LMND - what's the disruption ?

My position in LMND was 2%. I just added 1% after-hour so it’s sitting at 3%. It’s a small position because insurance is still a complicated business. At 5B cap, If LMND succeeds and increases 10 times. It’ll become a meaningful position. I’ll add to the position as it progresses.

So many people don’t understand Lemonade. Lemonade’s disruption is not about AI although it’s a plus. It’s about the business model.
Traditional insurance wants to pay out as least amount of benefit as possible to use the leftover money as profit or to invest in bonds, stocks, etc. They call this float. So this business model acts against the customer. Instead of payout claims painlessly, there will a lot of hassle.

Lemonade takes a fixed percentage from the premium as a fee and the rest go to reinsurance and charity. Lemonade has no incentive to act against the customer so Lemonade is happy to pay out the benefits customers deserved. Happy customers bring in more business. Lemonade is not available in my area but if it does, I’ll definitely switch to Lemonade. As Lemonade scale-up, Revenue increases faster than the expense, Lemonade will make a profit.

We can almost guarantee traditional insurance companies are not going to pull down old system of “pay out as little as possible and save the rest of premium for profit and investment” and change to a fixed fee business model!

If I am not mistaken, for the last quarter, the revenue dropped 40% mainly because of the change in accounting method not from natural disasters. Loss from disasters was only 6% out of the 72% loss.

A few key points:
-In force premium continued to increase at high rate of 100% per year.
-Loss ratio continued to go down.
-Premium per customer increased 20%. You can think of this as retention rate in the Saas world.

  • Gross profit increased 83% over Q3 2019
    -Adjusted Gross profit increased 138% over Q3 2019
    -Operating expense increased just 11%, a lot lower than gross profit increase.
    -Gross earned premium increased 104% over Q3 2019

From shareholder letter: "All told, our gross loss ratio improved from the 78% we reported in Q3 2019,
to 72% in Q3 this year. From all of the events of the quarter, CAT losses
accounted for only 6% of that 72%.

Changes in GAAP Revenue
Q3 2020 was the first quarter since our change to proportional reinsurance,
and so GAAP revenue deserves special attention. While our July 1, 2020
reinsurance contracts deliver a significant improvement in the fundamentals
of our business, they also result in a significant change in GAAP revenue, as
GAAP excludes all ceded premiums (and proportional reinsurance is
fundamentally about ceding premium). This led to a spike in GAAP gross
margin and a dip in GAAP revenue on July 1 - even though no corresponding
change in the scope or profitability of our business took place at midnight
on June 30. "

Third quarter total revenue was $17.8 million. Note that our ‘proportional
reinsurance’ agreements went into effect at the beginning of the quarter,
increasing the proportion of premium that is ceded. This meaningfully
improves the capital efficiency of our business, but can make year-on-year or
quarter-on-quarter comparisons of revenue misleading.



They call this float. So this business model acts against the customer.

And the longer they hold on to float and to reserves the more revenue they generate which often impels many companies to pay less attention to underwriting discipline. There are many who do however.

72% loss ratio is reasonable for most insurance lines. So they must be charging enough to cover losses, their cut and premiums to reinsurers. Since loss experience in the lines they write is pretty predictable they must be pricing the product correctly… not difficult for standard fire and personal lines.

But the reinsurers have to make money too. I don’t see how Lemonade can sustain the model of generous payouts, and a cut of the business and still have an attractive reinsurance situation without charging enough to cover all the costs. And since these are on the average the same for every insurance company the advantage they now hold from superior selection or underwriting will have to dissipate. I dont think it is sustainable.

Their current advantage stems I believe from AI methods that allow them to selectively underwrite and price the product. But as they grow ,all the numbers will I believe, converge to the industry averages.And so their advantage and their growth will plateau.

Its true that Geico prospered for a while by selective underwriting and Chubb of course is does well using stringent underwriting standards but their growth rates were nowhere near what the market is anticipating for Lemonade based on recent results.

AIG made lot of $ because they were careful underwriters but much of that was because AIG kept moving into areas that no one else understood. And because of their financial ratings. But they had to continually create new lines in order to maintain success. And boy you could never get them to pay claims in timely fashion. But much of their success was insurance for large commercial enterprise. Their personal line divisions made lots of money also but they did not grow at the compound rates we expect here not even the Japanese Life subsidiary.





Agree. AIG was one of the best at specialty insurance. AIG took on Insurance Products that other companies didn’t understand and were therefore able to charge higher premiums and generate very profitable lines of business. This strategy of course works until it doesn’t. In AIG’s case they started writing very profitable insurance on substandard loans and mortgages which increased the ability of banks etc to then onsell them to others at a higher rating. Great idea until the Great Recession hit and the banks came looking for payouts that were not then possible to pay. Thanks to the American taxpayer, AIG and the banks were bailed out. No reinsurance could save these contracts at that point.

Insurance and Reinsurance needs to be profitable so they can constantly build their reserves for the future when tough years happen. Reducing the company’s profit or screwing the reinsurer is a self defeating strategy.


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Customers first. User experience.

The key ingredient for business success is happy customers. Why Apple wins so many customers? It’s because it offers a good user experience. A good user experience means happy customers. Happy customers bring in business to help a company to succeed. Jack Ma sums it up nicely: Customer first, employee second, shareholder last. Jack Ma did not mean he doesn’t care about shareholders. He understands that happy customers ultimately reward shareholders. By putting customers first, he grew Alibaba into an empire!

Limit to growth. Sustainability. Back to average.

100% revenue growth is an amazing growth rate. You can’t expect that to continue forever or they will own the world! A 100% growth rate can’t even continue for 10 years. 100% growth per year, if compounded, it’s 8 times increase in 3 years, 32 times increase in 5 years, 1024 times in 10 years! 5B X 1024 is a 5 trillion cap. You can’t expect that to happen. Realistically, a 100% growth rate will plateau in 3 to 5 years and gradually decline to 50%, 30%, 10%. Any fast-growing companies will revert to the mean eventually. (Market average return of 7% to 10% per year)

In insurance industries, I saw some companies growing at 30% to 50% per year: e.g. Goosehead, Kinsale. These two are proven and will be good investments compared to big insurance companies out there. I used to own them when I owned a big portfolio but no longer because they don’t grow close to 60% to 100% per year I expect. Now I own just 7 stocks so they have to be the fastest-growing.

Reinsurance has to make money.

Correct. Lemonade takes just a 25% fee. Reinsurance companies have to work with Lemonade so that they still make a profit. I don’t think Reinsurance companies are going to do business with Lemonade at a loss. The role of Lemonade in this arrangement is to put a cap on how much money reinsurance companies can take. They can’t take 100% of the money.

Size vs growth.

Again, don’t confuse size with investment profit.
For investors, especially for us hyper-growth investors, we want to invest in growth, not in an absolute amount of profit make by companies. We don’t own the whole company. Absolute profit amount is meaningless to us. IBM makes 9B in profit per year but if we buy it, it’ll be a horrible investment. Given 2 companies: 1. A makes 1B in annual profit but grows it at 10% per year. 2. B makes a 100m profit but grows it at 100% per year. B is a better investment. A fast-growing company means it has a compelling product and is taking market share from existing companies.


This strategy of course works until it doesn’t. In AIG’s case they started writing very profitable insurance on substandard loans and mortgages which increased the ability of banks etc to then onsell them to others at a higher rating. Great idea until the Great Recession hit and the banks came looking for payouts that were not then possible to pay. Thanks to the American taxpayer, AIG and the banks were bailed out. No reinsurance could save these contracts at that point.

Absolutely right. It was a simple case of lax underwriting discipline. It would have been stopped early in its tracks if the CEO had not been forced to leave the company in 2005 or 2006. Under his direction any division that failed to uphold underwriting standards or concentrated too heavily or didn’t properly lay off risk would be told to change practices or be shut down. The insurance world is full of AIG ex-division chiefs and subsidiary presidents…The guy who underwrote the the substandard loan packages had a piece of the action and was greedy.

Its in many ways similar to the problems that Lloyds eventually ran into. i.e. They really did not understand their exposures.

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You clearly have not worked in the insurance industry. Carriers fall over themselves to make their customers happy during the claims process. Take auto insurance, most carriers set up a network of independent auto repair shops. Customers take their cars in, the shop fixes it, and the customer pays the shop their deductible and drive out. No going to multiple shops for multiple bids, no messing around. If the customer is not happy with the work, the insurer backs them up. Because a large percentage of the shop’s work comes from the carrier, the shop is under pressure to make the customer happy. I worked in the industry for 15 years, had thousands of clients, and dealt with thousands of claims in those 15 years. Never had an auto claim where the customer was not happy, and rarely a homeowner or business claim. Usually the unhappy customer for homeowners was due to shoddy work done by a craftsman they hired.
I have no knowledge of the company you are touting, but if their claim to fame to disruption is they are farming the claims process to re-insurers, I have to say, “WHERE IS THE BEEF?”
A re-insurer is an insurance company, it will process the claim, most likely using industry standard claims process.

How can a company keep their customers happy, when they turn over the most important event in the process to a third party?

Solely based on what you say about this company, I would not touch it with a ten foot pole. Their claim to fame is BS.


I work in insurance in a digital role for a direct competitor of LMND. LMND has a number of competitive advantages over most traditional insurers. These include:

Customer Experience (Purchase)
Customer Experience (Claims)
Marketing - Better messaging and email follow-up on abandoned quotes than most companies
Customer Feedback - Some insurance companies understandably have poor reviews online and weak NPS due to their mediocre Customer Experience. This can hurt acquisition and loyalty. Due to LMND excelling in other areas they have an advantage in this area.


I don’t think Price is an advantage. I got a quote from LMND for a renter’s insurance in NYC maybe 2 weeks back and it was more expensive than what I’m already paying with AllState.