What Happened to the Insurtech Revolution?

Don't look now, but some of the big insurtech names -- Lemonade, Hippo, Oscar, Root and Metromile -- are having a rough go of it. 

a computer showing a stock's value over a period of time it starts off strong but then decreases as time progresses

We were promised an insurtech revolution, right? Well, don't look now, but some of the biggest names are having a rough go of it. 

Lemonade's stock price is down 81% since its peak in the middle of February, even as the S&P 500 average has climbed 15%. Hippo is down 85% over the same stretch. Root is off 91%. Metromile has plunged 92%. Oscar has tumbled 81% since mid-March.

What happened?

The short answer is: nothing. Lemonade still has a $1.97 billion market capitalization, the sort that most entrepreneurs would kill for. Hippo carries a $1.18 billion valuation; Root, a valuation north of $500 million; and Oscar, a market cap of $1.4 billion. Even Metromile, which is being acquired by Lemonade, carries a price tag of roughly $250 million (half the stated value when the purchase was announced in November because the transaction is all stock and Lemonade's share price has fallen 50%).

Not too shabby.

Yes, some investors have lost money, but as the Cockney saying has it, "You pays yer money, and you takes yer chances." Most of the investors have surely done plenty well elsewhere in a robust investing climate. From a business standpoint, while all certainly face challenges, the insurtech superstars are maturing into sustainable businesses, even if they may not turn out to be the rocket ships to the stars that many assumed a year ago.   

The longer answer is that there has been a resetting of expectations about the role of insurtechs, and this sharp lowering of valuations seems to just be part of that.

At ITL, we've published any number of articles over the years that aimed to temper enthusiasm about some of these "full-stack" startups, which were designed to become full-fledged carriers that competed head-on with incumbents. Like just about everyone else, we were captivated by the charismatic founders, the novel ideas, the crisp use of technology and the friendly user interfaces, but we stayed pretty firmly within the grasp of reality, largely thanks to Matteo Carbone and some colleagues. They wrote occasional articles that cut through the hype and looked at the numbers to see how Lemonade, Root and Metromile were doing as they tried to move up the learning curve on understanding and pricing risks and attempted to keep their early, exponential growth going. Here, for instance, is the latest article on the three companies, from 2020, raising some issues about, in particular, Lemonade and Metromile. 

I, for one, was more surprised at the valuation north of $10 billion for Lemonade and at the peak valuations of the others than I am about today's market caps, which still seem quite healthy to me. The decline makes even more sense when you think about how quick these companies were to enter the public market -- many insiders surely took the opportunity to lock up some serious wealth by cashing out part of their holdings, even if they still believe fervently in the long-term prospects. 

The tumbling back toward Earth of these big-name companies doesn't, for me, indicate anything about the continued opportunities for breakthrough innovations. 

There will always be opportunities for what were known as "arms suppliers" during the internet boom. The term, despite being military, actually originates from the Gold Rush days. While few miners built huge fortunes -- and while I couldn't name you a single famous mining family despite having lived in Northern California for 25 years -- loads of people made bank by "arming" the miners. A guy who sold jeans to the miners is the namesake for the San Francisco 49ers' Levi Stadium. A guy who built railroads that connected the Gold Rush to the rest of the country, and not a miner, has his name on Stanford University up the road. And so on. During the internet boom of the mid- to late 1990s, lots of attention went to the companies that swung for the fences, like Exodus Communications, which became the biggest web hosting company and hit a market value of $32 billion in 2000. But some of the smart folks I knew said at the time that the far safer bet was to be an "arms supplier" like Sun Microsystems, which sold the servers that powered Exodus and so many other companies. Sure enough, Exodus filed for bankruptcy in 2001 and was sold for parts, while Sun sold itself to Oracle for $7.4 billion in 2009.

In insurance, there have been lots of "arms supplier" stories -- RiskGenius folding its AI into Bold Penguin, which was then bought by American Family Insurance mostly for its brokerage platform -- and there will be many, many more.

As you've seen if you've been following this newsletter for any length of time, I also think there is huge opportunity in platforms like Bold Penguin's -- or those of Bolt, Matic, Branch and more -- and in ecosystems of partners that share data and coordinate activities via application programming interfaces (APIs). So, I believe that innovation is just starting to gather steam in the insurance industry, no matter what the hit to some high-profile stocks might suggest.