Consolidation and Covid-19 blamed for insurtech investment 'slowdown'

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Consolidation and the global coronavirus pandemic have driven a slowdown in insurtech investment in the first quarter of the year, experts have cautioned, with the worst of the Covid-19 impact on funding yet to come.

Last week, Willis Towers Watson reported insurtech investment worldwide during quarter one, which saw almost the same amount of money raised in its first three days as was then subsequently raised in its final three weeks, totalled $912m (£738m).

WTW insurtech running total
Willis Towers Watson

According to WTW’s latest insurtech briefing, the deal count, at 96, was up 28% over the fourth quarter of 2019, and 10% more than the first quarter of that year. This represented the highest number of investment rounds by transactional volume ever recorded.

However, overall total funding was down by up to 54% (see ‘Funding in numbers’ table) reflecting in part far fewer ‘mega-deals’ ($100m-plus deals) taking place in the year so far.

Funding in numbers

BCG Quarterly Insurtech Roundup Q1

  • Q1 2020 - $912m
  • Q4 2019 - $1.9bn
  • Q1 2019 - $1.4bn

WTW Quarterly Insurtech Briefing Q1

  • Q1 2020 - $928m
  • Q4 2019 - $1.9bn
  • Q1 2019 - $1.4bn

CB Insight State of Fintech Q1 Report

  • Q1 2020 - $825m
  • Q4 2019 - $1.9bn
  • Q1 2019 - $1.6bn

In 2019, multiple unicorn-making rounds bolstered eight out of the 10 insurtech firms valued at $1bn or more. This most recent quarter, however, included no unicorn making rounds and only observed one mega-round — the $100m Series D issue by Policy Genius.

While in Q4 2019, 19 countries outside of the US, including UK and India, made up half (50%) of all deals, in Q1 2020 the investment was more concentrated in the US, which absorbed 57% of deals, and the UK, with 10% of deals.

Meanwhile, the UK and India, both countries that have typically been home to an insurtech scene, registered the largest increase in funding amounts – up 180% and 53% year-on-year and 66% and 237% quarter-on-quarter respectively, Boston Consulting Group identified.

Property and Casualty, which raised $323m, and health insurtechs, which raised $239m, saw funding down 45% and 60% year-on-year and 58% and 74% quarter-on-quarter respectively, according to BCG’s report.

Covid-19 may be challenging investor confidence resulting in a softening of deals in countries outside core insurtech markets. Meanwhile reinsurers and insurers could be pulling back from insurtech investing to focus on concerns driven by the pandemic, according to market watchers.

However, experts are torn on whether the recent change in investment behaviour is down to the Covid-19 impact, or whether other factors are at play.

Andrew Johnston, global head of insurtech at Willis Re, said: “This has been a particularly interesting quarter for global insurtech. It is clear that Covid-19 has had a material impact on later-stage investments, and reinsurers and insurers are holding back. Despite the very large percentage drop this quarter when compared with the last, we are still seeing a huge amount of activity in early-stage funding rounds, across a very large number of deals.

BCG insurtech quarterly
Boston Consulting Group

“The relative downturn of reinsurer participation in this round would explain why we have seen fewer megadeals, affecting the overall amount raised significantly, which is not surprising as reinsurers increasingly participate in later stages. Again, Covid-19 is a likely culprit for less engagement from industry capital as reinsurers focus their attention on other, perhaps more pressing issues.”

In contrast to Johnston’s observation that there is still a large amount of interest in early-stage rounds, as mega-deals appear to be suffering, investors have also pulled back on early-stage deals across all fintech as they prep for a recession, CB Insights said. 

Covid-19 impact

While Johnston highlighted reinsurer behaviour as a result of Covid-19, according to BCG it is still very early days to be seeing an impact from the pandemic on insurtech investment. The report cautioned that the pandemic impact has yet to heighten.

Megadeals of 2019

Wefox Group - $125m (Q1)

Investors: Credit Ease Fintech Investment Fund, Goldman Sachs, Mubadala Ventures, Sales Force Ventures

Clover Health - $500m (Q1)

Investor: Greenoaks Capital Management

Lemonade - $300m (Q2)

Investor: Allianz X 

Collective Health - $205m (Q2)

Investor: Sun Life Financial

Fundbox - $176m (Q3)

Investor: Allianz X 

Babylon Health - $550m (Q3)

Investor: Munich Re Ventures

Hippo Analytics - $100m (Q3)

Investors: Bond, Comcast Ventures,Felicis Venture,Fifth Wall Ventures, Hillhouse Capital Management, Horizons Ventures, ICONIQ Capital, Lennar, Micheal Ovitz, Pipeline Capital Partners, Propel Venture Partners, RPM Ventures, Standard Industries, Zeev Ventures

Root Insurance - $350m (Q3)

Investors: Coatue Management, Drive Capital, DST Global, Redpoint Ventures, Ribbit Capital, Scale Venture Partners, Tiger Global Management

Policy Bazaar - $130m (Q3)

Investor: Tencent Holdings

Gusto - $200m (Q3)

Investors: Dragoneer Investment Group, Fidelity Investments, General Catalyst, Generation Investment Management, T. Rowe Price

Wefox Group - $110m (Q4)

Investors: Merian Chrysalis Investment Company, Mundi Lab, Omers Ventures, Samsung Catalyst Fund, Target Global, Undisclosed Investors

Bright Health - $635m (Q4)

Investors: Bessemer Venture Partners, Cross Creek, Declaration Partners, Flare Capital Partners, Greenspring Associates, Meritech Capital Partners, New Enterprise Associates, Redpoint Ventures, Town Hall Ventures

Next Insurance - $250m (Q4)

Investor: Munich Re Ventures

Duck Creek Technologies - $120m (Q4)

Investors: Dragoneer Investment Group, Insight Partners, Neuberger Berman, Temasek

The report stated: “Although Q1 2020 figures were down on average compared to previous quarters of 2019,  we believe this is mainly due to a consolidation effect within the industry rather than to the current global pandemic. Last year, insurtechs globally attracted approximately $6bn in equity funding, with the majority of the funding being targeted towards companies operating in P&C and Health.”

It added: “Venture Capital Investments within the insurtech space may be negatively impacted by Covid-19, however we assume this is even more strongly to be observed during the second and third quarters of this year.

“We believe VC firms and Angel Investors will still be looking to invest, but they might be focusing on fewer deals with relatively smaller funding amounts, while we expect term sheets referencing lower valuation multiples and more investor friendly terms. Moreover, time will probably be more spent on supporting portfolio companies as opposed to scouting for additional ones. It is likely that reinsurers will reduce their investment activity as well, as their balance sheets experience increased pressure and deployable capital becomes relatively more expensive.”

Long term effect

Despite experts’ caution on insurtech investment, the sector remains buoyant that in the longer term investment will continue,

Luisa Barile, chief financial officer of Bought By Many and treasurer and council member of Insurtech UK told Post: “If you look insurtech in general, I don’t expect longer term would have a negative impact on the sector.”

Barile added that the sector is even stronger than before because the crisis has shown how important innovation is for the sector.

She said: “[Insurtech] will be one of the sectors that will come out stronger from the crisis because a number of insurance companies, as well as insurtechs, are investing quite heavily in the crisis because insurance sector in general which includes insurtechs and incumbent, feel a strong need of innovation. So the crisis has pushed companies to digitalise even more than what they were doing before.”

However in shorter term, the sector will see a negative effect.

Barile said: “Clearly every sector is affected negatively because there is less investment available and the implication for insurtech, compared to other sectors is that insurtech is younger as a sector compared to fintech for example.

“This has two implications, one is there are a lot more companies that are at earlier stages and therefore more risky as an investment and there are a lot less investors with experience of investing in insurtechs.

“The natural tendency of people in a crisis is that they stick with the factor that they know best, so insurtech was penalised by the fact that a number of investors who were very interested in insurtech before the crisis are now saying ‘we don’t know the sector too much,” Barile concluded.

Bought By Many has itself just raised $98m in a series C round, the largest of any UK insurtech so far. The deal, announced earlier in May, saw term sheets signed off before “anyone had heard of Covid-19,” according to Bought By Many CEO Steven Mendel.

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