3 Things – Root & Lemonade, AIG Focus & Insurtech Funding Trends

Hello Friends!  It was another busy week of earnings reports and other news.  This week we are following Root & Lemonade running out of time, AIG focusing, other carrier results and Insurtech funding trends.  Here are the three things we learned:


Root & Lemonade Running Out of Time

Two of the most notable public insurtechs Root & Lemonade reported Q1 2023 earnings this week.  Both stocks enjoyed a rally on the narrative that they were taking steps to controlling their loss ratios.  If that trend continues it will help investors recoup losses.  Root’s CEO is certainly eager to get cash out of the company.  He will receive a large payment according to the proxy statement filed despite the lack of profitable results and dismal shareholder returns.  Root is trimming their book and cutting costs hoping to survive but it is starting to appear they may run out of cash before they can make any meaningful progress towards profitability.  Current cash stands at $523.6 million outside of regulated entities.  Inflation and costly distribution channels limit their ability to control costs and debt covenants limit the amount they can spend.  Lemonade is growing their customer base, adding 48,000 over the quarter, an increase of 23% over the prior quarter.  In-force premium stands at $653 million but their average premium, though increasing, is still only $352 per insured.  With just under $1 billion of cash and a stubbornly high loss ratio, it is possible to see a future where they too will run out of money.  They continue to have to keep a large marketing spend to power this growth and with inflation staying high, they can only increase rates so much to try to drive towards profitability.  Just look at two of the companies they were hoping to disrupt, Allstate posts a combined ratio of 18.6 and Progressive is pulling back their spend to control a combined ratio that is above their target of 96%.


AIG Focus & Others Carrier Results

AIG continues to sharpen their focus and divest of businesses that are not part of their core insurance focus.  They announced this week that they have struck a deal with American Financial Group (Great American) to acquire their crop insurance division.   Crop insurance, like Flood, is backed by the Federal Gov’t and normally a profitable business with lower risk exposure than typical commercial and specialty lines.  AIG has viewed the operation as not core to their go-forward strategy and AFG is fortunate to acquire the business that will increase their crop insurance premium written to $1.8 billion, keeping them the 5th-largest writer and largest U.S.-owned participant in the multi-peril program.  AIG reported results this week highlighted by $502 million of underwriting income, a record in Q1 underwriting results in their history.  CEO Peter Zaffino said the results demonstrate their strategy of focus and continued efforts turning around P&C operations to evolve its business model and move away from its conglomerate structure.  CNA reported increases in net income and core income and a slightly increased combined ratio from 91.9% to 93.9% showing commercial lines strength.  Everest Re was powered by their reinsurance division who achieved record quarterly premiums increasing by almost 20% in year-over-year comparison showing the rate increases taken by reinsurers in the recent renewal cycle.


Insurtech Funding Recovers

Gallagher Re reports in their quarterly InsurTech report that funding has increased 37.6% quarter-over-quarter from $1.01 billion in Q4 2022 to $1.39 billion in Q1 2023.  The largest percentage of all funding deals were in the ‘early stage’ category, showing that mid-to-late stage rounds are still harder to raise.  This would enforce the idea that the trend for InsurTech investment will be focused on entities who are adding value to incumbent business models and will come from private sources, not IPOs.  To raise money in this new paradigm companies need a focused solution that can turn value creation into profits in a short time and does not depend on the promise of disruption.  Agency management technology provider, Novidea was able to raise a Series C round of $50 million.  The company has raised $90 million to date and will use the funds to further develop its cloud-based, data-driven insurance platform that helps insurance agents, brokers and MGAs provide better customer experience.  Technologies that enable the distribution channel to create better customer experience and less friction appear to be attracting investment.

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