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?

Both Clearcover and Lemonade view their premium income as ARR or a close equivalent. In its post announcing its growth milestones and improving accounting, Lemonade called its premium revenue ARR, and in an email to TechCrunch Clearcover said that it does “consider [its] premium run rate as a proxy for ARR, yes.”

This is neat. Now we have to decide if we agree. Starting, it is clear that not all traditional ARR is equal. Some ARR has gross margins in the 80% range. Some ARR sports gross margins in the 60% range. And some ARR has net retention of 115% on a year-over-year basis. And some ARR features replacement-level or worse net retention rates.

The question before us, then, isn’t whether it’s fair to say that ARR has a wide quality band, but if the ARR-ish figures of insurance startups land inside that range. I’d hazard that the answer is probably yes. Insurance startup ARR not as good as software ARR, but that doesn’t really make it not ARR.

Why isn’t it as good as software? Lower gross margins (though it would be easy to assume that lifetime value of insurance customers is high, making lower margins less problematic if customers churn infrequently). For example, here’s our Q&A with Lemonade regarding its cost of revenue valuations (how one calculates gross margins):

  • TechCrunch: Does Lemonade count its loss ratio as a cost of revenue/cost of goods sold? 
  • Lemonade: Insurance accounting works somewhat differently, but conceptually our Loss Ratio is like COGS, and our gross margins are fairly stable at around 25%.

And here’s the same sort of question with Clearcover:

  • TechCrunch: Does the company count its loss ratio as a sort of cost of revenue, something that goes into its gross margin calculations?
  • Clearcover: Yes, we think of the loss ratio as a sort of COGS, which we net from premium to arrive at the gross margin (per unit).

For the sake of argument we could posit that Clearcover’s gross margin is double what Lemonade currently sports and it would still not command software-style gross margins. In short, this feels like ARR, but of a different class.

We probably need to have some distinctions for ARR to help us understand what we talk about when we discuss the stuff. Say, low-margin ARR, mid-margin ARR, and high-margin ARR. We could use bands like 0-50%, 51-75%, and 76%+ for the different categories. That would be useful. Each would have its own revenue multiple band, once things like growth rates and S&M spend efficiency were included.

Today brought more capital to the startup cohort hoping to reinvent insurance with technology. If it succeeds, the group of companies could drive better gross margins than their traditional peers. And if they do, perhaps all the capital wagered on their success will pay out.

  1. My former employer, Crunchbase, also recently raised a Series C led by OMERS Ventures. I own shares in Crunchbase that were part of my compensation. None of this matters in the context of this post, but it seemed like a good thing to disclose.