Kin is going public. I was the 1st investor and am still bullish. Here's why

My first LinkedIn post!

In honor of today’s announcement that Kin is going public via SPAC ($OCA), I thought I’d write a bit about why we invested in Kin and continue to be excited about its future. I ended up looking back at the first deal memo we wrote about Kin (some of which is pasted below) which was kind of fun to see what we got wrong and right.

I go way back with Sean (co-founder/CEO), and likely would have invested in anything that he started. He's the guy you back again and again (more on this later). I ended up convincing him to join our accelerator, and it has been an amazing journey together, and we ended up investing in the company in every round (5 times!).

TL;DR: Homeowners Insurance is a clunky behemoth that’s slow to adapt and leaves its customers confused, angry, and unsatisfied. The best innovation to come along in recent times is going direct to the consumer, like GEICO and Progressive; Kin is DTC home insurance and with a better mousetrap - better underwriting and marketing using data. The market is massive and they have just scratched the surface, this will be 10X bigger in a few years. This is a superstar team that you'd back all day long.

Here’s a snippet from my original deal memo on the company in 2017 (with a couple of minor things redacted):

Kin has the exact blueprint that we look for when investing in consumer insurance companies: sharp entrepreneurs aiming squarely at eliminating pain points for consumers, with a vision for displacing incumbents and the goal of building an enduring brand. 

They are attacking a massive market (homeowners insurance) in a truly innovative way and are already live in the biggest market (Florida). On top of that, they are an amazing founding team with multiple successful fintech exits between them. They have been fast and lean, getting to market in a difficult and complex market with incredible speed.

Home insurance is a space where 70% of customers say they'd prefer to buy online but 95% STILL end up buying via agents (average age: 59) because there is no compelling online option in this $100B+ revenue industry. This is partially why GEICO & Progressive have done so well - they go direct in auto insurance when everyone else sells via agents, so their acquisition costs are much lower. They are the only 2 major insurers to gain market share in the past 20 years. This cost efficiency has allowed the companies to experiment with many other levers, like new products, lower prices, higher loss rates, etc.

In some ways, Kin is building a modern tech-forward GEICO of homeowners insurance. They go beyond GEICO by being focused on delivering a perfect user experience, taking a scientific, data-driven approach to underwriting and marketing, and tapping new distribution channels across web, mobile, and social media. 

They are live in Florida and will soon be in Texas, which combined represent >25% of the homeowners insurance premiums in the US (they are large states with expensive homes prone to flooding). Many carriers are not active in these areas, so customer acquisition is less than half of what it costs elsewhere, even though premiums are more expensive. This should give them great unit economics from the start.

Market/problem

Homeowners insurance is a $100B+ / year market and has seen little of the innovation that has occurred in other areas of financial services...

 -95% of homeowners insurance is still sold through local agents, a channel that costs $1300 for each acquired customer.

 -It's mostly manually underwritten based on only 40-50 fields of data, unreliably provided by the customer and an insurance agent - e.g. nobody really knows what kind of shingles they have on their roof or how many feet of fencing they have. (When I got my homeowners insurance, I ended up googling the answer to many things I didn’t know - this can’t be good)

 -The actual insurance policies have changed little since the New York Fire Insurance contract of 1922 and cover things irrelevant to modern life (pewter ware?!?) and exclude things important to modern life (consulting business run out of the home, occasional AirBNB rentals)

Home insurance companies are out of sync with their customers who increasingly demand a digital experience.  The majority of homebuyers are now <40 years old, and insurance customers rank their satisfaction with their insurance companies’ online experience lower than government and <30% that of banks. 

Insurance companies have a hard time addressing the above issues because:

 -They are held captive by channel conflict - the agent owns the customer relationship and the agents leave (and take the customer with them) if they see the carrier invest in direct-to-consumer technology, even simple things like allowing the customer to self-service policy changes.

 -Core systems that run insurance carriers are very inflexible - many carriers are still run on mainframes and software written in the 1970s

Product/solution

Kin developed a homeowners insurance product that is easy to sign up for and is underwritten and priced automatically based on 1000s of variables rather than the 40-50 used by the traditional insurers. Signing up for Kin just requires an address. They get hundreds of other data points from public and private datasets, satellite imagery, etc.

Customers can sign up for insurance on their own terms without answering a lot of questions about their houses (or waiting for an insurance agent to finish their golf game lol), yet they can still get help from a CSR (they can just text Kin!) who is not commissioned to hard-sell them.

Early data is good; they are acquiring customers at < 30% the cost of legacy competitors. This is a huge deal because sales and distribution have been 20% of the insurance cost structure. You have to imagine that there are lots of minor improvements on cost that tech will improve over time. A simple one is assessing damage via drone / satellite imagery.

We believe that larger data sets, like Kin already uses for marketing will be helpful to improve underwriting profit and reduce defaults. The data helps them win on marketing and pricing. This is a tech company.

Long-term, there is the possibility of bundling risk-reducing products and services with their insurance policy for free or at a very discounted cost. For example, having smoke alarms professionally monitored reduces fire claims, having gutters professionally maintained reduces roof claims. They can use the actuarial savings to subsidize those products, deepening the relationship with the customer and aligning interests. Right now, customers underinvest in preventative technologies and services because they are insured against the risk.

Business model

At the moment, Kin is selling 100% of their risk to an $11B Bermuda based reinsurance company and renting an insurance license from a publicly-traded insurance carrier in Texas (a fronting carrier - State National). 

Their business model is commission-based. Rough math is 20% commission x $3000 of premium (Florida) / customer x 6.5 year customer life = $3,900 LTV.

Down the road, they can make a bigger cut by handling claims and by taking on some of the insurance risk rather than selling it all.

Traction

They’ve got a product live in Florida though it is very early; They have insurance partnerships in place, developed a product and have ~600 customers generating about $120k in ARR.

Why I'm still bullish

I got it mostly right in the deal memo. Some things didn't pan out as expected but others ended up working out much better than expected, like their margins - their take rate has increased from 20% to 29% over the past few years, and will continue to improve. We also thought retention would land in the 80% range (a bit better than incumbents); it instead is >90%.

The leadership

Sean and I have a long history. We worked together at BCG, had a payments company (FeeFighters) together and sold that business to Groupon. Sean has the right amount of scrappiness that you want in an entrepreneur; I’ve seen him be fearless and adaptable in our previous ventures together. He's been through a lot of adversity getting here with this company and will be a great public company CEO.

(me and Sean together at SXSW10 years ago; we both had more hair then but were just as nerdy as today)

A Distribution Model Designed for the Future

Legacy insurance carriers are stuck selling insurance through agents, even though the vast majority of customers today prefer shopping digitally. The biggest players barely have Web 1.0 distribution, remarkable for such a massive sector. Cutting out agents helps Kin keep premiums down while also giving them control over the entire customer experience.

Using the D2C model has also helped Kin put up some amazing numbers in terms of unit economics between its low customer acquisition costs (CAC) and the high lifetime value of their customers. As a result, Kin’s lifetime value is 7.9 times its CAC. Moreover, Kin boasts a 200 percent year-over-year growth rate and a 92 percent retention rate. 

Homeowners Product & TAM

We also feel that they picked the best product within the insurance space to go after.

Homeowners insurance is a $105 billion market, second only to auto insurance. Homeowners insurance is a mandatory product – virtually all homeowners with a mortgage are required to have it. Unlike renters insurance, where little changes from policy to policy, home insurance is a bespoke product. Also unlike renters insurance, Homeowners insurance is expensive - the average Kin premium is $1634, compared to $229 for Lemonade.

Because every house is unique and complex, so every policy is, too. Automating risk assessment and underwriting homes with more complete data is a large competitive moat.

The TAM on this business is massive - Kin is only active in 3 states today, but will be in 20+ in the next couple of years. They have barely scratched the surface of possibilities today.

Data Advantage / Tech

Everything that Kin does differently stems from the company’s reliance on data and technology, starting with risk selection and underwriting. They pull 10,000+ data points for each home to make sure the coverage is appropriately priced and accurately underwritten. That’s one reason Kin can provide insurance in places like Florida where climate change has made it almost impossible to get affordable coverage. 

Data and technology also drive Kin’s marketing. Because they have so much information on any given area, Kin’s marketing team can get their message out to a receptive consumer at the right place and time, when they are most likely to respond favorably. Unlike their competitors, consumers can be on the site and through the funnel, application to bind, in just a couple of minutes. 

We like the stock

It's been awesome to see the growth of this company over the past several years, but I truly believe that the most growth is yet to come, and I look forward to being a Kin shareholder and customer for many years to come.