LEMONADE

Insurance meets Technology and Social Impact

BACKGROUND

Lemonade is digitizing insurance, by building a new insurance model from the ground up. The company prides itself on being innovative and catering to a very specific section of the market, mostly millennials and younger.

I cant say it better than the company themselves, so the next few paragraphs are extracted from their 2021 10-K Annual Report.

By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, we believe we are making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, we have built a vertically-integrated company with wholly-owned insurance carriers in the United States and Europe, and the full technology stack to power them.

Why Insurance?

Insurance is one of the largest industries in the world. Property, casualty, and life insurance premiums amount to approximately $5 trillion globally, and account for 11% of gross domestic product in the United States.

The scale of the industry is an indicator of the essential role insurance plays in our economy and society. Most homes, cars, and businesses in the United States have some type of insurance coverage. Laws, lenders, and landlords often mandate insurance, making it a non-discretionary product that remains largely unaffected by economic cycles. We believe people typically buy insurance for their entire adult life, producing highly recurring and naturally-growing participatory revenue streams.

Why Technology?

Technology pushes the frontier of what is possible. It changes what we can measure, the efficiency with which we work, and the speed with which we communicate. As our capabilities advance, consumers come to expect and demand more. Measurement begs for personalization efficiency calls for lower prices speed demands better service. Experiences that once seemed reasonable, turn frustrating.

These unrelenting forces have transformed industry after industry and are poised to do the same for insurance.

Appeal to the Next Generation of Consumers

While the rest of the industry typically appeals to established consumers with the 'I switched and I saved' value proposition, we are largely competing with non-consumption, attracting consumers incumbents want, but doing so years before they are ripe for legacy providers .Approximately 65% of our current customers are under the age of 35, and about 90% of our customers said they were not switching from another carrier.

How does Lemonade do this?

More than 93% of homeowners insurance policies in the United States are sold via agents. Lemonade provides a digital platform that eliminates the middleman.

Two bots handle all the on-boarding and claims, AI Maya and AI Jim.

AI Maya is a playful onboarding and customer experience bot. Maya handles everything from collecting information and personalizing coverage to creating quotes and facilitating payments securely. By asking customers a limited number of high-impact questions, and adapting based on their responses,

AI Jim is the claims bot. Any claim Jim is not authorized to settle is assigned to a human, but even where human intervention is needed, Jim does most of the heavy lifting, so claims can be settled quickly and efficiently.

Lemonade also harnesses other intelligence platforms like CX.AI, Forensic Graph, Blender and Cooper to further enhance the use of technology as the centre of its product offering.

• CX.AI is a bot platform built to understand and instantly resolve customer requests without human intervention.
• Forensic Graph utilises the combined power of behavioural economics, big data, and AI to predict, deter, detect, and block fraud throughout the customer process.
• Blender is a robust insurance management platform that was built from scratch by Lemonade to stream the customer experience, underwriting, claims, growth, marketing, finance, and risk teams.
• Cooper handles complex as well as repetitive tasks, from helping the customer experience team handle lengthy, manual processes such as processing paper checks, to automatically running tens of thousands of tests on each release of software.

Something very few people know but is critical before considering Lemonade for investing purposes. The company is registered as a public benefit corporation and has a stated mission of transforming insurance from a necessary evil into a social good. Its business plan includes annually giving a portion of its underwriting profits to a non-profit organization chosen by each customer upon signup. This means that Lemonade profits are essentially capped. This is very different from other listed entities. To become a mega company , this company must grow its customer base exponentially and they are currently growing at 31% year-over-year.

Where will the growth come from?

Lemonade started out with Renters Insurance, a compulsory insurance in the USA. Most renters are young, so Lemonade aims to grow with their customers. Any individuals insurance needs grow as they get older. The insurance products also become more expensive, the older you get. In a recent survey 90% of Lemonade customers said they will not consider moving to another insurer.

Lemonade is also expanding their product offerings consistently. You can see on the image attached, how they beautifully explain the move from Renters and Pet insurance all the way to Life, Car and Umbrella insurance.

The company is mostly focused on the USA right now, operating in states covering 95% of the US population. Lemonade holds a pan-European license, enabling them to sell in 31 countries across Europe, and commenced operations in Germany in 2019, and in the Netherlands and France in 2020. The company launched in the UK during October 2022. The Lemonade platform is inherently multilingual and agile by design, so that they can efficiently expand into new markets and new products both within the United States and internationally.

The Financials

I am not going to mince my words. Lemonade is loss-making. In Q1 and Q2 of 2022 the company lost $74.8 million and $67.9 million respectively, which brings the year-to-date (YTD) loss to $142.7 million. The Q3 results will be announced on 9 November 2022, and I do not expect to see a material change or any sign of profits. This is a growth company investing heavily into Sales & Marketing costs ($75.3 million YTD) and Technology Development ($34.7 million YTD).

The company has a clear path to profitability. I have attached a snippet from the most recent Shareholder Letter. If you invest in a loss-making business, you need to keep a close eye on quarterly results and hold management accountable for the progress made on an agreed profitability strategy. The only way to do that is buy selling if the plan goes completely wrong. Hope is not an investing strategy, and a management team needs to clearly articulate and deliver on a strategy.

Management

I love founder-led companies. The passion for the execution of the vision is what investors crave.

Daniel Schreiber has served as Co-Founder, Chief Executive Officer, and Chairman of the board of directors since the founding in June 2015. Prior to co-founding Lemonade in 2015, Mr. Schreiber served as President and a member of the board of directors of Powermat Technologies Ltd., a wireless charging solutions and technology company, from 2011 to 2015. From 2003 to 2011, he served as Senior Vice President of Marketing and Vice President of Marketing and Business Development at SanDisk and M-Systems (which was acquired by SanDisk in 2006), respectively. In 1997, Mr. Schreiber co-founded and acted as the Chief Executive Officer of Alchemedia Inc., an internet security software company acquired by Finjan Software in 2002.

Lets see if Mr Schreiber can pull off a SanDisk at Lemonade.

This is a Add To Watchlist stock for those who have a higher risk appetite, but also want to invest in companies who give back to society.

Full Disclaimer: I own Lemonade at the time of writing. I have built only 15% of my desired position, so I am dollar-cost-averaging in slowly and carefully. Nothing in this article should be seen as financial advice. Everything stated is for educational purposes.