Hippo Insurance Joins the SPAC Frenzy

Another day, another mega-SPAC deal…

Today fintech home insurer Hippo Enterprises announced it was doing a reverse merger SPAC deal with Reinvent Technology Partners Z. The deal values Hippo at $5 billion (less net cash) and the company will raise approximately $1.2 billion from the deal.

Hippo Insurance

IPO Interest

7.0

What is Hippo Insurance?

Hippo is a fintech company with the mission of transforming the home insurance industry.

Expected IPO Date:

Merger expected to close mid-2021.

  • Hippo is merging with SPAC Reinvent Technology Partners Z, you can purchase this SPAC under the ticker symbol RPTZ.
  • Reinvent is led by Reid Hoffman, the founder of LinkedIn.

Bull Case

  • Hippo is valued at 4.4X its 2023 estimated written premiums. While by no means cheap, this is a lower multiple than comparable companies fintech insurers like Lemonade.
  • Hippo carries a Net Promoter Score of 75, significantly higher than the industry average of 35.

Bear Case

  • The growth rate of Hippo Insurance’s written premiums fell from 114% in 2019 to 33% in 2020.
  • Hippo Insurance may be getting into the “SPAC craze” at its tail-end.
  • Recent SPACs have seen more muted market reaction.

Hippo Insurance is Going Public: About the SPAC Merger

Along with Reinvent Technology Partners Z’s cash, the deal also includes $780 million in proceeds from a PIPE. In total, Hippo Insurance expects to have $1.2 billion in cash at completion in the merger.

Also participating in the deal were Silicon Valley heavyweights Dragoneer Investment Group and Ribbit Capital. Their involvement in Hippo Insurance is a selling point for the health insurer as both have a reputation and record of success of investing in fintech companies.

Dragoneer most famously teamed up with PayPal to buy shares of Latin America ecommerce giant MercadoLibre when its Mercado Pago fintech opportunity wasn’t well-known by Wall Street. MercadoLibre shares have exploded 238% since Dragoneer’s 2019 investment and Ribbit has invested in a who’s who of fintech companies including Affirm and Coinbase.

Overall, the deal appears well funded with a Rolodex full of investors with deep expertise in the space.

What is Hippo Insurance’s Stock Symbol and Valuation?

The merger between Hippo Insurance and Reinvent Technology Partners Z is expected to close mid-2021. Until then, investors who are interested in owning Hippo Insurance can buy shares of RPTZ, the SPAC that Hippo will merge into.

Once the merger completes it’s likely Hippo will change its ticker symbol to something closer to the company’s actual name.

Is Hippo Insurance Too Late to the SPAC party?

Per the Wall Street Journal using data from S&P Global, fintech is quickly moving into the insurance space, moving beyond mere brokerage to becoming carriers that are responsible for financial coverage and claims. Five property-and-casualty technology startups either formed a carrier or announced the acquisition of one, up from three in 2019 and one in 2018.

At the same time, you’ve seen a huge increase in the number of fintech-related SPACs and IPOs.

That’s not by coincidence. An open secret in the IPO and SPAC market is timing matters. Founders and the venture capitalists that invest in private companies pay close attention to recent public debuts with a careful eye on what the public is valuing stocks in their industry before they pull the trigger.

Assuming Hippo Insurance is no different than every other company, it’s likely they’re not liking what they’re seeing in the public markets, most notably from recent IPOs/SPACs in the fintech insurance space:

  • Oscar’s soft IPO: Shares of the tech-focused health insurance technology platform founded by the brother of the former senior advisor to the president (and son-in-law) Jared Kushner fell 11% below its IPO price on the first day of trading when the company debuted on the public markets this week.
  • Clover Health’s struggles: Shares of Chamath Palihapitiya’s SPAC Clover Health are down approximately 40% in the last month alone as a combination of negative headlines from a short-seller and weakness among richly-valued growth stocks have dragged the company down.
  • Lemonade’s sell-off: Even fintech insurers that are exceeding expectations are getting punished. Shares of the AI-based home and rental insurer Lemonade recently plunged nearly 20% after reporting strong earnings.

To be fair to Hippo Insurance, it has been reported the company was in talks to do a SPAC deal as early as last November. However, it’s likely the current backdrop sped up the company’s timeline.

Investor sentiment can quickly change and it’s possible the company might be facing a much tougher environment than even a few weeks ago. It’s likely many other fintech stocks will be watching Hippo’s SPAC with bated breath.

Should You Buy Hippo Insurance or Pass?

When analyzing Hippo Insurance, your main consideration should hinge on how bullish you are on their business model.

The company feels that insurance is too adversarial, pitting customers against insurers. Their approach is to create what they describe as a “partnership” where the company helps customers maintain their homes.

This “partnership” consists of Hippo offering smart home tools that can provide premium discounts. In addition, in early 2020 the company acquired home maintenance platform Sheltr, which provides checkup work designed to save on costly maintenance.

Homeownership is a large market, with $105 billion in annual premiums, so if Hippo’s insurance strategy is truly disruptive they could have a long runway for growth.

However, with the company reporting $405 million in written premiums in 2020, it will trade at a steep valuation. While investors have been willing to pay up for emerging companies in this market, recent sell-offs in Lemonade’s (Nasdaq: LMND) share price show valuations may be contracting.

In addition, while Hippo grew its premiums 114% in 2019, that growth rate decelerated to 33% in 2019. The company expects written premiums to grow at a similar rate (34%) in 2021.

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