Lemonade files S1
sec.gov
sec.gov
- To buy and manage a policy, you have to install their mobile app. They have a website, but to do anything substantial they redirect you to the app.
- I canceled the credit card I use for the premium. To update the credit card, I have to use the virtual chat bot, which comes with fake “typing…” indicator.
I bet these fancy UX cost them a lot of money, but literally made the experience worse.
Reddit just wants you see ads. The percentage of Reddit users that block ads must be astronomical.
Facebook try’s to tie sentiments to a reasonably verified identity while reddit adopted a less sophisticated wild Wild West approach.
Facebook is winning that war. Knowing people so you can sell ads at an auction to them is what makes you rich.
It's no good for consumers, but I don't think many investors would be happy to hear that a company is just leaving those data and opportunities on the table.
I don't think they could've done a better job solving a problem through software (an app).
I tried cancelling it to make sure it will be easy. The steps seem super easy and straight forward all the way up to the confirm option.
edit: I just found out that their policy framework is open-source on Github (https://github.com/lemonade-hq/policy-2.0). That's huge to me.
And they use regular English to explain everything with real examples like how they'd cover an Airbnb if you had a fire, and what a deductible is. Meanwhile I couldn't find my policy on State Farm's site and had to dig through Dropbox to see that the its line items are furs, silverware, and waterbed damage. What year is it?
That's not their policy framework. They use the same standard policies everyone else does (created by a division of Verisk called ISO). It was their attempt to "show" they can design a "Plain English" policy. In reality, it had nowhere near the effort put into it that could plausibly allow that, and is not used by them in production in any way.
Being forced to use a chatbot sounds annoying, I agree, but for people who aren't like us on HN who are in the know, the typing indicator fulfills an important function: instant replies can be jarring to users and inhibit their ability to understand the interaction as chat. (There is some evidence to think this intuition is right, by the way: https://chatbotresearch.com/wp-content/uploads/2018/11/icis2...)
Let's not get into whether chatbots have done more harm than good, but I think we can agree that if we're going to have them at all we should do them right.
I will only use the state-wide automobile insurer for all my insurance policies for all types or cover they offer that I need (vehicles, building, and home contents).
Why? They have an outstanding reputation and physical offices in both cities in the states (Tasmania).
Needing to make an insurance claim is almost always going to be a stressful event to some extent. Being able to walk in and talk to a real person if needed is something I’m willing to pay a premium (pun!) for.
When it comes to insurance, for me, cheapest is not always best.
It’s called the Royal Automobile Club is Tasmania, or RACT.
Wonkypodgia does a better job of explaining it:
The Royal Automobile Club of Tasmania normally abbreviated to RACT is a motoring club in Tasmania, Australia. The organisation was established in 1923 and now has over 191,000 members.[1] It is a member of the Australian Automobile Association. It provides services such as roadside assistance, vehicle, home and contents insurance, personal and car loans, driver's education, tourism services and home security products.
In addition to consumer services, the club also engages in consumer advocacy, particularly in regard to petrol prices, which are both historically and recently higher than prices in other parts of Australia.
https://en.wikipedia.org/wiki/Royal_Automobile_Club_of_Tasma...
The Australian Automobile Association (AAA) was established in 1924. The AAA is the peak organisation for Australia's motoring clubs and their eight million members, and advances the interests of all road users across Australia to ensure land transport networks are safe and sustainable, and that the cost and access to transport is fair.
https://en.wikipedia.org/wiki/Australian_Automobile_Associat...
Right now it is mostly laws that protect categories of people that keep insurance companies from charging people more.
What’s the plan here, use machine learning in a “hands off” way with a black box algorithm to apply pricing discrimination in a way that a human could not because of regulation?
Probably a fair amount of fat to trim.
An agent generally needs a couple hundred paying policies to be in the black.
Can’t really offer a source but I heard it from an insurance broker personally.
That depends on how large the industry is, what its cost structures look like and how price sensitive it is.
A small, persistent cost advantage can be enormous in the insurance industry.
You're also saying that in a thread about a company that just produced VC-sized returns and is IPO'ing. Your premise clearly doesn't follow, as most VCs invest early and will exit with an IPO like this. The primary question going forward with Lemonade is for public shareholders and whether the company can get a lot bigger in the future. The VC-sized returns were already generated for the early VCs.
They still market heavily, and I presume they paid well for their (pretty good) branding.
When I applied there was a wait between applying and having coverage: an amount of time I suspect correlated to a human having to review materials.
My local market has weird insurance regulation, so I had to reach out for customer-service to ensure coverage which wasn't explicitly in the policy. The regulation and compliance department of any insurance company is likely rather large and expensive and rather difficult or risky to offload to AI.
I haven't had to make a claim, but I get the strong opinion that automated claim approvals are basically a function of claim amount and claim history. Anything over $X or for your Nth claim still involves a human at least as a gatekeeper. The AI may be real, but it seems strongly like the usual "fake it till you make it" AI that lots of companies claim to have but are actually 'mechanical turks'.
“We seek to encourage good behavior and build a long-term relationship based on mutual trust by endeavoring to decouple our financial incentives from variability in claims. In our model, we minimize any incentive to deny legitimate claims as we aim to give back, rather than pocket, leftover monies. After our customers purchase a policy, we ask them to designate a charitable cause for us to support with the residual premiums from their policy. Despite there being no contractual obligation requiring us to donate leftover premiums to nonprofits, when a customer embellishes a claim, such customer reduces the total amount available that can be contributed to nonprofits. As a result, we believe customers are less inclined to embellish claims as they would be hurting a nonprofit they care about, rather than an insurance company they do not.”
The nicest business meal I ever had was during a lunch meeting that I tagged along to with a large insurance carrier. They could probably cut out $30 steak lunches to lower costs too.
This is where better technology can result in lower costs. It's a volume/unit-cost game. Their unit cost per person is maybe a few cents or a few dollars cheaper, but at huge volumes it makes a big difference.
Pre-COVID, many health insurance companies (my industry) were gearing up to offer free Doctor on Call (a service that, if well-implemented from a tech PoV, has near-zero margin costs), because access to such a program reduces the risk of expensive claims later down the line.
I'm sure there are equivalents in the kind of insurance that Lemonade provides. For example, they might offer free or heavily subsidized home security installation in certain zip codes with a history of burglaries.
By law, it's required to be at least 80%.
Yes, this is a common criticism of the ACA.
Controlling medical expenses isn't easy. Neither is getting admin + overhead under 10%. You need both to get a reasonably profitable insurance product.
If you assume it costs the health care providers the same amount to file a claim as it takes to process it, then the total overhead of having the insurance industry jumps up to > 30%.
I’ve heard the US numbers are comparable to that, but it is nice to be able to derive it from first principles.
Interestingly, this analysis suggests that the cost of filing a claim should be paid by insurance, not the customer.
Currently the cost is an externality for the insurance company, so they can waste time with nonsensical revisions and rejections before finally paying out.
If the insurance company had to pay for the paperwork on both sides of the process, they’d have a strong incentive to streamline claims.
For health insurance, the rule is:
> Health Insurance companies must spend at least 80% of the money they take in from premiums on health care costs and quality improvement activities. The other 20% can go to administrative, overhead, and marketing costs.
As a health insurer, you can lower premiums while increasing spending on "Quality improvement", to provide a better experience at a lower rate, and increase your market share. This is one dimension of competition that is only beginning to be competitively explored.
If you can get quality improvement at lower marginal costs (which is ultimately a tech problem), you're a more competitive health insurance company.
- Processing claims with humans is expensive; every step that can be accomplished by a computer will probably be cheaper.
- A claim processed via ML will probably be handled fast. A fast response = happy customer, which helps with retention. This is a big one.
- A claim that is processed and closed quickly is harder to amend. Some customers slowly realize that adding items to a claim is free money. Others (legitimately) forgot items and want to add them. A quick claim is usually cheaper than one that might take a few days (or weeks) to process.
- Younger generations are more used to working with a web pages and will likely look at humans (e.g. agents) as old-fashioned.
The big carriers are both scared and dubious of Lemonade. If Lemonade can somehow make it work they could do serious damage to the carriers. But it's hard to see how they'll make the numbers work, as their current losses show. Most of the carriers are trying to implement something similar (which is where I'm slightly involved).
(Anecdotally, they are offering me about 95% of what I pay Geico for similar coverage, and without the auto insurance discount.)
My understanding is that it is generally considered that renter's insurance is too high at most large carriers. There are historical reasons for this which I won't go into (and I don't understand all of them anyway). The carriers don't change this because:
1) Lowering renter's insurance premiums would require raising premiums elsewhere (e.g. homeowners). Raising rates causes customers to leave.
2) Renter's insurance is fairly cheap as it is and people don't price-shop all that much.
3) Shifting premiums brings regulatory scrutiny and you have to do it right (and legally). It's not worth the hassle.
I think Lemonade started largely with renter's insurance to take advantage of that gap. It's one of the things that put fear into the major carriers.
Before I started working in the business space I knew almost nothing about insurance (and didn't care). It's been fairly interesting and I have more empathy for the carriers than I used to; they aren't quite the blood-sucking maggots that some maintain.
Or maybe Lemonade is like many other "tech" companies, and is selling their product below costs in the hopes of growing into profits. From a consumer standpoint, gambling with your insurance in such a manner is scary.
This is exactly what they're doing. Take a look at their losses from claims. Brilliant marketing though, especially for an insurance company.
I assume that Lemonade is banking on doing away with almost all manual processing so they're ideas are different from mine.
You’ll see the same kind of jobs that exist today, but they will be smaller in number, and way less paper-oriented.
The places where the money hides, so to speak, include (1) handling complex cases [customers] (2) scaling a human's ability to process non-automatable settlements. (3) scaling internal support interactions with customers (4) introspection to claims data and support data. (5) graceful handling of prior authorizations.
These problems are not as attractive, but they are where insurance companies spend most of their money. It's still a tech problem, but it's not super fancy.
Existing carriers struggle to solve these problems, because they have historically grown by acquisition, and as such do not have the kinds of unified data systems required for the rapid development of applications that perform the required kinds of introspection. It's a space that's ripe for disrupting.
Most people in the tech industry don't apply the ML label to these kinds of software. However, there is a ton of knowledge invested in these systems: certainly more than any one currently-living human has in their head.
A more apt, though out-of-fashion label might be "expert system": https://en.wikipedia.org/wiki/Expert_system
I’d say customer acquisition is the biggest cost and insurance companies are terrible at it because differentiation is almost impossible in a price driven by extreme price war.
It’s not uncommon that 30-50% of your travel insurance premiums are going to a broker or price comparison website. Talking about great value.
It’s not as sexy as ML in claims but one of the big innovations Lemonade has developed is looking like the anti-insurer and creating a huge PR machine around that. True or not, it worked.
Like you, I’m not convinced that the value they add to the chain justifies their expense, but they’re legally and economically entrenched.
My only hypothesis for their eventual dissolution is that unit commissions will get smaller and smaller over time, as more brokers use tech to manage bigger books of business with lower employee headcount requirements, and brokers become more indistinguishable from carriers.
Or maybe some consortium of carriers will get together to build THE comparison shopping site, like healthcare.gov, and offer some ridiculous bonus payment to you the member for shopping there.
Ιmagine a spaghetti code. Now think of an IT eco-system that has grown with half-baked interfaces, patches, MANY MANY MANY MANY spreadsheets, legacy systems (and I mean having MS Server versions 10+ years old), and nobody dares to change passwords because there will be pain.
Now imagine that a mega-big insurance is growing by M&A, and it becomes mega-big by absorbing other companies, (speghetti-zed) IT eco-systems, and they try to absorb processes and data with even more spaghetti-ish manners. One sneeze and the world is coming down...
Now consider a new, modern company that has the talent, and none of the inheret problems/risks. They may not be mega-big (yet), but they got the potential to slowly steal chunks of the market, only if/the grow clean, fresh, and organically.
In the UK it's a (growing?) trend to have your app on someone's phone, tracking motion from the phone's sensors (accelerometer, GPS/speed, etc.) and they can give you lower premiums. The possibilities are endless... as long as they are modern enough.
I've read several anecdotes of people hard coding hacks into black box algorithms which end up being discriminatory even when stuff like race is not a direct input. I do not think the law cares how discrimination is arrived at.
And btw, lots of insurers specialise in pricing high-risk customers. If another insurer comes in and tries to subsidise low-risk customers using high-risk customers, then a specialist insurer just comes in and undercuts them profitably.
Even a low-risk customer becomes a bad risk at the wrong price. It is all about the price.
Those laws don't really do anything. You can just use zip code and credit score, and bob's your uncle.
Seems like a struggle to get to profitability. With the ratio of closing the gap slowing, sure looks like it's getting harder. This is what bugs me about these companies, after years of running the business and doing 1 Billion in revenue it's still a coin flip whether they will ever be profitable. How is this any different from the first "Internet Boom" except that they've been floated to a much bigger revenue number by VC losses.
So now the VCs want return on investment. The public is getting a chance to buy, and some will, and the VCs make out, the founders probably already did by selling to the VCs, but where is the value creation? Just a shell game.
That is the opposite of how that works, FWIW. Unless the founders took VC money to pay themselves multi-million Dollar salaries or something?
I'm a bird in hand guy when it comes to equity at the fast-growing private companies I tend to be attracted to. I'm almost certain I'd feel differently if I had a larger stake or founder-level attachment to what was being built.
Do you gain more in expense reduction than you lose in loss increases?
By itself, the loss ratio tells you nothing because the pitch here is really that they can reduce expenses, not that they can reduce losses.
And I think the way they present this is slightly misleading. They only handle 1/3 of claims by computer in their entirety. The innovation is really on the front-end. And whilst this is probably a big part of costs, it isn't exactly huge. In addition, this is something that is fairly easy to replicate.
The specific claim made is: we have a "flywheel" (as ever, every company has one of these in 2020) whereby we use data to reduce costs and losses. This seems, from what I can see, false.
If you look at the auto insurers, it's incredibly competitive and everyone is trying to balance those unit costs with the loss ratio. They are all moving targets but premium pricing is heavily regulated meaning your pricing will 100% come under scrutiny from some states (this must be done individually for every state in the U.S.) so any changes to pricing tends to be a complex process that could take months, if not a year+ (in some states) to take effect.
So when you get pricing wrong and are taking a big claims loss, it takes some time to dig out of that and you'll also piss off lots of customers who got in "cheap" and are now getting a rate increase. And when you get pricing wrong and you're loss ratio starts looking better, your competitors may be out-pricing you, making you uncompetitive until your adjustments are improved.
Theoretically two companies with the same policies will pay out the same losses but will differentiate themselves in expense ratios.
In some lines it’s not bad to have loss + expense ratios > 100% because the average time of premium is very far from the average date of loss, so while there is an underwriting loss it is offset by the investment gain.
Of course, this doesn't mean your company is. Insurance companies have many expenses beyond paid claims. But loss ratio should never get to 0% and, by definition, can't be negative. 72% is pretty good for a relatively new insurance business.
1) Grow really big with VC money (You'll need this for step 3)
2) Stop paying out claims with made-up reasons
3) If someone sues you to get their payout, use your massive resources to bankrupt them with legal fees
For those unfamiliar with the combined ratio, taking a stab at an explanation by simplified analogy…
For most normal companies:
Revenue
− Cost of goods
———————————————————
Gross income
− Operating costs
———————————————————
Operating income
− Interest expense
———————————————————
Net income
Premiums
− Losses
———————————————————
“Gross income”
− “Operating costs”
———————————————————
“Operating income”
+ Investment income
———————————————————
Net income
Gross margin = Gross income / Revenue
Operating margin = Operating income / Revenue
Loss ratio = Losses / Premiums
Combined ratio = (Losses + “Operating costs”) / Premiums
Net earned premium 25.3
Net investment income 0.9
-------------------------------------
Total revenue 26.2
Expense
Loss and loss adjustment expense, net 18.2
Other insurance expense 3.3
Sales and marketing 19.2
Technology development 3.5
General and administrative 18.2
-------------------------------------
Total expense 62.4
Loss before income taxes (36.2)It's somewhat worse than average, but trending in the right direction. Will give a qualified "OK".
> Sales and marketing at 19.2 seems a bit high, but I guess they’re doubling down on growth, and it implies they have a long runway.
It's very high, relative to written premium. You can always buy market share in insurance by increasing commissions and/or increasing marketing, and it's okay to overspend in the beginning for branding/momentum purposes, but it's not sustainable. They raised $500 MM, and spent $200 MM (and much of the remaining $300 MM is needed for statutory surplus) so who knows how much longer they can sustain that.
Administrative and tech I'm somewhat sanguine about, as long as they keep moving upmarket to Homeowners' insurance. Renters' insurance is never going to have a great margin. Tech is at least decent, and hopefully the kernel for expanding easily into other markets.
The combined LR isn't 72%. The combined LR includes marketing and sales.
I'd argue the pure LR should be evaluated without respect to growth. If you want to adjust for growth look at the combined LR which doesn't look too pretty. But if they can manage to get that LTV it will be a big success
1) 72% pure loss ratio is ok, but normally for these lines I'd aim for mid 60s. Nothing special to see here..
2) It took them THREE YEARS to get there, and they were exceedingly poor at selecting and managing risk for 2 years. 161% loss ratio??!! That is flunky-level poor risk management. If they had a reinsurer, that reinsurer is probably very unhappy and unlikely to renew the treaty.
3) The combined ratio is really poor. They are hemorrhaging cash because of high G&A and high sales & marketing. Again, after 3 years of effort. This indicates they have not operated any more efficiently that other legacy insurers, AND that Lemonade is spending aggressively to acquire customers.
Lemonade's competitors have vastly more financial resources and market reach, can cross-sell more products, can equal or better its tech experience (USAA, Esurance), operate more efficiently (every major direct P&C writer), and acquire customers at scale at equivalent or better acquisition costs. For the Lemonade investment thesis to work, one must believe they will eventually address these weaknesses at scale, and that they will be given a software valuation multiple when they are really just another direct writer of insurance.
Actually from the S1:
> in February 2020, we announced our intention to launch pet insurance, and we may in the future choose to enter, as underwriter or as agent, into additional vertical markets, such as auto and life insurance, in order to achieve our long-term growth goals.
It sounds like they will enter other insurance markets provided the regulations aren't too costly.
You have to buy earthquake insurance through a state program that the insurance company may offer - but it isn't really from the company, its from the state. In general, they are extremely high deductible programs and only for catastrophic loss - e.g. deductibles that are 25% of the structure.
I think the difference is that renter's insurance isn't covering damage to the building. They're only covering damage to your stuff if it gets buried underneath the building.
They've made a net loss for every year in operation - although granted that loss is shrinking.
This isn't a tech business - it's an insurance business that uses some tech.
There's no network effect, and they are operating in a price sensitive market.
Price sensitivity can be a good thing for a competitor, and tech actually does help their business (see my cousin comments in this thread).
I work in insurance tech, but not for Lemonade or anyone affiliated with them.
You expect to see it really high in the beginning (while they're learning how underwriting works), and to logarithmically decline over time, tending to plateau somewhere reasonable. That's what their loss ratio trajectory looks like, so far.
I grabbed that quote from the web site. With State Farm if there is money left over they give it back. While donating to causes is great, since you want to avoid doing that it just looks like marketing.
We've really bad fires in CA in the last few years. I think claims were in the $12B range from the 2018 fires. What happens to Lemonade when there is a mass causality like this and many insured make claims at the same time?
The wikipedia page on the subject is pretty interesting: https://en.wikipedia.org/wiki/Reinsurance
https://en.wikipedia.org/wiki/International_Society_of_Catas...
Originally the "Society for Equitable Assurances on Lives and Survivorships", but obviously that wasn't hip enough to survive past the 19th century.
https://en.wikipedia.org/wiki/The_Equitable_Life_Assurance_S...
Natural disasters don't work that way. Insurance companies might go 10 years without a major claim, then suddenly there's a major disaster and 10% of their customers have claims that far exceed the value collected by the policies over several terms.
I am a former investment banker, and enjoy analyzing companies in my spare (limited) time. I've been following Lemonade since 2018 so their S-1 filing piqued my interest.
https://balancedview.substack.com/p/lemons-for-lemonade
Long story short, I think there are two major topics that pop out upon reviewing. 1) The unit economics are extremely concerning. 2) Cedeing 75% of gross written premiums starting June 2020 not only shifts business model towards a brokerage business, but also calls into question the true value add of their heavily marketed ML / AI platform for underwriting, and the ensuing loss decrease that can be generated from better data = more profits.
Happy to answer any questions, appreciate the look!
> to become more efficient versus than competitors and ultimately lower loss ratios
I didn't see them explicitly mention their focus on reducing LR for their business model. I read the LR data as a metric to prove their sustainability.
However, I explicitly saw them mention that they want to generate consistent profits, with a reduced focus on pricing/claims, by just taking a fee. Their utilization of ML AI is focused on the UI
> Thus the strategy of lowering their revenue, as ceded revenue to reinsurers doesn’t contribute to GAAP revenue
Where is there GAAP revenue reported? To me it looks like they included ceded revenue in both "Total Revenue" (is this GAAP?) and their non-GAAP "Operating Revenue"
On your first point, Lemonade's loss ratios are currently higher than industry average. This is likely tail weighted & driven by a few outlier claims, as their premiums underwritten are minuscule versus their large competitors. Lemonade has every incentive to continue pricing risk better, and ML is the perfect tool for this. Having spoken to CIOs (chief insurance officers) in the industry, the amount of data insurance companies generate is tremendous, and very quickly ML can spot correlations between price, claims payouts, frequency, etc. Harnessing the data as the largest insurcos are surprisingly manual & paper based, and asking the right questions to the machine is the hard part, but Lemonade has the advantage of being more nimble & not encumbered by the legacy tech stack.
Lemonade's original philosophy of taking a flat fee & donating the unpaid claims, was driven by disincentivzing fraud. They hired behavioral scientists, and this was big marketing push for their 1.0/1.5 platform. Insurance companies only have so many value levers to pull, and I think while not explicitly stated in the S-1, reading through publicly available posts & data show Lemonade is very much focused on pricing risk correctly and lower LR.
Regarding point 2, GAAP revenue (rarely use this term) is on the income statement throughout the S-1 (pg 18 is the first instance). Ceded premium to reinsurers is excluded from GAAP revenue (pg 103 has a table breakdown).
My thought is Lemonade is marketing GWP front and center on page 2, but shifting their biz to be heavily ceded to insurers, which lowers revenue. Yes, Lemonade is receiving a fee in exchange, and maybe lowering liabilities on their balance sheet. But, its not a great trade because 1) expensive CAC to cede it away, 2) they essentially become a broker, and brokers don't generate the multiples investors want, and 3) they don't take advantage of insurance float.
Only thing that would keep me from jumping is lack of auto insurance as well, but I understand NOT being in to that business.
I hope they do well.
- The ad is for a Haftpflichtversicherung. It pays, when you for example use the phone of a friend and it falls down. You are obligued to pay for the damage.
- In the ad, they make it seem like your own device is insured, which is not the case.
It does not seem to me that they are to be trusted.
So do they simply have a nicer UX / more appealing model (marketing) to a younger generation? If so, I’m surprised they weren’t bought by one of the bigger brands by now.
Most insurance carriers I called want to "We can't find your quote, can you please repeat all those pages again, so we can start a new one?" Most don't disclose what features they offer and let you customize it _fast_. Fucking AllState didn't even show much property cost is insured until I called them and it didn't let me add more coverage until I called. 9.99 a months is very cool, but I would like to know how much and what insured first.
Customer support is pretty good as well at Lemonade. One email and my old policy canceled and all personal items transferred to new place.
That is on top of the fact that no one goes above 300k and make you buy a 1m umbrella policy. All while trying to sell you car insurance, life insurance, shit yo pants insurance.
The point is not to build a chat bot that handles everything, but a chat bot that handles a larger fraction of claims than competitors. And that drives down costs.
From the S1
"As a public benefit corporation, we will be less attractive as a takeover target than a traditional company would be and, therefore, your ability to realize your investment through an acquisition may be limited. Under Delaware law, a public benefit corporation cannot merge or consolidate with another entity if, as a result of such merger or consolidation, the surviving entity's charter "does not contain the identical provisions identifying the public benefit or public benefits transaction receives approval from two-thirds of the target public benefit corporation's outstanding voting shares. Additionally, public benefit corporations may also not be attractive targets for activists or hedge fund investors because new directors would still have to consider and give appropriate weight to the public benefit"
Right now it looks like individual stocks are highly correlated to the broader market. [1]
The economy and a diversified portfolio could benefit more from benefits to broader society than anything they do individually. Public benefit corporations could be a trend that could significantly grow in the coming years
[1] https://www.bloomberg.com/opinion/articles/2020-05-27/all-th...
If Lemonade were serious about charity, wouldn’t they make themselves contractually obligated to donate excesses?
> Our 2019 annual Giveback for the 12 month period ended June 30, 2019 amounted to about 1.5% of earned premiums.
They take 25% on all premium to begin with. From what I know - standard in the industry is somewhere between 20-25% cut. So, for them to take effectively 23.5% isn't weird at all.
If they go public - their employees can cash out. There's no way anyone at Lemonade will stay unless that stock everyone is earning gets paid out.
1. Is it natural for CFO's to receive that many options? The executive compensation chart looks like CFO receives much more than anyone else. 2. https://imgur.com/a/Jl6W1P8 Do they not share the % shares owned by everyone until IPO?
I understand how their model is a bit different from other insurance companies, and I think that's cool. But I'm still left wondering why they thought this form of insurance (as opposed to auto, life, etc) was the easiest to attack.
Regulators also don't put as much financial scrutiny in lines that don't have high caps (although they still scrutinize other aspects like consumer protection).
If a "renters only" insurance agency goes under, most guaranteed funds could pay it out without much consequence. It is a whole different story if a major health insurance company were to go under.
Wall Street needs more of them.
And reading their mission statement, they say: "Harness technology and social impact to be the world's most loved insurance company."
This is a little bit laughable. Since when ever has a bank, insurance company, or finance-related company been "loved" by its customers? Bringing you joy every day? Maybe they should aspire to a more realistic goal.
Quite often in the insurance industry a cost margin in the low single digits is considered good.
https://balancedview.substack.com/p/lemons-for-lemonade
Their payback period isn't 2 years, not even close with 18% gross margins.
Let me know what you think!
From that perspective, your modeling makes sense, but it leaves me questioning the core assumption behind your conclusion:
> "Lemonade has a great product. I personally enjoy using their app - its smooth, incredibly user friendly, and turns a chore into a pleasant task. Lemonade’s revenue growth has been incredible thus far. Despite the tear-down above, I think there is strong product market fit and the target market appreciates the value proposition. Unfortunately, at this stage of a company’s life and the current environment, public investors will not view widening losses in a positive light."
Given the uncertain environment, is possible that investors are taking a longer-term view of what is needed to establish a new leader in the saturated insurance vertical? You acknowledge the strength of their UX, and it seems they've been investing in building their brand and not just focused on performance marketing. Done effectively, this would continue to deliver efficiency improvements to CAC in the years to come if they can cement themselves as a household name that is a good alternative to State Farm and the like.
Based on that, I'm curious what CAC trajectory they would need to have (and by extension how realistic that looks for their channel-level marketing performance) to get investors excited.
I haven't read the S1, but I'm also curious how their fundamentals compare to other insurers. Is this a company that wants to be valued like a tech company and deserves it? Or should they be valued like a more traditional insurance company?
Does their approach give them a unique avenue to sell in higher-margin products and services that will flip the current assumptions on their head?
The institutional investors whom Lemonade's exec team will be pitching to on the road show in a few weeks will be long-term focused. The bankers are likely pitching to insurance-focused and technology-focused funds. The investors will ask questions about normalized loss ratios, margins, etc. to determine the run-rate cash flow and ultimately the end-state profitability of Lemonade.
The problem is investors will certainly appreciate an emerging leader in a traditional space with a good product & brand presence. However, I think at the end of the day this feels eerily similar to some aspects of WeWork's story. The insurance (WeWork - real estate) investors will negatively view the near-term cash hemorrhage, and the tech investors will puke at the normalized, future margin profile.
You come from the SaaS world, so you appreciate the low marginal cost of distributing a SaaS product (Ben Thompson fan, anyone?). This means high gross margins and initially large Sales & Marketing spend to acquire customers, but then decreases as percentage of revenue as 1) customers are locked into your platform and their business processes rely on the product) and 2) cash generated from high margin business can fund future growth.
This is not the story at Lemonade. Much like WeWork, there is a ceiling on their gross margins. They are at ~17% right now gross margins, driven by a ~70% loss ratio. This loss ratio is near-industry historicals, and unlikely to materially change. This is similar to WeWork, Rent + Operating Expenses of buildings were ~70-80% of revenue. Compare both to a SaaS company gross margins of 80%. I just can't see investors being excited about this, even if they do inexpensively grow market share. Lemonade's loss profile is similar to competitors, but they have nowhere near the spending power on advertising & customer acquisition needed to make the insurance model work.
Regarding your thoughts on CAC, I think Lemonade is working hard on improving their S&M channel efficiency, and this is evident in Q1. However, my problem is insurance is inherently a high-need, low-value industry. The need for insurance is acute, but the general population places very little value in the activity of seeking out the best insurance experience. You purchase insurance and hope you never interact with the insurance company again. Does brand really matter past the initial, fervent adopters? Furthermore, the value proposition not only has to be clear, but also meaningful to capture people's attentions and make the switch.
I believe CAC will continue to increase if Lemonade intends to grow at their historical pace. For the past 3 years, Lemonade has attempted to market themselves as an anti-insurer, which is great, but the reality is the U.S. market is broker and traditional marketing channel dominated. Insurance lacks organic growth because its inherently a low value activity compared to Facebook, Uber, etc. If they don't spend to capture mindshare, its challenging to see people promoting their product naturally. To get investors excited, Lemonade needs to 1) capture market share inexpensively, 2) through ML/AI, decrease their loss ratio vs. industry average, and 3) allocate capital more efficiently as they are giving away 75% of their premiums under a new deal starting June 2020.
I'm not entirely sure what the answer to a higher-margin insurance product is for them. Lemonade mentions getting into pet, auto, etc. Sure, customer upsell seems easy, but still a very different product, and like I mentioned above, loss ratios are loss ratios. Shit breaks or things go wrong eventually and no amount of pricing risk correctly is going to make that decrease unless you reject higher-risk customers.
Traditional insurers trade on Price / Book, and also Price / Earnings. Allstate trades at ~10x price to earnings, and Progressive trades at ~13x.
Are there certain new product avenues they could explore that larger traditional insurers may not be well-positioned to because it just isn't in their organizational DNA? Or is the answer to that "money" and the existing insurers choosing not to pursue ideas because it doesn't make enough for them to care?
Lemonade's competitors also do most types of insurance, there aren't very many large private or public insurance companies that only focus on renters, homeowners, etc. The power is in the bundle and upselling a suite of insurance products to the customer you've already spent the CAC to acquire. With this comes more data to better underwrite deals, and the cycles goes on.
Lemonade has mentioned looking into niche products like pet, phone, etc. Sure, they can carve out a nice space for itself, but the reality of those products is its low premium, low addressable market stuff so its not the most efficient use of capital for large insurers.
One major piece Lemonade is also missing is the traditional float an insurance company has. Even if loss ratios + expenses are 100% of premiums, insurance companies can still generate returns on the massive amount of float these premiums generate every year.
See here in the Customer Retention section for more details: https://www.meritechcapital.com/blog/lemonade-ipo-s-1-breakd...
Regarding retention, I chose to not incorporate regulatory or underwriting risk driven cancellation to capture demand driven cancellations only. I expect as time goes on and Lemonade's capital increases & they fine tune the underwriting model / better price risk, these Company forced cancellations will decrease, as they have the past two years.
I'd be interested to know what % of customers transfer to a competitor vs. not needing the renters / homeowners product anymore.
I do agree with you, however, that this lowers their implied customer lifetime even further, and by extension unit economics.
See https://news.ycombinator.com/edit?id=23461599 for their most recent quarter. Sales and marketing were over 70% of revenue.
Their Y1 and Y2 net retention rates were 62% and 71%. This is below industry average.
so much for machine learning algorithms ... :-)
Woof.
Maybe you'd be surprised at how easy it is to lose money... At least - to me - it seems hard to be profitable with the margins required to have a silicon valley office + salaries. The company I'm at is very worried about loss ratio. You oversubscribe to one region because you're competitive there and some minor weather event happens - bad time. Even if your company isn't paying directly for losses, you lose lots of money in having to handle claims and you lose leverage with contracts in the future with the people who do actually pay out the claims.