How will investors value Metromile and Oscar Health?

Last night, Metromile and SPAC INSU Acquisition Corp. II completed their combination, putting the per-mile auto insurance startup up for regular trading today for the first time.

In the wake of last year’s debuts by neoinsurance companies Lemonade and Root, it’s not surprising to see others test the public markets. For example, Oscar Health recently announced its intention to go public via a traditional IPO.

How the new entrants will fare, however, is not clear.

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There is something of a tale of two companies in Lemonade and Root, with the pair valued at divergent multiples and sporting very different post-IPO trajectories, at least concerning their value.

While Lemonade has appreciated greatly from its IPO price ($29) to its current value ($155.33), Root’s share price dropped from its debut ($27) to today ($21.75).

This morning, as Metromile starts its life as a public company, Oscar Health preps its own run at an IPO and other neoinsurance players like Hippo wait in the wings, let’s quickly check the difference between how Root and Lemonade have fared, and then ask what we can learn from their different valuation multiples and what they might mean for the next startup insurance players hoping to go public while the IPO window is wide open.

Root, Lemonade

Lemonade’s path to the public markets was one that started modestly with its first IPO pricing, improved, and then, after technically going public at a down-round valuation, took off like a rocket. Root’s IPO pricing run involved what we thought of as a strong IPO range¬†and then an above-target pricing.

But since then, Lemonade shares have rallied to several times their original price, while Root has dropped around 20%. Lemonade, for reference, sells rental insurance with an eye on going up-market in time to other forms of home-focused insurance. Root is in the auto insurance market, where Metromile also works.

Both Lemonade and Root have yet to announce Q4 2020 results, so we’ll look at their Q3 details instead. We want to get a handle for how divergently their insurance incomes are being treated. This should give us a better understanding of how Wall Street values each, then we’ll apply what we learn to our two new companies. What we learn today will hopefully bear on other insurtech startups that want liquidity during the current cycle.

Results via the company, comparisons are Q3 2019:

  • Root Q3 2020 revenue: $50.5 million (impaired from $75.8 million).
  • Root Q3 2020 gross profit: $0.7 million (improved from -$36 million).
  • Root Q3 2020 net loss: $85.2 million (improved from -$100.1 million).
  • Premiums in force: $600.1 million.
  • Valuation: $5.45 billion (Google Finance).

This gives us Root revenue run rate multiple of around 27x, and a premium in force multiple of just over 9x. Now let’s observe Lemonade’s data.

Results via the company, comparisons are Q3 2019:

  • Lemonade Q3 2020 revenue: $10.5 million (impaired from $17.8 million).
  • Lemonade Q3 2020 gross profit: $7.3 million (improved from $4 million).
  • Lemonade Q3 2020 net loss: $30.9 million (improved from $31.1 million).
  • Premiums in force: $188.9 million.
  • Valuation: $9.33 billion (Google Finance).

Looking at the same two metrics, Lemonade has a run rate multiple of 222x, and a premium in force multiple of more than 49x.

The critical question is which is a better market comp for Oscar Health and Metromile? Will the two impending neoinsurance providers, focused on health and auto respectively, look more like Root when they debut, or Lemonade?

To be clear, Root’s stock is not cheap, it’s just that it appears inexpensive compared to Lemonade’s own, which is incredibly less cheap; I am avoiding saying expensive so that you will not email me to complain.

Continuing, here’s what we know about Metromile and Oscar Health, respectively, using our same rundown as before (data pulled via supplemental Q3 update here).

  • Metromile Q3 2020 revenue: $8.3 million (impaired from $14.1 million).
  • Metromile Q3 2020 gross profit: -$3.0 million (impaired from $0.0 million).
  • Metromile Q3 2020 net loss: Not disclosed.
  • Premiums in force: Not disclosed.
  • Valuation: $1.3 billion, pre-trading.

Metromile recently raised its full-year 2020 guidance, sharing expected number of policies in force, but not premiums, so we can’t do all our former math. But Metromile is worth around 39x its Q3 GAAP revenue run rate. That is more Root than Lemonade, so we have our first answer.

As an aside, why is there so much negative revenue growth amongst the companies? Changes to how they cede premiums to reinsurance providers. Doing more ceding allows for better economics, at least in theory, but shows up contra-revenue in results. So, none of the companies we are discussing are shrinking in terms of in-market footprint, but they are not showing impressive GAAP numbers.

Welcome to covering insurance companies.

Next up is Oscar Health, which appears to have not shared much in the way of quarterly data. But we do have its full-year 2020 results, which will have to do.

Results via the company, comparisons to 2019, gross profit calculated as total revenue minus the sum of net claims incurred and other insurance costs:

  • Oscar Health 2020 revenue: $462.8 million (impairment from $488.2 million).
  • Oscar Health 2020 gross profit: -$63.1 million (improvement from -$87.9 million).
  • Oscar Health 2020 net loss: $406.8 million (impairment from $261.5 million).
  • Direct Policy Premiums: $2.29 billion.
  • Valuation: Unclear, last known valuation was $3.2 billion set in 2018 per PitchBook; company has raised three equity rounds since.

As you can tell, we’ve had to change up some metrics and get our hands around Oscar Health in a bit of a different manner than our other companies. But what we can see is that Oscar Health’s gross profit — really it’s “InsuranceCo Combined ratio” expressed in dollar terms for set periods of time — is not stupendous. And that the company has negative revenue growth, just like the rest.

Lemonade, the most highly valued of all the companies on a multiples basis, has the strongest GAAP gross profit. Root’s may be most improved. Metromile’s is heading backward, while Oscar Health is improving but remains miles from neutral.

It’s all a bit messy, but it does appear that there is a correlation between gross margins and insurtech companies’ resulting multiples. It’s not perfect, but it’s a useful rule of thumb. All the companies in our group are pretty good at adding customers to their businesses. So the one that is juicing those users for gross profit at the highest clip as a percentage of revenue is valued the most highly, in multiples terms. That makes sense.

This bodes medium for Metromile, and poorly for Oscar Health. And for all other neoinsurance players, it offers a lesson, especially those looking to go public this year.