Our prior writings about InsurTechs at the peak of the mania focused on the financial foundations and the long-term survivability of this group.
One of the questions we raised was whether the InsurTech group is marching toward the peak of inflated expectations or has crossed the trough of disillusionment, and what the implications of this are. (For background, see this publication’s prior discussion on the InsurTech Hype Cycle).
This recently concluded earnings season saw material movements in the stock prices of the Class of 2015 InsurTechs. All three public InsurTechs beat Street estimates and showed a wide variance in stock price performance. While Lemonade and Hippo rallied on results and guidance, Root slipped materially on a slower top-line trajectory.
On the other hand, two InsurTech carriers, Slide and Accelerant, IPO’d and saw significant gains of about 24% and 36% percent on their IPO price.
Are we witnessing a seismic shift in the InsurTech world? Have we missed this turnaround since InsurTechs had previously mentioned they needed time for economies of scale to kick in?
Keeping that in mind, we decided to revisit underwriting metrics for some of the publicly traded names, their capital position, and concluded with thoughts on future consolidation.
For all the initial talk of disruption, our analysis leads us to believe that this evolution in pathways for these three publicly traded InsurTechs suggests that they are on track to become second or third-tier players in the industry. This is about as good as it is going to get for the better InsurTechs.
Ten years in, some of these carriers are still talking about profitability being years away.
With a watchful eye on capital, InsurTechs have had to pivot to lower-risk products, pulled back on tech and sales spend, or pivoted their models to become intermediary platforms. The next stage in survival is hoping to turn some profitability before they are acquired, or capital runs out.
Looking ahead, with InsurTech funding slowed to a trickle, balance-sheet light firms with unique specialization – such as parametric InsurTechs or digital wholesale brokers – will be best placed to succeed.
The fate of full-stack carriers, encumbered by high underwriting losses and unclear differentiation, is clear. While change in strategies, top-line and bottom line expense management might have extended the remaining capital utilization at the companies, the best course would be to sell or merge before competition intensifies in both personal and commercial lines.
Moreover, with the failure of the full-stack carrier experiment, these formations will not be repeated, and the next class of InsurTechs will be focused on integrating into the insurance value chain, rather than outclassing the incumbents.
We discuss these points in detail below.
Progress has been made, but underwriting profitability is still a ways out
One of the hallmarks of InsurTech reporting is the focus on Ebitda or adjusted Ebitda. This narrative focuses on treating them as tech franchises, which brings upside in valuation since they are evaluated similarly to SaaS or fintech businesses.
We are skeptical of this narrative since it downplays the underwriting losses written against a capital base (more on this later). Hence, we evaluated the loss ratios for the group shown below and also compared this to some of the larger incumbents. We note that the peer group writes disparate lines of business, so we would focus on overall trends as opposed to comparing them against one another.
All three carriers have shown significant improvements in loss ratios, which are also influenced by the evolution of their operating segments and platforms, as well as sizable rate tailwinds.
Note that the past few years have been generally favorable in the personal lines space after the post-Covid-19 trough. So, a rising tide did lift all boats. This has also intersected with shifts in the publicly traded InsurTechs shown below.
Hippo’s improvement results from its shift to the Spinnaker platform, with the home insurance platform being deprioritized.
Lemonade’s improvement focuses on renters and expanding into pet insurance, with homeowners and auto no longer a priority.
Root, on the other hand, has remained true to its formation and continues to focus on fine-tuning its models.
All three are also heavily dependent on reinsurers, ceding 50-75% of their premiums. This compares to established carriers, who retain almost all of the business they write.
In other words, the improvement is not because the companies figured out a path to profitability and applied it to their original business plans. It was because of several internal and external factors applied to their books of business.
But loss ratios are only one part of the equation when evaluating underwriting profitability. For any new franchise, initial expenses are significantly higher compared to a more mature one.
The InsurTech narrative thus focuses on either making significant adjustments when evaluating expenses or not discussing the expense ratio altogether in earnings presentations or conference calls.
However, expenses are a cash item and will deplete capital. For our analysis, we evaluated the overall expenses on a gross basis for the InsurTechs to understand operating efficiency before the impact of reinsurance.
The table below shows this analysis. Note that the ratios below may not be apples-to-apples with what the companies disclosed, as we are considering a particular set of expenses that may not include other adjustments made by certain companies.
What immediately jumps out is the change in the sales and marketing as well as tech and development ratios. Even on an absolute basis, these amounts are materially lower than the initial expenditure and, in some cases, only a third of what they used to be.
It’s a classic case of robbing Peter to pay Paul.
This is a lesson for other InsurTechs. As the hope of achieving GAAP profitability has taken materially longer than expected, carriers have had to pull back on these expenses.
While that gives them a shot at surviving by making the numbers more palatable in the short term, it calls into question the IP these companies offer long term. And that IP was central to their founding stories.
Capital depletion leads to latest pivots
Some of the more prominent InsurTechs entered the scene 10 years ago. At that time, the focus was on the discussion of TAM and how tech disruption would enable them to take an outsized piece of this pie.
However, insurance companies, including InsurTechs, must comply with regulatory requirements on capital adequacy. Although tech investors might overlook the focus on capital, adequate capital levels are essential for an InsurTech to remain compliant and to satisfy its partners, including reinsurers.
Apart from underwriting losses, many InsurTechs have also spent substantial amounts on technology and platform development, as we observed among the publicly traded names in the table above.
Large amounts of money were spent on the premise “if you build it, they will come,” where a nice user interface was expected to lure droves of customers.
In the past, we have flagged about the skewed lifetime value to customer acquisition costs for this segment versus initial expectations. This led to material depletion in capital bases without much to show for it in terms of acquiring and retaining the higher-quality customers.
The table below shows the change in equity over time for the publicly traded cohort. While the overall industry has increased by 20% since year-end 2020, InsurTechs have decreased by 43% on average.
This can also be illustrated by the net income numbers shown below. On a cumulative basis, the three publicly traded InsurTechs have lost over $3bn since year-end 2020, while the P&C industry has gained over $423bn. As industry results for Q2 were unavailable at the time that this note was written, our analysis only includes data up to Q1 2025.
This level of meaningful loss has led to an evolution in the companies’ strategy, while also showing an underscoring that the original thesis hasn’t really panned out.
Lemonade started with renters insurance, which is a low-severity, lower-premium business. Lemonade’s car insurance product, expanded through its Metromile acquisition, failed to gain traction due to higher underwriting losses compared to capital needs.
The company also expanded into pet insurance, aiming to leverage its understanding of the direct-to-consumer product, similar to its renters book.
Hippo, on the other hand, has gone through a complete shift in its business profile since its IPO.
Although the initial premise of the franchise was a homeowners’ carrier with value-added services as well as some MGA business, the company now resembles more of a fronting carrier after heavily leaning into its Spinnaker platform, which it acquired in 2020.
Root, on the other hand, has probably strayed the least from its original mission, and continues to learn and refine its approach by focusing on the auto product.
The reality for these franchises is that Root and Hippo are only recently positive on a net income basis, while the Lemonade is still guiding positive expectations for the future. Root has also talked about slowing down growth, so the positive income is a result of reining in growth and expenses.
In other words, these firms have shifted from changing the insurance industry to saving capital to survive and doing whatever it takes. These steps also come at a time when industry results have been the strongest, essentially putting the competition in an even stronger position.
Sales could help thin this herd, but specialization and uniqueness will matter
At the height of the SPAC and InsurTech IPO craze in 2021, many of these companies traded at significantly higher multiples than the broader insurance sector. Industry estimates indicate that there are now five times as many InsurTechs as there were roughly 10 years ago.
After the initial euphoria of 2020 and 2021, 2022 became the pivot point for many carriers as they attempted to dig themselves out of a capital depletion hole that gave them limited runway.
One can see this play out with declining valuations improving over time, as shown in the table below.
However, the writing is on the wall. Venture capital is no longer willing to write blank checks. This shift in funding patterns over the years has also led to a significant evolution in the original purposes of InsurTechs.
Over time, these platforms have evolved to include:
Full-stack InsurTech carriers
Parametric InsurTechs
MGA businesses
Embedded platforms
Digital brokers/exchanges
B2B enablers
First came the full-stack carriers, including several that went public. With high underwriting losses and no clear market differentiation, it is unlikely we will see large-scale new formations. With an unclear differentiation, it remains unclear what becomes of the balance sheet InsurTechs.
MGAs were the subsequent development in this chain, which were able to benefit from the MGA gold rush and relied on a capital-light model. The niche product MGAs will survive, but the rest will struggle to maintain relevance as the pricing cycle continues to deteriorate.
Digital brokers or intermediaries could also face a similar fate to MGAs, depending on their value-added proposition. In other words, the strong will survive, and the weak won’t. Some will also be interesting to both public and private brokers hunting growth now the brokerage supercycle is over.
Parametric InsurTechs are likely some of the best positioned in this space because of their unique product offerings, although it remains to be seen if they gain nationwide traction.
Embedded platforms also face a scale and recognition challenge. Their low margins and unclear long-term take-up rate will likely relegate them to a sideshow in insurance as well.
Today, incumbent carriers are the only realistic buyer constituency for the full-stack InsurTech carriers. PE firms are unable to invest due to these companies’ poor underwriting performance.
VC firms are disillusioned with the cohort but would likely still entertain deals with a particularly high coupon, warrants and liquidation preferences.
Many InsurTechs have been unable to definitively prove their ability to generate a differentiated book of business. Hence, we view platform-to-platform acquisitions as less likely.
In summary, InsurTechs have pursued various strategies, including expansion, pivots, or doubling down.
The next phase of the InsurTech cycle will focus on this group integrating into the insurance value chain rather than replacing incumbents. For the established groups writing business, mergers could provide finality. However, not everyone will find a willing partner.