Introducing the Equal Ventures Insurance Index
Highlighting trends in public equities for insurance investors
By: Rick Zullo & Adam Chadroff
Engage in the discussion on Twitter
Markets over the past 18 months have resoundingly demonstrated that building lasting value is not just about posting strong revenue growth. This is broadly true, but it may hold especially true of the insurance sector — a space that, before the VC run-up over the last decade, was hardly synonymous with rapid tech-enabled growth. Insurance is dominated by heavily-regulated behemoths, who are definitionally risk-averse and well-capitalized. While premium growth is important, so too are capital efficiency, predictability and combined ratios. As the growth-at-all-costs sentiment evaporated in 2022, investors capitulated: hot insurtech equities got crushed, and private insurtech funding fell by >50% year/year.
What’s clear is that evaluating and valuing insurance equities requires an appreciation of the drivers of industry performance and the nuances across lines of business. Slapping an “ARR” multiple onto an insurance business doesn’t cut it in 2023. At Equal, we continue to see massive opportunities to create long-term enterprise value in the insurance industry. And as we seek to identify and partner with dominant emerging companies in the space, it is instructive to take cues from public market multiples and trends. To help make those trends more visible, we’re introducing a series of equity indices on which we will periodically report throughout the year.
We started by compiling a list of large-cap and otherwise relevant P&C Carriers and Distributors. We then compare performance of these legacy businesses to the emerging tech-enabled (and volatile) companies that led insurtech higher on the way up. Our hope is that by highlighting the valuation of these respective segments, we can help to drive both quantitative and qualitative insights about what’s playing out in insurance for investors and onlookers not otherwise in the weeds.
Establishing Valuation Baselines Today
First we defined a relevant universe of diversified P&C carriers to showcase the metrics we believe drive performance and the current baseline metrics coming out of Q1 2023. We look at traditional GAAP metrics as well as the EV multiple on 2022 Net Earned Premium and compare legacy companies to “emerging” insurtech challengers.
We took the same approach for a diversified set of “emerging” insurance distribution and marketing companies, and compare their performance to that of traditional insurance brokerages.
No matter how you cut it, the “emerging” insurtechs have performed terribly, both in absolute price terms as well as on valuation multiples. For the marketing and distribution challengers, this translates to combined market cap across the index down appx 75% and the average group revenue multiple off by roughly two-thirds.
For the full-stack carrier challengers, the results are even worse: the group lost 85% of its combined market cap over 24 months, and the earned premium multiple fell from >25x in 2021 to <1x today. Two of the three companies in fact closed out Q1 2023 with negative EV (rendering the premium multiples nonsensical). The market is telling us in fairly clear terms that this business model (loved and high-flying two years ago) is no longer viewed as a sustainable one.
To help us keep tabs on how valuations and prices evolve, we will continue to refresh this data over upcoming quarters. We will also track the price action of each segment above going forward using the indices below (equal-weighted using prices as of 12/30/2022).
Insights & Next Steps
In as complex a space as insurance, tracking multiples and taking stock of current baselines does not on its own uncover obvious investment theses. Rather, we see the data coming out of this exercise as the “what”, which can help us uncover the “why” behind the trends and divergences. For example, even this fairly simplistic approach yields important observations and second-order questions for additional research:
- Insurtech carriers now have lower multiples on earned premium and book value compared to the legacy carriers. Does this mean they are cheap? To us, the answer is no. We believe the divergence in multiples can be explained by the unsustainable loss ratios of the challengers, a topic we will double-click on in upcoming posts.
- Brokers and distributors in our index (legacy & emerging) outperformed carriers over the past 24 months and over Q1 2023. Insurance brokerage is a meaningfully different business from underwriting, but we believe this divergence can best be explained by the impacts of inflationary pressure and hard reinsurance markets over the past year, as well as the stability/attractiveness of brokerage cash flows in a tough macro environment.
- Every emerging insurtech in the index has gotten crushed over the latest market cycle. There isn’t a single “insurtech” equity comped above that lost less than 50% of its market cap over the preceding 24 months, and the median return across all the insurtech equities is down a staggering 87%, despite a bounce in Q1. We believe the common thread across these businesses boils up to unsustainable CAC. Consumer businesses in insurtech and elsewhere are casualties of the low interest rate environment, and this points to the shift toward insurtechs as enablers rather than as disruptive DTC brands.
We look forward to the ongoing dialogue about insurance equity performance and the takeaways for early-stage investors. Macro remains volatile, and the data set of public insurtech comps is limited, but we are confident that diving into trends in valuations will be a springboard for uncovering questions about what is driving performance and why.
