September 13, 2023
Why QED is doubling down on Kin
It’s been a rough market for fintech since the peak of 2021, when I last wrote about Kin Insurance as they were preparing to go public.
It’s easy to complain about this market turn for young companies, but the downturn has reminded us of some enduring truths about building companies that were obscured in the exuberance of the COVID-19 bubble.
1) Startups should grow because of product market fit, not because of the business cycle.
2) Financial markets – and public markets especially – ultimately care about a company’s ability to turn effort into cash.
Back in 2021, Kin had agreed to go public via a SPAC transaction. At the time, the market was rewarding the insurtech 1.0 companies with exceptionally high valuations despite having poor or negative unit economics. For example, Lemonade spent the first half of 2021 trading between 40-60x forward revenue.
We thought that was a great outcome at the time, but in hindsight Kin had yet to achieve the right scale. Despite the excitement, I remember talking up Kin to a hedge fund manager that summer. He stopped me and said – “Wait, what’s their topline revenue right now? $40 million? Amias, I have to prepare for Facebook’s quarterly earnings. I just don’t have time.”
Venture investing, on the other hand, is all about belief – not just in a company’s team and product, but in their ability to grow and the team’s ability to become great. QED and the other investors on Kin’s cap table are constantly thinking about our companies as teams of people, constantly probing with ideas and challenges. The concept of “earnings season” just doesn’t register for us.
By the time QED led Kin’s “stay private” Series D in early 2022, we knew that the market wouldn’t reward high growth, high-loss insurtech companies with bad unit economics and a long, uncertain road to breakeven. We recognized that Kin needed to continue to prove itself as a new kind of insurtech, not just one with better numbers, but as a fundamentally different kind of company.
On the heels of their impressive Q2 results and with the latest financing led by QED, I thought this would be a good opportunity to reiterate why we continue to bet on Kin, and to explain how Kin’s entire model is designed to be a great business for consumers and investors.
You’ve likely seen the headlines about how climate shocks are making parts of America “uninsurable.” It may seem too simple, but the key to underwriting home insurance is having a very detailed understanding of the physical properties of the homes. This is particularly true for homes that are exposed to hurricane or wildfire risk, and it’s very difficult to do at scale. Legacy insurers built their businesses when this was actually impossible to do digitally, so they’ve relied on insurance agents for this purpose. In an era without computer vision, cheap aerial imagery, or data mining on loss histories, agents were actually an acceptable solution. But when compared to the power of modern analytical techniques and the incentives that come from a direct-to-consumer model, agents simply don’t have the data or incentive to accurately do that job.
So, while legacy insurers are losing their enthusiasm for selling and servicing policies in catastrophe-prone states, Kin examines and applies the most granular possible data to profitably serve those customers. Kin’s model is designed to serve higher risk areas, with careful attention to getting the price of each policy correct, rather than on average. This pricing is combined with tight feedback loops between marketing, risk, and claims – enabling Kin to increase the distribution of policies with favorable loss ratios and decreasing the distribution of policies with unfavorable loss ratios. When a company grows quickly while improving their loss ratio, it creates a virtuous cycle for investors and customers – and they’re doing this in really tough markets like Florida, where recently the legislature and governor have taken very positive steps to stabilize the property insurance market with meaningful solutions that benefit residents.
Just let that sink in. Kin, which is viewed as being in the hyper risky “hurricane business,” is not just growing in states where other insurers have stalled or left, it’s growing profitably. Compare that to Lemonade, which is growing in the nationwide, lower severity “renter business,” but their path to profitability is far more uncertain.
In the startup world, growth is oxygen, and Kin is filling up its lungs right now. They’re growing exceptionally fast because they’re acquiring customers who aren’t being well served by incumbents.
In a business like insurance, growth can come easily if you don’t pay attention to risk. That’s why we love seeing how well Kin controls its operations, even while growing so quickly. For example, Kin precisely hit their premium target in 2022 after throttling their growth mid-year for risk management purposes – Kin's robust exposure management ensures their portfolio stays within plan and within their reinsurance program expectations by responsibly managing new customer acquisitions, geographic diversification, loss ratio performance, and more. Now they’re on pace to deliver $370+ million in total premium in 2023 and they’ve turned the corner to positive operating income (26.7% in Q2).
Kin’s growth is even more impressive relative to Lemonade because it’s entirely organic. While Lemonade’s top line growth of 50% sounds impressive, that number drops down to 28% when you exclude their acquisition of Metromile.
Kin’s direct-to-consumer model and vertical integration cuts out a significant amount of the legacy cost structure, and their proactive marketing targets customers that they know will be a good match for their risk appetite. Kin’s YOY growth is the expression of a simple win-win – they offer great service and properly priced insurance in markets that are increasingly underserved.
Kin’s efficient management of the sales process means that the value of a customer is immediately accretive, whereas Lemonade and others lose money on every customer in the first year and hope to make it up through renewal, upsell, and cross-sell. Unfortunately, the renewal rate for Lemonade is low enough that the average customer in 2022 didn’t even pay back their customer acquisition cost!
Kin generates a small profit as soon as a customer pays their first year’s premium. Some of this financial performance is related to the fact that there has been less competition in states like Florida, but it’s largely just a result of a business model with a virtuous cycle based on vertical integration, data, and automation. Kin markets to customers to whom they can offer attractive pricing, so marketing is highly efficient. Proactive, data-driven customer service and claims leads to higher satisfaction and retention. And the same efficient operating model enables Kin to turn more of that revenue it generates into more marketing and service for customers.
The difference between these financial metrics is so stark that we believe Kin will be the defining company of insurtech 2.0. Whereas Lemonade, Hippo, and Root prioritized growth over control, likely believing that risk would normalize at scale, Kin’s model is based on a real understanding of insurance from the inside out.
Kin uses an underappreciated structure called a reciprocal to better align with their customers. As a trusted and financially stable carrier, Kin took a very proactive, technology-driven approach to support customers and triage claims around Hurricane Idalia a few weeks ago. They accurately predicted which homes were going to feel the effects of the storm, and their claims and customer support teams were ready to deliver the best possible experience to those who experienced a range of damage and hardship – and their important work continues to ensure claims are handled quickly and efficiently.
We at QED remain so excited to watch the Kin team execute through these choppy waters and help homeowners have a stable, modern insurance company even as climate change challenges their communities.
It’s been a rough market for fintech since the peak of 2021, when I last wrote about Kin Insurance as they were preparing to go public.
It’s easy to complain about this market turn for young companies, but the downturn has reminded us of some enduring truths about building companies that were obscured in the exuberance of the COVID-19 bubble.
1) Startups should grow because of product market fit, not because of the business cycle.
2) Financial markets – and public markets especially – ultimately care about a company’s ability to turn effort into cash.
Back in 2021, Kin had agreed to go public via a SPAC transaction. At the time, the market was rewarding the insurtech 1.0 companies with exceptionally high valuations despite having poor or negative unit economics. For example, Lemonade spent the first half of 2021 trading between 40-60x forward revenue.
We thought that was a great outcome at the time, but in hindsight Kin had yet to achieve the right scale. Despite the excitement, I remember talking up Kin to a hedge fund manager that summer. He stopped me and said – “Wait, what’s their topline revenue right now? $40 million? Amias, I have to prepare for Facebook’s quarterly earnings. I just don’t have time.”
Venture investing, on the other hand, is all about belief – not just in a company’s team and product, but in their ability to grow and the team’s ability to become great. QED and the other investors on Kin’s cap table are constantly thinking about our companies as teams of people, constantly probing with ideas and challenges. The concept of “earnings season” just doesn’t register for us.
By the time QED led Kin’s “stay private” Series D in early 2022, we knew that the market wouldn’t reward high growth, high-loss insurtech companies with bad unit economics and a long, uncertain road to breakeven. We recognized that Kin needed to continue to prove itself as a new kind of insurtech, not just one with better numbers, but as a fundamentally different kind of company.
On the heels of their impressive Q2 results and with the latest financing led by QED, I thought this would be a good opportunity to reiterate why we continue to bet on Kin, and to explain how Kin’s entire model is designed to be a great business for consumers and investors.
You’ve likely seen the headlines about how climate shocks are making parts of America “uninsurable.” It may seem too simple, but the key to underwriting home insurance is having a very detailed understanding of the physical properties of the homes. This is particularly true for homes that are exposed to hurricane or wildfire risk, and it’s very difficult to do at scale. Legacy insurers built their businesses when this was actually impossible to do digitally, so they’ve relied on insurance agents for this purpose. In an era without computer vision, cheap aerial imagery, or data mining on loss histories, agents were actually an acceptable solution. But when compared to the power of modern analytical techniques and the incentives that come from a direct-to-consumer model, agents simply don’t have the data or incentive to accurately do that job.
So, while legacy insurers are losing their enthusiasm for selling and servicing policies in catastrophe-prone states, Kin examines and applies the most granular possible data to profitably serve those customers. Kin’s model is designed to serve higher risk areas, with careful attention to getting the price of each policy correct, rather than on average. This pricing is combined with tight feedback loops between marketing, risk, and claims – enabling Kin to increase the distribution of policies with favorable loss ratios and decreasing the distribution of policies with unfavorable loss ratios. When a company grows quickly while improving their loss ratio, it creates a virtuous cycle for investors and customers – and they’re doing this in really tough markets like Florida, where recently the legislature and governor have taken very positive steps to stabilize the property insurance market with meaningful solutions that benefit residents.
Just let that sink in. Kin, which is viewed as being in the hyper risky “hurricane business,” is not just growing in states where other insurers have stalled or left, it’s growing profitably. Compare that to Lemonade, which is growing in the nationwide, lower severity “renter business,” but their path to profitability is far more uncertain.
In the startup world, growth is oxygen, and Kin is filling up its lungs right now. They’re growing exceptionally fast because they’re acquiring customers who aren’t being well served by incumbents.
In a business like insurance, growth can come easily if you don’t pay attention to risk. That’s why we love seeing how well Kin controls its operations, even while growing so quickly. For example, Kin precisely hit their premium target in 2022 after throttling their growth mid-year for risk management purposes – Kin's robust exposure management ensures their portfolio stays within plan and within their reinsurance program expectations by responsibly managing new customer acquisitions, geographic diversification, loss ratio performance, and more. Now they’re on pace to deliver $370+ million in total premium in 2023 and they’ve turned the corner to positive operating income (26.7% in Q2).
Kin’s growth is even more impressive relative to Lemonade because it’s entirely organic. While Lemonade’s top line growth of 50% sounds impressive, that number drops down to 28% when you exclude their acquisition of Metromile.
Kin’s direct-to-consumer model and vertical integration cuts out a significant amount of the legacy cost structure, and their proactive marketing targets customers that they know will be a good match for their risk appetite. Kin’s YOY growth is the expression of a simple win-win – they offer great service and properly priced insurance in markets that are increasingly underserved.
Kin’s efficient management of the sales process means that the value of a customer is immediately accretive, whereas Lemonade and others lose money on every customer in the first year and hope to make it up through renewal, upsell, and cross-sell. Unfortunately, the renewal rate for Lemonade is low enough that the average customer in 2022 didn’t even pay back their customer acquisition cost!
Kin generates a small profit as soon as a customer pays their first year’s premium. Some of this financial performance is related to the fact that there has been less competition in states like Florida, but it’s largely just a result of a business model with a virtuous cycle based on vertical integration, data, and automation. Kin markets to customers to whom they can offer attractive pricing, so marketing is highly efficient. Proactive, data-driven customer service and claims leads to higher satisfaction and retention. And the same efficient operating model enables Kin to turn more of that revenue it generates into more marketing and service for customers.
The difference between these financial metrics is so stark that we believe Kin will be the defining company of insurtech 2.0. Whereas Lemonade, Hippo, and Root prioritized growth over control, likely believing that risk would normalize at scale, Kin’s model is based on a real understanding of insurance from the inside out.
Kin uses an underappreciated structure called a reciprocal to better align with their customers. As a trusted and financially stable carrier, Kin took a very proactive, technology-driven approach to support customers and triage claims around Hurricane Idalia a few weeks ago. They accurately predicted which homes were going to feel the effects of the storm, and their claims and customer support teams were ready to deliver the best possible experience to those who experienced a range of damage and hardship – and their important work continues to ensure claims are handled quickly and efficiently.
We at QED remain so excited to watch the Kin team execute through these choppy waters and help homeowners have a stable, modern insurance company even as climate change challenges their communities.