With the announcement back in April 2022, that the first special purpose acquisitions company (SPAC) focussed on the Insurtech industry would be floated on the London Stock Exchange, is this the start of bells ringing as more line up to see a full listing on the London Stock Exchange as a potential destination? Or a flash in the pan as investment cash becomes more difficult to obtain now that interest rates have risen? Matt Carter, Practice Director of Altus’ Specialty Markets team, takes a look.
The first Insurtech SPAC, Financials Acquisition Corp listed on the main market of the London Stock Exchange, and raised GBP150 million, but will others follow? A SPAC is a company that has no commercial operations and is formed strictly to raise capital through an initial public offering (IPO) or the purpose of acquiring or merging with an existing company.
However, the number of SPACs that execute this hyper-focused plan is still relatively low. Those that execute the plan of acquiring a business and deliver returns to the original investors are rare, as excellently detailed in Harvard Business Review by Max H. Bazerman and Paresh Patel. Will lining up the right insurtech be similarly challenging?
Is the timing now, right?
Well, the announcement suggested “…[Financials Acquisition Corp] will target a business combination with tech-enabled insurers that are approaching “sufficient scale and maturity” to debut on public markets.”
There are plenty more of those now in 2022 than there were in 2019. The question is, which is the cart and which is the horse here? Has the SPAC listed because they have a target identified, or is it the blank cheque vehicle, which is now scouting for its best fit target? Whichever, it will have piqued the interest of the Insurtech community.
The SPAC sector in the UK is likely to grow, so this is not going to be the last. If you consider that, according to spacinsider.com, in 2007 there were 66 IPOs and in 2020 there were 242, we are likely to see more in the UK and more focused on the quickly maturing Fintech and Insurtech sectors.
Added to this is the growing number of established, multi-year tenure insurtechs represented by the expanding membership of Insurtech UK, so choice would not seem to be the issue for this new venture. Fit, however remains in ‘the eye of the beholder’.
Insurtech, like a fine red wine, maturing nicely
It is well documented the amount of money being invested into insurtechs (and fintechs) continues to grow. Research from Willis Towers Watson suggested that in 2021, $10.5bn was raised, surpassing the $7.1bn in 2020. Given some of the eyewatering single raises some of the Insurtech community recently have achieved, this shows no signs of slowing down.
But SPAC or not, what is the point in going through the extra regulatory pressures of a listing? As has been already documented, the substantial amounts of Venture Capital and Private Equity money supporting these businesses remain accessible, leading to the first UK based Insurtech “unicorns” Zego, Manypets (formally Bought by Many) and Tractable reaching that significant milestone in 2021.
IE Note: Did insurance/insurtech start-up funding hit a peak in 2021? Probably. If you look back at the WTW reports from last year you can see we are at the end of a long cycle as regards Series A-D funding rounds. Much of the optimism from 2015 onwards has vanished after Covid19 and the subsequent cash and assets grab by Globalists running most developed economies. If you adjust insurtech investment for the actual inflation rate of about 35% (typical food & fuel prices in 2022) then you can see that a huge sum of money would have to be invested just to keep pace this year. That investment in real terms, adjusted for inflation, isn’t happening.
These investments, the number of third or fourth round raises, and the growing scaling-up of many that only a few years ago were new entrants, demonstrate the fast-evolving maturity curve of the sector. Overcoming initial challenges, many have successfully developed their own channels, on boarded their own customers and control their own proposition to their stakeholders’ and investors’ ultimate success. They are becoming part of the new insurance mainstream.
As a result, a listing by one on the stock exchange (through a SPAC or IPO) would not only potentially cement that fact, but would also start to address the value of new customer centric business models, slowly rebalancing our stock markets’ reliance on fossil fuels to drive its growth.
What does this mean for digital transformation for insurers?
Primarily, it just became more expensive, as is the case in the VC community it is far cheaper and much more risky to invest in a start-up, as the number of insurtech successes continues to grow and with more insurtechs become ‘grown up’ the ability for insurers to acquire this technology, capability or customer base is likely to be expensive, but still possibly cheaper than trying to create a ‘me to’ business to compete.
However, what it is likely to demonstrate is that in order for insurers to transform, it will be better to partner with insurtechs who provide both leading edge technology and future thinking attitudes.
What has been evident over the last 24 months following the significant partnerships announced between large incumbent insurers and insurtechs, is that in order to transform, enter a new market or just appear to hold a USP, these partnerships (and in some cases expensive acquisitions) are the best or only way to create that step change.
Whilst the SPAC announcement should have no direct impact on insurers’ attitudes on the need to transform, it should reinforce the need that investing in becoming a modern digital business is vital. It’s now arguably even more urgent as the new competition has no legacy, utilises modern architected systems, is customer centric and has significant access to funds to compete.
Be careful what you wish for
The danger in becoming part of the establishment and a stock market listing, means potentially losing control and the secret sauce that made you investable in the first place. It is critical that whatever your ultimate destination, getting your house in order is vital, as with an investment or a listing comes a loss of ultimate control. Throwing in the need to stay on the right side of the regulators, and it can seem the joy in establishing the business and launching it seems but a distant memory. I see this with both new and established business when helping them understand the capabilities required to remain agile whilst running a digitally aligned regulatory compliant insurance business.
So, the skill is remaining different enough to appeal to customers and be responsive to their needs, whilst maintaining full regulatory compliance. Add in the sizable burden on being a listed business as well, and there are only a few insurtechs that might sign up. While this is certainly a challenge, no one can take away from them for being the trailblazer and paving the way for others to follow.
Just be careful what you wish for doesn’t come and bite you in the back.