Listed insurtechs struggling to replicate Lemonade's post-IPO success

Insurtech company Kin Insurance Inc. is poised to go public in the U.S. via a special purpose acquisition company merger even as some peers traded lower after listing in 2021.

Shares of Bright Health Group Inc., Oscar Health Inc., Metromile Inc. and Clover Health Investments Corp. have all dropped since making their public market debuts earlier in 2021. Root Inc. has also seen its stock price fall sharply since its IPO in late 2020. Newly debuted Hippo Holdings Inc.'s share price was down 11.14% to $6.06 at market close Aug. 11, a couple of days since going public via a SPAC deal.

The outlier has been Lemonade Inc., whose shares remain well above their initial price a year after debuting. Lemonade's stock peaked at $183.26 in January.

Kin, which posted an over 200% growth in shareholder interest revenue in the first quarter from a year ago, is optimistic about its growth potential. The company expects $234 million total written premium and $69 million gross profit in 2022, according to its investor presentation. CEO Sean Harper said "Kin is 100% direct to consumer, which is lower cost (no agent commissions), has lower churn and enables our superior risk selection."

He added that homeowners insurance is a more appealing segment of the market because it is less intense competitively and that the company's technology and business model advantages manifest themselves as superior unit economics."

Kin's stock price can go "either way," said Kat Liu, an analyst at research-driven financial services company IPOX Schuster LLC. Commenting on Kin's $1.03 billion valuation, Liu said it is "relatively reasonable while still steep."

Kin's stock price may not "pop" as the company does not have a big enough brand name to create an investor culture the way Lemonade did, said Kaenan Hertz, managing partner for Insurtech Advisors LLC. While Kin's valuation is "amazing" given its level of premiums and revenue, Hertz said it is unlikely that the amount raised will let the company scale to the point of profitability.

Liu said she would proceed with caution when investing in insurtech IPOs in the current environment.

"The valuation is high, the IPO market is almost at its record-breaking busiest and the general stock market in U.S. is doing good, all [of which] are ideal for companies looking to go public," Liu said. "However, individual investors should maybe wait and see especially when the valuation is high."

Lemonade effect

Valuations of insurtech companies are "overly inflated" after investors got "hyped up" by Lemonade's IPO, which priced above range and had an initial return of 139.34%, and the stock's strong performance in the ensuing months, Liu said. But the market reception on insurtech has started "deteriorating," the analyst said.

Oscar Health followed a similar pattern when it went public in March, Liu noted. The offering priced above the elevated range and was upsized, with Oscar Health valued at $6.55 billion. However, markets were not as receptive: Oscar Health traded down 10.77% on the first day, and the company's market capitalization has dropped.

Bright Health, Metromile and Clover Health have also seen their market cap drop, although Clover Health's stock price spiked in June after traders on Reddit's popular r/WallStreetBets subforum encouraged one another to buy or hold given the significant short interest in the stock.

Getting the highest possible valuation is key for the insurtechs that went public this year, Insurtech Advisors' Hertz said. Companies compete in "complex difficult markets with established goliath sized competitors," which means they have to lose money for a long time to build better products and services, as well as networks, than their incumbent competitors, according to the managing partner.

Lemonade is the outlier because it had "first mover advantage" and developed its brand well, Hertz said. Additionally, he noted that the company made moves in the renters' insurance market, a small segment of the industry that agents do not prioritize because of the "extremely low" commissions.

Ben Carey-Evans, insurance analyst at data analytics and consulting company GlobalData, echoed Hertz's view that Lemonade's branding played a key role in the company's post-IPO success. Lemonade was already an "extremely well-established player" when it went public and it has been "heralded as the gold standard for insurtechs around the world for a number of years now," the analyst said.

Carey-Evans is expecting Lemonade's impending entry into motor insurance to support the stock price due to the huge growth potential in that market. The analyst also projects that Lemonade could become popular post-pandemic owing to its digital approach and prioritization of cheaper premiums.

The company's promise to offer cheaper policies to safe drivers indicates it will use telematics, which is likely to prove popular as household budgets are squeezed post-COVID-19, Carey-Evans said.