Start-up insurance companies are facing a crisis of confidence in a brutal technological defeat

“Forget everything you know about insurance,” was the brazen slogan of a banner adorning the New York Stock Exchange when Lemonade went public in July 2020. The message captured the confidence that propelled the U.S. insurance company and its counterparts, including Hippo and Root, to the stock market in valuations far above those of more established counterparts.

The self-proclaimed destroyers had fascinating information for investors: our technology can track risks in real time; reducing the number of insurance claims by anticipating incidents such as leaks; and speeding up document processing. The result, they said, is a business that will eventually outperform older competitors.

But two years after its Wall Street debut, Lemonade, along with Hippo and Root, are among the biggest victims of the brutal tech stock crash, as rising interest rates force investors to abandon high-growth companies in favor of those. which generate reliable profits.

As part of the sell-off, the wider fintech sector “suffered a particularly heavy blow, and then inside [that]I think insurtech has been hit hardest, ”said Alex Tim, CEO of Root, a car insurance specialist who received early support from heavy technology investor Tiger Global.

Shares of Lemonade, which provide tenant insurance and other personal coverage, fell nearly 90 percent from its peak last year and are now more than a quarter below the IPO price. Root, which went public shortly after Lemonade, saw its shares fall more than 90 percent, while insurance company Hippo was down more than 85 percent since its listing in early 2021.

As technology rallies threaten to disintegrate further, companies known as insurance technologies now have to convince a much more skeptical market that their business models are worth sticking to.

Ruth Fox Blader, a partner at London-based fintech investor Anthemis, said the insurance companies’ early assessments were driven by a “hip cycle” that failed.

At its peak, Lemonade was valued at about 100 times sales, according to Bloomberg. In contrast, well-established and large US insurers such as Travelers and Chubb traded between once and twice.

“There was very good will, and the growth and size of the target market had dollar signs in everyone’s eyes, but the basics. . . it really needed to be studied more deeply, ”Blader said.

Despite penalties over the past few months as a public company, Lemonade CEO and co-founder Daniel Schreiber seems to be showing the same calm now as he showed on the hectic first day of trading, when the group’s shares closed at nearly 140 percent.

In an interview with FT, he cited a letter from Lemonade published before its IPO, in which the founders of the New York-based company stressed that “they are not interested in the price of our shares every day, weekly or monthly basis.”

“This is really something we said on the way up, I say it on the way down,” Schreiber insisted. “This is one of those dynamics of ‘the one who laughs last,'” he said, given the need for a long-term perspective.

On the eve of its IPO, Lemonade, which sees SoftBank as an early supporter, blew its trumpets with artificial intelligence-powered systems that allow lightning-fast claims payments.

But as fears of a downturn in the US economy grow, analysts and investors are focusing on the underwriting of insurance technology – the price at which they are willing to take on customers’ risks – rather than their technological understanding.

Loss ratios, which measure claims as a proportion of premiums sold, remain persistently high, undermining profits. According to Capital IQ, Root, Lemonade and Hippo reported $ 1.1 billion in net losses to each other in 2021, compared to a combined $ 474 million two years earlier.

Tim calls for patience. Loss rates, he said, will be higher with a brand new customer base as insurers work out the right price to take the risk on – while rising inflation in the cost of damages makes work even harder. All insurance companies say loss ratios will improve as their understanding of customers deepens.

Lemonade said the raids on pet and home insurance “demonstrate higher loss ratios than our more mature and stable tenant book.”

Schreiber argues that the group’s decision to sell directly to consumers instead of using agents means that costs are higher in the beginning. However, the expected improvements in the loss ratio and return on this initial investment mean “arithmetic fixes itself,” he said.

This is the optimism shared by Julian Teike, CEO of the private German insurance company Wefox, who likens the challenge faced by the listed insurance companies at an early stage to the “valley of death”.

After the initial noise, he said, companies are struggling as the value of better technology, lower costs and more sophisticated insurance only crystallizes once insurers have a significant ledger.

Smaller insurers concentrated in one area are also more vulnerable to one-off events. Last year, Lemonade and Hippo were fined for their exposure in Texas as the winter storm Uri led to a payoff.

“The results can be really good and influenced by the technology that is built if the book is really big and it will take time,” Teike said. Wefox manages a platform model that connects insurance providers, brokers and customers.

Line chart of change in share price over the past year (%), showing tenants, car and home insurers all suffering

For some, time is a luxury that the listed insurance companies do not have, as losses eat up the piles of money raised in their IPOs.

“They will all need outside capital over the next 24 months, and I don’t know how they get it,” said Ryan Tunis, an analyst at research firm Autonomous.

According to Capital IQ, Lemonade had $ 211 million in net cash at the end of March after spending $ 40 million in the first quarter. Schriber expects the group’s losses to peak this year.

Root has $ 644 million in net cash, burning $ 51 million between January and March. Tim is convinced that the business is “very past the peak” and feels “very good without additional capital raising, which we can achieve according to the strategic priorities we have set for our business.”

Hippo, meanwhile, had $ 320 million in net cash and spent $ 59 million. Rick McCatron, president and CEO of the group, said it had “enough time to take off and land in order to reach maturity, to implement all the things we are already beginning to implement.”

Lemonade and Hippo report a figure for their liquidity that combines gross money and investment. Under that measure, Lemonade had $ 1 billion and Hippo $ 772 million at the end of March. Root says he had $ 736 million in unencumbered capital when the quarter ended.

Net income column chart ($ million) showing net losses increased for newly registered insurance companies

Even when they have a brighter future, insurance technology cannot afford to stand still. Root, whose real-time takeover uses in-vehicle data to provide a constantly updated picture of customer risk, has taken the most radical course to increase takeover margins.

It laid off one-fifth of its workforce in January, cut its marketing spending and raised prices for its policies.

Hippo, which is based in Silicon Valley, is rapidly diversifying beyond its central areas of California and Texas, while tightening its funding guidelines. Lemonade also focuses on those countries that have proven to be the most profitable.

After Tim admits that publicity “generates a lot of noise” as investors take bearish or bullish positions for the company’s future, the trio of insurance companies have attracted more experienced industry veterans.

Last year, Hippo selected Grace Hanson of Hiscox, a London-based insurer, to be its chief claims officer. This month, he announced that McCatron, its president since 2017, has also been appointed chief executive, highlighting his “extensive insurance experience”.

Lemonade has hired Sean Burgess of the San Antonio-based USAA Insurance Group as its chief claims officer. In March, Ruth appointed Chief Financial Officer Rob Bateman, whose CV includes work for well-known insurance companies such as The Hartford.

There are signs of improvement. In its first quarter results in May, Hippo reported its best gross loss ratio on the market at 76%, which sharply increased its shares. This measure is expected to fall below 100 percent for the whole year.

Skeptics like Tunisia’s Autonomous are urging troubled insurance technology to start looking for buyers among industry giants. “You want to be the one to be bought,” he says.

But McCatron said last year’s challenges were “just a matter of growing up”, comparing him to basketball legend Michael Jordan.

“When Michael Jordan was 5, [he] he showed promise, but he was 5, he had to mature. “

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