CXA Group sells brokerage arm in bid to strengthen financials

INSURTECH firm CXA Group on Friday offloaded its brokerage business for a lower-than-expected price as it attempts to strengthen its financial position and double down on its Software as a Service (SaaS) business.

CXA entered negotiations with global insurance adviser Pacific Prime to sell its brokerage business around the fourth quarter of 2020, amid fundraising talks for its Series C round, chief executive Rosaline Chow Koo told The Business Times (BT). CXA employs about 300 staff regionally, 40 per cent of whom will be moved to Pacific Prime as part of the deal.

Proceeds from the deal will be used to finance CXA's expansion into Europe, where the firm has seen "demand from European insurers and their bank partners", said Ms Koo.

Separately, another dozen employees will be laid off as part of the consolidation. This represents about 5 per cent of CXA's total workforce, she added.

Some staff were let go due to their roles becoming redundant, as the firm will be expanding with a fairly lean cost structure, Ms Koo said. The company plans to hire "hundreds" more over the next two years for product and tech development.

The sale comes following a few difficult years for CXA as it struggled with widening losses and high cash burn. Based on regulatory filings of CXA Group Pte Ltd (which may not fully reflect the company's financials), CXA recorded a loss of S$29.7 million in 2019, despite revenue of S$26.4 million. Total current assets stood at S$16.5 million, versus total current liabilities of S$53.9 million as at Dec 31, 2019.

Losses for 2019 widened from S$17.5 million in 2018 and S$20.3 million in 2017, despite higher revenue.

Founded in 2013, CXA has attracted notable backers, including HSBC, Singtel Innov8, the Singapore Economic Development Board's investment arm EDBI and B Capital Group, the venture firm of Facebook co-founder Eduardo Saverin.

Sources told BT that the deal went through for a slightly lower price than the S$18 million to S$20 million that was expected. Brokerages typically ask for up to twice their annual revenue, BT understands.

According to regulatory filings, CXA's brokerage income stood at S$9.6 million for the full year ended Dec 31, 2019 - marginally higher than the S$9.5 million from a year earlier. This contributed 36.2 per cent to its FY2019 topline. Revenue from brokerage services tends to remain stable year on year unless there have been major acquisitions.

Meanwhile, its SaaS segment generated S$11 million for the firm in 2019 - or about 41.7 per cent of total revenue.

Ms Koo told BT, however, that 2020 has been an "exceptional year" for the firm, as it managed to grow its business by 45 per cent and narrow its losses before interest, taxes, depreciation and amortisation by 64 per cent. This was partly because of its SaaS segment, which grew 218 per cent on the back of demand from banks and their insurers to white-label its platform.

CXA's SaaS segment contributed 70 per cent of its revenue last year, while the other 30 per cent came from its brokerage business.

Ms Koo told BT that CXA now expects to turn profitable (before accounting for interest, taxes, depreciation and amortisation) by 2023.

CXA's product is a health and wellness platform white-labelled by banks, insurers and payroll firms and used by their clients to lower employee healthcare costs. (A white-label product is manufactured by one company and packaged and sold by other companies under various brand names.)

According to regulatory data on intelligence platform VentureCap Insights, CXA has raised about US$34.9 million in total equity funding. It was valued at about US$107 million after its Series B round in 2017.