Why Lemonade is a 10x Company

“When Life gives you Lemons make Lemonade”

That proverbial phrase was a leading factor that influenced Co-founders Daniel Schriber and Shai Winniger to create the insurtech company Lemonade. Lemonade is an insurance company that offers insurance policies that range from home, rental, pet, and soon-to-be life insurance. What makes Lemonade special among other insurance companies is its implementation of artificial intelligence, data, and behavioral economics. This allows Lemonade to offer customers more affordable insurance policies, faster-claiming processes and allows them to contribute to social goods.

What makes Lemonade stand out among other insurance companies?

The main competitive advantage Lemonade offers is the simplistic process of obtaining insurance faster through the user-friendly interface built on Lemonade’s AI infrastructure/digital platform designed to delight the consumers. With the data collected through AI bots, Maya and Jim, Lemonade is able to automate the underwriting and claim process enabling a seamless customer experience. As more consumers sign up for Lemonade insurance, Maya and Jim continue to collect valuable data from customer interactions getting smarter n smarter. The more intelligent and sophisticated the bots become, the more competitive pricing will be compared to other incumbents.

Source (Value Penguin)

As seen from the horizontal bar graphs, Lemonade has relatively cheaper policies compared to the legacy insurance companies featured above like State Farm, Amica, and Farmers for comparison.

Source (HyperCharts)

Gross Margin- yellow

Operating Margin - red

Quarter after quarter, Lemonade has able to improve gross margins and reduce operating margin mostly likely due to its artificial intelligence and machine learning capabilities

Lemonade Reinsurance

Insurance often produces businesses with high recurring revenue streams, therefore, have predictable top-line growth with significant bottom-line volatility as profits can fluctuate, for example, natural disasters putting a business in financial hardship. There are two conditions that must be met by insurance companies; insurers often see unwelcome swings in their results and regulators require insurers to keep significant reserves for any unexpected situations. Wanting to improve growing gross margins and wanting to be capital-light, Lemonade chose the route of “reinsurance”. The concept of reinsurance refers to the "reinsurer," agreeing to cover a portion of the claims of another insurer, while the "primary insurer," in return shares a portion of their premiums. This allows Lemonade to reduce its capital requirements while maintaining its growing gross margins quarter after quarter. Lemonade is able to keep its gross loss ratio under 75% and keep a minimum of 25% of gross earned premiums as operating profits. Without the reinsurance strategy Lemonade has adopted, they would be required to save $1 out of $2 in earned premiums but are now only required to retain $1 out of $7 required. This allows Lemonade to invest more cash to continually grow and expand its business globally.

Lemonade’s User Base

When investing in a company that offers services to B2C (business to consumers) it’s essential to look at customer reviews to find customer satisfaction and or distinct flaws. In the reviews, I’ve been reading from social media and even the app store; the common message I see the most is “Just filed a claim with Lemonade and got paid in literally 7 seconds”. As Lemonade matures, more n more customers will begin to rave about it and Lemonade insurance will eventually become word of mouth. Free marketing similar to Tesla* If the product or service is spectacular, the company doesn’t have to spend money on marketing and rather invest that money to continue growing the business. Down below are some pictures regarding the impressive customer satisfaction Lemonade has received from consumers and reputable insurance reviews.

Source (Lemonade)

Showcases the satisfaction customers have experienced when using Lemonade services.

Just a couple of examples of positive user experience*

Source (Clearsurance)

Ranked among legacy insurance companies, Lemonade was able to rank #1 in-home and rental insurance.

Source (CEO Daniel Schreiber’s Twitter)

Ranked #1 by consumers in Holland

Lemonade Google Trends

Google trend data is pretty neutral amongst all insurance policies that Lemonade offers possibly since people resort to the mobile app (Lemonade) to register rather than Google.

Source (Google Trends)

Sustained uptrend with potentially more user acquisitions due to higher search volume.

Conclusion

Lemonade is disrupting the traditional insurance industry being the pioneer in the new age of digital transformation for insurance companies. The digital substrate built on Lemonade’s AI infrastructure is game-changing and will only improve as time progresses. Although the valuation is not favorable, as an investor you’re investing in the potential growth story and the exponential growth Lemonade may experience in the coming years!

Brandon Fong

16% of my portfolio

Cost basis- 64.67

Sources:

• https://sec.report/Document/0001047469-20-003926/

• https://www.lemonade.com/?f=1

• https://hypercharts.co/lmnd