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Happy New Year.

2022 seems to have been somewhat of a watershed year for Insurance as a whole and especially the Insurtech ecosystem.  But our industry pales in comparison to the craziness we have been witnessing over the past week with the 15 votes it took to get the next speaker of the House elected.

On Friday January 13th, 2023, the first three initial public offerings of the year took place, with one being a blank check company focused on Israeli high-tech companies. The most notable IPO that day was the launch of Argentinian soccer legend Messi’s clothing line, MGO Global, which saw a 200% increase in stock value for two hours before falling to end the day with a 7% decrease in trading. Additionally, the first insurance IPO of the year occurred, with Skyward Specialty opening above their $15 strike price and closing the day at $19.10, a 27% increase. The offering was 53% primary and 47% secondary, with the primary proceeds being used to increase Skyward’s capitalization and financial flexibility, support the company’s growth, and for general corporate purposes. They raised $71 million for the corporation and investors took home $63 million, resulting in a market cap of approximately $718 million.

Here’s a quick poll.  Do you think that the Insurtech IPOs in 2023 will fair better than the current crop of public Insurtechs?

Skyward specializes in niche specialty lines and aims to “own the niche”.  One example of this is their targeting of the cannabis industry with professional and executive liability as well as commercial surety coverage. Overall, they write about $1 billion in premium per year across 8 functional groups. The largest component of their business is Industry Solutions, which includes multi-line coverage for construction, energy, and specialty trucking, representing about 25% of their premium volume. The next largest component is Global Property coverage for multi-jurisdictional entities, accounting for about 20% of their premium volume. Their 2021 loss ratio was 70.9% with an expense ratio of 26.9%, resulting in a combined ratio of 97.8%. They had a net income of $20 million in 2021, following a net loss of ($74.6) million in 2020.

Their S1 also highlighted their distribution channel mix:

One way or the other, they directly rely on agents for nearly three quarters of their business.

One of Skyward’s perceived key competitive advantages is their claims handling process. They handle nearly 75% of their claims internally, utilizing 79 claims staff, which equates to approximately 1 staff member for every $10 million in premium (how do you compare?). They only outsource workers comp and select captive and program business to third-party administrators.

2022 in Review

Reflecting on 2022 and looking forward to 2023, I’m reminded of what former Speaker of the House Tip O’Neill said, “all politics is local.” This applies not only to the ongoing events in Congress or Florida, but also to the challenges faced in the insurance industry such as social inflation, rising costs, and the effects of weather. For example, in Buffalo, over 100 inches of snow fell between the end of November and December, causing significant disruption. The snow reminded me of one Christmas I spent at the “Totem Pole Resort and Marina” on Shuswap Lake in British Columbia.  I don’t know how much snow we had, but I do remember having to dig out starting from the inside because the snow essentially piled up to the height of the door – and the dogs had to get outside!.

Within the Insurance space and especially within the Insurtech ecosystem, a few themes emerged this past year:

• Embedded sales will save the industry
• Weather rained on the reinsurance parade
• Data and AI will save bad business
• Insurtech losses resemble Ali’s 14^th round in the “Thrilla in Manila”

Embedded Shmembedded

2022 could be characterized as the year of “embedded” partnerships. Companies like Lemonade partnered with Chewy to distribute their pet insurance, Hippo sold home insurance through Lenar homebuilders, and Root deepened their relationship with Carvana. Even traditional carriers are rebranding their partnership efforts as “embedded,” such as Markel partnering with Bolt’s Buoy to offer boat renters insurance, The Hartford and Zurich with Flexport to embed cargo insurance, Nationwide with Petco for pet insurance, and Assurtant and Assurion expanding their offerings.

Just because a partnership is labeled as “embedded” doesn’t guarantee its success. In fact, many of these insurance products have not seen strong uptake, and depending on the costs of the partnership, the carrier or insurtech may be losing money on each purchase. The key to success is offering a relevant solution that addresses a real need, at the right time, and through the right channels. This is ultimately what effective marketing is about – presenting the right message, through the right medium, at the right time. So the question remains, are embedded partnerships truly necessary or is it more about offering better products and utilizing better marketing strategies?

Another challenge for embedded partnerships to succeed is that the platform in which they are embedded must be growing. Unfortunately, in the current economic climate, many industries such as home builders, car sales, and retail outlets are experiencing decline, which is mirrored in the insurtech ecosystem. Without being able to identify the right marketing and product fit, companies are seeking new distribution channels, but even these channels are struggling to stay afloat. It’s critical for either a traditional carrier or insurtech company looking to expand into the embedded world to ensure that their partners are financially stable and that they have an appropriate product to offer to their clients.

Weather rained on the reinsurance parade

2022 saw 18 extreme weather events in the US that exceeded $1B in costs (including everything from fire, snow, rain, wind and even the lack of all the above – drought). This makes the last 3 years the highest on record with 20 such storms in 2021 and 22 in 2020.  According to NOAA, the estimated total cost of the extreme storms in 2022 was $165B and this follows $155.3B in 2021.  Put differently, over the last 2 years, extreme weather-related costs amount to $1 per person living in the US.

The reinsurance market is continuing to harden in January 2023, with risk-adjusted global property catastrophe reinsurance rates on line (RoL) increasing by 37% on average – the largest yearly increase since Hurricane Andrew in 1992. The market is facing rising rates, tighter terms, and difficulties with sufficient capacity due to macroeconomic challenges like record high inflation, interest rate hikes, geopolitical concerns, volatile energy markets, natural catastrophe events like Hurricane Ian, and depleted capital, and overall claims losses from 2022. Additionally, the decrease in available retrocession cover is contributing to constraints and price pressure.

This will have an outsized effect on the Insurtechs that sell Insurance either as a full-stack carrier or an MGA. They don’t have the surplus or revenue/profitability to support significant increases or changes in their reinsurance contracts.

Data and AI to the Rescue

Data and AI have the potential to revolutionize the insurance industry by improving efficiency, reducing costs, and providing a better customer experience. For example, by analyzing large amounts of data, insurers can better understand their customers’ needs and tailor their products accordingly. Additionally, AI algorithms are being used to identify patterns in customer behavior and claims data, which can help insurers better predict and manage risks.

One of the most promising ways that data and AI can save the insurance industry is by automating many of the processes that are currently done manually. For example, AI-powered chatbots are used to answer customer or agent questions and process claims, which greatly reduces the workload of human employees. Additionally, AI-powered underwriting algorithms are helping insurers make more accurate risk assessments, which lead to fairer and more accurate pricing for customers.

Another way data and AI is helping the insurance industry is by using predictive analytics to identify potential fraud. Insurers can use data and AI to analyze patterns in customer behavior and claims data, which can help them identify potential fraud more quickly and accurately. Additionally, AI-powered fraud detection systems can be used to automatically flag suspicious claims, which help insurers catch fraud before it causes significant financial losses.

However, all of this is predicated on having a sustainable business model. Many insurtechs lack this and have been trying to play a “shell game” in hopes of not being discovered. Those that do have a viable business model have focused on four key areas: providing value to customers by addressing real needs, diversifying, and scaling their revenue streams, being efficient and lean through the use of technology, and investing in long-term growth through people, technology, and partnerships. If you are a supplier to insurance companies, this can also include providing valuable data and insights to aid in risk management.

Layoffs and Losses Mounted

2022 was a year of downsizing within the insurtech ecosystem, with many public insurtech companies announcing layoffs of up to 25% of their workforce, and many private companies also reducing their workforce in order to conserve remaining capital. Many of my friends and others left to return to traditional carriers, due to a combination of layoffs and a desire for more stability, maturity, and fair compensation. The prospect of substantial payouts faded as quickly as the stock valuations for these insurtech companies did.

Mckinsey charted the value lost relative to each public Insurtechs all time high.  This ranged from 98% for Root to 57% of value lost for Alignment Health.  Today’s market dynamics are presenting Insurtechs with significant headwinds while the incumbent insurers are benefiting from certain tailwinds.  This has essentially strengthened the position of incumbents to the detriment of the Insurtechs.  In fact two main opportunities exist for the legacy carriers and traditional insurance suppliers.

1. Quickly hire the great talent that is becoming available. This will propel you into the future.  Please reach out to me if you are looking for great talent and I can make some recommendations and introductions.
2. Be bold and think about acquiring businesses or IP rather than renting it. With many Insurtechs on life-support, their willingness to be acquired at any evaluation is increasing.  There are lots of great ideas and solutions out there that could thrive within the nurturing of an incumbent carrier.

Giving Thanks

In the midst of the challenges and losses of 2022, there was much to be grateful for. On a personal level, I am thankful for the health of my friends and loved ones, and for those in need of prayers, I pray you have a full and speedy recovery. On a professional level, I want to express my gratitude to all of those who have read my notes and provided valuable feedback, comments, and questions. Your engagement and interest in the content is what keeps me up late at night writing these!

I would like to extend a special thanks to all of those I work with regularly and occasionally, whether through Insurtech Advisors or Ahoy! Insurance. This year, I had the opportunity to work across all aspects of the insurance value chain, and even had a chance to explore the asset management side, through a reinsurer who has an interesting opportunity for carriers to diversify their surplus. If you are interested in learning more, please reach out.

Wishing you a safe, healthy, and fulfilling 2023 and beyond.

Please reach out if you want to share some insights or have further questions.

Insurtech Advisors helps regional carriers and agencies to collaborate with the best Insurtechs that will enable you to succeed and continue to meet the needs of your members, employees and independent agents. We know your company and the Insurtech landscape. We save you countless hours of wasted time and false starts. We also work closely with your team to identify opportunities and then introduce you personally to the best Insurtechs to pilot.

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