S&P:“Full Stack” Insurtech Enterprises Shine For 2021 US Insurtech to see More M&A, Heightened Investor Interest

By Thomas Mason

S&P’s latest  Global Market Intelligence report on the  insurtech market, sees the creation of U.S. insurtech companies that both sell and underwrite policies (a.k.a. full-stack) accelerated in 2020, aided by an abundance of venture capital.This trend is likely to continue in 2021, which will in turn spur more private capital raises, M&A activity and new carrier formations.

Key highlights include: 

• The trend of companies going “full-stack” (both selling and underwriting policies) is in full swing and likely to continue. The report provides a roundup of companies that have done so in the P&C sector, and highlights select digital agencies with the potential to go this route in the future.

• Venture capital funding to the U.S. insurtech sector took a hit in April, but has since rebounded and should remain strong in 2021, aided by a host of factors laid out in the report. But 2022 and beyond are less clear, given a decline in the rate of startup formation.

• IPOs and M&A activity will likely abound in 2021, as the insurtech companies that were part of the startup boom in 2015 and 2016 have matured and are now considering exit events for their investors.

•In percentage terms, growth in direct channel U.S. private auto premiums should continue to outpace the U.S. private auto insurance industry as a whole in 2021. But while buying online seems ideally suited to consumers sheltering in place, direct channel writers have not been spared the pandemic’s impact to driver behavior and economic conditions.

The creation of U.S. insurtech companies that both sell and underwrite policies (a.k.a. full-stack) accelerated in 2020, aided by an abundance of venture capital, according to S&P Global Market Intelligence’s latest insurtech market report. This trend is likely to continue in 2021, which will in turn spur more private capital raises, M&A activity and new carrier formations.

The full-stack model is particularly prevalent in the property and casualty sector, where S&P Global Market Intelligence identified roughly a dozen companies as of Dec. 10, 2020.

The health insurance market has produced some large full-stack companies as well, including Oscar Insurance Corp., Collective Health LLC and Clover Health Investments Corp. They are relatively scarce in the life insurance market, but we are aware of one: Bestow Inc. The Dallas-based startup created a carrier subsidiary, Bestow Life Insurance Co., in 2018 and announced the acquisition of Centurion Life Insurance Co., a carrier licensed in multiple states, in December 2020. Should Bestow Inc.’s plans prove successful, it could coax other life insurtech startups into going full-stack, such as Ethos Technologies Inc. and Ladder Financial Inc. They too focus on term life insurance policies and have each secured copious funding.

The full-stack trend seems increasingly less like the choice of a few early adopters and more like the goal of many startups that begin as digital agencies but lack enough capital and/or experience to go full-stack in the early innings. For instance, the three most recent entries to the list — Pie Insurance Holdings Inc., Branch Financial Inc. and Hippo Enterprises Inc. — all began as brokers, partnering with incumbents to handle the issuance of the policies for years before making the switch. Pie focuses on commercial lines, particularly workers’ compensation, while Hippo focuses on homeowners insurance and Branch offers both home and auto.

Some insurtech startups achieved the full-stack model by forming a new company, others did so by acquiring an existing carrier and some, like Bestow Inc., did both. Since 2015, the two paths to becoming full-stack — acquiring an existing carrier or forming a new one — have been nearly evenly split among P&C companies.

Since S&P Global Market Intelligence expects the full-stack trend to continue in 2021, more M&A transactions seem likely as well. Unfortunately for bulge-bracket investment banks, many of these full-stack transformation deals are likely to be small, particularly if the target is in runoff. Buckle Agency LLC agreed to buy Gateway Insurance Co. for only about $5 million, for instance, and Metromile Inc.’s purchase of Mosaic Insurance Co. (which it renamed to Metromile Insurance Co.) in 2016 was approximately $20 million in size. In such deals, the insurtech acquirers purchased clean shells, which are carriers that are no longer writing new business but still have state licenses to write policies.

But this will likely not be the only source of M&A activity in the U.S. insurtech arena. In a section entitled “Taking the exit,” the report discusses how many fast-growing startups have reached the point where they are considering liquidity events for their investors. While some will go the IPO route, as Lemonade Inc. and others have done, others might consider selling. Conversely, some of those startups, particularly the ones that have gone public, now have dry powder to do acquisitions themselves.

Regardless of whether startups choose to build or buy their carrier operations, they need financing to do so. The report anticipates that startups will likely be able to secure the additional funding required, given encouraging venture capital trends through the first nine months of 2020. Funding for private U.S. insurtech companies declined dramatically in April 2020, amid the early stages of the pandemic, but both the value and volume of transactions rebounded in subsequent months.

Full-stack companies garnered roughly half of the total amount raised by U.S. insurtech companies through the first nine months of 2020, though the digital agency and business-to-business solutions categories each had a larger number of transactions.

In 2019, S&P Global Market Intelligence predicted strong growth ahead for private U.S. insurtech funding, due to low interest rates, large amounts of uninvested capital at VC firms and an environment conducive to exits, be it IPOs or acquisitions. This proved accurate. But while those catalysts remain in place, the long-term view seems less clear. Private company funding could begin to decline if the rate of startup formation falls and the more mature companies find an exit for private investors, either through an IPO or a sale of the company.

This article by Thomas Mason, S&P Global Market Intelligence,  was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Globa, and is used here with the permission of S&P.