Big news for insuretech today and it’s not good. PURE sold itself for $3.1B to Tokio Marine. This is a great outcome for PURE and they are to be congratulated on building such a successful business in a relatively short time (11 years).

However, this is pretty terrible news for Insuretech. It proves that recent funding rounds were done at levels that are unlikely to make a profit for the investors.

Tokio Marine: The Softbank of Insurance

Just as Softbank is known for paying the richest multiples for technology startups, TM is known as the richest buyer of insurance companies. To be clear, I’m not suggesting TM buys overhyped “revolutionary” companies like Softbank does. If anything, it’s quite the opposite. TM pays a lot, but they pay up for quality. They pay a premium for premium companies.

The point is they are the “peak multiple”. If you are an insuretech, your absolute best case is someday TM buys you out. So we can use the PURE price as a benchmark for what is possible for a mature insuretech.

Benchmarking Insuretech to PURE

If an insuretech wants to sell for $3.1B after 10+ years of existence, what financial metrics do they need to reach? Well, it’s a little complicated because PURE is a reciprocal so they are earning their money off of fees not underwriting profit. Some of the insuretech startups have copied this structure (Lemonade) while others are more traditional models.

Therefore, probably the simplest common denominator we can use is top line, aka gross premiums. PURE is at ~$1B of GPW. We can compare the early growth trajectory of PURE to the newcos and see what we can learn. (Note, the asterisk is where I have simply annualized 1H’19 for simplicity.)

GPW $Year 1Year 2Year 3Year 4
Metromile$4M$53M$87M$105M *
Lemonade$9M$47M$89M *N/A
Root$4M$106M$375M *N/A

It’s pretty remarkable how similar Metromile and Lemonade are to PURE in their initial growth trajectory! (Root is well ahead and I will come back to them in a bit, but let’s focus on the other two first.) In fact, in my prior post about insuretech valuations, I suggested PURE was a realistic target outcome!

The PV of a 2027 Sale

If Metromile and Lemonade are on pace to be PURE in 8+ years, then we can do a pretty simple valuation. Best case is they get TM to buy them in 2027 at $3.1B.

If investors, only require a 9% return (pretty low given the uncertainty), then a simple rule of 72 says they are worth $1.55B today. If one were to use a more realistic 15% discount rate, they are worth $1B each.

That’s not good given Lemonade raised money at over $2B and is expected to get a higher valuation next time around. And remember, the $3.1B takeout is a dream scenario! If Tokio Marine isn’t interested (or the business model can’t scale successfully), the price is a lot lower!

But Look At the Growth At Root!

Their growth pace is well ahead of PURE. Of course, it needs to be given they recently raised money at a $3.65B valuation! To get a 12% return from here suggests a $9B sale to Tokio in 8 years!

Is this possible? It suggests GPW of $3B instead of $1B. Well, they are now at 4X the pace of the early PURE, so maybe it could happen??? But recall, PURE is a reciprocal. They are valued on fees. Root is worth less because it has traditional insurance earnings which requires an underwriting profit and capital…lots of capital.

It’s not just that the market prefers fee earnings to underwriting earnings. It’s that the proof of concept is tougher. A reciprocal just has to prove that it can grow. If they put together a customer base at a 100 CR and those customers don’t leave, a reciprocal will be successful. Root has to do better than that to be successful. It has to grow at an attractive CR.

The other challenge is a constant need for more capital. A reciprocal grows by asking its customers to put up capital. Root needs to go back to its investors to fund its growth, which is a risk. Yes, I know in our current crazy world, raising more capital is an opportunity (for a better valuation) not a risk! But, that’s clearly not sustainable.

If Root can’t show a path to profit, eventually (and likely suddenly) investors will balk at putting more $ in and Root will have to go into survival mode which means cutting off growth until the underwriting improves.

I’m not sure VC investors understand that profitless growth can’t be a way of life for an insurer the way it is for many tech startups. There is a regulatory framework that makes that strategy untenable.

So What Would a $3B GPW Root Be Worth in 2027?

I answered that in the prior post as well. Mature personal lines insurers trade around 1X GPW. If Root were still growing somewhat faster than peers, then it could go to the high end at closer to 1.5X, especially to someone like Tokio. That would be a $4.5B market cap.

The bad news for investors is that would be a 2.5% CAGR off the $3.65B round they just funded. Of course, if they can’t sustain an underwriting profit or if they have to slow growth to improve the underwriting, the return won’t even be 2.5%. Buyer beware!