Jones: MS Transverse targeting “opportunistic” investments to capitalise on insurtech dislocation

MS Transverse Ventures’ Matthew Jones said the fronting company’s rebooted venture arm aims to be “opportunistic” in its investments to give insurtechs runway to reach profitability, while detailing the firm’s plans to raise and deploy a second fund by year-end.

Jones recently started as the head of ventures at MS Transverse, which launched its first fund in 2020 to invest in seed-stage and Series A firms at the intersection of insurance and emerging technology. He spoke to The Insurer TV at this week’s Insurtech Insights USA event in New York.

The veteran venture investor noted that a few short years ago, capital flooded the insurance segment from investors unfamiliar with the market, but who viewed it as “unmodernized” and “ripe for some kind of Uber-type disruption”.

“Lo and behold, that didn't happen. Insurance isn't that kind of simple business that is prone to be disrupted like that,” he explained.

“And so, now what we're seeing is a rapid maturity in the space, where people have realised and become more familiar with some of the more established valuation frameworks that we see in the insurance industry,” Jones added.

That, he said, has led to “more rational investor behavior”.

“A lot of companies raised a lot of money over the last few years at incredibly high valuations, and I think in a lot of these cases, the strong founders – the smart teams – invested that capital into some really interesting technology assets,” he noted.

“Opportunistic is exactly the right word”

However, Jones said those firms would “undoubtedly” have to raise more money before breaking even.

“Where you'll see us playing over the next few years is supporting these management teams in these companies that have got to that point in their maturity,” he continued.

“So, in other words, companies that have got clear line of sight into profitability, but aren't yet there, have got good, strong insurance fundamentals,” he said of firms that MS Transverse Ventures would look to back.

“Those are the kinds of businesses that I think are very exciting and of course, the ones that are using technology are the ones that we think will have a serious advantage in the space,” Jones commented.

“Opportunistic is exactly the right word,” he said of the investments he would target, adding that MS Transverse would be “very interested” in the traditional minority equity stakes in insurtechs, along with more creative types of deals.

“You'll also see us rolling up our sleeves and getting involved in all sorts of other situations that maybe other investors shy away from,” he explained.

“Maybe there are investors that are looking for liquidity, they're already on the cap table. Maybe they're looking to clean up that cap table, or maybe engage in some M&A activity,” he continued.

“Those are all interesting and exciting opportunities to get involved with companies that maybe other people don't have the appetite for,” Jones added.

Eyeing second fund by year-end

While MS Transverse’s first fund is not fully deployed, Jones said the aim is to get a second fund up and running by the end of this year.

He also said he expects 2024 to be “a really good vintage” for investment returns.

“I think you can see here, at this event, there were some really good ideas and it's been really refreshing to be back on the investing side and hearing some of the great stories and some of the great ideas that are out there,” he commented.

Jones also said that LPs in venture funds see that “now is really the time to be deploying capital”, commenting that they are “particularly excited” to invest, while adding that his firm would bring the capabilities of MS Transverse and the wide group to benefit portfolio companies.

“That might be bringing our fronting capabilities into a portfolio company and helping them to accelerate their growth plans. It might be bringing our huge teams of actuaries and data scientists to benefit a management team, for example,” he said.

“So, it's not just me and the rest of my team. It's the broader MS Transverse team, who are, as you saw last week, crushing it in the fronting space,” added, referring to MS Transverse’ recognition as Fronting Carrier of the Year at the Program Manager Conference and Awards.

More sober funding environment

Jones said that the insurtech funding market is experiencing “a bit of a hangover”, with parties growing more sober over valuations, which said “should have come back down to earth a little bit”.

“What we're seeing is, for the top-quality companies in the market, they are still continuing to command incredibly strong valuations,” he noted, as those firms continue to raise big rounds.

“And I think for the rest, it's a case of doing the hard work to figure out which of those are the diamonds in the rough, which of those that really got some of those good, strong insurance fundamentals,” he commented.

“I think a lot of those have been forgotten over the last few years,” he said, highlighting the importance of having “a decent loss ratio”, especially for classes of business with longer tails.

“So, I think, people are kind of coming around to remembering all of that stuff,” he said.

“No doubt” in benefits of operating experience

Jones spent around two years as chief strategy officer at cyber insurtech Cowbell, and he said that there is “no doubt” in his mind that the experience will make him a better investor, saying he had a “fantastic time” at the insurtech, and that in cyber “you really have to be on your toes”.

“I can definitely say that my approach to diligence, over the coming years, will be completely different from how I would have approached it before,” he commented.

“Τhe depth of the questions that I would feel comfortable to get into and the kinds of topics that I would want to cover – I'm ready to go much, much further in depth, and I'm already seeing that,” he said.

“I'm incredibly grateful for that experience,” he added.

One topic that has emerged as a big theme in insurtech has been a move away from start-ups looking to tackle major industry problems and to build firms with massive scale, to targeting much more niche segments of the industry.

“People are [now] going after very, very small niche opportunities,” Jones said.

“I think what I'm looking for are entrepreneurs that want to occupy that middle ground,” he continued.

“They're realistic about how hard it is to build multi-billion dollar premium businesses, but also have got ideas about how they can stack niche opportunities on top of each other, in the form of maybe different programs, working with maybe different carriers, different reinsurers, depending on their appetite,” he said.

“I think those that have got a clear view about how they can extract economies of scale, as they build these programs up, are the smart folks that we want to be partnering with,” Jones added.

Low point in ’24 for funding

Jones expects interest rates to remain elevated and for 2024 to be a low point in insurtech funding, before rebounding in 2025 and 2026, a dynamic that he said presents opportunities.

“Now's the time that you want to be deploying,” he said, saying assets could be acquired from failing companies, and that firms can be bought at discounted valuations.

“I think what people forget is that that's in part what venture capital is for, and it is speculative capital that is designed to support businesses through an unprofitable stage,” he commented.

“Not every business makes it. And so, I think it's entirely acceptable for companies to be going through that process, and I think we'll see more of it,” he continued.

“But I do think over the next couple of years, we'll see a little bit more money coming into the space, and I will see a broadening of appetite from investors. And then we'll kind of move through the next phase of the cycle,” Jones said.

Watch the full interview with MS Transverse’s head of venture Matthew Jones to hear more about: