P&C InsurTech firms Lemonade, Metromile and Root posted their best quarterly underwriting results to date in Q4 2018, bringing their combined ratios down to more competitive levels.
Importantly, all three companies continued to drive down their loss ratios on both a gross and net basis.
However, Lemonade and Metromile both posted quarter-on-quarter reductions in direct written premiums (DWP) for the first time in the past two years, while Root continued to expand.
Lemonade, a personal lines InsurTech, recorded its best quarterly underwriting result since inception, despite its executives stating that they “screwed up an entire quarter”.
The company’s co-founder and COO Shai Wininger said in a blog post that the fourth quarter was “a big miss” because of “a single bad judgement call”.
“We wanted to test what would happen if we slowed growth somewhat, and put more focus on balancing portfolio risk,” he continued.
Wininger explained that Lemonade began “a series of experiments” in the third quarter that had a significant impact in the following quarter, slowing down momentum.
“It was a $5mn-$10mn mistake, making it one of our more expensive lessons,” the executive said.
However, these performance judgements were somewhat puzzling to those in the P&C (re)insurance industry for a few reasons.
First, there has been scepticism over Lemonade’s aggressive growth as a company built on the false premise that insurers profit from denying claims.
“Every dollar your insurer pays you is a dollar less for their profits. Their interests, in other words, are profoundly conflicted with yours,” said Lemonade co-founder and CEO Daniel Schreiber in one of the company’s first blog posts.
This approach to the consumer, paired with charging very low prices and offering immediate claims payments, has caused some to question the sustainability of the firm’s strategy.
On a quarter-by-quarter basis, Lemonade’s DWP growth has ranged from 279.1 percent to 31.8 percent since inception. It increased three-fold to $14.0mn in Q4 2018 from the prior-year period. In full-year 2018, it reported $46.8mn of DWP compared with $9.0mn in 2017 – a 420.5 percent yearly expansion.
In light of this, the 9.7 percent reduction in DWP from Q3 to Q4 2018 was viewed positively by some industry specialists, who argue that shifting focus away from exponential growth towards improving the loss experience is a more sustainable strategy.
In a LinkedIn blog post on the three InsurTechs’ Q4 results, IoT Insurance Observatory founder Matteo Carbone and Scor P&C Partners deputy CEO Adrian Jones wrote: “Sceptics point out that a quarter doesn’t mean much, there’s a long way to go before reaching sustainability, and each additional point of loss gets harder to take out. True, but the increased focus this year on reducing losses and increasing prices is making a difference.”
This leads to the second argument on why market observers were confused by Lemonade’s negative management comments – the “big miss” of a quarter also delivered the company’s best underwriting performance since inception.
The firm posted significant improvements in its loss ratios – both direct and net – while driving down its expense ratio to its lowest level ever of 44.2 percent.
Lemonade’s net loss ratio dropped to 61.9 percent, from 62.4 percent in Q3 and 62.2 percent in Q4 2017. The net loss ratio figure was its lowest since Q3 2017, when the metric was 59.0 percent.
However, the more significant improvement was in the company’s gross loss ratio, which dropped to 88.2 percent in Q4 2018 from 91.6 percent in the previous quarter and 144.1 percent in the final quarter of 2017.
Moreover, Lemonade’s net loss ratio was around 13.0 points better versus Metromile and Root, which paid out 75 cents on the dollar in Q4 net claims.
Metromile, an InsurTech that offers pay-per-mile private auto insurance, started operations in 2009 and is yet to generate an underwriting profit. Its full-year 2018 combined ratio increased to 147.8 percent from 129.0 percent the previous year due to a 13.0-point increase in its expense ratio.
However, the company’s fourth-quarter combined ratio showed improvement from the corresponding period in the previous two years.
On the loss side, Metromile has shown little consistency, failing to get its quarterly net loss ratio below 65.0 percent over the past two years.
However, the company could be addressing the need for better underwriting by adding talent from the traditional insurance industry. At the beginning of this month, the company appointed Jeff Briglia as its chief insurance officer. The executive has previously worked at Mercury Insurance, Allstate and Progressive.
The carrier also expanded its executive team through the hire of Bhanu Pullela from Wells Fargo as chief marketing officer, and Paw Andersen, previously a senior leader of engineering in Uber’s Advanced Technology Group, as chief technology officer.
At Root, another auto insurance InsurTech, fourth-quarter results were a cause for optimism as the combined ratio dropped to 158.1 percent in Q4 2018 from 344.1 percent in Q3.
The firm has clearly made improvements in underwriting, as its loss ratio halved to 77.8 percent from the prior-year period.
Moreover, Root achieved these results while simultaneously growing DWP by 54.9 percent quarter on quarter to $50.8mn.
Notably, back in August 2018, Root raised another $100mn in venture financing and claimed to have reached “unicorn” status with a $1bn valuation. The insurer is backed by reinsurers including Odyssey Re and Munich Re.
However, after looking at Root’s Q2 2018 results, Carbone and Jones said that the company may still have two years to show investors that it can become a profitable venture.