Lemonade files S1

Yep, this is what I meant. The "first generation" of these engines were written in COBOL, and are quite nasty by modern standards.

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

Yeah, it's hard to imagine why it would make business sense not to push app installs as hard as possible. Take a look at logcat once in a while and notice how often apps you haven't used in weeks are still phoning home sending who-knows-what, not to mention occasional attempts at "re-engagement" from push notifications and much more.

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.

Hi all, I think this thread has been full of great discussion, and there has been many questions surrounding Lemonade's financials and strategy.

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!

Very insightful questions, my thoughts below:

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.

> If so, I’m surprised they weren’t bought by one of the bigger brands by now.

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"