Lemonade’s IPO – what does it mean for the insurance industry?

US-based full-stack insurtech Lemonade doubled its share value on its very first day of trading on 2 July, soaring from $29 (£22.37) to $69.41 (£53.53).

This came after the insurtech filed for an Initial Public Offering (IPO) back in June in order to offer shares to the public.

Lemonade was valued at $3bn (£2.3bn) in July, whereas prior to its IPO the firm was only valued at $1.6bn (£1.3bn).

Meanwhile, in mid-July Lemonade announced that it was officially entering the pet health insurance market. This sector is worth a couple billion of dollars in the US according to Daniel Schreiber, the insurtech’s chief executive and co-founder, and the firm believes that this market could grow further.

Although Lemonade has been likened to the “new Marmite”, others see its move as the long-awaited disruption of incumbent insurers.

But what does this all mean for other insurtechs and for the wider insurance industry?

Different, from day one

An IPO is a type of public offering; through this process, a private company can transform into a public company. IPOs are typically used by companies to raise money for expansion so that they can become a publicly traded enterprise.

Chris Sandilands, partner at Oxbow Partners, said that this is a “great success” for Lemonade’s founders, Schreiber and Shai Wininger, as well as the insurtech’s staff.

“From the [beginning], this startup was different: raising a big seed round from Sequoia, going ‘full-stack’ from day one, and hiring industry stalwarts from AIG and Liberty right away.

“But, as an insurance industry professional, I am not sure I share the unconstrained excitement. In my view, the Lemonade IPO is a success for venture capitalism and entrepreneurship, but less obviously for insurance or insurance customers.”

’Debate and division’

Matt Connolly, founder and chief executive of Sønr, and founder and chief executive of Tallt Ventures, told Insurance Times: “There’s been so much debate and division surrounding Lemonade’s IPO.”

Having spoken with Schreiber just before the insurtech filed its S-1 form, a registration form for US firms that want to be listed on a national exchange, Connolly said that Lemonade’s chief executive believed the early IPO could “provide the opportunity to return capital early”.

This, Connolly added, was for the purpose of increasing any investors’ ability to “put back in” further down the road.

But the capital is also available to deploy into the next generation of “Lemonades.”

Last week, insurtech competitor Hippo announced it had raised series E funding worth $150m (£116m) at a $1.5bn (£1.2bn) post-money valuation, bringing the homeowner insurance firm valuation to $1.5bn. Its chief executive Assaf Wand said that the insurtech is preparing for a potential IPO and in 2021 it will be ready to go public, according to Bloomberg.

Exceptional

Meanwhile, Connolly added: “Seeing an idea become a $4bn reality [based on current share price] in just five years is exceptional.

“Lemonade’s IPO will attract newcomers to the industry - new talent, new entrepreneurs and new capital. And this will further accelerate the pace of change. It will also awake insurtechs and incumbents to the art of what is possible, in turn, driving more innovation and collaboration across the sector.

“It’d be a struggle to find an entrepreneur who wouldn’t want this for their company and I haven’t come across a single insurtech that hasn’t been buoyed by the IPO.”

Significant impact?

But it hasn’t been all smooth sailing for the insurtech. Back in November 2019, Lemonade reportedly postponed its IPO due to market concerns from one of its investors.

In September 2016, the same year that Lemonade launched, Oxbow Partners posed three questions about the insurtech’s model, challenging the assertion that “traditional insurance companies make money by keeping the money they don’t pay out in claims”.

Sandilands believes that Lemonade has not answered these questions and that its model has become “increasingly standard overtime”.

“The peer-to-peer description was quietly dropped in late 2016 and ‘give back’ appears to have become less central to its proposition over time,” Sandilands continued.

He explained that although many of Lemonade’s reviews suggest its customer experience is good, “we would expect no less from a business that has been able to develop without legacy technology or operational constraints.

“But I just don’t see that Lemonade has had a significant impact on the industry, let alone transformed it in any meaningful way.”

Sandilands additionally points to the insurtech’s scale, citing that at $116m (£89m) gross written premium (GWP), it has “hardly blown the top-line lights out” despite the nearly $500m (£385m) of funding.

“It cannot be said that Lemonade’s arrival has shocked the industry into any particular ‘emergency response’ like Amazon has done with e-commerce, and Lemonade itself, with 650,000 customers, is unknown to most of the market. Maybe it is too early to tell – Amazon was founded 26 years ago after all,” Sandilands said.

The insurtech also boasts a three-second “world record” claims payout, but Sandilands said: “Increasingly it pays claims itself rather than passing them to reinsurers. But then ‘traditional’ insurers pay claims too, albeit with some high-profile exceptions.”

He questioned whether Lemonade would be paying out more readily on business interruption (BI) claims for example, that could cripple its business if it wrote SME insurance.

Tough journey ahead

Whether Lemonade can hold its value awaits to be seen, Connolly said.

“There’s been great analysis on their numbers, which paints a tough journey ahead. Equally they are now able to access sufficient capital to buy their way to scale and profitability,” Connolly continued.

“I’m keen to see the causal effect of the IPO on both the insurtech community and the incumbent insurers. For the time being, this is undoubtedly a success story - no matter which side of the debate you are sitting.

“Let’s not forget the insurance innovation journey is only 1% finished. If that,” he added.

Matthew Grant, partner at InsTech London, told Insurance Times: “It will be two or three years before anyone can really tell whether it is making money or not because it is built on a growth story.

”They are in a niche area and are talking about moving into a very competitive general area – property insurance. It depends how you look at it; for the marketplace it is a good sign but there’s a high expectation built into that price.”

Sandilands added: “As entrepreneurs, Schreiber and Wininger have done an incredible job. But as industry transformers, they have not even scratched the surface.”

He reiterated the conclusion of Oxbow Partners 2016 blog: “the industry should look at the components of the Lemonade proposition for inspiration rather than just regurgitate the company’s (outstanding) marketing”.

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Read more…’Future of insurance as insurtech’ more crucial than ever says Insurtech Board chairman 

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