A majority interest in Esurance Inc., a direct-to-consumer, online provider of personal lines insurance, was acquired by Folksamerica Holding Company Inc. “It was just the right thing at the right time,” Jean-Bernard Duler, CEO of Esurance, told Insurance Journal. “We found the right partner, and the right owner, with Folksamerica.”
While financial terms of the transaction, which closed on Oct. 4, were not disclosed, it was indicated that Esurance, which will become a subsidiary of Folksamerica, will continue to operate as an independent entity, offering personal auto coverages through its www.esurance.com service.
Folksamerica Holding Company Inc., the parent of Folksamerica Reinsurance Company, is a wholly owned subsidiary of White Mountains Insurance Group Ltd.
“We were at the stage where we raised the first round last year,” Duler continued. “We raised the second round in November and we were at the—point where we were either going to raise money for a third round or eventually be acquired—You want to keep your company and your people intact. “We found some potential buyers that were interested more by the technologies than the company as a whole. [With Folksamerica], nothing is going to change in terms of management. They are very interested by what we bring, and they bring things that are very complimentary to what we do here.”
On Sept. 18, Esurance, based in San Francisco, Calif., confirmed that it had cut approximately one-quarter of its staff. It was also indicated at the time that the company was in the process of seeking a buyer.
“As a reinsurer, we have had the opportunity to look at many of the startup companies as a capacity provider to them,” said Steven Fass, CEO of Folksamerica. “We have always felt that this is a great technology and will become a very important distribution system, but we have never found a company that actually combined the insurance skills and the technological skills. We would have been very interested in Esurance had they come to us for reinsurance support. As it worked out, it’s even better since they came to us at a time when they needed capital and we’re able to provide that. So this is not the first e-commerce venture that we’ve looked at, but this the first time we’ve gotten involved in it.”
Under the terms of a tri-party agreement signed in 1999, Esurance was set up to act as an MGA for Argonaut Insurance Company, which is responsible for the issuance of the policies and assumes 15 percent of the risk. The remaining 85 percent of the risk is assumed by General Re Corporation.
When asked if the acquisition would have an effect on that original structure, Duler indicated that while there had been discussions with Argonaut and Gen Re during the past few weeks and there would be no changes in the short-term, Folksamerica is, after all, a reinsurer.
Fass affirmed that there will eventually be some changes, as yet undetermined, with Folksamerica Reinsurance Co. taking a risk-bearing position of some significance in the venture.
“At this point, we’re not quite sure how everything gets restructured,” Fass noted. “We certainly recognize the value that both Gen Re and Argonaut have brought to the company in the early days. We would like to work out a structure that is agreeable to everybody. But in terms of protection to the policyholder, it will be of the same caliber and hopefully the same companies. “Folksamerica will be in this whether it’s to take a portion of what Argonaut has or a portion of what Gen Re has or whether we are alongside of Gen Re or whether we’re behind Gen Re. There are a lot of mechanics that need to be discussed. And I’m sure they’ll have some opinions about how it should best be structured—We’ll work that out with our partners.”
“We were feeling concerned about policyholders, and we want to make sure that there’s [no] changes to concern the claims—the paper is ‘A’ paper,” Duler added.
He also said that he did not foresee any resulting increases in premiums for policyholders.
“We have filings in place. It’s highly regulated,” he said. However, he added that Esurance acts as an insurance company. “Down the road, it’s possible we will increase the rates in some states. It’s possible we will decrease the rates in some other states [but] we have no plans at this stage.”
Likewise, Esurance plans no changes to its current distribution system.
“We sell directly to the consumer,” Duler said. “We see that as a benefit to the consumer experience. Don’t forget we’re set up as an agent and we have licensed agents in the call center. So the way we distribute our product, we distribute that through partnerships, and those partnerships remain in place. I’m talking about E-Loan, Kelley Blue Book, Auto Trader—nothing has changed for that.”
Does the acquisition reflect changes that are currently taking place in the insurance e-commerce marketplace? Fass said that Folksamerica views the transaction more as an insurance opportunity than as an e-commerce opportunity.
“Esurance is the leader in the technology, the only company to have a knowledge that is really starting to make this pay off,” Fass said. “We come into this as an insurance investor, not as a venture capitalist.”
Reiterating his previous announcement that Esurance would, for the time being, cut back on the development of new products in favor of focusing on its core personal auto product, Duler said, “We were going very fast. We rolled out 24 states in six months—We were migrating technology—We were working at the same time on renters and homeowners and travel and umbrella—maybe too much is too much.”
Esurance will, however, continue its expansion into more U.S. states.
“I want to stress that it’s a very positive step for [Esurance],” Duler said. “I think it’s going to help us build value for our policyholders and the people in the company, and things are going to work very well.”
“We come into this with the idea that this is a long-term investment; this is a major commitment by Folksamerica,” Fass emphasized. “We don’t come in with an exit strategy and are not looking for any quick IPO or anything else that perhaps the founding shareholders were looking at. It’s a much different approach that we’ve taken.
“Historically, we have found the right blend of traditional insurance values and innovation and this really fits into both of those. It is an insurance operation. It’s run with insurance company discipline, yet it’s very innovative technology and the cutting edge of a new distribution system.”
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