IA Capital’s Lerner: AI firms can raise at lofty valuations; ‘most’ insurtechs no longer can

(The Insurer) - IA Capital’s Andy Lerner has said that AI-focused companies can raise funding at high valuations but most insurtechs no longer can, adding that leveraging AI is “table stakes” for current startups.

Speaking to The Insurer TV on the sidelines of this month’s Insurtech Insights USA event in New York City, the venture firm’s managing partner said he expects more incumbent industry players to make strategic acquisitions of insurtechs.

“I think AI companies can raise a lot of money at a high valuation, but most of the insurtech world cannot anymore,” Lerner said of insurtech funding conditions. He acknowledged that “a shake-out” has taken place, with 2021 representing “the high-water mark for valuations".

“And since then, companies that have been perpetually unprofitable have been acquired or gone away. So we're seeing a healthy crop of P&C insurtechs now that not only want to grow revenues quickly, but they're going to get to profitability in relatively short order,” he said.

“I think that's the new big trend. 2025 will be the year of profitability for insurtech. AI is the exception. There's still a lot of investors that'll pump money into an unprofitable AI company."

Lerner said that the sector in recent years has been changed by renewed “discipline for the startups to get the profitability".

IA Capital has been around since the 1990s and describes itself as the longest tenured venture capital firm specialising in insurtech. It has around 40 investments in its portfolio, having exited around 30. It is now investing out of its 10th fund.

That level of tenure, Lerner said, gives IA Capital a data advantage when deciding which companies to back.

“We really analyse what kind of founders have worked out the best, and we've seen a bit of an inverse relationship, where the younger the founder, the more successful the outcome,” he said.

“And even a stronger relationship is that the less the founder pays himself or herself, the better the outcome. So founders that care less about salary and are going to make their money when they sell the company because they want a lot of equity, that seems to work out very well,” he pointed out.

AI NOW ‘TABLE STAKES’

Lerner said that leveraging AI is now “table stakes” for startups, much in the same way using cloud computing technology was critical for a previous generation of insurtechs.

“All the startups know how to (use AI) now. AI is a very big theme, and I don't know exactly where it's going to shake out, because the largest AI companies like Google and Open AI have insurance on their roadmap,” he said.

"Those giant foundational models are very, very hard for small startups to compete with.

“I think there's a role for AI companies in insurtech to maybe build on top of those models, but they have really got to pick and choose maybe a niche area, or an area that they're not going to be competing with the with the big players,” he said.

Lerner said insurance companies “are getting more tech-savvy every year”, with some choosing to build out their technology stack internally, with others opting to buy technology either through vendor relationships or by acquisition.

He expects the trend of strategic insurtech acquisitions to continue.

“I would like some more IPOs of the insurtech world, and the publicly traded insurtechs have come back in value. But a lot of public investors remember they lost money on some of these names that went public in the last five years,” he said.

“So I think that M&A is going to be more important than IPOs for our portfolio, and how we sell in the next few years."

Lerner said his firm is seeing better opportunities to invest in distribution businesses and software-as-a-service platforms that he says scale with premium size and have benefited from the inflationary environment among premiums across different insurance classes.

“As your readers know, there's inflation in premiums, and especially personal lines, and auto and homeowners insurance rates have gone up a lot,” he said.

“Our companies that are distributors or other product-based companies have really benefited from that inflation without taking the risk, because they're not actual insurance companies on it. So that's been a very good area for us,” he added.

INSURTECH INTEREST IN CLAIMS ‘HEATING UP’

He also pointed to IA Capital’s investment in claims insurtech Snapsheet to make the case that the claims sector “is heating up a little bit”, calling Snapsheet “maybe the most successful P&C claims company out there”.

“AI is becoming more and more important in claims on that,” he said of the claims area, though he called it “hard to be a service provider to an insurance company, like State Farm or Allstate”.

“They know how much it costs to do an auto crash claim down to the penny. So they will squeeze you on margins. So you're selling it to the most sophisticated companies. If you're a claim service provider,” he noted.

“You really need superior technology (and) give them something that they don't have in-house to do it,” he added, saying that for future investments he’s “less excited” about firm selling to carriers.

“Now, insurance companies take a long time to pick vendors. They're usually sticky once they do, but they can squeeze you on price. I'd rather invest in something like an MGA where you get the right model,” he observed.