InsurTech: benchmarks and breakouts

Co-authored by Remus Brett and Ferdi Sigona

LocalGlobe’s broad sector focus means we’ve seen technology (and data) create, but also transform the most diverse set of industries. Some — like finance or entertainment — were quick to disrupt. Others — like healthcare and insurance — have been tougher to crack, but there are many signs the 2020s is the decade this finally changes.

Life insurance premiums were first based on age alone. Basic data points such as gender and smoker status were incorporated as late as the 1970s. Weight, blood pressure and family history in the 80s and 90s. Today an ever-increasing supply of data about people’s health, behaviour and environment, being collected from all kinds of tech — from satellites to phones and smart watches — is available in real time.

It’s now possible to transform not just how insurance risk is calculated (what the people who — in non-pandemic times — crowd Leadenhall Market for after work beers would call the underwriting model), but also how policies are distributed, how claims are filed and resolved, and even how customers can be catered to in new ways that lower risk and increase engagement.

A flurry of start-ups have of course jumped at the opportunity. Some have focused on established market segments, using technology to innovate a part of the value proposition:

Some are betting on segments that are entirely new or have so far been badly served:

Others are building out emerging components of the insurance value chain and / or tech stack:

Since 2016, LocalGlobe’s InsurTech portfolio has grown to include ten companies across this broad spectrum (some are mentioned above). Some started out with a pure insurance focus. Others, like Hometree and Goodlord, have added insurance as a core proposition as they’ve scaled.

The last year has seen — among so many other things — the very first InsurTech leaders go public: Lemonade and Root had their IPO last year. This year, Metromile and Clover Health followed with SPACs, Oscar Health with an IPO just last week, and Hippo is next in line. On this side of the pond, our portfolio company Zego became the UK’s very first InsurTech unicorn. Many of the assumptions behind these businesses are yet to be truly tested. Yet, successful outcomes already provide validation, and can serve as the first public benchmarks investors and founders will keep in mind.

Whilst insurtech “tech stack” players can benchmark themselves against a myriad of already IPO’d software products, the only public insurance carriers up until Lemonade’s IPO had been around for a long time (the 12 that are in the Fortune 100 are on average 125 years old)! They have low revenue growth, are profitable, and hence typically trade on multiples of earnings forecasted for the next 12 months (i.e. price / NTM EPS) or book value (i.e. price / book value per share).

Because InsurTechs have very different characteristics (negative net income and impressive growth rates), valuing them requires us to factor in different metrics.

We think these are:

1. Gross Written Premium (or GWP) and its growth: the amount customers have agreed to pay on new and existing insurance policies.

Revenue and its growth: for insurance companies, most of the revenue is usually driven by the portion of GWP customers have already paid, and that is retained after detracting what is ceded to reinsurers.

Loss Ratio: This is a measure of underwriting performance, i.e. how well an insurance provider manages their risk. It is calculated as the percentage resulting from the ratio of losses (due to claims) to gross premium.

LTV/CAC Ratio: if you’ve come to this post from a VC or start-up background, you’ll already be familiar with this one. It speaks to how effective a company is at generating revenue from customers.

We have started piecing together a benchmark dataset of the first three metrics, looking at InsurTech unicorns and their most up to date valuations. Whilst data is only available for those companies that are public, we will endeavour to add pieces to the puzzle in the near future:

Gross Written Premium: All InsurTech leaders have experienced exceptional GWP growth. YoY growth was 73% for Oscar, 84% for Lemonade, and 37% for Root.

Revenue: Revenues are driven mainly by premiums earned, and as such lag GWP.

Loss Ratio: An insurer’s loss ratio is the leading indicator of its ability to underwrite risk: more claims mean a higher ratio. This number will also be affected by the amount of risk that’s offloaded to reinsurers: the more risk is offloaded, the more positive the impact is on the loss ratio. All InsurTechs have shown a gradual improvement in their high loss ratios.

LTV/CAC Ratio: LTV/CAC (Customer Lifetime Value / Customer Acquisition Cost) calculations are not clearly illustrated in companies’ S-1s or public accounts. Lemonade believes its ratio is between 2 and 3; Metromile has indicated its ratio is around 3; Estimates for Root are much worse, under 1.

Rob Moffat has written about how for InsurTechs, like incumbent insurance providers and unlike a majority of software startups, it takes several years to recover the initial cost of acquisition. Whether InsurTechs imitate incumbents by charging customers higher prices as time goes on, or avoid doing so by commanding lower acquisition costs, improving customer retention or margins, remains to be seen. All the extra data collected from customers by InsurTechs could be leveraged in new and interesting ways here.

What is the data telling us?:

— Lemonade is the markets’ darling: Lemonade is the highest valued InsurTech from a multiples standpoint, and its post-IPO journey has been a success. Root’s stock appears inexpensive in comparison. Reasons may include: 1) Lemonade’s target P&C market is more than double the size of Root’s main market, auto; 2) Lemonade’s captured a smaller percentage of its larger market; 3) Lemonade’s innovation is in its customer experience and engagement, which means it can more easily grow with its millennial customers to cover their other insurance needs and increase LTV; Root’s innovation is in its underwriting model and it applies more specifically to auto insurance — as such it might be harder for Root to be the natural choice for its customers’ other insurance needs. It’s hard to comment on Oscar and Clover as part of our dataset, because of the complexity of things like Medicare and the impact of the pandemic.

— Multiples don’t depend on any one factor: It’s hard to find a correlation between any metric, be it GWP, revenue, or profitability, and valuation multiples. We expect this to improve as more InsurTechs within similar market segments go public.

— Future InsurTech unicorns have some, but not many, benchmarks: Publicly traded company multiples are useful in setting the valuation for a company in our portfolio, or one we’re trying to evaluate. Similarly, they are useful for founders fundraising. For example, Root’s IPO makes it a little easier to value a company like Cuvva: the insurance type and the telematics driven innovation are similar. Given the scarcity of publicly traded models however, most valuation exercises in InsurTech will have to remain somewhat creative, with considerations ranging from market size to regulation.

— Markets believe the growth story: Whatever the InsurTech, multiples tell us that markets believe in this wave. It’s worth noting that whilst the InsurTech unicorns we mentioned sound huge compared to your average start-up, they are dwarfed by the size of insurance industry incumbents. Lemonade’s revenue is less than 0.0005% of the world’s biggest insurance providers, such as UnitedHealth and AXA. That number alone explains why insurance is and will continue to be — we believe — one of the opportunities most suited to venture scale returns. And, thanks to tech and data, there’s never been a better time to capture it.