Eric Emmons, MassMutual Ventures: DI M&A VC Roundtable

November 17, 2022 4:47 AM

Three insurance VC professionals spoke to Digital Insurance about M&A activity in the insurtech sector. This section features Eric Emmons, managing director of MassMutual Ventures. Click here to return to our package home page.

What’s the overall health of the insurtech market?

Eric Emmons, MassMutual Ventures

We believe the fundamentals of the insurtech market are strong. Many insurtechs initially set out to address the key issues of poor data flows, systemic process inefficiency, limited product selection, and legacy software environments within the incumbent carriers, and these continue to be pressing problems today. We think the insurtech market is weakest primarily in spaces with low barriers to entry and low differentiation for the marginal entrant.

What’s your view of the insurtech startup market and what it has in store for 2023?

Like other segments of the economy, the insurtech market is experiencing a reset of valuation expectations after the 2020-21 asset bubble, and we expect to see the normal boardroom dynamics playing out as subsequent financings come in at flat or lower levels. Strong companies that don't require $3 of capital to generate $1 of ARR will continue to find interested investors; less efficient startups will either cut costs and/or end up consolidating with their competitors. There's still ample capital supporting the space, but the expectations around the next financing round have certainly changed.

How might insurtechs disrupt the insurance market in the future?

One of the biggest disruptions we foresee in the next five years is the securitization of many types of insurance policies into standard financial assets. This new uncorrelated asset class (life and P&C insurance-linked securities) will reshape global reinsurance and will be a significant addition to global asset markets and investor portfolios. Our portfolio company, Ledger Investing, has spent the last nine years building the necessary infrastructure for this market, and we are excited that large asset managers have now discovered this sector.

Why has insurtech M&A cooled and will it stay that way?

The implicit bid/ask spread is still quite wide for certain insurtech company assets. The would-be buyers are encouraged by lower revenue multiples and may, in fact, be underbidding these for certain companies that don't have a clear alternative to a sale. The sellers, on the other hand, may be reluctant to accept a lower valuation than that set in the last financing transaction. As a result, a lot of investor syndicates are bridging to a future in which either revenue or multiples will permit a better outcome. I expect we will see a wave of M&A in 2023, as boards either capitulate or as companies successfully grow into an acceptable exit valuation.

Will insurtech funding remain strong?

Yes, funding will remain strong, in that there will continue to be an excess of capital chasing a finite number of attractive investment opportunities and quality management teams in the sector. Great companies and teams will continue to get funded, but I would expect that undifferentiated "me-too" offerings will struggle to raise capital.