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Insurtech valuations riding high in US, but 'shakeout' might be coming

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Insurtech valuations riding high in US, but 'shakeout' might be coming

The rising valuations of U.S. insurance technology startups was a hot topic at the annual InsureTech Connect conference, with an entire Sept. 24 panel entitled "Soaring Valuations & the Possible Insurtech Hangover."

The panelists offered several explanations for this trend. Some were environmental — namely low interest rates and the bull market in equities — while others were data-focused, such as the lack of many comparable exits upon which to base valuations. Several panelists also spoke to the massive market opportunity awaiting the companies that can crack it. "It's such a big market and industry," said Carsten Maschmeyer, a founding partner at Maschmeyer Group Ventures, an early-stage venture capital firm that invests in U.S. technology companies.

Notable valuations of late in the U.S. insurtech space include Hippo Analytics Inc.'s $100 million series D round in July, which valued the homeowners-focused digital agent at $1 billion, and Root Inc.'s $360 million series E round in August, which valued the full-stack auto insurer at $3.65 billion on a post-money basis. As panelists pointed out, these valuations are just on paper for the moment. But Prudential Financial Inc. is paying real money to acquire Assurance IQ Inc., a direct-to-consumer digital agency that helps consumers purchase a variety of coverage. The deal, announced in early September, entails $2.35 billion upfront and an additional earn-out of up to $1.15 billion contingent upon growth objectives.

But a reckoning might be coming. "I definitely think a shakeout will happen in the next year or two," said Andy Lerner, a managing partner at IA Capital Group, which invests across the fintech landscape, with several investments in U.S. insurtech companies. Vincenzo La Ruffa, a partner at Aquiline Capital Partners LLC, described what he foresees as a "sonic boom" coming in three to five years, when some of the early startups will need to be recapitalized. This could present an even greater opportunity for investors, in his view, since they will be able to invest in quality companies at sweeter terms. Aquiline Capital Partners is a private equity firm focused on a range of financial services investments, including more traditional companies and fintech.

That said, venture capital firms would typically prefer smaller valuations when they invest, in order to maximize profits when they exit. As such, they might potentially be biased in calling companies overvalued, a point that the panelists themselves acknowledged.

Cambridge Mobile Telematics Inc.'s $500 million capital infusion provided fodder for a separate discussion. In a session entitled, "The Half-A-Billion Dollar Question," Andreas Hansson, a partner at SoftBank Investment Advisers, talked about the rationale for SoftBank Vision Fund LP cutting such a large check. Hansson pointed to CMT's profitable and scalable model; its partnerships with insurers; and its mission of using telematics to increase road safety, not just to disrupt the insurance industry. The Vision Fund also has a strategy of thinking holistically about its portfolio, Hansson said. The insights and data from CMT can potentially be applied to other investments in the Vision Fund's portfolio, including its bets on ride-sharing companies and autonomous vehicles.