Phil,
First of all congrats, on your gutsy move into the world of transparency. Feel free to take my concerns with a huge grain of salt.
I am an actuary by training and I know that disqualifies me from talking about disruptive insurance companies on most TMF boards, but maybe this will be the exception. I took a small position in LMND a few years back and rode it up and part way down before bailing out. Here is why I sold despite some pretty impressive growth.
- Inconsistent analysis and results - as the company grows, more and more the existing block of business dwarfs the new block (recent sales). So when they say that they expect big loss ratios in the first year, then the LRs should come down rapidly after 3 or 4 years because the first year business with the bad LR is a smaller part of the whole pie. For the most part this hasn’t happened. It did this past quarter on a gross basis, but net of reinsurance, LRs actually grew. Which means the business they kept performed worse than the business they reinsured.
- The story about 1st year LRs being worse than renewal years. That story makes perfect sense when we are talking about dental insurance. Often, when a company first buys dental insurance, in the first year, their employees catch up with office visits and dental work that just wasn’t being done regularly prior and that initial loss ratio is ugly. Then, in year 2, it comes down. But is there an analogy for homeowners, car insurance or pet insurance? What, they catch up by burning their houses down, crashing their cars or killing off Fido? I don’t think so.
- Then there is the co-CEO, whose smugness and confidence belies the fact that self-proclaimed smartest guys in the room often aren’t. If all the legacy insurance CEOs were so jealous of his company as he claims, why not buy it ?
- Insurance companies that pay claims so quickly may, and I mean MAY, be open to some fraud.
- Their initial pricing models sucked pure and simple so they had to go back and apply for lots of rate increases to help improve LRs. Which is, of course, what all the boring, dumb legacy guys do when their LRs suck.
I hope to join you some day in your monthly analysis - congrats again!
Vince