Insurance Tech Investments: Innovation or Returns? Dang Duy Minh Quan LEO TECH SERVICES

Insurance Tech Investments: Innovation or Returns? Dang Duy Minh Quan LEO TECH SERVICES

Insurance Tech Investments: Innovation or Returns? FinTech is looking to be the most promising startup industry for the next decade. Goldman Sachs estimated that startups could wrestle up to $4.7 trillion in annual revenue, and $470 billion in profit from financial institutions. Even a basis point of the market share represents significant business, so investors are extremely eager to back new entrants. Or to get in themselves: Goldman is so impressed with peer-to-peer lending, it is launching its own online operation, Mosaic. In offices well away from Wall Street, Leo Tech has turned its focus to a lessermentioned sub-sector of FinTech, InsurTech. 35% FinTech Funding % Breakdown 30% 30.1% 25% 20% 15% 19.3% 17.3% 10% 8.6% 9.4% 5% 4.6% 3.0% 1.6% 4.0% 2.0% 0% Investment Tech Alternative landing Mobile Payments Banking Tech Remittance Payments Insurance Tech Crowdfunding Payment Cards Bitcoin Insurance tech only accounts for ~10% of the investment in the FinTech space. However, we believe there are many undervalued assets in this often overlooked sub-sector. Over the past year, my team has committed sizable resources into researching the InsurTech venture capital space and have used the findings to educate our firm on this market movement, and to predict the potential disruptions area. Insurtech defined Looking at the root of this buzzword it's important to understand what we define as an 'insurance' business, and what we consider to be technology. Insurance businesses can overlap a number of areas including Customer Engagement, Regulation, Internet of Things, Data Analysis, Investment Management, Data Security and Health. As for technology we're not just considering big data and wearables. We're talking about the application of knowledge. More broadly that's the application of techniques, skills, methods and processes to improve insurance businesses in the range of products they offer, the way they perform internally, and ultimately the way they better serve customers. Leo Tech Services Pte Ltd, 2016 1

For this report we commissioned research company Tracxn to develop a targeted study on the development of venture funding in Insurtech, and how corporations are getting themselves into the space. Some interesting data surfaces: Funding (in $M) and number of rounds between 2011-2015 3,000 100 2,500 Funding No. of rounds 80 Funding ($M) 2,000 1,500 1,000 60 40 No. of rounds 500 20 0 2011 2012 2013 2014 2015 0 Notable Rounds Insurity $49.8M Green Road $13M Square Trade $238M Castlight Health $100M Goji $52.5M Oscar $40M Oscar $100M Zenefits $81.5M Zhong An Insurance $931M Zenefits $500M 160 Number of Insurtech Investors between 2011-2015 154 120 105 80 58 72 40 37 0 2011 2012 2013 2014 2015 Leo Tech Services Pte Ltd, 2016 2

Here, we can see the following: The number of insurance VC deals have increased by ~25% CAGR Funding for the largest deals increased by 5x to even 10x Average funding to insurance startups (excluding the top 2 deals) has more than doubled Number of investors who are willing to put money into insurance startups are growing at ~40% CAGR All of the above means that there are more channels of funding for insurance, as well as signals that investors are confident that the insurance industry can provide higher return, and is more likely to succeed. But what if the larger amount of investment is due to strategic investors (insurance companies) investing to grow their core business, and not due to investing from traditional VCs? Breakdown of Insurtech Investor Types, 2011-2015 100% 11% 14% 13% 10% 16% 80% 60% 40% 20% 0% 2011 2012 2013 2014 2015 Traditional VC Corp Dev This does not seem to be the case as the corporate/strategic investors as a percentage of all insurance venture capital investors have stayed stagnant over 5 years, hovering at ~13% each year. This also means that traditional VCs and corporate VCs are growing at equal, even pace year-on year. Leo Tech Services Pte Ltd, 2016 3

The bigger implication of this is that interest in the insurance technology space is generated by both need for innovation (corporate VCs) and need for higher returns (traditional VCs). Now, let s zoom into the corporate VCs in this space: Insurtech Corporate Investors % Breakdown, 2011-2015 2015 2014 2013 2012 2011 0% 10% 20% 30% 40% 50% 60% 70% Corp. Dev Corp. Dev Strategic/VC Corp. Dev Accelerators We therefore reached the following conclusions: From 2011-2013, ~50 - ~70% of corporate VCs have chosen to invest through a dedicated separate strategic development VC arm However, in 2014-2015, ~60% of corporate VCs have chosen to invest instead with their normal in-house corporate development team In 2015, for the first time, we started to see ~5% of corporate VCs investing through accelerator/incubator labs This means that corporate VCs are deciding to go more and more upstream in the innovation process each year, taking on more risk to nurture startups from even the incubation phase. This is likely due to the realization that to bring external innovation in-house, you cannot just acquire it through a traditional VC investment, which can also stifle startups creativity But to really understand Insurtech, we need to look at it more a granular level, at the value chain level. Leo Tech Services Pte Ltd, 2016 4

We see that: Investments in the insurance industry is large, but ~40% goes to the Insurers part of the value chain, while those deals only account for ~10% of the deal volume. And we can see a similar situation in the Employer Insurance Space Investments in the Distribution Platform part of the value chain is ~12% of the overall investment size, but that is spread over ~40% of the deal volume in the insurance space. And again, we see a similar situation in Back-end Solutions -but to a less drastic extent No traditional VC is especially focused in investing in insurance. The highest number of deals in this space is 4, conducted by Y-Combinator. Leo Tech Services Pte Ltd, 2016 5

Few startups are willing to go into the Insurers & Employer Insurance space, as it appears that a comparatively large amount of capital is required. A lot of startups are playing in the Distribution Platform and Back-end Solution space so competition will be fierce. There is no committed VC player in the insurance tech space yet. Conclusions For insurance startups it means picking the right battle. Know which part of the value chain you are playing in and target your fundraising strategies accordingly. Pick the right strategic investors (corporate VCs) or traditional investors (traditional VCs) that add the most value to your business. For traditional VCs that means there is more competition. With more investors in the space, high value startups have a larger pool in which they can choose whose dollars will they take. Traditional VCs need to differentiate themselves just as in any other kind of market place. This is something that we at Leo Tech have been actively doing. For insurance companies the implications are much the same. Increasing investment competition means it s harder to land that external, market disruptive, opportunity. This is a conclusion reached by many established corporates -and by extension that it is better to take that innovation in-house, and build something from ground zero up, which is what Leo Tech actively through its Venture Building activities and what we also provide as consultancy to our corporate clients. If you are looking at the insurance technology space and would like to discuss more with us about building potentially synergetic relationship, get in touch. About Leo Tech Dang, Minh Quan ("Quan") is a Senior Investment Analyst at Leo Tech, based Singapore. This report was based on his direction and analysis of research carried out by Tracxn Technology. Leo Tech operates three main areas of business: Consultancy, Startup Studio and Venture Builder. Consultancy end to end Software & IT services from developing your idea, the product, launching it and taking care of the infrastructure through a 24/7 service desk. Rapid prototyping to cloud hosting for small business, governments and multinationals like Visa and Blackberry. Startup Studio we provide our resources in return for equity. Everything from office space, growth hacking and mentoring through to help with fundraising -but our main contribution is software and IT services. A hybrid of incubator, accelerator and VC. Venture Builder ideas that come from within Leo Tech are turned into products and businesses in their own right. A trending video and social sharing app, tracking tools for homeowners and property investors, a network of fintech products connecting the unbanked and affluent to financial institutions and ecommerce in Myanmar. Leo Tech was founded as a software R&D house in 2010, with 5 staff in Singapore. Today the team has grown to over 100 here with more in London and Yangon, working on all kinds of projects - financial risk management dealing with thousands of transactions per second, wearable apps, mobile games. For information visit www.leotech.com.sg Leo Tech Services Pte Ltd, 2016 6