A first look into the “Insurtech Chainsaw Massacre” – Part 1

The (short) history of Insurtech so far:

Just a few years ago, “Insuretech” was one of the hottest sectors within Fintech and VC. As in other sectors like retailing or travel, “Digital Insurance” companies were supposed to disrupt this old and slow industry. Listening to VCs and founders was mostly about how easy it would be to take market shares and profits from the old Dinosaurs.

Lemonade was the first Insurtech that went public in July 2020 and its 139% increase on the first day clearly set the scene. The share price went up further and peaked in February at around 170 USD.

Of course this triggered a certain feeding frenzy and a couple of other Insurtechs went public either via IPO or SPAC in the following months, like Root, Oscar, Metromile etc.

However, now, roughly 18 months after Lemonades IPO, things look a lot different. Here is an overview of the “Chainsaw massacre” that happened (in the order off going public):

Name Type of going Public Date IPO Price ATH Current price Market cap vs. IPO vs. high
Lemonade IPO 01.07.2020 29 171,56 29,94 1854 3,24% -82,55%
Root IPO 28.10.2020 27 23,8 1,73 436 -93,59% -92,73%
Clover Health SPAC 08.01.2021 15,3 28,85 2,63 1271 -82,81% -90,88%
Metromile SPAC 10.02.2021 17,2 22,69 1,54 197 -91,05% -93,21%
Oscar Health IPO 04.03.2021 39 37 6,84 1440 -82,46% -81,51%
Bright Health IPO 23.06.2021 18 17,93 3,1 1950 -82,78% -82,71%
Hippo SPAC 02.08.2021 10 15,05 1,93 1083 -80,70% -87,18%

Only Lemonade, the “Ur-Insuretch” ist trading above its IPO price, but down -83% from its peak. All other Insurtechs are at least down -80% from their IPO price or more than -90% from their peaks.

In Metromile’s case this is especially interesting as they have received a takeover offer from Lemonade in November.

The big question of course now is of course: Is there any value in these stocks right now or is it all utter crap ?

General comments

Net cash in an Insurance context

A lot of the companies above have raised a lot of cash and still have cash on their balance sheets.

Most investors now have understood, that cash on a balance sheet that is not required to run a business, can be deducted from Enterprise value. However what few investors understand (among them many Berkshire investors) that cash on an insurance balance sheet has to be treated differently.

Insurance is a regulated business and the regulators prescribe what amount of “net equity” is required to get or keep the insurance license. In practise, this means one has to to the follow calculations for a typical Property & Casualty company:

  1. Add all “hard financial assets” such as cash and investments plus insurance receivables
  2. Deduct all financial debt and insurance liabilities  from the financial assets
  3. Estimate and deduct the required additional Solvency capital required

Step 3 is clearly the most difficult one. A rule of thumb for US P&C insurers is usually to assume that Solvency capital is at least 30% of premium or a similar amount of gross reserves. However for fast growing, loss making insurers it is important to understand, that the regulator wants to see the capital upfront, i.e. at the end of the year your Solvency capital must cover next year’s premium AND next years losses already.

The whole thing gets even more complicated because of Reinsurance and other “shenanigans”, but assuming the 30% rule mentioned above is a good guide.

Unfortunately, for Life & Health Insurance companies, these calculations do not work one one has to rely on regulatory reports. For US Insurance companies this is often very difficult as US insurers usually are not required to report consolidated Solvency numbers. In any case, I’ll use more conservative numbers

Reinsurance

A lot of Insurtechs use significant amounts of reinsurance which makes the accounts often hard to read when losses are high. As a general rule of thumb, Reinsurance contracts over time will only accept “normal” loss ratios and “normal” expense ratios. So even if in some years. losses can be transferred to Reinsurers, these will normally need to be paid back at some point in time.

Although Reinsurance takes away some profits, it can be a very effective surrogate of equity especially early on when capital is much cheaper for Reinsurers than primary insurers. Nevertheless, gross written premiums and “gross” losses are the best basis for valuing P&C insurance companies.

Health Insurance players

To be honest, the whole US health system including insurance is far out of my circle of competence. Therefore it makes little sense for me to look at Oscar, Clover and and Bright in more detail. Oscar seems to have become a rather big Health Insurer with even bigger losses,  Clover is ~50% of the size of Oscar but equally loss making. Bright has Oscar’s size, both in premium and losses and just seem to have lost their CEO. Simply “too hard”.

Property & Casualty players

At least for me, property & casualty players are easier to understand. The valuation drivers here are gross written premium, loss ratios and of course cost, which hopefully scale with volume.

Here is a “valuation” overview based on conservative “excess cash estimates” and gross premium:

Annual Run rate gross premium Q3 Growth yoy Loss ratio “Net cash” Market cap EV
Implied EV/premium
Metromile 111 7% 81% 160 500 340 3,1
Hippo 516 94% 128% 500 1083 583 1,1
Root 818 24% 91% 250 436 186 0,2
Lemonade 320 86% 77% 750 1854 1104 3,5

For Metromile, I used the price of the Lemonade bid from November last year.

Now drawing the conclusion that Root as the cheapest stock would be the best investment might be a little bit too early. Root is growing slower and only does car insurance, which is extremely competitive. By coincidence, Root is a strategic partner of Carvana, however Carvana is deeply underwater on its 130 mn USD investment.

Hippo in contrast shows the highest loss ratio, but their core product, homeowner insurance is supposed to be quite sticky and they grow quite significantly. Lemonade in contrast, has diversified already from its core renter product to pets and international and now into car insurance with the Metromile acquisition.

As a teaser for a deeper dive into these companies, here how the metrics from above  for growth investor’s darling Trupanion and market leader Progressive:

Annual Run rate gross premium Q3 Growth yoy Loss ratio “Net cash” Market cap EV
Implied EV/premium
Trupanion 726,8 40% 85% 0 3610 3610 5,0
Progressive 47600 15% 76% 0 62140 68140 1,4

Trupanion, the US pet insurer looks much more expensive than the Insurtechs. Even compared to Lemonade they are masters in marketing. Their quarterly report doesn’t mention insurance terms like premiums or claims, only “subscription revenues”.

For Progressive, the most interesting part is that even they had to suffer a loss ratio of 76%, with a higher loss ratio for “personal lines”. So the loss ratios of the insurtechs don’t look that bad in comparison.

So overall, there could be (some) value in these “fallen Angels”, therefore I will look deeper into them at some point in the future.

To be continued ….

3 comments

  • GNP-GlobalNosePicking

    Trupanion should also include a “pet-replacement” clause, whereby they would replace your pet, if it passes away. Just to facilitate you keep hooked to your “subscription”. X-D

  • Good kick off (part 1) of another series I am eager to read.

    Actually, I did not not know that performance was so bad (chainsaw massacre bad!):
    I followed these insurtechs on a top-level to check my impression that they are not a real threat for PGR, I felt mostly proven right and did follow them less. The theory is great to build a green-field fully digitized insurance with only the best up-to-date systems and software, but it is more difficult than that (culutre, profitable! growth, data over decades, (real insurance mathematics) actuaries might be more complicated than trendy data science (I geuss), culture, …)

    Reg. point two: financial debt often sits with the holding company, and thus might actually not fall under regulations apllying to the operating insurance companies, if I am right (alwasy a big IF!).
    Based on this framework, it is determined if insurance OpCos can ‘upstream’ dividends to HoldCo.
    Anyway, I deem your approach good (enough), more transparent and a good way to go (for myself)!
    No need to bother in general, or at least with better companies (ie PGR). Of more importance maybe with BHF, JXN which might deliver great shareholder returns if upstreams to holdco are allowed …

  • FriendlyFollower

    Interesting analysis. A bit off topic but somehow related I tried Germany‘s hottest insuretec CLARK (for the miles bonus :)). I have to say, I was extremely underwhelmed by the experience. Apart from the fact, that I now have my insurance in one place and get a reminder to renew there is absolutely no intelligence on the Plattform. I was expecting suggestions for insurance Chance for better coverage or price or actual suggestions for insurance which are „missing“ in my portfolio – nothing of the sort. I followed the car insurance renewal advice and had to fill in ALL my data again, despite the fact they had all the data from my current contract. What I got as suggestions were premiums priced significantly above my current insurance (the cheapest was 20% more than my current insurance which is definitely not the cheapest). I have deinstalled the app as I was so disappointed. May be to high expectations from my side but if this is “insuretec” i pass – at least at the current status…

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