In the wake of insurtech unicorn Root’s IPO, it felt safe to say that the big transactions for the insurance technology startup space were done for the year.
After all, 2020 had been a big one for the broad category, with insurtech marketplaces raising lots, rental insurance startup Lemonade going public, Root itself debuting even more recently on the back of its automotive insurance business, a big round to help Hippo keep building its homeowners company and more.
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But yesterday brought with it even more news: Metromile, a startup competing in the auto insurance market, is going public via a blank-check company (SPAC), and Hippo raised a huge, unpriced round.
So let’s talk about why Metromile might be plying the public markets, and why Hippo may have have decided to pick up more cash. Hint: The reasons are related.
A market hungry for growth
The Lemonade IPO was a key moment for neoinsurance startups, a key part of the broader insurtech space. When the rental insurance provider went public, it helped set the tone for public exit valuations for companies of its type: fast-growing insurance companies with slick consumer brands, improving economics, a tech twist and stiff losses.
For the Roots and Metromiles and Hippos, it was an important moment.
So, when Lemonade raised its IPO range, and then traded sharply higher after its debut, it boded well for its private comps. Not that rental insurance and auto insurance or homeowners insurance are the same thing. They very most decidedly are not, but Lemonade’s IPO demonstrated that private investors were correct to bet generally on the collection of startups, because when they reached IPO-scale, they had something that public investors wanted.
Namely: Growth.
After Lemonade went out, Root followed. And like Lemonade, Root had a good IPO pricing run, selling shares for $2 over its expected range, raising north of $1 billion when all the transactions related to its debut were tabulated.
Since then, however, Root has been a mess. Its shares are off from $27 to $16.73, as of close yesterday. Lemonade, by contrast, priced at $29 and was worth $68.99 per share at the end of trading yesterday. So, a mixed bag.
Why the difference? Root expects its GAAP revenue to fall in Q3 2020 compared to Q3 2019 thanks to changes in how it reinsures itself. Its insurance metrics show growth, however, with expected “direct written premium growth of 34% to 41%” and anticipated “direct earned premium growth of 50% to 58%” on a year-over-year basis.
Lemonade, in contrast, just reported “in force premium” growth of 99% in Q3 2020 compared to the same period of 2019, and gross earned premium growth of 104% over the same time period.
It’s easier to eat some short-term GAAP revenue changes when the underlying business is growing at around 100% instead of half that. (Yes, we’re comparing slightly different metrics here, but as we’re speaking directionally, let’s not quibble.)
Hippo
This brings us to Hippo. When Hippo raised earlier this year, the price at which it managed to sell equity was low compared to the multiples that Lemonade had shown were possible for a public neoinsurance startup. Hippo brave-faced it, taking its $1.5 billion valuation and $150 million in new cash and getting back to work.
Then yesterday Hippo announced $350 million more from Mitsui Sumitomo Insurance Company, which had put money into its July round earlier this year. The startup wrote in a release that the capital was earmarked for growth (it “will support Hippo’s product rollout in additional states”) with nearly universal coverage of Americans a 2021 goal, and to provide “additional capital for its insurance and reinsurance companies.”
My read of those things is that Hippo can now grow faster (good) and, with more capital for its own insurance organs, can keep working on its economics (good). The Exchange reached out to Hippo about the deal, curious why it was raised via a convertible note (“a convertible note at this stage allows us to move faster while maintaining growth across all fronts of the business”), the structure of the note (“it’s a convertible loan with discounts baked in”), and growth metrics, to which the company said nothing useful other than wrapped up its buy of an insurance carrier after its Series E.
It’s probably not capital un-intensive to do that.
Regardless, Hippo was able to do all of this because its growth is more like Lemonade’s own than Root’s, speaking broadly. From our July note on its prior funding round:
Hippo also announced that it had gross written premium — the value of insurance products sold, before certain deductions — of $270 million in the preceding 12 months, a figure that had grown 140% over the prior year.
That fits our assembling thesis that these neoinsurance companies neatly fit the sort of growth profile that investors are hungry for in a world where debt yields zero if you are lucky, capital is cheap and the digital transformation and mobile revolution are still unfolding into new business categories over time.
Metromile
What can we say about Metromile’s growth? Sadly the real guts of its impending SPAC investor pitch are not out yet, but the company did provide a set of highlights for our perusal:
- “76% average annual premium growth rate from 2015-2019,” which tells us very little about its recent growth, mind, but the pitch to investors here is that the company has a history of compounding growth.
- “21-state footprint by end of 2021 and 49 states by end of 2022,” a factoid that continues the growth pitch.
- “Expect[ed] to achieve $48 million of enterprise software revenue in 2024.” This is something of a sop, but since every company wants to be a software company, so be it.
The SPAC is going to stuff Metromile with around $294 million at a “pro forma implied market cap” of around $1.3 billion. Which is neat, we suppose, but the growth numbers probably matter more than the company’s new valuation.
The guaranteed cash that the SPAC-led debut provides Metromile is attractive, especially after competitor Root raised so very much during its more traditional IPO. Now it can compete, provided the transaction goes through. But to fully unite Metromile and our larger thesis will require some more recent numbers, even if what we saw above is trending in the right direction.
So what?
Summarizing, Lemonade’s multiples appear predicated to a large degree on its rapid expansion. Root’s public market struggles could be tied to slower growth rates, which make its yet-emerging economics less attractive in the near term. Hippo’s recent raise is not a surprise thanks to its own recently recorded growth rates. Metromile’s SPAC-led debut is slightly opaque, but it appears that it’s being pitched as another growth play.
So, you can thank the broader state of the capital markets for the withering hunger for growth that is driving this cohort of less economically mature businesses ahead in terms of capital accretion and public demand for their equity. Or more simply, risk tolerance is high today provided that a company can show lots of growth; the unicorn ethic of 2015 has shifted from the private to the public markets, at least for insurtech.
Why do we care? Because interest rates are not going to go up for a long time, which will keep capital cheap and growth demand high. So the same winds that are working above should keep blowing. Perhaps we’re not done seeing large private checks, and public demand for companies like Metromile and Hippo will keep the insurtech startup world hot for another year.
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