Insurtech company Lemonade yesterday filed for an IPO on the NYSE. Although no financial details about the offering were disclosed in the prospectus, reports suggest Lemonade will raise at least $100 million and perhaps even as much as $300 million at a company valuation of $2 billion.
Such a valuation puts it alongside well-establish and profitable traditional insurance companies. Israel's two largest insurance companies - Harel Insurance Investments and Financial Services Ltd. (TASE: HARL) and The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5) have a combined market cap of about $2.4 billion and together and had combined premiums of $7.6 billion in 2019.
Compare these figures with Lemonade, which in 2019 had revenue of $67.3 million, up 200% from 2018, and had a net loss of $108 million. Revenue totaled $26.2 million in the first quarter of 2020, compared with $11 million in the first quarter of 2019. At the end of the first quarter of 2020, the company had an accumulated deficit of $234.8 million, up from $198.3 million at the end of 2019.
Lemonade was founded in 2015 in Israel by entrepreneurs Shai Wininger and Daniel Schreiber and has been licensed to operate in the US insurance market since 2016. The company has raised $480 million and its biggest investor, Japan's Softbank, knows a thing or two about being burned by over-valued loss-making startups that are going to change the world, after last year's planned IPO of shared workplace giant WeWork broke down.
So what makes Lemonade so valuable? Unlike traditional insurance companies, Lemonade has a dream, which is certainly achievable if the company can succeed in persuading customers to buy insurance from it over the Internet. This is certainly possible in a world where the Internet is changing global agendas and creating new interfaces with customers, and not necessarily with the advantage of size.
Lemonade has set out to demonstrate the far greater efficiency available to a company based more significantly on technology compared with the traditional, ordinary insurance companies. To achieve this goal, Lemonade is relying on simple insurance products for homes and apartments and not the more complex but more profitable products.
Like ill-fated WeWork before it, Lemonade has successfully branded itself as a startup so that it is looked upon differently from traditional insurance companies and has a much higher relative company valuation. But at the end of the day, Lemonade is an insurance company that must sell insurance and frequently pay out on claims. It must take into account the behavior of customers, and rival insurance companies, and the cost of clearing claims, and reinsurance, just like any other insurance company.
But at the same time, it brings to the table experience in changing the interface with the end-customer by harnessing big data and AI to its pricing while streamlining the system.
Lemonade has much in common with WeWork in that it has entered a traditional and saturated field and is pitted against experienced and well-established rivals with known market prices. With WeWork, it didn't work but Lemonade has the backing of genuine technology. This gives it an independent and concrete status in a competitive market and affords it the opportunity to realize the promise contained in the valuation attached to it even if it doesn't yet have the premiums and the profits.
Lemonade is a digital insurance company with an interface that has access to extensive and unique data and statistics and is operating in niche markets for home insurance in huge markets. Its entire model is based on offers over the Internet, which appeals not only to students and young people but also well-heeled and older people with property but it must reach this latter group to be independently profitable.
One big question mark is how rivals will respond. There is no guarantee that Lemonade can retain exclusivity on its technology with every major insurance company striving to change the way it reaches out to customers by creating platforms that miss out the middlemen, mainly insurance agencies, and increase direct sales, relying more on big data and internal streamlining. The big insurance companies have the vast amounts of money required and the experience and data to make the required investments work.
Lemonade is slowly acquiring customers but home insurance is renewed every year and customers are savvy and conduct market surveys before renewing. Lemonade stresses that for every dollar in expenses, it records $2 in premiums, which is promising. But Lemonade still needs much money for investment to continue growing and finding more customers and consolidating its business model. At the end of the first quarter of 2020 it has 729,300 customers, up 13.4% from the end of 2019. There is still a long way to go.
Published by Globes, Israel business news - en.globes.co.il - on June 9, 2020
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