carrier Management’s 2022 InsurTech Summit. He said he expects to see merger and acquisition activity pick up throughout the rest of this year as the marketplace grapples with this shift.

“I think there are a lot of people, honestly, probably trying to figure out their exit strategies right at this moment, right in the next few weeks, because things are looking interesting, I guess, is a nice way to put it,” he said.

Matthew Jones, managing director at Anthemis, also spoke at the summit, adding that the insurtech segment weathered the pandemic well as excitement about opportunities in the space increased among fintech and insurtech investors. However, he said this means insurtechs that didn’t consider acquisition opportunities during the past couple of years because of excess capital may be rethinking those decisions as the market has tightened.

“I might even go as far as to say that I know for a fact some are regretting saying no to some of those deals because they’re now coming out of the pandemic period and capital isn’t necessarily so available,” Jones said.

To understand how things might play out in insurtech throughout the remainder of 2022, Cheatham recommended examining what’s happening in the public markets.

“We’re seeing a realignment of software companies in the public markets, but also, I think it’s going to filter down again to the private markets where valuations are also going to get pushed down to some degree,” he said.

Indeed, Bloomberg reported in May that software companies that saw big returns during the first couple years of the pandemic

have lost more than half of their value since hitting peaks last fall. Zoom Video Communications Inc., DocuSign Inc., Snowflake Inc. and Asana Inc. experienced double-digit gains during the pandemic before crashing this year, and while most of the market has seen a recent decline, computer application and data storage providers have seen sharper losses, according to Bloomberg’s report.

“That’s a macro indicator of how things are going in software, and insurtech has clearly aligned themselves as a software engineering play,” Cheatham said. “All of that’s going to matter as we look at this. I think it all plays again into more M&A coming down the pipe as an alternative to what was available.”

With this in mind, both Cheatham and Jones said they expect insurtech M&A activity to pick up substantially throughout the remainder of the year.

“[It’s] certainly a topic that has been right at the top of our agendas in all of our board meetings so far this year,” Jones said. “I think it’s fair to say the biggest trend is that we’re expecting quite a lot of it.”

Adding to the increase in insurtech M&A activity is that the industry is beginning to mature and has entered a second wave, with insurtechs that were founded nearly a decade ago beginning to command healthy valuations, Jones said.

“There are probably two categories of companies: the ones that really made it — those are the ones that are going to command healthy valuations and be doing the acquiring — and the ones that didn’t quite make it. The ones that didn’t quite reach escape velocity,” he said. “I think each of those types of companies are going to be really interesting acquisition opportunities for the industry at large. I think as these companies continue to mature …you get to the point where they have to make critical decisions about their future. I’d expect the pace to pick up.”

Insurtechs as Acquirers

Jones said that despite funding and market challenges, however, he expects to see more insurtechs doing the acquiring than being acquired this year.

“If I had to choose, if I was told I can’t pick both, I think I would probably say that I expect slightly more on the insurtechs acquiring side,” he said. “Again, if I think about board conversations, there’s probably slightly more activity and more discussions around insurtechs being acquirers than the other way around.”

His advice for those insurtechs is to understand the purpose of the acquisition prior to engaging in a deal.

“I think the first thing that comes to mind is to ask yourself the question, ‘What are we buying here?'” he said. “Are we trying to bring in talent that we otherwise couldn’t recruit? Are we trying to bring in tech, or both?”

These questions are best answered by keeping the same mindset as an early-stage startup, Jones said, in order to understand how the company can grow and continue working toward its objectives while taking on another company.

“M&A is a muscle,” he said. “As you do more and more of these transactions, you will become better at them.”

However, he also offered a word of caution.

“I think too many organizations are perhaps tempted to engage in M&A because their competitors are,” he said. “With such an active environment in this space, I think that’s the challenge — making sure that you don’t turn into a full-time M&A shop, which can be very tempting.”

For insurtechs seeking to acquire other insurtechs, Cheatham said their focus should be all about the technology.

“You’ve got to dig in really hard on the tech on an insurtech-to-insurtech deal and really understand what does it do, how well does it work,” he said. “The tech becomes key here. I think it’s really exciting but also potentially perilous to acquire for tech.”

Although a much greater focus has been placed on tech and automation in the insurance industry during the past few years, partially due to pandemic shifts in workplace culture, Cheatham added that it’s also important to remember insurance is a people-focused industry, and the people are important in any acquisition.

“The people that are coming with that tech are super, super, super important because they’ve built that tech. They know where the bodies are buried. They will help you fix all that stuff that you need to fix,” he said. “They’ll help you scale it. They probably have ideas that never got executed upon. Making sure the people are happy as well is really important in these deals.”

Coping With Challenges

While strategic acquisitions can serve to benefit insurtechs in many ways, Cheatham and Jones agreed that they don’t come without challenges.

“I think the thing I’ve realized in hindsight is every financing round or acquisition I went through looked dead at some point in the transaction,” Cheatham said. “That is a horrible, horrible feeling.”

He said the best way to navigate this difficult period is to fully commit to the acquisition and ensure proper communication with everyone involved.

“If you are going to do an acquisition, really commit in your brain to trying to make it happen, because if you’re half in and half out, I don’t think these things go particularly well because the other side will note that, and they want you to be wanting to do this. You have to commit to making it happen,” he said. “Keep track of your employees during the process because probably the information’s going to get out that something’s going on, and you have to manage that appropriately with your team. Make sure everyone’s on board and talk them through the process.”

Jones said that equally as important as transparent communication about the logistics of the deal is honesty about the company’s own objectives.

“Be honest with yourself about what you’re trying to achieve,” he said. “Is it an exit full stop? Is it a new job? Is it a legacy for the technology that you’ve built?”

He added that time management is crucial as well. “Time kills deals,” he said. “Outline a timeline, and do your very, very best to stick to it.”

That said, his biggest piece of advice demonstrated the importance of honesty when it comes to M&A deals.

“Have a coping mechanism,” he said. “A girlfriend, boyfriend, parent, best friend, someone that you can call because it’s going to be stressful. I think having a rock that you can rely on to be able to get through that process is really important.”