Clearcover and Lemonade tout improving margins as they scale fundraising, ARR

Today, we're taking a quick glance at the venture-backed insurance space

Hello and welcome back to our regular morning look at private companies, public markets and the gray space in between.

Today we’re taking a quick glance at the venture-backed insurance space. On the heels of ARR milestones set by the well-capitalized Lemonade, another startup in the space, Clearcover, announced a new funding round this week. TechCrunch corresponded with each company, giving us an interesting window into how their economics improve with scale and how they think about their revenue.

The venture-backed insurance market also includes MetroMile and Root Insurance, players in the automobile insurance market. Why do we care about these four firms and their progress as later-stage, private companies? Because a mountain of cash has been pumped into their coffers. TechCrunch calculates that these four firms have raised $1.4 billion in aggregate to date.

The better we understand the space, the better we’ll understand the future IPO and exit markets.

We’ll start with Clearcover’s latest round, and then dig into our two interviews.

Clearcover raises $50 million

Clearcover, a Chicago-based, technology-powered insurance startup, announced today that it has raised a $50 million Series C. The round comes a little under a year since Clearcover raised a $43 million Series B. The company has raised around $104 million to-date.

OMERS Ventures led the round while previous investors, including its Series B lead Cox Enterprises, also took part in the funding event.1

The company intends to use the capital to add state-markets to its roster (it currently operates in five states, but wants to reach all fifty). But even with a constrained geographic footprint, Clearcover is growing nicely. The firm cited “tripled policy sales” in 2019 compared to 2018, leading to “quadrupling premium [revenue].”

Those are the sorts of growth rates that investors love. Especially as, for venture-backed insurance startups, margins improve with scale.

Improving margins

Both Clearcover (automotive insurance) and Lemonade (renter’s insurance) have shown improving loss ratios (an insurance term) as they’ve scaled.

Yesterday, while examining a new set of private companies that have reached the $100 million ARR milestone, TechCrunch included Lemonade, which reached the mark in Q4 2019. More exciting than its mere revenue growth, however, were its improving margins. Those improvements were predicated on a falling loss ratio. From paying “out $3.68 in claims” for “every dollar [it] earned” back in 2017, Lemonade has improved the figure to $0.78, it reported in November.

Clearcover is seeing similar improvements. TechCrunch asked how far its loss ratio has improved over the last 12 months, and while the company declined to provide a specific number, its answer is still useful:

We take a state-by-state, cohort-centric view of loss results, and those loss ratios have improved substantially over the last 12 months. In some states, this was due to our own risk management choice. In other states, this simply has to do with scale.

So margins can be improved with scale and better management. Each should improve with corporate maturity, which makes the sector an attractive bet; it gets better with growth, not worse with scale.

But can we really call insurance premium revenues annual recurring revenue (ARR)? Let’s explore the question.

Is that ARR?