Emerging insurance companies face a credibility crisis

“Forget everything you know about insurance,” was the passionate slogan on a banner adorning the New York Stock Exchange at the July 2020 listing of Lemonade. The message embodied the confidence that drove the new US insurer and its peers, including Hypo and Root, to the stock market with much higher valuations than more established companies.
Companies that claim to be innovators had the idea of ​​misleading investors. Our technology can track risks in real time, reduce the number of insurance claims by anticipating incidents such as leaks, and speed up transaction processing. The result, she says, is a company that outperforms older competitors.
But two years after its launch on Wall Street, Lemonade, along with Hypo and Root, is one of the biggest victims of the technology stock’s brutal route, as high interest rates push investors to dump high-growth companies in favor of companies already on the market Generate reliable profits.
Alex Tim, CEO of Root, a car insurer that had early support from technology investment heavyweight Tiger Global, said the broader fintech sector “has been hit particularly hard, and I think the fintech sector has been hit hard by heavy sales Insurance technology has been hit the hardest.
Shares of Lemonade, which provides insurance for tenants and other personal coverage, have tumbled nearly 90 percent since their peak last year and are now a quarter below their initial public offering price. Root, which was listed shortly after Lemonade,’s share has fallen by more than 90 percent, while Hypo Home Insurance has fallen by more than 85 percent since its listing in early 2021.
With the technological boom threatening to unravel even further, the companies, better known as insurance technology companies, now have to convince a much more skeptical market that their business models are worth keeping up with.
Ruth Fox Blader, a partner at London’s fintech investment firm Anthems, said early valuations by insurance technology companies were prompted by a “hype cycle” that did not stand up to scrutiny.
At its peak, lemonade was valued nearly 100 times the sales, according to Bloomberg data. In contrast, large, well-established U.S. insurers such as Traveler and Chubb traded for twice as many sales.
“Many were well-meaning, and the growth and size of the available market seemed profitable in the eyes of all, but the fundamentals needed to be examined more deeply,” Foxblader said.
Despite his past few difficult months as a public company, it appears that Lemonade’s CEO and co-founder, Daniel Schreiber, is now showing the same sobriety as on a lively first day of trading, when the group’s shares closed down nearly 140 percent has. on.
In an interview with the Financial Times, he referred to a letter Lemonade published prior to its initial public offering in which the company’s founders stated: “We are not interested in the price of our stock on a daily, weekly or weekly basis. on a monthly basis. “
“It’s something we said to the increase, I say to the decrease,” Schreiber continued. “This is one of the last laugh dynamics,” he said, pointing out that it is necessary to take a long-term view.
In the run-up to its initial public offering, Lemonade, of which SoftBank is an early supporter, has announced its AI systems that allow claims payments to be processed at a tremendous rate.
But with growing fears of a downturn in the U.S. economy, it is the insurance technology companies ‘primary guarantee – the price they are willing to pay to insure customers’ risk – rather than their technology expertise, which analysts and investors focus on.
Loss ratios, which measure outstanding claims as a percentage of premiums sold, remained sharply high, leading to a decline in profit. According to Capital IQ, Root, Lemonade and Hypo suffered $ 1.1 billion in net losses between them in 2021, compared to $ 474 million two years ago.
Tim insists on patience and notes that loss rates will be higher with a whole new customer base as insurers work to determine the right price for risk insurance – while rising claim price inflation has made the task more difficult. All insurance technology companies say their loss rates will improve as they deepen their understanding of customers.
Lemonade said getting involved in home and pet insurance “shows higher loss rates than the insurance history of more stable tenants.”
Schreiber argues that the group’s decision to sell directly to consumers rather than use agents meant that costs were initially higher. However, he said the expected improvement in the loss ratio and return on this initial investment would mean “the same algorithmic reforms”.
This is an optimism shared by Julian Teck, CEO of German private insurance technology firm WeFox, who likened the challenge facing listed insurers to a “valley of death”.
After the initial upheaval, he said, companies suffer because the value of better technology, lower costs and more sophisticated insurance is only clear once the insurance companies have a strong record.
Smaller insurers concentrated in one region are also more likely to have some events. Last year, Lemonade and Hippo were hit by their exposure to Texas as Winter Storm Urey increased payments.
“The results can only be really good, influenced by the technology that is created, if the performance record is really big, and it will take some time,” Teck said. Wevox operates a platform that connects insurance providers, brokers and clients.
For some, time is a luxury that listed insurers do not have because losses wipe out the huge cash raised in their initial public offerings.
“They’re all going to need external capital in the next 24 months, and I do not know how they’ll get it,” said Ryan Tunis, an analyst at research firm Autonomous.
According to Capital IQ, Lemonade had net cash of $ 211 million at the end of March after amortizing $ 40 million in the first quarter. Schreiber expects the group’s losses to peak this year.
Root has $ 644 million in net cash and amortized $ 51 million between January and March. Tim is confident that the company is “over the top” and feels “in better shape without additional rounds of capital raising that we can implement in line with the strategic priorities we have set for our company”.
Hypo, meanwhile, had $ 320 million in net cash and amortized $ 59 million. Rick McKathron, the group’s president and CEO, said it has “a long way to go to get the maturity to do all the things we’re already started to do”.
Lemonade and Hypo reported a liquidity figure that combined total cash and investments. By that measure, Lemonade had $ 1 billion and Hypo $ 772 million at the end of March. Root says he had “free capital” of $ 736 million when the quarter ended.
Even if they outline a better future, insurance technology companies can not stand still. Root, whose warranty uses real-time vehicle data to provide a constantly updated picture of a customer’s risk, has embarked on a more extreme path to expanding warranty margins.
It laid off a fifth of its workforce in January, cutting back on marketing spending and raising policy prices.
Hypo, headquartered in Silicon Valley, has rapidly diversified from its presence outside the heart of California and Texas as it tightens its warranty guidelines. Lemonade also focuses on states that have proven to be the most profitable.
With Tim acknowledging that when a company is public, it “makes a lot of noise” because investors are pessimistic or optimistic about the company’s future, the three insurance technology firms have attracted more industry veterans.
Hippo persuaded Grace Hanson of Hiscox, a London-listed insurer, to be his claims chief last year. And this month, it announced that McKathron, its president since 2017, has also been named CEO, underscoring his “extensive experience in insurance.”
Lemonade has appointed Sean Burgess of USA Youth Insurance Group in San Antonio as its Claims Division Head. Root appointed Rob Pittman as chief financial officer in March, whose CV includes terms of office with well-known insurers such as The Hartford.
There are signs of improvement. In its results for the first quarter of May, Hypo reported its best overall loss ratio since the listing, at 76 percent, which shot its shares up. It expects this measure to be at less than 100 percent for the full year.
Skeptics like Tunis from research firm Autonomous recommend that struggling insurers start looking for buyers among the big industry giants. “You want your company to be a buying company,” he says.
But McKathron said last year’s challenges were “just a matter of growth” and drew comparisons to basketball legend Michael Jordan.
“When Michael Jordan was five, he was promising, but he was five, he had to grow up.”

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