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Insurtech startup Lemonade sees shares jump 139% on IPO

But underwriting models ‘not time-tested and may not be robust enough to weather any catastrophic events’

Lemonade (LMND) raised $319m (€283m) with an initial public offering (IPO), signalling high investor demand at a time when markets have been shaken.

The New York-based insurtech company sold 11 million shares at $29 on 2 July.

The start-up’s debut was the strongest by a US company in 2020 so far, MarketWatch reported. Shares skyrocketed during the day and finished up 139% at $69.41.

Insurtech IPOs have been garnering a lot of attention in recent years, especially from their more traditional peers.

For example, reinsurers such as Munich Re have been stepping up their investments into such companies, as they enter their territory, a 2020 report by US financial data and software company PitchBook said.

Startups vs incumbents

Venture-backed insurtech startups are beginning to disrupt the incumbent industry, which has been a laggard in their digital transformation, with currently 12 unicorns existing in the global insurtech space, the report found.

Lemonade said it has digitised the entire insurance process. The start-up claimed that it had set “a new world record” when its AI bot was able to approve a claim for a $980 personal item in three seconds, PitchBook notes.

“We expect M&A activity to intensify in this space as companies without strong traction become targets for incumbent insurers seeking innovative technologies and expansion into niche markets,” the author writes.

However, Robert Le, senior analyst, emerging technology at PitchBook, points to Lemonade’s small current size: “With the IPO, Lemonade is entering the public markets at a precarious time. While the company has experienced strong growth in terms of gross written premiums, its scale is still very small relative to incumbents.”

Insurtech deal overview

In 2019, cumulative global deal value across VC, PE and M&A for insurtech companies reached $19.1bn – with M&A comprising $9.2bn of that total.

But in Q1 2020, global VC in insurtech recorded $785m of invested capital, a significant decline from $1.8 bn in Q4 2019, the report finds. Insurtech VC deals and exits have shrunk accordingly in 2020 (see charts below).

Underwriting capabilities

Digital distribution and related customer acquisition technologies are relatively mature in the segment, while underwriting and claims technologies are still in the early stages.

“For 2018, some of the established insurtech companies such as Lemonade, Root Insurance and Metromile had loss ratios of 90% or greater, while the average for the P&C industry hovers at around 70%.

“Startups will have to continue proving their ability to reduce losses—with better underwriting capabilities and by increasing premiums—without high customer churn,” the report said.

Le explained: “In order to garner investor interest in the public markets, we believe Lemonade will need to significantly expand its operations in terms of geographic coverage (currently only available in 27 states & DC in the US, Germany and Netherlands in the EU) and product lines as well as deliver better operating metrics (its loss ratios are still too high).

“Furthermore, having only launched less than four years ago, we believe that their underwriting models are not time-tested and may not be robust enough to weather any catastrophic events.”

Underwriting however remains a critical cost factor for insurers and reinsurers, and PitchBook expects heightened demand for technologies that can help decrease that burden.

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