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Public InsurTechs: The class of 2021

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There is a growing consensus among investors, executives and observers of the P&C InsurTech world about who is next in line to go public.

Hippo and the appropriately named Next Insurance are set to join Root, Lemonade and Metromile – the latter due to list through a blank check company this quarter – on traders’ screens and retail investors’ apps this year.

Hippo is regarded as the most advanced of the pair on its journey to a public listing, but there is a debate to be had as to whether the company’s surprise $350mn of top-up financing from Mitsui Sumitomo will hasten or delay the home insurer’s initial public offering (IPO).

In a very clear hint that stock exchanges are trying to woo InsurTech unicorns, in December, Nasdaq posted an advert in Times Square congratulating Hippo on its $350mn financing from Mitsui Sumitomo.

“Subtle,” wrote outgoing Scor Venture Partners executive Adrian Jones in an ironic LinkedIn comment.

The structure of the Mitsui investment also fits with an impending listing. The investment was made in the form of convertible debt, which will swap into equity the next time Hippo fundraises.

Did Hippo really need the extra capital? Perhaps, because it allows it to write more cover, making the kind of exponential growth expected of Silicon Valley unicorns an easier proposition.

But the deal also gives Hippo something it has been missing since it parted ways with Munich Re in 2019: a powerful patron in the reinsurance market with skin in the game.

Hippo announced that Mitsui Sumitomo would lead its reinsurance treaty at January 1 and explore ways to introduce the company’s technology to the $86.5bn gross written premium Japanese market.

It also broadens Hippo CEO Assaf Wand’s exit routes, with the Japanese big-three member now a clear potential future acquirer of the company.

But Hippo’s likeliest path forward remains a 2021 listing. For now, the equity capital markets simply value InsurTech companies more highly than venture capital, private equity or strategic investors, if the experience of Lemonade and Root is anything to go by.

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Root’s challenging start to life as a public company is a reminder that stocks can go down as well as up. Root is currently trading 33.3% below its opening share price of $27. The IPO was a success insofar as the carrier raised an extra $655mn at a high valuation, but since it went public the experience of the company has been chastening.

There is a legitimate fear that, if Root’s troubles worsen, the company could cause difficulties for InsurTech as an asset class.

If InsurTechs are tarnished by a high-profile failure, strategic acquirers could be a better route to exit for InsurTech unicorns. That was after all the trajectory taken by the dot-com era InsurTech Esurance, which was acquired in 2000 by White Mountains, and then subsequently taken public.

It is hard to say how well Hippo is doing financially with so little public disclosure, but many sources – including investors in the company – have praised Hippo for its sustainable approach to growth and are very optimistic about its prospects.

The phrase I’ve heard most from bankers and investors alike about is Hippo is that the InsurTech is “actually a good business,” the modifier a nod to the idea that some InsurTechs are better in theory than in practice.

As a private company that does most of its underwriting as an MGA, it is hard to get good visibility on the carrier’s performance.

A very rough proxy would be Spinnaker Insurance, a fronting insurer that sits between Hippo’s digital agency business, which was acquired by the start-up in August, giving it control over its own paper for the first time. Spinnaker wrote $205mn in the first nine months of 2020, compared to $51mn in 2019, according to data from SNL.

It is hard to tell how much of that surge is Hippo’s growth. To complicate things, Hippo was using a different insurer’s paper in the western US until recently (Topa Insurance) and Spinnaker services a plethora of program underwriters, including some active in the rapidly hardening excess and surplus lines market.

Next has a similar godparent-like backer in the form of Munich Re, one of its largest investors and its (re)insurance capital provider.

Next is one of the relatively few success stories to come out of Munich Re’s Digital Partners, a unit of the reinsurer’s which provided underwriting capacity to a flock of early InsurTechs. Munich Re Ventures, the reinsurance giant’s corporate venture arm, was also an early investor.

Although on the surface Next seems little different to other direct offerings in the small business sector, such as Hiscox, its focus on data science and reinsurance backing from Munich Re makes it a formidable competitor. The buzz around the company from investors and analysts is positive and there is a sense that an IPO would be well received.

Just like Lemonade and Root, the case could certainly be made that the costs of acquiring digital customers are punitive, while any impending S1 will certainly make the case that, once an insurance customer has been acquired, a competitive renewal quote is likely to be accepted – making the unit economics work in the longer term.

Hippo and Next are both operating in markets where insurance is a compulsory purchase for their customers and neither have rushed into holding significant risk on their own balance sheets, preferring instead to pass it onto (re)insurers while they perfect their underwriting model.

Reinsurance capital will continue to play a crucial role in the development of these business into the future, allowing them to control the volatility of their earnings.

The positive perception of both companies by investors makes a traditional IPO rather than a SPAC transaction the more likely option at this stage, despite strong rumors on Wall Street late last year that Hippo was exploring a blank-check option.

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There are other businesses that we should keep in mind as well when thinking about the growth of the InsurTech cohort.

Bold Penguin, which operates digital exchanges for commercial insurance risks, has been growing rapidly, sources have noted. The company was founded by a co-founder of Root, Ilya Bodner, although he parted ways with Root CEO Alex Timm in 2017.

Then there is telematics firm Cambridge Mobile Telematics (CMT), which went from obscurity as an MIT spin-out to receiving a $500mn investment from Softbank’s Vision Fund. CMT, which supplies software to State Farm, Liberty Mutual and Nationwide, could easily list on the Nasdaq.

On the balance sheet side, Pie Insurance is at $100mn of premiums for 2020 and is likely to move beyond workers’ compensation and into other lines of business.

Meanwhile, Kin Insurance has a mature digital agency business and has launched a reciprocal exchange in Florida, where it is taking advantage of the turmoil caused by rising reinsurance costs in the Sunshine State to pick up new business.

Branch is also one to watch, with the Ohio-based InsurTech growing in the MidWest and is also a licensed reciprocal exchange. The carrier focuses on bundling digitally underwritten home and auto cover and is set to launch dozens of new states this year. Both Kin and Branch have had investment from Mike Millett’s Hudson Structured Capital Management, one of the most prolific InsurTech investors of 2020 by deal volume and value.

Other names I think could be credible IPO or Spac candidates in 2021 are States Title, which is tearing up the archaic title insurance industry, and cyber MGA Coalition, both of which conducted substantial raises last year.

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