Would an IPO by any other name taste as sweet as Lemonade?

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The recent IPO (initial public offering of shares) by Lemonade Insurance was on its face not much different from any other- a filed S-1 that tells the company’s story, advises of potential risks, denotes which firms are acting as advisors or underwriters, provides historic and pro forma financials, and acts as an appetizer for the market in terms of investing in some fresh lemonade.

However- there are few IPOs within the fintech or Insurtech world as widely studied and anticipated as that of Lemonade, and none as unorthodox in its seeming acceptance in spite of the paucity of traditional financial supports.

Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.                                  image source

IPOs within the insurance start up world are rarer than the fabled unicorn (start up firms with stated valuation of more than $1 billion).  In the past few years there have been few insurance entrant IPOs,  Deutsche Familienversicherung (DFV_AG), Prosight Insurance, among some others.  None have had the attention held by Lemonade Insurance .

The presence of an IPO in the marketplace should be a normal course of business; The Street.com suggests a firm engages in an IPO strategy for some of these reasons:

  • To raise capital. Initial Public Offer.
  • To reward prior investors or principals for taking early risk in the firm.
  • Attract initial investors in the instance of initial bootstrap or lending funding.
  • An IPO structures shares for sale.
  • Helps structure regulatory compliance around financial disclosure and market transparency.
  • Places investment action in the hands of a third party.
  • Engages market experts in crafting disclosures and reg compliance.
  • Forces an independent audit of financials and governance.
  • An IPO might even identify a financial organization that will purchase an entire offering.

These reasons are not new to the reader- an IPO is structured to introduce a firm’s ownership to the street, is a formal vehicle through which a firm legitimatizes its presence to the market, and serves as a third party buffer to the rigor of regulation and reporting.  An IPO gives the street a chance to review a firm’s financial bona fides and the firm a chance prove its worth to investors.

The Lemonade IPO followed the noted pattern and legalities, so why was the buzz around Lemonade’s IPO so involved, so polarized, and so unexpected in its results to date?

It could be said Lemonade’s unique path to its IPO was first laid in 2015 when co-founders Daniel Schreiber and Shai Wininger sat over coffee and decided their next project would be starting an insurance company.  Their confidence then in that project idea was not unlike a purchaser of LMND stock at the IPO- they could not quite put their finger on why starting an insurance company without insurance experience was correct, and in parallel thought an LMND investor could not quite understand why purchase of a stock in a company that had not come close to being profitable was a good idea.  But in both cases the respective parties forged ahead.

 

The Lemonade IPO had many non-traditional facets that in combination with its history have appealed to investors (somewhat akin to the many aspects of insurance in combination being the Insurance Elephant):

  • Homegrown tech focused on efficiency, AI, machine learning, bot-based sales and claims, and data aggregation regimen built for the firm’s continuous innovation in the industry. In fact, the CTO was a key first hire for the firm. Having leadership and board members who are recognized in the industry provided early confidence in the firm and smoothed the way to early investment.
  • Insurance expertise engaged early in the firm’s history to build an insurance knowledge intellectual capital- they bought that skill rather than try to build. A pedigree was formed that the industry could recognize. Prior start up experience held by the co-founders provided early trust from financing sources.
  • The cachet of being a public benefits corporation was a soft sell that resonated with customers, investors, and per the text in the IPO S-1, potential purchasers of the issuance. The charitable giveback was in fact a corporate strategy designed to attract its target customers, and in the IPO attracted ESG fund investors.  The firm worked hard to reinforce the concept that they are not greedy corporate players.
  • Continuous and clever marketing of the firm’s core concepts, its AI sales and claims bots, its giveback candidates the customers designated at policy inception, and inclusion of heady concepts like behavioral economics and game theory. Ulysses couldn’t have had better representation over the past few years if he had an agent.
  • The firm scaled up rapidly due in great part to its singular focus on an easy policy to sell to a willing customer, and easy claims to settle based on what was being insured- personal property. Few long-tailed claims to muddy reserving or claim cycle time.  Prompt claim handling that would result in mostly positive customer survey results.
  • A well-spoken, C suite environment comfortable, serial entrepreneur as front man. Not much talk about the surrounding cast of leaders- the message was uniform and continuous from Daniel Schreiber.  Lemonade became a fashionable target for praise and punishment, as well known a brand within the industry as any incumbent.  Google the company- over ten million results are generated.
  • Premium and claims ceding to reinsurance backers provided the firm confidence in scaling up, in establishment of the firms 25% flat operating fee, and flexibility in how financial results could be managed to ensure burn rate and operational runway were adequate for addressing growing pains and expansion.

Interesting corporate CV, plenty of attention from the industry, plenty of outside eyes watching and reporting, some deep pocketed early investors, hard work and planning and there it was- the IPO.

 

What, however, of typical IPO due diligence, assessment of financials, potential for growth of market capitalization?  What of valuation per net present value calculations of future financial results? Trend of sales and profit calculation from the firm’s start to its current state?  Would the S-1 projections, history, and risk rationale support the bankers’ proposed share price?

No, and perhaps none of the above.  Per the chart shown below (chart shared within Twitter by Matteo Carbone,  consultant, and apt observer of the firm since its formation), it cannot be said that the firm is currently operating profitably:

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nor is there clear confirmation that the firm’s stated strategy will alter its course to a profitable mix of insurance lines, retention, and reduction in reliance on reinsurance.

The IPO’s acceptance by the street and initial success resided primarily on what is ‘growth valuation’, confidence in the firm’s leadership, solid marketing- over time, a little dose of fear of missing out, and key man ‘je na c’est quois’.

There is much in the financial media that suggests the IPO valuation is founded on a weak traditional finances foundation, that at some juncture Lemonade’s difficulties in expanding into higher premium value covers (like homeowners) will become more pronounced, that growth in renters’ PIF will subside, and that retention rates will not be sufficiently offset by ‘graduation’ rates (renters moving to homeowners or condo policies).  As of this article’s writing the LMND share price hovers around $80 per share, almost 300% higher than initial issuance.  How the street has supported that price is uncertain since the basis for the IPO, price growth and fundamentals are also uncertain.

But before any of us question the IPO, whether in its basis, its outcome, or the firm having gained significant investment and operational runway, there must be a tacit endorsement of Lemonade’s place in insurance innovation history.  I suggest the IPO’s basis was founded in 2015 during that first meeting of the co-founders and the audacious plans sketched out at that time, even if all the parts were not known.

One must also consider the unspoken benefit that the firm’s evolution has provided the industry- living innovation vicariously through Lemonade’s activity and transparency.  Every insurance tech person knows who (what?) Maya (sales bot) and Jim (claims bot) are, as do the firm’s customers.

In full disclosure- the author holds no shares of Lemonade and is a traditionalist in determining company valuations.  Like everyone else, though, I am a market voyeur regarding the firm, and expect further volatility in share value and in the observations thereof.

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