Investment

Buffett may have made billions from insurance but few family offices invest in the sector

Warren Buffett once said cash flow from his insurance businesses was crucial to Berkshire Hathaway’s success. 

There were good reasons for this. Clients pay their premiums regularly, for fear of losing cover. Premiums are set by the insurer, along with the time of settling claims: in hard times, clients will pay more for protection.

Innovators need to be massively talented, and experienced, or both, to compete

More important, insurers also invest their float in pools of captive assets, as Berkshire Hathaway has done, with remarkable success.

The Agnelli family’s John Elkann has also developed a taste for insurance. He bought PartnerRe for $6.9 billion in 2016 and came close to selling it for $9 billion before Covid-19. 

Aquiline Capital Partners has emerged as one of the most prolific backers of insurance technology, known as insurtech. But chief executive Jeff Greenberg has strong support and hails from a family steeped in insurance at insurer AIG, raising $2 billion for his latest fund in May. 

Innovators need to be massively talented, and experienced, or both, to compete. Which is why Buffett heaps praise on Ajit Jain, his unusually smart insurance chief. 

A private investment company led by billionaire Thomas Tull, backer to the Pittsburgh Steelers football team, has invested in insurtech. Swiss family office PG3 has built a business out of insurance-linked securities.

Accident detection, claims settlement and renewal processing remain ripe for disruption, according to data provider CB Insights.

But the vast majority of family offices tend to steer clear of insurance due to the cost of competition. They are painfully aware of growing losses in catastrophe insurance, plus Covid-19, which may push the sector into a deficit of $100 billion in fiscal 2020, according to reinsurance broker Guy Carpenter. 

A fall in bond yields has slashed investment returns. Insurers continue to lay off risk through reinsurers and insurance-linked securities but terms on offer are tough. 

The sheer scale of competition from insiders is illustrated by a large number of insurtech deals in the sector. A string of established insurers, like Allianz and Munich Re are backing insurtech ventures. 

A few like Prudential Finance and Aon are acquiring them. Insurance broker Acrisure has just agreed to pay $400 million for an AI business developed by Thomas Tull’s Tulco. 

Duck Creek Technologies wants to raise $200 million from an IPO after winning project management contracts from large firms like Liberty Mutual, AIG and Berkshire. In June, US insurer Nationwide backed funding for Planck, whose AI can speed up the underwriting process.

Fund raisings recovered sharply since the first quarter, which Covid-19 struck. According to Willis Towers Watson, they rose in value by 71% to $1.56 billion from 74 deals in the second quarter. 

Oscar Health, co-led by Joshua Kushner, has raised $225 million. States Title has raised $123 million for a machine learning process which vets titles to real estate. Pet insurer Bought by Many raised nearly $100 million. 

According to CB Insights, innovation has not been strong in the past because executives spend so much time on regulatory compliance and protecting their patch.  

Chief executives were traditionally promoted from underwriting and claims departments, rather than IT which used to report to finance or operating divisions. Technology was seen as a cost centre, not a source of innovation.

At AIG, Hank Greenberg was a rare believer in innovation. Hungry for data and insights he pioneered risk management. He grew his profits by a remarkable 15% a year over 25 years to create the largest financial combine in the world. 

Greenberg retired from AIG in 2005. The business over-reached in the subsequent credit boom and required a state bailout but its cash flow repaired the damage.

Greenberg, aged 95, now manages insurer Starr Companies, named after AIG founder Cornelius Starr. One of his sons, Evan, runs Chubb and Jeff Greenberg has Aquiline.

Hank Greenberg reckons 15% to 20% of the insurtech applications have something to offer. Insurtech: “…will have a profound effect on the industry going forward. There is no question about it in my mind.”

Aquiline Capital manages investments worth $5.3 billion. A recent insurtech deal saw it invest in Flueid, which automates real estate underwriting. Unqork allows large insurers to manage complex transactions without a single line of code. Ontellus is skilled in outsourced data retrieval.

Envelop Risk has also sought experience. Its AI-driven process seeking to eliminate risks in underwriting is backed by AIC, a business run by Antoine Blondeau.  Director Brian O’Hara, who transformed insurance giant XL Capital. He said: “Envelop Risk is transforming the cyber insurance and reinsurance market.”

Ty Sagalow retained senior roles at AIG, post-Greenberg, but he quit to join Lemonade in 2016 as chief insurance officer: “I conclude that true disruptive innovation is almost impossible within the framework of legacy carriers.”

Lemonade uses AI to digitise mutual insurance policies for homeowners and tenants. A bumper IPO has seen its share price double, making the company worth $4 billion.

But the majority of newcomers look to the future, not the past. Hippo Insurance uses big data to target tech-driven home insurance and security services. It has raised $150m through lockdown from investors such as Iconiq, an adviser to Mark Zuckerberg, Oren Zeev, formerly at Apax Partners and Meyer Malka’s Ribbit Capital, a frequent insurtech backer. 

Next Insurance, a one-stop insurer for small businesses, also backed by Oren Zeev has raised money from Munich Re to strike a value of $1 billion.

Root Insurance’s smartphone technology tracks the driving skill of drivers to reach a fair premium. It claims a $3.65 billion value after getting $350 million from investors led by Yuri Milner’s DST Global and Philippe Laffont’s Coatue. 

Pie Insurance provides workers compensation insurance for small companies and raised $127 million in May in funding led by Gallatin Point Capital, an investment office led by Matthew Botein, ex-BlackRock, and Lee Sachs.

InsurTech Gateway of the UK is incubating a series of startups with backing from Hambro Perks, chaired by veteran banker Rupert Hambro, and Robert Lumley, whose Lumley Jacobs, has developed a string of insurance partnerships. 

The firm is regulated and convinced the insurance world needs disruption. Tech entrepreneur Joel Moxley is one of its investors. Its early-stage deals include By Miles, an insurer for low mileage drivers; Floodflash for instant flood insurance settlement and Guardhog, used by AirB&B for client house insurance.

There is no shortage of new businesses out there. But Willis Towers Watson notes that the latest batch of investors have concentrated on later-stage investments where goals are already being met and relationships forged. 

A few newcomers are already going bust. Family offices should look before they leap.

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