Evolution in Late-Stage InsurTech Investment Trends

February's Global InsurTech Report for Q4 2023, a collaboration between Gallagher Re, Gallagher, and CB Insights, examines the final primary stage in the InsurTech funding life cycle: late-stage or "mega-round" growth deals and exit strategies. Preceding quarterly reports reviewed the cycle's move through early-stage incubation and acceleration, followed by midstage expansion. This completes the life cycle.

Key Numbers from 2023

Key InsurTech funding data shows that global InsurTech funding ticked up 0.5 percent quarter over quarter from Q3 to Q4, an increase of $5 million, according to the report, while global InsurTech funding decreased 43.7 percent year over year, from $8.0 billion in 2022 to slightly more than $4.5 billion in 2023.

Meanwhile, late-stage deals received 39.9 percent of all 2023 Q4 InsurTech funding—a 6-quarter high. Global deal share among US-based InsurTechs rose 5.50 percent from 2022 to 2023, the largest gain for any country, the report says.

There were 41 venture technology investments from reinsurers in Q4 2023.

Though property and casualty InsurTech fell slightly in Q4, property and casualty deals continued to significantly outpace life and health deals, both in the number and value of deals, according to the report.

Reversing a Trend

Reversing a trend that had been in place since 2017, late-stage deals in 2023 were outpaced by midstage acceleration fundraising deals, the report says. This was unexpected because late-stage deals usually involve larger sums, generally three times more value per deal than an average midstage transaction.

The number of deals was not significantly lower—for example, there were more 2023 Q3 property and casualty deals than in Q3 of 2021, a record-setting year in many InsurTech investment categories—the sums associated with those deals fell from an average of $18.3 million in 2022 to $13 million in 2023, according to the report.

2021: Anomaly or Peak

Much focus has fallen on InsurTech investing in 2021, and whether those numbers were an anomaly or a peak in InsurTech investment. Up to 2021, the compound growth rate of deal counts and the rate for the total amounts invested were consistent, according to the report. This gave a reliable basis to create a Fibonacci projection for subsequent years.

In 2023, no quarter met the projections that 2021 was simply an anomaly, the report says. Between 2018 and 2021, total average deal count went up year over year. Average deal size jumped from 2018 to 2019 and dipped in 2020, but an uptick in deal count ensured an overall rise year over year. Deal counts then skyrocketed in 2021, as did average deal size. In short, 2021 was a banner year across the board. Average deal checks were the highest ever and there were more deals than ever.

Combining these results with the Fibonacci projection suggests that 2021 was likely a true peak of natural market activity and pricing, according to the report "the apex of what we can now describe as the first phase of InsurTech investment—the 'Great Experiment.'"

Reinsurers Tech Dollars

US rensurers' private technology investments continue to lead the world, accounting for 37 percent of funding in 2023, the report says. That's down from the 2012-to-present average of 55 percent but remains more than twice the investment of France, which is in second place. In fact, the amount invested by US reinsurers equals the investment of the next four countries combined.

Investment at the Seed/Angel stage is up slightly from 16 to 20 percent, according to the report. Series A investing holds stable at 27 percent versus a historical 28 percent. Where the biggest shift has occurred is investment moving from Series B, C, and D (down by 50 percent or more) to Series E and later, which now accounts for 10 percent of overall investments.

Late-Stage Investors

The United States continues to dominate late-stage investing overall generating more than $2.5 billion allocated to 43 deals in 2022 and 2023, the report says. Germany was second, generating $559 million allocated to 7 deals. France was third, generating $292 million allocated to just 2 deals.

Routes to Exit

Mergers and acquisitions (M&A), heavily weighted toward acquisitions, are the primary exit paths for InsurTech investors. Of 424 exits since 2012, 328 were acquisitions, 17 were true mergers, and only 79 deals fell outside the M&A category, according to the report. Recent examples of insurers acquiring InsurTech companies include two in April 2023: Direct Line's acquisition of By Miles and Arch's acquisition of Thimble.

There are also cases of an InsurTech acquiring another InsurTech, such as Bold Penguin acquiring RiskGenius in October 2020—followed by Bold Penguin being acquired just 3 months later by American Family.

Corvus Acquisition

Some of the biggest news was the November 2023 announcement that The Travelers Companies, Inc., would acquire Corvus, the report says. Corvus proprietary software evaluates organizations' information technology security, providing customers—mostly small-to-medium enterprises and their commercial insurance brokers—with a security ranking score, which can be compared by multiple variables such as industry and company size. Corvus long distinguished itself by emphasizing traditional relationships between policyholders, brokers, and underwriters to use data and technology to benefit everyone in the insurance value chain.

Potential for InsurTech Bargains

Many observers of the InsurTech market have predicted that M&A activity will pick up significantly, as InsurTechs that have successfully raised money but failed to generate enough revenue eventually run out of equity capital and look to sell their technology and/or business, according to the report.

In that instance, a variety of technology could come onto the market and creating potential bargains for those in a position to buy, though the report suggests a lower volume of such deals will become available than some observers expect, particularly with a sense of "wind currently refilling the InsurTech sails." Though it's a story worth keeping on the radar.

Conclusions

Consecutive InsurTech quarterly reports in 2023 examined each stage of the funding cycle from start to finish, explored the nuances within each stage, and the reasoning involved in successfully raising capital. The overriding lesson is that a sensible funding strategy is vital to an InsurTech's foundation, growth, and ultimate success.