Summary
- Lemonade is a very impressive recent-IPO entry into the insurance sector.
- Its leadership is talented and has adopted a clear strategy for competing with industry giants.
- That strategy is based on principles and practices of advanced technology, efficiency and a customer-friendly orientation.
- I rate Lemonade as an attractive addition to a portfolio, but I would advise waiting to open or add to a position.
Introduction: A Compelling Story
Lemonade is, first of all, a very interesting company. Its co-founders Daniel Schreiber, the CEO, and its ‘DaVinci Code’ technologist co-founder Shai Winninger, are focused on creating a very successful company based on efficiency. That efficiency is both internal and customer-facing, and assumes a digital model.
In the larger context, Lemonade (LMND) is ambitiously attempting to spearhead transformation of the insurance industry to a new, digital paradigm. Technology and ease of customer interactions with the product(S) are at the heart of this strategy.
Whatever the future of Lemonade as a company and as a stock, it is a fascinating study in the application of hi-tech paradigms to an industry that is traditional, stolid and at least partially stuck in the legacy ‘analog’ world.
Lemonade: Chronology
This synopsis of Lemonade’s rise is provided by Wikipedia.
“Lemonade Insurance Company is an American property and casualty insurance company headquartered in New York City offering renters and home insurance policies for homes, apartments, co-ops and condosin many US states in addition to content and liability policies in Germany and the Netherlands.Lemonade delivers insurance policies and handles claims through desktop and mobile apps using chatbots. Its business model includes giving underwriting profits to nonprofits of the customers’ choice.”
“Lemonade Inc. is backed by investors including Aleph, Sean Grusd, General Catalyst, GV (formerly Google Ventures), Sequoia Capital, Thrive Capital, XL, and Japanese tech investor SoftBank, having raised $120 million as of December 2017. Lemonade is publicly traded on the New York Stock Exchange under the ticker symbol LMND.”
“Lemonade was founded by Daniel Schreiber (former president of Powermat) and Shai Wininger (co-founder of Fiverr), in April 2015. Dan Ariely joined in 2017 as the Chief Behavioral Officer at Lemonade.”
“Lemonade underwrites its own policies and is reinsured at Lloyd’s of London.[14] In 2020, Ohio-based financial analysis firm Demotech rated Lemonade’s financial stability as A-Exceptional.”
Lemonade is a recent IPO with a good chance at long-term success thanks to a solid vision, business plan and adherence to a few striking principles.
Lemonade Attempting to Blaze the Digital Trail in Insurance
The strategy of building an insurance company based on design and implementation of a digital model is fundamental to LMND. Daniel Schreiber, LMND CEO, emphasizes this change repeatedly, as we shall soon see, thanks to another incisive interview by the YouTube investment presenter David Lee.
Schreiber describes how the legacy insurance companies are caught ‘flatfooted’ as they attempt to navigate the course from the Industrial to the Digital Revolution. They are stuck in old paradigms and old technologies, and find it difficult to progress beyond them. In contrast, Daniel Schreiber says, a nimble start-up like LMND with its digital emphasis, is in a great position.
“The differences as pronounced as they are today, they’re not converging, they’re diverging.”
The ‘legacy’ companies are aware of these challenges. Daniel Schreiber has talked with certain CEOs of such companies, and while he calls them ‘fiercely impressive,’ some are as impressed by LMND. A few have even told him, “Daniel, I fancy your chances more than I fancy my own.”
None of this guarantees Lemonade’s success, given the challenges ahead, but it does imply that LMND may yet realise its ambition of leading a transformation in the insurance sector.
LMND: The Business Model
The LMND business model is both simple and powerful. It can be summarised as ‘using technology to enhance the customer experience where customer happiness is the goal of everything LMND does.’
The Wikipedia piece sets out the practical side of this strategy, which shows another way in which LMND differentiates its approach from the legacy models:
“Lemonade’s business model differs from that of typical insurance companies in that it keeps a flat 25% fee of a customer’s premium while setting aside the remaining 75% to pay claims and purchase reinsurance.Unclaimed premiums go to a nonprofit of the user’s choosing in an annual ‘Giveback.’”
"Insurers typically make money by investing your premiums (“float”) and by paying out less in claims and expenses than they took in premiums (“underwriting profit”)."
Lemonade is much more ‘interactive’ with its customers. The mixture of premium setting-aside and holding a large reserve of the premium total to pay claims and purchase reinsurance enables both 1) swift payout on claims and 2) funding of a customer’s target charity, as desired.
