The IPO of Lemonade in July highlights the value of leveraging ample reinsurance to move from startup phase to a public company, which the online provider of renters insurance pulled off in a scant four years.

Executive Summary

"Reinsurers have been willing to take some early losses, seeing it as the price of admission to support the customer of the future," said SCOR's Adrian Jones. Jones, along with a trio of InsurTech executives, talked to journalist Russ Banham about the future appetites of reinsurers to cover and fund InsurTech carrier startups after Lemonade disclosed a significant cession to reinsurers in a July IPO filing.

In its IPO registration statement, Lemonade revealed a substantial quota share reinsurance agreement with seven reinsurers, in which it would begin ceding 75 percent of its premiums and losses to the reinsurers on July 1, with reinsurers paying a 25 percent ceding commission to Lemonade for every premium dollar ceded.

Since many InsurTech companies hope to go public, ceding large losses to reinsurers helps spruce up their balance sheets, offering more revenue and profit predictability to investors. As Lemonade stated in the registration statement, the quota share agreement “largely eliminates the bottom-line volatility inherent in traditional insurance companies…making us capital-light, buffering our gross margins from the vicissitudes of claims and leaving room for our gross margins to grow.”

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