Auto Insurance Technology Investment Ecosystem Fueled by Market Disruption

With no relief in sight of performance pressure on insurers, companies that can materially improve their results will continue to attract investors and fuel continued M&A activity into 2017 and beyond.

(Image credit: Adobe Stock.)

In “All The President’s Men,” the 1976 movie about the Watergate scandal, Hal Holbrook, playing “Deep Throat,” famously shared the advice to “follow the money” to investigative reporters Carl Bernstein and Bob Woodward. That quote is most apt today in identifying some of the most likely beneficiaries of market disruption in the auto insurance industry.

Investors of all kinds are pursuing promising opportunities for attractive returns in tech-enabled solutions and services in the auto insurance supply chain, which is undergoing rapid consolidation and disruption by external market forces, as well as established and new technology startups.

U.S. Personal Auto Results Continue to Deteriorate

In 2015, U.S. private passenger auto insurers collected $198.8 B in premiums and paid out $206.3 B in losses and expenses—obviously unsustainable over the long run—and results continue to deteriorate. A.M. Best expects to report a 15-year worst combined ratio of 107.8 for 2016. Clearly, companies that can help auto carriers reduce costs represent promising investment opportunities.

Private equity, venture capital and corporate insurance venture groups are all bringing their ample checkbooks to the negotiating table to compete for target companies serving the auto insurance industry ranging from startups to well established market share leaders. Adding to the activity level, while private equity and venture capital once traditionally managed their investments to a seven-year exit horizon target, investors have been opportunistically exiting much sooner, in some as few as three or four years.

(Source: Adobe Stock.)

(Source: Adobe Stock.)

With private passenger auto claims frequency and severity both expected to continue rising for at least several more years, two of the most popular investment sectors are auto claims and repair solution and service providers. In 2015, the U.S. insurance industry paid out almost $40B to repair damaged vehicles. These vendors provide carriers with solutions that generate meaningful operational improvements and lower claim costs.

Market leaders in the auto claims segment already controlled by private equity investors and reported to be in play currently include CCC Information Services and Mitchell International. Solera was taken private in 2016 by a large private equity firm. Large collision repair consolidators who manage networks of hundreds of repair facilities including ABRA, Service King, Caliber and Carstar, are also controlled by private equity investors and some of them are currently in play once again. In at least one situation, a single private equity investor now holds positions in two of the leading companies in the auto claims software and repair segments. Insurance distribution technology and services was another recently active space as private equity investors acquired HUB International and Applied Systems.

Continued M&A Activity

Looking at the broader insurance industry, and further strengthening these sellers’ market conditions, nearly half of global insurers expect to acquire new technologies through M&A in the next three years according to a recent Willis Towers Watson survey. In addition, corporate insurance VCs are actively investing in mostly early stage InsureTech opportunities.

With no relief in sight of performance pressure on insurers, and with an investment market with more “dry powder” than available investment opportunities, companies that can materially improve insurance carrier results will continue to attract investors and fuel continued M&A activity into 2017 and beyond.

CCC Launches Telematics-Powered Claims Management Suite

Stephen Applebaum // Stephen Applebaum is the Managing Partner of Insurance Solutions Group and provides U.S. Industry Relations support to Accident Support Services International, Inc. He may be reached at stephen.applebaum@gmail.com.

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