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Lemonade files S1

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Re: Lemonade files S1

#181

Post by a_quigley »

bradlys wrote: post #43
aphextron wrote: post #36

They've somehow managed to build an insurance company that loses money. Incredible.

Am working at similar insurance "tech" company. 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'…

Which one is that?

Re: Lemonade files S1

#182

Post by a_quigley »

gen220 wrote: post #94
harryh wrote: post #76

Earlier quoted context omitted.

It sounds like you don't know what "loss ratio" means in the context of an insurance company. Loss ratio is the % of premiums collected that are paid back out in claims. If the number is below 100%, then your core insurance business is profitable 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 n…

Here to echo. I work in insurance and 72% is actually very good when you consider (1) their trajectory of how long it took them to get there (2) how strongly they're investing in growth, which is very expensive.

> how strongly they're investing in growth

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

Re: Lemonade files S1

#183

Post by aquigley »

aquaphile wrote: post #170
harryh wrote: post #76

Earlier quoted context omitted.

It sounds like you don't know what "loss ratio" means in the context of an insurance company. Loss ratio is the % of premiums collected that are paid back out in claims. If the number is below 100%, then your core insurance business is profitable 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 n…

That misses a 3 key points: 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)…

Why does LR even matter? They cede 75% of their risk so they operate more like a broker. I reckon the reason they don't cede more risk is because the re-insurers want them to have skin in the game. The re-insurers could get adversely selected if Lemonade can't price well

Re: Lemonade files S1

#184

Post by azinman2 »

a_quigley wrote: post #179
azinman2 wrote: post #25

What protects them? It’s unclear to me what’s their “unfair advantage”. I can tell you what it’s not — a chat bot. Unless they have some NLP/AGI breakthru (and if so, why are they an insurance company?), the apps that Allstate, Geico, etc are pushing should be able to do the same thing. Even if not in a “chat” interface, the end result will be the same. So do they simply have a nicer UX / more appealing model (market…

> 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…

Fascinating. It also makes it a les attractive investment for the stock market, no?

Re: Lemonade files S1

#185

Post by aquigley »

azinman2 wrote: post #184
a_quigley wrote: post #179

Earlier quoted context omitted.

> 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…

Fascinating. It also makes it a les attractive investment for the stock market, no?

From an individual stock's financial performance perspective, sure.

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...

Re: Lemonade files S1

#186

Post by aquigley »

55555 wrote: post #143

Does anyone know why they chose to offer renters/casualty insurance? 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.

Definitely the easiest insurance line to get started in for a variety of reasons. Things like easier compliance, younger and uninsured demographics that are easier to market to, and reduced complexity

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.

Re: Lemonade files S1

#187

Post by Abalancedview »

shostack wrote: post #178
Abalancedview wrote: post #177

Earlier quoted context omitted.

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…

Really insightful--thanks for the thoughtful response. 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?

Yup, Lemonade is certainly has the advantage of being more flexible and nimble. I've spoken / worked with larger insurers and they are hampered by the amount of manual processes and bureaucracy that are typical for +50 year old corporations.

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.

Re: Lemonade files S1

#188

Post by aquigley »

Abalancedview wrote: post #175

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 to…

Interesting read! It took me a bit longer to get through that S1 than you though. A few points I'd love to discuss

> 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"

Re: Lemonade files S1

#189

Post by [deleted] »

Abalancedview wrote: post #174
shostack wrote: post #104

Earlier quoted context omitted.

No kidding. Many SaaS businesses would kill for that payback period.

Unfortunately their LTV / Cac is terrible, I've provided a full teardown on what parts of the S-1 trouble me the most (unit economics and revenue growth). 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!

[deleted]

Re: Lemonade files S1

#190

Post by cleverprankster »

Abalancedview wrote: post #174
shostack wrote: post #104

Earlier quoted context omitted.

No kidding. Many SaaS businesses would kill for that payback period.

Unfortunately their LTV / Cac is terrible, I've provided a full teardown on what parts of the S-1 trouble me the most (unit economics and revenue growth). 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!

Nice analysis. For your unit economics calcs, their retention isn't 75%. That figure excludes customers that the company churns. When you include those figures into retention, the Year 1 retention is 62% and the overall 2 year retention is 44%.

See here in the Customer Retention section for more details: https://www.meritechcapital.com/blog/lemonade-ipo-s-1-breakd...

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