Hippo began to trade earlier this week after completing its SPAC combination. The home-focused U.S. neoinsurance provider initially stuck close to its $10 per-share pre-combination price before plummeting yesterday during regular trading.
But Hippo’s declines don’t appear to be of its own doing. Lemonade, another U.S. neoinsurance player — albeit one more focused on rental coverage — posted slightly better-than-expected Q2 results earlier in the week. After its report, Lemonade’s value dropped sharply, and it appears it dragged Hippo down with it.
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The trading volatility is interesting on its own, but what matters more is that the drop in the value of several neoinsurance companies is part of a larger trend. This week’s declines are not incredibly surprising — the market has negatively repriced tech-enabled insurance providers in recent quarters, which can be an uncomfortable situation for a category that previously basked in warm attention from public investors.
At this juncture, we’d typically riff on the new values of public neoinsurance companies and use that data to work our way into a guess concerning what the price declines might mean for related startups. Taking public-market data and using it to better understand private markets is pretty much the national pastime of this column.
Not today. Instead, we’re going to look into an interesting dynamic among neoinsurance companies that may matter a bit more for our comprehension of the private markets. Namely that the players in the space that we can name and track are generally cash-rich and market-sentiment poor.
Public markets are cutting the value of neoinsurance stocks, but the companies behind the valuation declines are rather wealthy. This makes their enterprise values smaller than you might guess from a quick glance at their market cap figures. But do Lemonade or Hippo really care if the stock market decides from one quarter to the next that their businesses are worth plus or minus 10%? Do they have enough cash to pursue their long-term visions, regardless?
Let’s unpack all the numbers, discuss an interview The Exchange held with Hippo CEO Assaf Wand earlier in the week and consider what Lemonade had to say during its earnings call.
Sure, it’s not great news for neoinsurance startups that their public comps are in choppy waters. But for the public companies themselves, it may be a time to put both middle fingers in the air and stick to the plan rather than fret about what the analyst class is worried about.
Lots of cash, little love
Lemonade went public in July 2020, posting big gains and generally warming the waters for future neoinsurance public debuts, and Root went public that October. MetroMile announced its SPAC combination in November 2020, and Hippo announced its own SPAC deal in March 2021.
Recall that Lemonade is focused on rental insurance with an expanding line of products, while Root and MetroMile sell auto insurance. Hippo’s main business is home coverage, though it is also expanding its product mix over time.
Here’s where the four companies stand compared to their 52-week highs (calculated from yesterday’s close):
- Lemonade: -57%
- Root: -76%
- MetroMile: -66%
- Hippo: -47%
That Hippo number is a little bit bullshit; its highs were set early in the year when SPACs were trading at a premium to their IPO price. More realistically, Hippo is off 20% from its combination price.
Still, it’s a pretty awful set of numbers. Investors are either betting that growth at neoinsurance companies will prove weaker than they initially anticipated, or revenue quality will take longer to mature, or both. It’s not a strong endorsement of the individual companies — or their collective efforts to reform the insurance market through tech and consumer-friendly apps.
But observe the companies’ most recently known cash balances, and, where we have it, their most recent quarter’s operating cash burn:
- Lemonade: Cash and equivalents of $1.2 billion, Q2 operating cash burn of $56.5 million [source]
- Root: Cash and equivalents of $1.1 billion, Q1 operating cash burn of $90.9 million [source]
- MetroMile: Cash and equivalents of $221.5 million, Q1 operating cash burn of $29.4 million [source]
- Hippo: Cash of around $1 billion per the company, Q1 operating cash burn $15.5 million [source]
So, Lemonade has north of five years of cash at its current operating burn rate. Root has three years. MetroMile just under two. And Hippo has basically forever, though we had to cobble together its numbers and we’ll know better when it reports earnings.
My read of the relatively large cash balances present at these companies is that they raised at intelligent points in time, capturing extensive upside to the value of their shares in the wake of Lemonade’s strong public debut. Now the market is less bullish on their economics, but they already got the damn cash.
So now the collected companies have to do what every company says that it wants to do when it goes public: Focus on the future and build like mad.
Hippo
This post was coming out today even before the week’s news led to Lemonade shedding more than a tenth of its value. In late July, we asked, “Should we be worried about insurtech valuations?” The answer was apparently yes.
But listening to Hippo’s CEO, the recent market movements are not what matters. Per Wand, the redemption drama surrounding its SPAC combination that saw it raise less money than it had hoped is not a massive deal. Hippo will have around $1 billion in the bank post-combination, the CEO said, speaking in round numbers. So what if it was going to be $1.1 billion?
He argued that he’s building a long-term company, making short-term value fluctuations somewhat irrelevant, and that better tech and strong customer focus will win over time. Or, more precisely, that he has lots of cash, which means lots of time, and that his perspective on what to build hasn’t changed.
The sentiment echoes what I heard from Root CEO Alex Timm after his company’s Q1 2021 report. Timm said his company was focused on the long term, and that the market might not fully understand the longer-term trajectory of Root’s business. Timm was also bullish about the tech underpinning his insurance company, which helps it make pricing decisions that continue to improve over time. So he also has an eye on future growth, improving economics over time and long-term value.
All of this sounds like the Lemonade earnings call from earlier in the week. Here’s the CEO from his opening remarks:
We keep monitoring every dollar that we invest in that is generating new customers on new products that will be long-term and profitable.
But really, the emphasis is on long term. And in terms of funding all of that growth, we believe we are likely able to fund the business to breakeven with cash already on our balance sheet, so we’re in a really strong cash position today.
So, who is more correct? The CEOs or the markets? I do not know. But I do know that the CEOs of the companies in question today got the markets to pay up when they were willing to. They now have lots of time to prove that they, and their companies, were right all along.
There are a number of yet-private neoinsurance players hoping for a near-term turnaround in the value of their public peers. The companies they are watching, however, might take a bit longer to return to the same state of market love that they enjoyed before. But they definitely can if their models shake out thanks to their cash positions.
Let’s see.
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