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Lemonade files for NYSE IPO & reveals new reinsurance arrangements

9th June 2020 - Author: Matt Sheehan

Insurance technology start-up Lemonade has announced plans for an initial public offering (IPO) of its common stock, while also revealing the arrangements of its new reinsurance program.

LemonadeThe firm, which is backed by Japanese conglomerate SoftBank among others, filed a registration statement with the US Securities and Exchange Commission (SEC) to apply for listing on the New York Stock Exchange.

According to the filing, Lemonade is targeting a $100 million IPO with a listing under the ticker symbol LMND, although commentators have suggested it could target up to $300 million.

Using this capital, the insurtech is expected to continue pushing for growth in the European market, while also looking to expand further into the US.

The document also emphasised that reinsurance capital would represent a key tool for Lemonade as it continues to target growth.

Accordingly, Lemonade has a new multi-year quota share reinsurance program in place from July 1st, which will see it cede 75% of its premiums in exchange for a 25% ceding commission.

The agreement is with a panel of seven reinsurers, with three-quarters of these contracts set to run over a three-year term.

“All told, about 55% of our book will be reinsured on a three-year term, with the remainder coming up for renewal and renegotiation on an annual basis,” Lemonade explained.

“We believe that staggering the terms this way provides the appropriate balance between maximizing predictability, and enabling us to capture more margin over time.”

The insurtech noted that the reinsurance program is designed to maximise profitability, while also protecting the integrity of its fixed fee.

“These two remaining goals live in tension with one another,” it stated. “Leaving zero “wiggle room” around our fixed fee would guarantee its stability, but would preclude our benefiting from our improving loss ratio. Conversely, any room for improved profitability would also introduce additional volatility into our business.”

In addition, Lemonade has non-proportional reinsurance contracts in place with eight reinsurers, in a combination of per risk reinsurance and facultative reinsurance arrangements.

Together with the proportional reinsurance contracts, these non-proportional contracts will ensure that the most the firm will pay for any one claim is unlikely to ever exceed $125,000.

“We believe our reinsurance structure achieves important goals: making us capital-light, buffering our gross margins from the vicissitudes of claims, and leaving room for our gross margins to grow,” Lemonade concluded.

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