Jill Frankle is vice president of strategic ventures at Hartford Investment Management Co. (HIMCO). In this interview, Frankle tells us about the latest developments in the insurtech space, and explained how HIMCO's venture portfolio complements its long-term investment strategy during a period of industry-wide disruption in the insurance sector.
Jill Frankle was named to Trusted Insight's 2020 Top Private Credit Institutional Investors.
Trusted Insight: Can you share a brief summary of HIMCO, and what your day to day responsibilities are there?
Jill Frankle: My role is to lead Hartford STAG Ventures, which is the strategic venture capital arm of The Hartford. I joined The Hartford in 2017, and recently, we moved the investment function for Hartford STAG Ventures into HIMCO, where we work closely with the private equity team. We can leverage the investment acumen of a broader team and it is highly collaborative, so it has been a great fit.
HIMCO has been providing investment advice for over 35 years. With over 130 investment professionals and approximately $102 billion in assets under management (as of September 30, 2020) across the fixed income, alternative and equity markets, we are able to deliver tailored strategies to insurance, sub-advisory, and other institutional clients. Within alternatives, we have established programs in private placements, private real estate, middle market loans, private equity/mezzanine debt, and now venture capital.
"We look for novel technologies or business models that can accelerate the work that we have on our strategic roadmaps and which help us innovate on a faster timeline."
HIMCO delivers tailored strategies to insurance clients like The Hartford, but also to third-party clients. Today, our core client for venture capital investing is The Hartford. On a day-to-day basis, we are sourcing leading, emerging companies that can have relevance or impact to The Hartford, a leading provider of property and casualty insurance, group benefits, mutual funds and other investment products.
We look for novel technologies or business models that can accelerate the work that we have on our strategic roadmaps and which help us innovate on a faster timeline. We work closely with The Hartford's business units and the operations teams to diligence these companies and determine where it makes sense to partner and/or invest. In doing so, we are a bit unique within HIMCO, in that we are not just providing capital to these companies, but we are also providing valuable insurance domain expertise. We are very active in providing guidance and support to current portfolio companies, as well as prospective portfolio companies.
Trusted Insight: Insurance institutions tend to invest for the long haul for the sake of responsible asset-liability matching. How does venture complement a portfolio oriented more toward the long term?
Jill Frankle: Well, if you look at venture capital, it is a long-term asset class. The time from initial investment to exit for many venture companies ranges between 6 and 8 years. We believe it is important to consistently put money to work every year in order to achieve vintage year diversification. Investing in high-quality companies alongside leading managers helps mitigate risk, as research has shown that there is persistence among returns for venture managers.
There has also been a lot of research regarding venture’s role in a broad portfolio and how a certain proportion allocated to venture alongside a buyout portfolio can actually lead to enhanced returns. So venture can actually be complimentary over the long term. With our investing program, we consider both the potential financial return over the long-term, as well as the strategic benefit to The Hartford.
Trusted Insight: We've observed that time to exit for venture-backed companies has been increasing. Has your team accounted for trends that show venture-backed companies staying private for longer?
Jill Frankle: Venture is a cyclical industry and exit activity seems to have picked up nicely in Q320, especially in fintech and insurtech. The median time from initial investment to exit is 5.2 years according to Pitchbook, so that is quite reasonable in today’s market. Again, as long as you continually put money to work in every vintage year, you will construct a portfolio with different maturation timelines. In addition, a strategy that pursues both fund commitments and direct investment is another way to achieve time diversification. Fund investments typically have a 10-year term plus two one-year extensions. On average, you get the bulk of your capital back in a 7-to 10-year time period.
"We invest in a variety of areas across the insurance value chain, from novel products to solutions that enhance underwriting."
Trusted Insight: You invest in early-stage ventures for HIMCO. What traits do you like to see in the managers you select?
Jill Frankle: We invest in a variety of areas across the insurance value chain, from novel products to solutions that enhance underwriting. These could include interesting third-party data or data and analytics capabilities that optimize the speed and accuracy of risk pricing. We also look at solutions that enhance claims processing and other back office operations. We are seeing a lot of interesting opportunities in solutions that are AI or machine learning–based, as well as products related to risk prevention and mitigation, for example, in IoT. The opportunity set is very broad, and that in and of itself allows us to have a diversified portfolio. When we are evaluating specific opportunities, we look for experienced, repeat, successful entrepreneurs.
We also look for large market opportunities in which a new approach or technology is solving a real problem and therefore has strong growth potential. We look for companies with strong underlying business unit economics and sound financial models, and which, given time and scale, can become strong and profitable enterprises. And we look for strong co-investors. Our approach is to be a small, value-add, strategic investor alongside leading VCs. Looking at who else is in the syndicate is important to us.
Trusted Insight: When you're looking at early-stage ventures relevant to The Hartford and to the industry, how do you define what's strategic and relevant?
Jill Frankle: When evaluating prospective opportunities, it is classic due diligence: Has the company established product–market fit? Are there beta customers or a pipeline of customers that you can speak with to validate the use case and ROI on the product or service? And can you underwrite the financial model and growth projections that the company is presenting? We always run sensitivities on a company’s model to ensure that even in a downside scenario, the opportunity is still compelling.
As a corporate venture capital investor, we believe that we have a competitive advantage, in that we can spend a lot of time with our colleagues on the enterprise side of the house. This includes leaders in strategy, product, underwriting, data science, IT, and operations. We can go deep on their strategy and roadmaps, digging into any pain points. We can also help them identify any gaps in their strategy based on trends that we are seeing in the market. The ultimate goal is to find solutions or technologies that they can test. If a positive outcome, The Hartford can partner and Hartford STAG Ventures can invest. It is a win-win. The enterprise benefits by accelerating its initiatives and we benefit by leveraging the domain expertise of our colleagues to find the most promising deals in our pipeline. Post-investment, we strive to be a value-add partner and customer. In some instances, there can be co-development activity to build new features and functionality.
Trusted Insight: You do your homework inside and outside the company.
Jill Frankle: You really have to.
"There really isn't an area that is not experiencing some element of change. It's across the entire value chain."
Trusted Insight: One thing we’re seeing in fintech is the rebundling of services that were unbundled by the first entrants to that market. What kinds of market disruption are you seeing with insurtech?
Jill Frankle: So that's an interesting point about fintech, because the hypothesis is that the insurtech landscape is about five years behind the changes we've seen in financial services and fintech. But insurtech seems to be accelerating. For example, we have seen the rise of companies like Lemonade, Root, and others, which have already hit the public markets.
There really isn't an area that is not experiencing some element of change. It's across the entire value chain, which, similar to what happened in financial services, can be unbundled. In the first wave of insurtech, we saw a lot of distribution opportunities: a lot of front-facing, direct-to-consumer plays, whether it's digital brokers or comparative raters online. Distribution was the first wave.
Then we started to see a lot of technology-enabled solutions that could help an insurance carrier. There’s innovation in APIs, which offer the ability to have much more integrated data sets, both within the insurance carrier and with partners, whether brokers or reinsurers. On the data and analytics front, there's been an explosion over the last two or three years of novel types of data that you can leverage for underwriting. The insurance industry has been predicated on understanding data to price risk. And right now, there's just a whole host of new data sets to leverage to better underwrite risk. So that's been a big wave. In risk engineering there are new solutions enabling virtual site inspections; concepts where there is someone onsite who is streaming imagery and data back to a risk engineer or inspector. AI can then be layered on top to make some risk recommendations, all potentially done faster and less expensively than traditional approaches. So the evaluation of a property risk or even a claim incident is changing.
And then with IoT, you have a lot of sensors and devices that can not only prevent risk, but predict risk; for example, when something might fail, such as some of the sensors you might see in an industrial setting. So the IoT space is also exploding and very valuable for an insurance carrier who is looking to detect, prevent, and predict risk.
And then on claims, there is a lot of focus on automation. In auto, for example, there's several companies that do AI-based repair/replace estimates based on photos, and you're going to start to see more of that, as there are similar solutions for property claims. So there are abundant opportunities across insurance to tap into new technologies to improve business operations.
The other thing that I would add, in terms of trends, is that a large insurance carrier is also a very large enterprise customer. So there's a lot of enterprise technologies that we can utilize, as well: cloud-based, open source, and all kinds of data science tools. It’s a really active time as the industry is transforming.
Trusted Insight: Are there any other verticals or geographic regions that have captured your interest?
Jill Frankle: We see opportunities both in the U.S. and in Europe; for the latter, particularly in the London Market and through our recently acquired Lloyd’s syndicate. So we get tied into some of the innovation activity that's happening abroad. And often, you’ll see insurtechs emerging out of Europe that come to the U.S. market. We have seen interesting solutions in fraud prevention, small business underwriting, drone capabilities, and the list goes on. These technologies coming out of Europe are similarly applicable in the U.S. market.
There's also a lot going on with how asset ownership is changing. In auto ownership, for example, you have some people who may drive for Uber. The way insurance is being handled there has to change. Then you have people who own assets, like a home, that in non-COVID times they may rent out via a sharing-economy platform. So insurance needs to adapt there, as well. We actually acquired a subsidiary called Y-Risk, which has solutions for the sharing economy. So, we are seeing changes in how assets are owned and insured.
Trusted Insight: How have you and your organization been navigating the market turbulence generated by COVID-19?
Jill Frankle: We have remained steady. We’ve continued to invest during the COVID time period. I think everybody back in March and April was saying, "Okay, what's happening in the world?" And maybe they took a breath and paused. But we were actively diligencing some investment opportunities that we continued to diligence, and we moved forward with those investments.
It’s really company-specific. COVID's been a strong tailwind for some companies, and there are companies that have accelerated some of the things they're doing because COVID necessitates their solution in terms of digital engagement or virtual capabilities. And in other instances, maybe valuations traded down a bit, which is healthy in this market. Having invested through many cycles, I’ve learned that you can often find some very compelling opportunities during times of dislocation.
We continue to be prudent and set a high bar for our investments. We are seeing a lot of compelling opportunities. There are a lot of passionate entrepreneurs out there looking to solve problems. And so we will continue to build relationships and diligence these companies. We've demonstrated that we can work very effectively through this remote time period, so in a way, it’s business as usual.
Trusted Insight: Is there anything else you’d like to add?
Jill Frankle: I really do feel like there's a tremendous opportunity to partner with some of these emerging companies and invest in them to support their growth and benefit in their success. It’s one of the things that attracted me to come to The Hartford and build a compelling corporate venture capital program.
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