Written By: JB Duler
JB Duler has an MS in engineering and an MBA in Finance from the Wharton School. After 17 years with AXA, FM Global and Chubb (ex CIGNA/ACE) he founded the first insurtech, Esurance and served as its first CEO (Esurance is now an insurance company with $2B in premiums part of Allstate). He then founded an insurance brokerage company he sold 10 years later to AJ Gallagher where he served as EVP for two years. He is the founder of Kiv Broker, a tech platform for insurance brokers.
I am sure you have read interviews from the Lemonade management team pushing more or less the same message “the insurance industry is stuck in the past, Lemonade is disrupting that stogy industry”, “the highest concentration of morons”, “existing technology in the insurance industry is stuck in the 19th century”. The icing on the cake: “Lemonade’s mission is to harness technology and social impact to be the world’s most loved insurance company”.
This short article is an attempt to give you an unbiased overview.
Lemonade (NYSE: LMND) is a direct-to-consumer insurer, specializing in Property Insurance (Renter, Condo, and Homeowner). The company focuses on the Millennial and Generation Z markets. As such, 90% of customers are under the age of 35. Lemonade claims they build tech to deliver simpler and in the company’s words more delightful customer interactions, thereby driving down customer servicing costs. The tech buzzwords include artificial intelligence, machine learning, deep learning and natural language processing.
As of the end of 1Q 2020 Lemonade reported $133M of in-force premium (barely a 3% market share), and a quarterly statutory combined ratio of 100. The company reported 729K customers as of the end of 1Q 2020, the vast majority of whom must be renters. Roughly two-thirds of Lemonade’s policies are concentrated in three states (California, Texas, and New York), although the company sells policies in 28 states representing 75% of the US population.
Although Lemonade is known primarily for their renter product (and more recently Pet insurance) the company’s success is predicated upon its ability to “graduate” renter policyholders to Home or Condo policyholders. While the company has increased the graduation rate, it is still low relative to best-in-class competitors. During 1Q 2020, 10% of new Condo customers were former renter policyholders (Source: S-1). Perhaps tellingly, the company did not report similar results for their Homeowner product. Best-in-class competitors have policy graduation rates in the 30% to 40% range for the Homeowner product.
Good luck with that. Let’s take the example of my daughter Laetitia, a recent Columbia University grad, who lives in Brooklyn. She shares a small apartment with three other single roommates. The rent is high and she just lost her job due to Covid. There is zero chance that she will EVER buy a homeowner policy within the next 10 years. My guess is that extrapolating that x% of Generation Z living in large cities will be buying a homeowners policy with Lemonade within a few years is a reach to justify a high valuation. The numbers prove otherwise so far.