Israeli-founded Digital Insurer Lemonade Readies for IPO

New York-based startup losing money but growing fast as it shakes up industry

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The Lemonade app, December 18, 2017
The Lemonade app, December 18, 2017Credit: Ofer Vaknin

Lemonade, the tech-driven insurance company founded by Israelis and based in New York, is readying to go public in the United States in the next several weeks after filing for an initial public offering on Monday.

The draft prospectus doesn’t reveal the terms of the offering, including the company’s planned valuation, which is being led by Goldman Sachs, Morgan Stanley and Barclays. But the perspective does give the first publicly available numbers on Lemonade’s financials.

They show that its revenues tripled last year to $67.3 million while losses more than doubled to $108.5 million. This year’s first quarter revenues reached $26.2 million and losses, $36.5 million. But while Lemonade is running huge losses, its ratio to income has been coming down – from losses of 2.4 times revenues in 2018 to 1.6 times in 2019 and 1.4 times in the first quarter of 2020. 

Lemonade founders Shai Wininger and Daniel SchreiberCredit: Ofer Vaknin

Lemonade’s shareholders’ equity, excluding one-time factors, at the end of March stood at $276 million and it held $275 million in cash.

Lemonade was started in New York five years ago by Israelis Daniel Schreiber and Shai Wininger, and to date has raised $480 million. The company’s biggest shareholders are the Japanese tech investor SoftBank, the U.S. venture capital fund Sequoia, the Israeli VC Aleph, insurance-tech investor XL Innovate and another VC, General Catalyst.

Lemonade is one of a growing number of young companies looking to shake up the insurance sector through better use of technology. 

The company has digitized the entire insurance process, replacing brokers and paperwork with bots and artificial intelligence. It claims to provide policies in as little as 90 seconds. Claims are filed through its app; if they are small enough, they can be settled in just three minutes without human intervention. Lemonade offers insurance in 28 U.S. states. 

The prospectus gives an indication about how fast Lemonade’s value has grown during its short history: In a March 2018 fundraising round, its shares were priced at $13.80 each and in June 2019 they were priced at $42.40. That latter round, which raised $300 million, valued the company at $1.5 billion (before the money), or a generous 27 times revenues.

SoftBank’s involvement in Lemonade these days is not an asset. Over the last three years, the giant Japanese investor has poured billions of dollars into young tech companies, which has pushed valuations across the tech sector higher and earned it a reputation as a maker of bubbles.

Most famously that was the case with WeWork, another New York-based, Israeli-founded company. WeWork was met with a wave of criticism when it tried to go public last year, leading to embarrassing revelations about its management, the exit of its founder and CEO Adam Neumann, and the slashing of its valuation. Its IPO was canceled.

Not only is Lemonade still losing money, as was WeWork when it tried to go pubic, but its prospectus in some way echoes WeWork’s excessive language. For example, it states that its mission is to “harness technology” and “to be the world’s most loved insurance company.”

Lemonade is not just a digital insurer but also employs a different financial model from traditional insurance companies. Instead of earning its profits from the difference between premiums it collects and the claims it pays out – which encourages traditional insurers to avoid paying claims in full if they can – Lemonade takes 25% of all premium income at the outset. The rest is used to pay claims. Lemonade donates any money left after paying claims to charities chosen by its customers. 

As a result, Lemonade is registered a benefit corporation, or B Corporation, meaning it has a double mission – to earn a profit for its shareholders like any other ordinary business and to benefit the public, even if it could come at the expense of short-term profits.

In its prospectus, Lemonade said it is targeting clients that traditional insurers don’t, what it calls “next generation customers.”

“While the rest of the industry typically appeals to established consumers with the ‘I switched and I saved’ value proposition, we are largely competing with non-consumption, attracting consumers incumbents want, but doing so years before they are ripe for legacy providers,” the prospectus says.

As a result, Lemonade said that approximately 70% of its current customers are under age 35 and about 90% of its customers said they were not witching from another insurer when they took out a policy. 

It has also appealed to younger customers by declaring that it won’t invest its funds in fossil fuel companies in the fight against climate change and that it wouldn’t insure firearms for a value in excess of $2,500.

The standard index for measuring the quality of an insurance company’s business is its loss ratio, or the rate of claims paid to policyholders compared with premiums collected. The lower the ratio, the better financial shape an insurer is in. Lemonade’s ratio has fallen over the years from 161% in 2017, meaning that for every dollar of premiums it collected it paid out a $161 in claims, to 113% in 2018 and 79% in 2019. In the first three months of 2020 it was 72%.

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