Lemonade, Metromile, Root struggle to reach underwriting profits

The venture-backed full-stack US insurtech startups continued to show rapid premium growth in the second quarter of 2018 with moderately lower underwriting losses but they have yet to generate a sustainable loss ratio under 100 percent, according to “The Second Quarter in InsurTech Start-up Financials” by Matteo Carbone and Adrian Jones.

The report has tracked the three independent P&C startups most commonly associated with the label “insurtech” namely Lemonade, Metromile, and Root. This quarter it looked at newly-licensed Next Insurance (which wrote no premium) plus four subsidiaries of larger companies with a direct or insurtech focus.

Renters insurance provider Lemonade which is backed by Softbank and Allianz, produced a net underwriting loss of $1.5 million in the second quarter of 2018 with a net combined ratio of 138 percent. Tokio Marine-backed pay-per-mile auto insurer Metromile recorded a net underwriting loss of $3.1 million over the period with a net combined ratio of 136 percent while Tiger Global-backed auto insurer Root produced a net underwriting loss of $11.6 million with a net combined ratio of 324 percent.

“If our subject companies are shifting management attention towards profitability, it is not yet obvious in the figures,” Carbone said.

In June, Lemonade co-founder Shai Wininger wrote in a blog that the firm now wants to reduce the growth pace and address its loss ratio, which doesn’t "work well".

“Improving underwriting results is like steering a slow-moving boat,” Carbone noted. “You can turn the tiller, but the boat may not go the way you want, and it will take some time. Insurance policies last a year, rates are regulated by states, and unsettled old losses can get worse if the legal environment changes,” he said.

Root grew direct premium written by 88 percent year on year to $14.9 million in the second quarter of 2018. Lemonade expanded by 32 percent year on year to $9.9 million and Metromile grew 6 percent to $20.2 million.

Industry veterans are outperforming the newbies on loss ratio but not premium growth, according to the report. Two of the startup carriers sponsored by highly-regarded underwriters are performing very well in terms of profit, the report noted. Berkshire Hathaway-backed SME insurer BiBerk, which ultimately reports to Ajit Jain, recorded a “respectable” 70 percent gross loss & LAE ratio in the quarter. Insurance broker Intrepid, where Rob Berkley sits on the board, turned in a 60 percent loss ratio (without LAE). Neither company has cracked even $4 million in quarterly premium, the report noted.

Meanwhile, reinsurers subsidize insurtech losses. Lemonade continues to hand reinsurers $3.61 of losses for every $1 in premium in the quarter, according to the report. Root handed reinsurers $1.41 of losses for every $1 in premium. Metromile – as with other metrics – is playing a safer game, and its reinsurers even made a bit of money in the quarter, getting $0.86 of losses for every $1 in premium, the report noted.

Root disclosed that it changed its reinsurance program, reducing its quota share from 50 percent to 25 percent of premium effective June 1 through the remainder of 2018.

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