And then we have the banks, which are making us feel like it’s a 2008 Groundhog Day with panic-inducing stock movements. Somewhere in the middle, the InsurTech cohort with its personal lines-heavy business mix had a difficult 2022 and has repeatedly faced concerns on capital availability and the ability to outlast the cash burn.
Against that backdrop, we headed into the Q1 earnings for this cohort, knowing full well that a bad print could be the death knell for this group. Frankly, we would have been quite surprised if the group had reported similar trends (more on this later) to the personal lines group. Additionally, with mounting short-interest, materially greater than traditional insurers, a short squeeze from good results would at least kick the can down the road.
The chart below shows the stock performance from January 2022 to illustrate the difference in fortunes for this group. This was going to be a make-or-break quarter.
As expected, both Lemonade and Root reported strong results, driving a one-day move of 27.8% and 17.6% after their earnings. Taking a step back, one quarter does not make a trend, and we will move out of the skeptical camp if we see the trend line remaining unchanged for 2023.
Firstly, for Q1 InsurTech carriers showed improvements in their loss ratios on a sequential basis. Yes, they were running at higher loss ratios than the established peer group. However, the market commentary seemed to be less pessimistic vs. some of the larger personal lines peers.
Secondly, growth is being restricted to balance capital utilization, loss ratio trends, rate action and expense initiatives. In our prior notes we have highlighted that this amounts to a game of whack-a-mole. Taking a step back, the best companies in insurance grow when others are undertaking corrective actions. This is not the case for InsurTechs. Think of it another way: when the strongest and largest peer groups steady their ships, they will once again come after the best customers at the InsurTech carriers, perpetually creating the issue of adverse selection.
Thirdly, the rate filing discussion can be a mixed bag. It’s easy to believe the simplistic assertion that the InsurTech carriers were early to the game and hence were updating their rate filings before the peer group. But taking a step back, if a company like Progressive witnessed noise in its March earnings numbers, what does that imply for the rest of the group? Consequently, we would be careful about just looking at rate filings and wait for these to translate into earned margin improvement over time.
We discuss these in detail below.
Firstly, reported loss ratios were surprisingly good.
The value proposition for InsurTech carriers includes segment differentiation (powered by AI-driven models) that would, theoretically, lower loss ratios in a significant way. Evaluation of loss ratios becomes pivotal in evaluation of InsurTech carriers as a whole.
This quarter, InsurTech carriers, Root and Lemonade reported reduced loss ratios.
The following table shows the past five quarters of loss ratios for InsurTech carriers along with incumbent personal auto results. The reported metrics differ from carrier to carrier, so it is important to compare the direction vs. a direct comparison of the numbers.
With InsurTech carriers’ survival at stake, the downward inflection to loss ratios provides much needed relief.
If we examine statutory results from 2022, we can see that the InsurTech insurers have turned around things a bit, but their businesses are still facing challenges.
The following table shows the statutory detail of their expenses and how out-of-balance they are, especially when compared to incumbents.
On the calls for InsurTechs, they mention they are getting a handle on expenses and boasted efficacy of their pricing models that should lead to the stickiness of a lower loss ratio. It remains to be seen if they can keep downward pressure on expenses, losses, and overall combined ratio, especially given that they are running at higher loss ratios and much higher expenses than incumbents.
Secondly, pull back on growth staves off capital pressure.
As discussed in past notes, InsurTech carriers have a tech-focused investor base, which is different from legacy insurance companies.
For InsurTech insurers, the story will ultimately be about growth. However, to deliver on the growth story there must exist a company that can grow. As such, for the embattled InsurTech carriers, their goals need to pivot to profitability (read: survival) when the growth story has led to major devaluations of their companies.
The following table shows premiums at InsurTech carriers and auto premiums at incumbents. Lemonade is still growing, though at a lower rate, and Hippo has pulled back considerably. Among incumbents, there is a steadier picture, though Progressive has enjoyed a bit more growth.
If the InsurTech carriers had been seeing favorable results in their predictive modeling and purportedly more efficient operating model, this would have been the perfect time to grow.
As incumbent carriers are forced to pull back, InsurTech carriers could have swept in and grown market share. However, InsurTechs carriers’ efforts were not where they needed to be, and they need to pump the brakes on growth, perhaps even more than the incumbents at this time.
In addition, InsurTechs have limited capital and need to be able to provide for the existing customers with this capital. This is another major motivation to pivot away from growth.
In further examination of the growth story, we looked at policies-in-force over the past several quarters. The chart below shows year-over-year change to in-force policies for two incumbents, Progressive and Allstate, and two InsurTech carriers, Root, and Lemonade.
We see that Root and Lemonade had taken the most rate in the group and have had the most dramatic declines since their peaks. Progressive has also declined in rate taken, but its filings came in earlier, assisting it in staying ahead of trend. Allstate and Travelers appear to still be in an uptrend on rate-taking.
The following are select quotes from Q1 earnings from InsurTech carriers as well as Allstate and Progressive on the topic of rates and loss cost inflation. Note Allstate’s and Progressive’s more cautious tone concerning the future.
Carrier quotes on rate and loss cost inflation:
Source: Earnings calls, company documents, Inside P&C
Progressive, a leader in personal lines, announced adverse development in March in the midst of a major rate-taking campaign. This may not bode well for the rest of the group, so our stance is cautious in terms of auto insurers having a handle on loss cost inflation. We need to see the rates earn in, with no noise, before we would say the rate-taking has worked and rates could meaningfully plateau.
In summary, the InsurTech carriers are still in trouble and will have to demonstrate consistent performance improvement for a sustained period before we would say they are delivering on their value proposition of disruption.
The incumbent carriers’ market shares have not remotely been affected by the InsurTechs, and the rise of InsurTech has actually helped the incumbents focus on their own process improvement and innovation.
The InsurTechs are hanging on for now, but with their IPO values all but gone, a positive outcome for the entire industry might be consolidation, with the incumbents building on the technologies the InsurTechs are trying to introduce.
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