Insurer in Full: Insurtech valuations soar with investors hungry for more Hippos
Insurance-related transactions are being announced at some attention-grabbing valuations, with the insurtech craze of the past few years now intersecting with the more recent boom in special purpose acquisition companies (SPACs)...
The latest example came when Hippo revealed it is going public, in what was the third insurance-related SPAC deal announced last week.
The home insurtech’s combination with Reinvent Technology Partners Z represents a $5bn enterprise value for Hippo. That is 4.4x its 2023 estimated total written premium and 25.1x 2023 estimated adjusted gross profit.
The transaction follows Metromile’s go-public deal with a Cohen & Co-sponsored SPAC – announced in November and completed last month – that represented a pro forma enterprise value for the auto insurtech of $956mn.
As this publication analysed earlier this week, further insurance-related SPAC mergers are sure to come, with various vehicles floating or preparing to float that are specifically targeting the insurance industry.
Source: Hippo investor presentation
Insurtech optimism and hype
But insurtechs did not need SPACs to attain sky-high valuations.
This was highlighted neatly last month when private investment firm Centerbridge Partners invested $100mn in TypTap, the insurtech subsidiary of Florida-based carrier HCI.
The investment represents about 11.75 percent of TypTap, and implies a post-money valuation for it of $850mn. That compared with HCI’s total market capitalisation just prior to the deal announcement of $467.7mn (though that has since increased with a surge in HCI’s share price).
This stark difference in valuation within the same company underlines the excitement investors have for insurtechs compared with incumbents.
“I don’t think the world appreciated what the sum of the parts is under HCI Group,” HCI chairman and CEO Paresh Patel explained to this publication in an interview at the start of this month. “I still don’t think it does at this point. So there seems to be a discount for being all together.”
This has also been shown by valuations of the insurtechs that have floated so far. Lemonade went public last July at a valuation of around $1.6bn while Root went public in October at a valuation of $6.75bn – not too shabby for companies that have yet to produce a profit.
Andrew Johnston, global head of insurtech at Willis Re, pointed out to this publication that as an example Root is said to have floated at a valuation higher than Scor’s market capitalisation ($6.5bn based on its current share price) while Hippo’s potential valuation of between $5bn and $6bn would also dwarf the market valuation prices of many well-established, profitable incumbent (re)insurers.
“I think the thing that is more surprising is not the individual stock values, but just the overall valuations that we’ve seen them floating at relative to book value,” Johnston said. “It’s hard to interpret that as anything other than investor optimism and possibly a little bit of hype.”
More insurtechs are likely to go public in coming months.
“The appetite for that will be multifaceted,” Johnston said, “whether it’s from public demand to invest in tech terms in the financial industry, whether it’s the investors in insurtech firms wanting to capitalise on overvalued businesses through a public floating or whether it’s insurtechs themselves wanting to be listed publicly.”
Is performance justifying valuations?
While insurtechs have floated at eye-catching valuations, the actual performance post-IPO is more mixed.
The share price of Lemonade, which floated at $29 a share last July, was soaring at over $180 in early January. But the insurtech’s share price dwindled during February before dropping significantly at the start of this month on guidance that the Q1 loss ratio will spike as a result of the Texas winter storms.
Lemonade’s share price closed yesterday at $94.07 down almost half from its high but still way above its offering price.
That experience contrasts with Root, whose shares have traded below its $27 offering price since floating in October last year, and closed yesterday at a near low of $11.50.
In addition, Metromile began trading after its SPAC merger on 10 February, and has since seen its shares close at a high of $19.97 on 17 February but then fall as low as $9.46 on 8 March before recovering somewhat to $11.67 yesterday.
There is a question of whether investors’ expectations match the reality that some insurtechs will not become profitable for years while their results can also show volatility.
Bank of America equity analyst Josh Shanker gave a downbeat view of the prospects for Lemonade and Root earlier this week, initiating coverage on both insurtechs with an “underperform” rating.
Shanker has a price objective of $29 for Lemonade - far below where it is currently trading - based on the sum of excess capital plus valuing each future customer at a fully-bundled $600, the equivalent of 2x 2025 revenue and a $2.1bn valuation. The analyst noted that Lemonade’s guidance of $372mn to $378mn in premium in-force for 2021 “seems aggressive”.
Lemonade started out by selling renters insurance but has added homeowners, pet and life insurance. Shanker does not expect the insurtech to be profitable until 2025.
One of the biggest barriers in assessing value for Lemonade is determining what kind of business it is, Shanker noted. In addition, he said the first quarter Texas winter storms may cause some investors to rethink the technology characterisation of Lemonade’s business model.
“We do not believe it has implications for Lemonade’s long-term strategy, but we do believe it represents a curveball to investors who view Lemonade as a tech startup and not an insurance company,” he said of the Texas freeze.
For Root, Shanker has a $9 price objective based on the sum of excess capital at the business plus valuing each future customer at a $1,500 acquisition cost. Shanker believes Root is likely to turn profitable in 2027.
The analyst estimates Root will need another capital raise in 2022, following the $1.1bn raised in its Q4 2020 IPO. “Time is short as Root will have to demonstrate its value proposition in the next 18 months in order to bring a follow-on to market at a healthy valuation,” he said.
Floating not the only option
Speaking generally about the lessons that can be learned from insurtechs going public, Willis Re’s Johnston commented: “I think the first lesson is that a significant amount of public investment capital is looking to invest in things relating to technology and the financial services industry.”
He added: “If we look at some of the insurtechs who have gone public in the last 12 months, a lot of attention has been captured, and a lot of bullish public capital has been attracted but the overall performance of some of these businesses, for the most part, has yet to be turned around to the extent that certain stock prices can be rationally justified.”
Johnston suggested that floating should not necessarily be viewed as the only way to succeed for insurtechs. He pointed to American Family’s announced acquisition of Bold Penguin - which came only a few months after the small business insurance-focused insurtech itself had acquired RiskGenius - as a success for all parties that did not involve an IPO.
The executive said it is clear that there is still a lot of capital looking for investment opportunities and an IPO is definitely not the only way to do very well from a return perspective for insurtechs.
“I think a cautionary tale to insurtechs, if there is one, is not to see this as the be all and end all success metric,” Johnston said. “Strategic partnerships might actually in the long run be the right thing to do if you genuinely are in love with your business. There is a question of whether some of the IPOs have set a fire on a very short fuse, which may spell bad news for other companies that want to go public.”
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