Insurance Companies Are Undervalued Technology-Enabled Services Companies
Insurance companies are undervalued Technology-Enabled Services companies. Further, they share attributes with richly-valued SaaS companies – namely predictable, recurring revenue. Insurance companies obviously don’t develop and sell technology as a core business, yet they leverage various software applications and analytical tools that power their core underwriting services. From Customer On-Boarding to Customer Relationship Management (“CRM”), Customer Analytics, to Policy Administration, to Marketing Automation, to Claims Management, to various Underwriting platforms. We can’t forget broadly defined Artificial Intelligence, which we will cover in Monday’s OnPOINT session at the annual IASA conference.
Why the Valuation Discount to SaaS Companies?
What gives? Why the steep valuation discount compared to SaaS or “cloud” software companies? Many SaaS companies are valued at low double-digit multiples of revenue – a significant premium to insurance companies. Compare a 10-20x SaaS EV/revenue multiple to the EV/revenue multiples provided below for some of the top insurance companies (the MEAN and MEDIAN EV/2018 Revenue multiples for the Insurance group is 1.5x).
We understand that insurance companies are dealing with uncertainty on the automotive side as a result of ridesharing and forthcoming autonomous vehicles (autonomous taxis first, then autonomous fleet services, followed by autonomous vehicles for the home 20+ years from now). We understand that insurance companies are susceptible to infrequent events which may have a negative impact to the P&L. SaaS companies are largely devoid of these risks and ought to trade at a premium to insurance companies – yet the valuation discount seems punitive.
The Insurance Industry Requires A Valuation Makeover
Insurers need to play offense and educate investors about their collective business. The insurance industry is not the industry your parents and grandparents were familiar with. Insurance companies are in fact technology companies.
This investor education process will not be quick nor easy. It will require persistence and patience. Here are a few recommendations that insurance companies may want to include in their investor education process:
- Consider recruiting Technology-Enabled Services/ Business Services and FinTech analysts to provide sell-side research coverage.
- CEOs and CFOs ought to discuss various technology initiatives (for example, using AI to better assess risk) on earnings calls and other forms of external and internal communications. Make investors understand that your core business is powered by technology.
- Dedicate a portion of your annual investor day to covering Technology initiatives.
- Invest in Technology – both people and tools – to drive your business. Build dedicated teams of software engineers, architects, designers and data scientists that are deployed on strategic projects.
- Leverage your data: Verisk (Verisk was spawned from a consortium of insurance companies), has built a $20 billion valuation largely on the back of the insurance industry. To what extent can you the insurer leverage your enterprise data, including anonymized policyholder data, to offer new, revenue-driving products? For example, benchmarking reports that could help commercial customers understand how their business compares to a peer group across a variety of KPIs.
- Disclose in investor communications financial metrics that technology investors are familiar with:
- Recurring revenue as a percentage of total revenue;
- Customer/policyholder renewal rates (dollar renewal rates);
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