In the past year, technology stocks trailed on Wall Street, but insurtech stocks saw major declines. Lemonade fell to a market cap of $2.3B, more than 50% compared to its trading day price. Since its SPAC merger, Hippo’s market cap dropped to $1.5B from $5B. Root, a car insurance specialist went public in 2020 and lost nearly 90% within a year. Metromile, another American auto insurer that went the SPAC route, was no better and got acquired by Lemonade.
The subdued market performance is evidence of investors dismayed by the ability of insurtechs to shake up this giant industry. Disruptive companies like Uber and Airbnb waited nearly a decade before going public. Contrast with Lemonade that went public after five years and Hippo at six. Both were opportunistic in capitalizing on the Covid-19 pandemic when the market was hot.
Market analysts opine that insurtech companies perhaps went public before they could predict their growth well enough. Lemonade’s market cap was $10 billion at one point with valuations driven by generous multipliers, akin to the super-profitable software sector. Lemonade’s customer base initially grew at a frenzied rate of 294% in 2018 and 108% in 2019. But after that rapid growth, rates slowed down and investors intently scrutinized efficiency effects, where technology leadership would be most impactful.
Some analysts see Hippo as better positioned in this group based on lifetime-value to customer-acquisition-cost (LTV:CAC) and its ability to improve loss ratios. The company has managed high customer retention rate of over 80% and a five-fold LTV multiple from its omnichannel presence and high premiums per homeowner policy (~$1,200). The opportunity in homeowners is tremendous, with $105B in annual premiums and one player with 10%+ share.
Hippo has adopted a proactive approach to home insurance protection, with smart devices and real-time notifications. This curbs claims frequency and severity and presumably allows Hippo to offer lower premiums. Its Smart Home program is widely adopted in US home insurance, with kits that mitigate damage from water, fire and theft. The opt-in rate is 75% with 500K devices shipped. Customers maintain their homes, with thousands of home checkups and preventive actions delivered, yielding 4.5/5 on customer satisfaction scores.
Hippo believes that it has several competitive advantages, listing its moats as:
1)Technology + Insurance approach: Ability to draw on full-stack tech – Smart Home based ML algorithms – to deliver superior CX.
2)Vertically Integrated Insurance Capabilities: Offsetting risk profile by using carrier partners.
3)Diversified Distribution Strategy: Selling D2C, through insurance and non-insurance partners.
4)Smart Home Program: Making customer homes resilient to typical damages
5)Dedication to Hippo customers: Treating human touch as a very important aspect of building trust with its client base.
So far, technology approaches haven’t convincingly proven value in clearly quantifiable terms. Investors expect AI advantage to be reflected in lower claims frequency rate. Where the new insurtechs exhibit a technological edge, it tends to pale in relation to one significant disadvantage – their limited size. Hippo suffered from a particularly high loss ratio last year, at 161% in the second quarter due to large concentration of policyholders in Texas who suffered from extreme weather conditions, resulting in substantial damage claims. For bigger insurance companies, the effect on the loss ratio was much lesser due to the geographical spread.
In recent months, Hippo has added experienced executives from giants like AIG and Chubb, to help improve its underwriting process, adding more sources and variables to augment customer analysis. It is geographically diversifying. At the end of Q3, it had $850 million in cash reserves, allowing significant legroom to improve models, and move up on profitability. Though the capital market is currently ambivalent to the sector, the momentum is expected to shift for those that achieve exponential growth and have a path to profitability well laid out.
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