Lemonade vs Duck Creek Technologies: beyond the IPOs
Both companies serve the individual property and casualty (P&C) markets, have brought in hundreds of millions of dollars in new capital and set billion-dollar-plus market caps. That’s about where the similarities end.
With the insurtech industry (and many of its well-capitalised players) in the headlines these days, it’s worth digging deeper to understand the fundamental differences between these two recently-minted public firms and, along the way, seeing insurtech for the multi-faceted gem it has become.
First, let’s ‘double-click’ on Lemonade’s and Duck Creek’s respective markets. Lemonade (NYSE: LMND) sells its rental and home insurance policies direct-to-consumer (D2C), competing head-to-head with traditional insurance companies such as GEICO, Liberty Mutual, and Progressive.
Duck Creek (NASDAQ: DCT), on the other hand, sells core system software to those same big-name insurers to help them power their businesses, a business-to-business (B2B) approach.
While each company followed a very different path to IPO, the numbers are telling:
Year founded: 2015
Pre-IPO funding: $480mn
2019 FY Revenue: $67.3mn
IPO Proceeds: $319mn
Market Cap: $3.5bn
Year founded: 2000
Pre-IPO funding: $357mn
2019 FY Revenue: $171.3mn
IPO Proceeds: $405mn
Market Cap: $5.2bn
in a short period of time that it successfully put to work for its investors. in April 2019, and its recent IPO undoubtedly provided shareholders with great returns. In the long term, however, its prospects aren’t as clear.
D2C sales typically incur more risk than traditional P&C insurance carrier sales and while the company has done a good job of steadily lowering its risk profile, it remains less balanced than the incumbents. The company also has a long road to profitability, so it’s a good thing it has lots of cash to burn.
Duck Creek has taken a longer road with many twists and turns, successfully evolving from a legacy software provider to a SaaS provider (). It and has grown its SaaS annual recurring revenue (ARR) to US$78.8m (as reported in the S-1).
Prior to its IPO and recent $357mn private equity infusion, . While Duck Creek never technically achieved ‘unicorn’ status prior to its IPO, it clearly was valued as one. The company is not profitable and plans to use IPO funds to buy back interests from existing shareholders, including Apax and Accenture, but its growing revenue and gross profit are encouraging.
Clearly the insurtech market is reaching maturity and, at the highest level, is following two distinct paths: competitor and enabler. These very different business models will be interesting to watch over the long term.
Digital D2C insurance companies such as Lemonade and Ladder are providing much-needed disruption to the insurance industry, but it’s unclear if their risk profiles are sustainable. B2B insurtechs may not look as sexy, but, by selling to already established carriers, they enable the existing industry, with its decades of experience and data, to catch up.
In many ways, looking at the IPOs of Lemonade and Duck Creek is an ‘apples and oranges’ comparison, but that’s my point: one business model is proven, one is being tested. Together, we have a front-row seat for watching how much value each will create and for whom.
This article was contributed by Ian Jeffrey, CEO and Co-Founder, Breathe Life
Insurtechs are winning the race with legacy system companies
Nestled in its own place within the world of financial services, insurance is arguably more unpopular than retail banking.
That’s hardly surprising given that, from a customer service perspective, insurance is something of an off-kilter transaction. You pay a sizable premium in exchange for a service you hope you will never have to use. This image problem is exacerbated by ubiquitous tales of insurers not paying out when it is time to make a claim.
The insurance sector has long been due to an overhaul, and this is where the disruptive force of insurtech comes in - one of fintech’s most upwardly mobile subcategories. Accordingly, last year, insurtech in the UK alone attracted £262m in investment, a growth of 60% on 2019, according to Tech Nation. Insurtech’s momentous growth has been captured in a new report by The AI Journal exploring this burgeoning sector.
What exactly is insurtech?
Put simply, insurtech refers to technological innovations that seek to make insurance cheaper to buy and more efficient to use. In a similar vein to fintech, the large, established institutions have been dipping their toes into insurtech, but it’s the disruptors who are genuinely looking to shake up the status quo, diving into and exploiting those areas that traditionalists have little imperative to explore.
Examples are price comparison sites (one of the earliest forms of insurtech that was eventually snapped up by the insurers it initially sought to disrupt), claims software, customisable policies, or even smart-tech-enabled dynamic policies whose premiums can fluctuate depending on changing circumstances.
The latter, for instance, could use someone’s fitness tracker or smartwatch to monitor fitness levels, thus reducing the premium of a life insurance policy; or track a GPS system that records the location of a car and assesses risk levels accordingly.
Most consumers tend to shop around for their insurance needs and perhaps end up buying their contents insurance with one provider, their car insurance with someone else, and their pet insurance with yet another underwriter. Managing all these different policies, with their varying renewal dates and payment terms can be complex. This has led to the increase in apps that pull everything together.
More prosaically, insurtechs are developing AI that uses machine learning to act as an insurance broker, eliminating the need for a human intermediary and therefore offering more cost-effective and impartial advice.
Insurtechs and risk
But there are some obstacles in the way of insurtech’s continued evolution.
Insurance companies are averse to risk. Understandably so, as at the crux of the industry is the role of the actuary, whose job it is to analyse and measure the probability and risk of future events. So it’s little wonder that there’s a reluctance among the traditional players to welcome the disruption that insurtech brings.
Insurance is heavily regulated, a minefield of legality and labyrinthine jurisdiction, which means the idea of shaking it up can be anathema. And why would they, when their old-school business models are working perfectly fine?
There’s an understandable nervousness and unwillingness to work with startups, who themselves need to work with the bigger firms in order to underwrite risk.
While it seems like a catch-22 situation, there is growing, if cautious, interest from insurance companies, who can see the benefits of insurance with a friendlier face, innovative solutions, and a competitive edge through differentiation. As that tentativeness dissipates, the growth of insurtech will gather even more momentum.
Tom Allen's analysis is based on the findings of a new report on the fintech and insurtech industries produced by The AI Journal.