We’ve spent quite a lot of time of late wondering just what the heck is up with the valuations of insurtech startups that went public in the last year. Keep in mind that we’re discussing neoinsurance providers like MetroMile and Hippo, not insurtech marketplaces like Insurify or Zebra.
There was a stream of insurtech exits in 2020 and early 2021. After Lemonade’s firecracker IPO, MetroMile and Hippo and Root also went public. Since those debuts, we’ve seen their valuations erode significantly.
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But Oscar Health got somewhat lost in our larger analysis of the space. An investor pointed out to The Exchange this weekend that we were a bit early in wondering just what investors were thinking when Oscar was going public — its IPO price range felt incredibly high, and we said so. Then, Oscar Health priced above that $32 to $34 per share interval, kicking off its life worth $39 per share.
Today’s it’s worth $13.58 per share.
We could call it another data point in our larger analysis, but it’s a bit more than that as Oscar Health expands the list of insurance types that startups tackled, scaled, took public and then saw fall out of investor favor. The companies that we are examining cover a number of industries, from auto insurance (Root, MetroMile), to home and rental insurance (Hippo, Lemonade), and, thanks to Oscar Health, health insurance as well. All are taking a whacking by the market.
Why? Happily, I think I’ve figured it out. More precisely, a CEO of a neoinsurance company in a different niche talked The Exchange through one particular hypothesis that makes rather good sense.
Show me the money metrics
Last week, I chatted with Pie Insurance co-founder CEO John Swigart. Pie sells SMB-focused insurance, with a focus on workers’ comp coverage. In Swigart’s view, small businesses have historically been overcharged and underserved for insurance. With a bit of tech, his company can offer coverage to smaller companies than many traditional insurance providers found attractive, and at better price points to boot.
Pie raised a $118 million Series C in March, with Crunchbase tallying $306 million in external capital for the company thus far. We’ll talk more about Pie at a later date.
What matters for our needs this morning is what Swigart said when I asked him what in the flying fuck was going on with public insurtech share prices. Given that he is building a related company, I was hoping that he would be both up to speed and have a take. He did.
The CEO first emphasized that there are lots of smart folks working at the now-unloved neoinsurance providers we’ve been watching. And, in response to my idea that we’re seeing the former startup cohort get repriced to lower multiples as the market treats them more like traditional insurance companies, he took a different tack. In Swigart’s view, investors are looking for the actual impact of all the tech that the neoinsurance companies have built: Where is that tech impacting loss ratios, bundling metrics or customer acquisition costs?
Or, more simply, if these insurance plays are really technology enabled, what is the technology enabling?
There’s a lot of nuance to what the neoinsurance providers are going through. They have largely ceded most of their insurance risk to reinsurers, for example. That means their near-term revenue growth is constrained, even if the decision could lead to better economics over time.
But business model evolution is not enough to explain their valuation declines. Investors may have expected better performance from the companies thanks to what was perceived — expected? — to be a technological edge.
Insurance customers are not complicated, Swigart said. They want less expensive coverage. And there are two ways to offer that without losing money, in his view: You can be a more accurate assessor of risk, or you can be more efficient at delivering your insurance service. Both can allow for cheaper, profitable coverage.
Presumably, the tech that Root and MetroMile and Hippo and others have built will allow them to better assess risk than their traditional rivals over time, and their digitally native product stance will lead to — again, over some time period — lower customer acquisition costs. Investors just, you know, want to see it. And, so far, perhaps they have not.
Notably, this perspective is not long-term bearish on neoinsurance companies, provided that their tech really does help them price risk more intelligently and their go-to-market motions can prove more efficient than wall-to-wall television coverage. Insurtech companies that went public have lots of cash, probably enough to get them to the point where their tech can make an impact, and that could shift investor sentiment. If you were bullish on the companies that we are discussing when they were private, you can still be bullish — and sane — today.
But from the public markets’ perspective, it’s the results, stupid. Investors want to see better loss ratios, slimmer loss-adjustment expenses and more efficient customer acquisition. We’ll keep tracking the earnings results from this collection of companies as they grow and mature. Let’s see what happens.
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