Our recent video on Lemonade offered up some shocking statistics on one of the largest industries in the world. Across the globe, over five trillion dollars of insurance premiums were written in 2021 which would make the insurance industry the third largest economy in the world. While we’ve been less than impressed with companies like Root and Lemonade that try to reinvent traditional insurance business models, selling technology solutions to insurance providers might make for a lucrative business. One such company is CCC Intelligent Solutions (CCCS), “a leading SaaS platform powering the multi-trillion-dollar P&C insurance economy.”
Autonomy Ahead
It’s worth saying again. Slapping a cover sheet on the 10-K and calling the whole thing an “annual report” is weak sauce. So is making people sit through a 30-minute video and calling it “the latest presentation.” Every publicly traded company needs to have – at a minimum – quarterly presentations that can be read by investors at their discretion (not webcasts) and an investor deck that spells out the value proposition and key metrics. Dig around enough and you’ll find the latter, though we’ll start with what CCC tells the SEC.
Digging into the 10-K we see our first hint at what the company does – “Our business has been built upon two foundational pillars: automotive insurance claims and automotive collision repair.” Our piece on How Technology Will Affect Big Insurance Companies talked about how this exposure might be threatened with the arrival of autonomous vehicles:
At some point, self-driving cars will move from killing people to saving lives. They promise to be infinitely safer than human drivers, something that startups like Zendrive are betting on with tools that let us monitor human driver behavior. This means that car insurance premiums could dry up…
Credit: Nanalyze
That seems like a valid concern, though like fusion and quantum computing, autonomy is always five years away. Autonomous vehicles will most likely find homes in the world’s richer nations, but for everyone else, automotive insurance will remain a necessity. While CCCS has been around for over 40 years, they only recently became publicly traded using a SPAC, and this means we don’t have much historical financial data. Fortunately, the investor deck drops this gem which shows how technology has been used to spur growth over the last decade.
That growth is expected to continue at 7-10%, with the majority coming from existing customers.
What CCC Does
A cursory look through the 10-K leads us to the basic thesis. CCCS is a pure-play insurtech SaaS company providing the automotive insurance ecosystem with technology-powered solutions such as (wait for it) “deep learning AI” which has processed over 14 million claims as of last year. Algorithm penetration is a function of customers using their phones to take photos to make claims. In 2022, more than 27% of claims processed through CCC’s system were initiated by digital photos.
Processing claims is just one component of a much larger ecosystem that enables participants to conduct business more freely. For example, CCC connects over 300 insurance companies with 28,000+ repair facilities which means that OEMs and parts suppliers will want to get involved as well – not to mention lenders who want to see what the insurance company plans to dole out when it’s a total loss.
CCC has built an attractive hub-and-spoke model where the platform becomes more necessary as more companies participate (also called the network effect). With such a broad customer base, it’s implied that future growth will come from within. CCC sees the total addressable market (TAM) for U.S. auto insurance to be around $9 billion of which they’ve captured nearly 9% (based on 2022 revenues of $782 million). That’s just one component of what’s called “Property & Casualty Insurance” or P&C which also contains home insurance, marine insurance, and professional liability insurance. CCC sees these additional categories adding another $4 billion of TAM which they’d likely address with potential M&A opportunities.
The company’s claim of servicing “four of the top five automotive insurers in China” should be taken with a grain of salt since revenues from those customers make up less than 1% of total revenues. Still, it’s a start at establishing global clients which would help reduce CSS’s reliance on ‘Murica where 99% of their revenues come from. Overall, it’s a $35 billion global P&C opportunity for CCC, and diversifying into other P&C niches outside of auto helps alleviate our concerns about autonomy which is (checks notes) just five years away now.
Key SaaS Metrics
Gross retention rate remains strong above 98% over the past three years which means not much business is being lost to whatever competition there might be. Less impressive is net retention rate (NRR) which seems all over the place for a SaaS offering with 3-5 year average contract length. For the past three years, NRR has been floating somewhere below the 116% average rate most SaaS firms realize.
Getting their existing 35,000+ customers to spend more on the platform is a critical driver of growth with CSS anticipating that only 1-2% revenue growth can be expected from new logos going forward. The majority of long-term growth expected – from 6% to 8% – will come from cross-selling and upselling new and existing solutions. (The lower net retention rates make more sense in this context.)
At its most optimistic estimates, CCC expects to see double-digit growth into the future. With gross margins in the 70s, it’s an increasingly profitable platform as the company looks to trim overhead costs. Positive operating cash flows and $400 million in cash provide them with sufficient capital to survive without selling shares or raising debt. Speaking of which, long-term debt of $774 million seems manageable with the underlying notes not coming due for another four years.
Investors should also note the $2.6 billion in intangible assets and goodwill that sit on the balance sheet of this $7 billion company. Expanding further into the P&C industry through acquisitions will likely increase intangible assets while potentially increasing shares outstanding which are on their own steady climb upwards.
Are We Down With CCC?
CCS is a surprisingly interesting company flying under the radar, but not one we’d likely go long. It’s not just their SPAC roots, or that this 40-year-old company seems in need of a rebrand and revamped investor relations. Heavy exposure to automotive insurance in the face of autonomy doesn’t sound very appealing. If it’s insurance exposure we’re after, then a dividend growth champion like Chubb might be a better fit. Perhaps if CCS was a venture backed SaaS firm in the early days of disruption it might be a different story, though we’re intrigued by their planned expansion into additional P&C offerings.
The hub-and-spoke model CCC has built provides a barrier to entry for new entrants which points to a need for further investigation into who their biggest competitors are. Is it some VC-backed growth story hell bent on capturing market share at all costs, or is the competition a fragmented lot of archaic solutions that CCC is rapidly displacing? That’s probably where we’d take this analysis next. For those of you wanting to pull the trigger on CCC, a simple valuation ratio of 8 means the stock isn’t much overvalued when compared to our catalog average of 6.5.
Conclusion
The insurance industry is one of the biggest in the world with loads of money available to be spent on making the entire process more efficient. Unlike other SPACs, CCC has a solid SaaS business to offer with big plans to expand beyond U.S. auto insurance which – if the company is right – still offers blue ocean market to be captured. Then there’s expansion into adjacent P&C verticals with trickles of revenue starting to come from outside the USA where all the growth has been thus far.
Publicly-traded insurtech companies we’ve looked at before – like Root, Metromile, and Lemonade – leave a lot to be desired, so perhaps it’s worth examining participants who didn’t suddenly just come of age when SPACs became popular. In particular, we want to know about who CCC competes with.
