TechCrunch recently reported on AgentSync’s newest funding round, a company focused on assisting insurance agents with adherence to regulatory requirements. Although the specific nature of their product may not immediately grab attention, the company’s expansion has been remarkably strong, achieving a ten-fold increase in annual recurring revenue (ARR) over the past year and a four-fold increase since the beginning of the pandemic.

Consequently, it’s not unexpected that this latest investment was secured only a few months following their previous funding event. Investors were eager to quickly increase their stake in AgentSync, contributing to a broader trend of increased venture capital investment in insurtech companies observed throughout 2020.

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Beyond private investment, public market participants have also shown interest in the space. Lemonade’s initial public offering earlier this year was met with considerable enthusiasm, resulting in a successful market entry for the rental insurance company. Root also became a publicly traded entity, but has experienced a decline in value, with its current share price approximately half of its peak.

Despite one notable success and one challenge for the industry in the public markets this year, Metromile is also pursuing a public offering. A recent data analysis conducted by TechCrunch, combined with external data regarding the insurtech venture capital landscape, suggests that private investment in insurtech is mirroring the attention it’s receiving from public investors.

Today, we will briefly examine the Metromile offering and analyze the insurtech venture capital market to gain a clearer understanding of the amount of funding being directed towards the next wave of companies aiming to achieve similar public market outcomes as these three insurtech leaders.

Ultimately, we will connect public company performance and recent private investment activity to determine whether both segments of the market are currently in agreement regarding the sector’s potential.

Metromile

Let's begin with an overview of Metromile’s initial public offering. The company is becoming publicly traded through a merger with INSU Acquisition Corp. II, a special purpose acquisition company (SPAC). Documentation similar to an S-1 filing from both organizations details the financial aspects of the SPAC and Metromile itself.

Regarding the financial performance of this insurtech company, a key area of focus is its growth rate. However, unlike many 2020 IPOs, assessing Metromile’s growth in standard accounting terms (GAAP) is complicated, and understanding the reasons behind this is crucial.

Essentially, a modification to Metromile’s reinsurance arrangements last May resulted in the company transferring “a greater portion of [its] premiums compared to previous periods.” This change “led to a substantial reduction in revenues as reported under GAAP,” according to the company.

Premiums that are ceded are not recognized as revenue. Lemonade recently clarified this concept in relation to a similar adjustment in its own business model:

Consequently, Lemonade has restructured its operations, which has decreased reported revenues while simultaneously improving its financial structure. This shift has had a noticeable impact, with the company’s GAAP revenues decreasing from $17.8 million in the same quarter of the previous year to $10.5 million in Q3 2020.

Root has implemented comparable strategies. Beginning July 1st, the company began “transferring 70% of [ … ] premiums and associated losses to reinsurers, while also receiving a 25% commission on written premiums to help offset initial and ongoing expenses.” This resulted in lower GAAP revenue and, again, improved financial performance.

All emerging insurance companies that have released financial results during their public offerings have altered their reinsurance strategies, creating some short-term inconsistencies in their reported results and challenging investors to determine their true value.

What insights can be gained from the experiences of Root and Lemonade following their similar adjustments? Unfortunately, not much.

Lemonade’s stock price continues to be more than double its IPO price, while Root’s has decreased by 45% from its own. Therefore, identifying a clear trend is difficult.

Nevertheless, with a better understanding of how ceding premiums—which Metromile now does to a greater extent than before—reduces GAAP revenues, we can now examine its recent financial performance:

For those who prefer not to analyze income statements extensively, simply comparing 2020 revenues to those of 2019 is sufficient. Then, observe the significant decrease in “losses and loss adjustment expenses.” In essence, Metromile has reduced losses by transferring revenues, a strategy also employed by Lemonade and Root, as we understand it.

It is uncertain how the market will respond to Metromile’s stock trading publicly. However, it appears likely that the outcome could significantly influence market sentiment: If Metromile’s auto insurance business faces challenges after its IPO, it would represent two difficult neoinsurance IPOs in contrast to one success.

This record is unfavorable and could reduce investor interest in large insurtech venture funding rounds.

Conversely, if Metromile performs well, Root’s post-IPO difficulties might be viewed as exceptions rather than the norm, potentially increasing confidence in the sector within the private market.

This returns our focus to the broader startup landscape.

Startups

We analyze the performance of publicly traded companies to gain insights into the startup landscape. The reasoning is that substantial public interest and resulting high valuations for specific company types can encourage venture capitalists to increase their investments in comparable, privately held businesses.

For instance, as valuations for public software companies increased significantly, the anticipated value of similar private companies also rose, leading to greater venture capital funding at earlier stages and at higher valuations.

The venture capital outcomes within insurtech aren't solely influenced by public market performance. Lemonade’s recent public offering means that the timeframe for observing similar companies in the public sphere has been relatively short. Furthermore, insurtech is a very diverse field, including marketplaces such as The Zebra, new insurance providers like Metromile and AgentSync, and software solutions designed to support other companies within the industry.

This situation is somewhat analogous to fintech, where we are examining a mixed collection of components and assuming they all represent a single element. This presents a challenge when evaluating a startup category that has evolved and become more varied.

Nevertheless, Metromile is undeniably a part of the insurtech sector, and its IPO has the potential to influence both public and, consequently, private market perceptions. Therefore, a deeper understanding of this sector is warranted.

Let's consider some relevant data to enhance our understanding. An analysis focused specifically on the insurtech space indicates that the third quarter was a positive period. We will highlight four key findings from the report (the complete report can be found here).

First, the primary metrics demonstrated improvement compared to the previous period:

Second, similar to other areas of venture capital investment, funding was concentrated in later-stage startups:

Third, a gap existed in the mid-market, which could pose challenges for insurtech startups aiming to progress to later stages of private funding:

And finally, there is encouraging news for those interested in investing in entirely new companies with the potential to disrupt the substantial insurance market:

More generally, a review of Crunchbase data by TechCrunch revealed a general increase in investment within insurtech from the first half of 2020 to the second half of 2020 (although future predictions are impossible).

Metromile is leveraging this private market to a certain extent as it pursues its public offering through a SPAC. Managing this level of capital is a significant undertaking. We will provide further updates as Metromile approaches its trading date.