This article was originally published in James Ledbetter’s FIN, the best newsletter about fintech; subscribe here.
It’s exceedingly difficult today to recall just how much excitement there was in 2020 around insurtech. In July 2020, the New York-based insurer Lemonade, which boasts that it uses artificial intelligence to maximize efficiency, went public. Its stock had a neck-snapping 140% gain on the first day. Lemonade ended up being, by some yardsticks, the best-performing IPO of 2020, among very stiff competition, including Airbnb and Snowflake. Three months later, the insurtech fairy dust also lifted the IPO of app-based car insurer Root, which on its first day of trading hit a market capitalization of more than $6 billion; this was for a money-losing company that had $290 million in revenue in 2019.
Insurtech fever spread well beyond the public markets. There are different ways to measure the billions that went into insurtech; one method used by Boston Consulting Group shows that it took seven years, from 2012 to 2018, for $15 billion in equity funding to be invested in the insurtech. But in the single year 2019 alone, $15 billion was plowed into insurtech, only to increase in 2020 and 2021:
But the insurtech bubble burst, and importantly it began bursting even before late 2021, when everything from tech stocks to cryptocurrency prices began tumbling. Root’s collapse started shortly after its October 2020 market debut, and has been nothing short of breathtaking. The $6 billion market capitalization has dwindled to, as of this writing, $158 million. The company still loses money, and its 2021 revenues were actually lower than 2020; earlier this year Root laid off about 20% of its employees.
When public insurtech companies fall apart, it affects private investment, too. Pitchbook recently issued a survey of insurtech investment for the second quarter. Its summary:
In Q2 2022, insurtech companies globally raised $2.6 billion in venture capital across 133 deals, representing an 8.5% decrease in QoQ deal value. This was the lowest amount of invested capital since Q3 2020 and 42.1% lower than the previous peak of $4.4 billion in Q2 2021.
This chart tells the story (the 2022 figures are for the first six months):
Pitchbook also noted that valuations for many insurtech investments have come down; the median pre-money valuation for a late-stage insurtech investment in the second quarter was $72 million, down 39.4% from the median valuation in full year 2021. That is no doubt a disappointment to insurtech founders, but a relief for investors who have clearly been overpaying to put money into this sector.
Some of this is simply clearing the froth from an overheated sector. Just to use Lemonade as an example: it generates a little more than $200 million a year in sales; a company that size should never have had a market cap of $3 billion. But there may also be a salient market insight here. Insurance is a very specific industry that benefits from scale in a way that, say, some financial services don’t need to. In the United States, you can run a bank or savings-and-loan with a few hundred or thousand customers and you won’t necessarily have significantly lower profit margins than a company that’s ten times as large. But insurance companies pool their risks and customers, and the larger the pool, the more opportunity there is to tailor the business for greater profit. Despite the meteoric growth of insurtech companies over the last few years, they remain dwarfed by the GEICOs and State Farms of the world. Perhaps it wasn’t clear to giddy markets in 2020, but it seems far likelier that insurtech companies will force change onto incumbents, or be acquired by them, than that they will overthrow them.
Of course, insurtech is far from dead; 2022 seems like it will be the second-largest investment year on record. In July, San Francisco-based cybersecurity insurance company Coalition raised a massive $250 million Series F round valuing the company at $5 billion. Lemonade is recently showing some signs of life; its recently completed acquisition of Metromile seems likely to help it jumpstart its newly launched auto insurance business. And opportunities abound; anyone who’s ever dealt with the insurance industry can appreciate how digitization and app logistics could massively improve the consumer experience.
Mark Selcow is a partner at Costanoa Ventures, and an investor in several insurtech companies. He acknowledged in a FIN interview that the current market is “painful,” but added “It’s always a meaningful moment when exuberance gets corrected.” He believes market downturns are good times for companies to focus on their products and infrastructure. The two most important areas he sees in the sector: 1) crypto insurance, “because crypto is chock full of risk, and so many kinds of risk” and 2) legacy insurers coming on board with the innovations that insurtech has created.