What is behind insurtechs’ disappointing IPOs?

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Hey Fintech Fam!

Many fintechs have used the untiring bull market over the past year as a good opportunity to go public. But in many cases, the lofty valuations have come crashing down after a stock market debut. Today’s newsletter explores why technology companies serving the insurance sector, which has generated a lot of buzz, have had such a rough go of it in the public markets. It ends with a story from my colleagues about what went wrong with India’s Paytm IPO.

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Insurtechs fail to live up to high valuations

A wave of companies are seeking to upend the insurance industry with high tech solutions, but public market investors have yet to buy the story.

More than a dozen so-called insurtech companies have gone public on US markets since 2020, taking advantage of a receptive environment for new listings.

With few exceptions, the companies have received chilly receptions, and investors are questioning their ability to eventually turn profits.

A basket of 22 insurtech companies has lost more than a quarter of its value so far this year, according to the HSCM Public Insurtech Index. Several of the worst-performing companies in the index, including Hippo and Root, focus on personal lines of insurance such as home and auto.

“Companies have underdelivered the IPO promise,” said Tracy Dolin-Benguigui, a Barclays equity research analyst who covers insurance companies.

The rout is an early black eye for venture capitalists and start-ups that promised to disrupt a very traditional industry with fast growth and new underwriting models.

Part of the problem, according to analysts and investors, is that several newly listed companies have accumulated riskier policyholders and prioritised low prices to spur customer growth. This has hurt their bottom line during the pandemic, which has had a disruptive effect on the broader industry.

For example, Root, an auto insurer that uses sensors to adjust rates to account for different driving styles, has fallen more than 80 per cent from its IPO in October last year, when it reached a market value of $6.8bn.

Hippo, a home insurer that went public through a $5bn blank-cheque deal in August, has since fallen more than 60 per cent. The company said hail storms in Texas, where many of its customers live, contributed to a spike in its loss ratio during the second quarter.

In the health insurance sector, Oscar Health, a company co-founded by Joshua Kushner (brother to Donald Trump’s son-in-law Jared Kushner), has lost more than 70 per cent from its market value since investors priced it at nearly $8bn in March.

And consolidation has already begun. Lemonade, a renters’ insurance company that has encountered volatile trading since its shares listed last year, said this month it would purchase the auto insurer Metromile for $500m. 

Metromile briefly reached a market value of $2.5bn after it went public in February, though its shares have fallen steeply since.

The fallout across the sector has hurt large investors that poured money into the start-ups. This contrasts starkly with the surging market for software and other tech companies.

Many venture capitalists that back insurtech start-ups have switched focus to companies focused on commercial policies, said Nima Wedlake, a principal at the investment group Thomvest. Companies that sell software to insurance groups have also fared better.

Wedlake said the firm’s previous experience investing in the online lender LendingClub, which has struggled after entering public markets, made it cautious about initially assigning sky-high valuations to finance-heavy businesses.

“We were super aware of the fact that these companies will ultimately be valued more as a carrier and less so as a pure-play technology company,” he said. (Miles Kruppa)

Quick Fire Q&A

Every week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry. Our conversation, lightly edited, appears below.

The pandemic has changed attitudes about work for many people in ways in which we are only just starting to understand. I recently Zoomed with Lilac Bar David, chief executive and co-founder of Lili, a digital bank tailored to the needs of entrepreneurs and gig-economy workers. Bar David says her company is well-positioned to take share from traditional banks as society adapts to new ways of working and banking in the years ahead. Since launching the product in January 2020, the company has attracted over 400,000 customers and raised $80m from investors including Group 11, Target Global and Foundation Capital.

Why focus on the gig economy?
If you’re looking at the future of work for the US economy, it’s all about freelancing, and it’s a market that is evolving. It’s the fastest growing since 2014 in regards to the US workforce. Since Covid started and the fact that many of employees were working from home, I think the benefits and the flexibility of becoming self-employed has really shifted more people towards entering that community whether its a part-time or full-time job.

How does Lili stand out from other neobanks?
We are building a category by itself. It’s not a consumer bank. It’s not a business bank. All of our different services and products are very focused on the challenges of independent workers, and we restructure banking products to fit that specific need. Secondly, we thought that banking wasn’t enough so in order to generate value. So we also embedded expense management, tax-saving, and other business tools like invoicing payments within the banking app.

Banks typically prefer customers with a steady and sticky stream of deposits. How do you make the economics work when catering to customers who do not have that?
[Gig workers and entrepreneurs] are not less profitable. They are just different in the way that they operate. So if you think about credit scores from that point of view, because they have income that is very diversified, from different sources and in different timing, they might be considered risky from a traditional point of view. But they are not risky, they’re just different. They often do have constant payments coming from different platforms, but it’s just not as normal as the W-2 employees.

How do you make money?
It’s mainly based on interchange, which means, whenever you swipe your card we will get a transaction fee.

Fintech fascination

Visa strikes back Contentious negotiations between two corporate giants spilled into the public eye last week when Amazon said it would stop accepting UK-issued Visa credit cards next year. Visa chief executive Al Kelly told the FT that he is confident the spat between his company and retail giant would be “resolved thoughtfully,” but the feud cast a spotlight on the larger trends threatening Visa’s dominance in global payments.

Crypto finds new homes After China effectively banned cryptocurrencies over the summer, miners quickly moved over 2m machines out of the country and scattered them across US, Canada, Kazakhstan and Russia, according to an FT investigation. Meanwhile, El Salvador’s government is planning a volcano-fuelled bitcoin city that will also function as a tax haven. In another sign of digital currencies’ growing influence: Arena is the new name for LeBron James’s home court.

Paytm flops Shares in Paytm, which has billed itself as India’s answer to Chinese fintech super apps like Ant, lost 40 per cent of its value in the first two days of trading. The slump reflects concerns about the viability of super apps in the face of intense competition from tech giants like Amazon. The fintech company, which offers everything from gold trading to fantasy sports, was an early mover in mobile payments but has been losing market share to foreign competitors.

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