Strange bedfellows: risks and rewards as re/insurers dabble in venture capital

Re/insurers, especially those that are listed, and venture capital firms do not appear, at first glance at least, to be natural bedfellows. The former strive to offer shareholders consistent, steady returns; the latter will take big risks, sometimes winning big, sometimes losing everything.

However, a growing number of re/insurance companies are increasingly becoming involved in the world of venture capital—and not only by partnering with or investing in established firms, although some have done that, but by doing it themselves. A growing number of players have established separate units to play in this space.

The reason they have done this can usually be summed up in one word: insurtech. As companies compete to try to ensure they invest in the right ventures and/or adopt new technologies that will give them an edge over their rivals, a number have set up units dedicated to executing this strategy.

In that sense, their remit differs from that of pure venture capital firms, which are interested only in a healthy return on investment within a predetermined timescale. In contrast, these arms of re/insurers have the parallel objective of seeking technology that can complement and enhance their parent companies’ operations and product offering.

QBE Ventures is one participant in the venture capital market—and this unit’s boss summarises his objectives in this exact way.

Ted Stuckey, managing director of QBE Ventures, says the subsidiary’s mandate is very clear.

“QBE Ventures is one piece of the broader QBE strategy. We are specifically charged with partnering with and/or investing in early stage companies that provide QBE with access to technically challenging and industry-changing technology solutions.

“The important part is partnering, because we are laser-focused on finding products, solutions and startups that we can deploy within QBE,” Stuckey says.

Seeking superior returns

Martha Notaras, partner at XL Innovate, another venture capital unit, says that the mandate of XL Innovate is to deliver superior investment returns by investing in insurtech in the property and casualty space.

“We are judged entirely on our investment returns,” she says. “We look to invest in companies that have the potential to change the insurance industry, where we can add value and which we believe will deliver high returns.”

XL Innovate is set up as a separate fund, in which the main company (AXA XL) is a limited partner. According to Notaras there are several re/insurance venture capital units in the market which use this structure, although she is also aware of corporate venture capital units which are operating units, and draw on the main company’s treasury funds for each investment.

Notaras further explains that the potential losses of a venture capital fund are limited to the amount of its equity investments. A limited partner could theoretically lose 100 percent of the amount it invested in the fund. Of course, the expectation is that some investments make a significant return upon exit. As a result the goal is that the fund overall returns the original equity plus valuable investment returns.

According to Notaras, XL Innovate invests in three silos: first, managing general agents which it creates to address underserved risks, such as New Energy Risk; second, data and analytics startups, which provide high-value input for re/insurers, such as Cape Analytics; and third, new insurance business models, which address insurance in new ways, such as Lemonade.

Best of both worlds

This focus on such areas illustrates the difference between traditional venture capital companies and these newer insurance-related venture capital enterprises. Asked how QBE Ventures differs from a traditional venture capital firm Stuckey says that at its core QBE Ventures wants to be not just an investor but also a customer, a partner for a startup’s further growth and development.

According to Stuckey, the firm can provide more value to its portfolio companies by being a customer rather than by simply investing in them, as a customer has a different focus, a different set of expectations and a different way of pushing the company forward.

“I’m confident when I go into meetings with our founders or other investors in our portfolio companies that the perspective I’m bringing is rooted in our actual experience using the product or in our position as a prospective customer for their product,” he says.

“What I always tell the entrepreneurs I meet is that a lot of this is based on where you are as a company and what sort of insights you need. There are hundreds of financial investors—your traditional venture capital shops—that add amazing amounts of value to startups who are looking for insights and advice and mentorship around very specific things, such as how do you scale an enterprise software-as-a-service company.

“Those are very traditional value drivers for financial venture capitals, and you can’t overstate the importance that those play in the growth and maturity of a startup from our perspective. But given that for so many of our portfolio companies we are their first, or one of their first, customers, the feedback they get from us is very valuable and complementary to traditional venture capital support.

“We also bring access to resources and our network within the insurance ecosystem to allow them to expand their customer base and grow.”

Notaras, on the other hand, states that XL Innovate operates more as a traditional venture capital firm versus a strategic fund, so it is not required to get participation from AXA XL business units. “AXA XL chooses to do business with some of our portfolio companies,” she says. “Regardless of any business relationships, we have been fortunate to tap AXA XL expertise in certain insurance markets to better understand the markets our portfolio companies do business in.

“What makes XL Innovate stand out is the combination of our proven experience in helping companies grow and our insight into the insurance industry.”

In terms of specific investment parameters, Stuckey says that QBE Ventures looks to invest in technology solutions that have the potential to transform QBE and the international markets in which it operates, so its investments are tightly aligned with its strategic priorities, such as delivering an experience of excellence to customers.

According to Stuckey, QBE Ventures is specifically looking for early-stage companies with strong founding teams with demonstrated domain expertise and the proven ability to deliver differentiating technology solutions.

Different risk appetites

Notaras states that XL Innovate’s investment range is $2 to $12 million and that it tends to look most seriously at companies that are series A or later, although it has made what she described as some very successful seed stage investment at the beginning of the insurtech wave. She adds that XL Innovate looks for entrepreneurs with relevant experience, the capability to build an outstanding team, and an idea that is scalable.

In terms of time frame Notaras points out that venture capital is a long-term game, with typical venture capital funds making initial investments in portfolio companies in the first few years, then harvesting those investments in a 10-year time period.

With an increasing interest in insurtech and other forms of technology-related innovation in the insurance industry there is a growing possibility that other insurers will find the venture capital route a profitable option.