It's been tough sledding lately for Hippo Holdings (HIPO 1.68%) and Lemonade, Inc. (LMND 0.83%). Sentiment on the previously hot 'insuretech' space has cooled considerably, punctuated by the broader sell-off of tech names trading at high multiples over the last few weeks. Both stocks have retreated more than 75% from their all-time highs. Lemonade was one of the hottest IPOs of 2020 while Hippo went public via SPAC in 2021 and then tanked afterwards. Both companies talk about using AI to improve underwriting and the customer experience. Both have shown impressive revenue growth but neither is profitable yet. With a lot of the air out of the market, which stock is the better buying opportunity right now?
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What is each company's 'secret sauce'?
Hippo uses technology to improve the home insurance experience and deliver "intuitive and proactive protection for homeowners." Hippo's key differentiator is its mission to transform the adversarial relationship between customer and insurance provider into more of a symbiotic partnership. For example, Hippo sends policy holders home monitoring kits that monitor for fire and water damage among other risks. Hippo also engages in "continuous underwriting", using things like permit data and property inspections to update customer policies to increase their coverage if they install a new pool, or to give them a discount if they put in a new roof.
This strategy is a win-win. It reduces the risk of unpleasant and costly damage for customers while decreasing the likelihood that Hippo will have to pay out to cover damage caused.
Lemonade approaches improving the traditional relationship between insurer and customer by donating up to 40% of unused money in a customer's policy to a charity of their choice during its Annual Giveback. There is something to be said for this creative approach, which generated a lot of publicity for the company and stock, but the pragmatic (or perhaps cynical) side of me views Hippo's approach as having more staying power with customers in the long run.
Which business has better unit economics?
Hippo's average premium per policy of over $1200 compares favorably to Lemonade's $254. Simply put, Hippo is focused on homeowner's insurance, which generates significant lifetime value for the company. Lemonade has a more diversified approach, offering homeowner's insurance, pet insurance, auto insurance, and renter's insurance. Note that renter's insurance makes up the majority of its business (53%) , and these policies bring in less lifetime value than homeowner's insurance which is why Hippo's average policy premium is much higher than Lemonade's. This is important because customer acquisition costs are intended to maximize value from potential customers.
Hippo's average lifetime value of $1900 versus a customer acquisition cost of $350 gives it a lifetime value/customer acquisition cost rate of 5.4x meaning it makes back 5.4x the cost on average of what it takes to bring in each customer. Lemonade's lifetime value to customer acquisition cost is 2x. Furthermore, Hippo has an industry-leading 80% customer retention rate, compared to a retention rate of 62% for Lemonade.
Who wins?
Sentiment on insuretech has soured over the last few months. Neither company is profitable and there is a possibility that they won't become profitable in the near future. But as many wise investors know, it is often fruitful to be greedy and take a look at new opportunities in places where others are fearful. Both companies are growing revenues at impressive rates.
In looking at these two insuretech names, I think Hippo is a better buy right now than the bigger and more well-known Lemonade, based on its superior unit economics. Furthermore, I think Hippo's proactive approach toward home insurance is a differentiator that customers will ultimately value more than Lemonade's charity angle. I think Hippo will eventually outperform Lemonade and that it is an intriguing investment opportunity for long-term, risk tolerant investors.
