As you probably have heard, the Insurtech Lemonade announced on Monday its intent to go public with a $100M offering. The current VC funding values Lemonade at ~$2B. There is not enough information in the S-1 to estimate market capitalization yet. Like another New York VC darling that flamed out, they were heavily funded by Softbank.
Lemonade’s announcement comes on the heels of Everquote and Selectquote’s successful IPOs.
Selectquote launched at the end of May at $20 and is trading around $27 now, reflecting a market cap of about $4.6B. In 2019, they were profitable and made $72.6M net income. Everquote launched in June 2018 at $18 and is now trading above $57, reflecting a market cap of $1.6B.
These launches come at a time where VC interest in Insurtechs in Q1 2020 has slowed down more than 50% to $750M from a year earlier at $1.7B. In addition, some well-funded Insurtechs have gone down the road of purchasing regulated Insurance carriers (Hippo buying Spinnaker Insurance who incidentally cede nearly all their premiums to reinsurers), Pie Insurance (workers comp) raising $127M to allow them to build or buy an insurance carrier, and Next Insurance forming their own carrier last year.
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Is Lemonade sweet or tart?
Looking at Lemonade’s S1 filing there is enough to make everyone happy. The people who like sweet lemonade will be looking at the fact that premiums are over $115M/year and the Gross Loss Ratio has fallen to below 100% (79%). This premium reflects about 3% of the rental insurance market. Which should give them plenty of runway.
If you prefer tart lemonade, then there are lots of data points to support your views as well. Lemonade has never been profitable. Net losses have ballooned to $108.5M in 2019 while revenue was only $63.8M. When we compare Q1 2019 to Q1 2020, we see losses accelerating 70% from $11M on 1Q2019 to $36.5M in 1Q2020.
To generate the $115M in premium, Lemonade spent $76M in advertising (85% of their sales and marketing spend). That translates to $1.51 in premium for each dollar spent in advertising. That is not sustainable for most carriers. In addition, it will take significant resources to get to 10% market penetration, which will top out their revenue at about $350M.
Finally, their 1 and 2-year retention rates are hovering around 75%. If you add in company-initiated cancellations, that figure drops to an average retention rate of 67%. Vastly different from industry leading results.
Technology to the rescue
We also learn more about their technology stack, which they spend $9.8M annually on. One part they are touting is their acquisition bot AI-Maya:
“AI Maya typically asks only 13 questions before giving a bindable quote (compared to 20 – 50 for a traditional carrier) for home insurance, but the interaction generates close to 1,700 data points”.
I wonder what the usable added points of information might be. IP address? Time? Date? OS? Browser? The time you spend on one question? How many times you come back before you bind? etc.
Finally, they are targeting technology investors who believe legacy insurance is a cash cow with most carriers behaving like they are leisurely grazing out on the pasture. Take this quote about delightful cocktails:
“Lemonade’s cocktail of delightful experience, aligned values, and great prices enjoys broad appeal, while over indexing on younger and first-time buyers of insurance. As these customers progress through predictable lifecycle events, their insurance needs normally grow to encompass more and higher-value products: renters regularly acquire more property and frequently upgrade to successively larger homes; home buying often coincides with a growing household and a corresponding need for life or pet insurance, and so forth. These progressions can trigger orders-of-magnitude jumps in insurance premiums.”
What does this mean for you?
At minimum, I suspect your executives and Boards will be asking questions like:
- What does this mean? If the IPO is successful, it means that VCs will pour far more money into carrier competitors who are going direct. More of your products will targeted. We are already seeing this in small commercial and workers compensation.
- What does this mean for us? Lemonade will not be a threat for many more years to come unless they also crack the nut into selling homeowners and auto. And their technology and reinsurance contracts hold up during a major claim event like a hurricane.
- How can we compete with Lemonade? You need to improve your renter’s product and develop an approach where independent agents can profitably sell a renter’s policy, or experiment with selling the product direct or through partnerships. Without this, Lemonade will continue to dominate new insurance buyers and that will give them a potential advantage as renters transition to more insurance products.
You should also explore leveraging technological advances coming out of the Insurtech space such as conversational AI, prefill, fraud detection, and others. These advances will help you maximize your value to agents, policy holders, and staff.
Feel free to reach out if you want to discuss the pending Lemonade IPO in more depth, or if there is anything else you are wondering about.
Kaenan
About Insurtech Advisors
Insurtech Advisors is dedicated to helping regional insurance carriers and agencies identify and partner with Insurtechs enabling you to thrive and continue to meet the needs of your members and independent agents. We work closely with your team to identify opportunities and aspirations and then personally curate and introduce you to the best Insurtechs to pilot.
Kaenan is a professional in the areas of block chain, telematics, wearables, analytics, artificial intelligence (AI) and Insurtech. He has played a key role in innovating many start-ups and established carriers. His advice has been widely appreciated in the financial community, which resulted in multiple quotes and publications in various media.
Most recently he was Practice Lead for Innovation, Fintech, and Strategic Insights at EY. Throughout his career he has held leading roles within Marketing Strategy and Decision Management with top Insurance, Banking and Finance companies, including USAA, Citibank and Sallie Mae.