In Lemonade’s Q3 earnings call, Co-Founder and Co-CEO, Shai Wininger, and CFO, Tim Bixby, outlined the firm’s approach to the current hardening reinsurance market, alongside how it will keep pace with high inflation.
Wininger suggested that despite reinsurance companies having several rough years, this doesn’t mean that they’ll change Lemonade’s business model, or stop providing reinsurance.
He added that the difficulties have mostly affected the cost of reinsurance and that he expects this to rise, however, Wininger also noted that Lemonade is becoming more diversified and that this, in turn, will offset the hardening market.
He commented, “With more products available in more regions, we believe that our reinsurance should play a different role in our business, optimising on two primary needs: protection against rare catastrophic events and optimising our surplus requirements.”
Tim Bixby also noted that the firm would be willing to retain more cat risk to offset rising prices. He said, “Our view on reinsurance generally is optionality. I think we’ve taken advantage of good markets and good terms that fit with our overall goals, the size of the business, and the risk profile.
“But generally, our bias is to lean toward reinsurance more as a benefit for surplus efficiency, capital efficiency, now that we are getting a really good grip on our loss ratio… We’re much more comfortable, now than three or four years ago, in terms of balancing that risk. I think we’ll be open to taking a little more risk.”
On the topic of inflation, Winninger stated, “Inflation means that prices keep going up, so the impact on the cost of claims is immediate, while the time it takes to change prices move at the pace of regulators.
“There’s a lagging window in which premiums collected are lower than what they should be to maintain a healthy loss ratio. We’ve made the changes so that some of our products ought to adjust for inflation.
“And for others, we’re getting into a filing pace and rhythm that should keep pace with inflation. But it will take a while for all these changes to work their way through the system and for policies to earn into these new rates.”
For the third quarter results, in-force premiums (IFP) with the firm rose 76% year on year to reach $609m.
Lemonade said that IFP stood at $347m in Q3 2021 and $189m in Q3 2020. Gross earned premiums over the same periods rose from $43m in Q3 2020 to $80m in Q3 2021, and reached $136m in this year’s third quarter.
It also noted that at $66m, the firm’s EBITDA loss in Q3 2022 was better than expected. According to the insurer, this was primarily due to increased operating expenses.
Net loss for the period was $91.4m, compared to the $66.4m, reported in the third quarter of 2021. Meanwhile, the insurer’s gross loss ratio went from 77% in Q3 2021 to 94% in Q3 2022.
