Why Aren't Investors Backing Neoinsurance Startups?

Insurtech Startup Valuations: A Recent Decline

Recently, considerable attention has been given to the fluctuating valuations of insurtech startups that have become publicly traded within the past year. This analysis focuses on neoinsurance providers such as MetroMile and Hippo, differentiating them from insurtech marketplaces like Insurify or Zebra.

A wave of insurtech companies completed public offerings in 2020 and the beginning of 2021. Following Lemonade’s successful IPO, MetroMile, Hippo, and Root also entered the public market. However, since these initial offerings, their valuations have experienced a substantial decrease.

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Oscar Health, however, was initially overlooked in our broader assessment of the insurtech landscape. An investor brought to our attention that our concerns regarding investor judgment during Oscar’s IPO were perhaps premature. The initial IPO price range appeared inflated, a point we previously highlighted. Oscar Health ultimately priced its shares above the projected $32 to $34 range, commencing trading at $39 per share.

Currently, the stock trades at $13.58 per share.

Expanding the Scope of Declining Valuations

While this could be considered another data point within our larger analysis, it represents something more significant. Oscar Health broadens the spectrum of insurance categories that startups have addressed, scaled, taken public, and subsequently experienced a loss of investor confidence.

The companies under examination operate across diverse sectors, including auto insurance (Root, MetroMile), property and rental insurance (Hippo, Lemonade), and, with Oscar Health, health insurance. All are currently facing market headwinds.

What is the underlying cause? Fortunately, a potential explanation has emerged. A CEO from a neoinsurance company in a separate sector shared a compelling hypothesis with The Exchange, offering a plausible rationale.

This hypothesis suggests a fundamental shift in how investors perceive the long-term viability and profitability of these business models.

The core issue appears to be the difficulty in achieving sustainable, profitable growth within the highly competitive and regulated insurance industry.

Focusing on Key Performance Indicators

Recently, a discussion was held with John Swigart, the co-founder and CEO of Pie Insurance. Pie Insurance specializes in providing insurance solutions for small and medium-sized businesses (SMBs), particularly in the area of workers’ compensation coverage. Swigart believes that historically, smaller businesses have faced inflated costs and inadequate service within the insurance sector.

Leveraging technology, his company aims to extend coverage to businesses often overlooked by traditional insurers, while simultaneously offering more competitive pricing.

Pie Insurance secured $118 million in Series C funding in March, bringing the total external capital raised to $306 million, according to Crunchbase data. A more detailed analysis of Pie Insurance will be presented at a future time.

The central point of interest, however, stems from Swigart’s insights regarding the current state of public insurtech stock valuations. Given his involvement in a related company, his perspective was considered valuable and informed.

The CEO initially highlighted the considerable talent present within the currently undervalued neoinsurance companies. Addressing the notion that these startups are being re-evaluated at lower multiples as the market adopts a more conventional insurance company assessment, he offered an alternative viewpoint.

Swigart contends that investors are actively seeking demonstrable evidence of the impact generated by the technology developed by these neoinsurance firms. Specifically, they want to see how this technology is influencing loss ratios, bundling metrics, and customer acquisition costs.

Essentially, if these insurance ventures are genuinely technology-driven, what tangible benefits is the technology providing?

The challenges faced by neoinsurance providers are multifaceted. A significant aspect is their reliance on reinsurance for managing insurance risk, which inherently limits their immediate revenue growth, despite potentially fostering improved long-term economics.

However, this business model evolution alone does not fully account for the observed declines in valuation. Investors likely anticipated superior performance fueled by a perceived – or expected – technological advantage.

Swigart explained that insurance consumers prioritize affordable coverage. He identified two primary strategies for achieving this without incurring losses: accurate risk assessment and efficient service delivery. Both approaches contribute to offering cost-effective and profitable insurance solutions.

The technology implemented by companies like Root, MetroMile, and Hippo is expected to enhance risk assessment capabilities over time, while their digital-first approach should ultimately lead to reduced customer acquisition costs. Investors are simply awaiting concrete evidence of these improvements.

Importantly, this perspective doesn't necessarily indicate a long-term negative outlook for neoinsurance companies, provided their technology effectively improves risk pricing and their marketing strategies prove more efficient than traditional advertising methods. These publicly traded insurtech firms possess substantial cash reserves, potentially sufficient to reach a point where their technology delivers measurable results, thereby potentially altering investor sentiment.

Remaining optimistic about these companies, even after their transition to the public market, is still reasonable if you were confident in their potential during the private funding stages.

However, from the perspective of the public markets, performance is paramount. Investors require evidence of improved loss ratios, reduced loss-adjustment expenses, and more efficient customer acquisition. We will continue to monitor the financial performance of these companies as they develop and mature, observing the unfolding results.