Insurtech is bloodied, but refuses to die
This article originally appeared in FIN by James Ledbetter, the best fintech newsletter; subscribe here.
It is extremely difficult today to remember how abuzz the insurtech was in 2020. In July 2020, the New York insurer Lemonade, which boasts of using artificial intelligence to maximize its efficiency, is become public. Its stock posted a staggering 140% gain on day one. Lemonade ended up being, in some ways, the best performing IPO of 2020, among some very stiff competition including Airbnb and Snowflake. Three months later, insurtech pixie dust also lifted the IPO of Root app-based car insurer, which on its first day of trading reached a market capitalization of over $6 billion; it was for a loss-making company that had revenue of $290 million in 2019.
Insurtech fever has spread far beyond the public markets. There are different ways to measure the billions invested in insurtech; a method used by the Boston Consulting Group shows that it took seven years, from 2012 to 2018, for $15 billion of equity to be invested in insurtech. But in 2019 alone, $15 billion was invested in insurtech, to increase in 2020 and 2021:
But the insurtech bubble burst and, crucially, it started to burst even before the end of 2021, when everything from tech stocks to cryptocurrency prices started crashing. Root’s slump started shortly after its market debut in October 2020 and has been nothing short of mind-blowing. The $6 billion market cap has fallen to $158 million at the time of this writing. The company is still losing money and its 2021 revenue was actually lower than 2020; earlier this year, Root laid off about 20% of its employees.
When public insurtech companies collapse, it also affects private investment. Pitchbook recently released a Q2 insurtech investment survey. His summary:
In Q2 2022, insurtech firms raised $2.6 billion in venture capital globally across 133 deals, representing an 8.5% decline in QoQ deal value. This is the lowest amount of invested capital since Q3 2020 and 42.1% lower than the previous high of $4.4 billion in Q2 2021.
This chart tells the story (2022 numbers are for the first six months):
Pitchbook also noted that the valuations of many insurtech investments have fallen; the pre-money median valuation of a late-stage insurtech investment in Q2 was $72 million, down 39.4% from the median full-year valuation of 2021. That’s without a doubt doubt a disappointment for insurtech founders, but a relief for investors who have clearly paid too much to invest in this sector.
Part of this is simply removing foam from an overheated sector. Just to use Lemonade as an example: it generates just over $200 million in sales per year; a company this size should never have had a market capitalization of $3 billion. But there may also be a salient market overview here. Insurance is a very specific industry that takes advantage of scale in ways that, say, some financial services don’t need. In the United States, you can run a bank or credit union with a few hundred or thousands of customers and you won’t necessarily have significantly lower profit margins than a business ten times the size. But insurance companies pool their risks and their customers, and the larger the pool, the more opportunities there are to tailor the business for greater profit. Despite the meteoric growth of insurtech companies in recent years, they remain overshadowed by the GEICOs and state farms of the world. Maybe it wasn’t clear for skyrocketing markets in 2020, but it seems much more likely that insurtech companies will force changes on incumbents, or be acquired by them, rather than knock them down.
Of course, insurtech is far from dead; 2022 appears to be the second highest investment year on record. In July, the San Francisco-based cybersecurity insurance company Coalition raised a whopping $250 million Series F funding round, valuing the company at $5 billion. Lemonade has recently shown signs of life; it just ended the acquisition of Metromile seems likely to help it revive its newly launched auto insurance business. And opportunities abound; Anyone who has ever dealt with the insurance industry can appreciate how digitization and app logistics could dramatically improve the consumer experience.
Mark Selcow is a partner at Costanoa Ventures, and investor in several insurtech companies. He acknowledged in an interview with END that the current market is “painful”, but added “It’s always a significant moment when exuberance is corrected”. He thinks market downturns are good times for companies to focus on their products and infrastructure. The two most important areas he sees in the industry: 1) crypto insurance, “because crypto is full of risk, and so many types of risk” and 2) traditional insurers are joining in on the innovations created by insurtech.