In 2021, about 200 businesses merged with special purpose acquisition companies as a way to go public. Hippo Holdings, an insurtech, now wishes it hadn’t taken part in the so-called SPAC euphoria.
Hippo was valued at $5 billion in March 2021 when it announced its combination with Reinvent Technology Partners Z, a SPAC backed by Reid Hoffman, cofounder of LinkedIn, and Mark Pincus, founder of Zynga. SPACs, at the time, were wildly popular due to the advantages promised by blank-check companies. Merging with a SPAC was believed to be a quicker, and cheaper, route to public markets compared with a traditional IPO. Companies using SPACs could also provide future guidance, which is not allowed with traditional offerings.
The SPAC euphoria came to a brutal halt in 2022 when a broad market downturn resulted in fewer IPOs. The Securities and Exchange Commission has also increased oversight of the sector, proposing a sweeping set of rules in March that would effectively even the playing field among IPOs and SPACs, Fortune reported.
Hippo completed its combination with Reinvent Technology Partners Z on Aug. 2, 2021, and began trading the next day. Unlike shares of many SPAC combinations, or de-mergers, Hippo is trading above its $10 original offer price, closing Tuesday at $15.20. But its valuation has fallen by nearly 93% to $353.6 million.
“We would have done better with a traditional IPO,” Rick McCathron, Hippo’s president and CEO, told Fortune.
Founded in 2015, Hippo is one of several insurtechs that sought to disrupt the insurance industry, which has lagged in adopting technology. The company offers home protection insurance and technology that links up with smart home devices that Hippo’s partners provide to consumers. Hippo also offers customers an assessment of their home health risks as well as a home maintenance checklist. It employs 640 people. The company raised $1 billion from its SPAC merger, which included a private investment in a public entity, or PIPE, and a convertible note.
“We have plenty of capital to weather the macroeconomic storm,” McCathron added.
Hippo has suffered from an “insurtech broad brush,” McCathron said. Several insurtechs went public in 2020 and 2021, including Lemonade, Root, Oscar, and MetroMile. Each offers different products to different subsets of the sector. Many have underperformed in the public markets. For example, Lemonade targets millennials with renters, pet, car, and term life insurance. Lemonade soared 139% in its first day of trading in 2020 but has dropped by nearly 74% since then, closing Tuesday at $18.13. Root, which provides car insurance, is off 77% from its first-day close. Oscar offers health insurance and is down about 75%. (Lemonade ended up buying Metromile for less than $145 million.) Lemonade, Root, and Oscar went public with IPOs, while Hippo and MetroMile used SPACs.
The dismal overall performance of SPACs also has affected Hippo. Just six companies—only 3%—of the 199 that merged with blank-check firms in 2021 are trading above their original $10 offer price, according to Renaissance Capital, a provider of pre-IPO research and IPO-focused ETFs.
In addition to a flagging economy, McCathron said the stigmas from insurtechs and SPACs have weighed on Hippo's share price. “It was likely we would have been down regardless,” he said, “but I don't think we would have been down as much.”
If Hippo had gone public with a traditional IPO, it would’ve had an easier time attracting analysts who could have helped explain the company’s complexities, McCathron said. Fewer analysts flock to SPACs compared with IPOs, which are underwritten by investment banks and typically assign dedicated analysts to cover those firms. “We've had to fight to get analyst coverage,” McCathron said. “It took us a solid year to build up and get the analysts that we do have.”
Hippo likely will be EBITDA profitable in the fourth quarter of 2024, with approximately $400 million of excess cash, McCathron said. The company plans to buy back about $50 million of stock.
Despite the lackluster stock performance of insurtechs, McCathron thinks they have succeeded in one way, which is spurring innovation in a sector that’s shunned it. Many incumbents are starting to do things brought to the market by insurtechs, McCathron explained. He pointed to State Farm, which invested $1.2 billion in ADT last year, and is partnering with the company to provide smart home technology. In late April, Chubb CEO Evan Greenberg said the insurer was “experimenting with various forms of A.I.” and would start rolling out various tools at scale, according to a transcript of Chubb’s first quarter analyst call.
“None of these companies,” McCathron said, “would have done any of those things if insurtech hadn't forced those changes to the market.”
See you tomorrow,
Luisa Beltran
Twitter: @LuisaRBeltran
Email: luisa.beltran@fortune.com
Submit a deal for the Term Sheet newsletter here.
Jackson Fordyce curated the deals section of today’s newsletter.
