My daughter, Hadar, the overachiever, managed to cram a 4-year college degree into just one year. It’s like she had a time-turner from Harry Potter. On top of that, she became an EMT, CPR Instructor, and continued lifeguarding. Why? To fund her love affair with fast food. (Honestly, who can resist the allure of crispy fries?)
Recently, she ventured into the world of credit with a shiny Discover card. But lo and behold, two months in, she’s already giving me those puppy eyes, asking for a financial lifeline. She’s sharp enough to dodge those pesky interest fees but seems to have a blind spot for 100 pair of glasses. We sat down for a heart-to-heart about not spending tomorrow’s money today. She nodded in understanding. If only the insurtechs had someone to give them such sage advice.
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Insurtechs and the Whiskey River
These insurtech companies remind me of a memorable trip to Austin, TX where I had the privilege to see Kris Kristoferson join Willie Nelson on stage in a small saloon and just jam together for the night. These insurtechs are like Willie, crooning away, hoping the “Whiskey River” of venture capital keeps flowing. But, just like my attempts to sing karaoke, it went south and ran dry.
Now, who do we point fingers at for the insurtech missteps? The Boards? The VCs? Or perhaps it’s the allure of those swanky Silicon Valley espresso machines and bean bags?
A friend of mine called me after the Hippo results and asked me how long should a board wait before replacing the executive team? I quipped, “When they’ve had enough time to order, use, and break a company-branded Segway.” But on a serious note, 12 to 18 months, after more active oversight.
Why have the Boards not moved. Most boards won’t move unless there is a major violation of conduct, rather than poor performance. Moreover, these boards have been able to count on the VC community for continued support. VCs have poured billions of dollars into these companies, rewarding them for growth even when they were not profitable.
Movies and Real Life: A Tale of Two Cities
Remember “The Wolf of Wall Street”? The VCs are like Jordan Belfort, living it up without a care for tomorrow. And “The Big Short”? The boards of Lemonade, Root, and Hippo should be having some serious déjà vu. They should be asking themselves the same question that Michael Burry asked his board. Are they doing enough to address the risks? Are they being patient enough, or are they just delaying the inevitable? Are they just waiting for their own bubble to burst?
The Insurtechs’ Financial Rollercoaster (Now with More Loops!)
Lemonade, Root, and Hippo’s financial reports are starting to resemble my attempts at DIY home repairs: ambitious beginnings, followed by a lot of “Oops!”
Lemonade spilled red ink to the tune of $67 million. Hippo, not to be outdone, splashed $105 million. Root, the “diet version,” shed only $38 million. It’s like they’re in a race, but the finish line is a cliff. Their stock prices continued to plummet.
- Lemonade’s 12-month trailing Net Income stabilized at a loss of $295M. They lose 13% of their premium per year due to attrition. This requires them to acquire even more customers than an incumbent carrier who would have retention rates far above 90%.
- Hippo lost 55% more than the previous quarter. This increased their 12-month losses to $361M, the highest since the end of 2021. One bright spot for them was their fronting carrier, Spinnaker Insurance, which contributed $5M to their quarterly net income.
- Root perhaps provided the brightest spot among these three. Quarter over quarter they have been bringing down their losses, with their 12 month losses down to $201M, down 21% from the previous quarter.
What in the world is a “Synthetic Engine”
And then there’s Lemonade’s “Synthetic Agents.” Sounds like something out of a sci-fi movie, right? In reality, it’s just a fancy term for “let’s juggle these numbers and hope no one notices.” It’s akin to me renaming my weekly pizza indulgence a “gourmet carb-loading session.” And frankly, NY has some of the best Pizza! (Although if you are following our politicians, they want to eliminate all the wood burning ovens).
Simply put, this is nothing more than a way for them to defer direct customer acquisition costs over 3 years. And this is critical for them. Between Q1 and Q2 of this year, they grew net new customers by 50k. Given they spent $24.8M on marketing, that amounts to $492.10 per net new customer.
They are brilliant with numbers. Next quarter, their marketing cost could drop by ⅔ and they will finally have reported CAC which is below their average premium per customer of $360.
So what does this really mean? It’s nothing more than an accounting trick which frees up capital. However, while it looks like their CAC dropped, in fact all that dropped is the way they accrue expenses. Not to mention, the real CAC goes up 16%, which is the fee they have to pay General Catalyst to front the money.
Peering into the Insurtech Crystal Ball
The future of insurtech is as clear as mud. Some prophets see a bubble on the brink of bursting. Others envision it as the golden goose of the insurance world. But if these fledgling companies want to soar, they’ll need more than just accounting wizardry.
The Grand Finale
In “The Shawshank Redemption,” Andy Dufresne is the embodiment of hope and resilience. If insurtechs want to make it to the other side, they’ll need a dash of that Andy magic. And perhaps a rock hammer. Or at the very least, a solid business plan.
Please reach out if you want to discuss these results or have questions on how you can better position yourself or your company for success.
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.