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At the close of trading last night, two of the early darlings of the VC and investment community, Root and Lemonade, announced their results for the fourth quarter of 2021 and the full year 2021. After-hours trading punished Lemonade with a 20.6% fall to $18.40, while Root reports a small drop of 4.1% gain to $1.39. To put this into perspective, this reflects about a 95% fall in the price of Lemonade and Root from their all-time highs.

What’s driving this?  Simple.  Both companies spend more than they take in. In the case of Lemonade, they lose just under two dollars for every dollar of sales. Root loses proportionately less. For every dollar of sales, they lose about 1.5 dollars.

More worryingly, this relationship between losing more than you make escalates and expands over time.

Lemonade 2021 Results

Root 2021 Results

Both companies are burning through their cash reserves. Root used up about $400M in cash last year, leaving $700M, while Lemonade appears to have used up $300M of their cash reserves, leaving them with only $270M. As I have previously disclosed, Lemonade still has about a year’s cushion, while Root may still have 3.  Not much, given their current burn rates.

Table of Contents

Growing Up

Reading Lemonade’s shareholder letter was like watching a teenage child begin to realize that his parents are not so embarrassing, but actually pretty cool. Dan Schriber began by highlighting how Lemonade passed from puberty to adulthood by comparing how “Insurtechs” are generally monoline, while Lemonade now sells 5 different product lines like the current “parents.” Yet, he still behaves like a pubescent kid: I can do anything better than my parents, especially because Lemonade is ‘technically’ more sophisticated than the incumbent carriers.

Those of us who work for, or with, the established insurance carriers know that this is nothing more than marketing hype. For example, Progressive has a lifetime of experience and sophistication in using telematics data and devices than Lemonade will probably ever have.  And, they sell several insurance products at a profit.

Barnstable Mutual Insurance Company in Yarmouth MA has been around since 1883. They are a monoline property carrier who writes about $20 million a year with a focus on Cat-exposed Cape Cod. They do this profitably with an average combined ratio in recent years of about 90. Moreover, their surplus is about five times their annual premium. Now, it’s more like reminding their cocky child that they might know a few things more than the kid does themselves.

Insurance 101 vs Insurtechs

As many of you know, the insurtech ecosystem can be divided into two broad categories: Insurtechs and Carriers, both of which have historically struggled with profitability. Insurtechs, many of which have closed their doors during the transition from childhood to puberty, merged with other Insurtechs, or even been acquired by established companies. A case in point was the announcement yesterday that one of the earliest Insurtechs who raised over $100m, Trov, had their technology and IP acquired by Travelers.

Why have these startups generally struggled or failed? The answer is simple: They thought cool technology could trump the basics of insurance. Those who succeeded were the ones who first understood the insurance business and found a way to improve certain pain points.

Whether you are a Carrier or an Insurtech, strong rigor and disciplined management are the basics of the business. If you have both, you can offer Insurance or a service that is profitable and sustainable.

Finally, I remember one of my professors of statistics, Ernest Enns, hammering home. Every problem can be broken down into first principles. I look forward to continuing to work with Carriers, Insurtechs, and investors who embody this approach. Insurance has survived for centuries and has been largely successful because they mastered the basics first.

Insurtech Advisors helps regional carriers and agencies to work with the best Insurtechs that will enable you to succeed and continue to meet the needs of your members, employees, and independent agents. We know your business and the landscape of Insurtech. We save you countless hours of wasted time and false starts. Furthermore, we work closely with your team to identify opportunities and goals, then introduce you personally and to the best Insurtechs pilot.

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