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An upcoming initial public offering (IPO) that has caught my interest is Lemonade ($LMND). I'm neither an expert in insurance companies or IPO evaluations in general, but figured I'd compile the information I've gathered to helping me reach my determination.
Like many companies that IPO, Lemonade has never been profitable. According to Couchbase, Lemonade has raised over $480 million dollars with a valuation of over $2 billion since its inception in 2015.
Right off the bat, my major draw to their service is the automated nature of their business. They claim to "collects 100x more data than traditional carriers", which it uses to determine insurance rates. However, this may be either a pro or con. It's an advantage because most millennials prefer to conduct everything either online on an app or over text messages. A bot for the insurance world is the next closest thing.
But for me to invest, I'd want to know more!
Giving Lemonade's Service a Try
The most obvious way is to give their service a try. It's completely free to compare my current homeowners insurance against what they could offer. Though the comparison isn't exact, as not all the fields are the same, I made them as close as possible. Unfortunately, my current homeowner insurance provider offered a more attractive price than Lemonade.
What I did gather from my experience is the process of getting a quote from Lemonade is insanely easy. I had a quote in less than 5 minutes, with many of the details easily explained on screen. In all honestly, I don't really know how my current insurance is structured except to say I have an insurance agency company sitting in the middle, likely skimming value. Therefore, despite Lemonade's rate is still higher, there's certainly potential in automation.
What I was unable to try out was filing for a claim. There may not be a way to reach a conclusion, but I'm confident the Lemonade process will be fast, but how fair is it? That could mean a big difference to customer retention. All of Lemonade's claims is that they don't try to deny a claim, but is the Lemonade claim lowballed?
Lemonade Inc: Three Companies in One
Lemonade as a whole is actually three companies in one, per the Lemonade Legal Stuff page.
- "Lemonade Insurance Company" - This is the actual company that provides insurance and claims.
- "Lemonade Insurance Agency, LLC" - This company acts as the licensed insurance agents that market Lemonade products. They receive a percentage 20% of the Lemonade Insurance Company premiums. They can also sell other insurance company products, which they also get various percentages.
- "Lemonade, Ltd" - This company is the technology arm of Lemonade Inc.
So why split up Lemonade Inc into three separate comapnies?
Is Lemonade as a B Corp Beneficial?
Lemonade is a for certified B Corp. But just because it's Lemonade is a B Corp does not mean Lemonade is a Non-Profit. Lemonade is a for profit company. This is similar to Toms (who donate a pair with every purchase). While this ultimately means they donate a part of their profits to charity, it is both an advantage and disadvantage. Just because Lemonade is a B Corp doesn't mean except they have listed in their charter to balance profit and purpose.
- They donate any unused premium in your "group" calculated once a year to a charity of your choosing. The idea is that if a customer knows their money is going to a good cause, they might not file fraudulent or overstate their claim.
- In recent years, non-profits have seen reducing donations due to changes in the tax code, so the option of providing people to donate via insurance is in my opinion a form of free advertisement. With less spent on marketing, the company can use that capital to expand to new areas of insurance and different parts of the world.
Buffet's GEICO vs Lemonade
Buffett investment in GEICO was in part due to the fact that insurance companies hold a lot of money, which can be invested. Additionally, GEICO had cut out pricey insurance agents. Lemonade has done that, and gone a step farther by automating the work of underwriter.
The competitive advantage that GEICO had against insurance companies of its time is the same competitive advantage that Lemonade now has against all traditional insurance companies.
How Lemonade Makes Money Now and In the Future?
Like all other insurance companies, Lemonade makes money in two ways.
- A fixed 20% premium of every insurance plan.
- Reinvesting your premium that's paid ahead of time.
The largest difference is they take 20% off the top as profit. The rest (minus any claims) are paid to non-profits of their customers choosing. So everybody wins, except for the company, and therefore the shareholders. The shareholders must hope they can attract enough customers to increase profits.
Lemonade is currently popular in the less than 35 age range. Though they are all currently renters, as they begin making more money and scale up their lifestyle, they may move from renters insurance to homeowners insurance. And their relationship with Lemonade is intact, they may need pet insurance and car insurance. In my opinion, Lemonade has the opportunity to upsell their product. And because their platform is digital, I'm assuming it scales well. And since they do business throughout the world, the ability to easily scale will work in their favor.
What Technology does Lemonade Own?
The technology that Lemonade owns in my opinion can become a competitive advantage. Sure other companies can create their own variations, but the simple fact that according to an interview with Lemonade CEO Daniel Schreiber and David Gogel, Lemonade has "rebuilt the entire stack from scratch" and "own the full stack the whole vertically integrated business". To me, this means efficiencies, saved money, and more profits. They avoid the problem of licensing out primary software from another company that have the power to indiscriminately raise prices.
Their platform is run completely off of Amazon AWS. The company also routes calls through their computers (no phones lines to maintain) and internally use Zoom and Slack. Noted is that as AWS service is scaled up (and down), this will increase the amount owed to Amazon.
Lemonade Employee Overhead Advantage
Part of the interview, he states that the claims processes is mostly automated via bots. If a decision can't be made, a human will intervene during the claims process. But the hope is that the bots can complete a majority of the claims, leaving the smaller percentage of edge cases to humans to resolve.
According to the Lemonade S-1, 123 employees in Isreal. Their two largest markets, California and Texas, currently have zero employees. Those also happen to be high salary states, so having remote employees can minimize costs.
As of March 31, 2020, Lemonade had 329 employees, only 193 of them in the United States. Compared to five traditional insurances companies (according to public information), 150-450 customers per employee. During the same time, Lemonade had over 2000 customers per employee. This underscores how large a role technology plays.
It wouldn't be an IPO without some risks. Here are some (I'm sure there are more) identified risks to both stated in the S-1 and the observed that I found to best most critical.
- The Lemonade business requires data for the AI to effective. The available data Lemonade has is substantially less than the existing traditional insurance companies. As Lemonade customer base grows, this overall risk slowly decreases.
- Insurance is a competitive space. Craft.co has a list of competitors, which I'll review in a different section.
- Reinsurance may not be available, limiting the number of new customers.
- Although they built their entire stack, it is still required to license 3rd party software. These prices may change over time, or changes to software choices may require re-programming.
- Lemonade Retention Rate is how many customer are lost per year. The current average customer lifetime is 4 years.
- Relies on renters more than homeowner insurance. The premium for renters insurance is less than homeowners insurance.
In addition to traditional competitors, there are many other technology-centric insurance companies. Some of these companies are subsidiaries of the traditional insurance companies, but are still competitors. Some of these companies may not be direct competitors (in terms of rental and home insurance), but may be future competitors.
In a May 2017 Lemonade post, it shows what percentage of customers were converted from which company. Interestingly enough, most come from GEICO, then State Farm, AllState, Liberty Mutual, and Progressive.
- Cover.com - Auto, Rental, and Homeowner insurance.
- Slice.Is - Home, auto, small business insurance for partial businesses like Uber/Lyft and Airbnb.
- Besure - Canadian P2P insurance, where you peers are part of determining the claim and leftovers are returned back to members of the pool.
- Toggle - By Famers insurance, that offers renters insurance.
- Jetty - A startup offering renters insurance, but geared towards a homeowner renting out a property.
- Hippo - Similar homeowners insurance, but from the looks less automated. Claim still require calling a number.
- Kin - Homeowner insurance
Other Online Opinions
- From Reddit post, it's stated that the renter insurance business is not very profitable and says insurance companies don't avoiding claim payouts since it's regulated by states.
- A fairly comprehensive Meritech Capital analysis.