Welcome back to our finance-meets-cinema series, where today’s feature Insurtech presentation stars Lemonade Insurance in its Q4 2023 financial thriller. With twists and turns that could rival any plot crafted by Alfred Hitchcock, let’s dive into the details that make this story not just compelling but also a lesson-packed narrative for regional carriers and tech enthusiasts alike. In fact, the AI Spin Doctors couldn’t salvage their stock price which dropped 28% the day after they announced their results. “Just go ahead now” and wonder what they are thinking since Root on the other hand continued to see their stock price appreciate another 11%.
Table of Contents
Act 1: A New Hope or A Phantom Insurtech Menace?
Lemonade, the protagonist in our tale, steps onto the scene with the swagger of Tony Stark, boasting advancements in AI and an innovative business model. Yet, beneath the surface, there’s a plot twist— Their Q4 2023 results reveal a 64% top-line growth, a feat akin to the meteoric rise seen in “Catch Me If You Can”, showcasing their ability to outpace and innovate within the competitive landscape of the small-time directors. But like most movies, there are times when the director struggles to keep the audience engaged. Lemonade grew it’s customer count at the lowest level in the last 5 years, only 12% compared to 27% the previous year (2022) and it’s average premium per customer grew only 7% to $369.
However, every hero’s journey has its trials. Despite the impressive growth, Lemonade’s ambitious use of synthetic agents reminds me of the classic 1973 film “The Sting” staring Robert Redford and Paul Newman. Two grifters team up to pull off the ultimate con. It seems to me that paying a <strong>16% premium</strong> on your acquisition costs, only to take advantage of an accounting trick around amortizing expenses, is just that – an elaborate scheme to make yourself seem profitable. It’s a move that could either be a stroke of genius or a “Titanic” miscalculation, depending on how you view the iceberg of Customer Acquisition Cost (CAC) exceeding Lifetime Value (LTV).
Act 2: The Empire Strikes Back with Numbers
Yet, in the face of adversity, there’s always a glimmer of hope. Lemonade’s narrative takes a turn with the approval of a 51% rate increase in California, a significant development given that approximately 50% of their car premium comes from the state. But hasn’t everyone taken rate. Allstate boasted about their rate increase approvals after threatening to stop writing in certain states.
This move, akin to the Rebel Alliance finding a way to defeat the Death Star in “Star Wars”, represents a strategic pivot that could lead to a healthier loss ratio and more robust growth in the coming years. However, it more likely suggests poor pricing discipline, which has finally caught up to them.
Act 3: Return of the Jedi or A Leap of Faith?
As we reach the climax, Lemonade stands at a crossroads. Will their investment in synthetic agents and tech innovation lead to a “Back to the Future” moment, catapulting them ahead of the competition? Or will it be a cautionary tale, echoing the Icarus-like fall in “Wall Street”? The balance between spending and earning is delicate, and the future hinges on their ability to ensure that LTV ultimately triumphs over CAC.
Looking ahead, Lemonade’s commitment to AI and automation plays a starring role in their journey towards profitability. The question becomes, how much more juice can they squeeze from the lemon? They are still losing millions of dollars per year, with a marketer’s promise that things will turn around.
Their loss ratio this year benefited from a much calmer Natural Catastrophe season, but so did all other carriers. We will see what 2024 brings and if they are able to sustain these loss ratios and continue their death march to profitability.
Epilogue: Lessons for the Underdogs
For regional carriers and others alike, Lemonade’s saga is rich with lessons. Embrace technology, but do so with a clear eye on the bottom line. Innovate like you’re living in “Back to the Future”, but remember, even Marty McFly had to deal with the consequences of his actions.
- Embrace AI, But Keep the Balance Sheet in Mind: While Lemonade’s adventure with AI and synthetic agents might sound like a scene straight out of “I, Robot,” diving into tech innovation without a clear path to profitability can turn into a “Mission Impossible.” We have helped others focus on where AI can lead to improved operations and employee, agent, and customer satisfaction while ensuring prudent spending. For example, Microsoft Co-Pilot costs $30 per user per month. If you have 250 employees, is this where you want to spend $90,000. Maybe, or maybe not.
- CAC vs. LTV – The Eternal Saga: If the narrative of your acquisition costs starts resembling “The NeverEnding Story,” it’s time to pause and rewrite the script. Ensure your LTV consistently outpaces CAC, or you risk starring in your own version of “The Money Pit.”
- Diversify with Caution: As Lemonade expands into new territories and products, think of it as their “Star Trek” enterprise. For regional carriers, it’s vital to explore new frontiers but remember the wisdom of “Jurassic Park”: just because you can, doesn’t mean you should, especially without articulating your unique value proposition vs the incumbents and a clear profitability in sight.
- The Thrill of Innovation with a Dash of Prudence: Lemonade’s journey, marked by highs and lows, serves as a thrilling narrative for regional carriers. By leveraging technology and innovative practices judiciously, you can script a story of sustainable growth and profitability, avoiding the pitfalls of a “Fast and Furious” expansion that burns cash faster than rubber on the road.
In conclusion, while the allure of AI and tech-driven strategies is undeniable, regional carriers must navigate this landscape with a strategic blend of innovation, cost management, and sustainable growth tactics to ensure their story has a sequel.
So, as the credits roll on Lemonade’s Q4 2023 tale, let’s take these lessons to heart. The path to success is fraught with challenges, but with innovation, resilience, and strategic foresight, regional carriers can write their own blockbuster success story.
Remember, in the world of insurance, as in cinema, the next great story could be just around the corner. Stay tuned, stay innovative, and may your journey be a box office hit.
At Insurtech Advisors, we recognize that each business is unique, and we tailor our approach to meet your specific needs. Our goal is to help you innovate quickly, saving you time and money by focusing your team on the right areas for your organization. By working with us, you can leverage our extensive knowledge of the Insurtech landscape to adopt best practices, implement cutting-edge technologies, and develop customer and broker-centric solutions that drive growth and profitability. Together, we can create a brighter future for your business, delivering unparalleled value to your customers, agents, employees, and stakeholders.
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.