Core Advantages. Why their product is superior.
- For lemonade the shortest time to resolve a claim is 3 seconds which is about 1/3 of their claims. Most other claims are resolved within a day. For traditional insurance companies it takes them an average of 30 days to resolve a claim.
- They have a massive tech advantage in terms of skilled workers, and DNA of the company (work culture) compared to traditional insurance companies. And they are currently collecting vastly more data through users interacting through their lemonade app than their competitors to properly assess future risk and policy pricing.
- Lastly in my mind, the greatest advantage that lemonade has is that the CEO has explicitly said their primary goal is to focus obsessively on customer experience. Whereas traditional insurance companies’ primary goal is to deny as many claims as possible. As of today the Lemonade app has a near perfect rating (4.9 stars). And the company is ranked #1 in customer satisfaction for home renters insurance.
Business Model (how they make money)
Lemonade currently sells Home & Renters insurance policies as well as pet insurance. They collect 25% of premiums as profit. The remaining 75% are set aside for customers and any unclaimed profit goes to a charity of the customer’s choice. At first I thought the social good aspect of the company was a negative point, but after hearing the CEO’s reasoning of their business model this brilliantly serves the business-customer relationship in two ways:
- It discourages customers from embellishing claims. They’re not hurting a faceless behemoth insurance company. But a charity of their choice that supports cancer patients, veterans, homeless, etc... If someone has a loved one who suffers from Alzheimer’s, they’re less likely to want to screw over a charity that helps fund research to cure Alzheimer’s.
- It discourages his own company from denying or delaying claims as they have nothing to gain from it. Thus keeping the focus on customer experience.
Current growth rate
They've had a 120% yoy growth rate in revenue since 2018. Their gross loss ratio has decreased by 18% YoY. Currently they have plans to expand operations to Europe and they just launched a new insurance policy for pet owners.
Current market cap vs future potential market cap
Lemonade currently has a market cap of 3 billion compared to current well known insurance companies such as All State (30 billion) and progressive (60 billion). The current market value of the insurance industry is 4.1 trillion dollars with no one insurance company making up more than 4% of the entire market.
Thus they can potentially 10-20x+ in value if they succeed, and especially if they expand to selling other types of insurance products, given that their operating expenses per customer are a fraction of other insurance companies.
Is their ceo exceptional?
Daniel Schreiber graduated from Kings College which is a top 10 college in the UK. He has 20+ years of entrepreneurial experience leading tech companies albeit little with the insurance industry. He has said he built Lemonade from "first principles", building the company from the ground up, which has resulted in an insurance company that is different from traditional insurance companies. Lastly I’ve watched several interviews of the CEO. And his level of clarity and simplicity in explaining his business model, and his long term vision for the company, in my opinion is on a similar level to Jeff Bezos and Satya Nadella.
A comparison with competition.
- They take a fraction of the time traditional insurance companies take to process claims.
- they’re currently ranked #1 in customer satisfaction for renters insurance.
- They can service 2500 customers per employee. The average insurance company takes 300 customers per employee.
- They’re structured completely differently than traditional insurance companies. If they are successful, traditional companies simply can’t replicate the app and website overnight even if they wanted to.
To give an example, in the 90s Walmart believed that they could simply replicate a website like Amazon if the internet ever takes off. But as people who work in software know, websites such as Amazon.com deceptively hides how tremendously complex it is to maintain the infrastructure and software behind it. The work culture and the way Amazon is structured as an organization is so profoundly different from traditional retail companies that it has taken Walmart 30+ years to finally launch Walmart+ and it’s still not of the same quality as Amazon’s website.
Conclusion (TLDR)
- Lemonade is currently building a moat that current competitors can’t replicate. At their core they’re a tech company as different from traditional insurance companies as Amazon is to traditional retail companies such as target, Walmart, Macy’s, etc...
- They’re focused purely on customer experience. Their App currently has a near perfect rating and the company has a #1 rating in customer satisfaction for home owners insurance. Their business model reinforces a positive relationship between the company and customer.
- They have a 120% yoy growth rate in revenue. Their expenses for operating is a fraction of that of traditional insurance companies. They can also service 10x more customers per employees. They’ve just recently launched a new insurance product (Pet insurance) and are expanding their business internationally.
- They have an exceptional CEO who has 20+ years of entrepreneurial experience and has a clear vision for the company.
Overall I believe this company has a decent chance of reaching a 10x valuation in 5-10 year period. There is a risk that they’ll fail or another company will disrupt the insurance industry in their stead. But I believe this is a good asymmetric risk/reward opportunity.
Submitted October 05, 2020 at 07:24PM by Okmanl https://ift.tt/3nlRXxq
