Lemonade plans to start selling term life insurance in the next 90 days, adding to its current rental, homeowners and pet insurance offerings, the company said in an earnings report released late Tuesday.

Executives gave some background during an investor conference call on Wednesday morning, confirming that while the InsurTech carrier isn’t going to underwrite the life insurance product, the distribution launch moves Lemonade outside the bounds of property/casualty insurance for the first time.

Referring to the test launch of the term life insurance product that will be written on an undisclosed carrier’s paper as a “form of market research,” executives said the move also signals that Lemonade will grow with the needs of their customers.

Shai Wininger, Lemonade’s co-founder and chief operating officer, noted that the there’s an “invisible boundary between P/C insurance and life insurance,” explaining that distinct regulatory frameworks typically force carriers to settle into one segment or the other. “We strive to prioritize product launches based on customer needs rather than regulatory frameworks, which is why in recent months, we established the Lemonade Life Insurance Agency and why we plan to bring the Lemonade experience to the term life market in the coming months,” he said.

Chief Executive Officer Daniel Schreiber added, “This isn’t one product instead of the other. It’s one product before the other,” responding to a regular question from the analyst community—”Why not auto insurance?”—and suggesting that auto may in fact be in the cards down the road.

Why Life?

“Other tech-enabled insurance companies have struggled to make the economics of digital acquisition work [for] term life policies. We offer no guarantees that we can do better. [But] there are very important differences between us and them…that make this a smart bet despite the uncertainty.

Shai Wininger, Lemonade

Still, there are “important differences between us and them—differences that make this a smart bet despite the uncertainty,” he said, noting, among other things, the fact that Lemonade will be leveraging existing technology and systems and will not be underwriting the policies.

“We won’t be disclosing the underwriter at this time,” a spokesperson for Lemonade told Carrier Management.

Confirming that Lemonade will not be taking any risk on the term life policies, Schreiber said, “The user experience will be very much a Lemonade experience but the underlying policy will be on somebody else’s paper. To the consumer this will be largely a transparent issue.”

Wininger noted that Lemonade’s existing customer base is another factor making the foray into life insurance a safe bet despite the struggles of others. In particular, he pointed to a soon-to-be-achieved customer count of 1 million policyholders for the P/C products that Lemonade does underwrite—”to whom we can market for free.”

And for those customers, “me-to-we” events like starting a family and moving from renting to home ownership may also be triggers for buying one’s first life insurance policy, he said, noting that the average age of people in the U.S. who are buying their first home is the also the average age of college graduates having their first child, and the average age of a Lemonade customer (around 33 years old).

Finally, Wininger said the “potential prize” of selling life insurance is bigger than the cost of the bet, citing research (from researchandmarkets.com) that puts the size of the global term life market at $800 billion this year and projects growth to more than $2 trillion by end of decade.

Schreiber stressed, however, that Lemonade doesn’t put full stock in that kind of market data. “Sometimes launching a product is the best market research,” he said, explaining Lemonade’s cautious approach. “The overwhelming majority of our homeowners customers do pay somebody [for] term life insurance. We would just as soon have them pay it to us. And there’s a very sizeable premium. So the prize is definitely worth going for,” he said.

“These are bets. We do regard them as bets rather than certainties. But they’re not bet-the-company moves. The risk that we’re taking is actually very modest because we are leveraging everything we’ve already done—all of the technologies, all of the branding, all the user experience, all the support staff. …It is a modest ante with tremendous upside.”

What About Auto?

As they did on their first earnings call as a public company three months ago, Lemonade executives fielded questions about whether, and when, the InsurTech carrier would enter the auto insurance market on the P/C side. This time, the question was often phrased as “Why life instead of auto?”

“It’s not life instead of car,” said Schreiber going on to state the company’s grand aspirations “to build an iconic insurance company for the 21st Century.”

“You can assume that before we’re done, we will launch all the products that our customers need. … This isn’t one product instead of the other. It’s just one product before the other.”
Daniel Schreiber, Lemonade“

Lemonade isn’t the only InsurTech to offer both life and P/C products. Early last year, for example, Policygenius, a New York-based online insurance marketplace expanded from life and disability insurance to offer home and auto on its distribution platform as well.

Choosing another sequence, personal lines insurer Progressive moved from auto to home and then life. Progressive’s entry into the life insurance market has been in the works for some time. Like, Lemonade, Progressive started on the distribution rather than the underwriting side although Progressive CEO Tricia Griffith suggested recently that underwriting life insurance is now a possibility.

Last year, during a third-quarter conference call, Griffith and Progressive’s Chief Strategy Officer Andrew Quigg described Progressive’s strategy using a “three horizons model” of innovation. Horizon 1 involves executing on core auto products, and Horizon 2 involves expanding to adjacencies within the P/C insurance market—to grow into commercial lines business, for example, Quigg said. Using the Progressive Advantage Agency to distribute life insurance products fell in the Horizon 3 phase, where Progressive seeks to research, expand and innovate to create an enduring business, he said. Not only has the arrangement generated millions in commissions but it also “materially increased retention for bundled customers on our core auto product,” he said at the time.

According to Progressive’s website, Progressive Advantage Agency actually transfers life insurance customers to Efinancial, LLC for placement with carriers unaffiliated with Progressive. But Griffith said that Progressive does now have a life insurance company filed in Ohio during an interview on “The David Rubenstein Show: Peer-to-Peer Conversations” on Bloomberg Television.

Auto on the Horizon?

Schreiber’s comments during Wednesday’s third-quarter earnings conference call built on his answer to a “why not bundle auto and home insurance” question posed by an analyst during the second-quarter earnings call in August. Back then, he confirmed the demand for Lemonade auto insurance, noting that Google, one of Lemonade’s early investors, once shared that the volume of search for “Lemonade home insurance” and Lemonade auto insurance” were roughly equivalent.

At that time, he also stressed the idea that Lemonade is not interested in “playing the ‘I switched and I saved’ game” of traditional incumbents, suggesting that when Lemonade acquires customers, it is more typically competing with “non-consumption” and growing with the customers, likening the customer acquisition process to “finding LeBron James in the eighth grade. …”

“We think about our customer and place her in the center. [From] renters, she will graduate to homeowners, get a dog, perhaps a diamond ring–and yes, in the fullness of time, she’ll need all these other insurance products….Without talking about car insurance specifically, I think the fact that we don’t yet have all our other products out there is a handicap. [But] the fact that we are managing to grow 100 percent year-on-year notwithstanding…is encouraging. It means there a lot of opportunity for us to grow further and improve retention rates,” he said.

Schreiber noted the need to have a licensed life insurer to further explain the move into distribution first. The two insurance companies that Lemonade owns in Europe and the U.S. are P/C carriers, he said. “To write life insurance on our own paper, we would have to stand up another carrier and capitalize it independently.”

Pressed for a timeline for launching an auto insurance product, Lemonade’s Chief Financial Officer Tim Bixby told an analyst, “Our practice is not to disclose timing until we disclose timing.” Bixby added: “Auto is important to our customers and critical to the long-term vision. We want to provide everything that our customers need. …While we’re not communicating specific timelines today, I think it’s fair to say that it’s as important to us as we believe it is to our customers.”

Both Schreiber and Bixby noted that Lemonade has operated on an agency basis before, offering earthquake insurance to California customers through Palomar Specialty. “In some categories, we feel there is not a great fit between the kinds of risks we want to retain, or the kinds of user experience that those involve,” Schreiber said. He noted that claims are a very rare experience under term life insurance policies, contrasting that with the high frequency in pet, home and renters lines where there is a greater need for Lemonade to interact and control the claims experience. “There’s also very little doubt and litigation” in term life, where a death certificate supports a claim. “It made sense to partner with somebody where the underlying risk was borne by them but we control all of the user experience.”

P/C Results

While Lemonade’s reported that gross earned premiums grew more than 100 percent to $42.9 million for the third-quarter, compared to $21.0 million in third-quarter 2019, net earned premiums dropped 41 percent to $10.5 million from $17.8 million. Lemonade recorded a negative number for net written premiums on its income statement—minus $47.4 million for third-quarter 2020, compared to a positive $30.1 million in third-quarter 2019.

Lemonade explained the decline in top-line revenues, citing a change in its reinsurance coverage to proportional reinsurance, which took effect on July 1—a change which also meant a boost in profits for the quarter (and which presumably also explains the red-inked net written premium figure).

In this year’s third quarter, Lemonade earned $7.0 million of ceding commissions as a result of the reinsurance change. “Gross profits”—calculated by subtracting net losses and other insurance expenses from the sum of net earned premiums, net investment income and commissions—totaled $7.3 million, a 42 percent increase from third-quarter 2019.

Nine month profit grew 23 percent to $17.3 million, with net written premium falling 62 percent to $27.1 million and net earned premium rising 56 percent to $65 million.

Based on the numbers shown on Lemonade’s consolidated statement of operations, the net loss ratio for the quarter was 63.8, while the year-to-date loss ratio stood at 69.8. On a gross basis, Lemonade said that its gross loss ratio was 72.