Will selling the brokerage business save CXA Group?

Who doesn’t like an inspiring Ted Talk? I always find myself inspired by entrepreneurs’ life stories before the practical (and cynical) side of me come to acknowledge that not all inspirational founders are actually good. 

We might have heard of the first time CXA announced its lay off of a dozen workers in a cost cutting effort early last year. Out of a 319 member team, 12 staff were let go – what Rosaline Koo, CEO of the group said was due to the automation of roles that involved “manual processing”.

The insurtech startup operates through a brokerage and a Software as a Service (SAAS) unit. Together, these units provide a B2B platform allowing corporations to provide employment benefits consisting of personalised insurance and healthcare services. In short, they work with insurance providers and white-label solutions to enterprise customers. 

A few days ago, CXA broke its news that it will be selling its brokerage arm to Pacific Prime to “strengthen its financials”.  The restructuring means that CXA will now be focusing on its SAAS as its main business model. 

While the company has repeatedly stressed that it was “on the path to profitability”, it did not deliver convincing results. 

Their layoff in 2020 was, barely a year after they raised US$25 million in a bridge funding round for its expansion in the Asia-Pacific. The company ran into cash flow problems because of the high cash burn (over 300 employees in Singapore alone) and the absence of a CFO until end 2019. 

Investors put in a bridge round of funding to extend CXA’s runway, but at the same time CXA can’t do drastic cost/staff cutting, which will send very negative signals to its insurance partners and corporate clients.

Instead, the CEO has confidently claimed that they might not even need additional funding because profitability was so-called, expected. 

True enough, they did not run another round of investment. But then came the news of selling their brokerage unit.

It doesn’t take a genius to guess that the real reason for them selling their brokerage  —  running out of money. Because otherwise, selling the brokerage does not make sense from a business strategy point of view – it will only reduce the company’s monetisation ability. The argument of focus does not hold – because brokerage is a natural extension and additional monetisation source without even much effort, besides the business unit was already established. 

Valuation should now be in question – and financial (i.e. non-corporate) investors will find it very difficult to justify an investment case into CXA.  

The escalation of events from the lay off, bridge funding and then the recent restructure must be signaling something. 

If these were really to achieve ‘Profitability’ like Rosaline has said repeatedly, my question is – should investors be cautious and demand more drastic measures?

Such measures would also show ownership and responsibility towards the corporate clients as well.