Persistency FG
Expert
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Really interesting article from the ESURANCE founder on the InsurTech company "Lemonade" that just IPO'd at a staggeringly high valuation.
Esurance Founder Gives Insights on Viability of Lemonade | AgencyEquity.com
August 24, 2020
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.
Lemonade is also struggling with 45% policy retention, after two years. That looks more like some non-standard auto writers! Best-in-class competitors have a 70% retention rate. This is likely due to the fact 90% of policy sales are to first-time insurance customers. Regardless of the drivers, an inability to retain renter policies prevents execution of the company's growth strategy, and severely decreases customer lifetime value.
Lemonade is highly focused on the use of technology to make the purchase and claims handling processes as customer friendly as possible. While laudable, to successfully retain customers, the company must offer value that extends beyond purchase and claims (nearly 95% of customers do not submit claim in any given year). Furthermore, the nature of the Homeowner (vs. Renter) claim process requires greater complexity and more reliance on human intervention, both of which will reduce margins and increase the need for the company to increase rates. Given the concentration of business in highly regulated states (e.g., California and New York) the opportunity to increase rates is severely constrained.
Another factor which may prevent Lemonade from increasing its Homeowner graduation rate is the fact the company is using a HO-3 policy form (with the addition of optional replacement cost coverage). While this is probably sufficient for many customers in lower value homes, more affluent customers demand the coverage provided by a HO-5 (open perils) policy form. While nothing will prevent Lemonade from selling a HO-5 policy in the future, the fact the company does not currently offer such coverage is a limiting factor on its ability to improve the rate at which customers graduate from a Renter to a Homeowner product.
We obtained a homeowner quote from Lemonade, for a $650,000 home in Texas. Interestingly, the UI capped the All Other Peril (AOP) deductible at a maximum of $2,500 and offered the Wind/Hail deductible at a single value of $5,250 (e.g., no choices). We checked the latest Texas rate filing for Lemonade and confirmed other deductible choices exist. It is not clear why the alternatives were not made available, as higher deductibles (e.g., 2% and higher) are chosen by more affluent customers as a way of minimizing premium cost.
Another less subtle but potentially critical factor with the potential to limit Homeowner production is the fact Lemonade does not intend to pursue an AM Best rating, but rather will stick with its Demotech rating. The lack of an AM Best rating is frowned upon (outside of Florida) by affluent customers, particularly those who have significant insured assets (e.g., business owners).
Implications for Independent Agents
Some insuretechs are turning to distributing their products through Independent Agents. Hippo and other smaller insurance start-ups realize the value of independent agents and find the agency channel a low cost (relative to direct marketing) way to generate new business. Lemonade is less likely to pursue independent agent relationships given its predominant focus on renters insurance, and its strategy of focusing on the Millennial and Generation Z markets. Furthermore, the absence of a HO-5 product combined with the lack of an AM Best Rating make Lemonade a less than appealing market to independent agents, particularly those targeting affluent small business owners.
Some numbers:
Lemonade has raised ($500M with venture capital and $300M through its IPO)
$3.5B market cap as of 08/18/2020
Ann. EPS Est. -4.24 FY 2020
So the question is, can Lemonade's tech provide a better customer experience? The tech industry is notoriously bad with customer support. When was the last time you called Google/Facebook/Instagram/Twitter for an account that had been terminated? Good luck! To get an answer you must know personally a senior engineer at one of those companies.
Maybe your customer experience was better at Comcast/ATT or T Mobile?
On the other hand when you call a broker or directly an insurance company (I personally love the service at Progressive) for an accounting or a claims issue, you get an immediate, personalized answer. Most often the problem is solved on the spot or a claims adjuster is dispatched.
So, is Lemonade a tech company or an insurance company? Let's look at some numbers again:
Lemonade has a $241,219 Revenue/Employee and generate a negative Income Per Employee of -$388,889Compare that to real tech companies with the following Revenue/Employee:
Netflix: $2.3M/employee
Apple: $1.9M/employee
Facebook: $1.6M/employee
Google/Alphabet: $1.4M/employee
Lemonade is an insurance company trying to get the valuation of a tech company. Unfortunately the numbers do not look as good. Let's wait few quarters before reaching any conclusions.
"We do everything," Bixby said. "That enables us to handle the whole customer experience just like Allstate (ALL) or State Farm or Chubb (CB). We can do it completely differently because we built our systems entirely from scratch."
Really? While it makes Lemonade feel bigger to compare itself to large established players, Lemonade has demonstrated that they are on a par with best in class insurance companies when it comes to customer service, and that includes renters claims. It may not be that easy for homeowners, especially when you don't have the scale and therefore have to rely on TPAs.
In conclusion, insurance is a promise to pay a given amount in the future. As the Founder of Esurance I just know so well that there is demand for low cost, easy to buy simple auto insurance. Lemonade shows that there is also demand for low cost, easy to buy simple renters insurance. But the amount of money it had required to show that is just mind boggling (close to $1B). Anything else is just speculation.
Implications for Independent Agents
Some insuretechs are turning to distributing their products through Independent Agents. Hippo and other smaller insurance start-ups realize the value of independent agents and find the agency channel a low cost (relative to direct marketing) way to generate new business. Lemonade is less likely to pursue independent agent relationships given its predominant focus on renter insurance, and its strategy of focusing on the Millennial and Generation Z markets. Furthermore, the absence of a HO-5 product combined with the lack of an AM Best Rating make Lemonade a less than appealing market to independent agents, particularly those targeting affluent small business owners. Lemonade says that it had refused to get an AM Best rating. Or is it simply that its financials are so bad that Lemonade would not get an A rating?
A word of caution for insurance agents: this is not a very positive analysis of Lemonade. Simply because the company has very little to show for given the massive amount of money raised. Being complacent is the worst to do. Insurance agents are very way behind in technology in general. There plenty of reasons for that: lack of skills, complexity, cost, and an overall extremely fragmented industry. In subsequent articles we will discuss what an independent agent can do (I would say MUST DO) to leverage technology and grow.
There is a lot of money flowing into insurance related ventures, assuming there is some tech, and that the description includes "disruption". Do not confuse Lemonade with Lemonaid, an online health provider that just raised $33M (!).
Esurance Founder Gives Insights on Viability of Lemonade | AgencyEquity.com
August 24, 2020
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.
Lemonade is also struggling with 45% policy retention, after two years. That looks more like some non-standard auto writers! Best-in-class competitors have a 70% retention rate. This is likely due to the fact 90% of policy sales are to first-time insurance customers. Regardless of the drivers, an inability to retain renter policies prevents execution of the company's growth strategy, and severely decreases customer lifetime value.
Lemonade is highly focused on the use of technology to make the purchase and claims handling processes as customer friendly as possible. While laudable, to successfully retain customers, the company must offer value that extends beyond purchase and claims (nearly 95% of customers do not submit claim in any given year). Furthermore, the nature of the Homeowner (vs. Renter) claim process requires greater complexity and more reliance on human intervention, both of which will reduce margins and increase the need for the company to increase rates. Given the concentration of business in highly regulated states (e.g., California and New York) the opportunity to increase rates is severely constrained.
Another factor which may prevent Lemonade from increasing its Homeowner graduation rate is the fact the company is using a HO-3 policy form (with the addition of optional replacement cost coverage). While this is probably sufficient for many customers in lower value homes, more affluent customers demand the coverage provided by a HO-5 (open perils) policy form. While nothing will prevent Lemonade from selling a HO-5 policy in the future, the fact the company does not currently offer such coverage is a limiting factor on its ability to improve the rate at which customers graduate from a Renter to a Homeowner product.
We obtained a homeowner quote from Lemonade, for a $650,000 home in Texas. Interestingly, the UI capped the All Other Peril (AOP) deductible at a maximum of $2,500 and offered the Wind/Hail deductible at a single value of $5,250 (e.g., no choices). We checked the latest Texas rate filing for Lemonade and confirmed other deductible choices exist. It is not clear why the alternatives were not made available, as higher deductibles (e.g., 2% and higher) are chosen by more affluent customers as a way of minimizing premium cost.
Another less subtle but potentially critical factor with the potential to limit Homeowner production is the fact Lemonade does not intend to pursue an AM Best rating, but rather will stick with its Demotech rating. The lack of an AM Best rating is frowned upon (outside of Florida) by affluent customers, particularly those who have significant insured assets (e.g., business owners).
Implications for Independent Agents
Some insuretechs are turning to distributing their products through Independent Agents. Hippo and other smaller insurance start-ups realize the value of independent agents and find the agency channel a low cost (relative to direct marketing) way to generate new business. Lemonade is less likely to pursue independent agent relationships given its predominant focus on renters insurance, and its strategy of focusing on the Millennial and Generation Z markets. Furthermore, the absence of a HO-5 product combined with the lack of an AM Best Rating make Lemonade a less than appealing market to independent agents, particularly those targeting affluent small business owners.
Some numbers:
Lemonade has raised ($500M with venture capital and $300M through its IPO)
$3.5B market cap as of 08/18/2020
Ann. EPS Est. -4.24 FY 2020
So the question is, can Lemonade's tech provide a better customer experience? The tech industry is notoriously bad with customer support. When was the last time you called Google/Facebook/Instagram/Twitter for an account that had been terminated? Good luck! To get an answer you must know personally a senior engineer at one of those companies.
Maybe your customer experience was better at Comcast/ATT or T Mobile?
On the other hand when you call a broker or directly an insurance company (I personally love the service at Progressive) for an accounting or a claims issue, you get an immediate, personalized answer. Most often the problem is solved on the spot or a claims adjuster is dispatched.
So, is Lemonade a tech company or an insurance company? Let's look at some numbers again:
Lemonade has a $241,219 Revenue/Employee and generate a negative Income Per Employee of -$388,889Compare that to real tech companies with the following Revenue/Employee:
Netflix: $2.3M/employee
Apple: $1.9M/employee
Facebook: $1.6M/employee
Google/Alphabet: $1.4M/employee
Lemonade is an insurance company trying to get the valuation of a tech company. Unfortunately the numbers do not look as good. Let's wait few quarters before reaching any conclusions.
"We do everything," Bixby said. "That enables us to handle the whole customer experience just like Allstate (ALL) or State Farm or Chubb (CB). We can do it completely differently because we built our systems entirely from scratch."
Really? While it makes Lemonade feel bigger to compare itself to large established players, Lemonade has demonstrated that they are on a par with best in class insurance companies when it comes to customer service, and that includes renters claims. It may not be that easy for homeowners, especially when you don't have the scale and therefore have to rely on TPAs.
In conclusion, insurance is a promise to pay a given amount in the future. As the Founder of Esurance I just know so well that there is demand for low cost, easy to buy simple auto insurance. Lemonade shows that there is also demand for low cost, easy to buy simple renters insurance. But the amount of money it had required to show that is just mind boggling (close to $1B). Anything else is just speculation.
Implications for Independent Agents
Some insuretechs are turning to distributing their products through Independent Agents. Hippo and other smaller insurance start-ups realize the value of independent agents and find the agency channel a low cost (relative to direct marketing) way to generate new business. Lemonade is less likely to pursue independent agent relationships given its predominant focus on renter insurance, and its strategy of focusing on the Millennial and Generation Z markets. Furthermore, the absence of a HO-5 product combined with the lack of an AM Best Rating make Lemonade a less than appealing market to independent agents, particularly those targeting affluent small business owners. Lemonade says that it had refused to get an AM Best rating. Or is it simply that its financials are so bad that Lemonade would not get an A rating?
A word of caution for insurance agents: this is not a very positive analysis of Lemonade. Simply because the company has very little to show for given the massive amount of money raised. Being complacent is the worst to do. Insurance agents are very way behind in technology in general. There plenty of reasons for that: lack of skills, complexity, cost, and an overall extremely fragmented industry. In subsequent articles we will discuss what an independent agent can do (I would say MUST DO) to leverage technology and grow.
There is a lot of money flowing into insurance related ventures, assuming there is some tech, and that the description includes "disruption". Do not confuse Lemonade with Lemonaid, an online health provider that just raised $33M (!).
