Mon. Dec 6th, 2021

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Many fintechs have used the tireless bull market over the past year as a great opportunity to go public. But in many cases, the high valuations collapsed after a stock market debut. Today’s newsletter examines why technology companies serving the insurance sector, which have generated a lot of buzz, have had such a rough road 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 fails to meet high valuations

A flurry of companies are trying to improve 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 launched in U.S. markets since 2020 and benefited from a receptive environment for new listings.

With few exceptions, the companies received cold receptions, and investors questioned their ability to ultimately make a profit.

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

“Companies have delivered on the IPO promise,” said Tracy Dolin-Benguigui, a Barclays stock research analyst covering insurance companies.

The route is an early black eye for venture capitalists and beginners who have promised to disrupt a very traditional industry with rapid growth and new underwriting models.

According to analysts and investors, part of the problem is that several newly listed companies have accumulated riskier policyholders and prioritized low prices to spur customer growth. This harmed their results during the pandemic, which had a disruptive effect on the wider industry.

For example, Root, a car insurer that uses sensors to adjust rates to take into account different driving styles, has fallen more than 80 percent since its IPO in October last year, when it reached a market value of $ 6.8 billion.

Hippo, a home insurer that went through a $ 5 billion blank check transaction with the public in August, has since fallen more than 60 percent. The company said hailstorms in Texas, where many of its customers live, contributed to an increase in its loss ratio during the second quarter.

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

And consolidation has already begun. Lemonade, a tenant insurance company that has experienced volatile trading since its shares were listed last year, said this month that it would buy car insurer Metromile for $ 500 million.

Metromile briefly reached a market value of $ 2.5 billion after it was announced in February, although its shares have fallen sharply since then.

The consequences in the sector have hurt big investors who have poured money into the start-ups. This is in stark contrast to the rising market for software and other technology companies.

Many venture capitalists supporting insurtech start-ups have shifted their focus to companies focusing on commercial policies, said Nima Wedlake, a principal at investment group Thomvest. Companies that sell software to insurance groups also performed better.

Wedlake said the firm’s past experience with investing in online lender LendingClub, which struggled after entering public markets, made it prudent to initially award sky-high valuations to financially difficult businesses.

“We were very aware of the fact that these companies would eventually be valued more as a carrier and less so as a pure technology company,” he said. (Miles Kruppa)

Quick Fire V&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 we are only now beginning to understand. I recently buzzed with Lilac Bar David, CEO and co-founder of Lili, a digital bank tailored to the needs of entrepreneurs and gig economics workers. Bar David says her company is well positioned to take stock of 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 more than 400,000 customers and raised $ 80 million from investors, including Group 11, Target Global and Foundation Capital.

Why focus on the gig economy?
If you look at the future of work for the US economy, it’s all about freelance, and it’s a market that is evolving. It is the fastest growing since 2014 in terms of the U.S. workforce. Since Covid started and the fact that many employees worked from home, I think the benefits and flexibility of becoming self-employed have really shifted more people to join that community, whether it be a part-time or full-time job is.

How does Lili stand out from other neobanks?
We build a category on our own. This is not a consumer bank. This is not a business bank. All of our various services and products are highly focused on the challenges of independent workers, and we are restructuring banking products to meet that specific need. Second, we thought banking was not enough to generate value. We have therefore also embedded expense management, tax savings and other business tools such as billing payments within the banking application.

Banks usually prefer customers with a steady and sticky stream of deposits. How do you make the economy work if you cater to customers who do not have it?
[Gig workers and entrepreneurs] is no less profitable. They are just different in the way they work. 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, it might be considered risky from a traditional point of view. But they are not risky, they are just different. They often have constant payments coming from different platforms, but this is just not as normal as the W-2 employees.

How do you make money?
It’s mainly based on exchange, which means we’ll get a transaction fee when you clear your card.

Fintech fascination

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

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

Paytm flops Shares in Paytm, which counted itself as India’s answer to Chinese fintech superstar applications like Ant, 40 percent lost of its value in the first two days of trading. The slump reflects concerns about the viability of superstar applications in light of intense competition from tech giants like Amazon. The fintech company, which offers everything from gold trading to fantasy sports, was an early leader in mobile payments, but is lose market share to foreign competitors.

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