Introduction: A Compelling Story
Lemonade is, first of all, a very interesting company. Its co-founders Daniel Schreiber, the CEO, and its ‘DaVinci Code’ technologist co-founder Shai Winninger are focused on creating a very successful company based on efficiency. That efficiency is both internal and customer-facing and assumes a digital model.
In the larger context, Lemonade (LMND) is ambitiously attempting to spearhead the transformation of the insurance industry to a new, digital paradigm. Technology and ease of customer interactions with the product(S) are at the heart of this strategy. Whatever the future of Lemonade as a company and as a stock, it is a fascinating study in the application of hi-tech paradigms to an industry that is traditional, stolid and at least partially stuck in the legacy ‘analog’ world.
“Lemonade Insurance Company is an American property and casualty insurance company headquartered in New York City offering renters and home insurance policies for homes, apartments, co-ops, and condos in many US states in addition to content and liability policies in Germany and the Netherlands. Lemonade delivers insurance policies and handles claims through desktop and mobile apps using chatbots. Its business model includes giving underwriting profits to nonprofits of the customers’ choice.”
“Lemonade Inc. is backed by investors including Aleph, Sean Grusd, General Catalyst, GV (formerly Google Ventures), Sequoia Capital, Thrive Capital, XL, and Japanese tech investor SoftBank, having raised $120 million as of December 2017. Lemonade is publicly traded on the New York Stock Exchange under the ticker symbol LMND.”
“Lemonade was founded by Daniel Schreiber (former president of Powermat) and Shai Wininger (co-founder of Fiverr), in April 2015. Dan Ariely joined in 2017 as the Chief Behavioral Officer at Lemonade.”
“Lemonade underwrites its own policies and is reinsured at Lloyd’s of London. In 2020, Ohio-based financial analysis firm Demotech rated Lemonade’s financial stability as A-Exceptional.”
Lemonade is a recent IPO with a good chance at long-term success thanks to a solid vision, business plan, and adherence to a few striking principles.
Lemonade Attempting to Blaze the Digital Trail in Insurance
The strategy of building an insurance company based on the design and implementation of a digital model is fundamental to LMND. Daniel Schreiber, the LMND CEO, emphasizes this change repeatedly, as we shall soon see, thanks to another incisive interview by the YouTube investment presenter David Lee. Schreiber describes how the legacy insurance companies are caught ‘flatfooted’ as they attempt to navigate the course from the Industrial to the Digital Revolution. They are stuck in old paradigms and old technologies and find it difficult to progress beyond them. In contrast, Daniel Schreiber says, a nimble start-up like LMND with its digital emphasis, is in a great position.
“The differences as pronounced as they are today, they’re not converging, they’re diverging.”
The ‘legacy’ companies are aware of these challenges. Daniel Schreiber has talked with certain CEOs of such companies, and while he calls them ‘fiercely impressive,’ some are as impressed by LMND. A few have even told him, “Daniel, I fancy your chances more than I fancy my own.”
None of this guarantees Lemonade’s success, given the challenges ahead, but it does imply that LMND may yet realize its ambition of leading a transformation in the insurance sector.
LMND: The Business Model
The LMND business model is both simple and powerful. It can be summarised as ‘using technology to enhance the customer experience where customer happiness is the goal of everything LMND does.’
The Wikipedia piece sets out the practical side of this strategy, which shows another way in which LMND differentiates its approach from the legacy models:
“Lemonade’s business model differs from that of typical insurance companies in that it keeps a flat 25% fee of a customer’s premium while setting aside the remaining 75% to pay claims and purchase reinsurance. Unclaimed premiums go to a nonprofit of the user’s choosing in an annual ‘Giveback.’”
“Insurers typically make money by investing your premiums (“float”) and by paying out less in claims and expenses than they took in premiums (“underwriting profit”).”
Lemonade is much more ‘interactive’ with its customers. The mixture of premium setting-aside and holding a large reserve of the premium total to pay funding of a customer’s target charity, as desired.
The business model in point-by-point terms:
• A positive customer experience that establishes a long-term relationship;
• Advanced technology (software) is key to building a company in concert with the Digital Revolution, which means a powerful software infrastructure mostly invisible to the user;
• A resultant efficiency in customer-company interactions and of resource use for better revenues and profits;
Customer-Facing on a Digital Substrate
The technology that Lemonade incorporates in its platform is based on the idea of a digital substrate, in accord with Schreiber’s vision and that of his co-founder Shai Winninger. The latter is the technical brains behind the operation, and Winninger’s belief in a powerful, mostly invisible software infrastructure is at the heart of Lemonade’s interface.
This is the praise that Daniel Schreiber has for his partner in his conversation with Dave Lee. Schreiber refers to LMND’s ‘DaVinci Code’ as Shai Winninger. The LMND CEO describes how Leonardo DaVinci approached perception holistically. To DaVinci, a bird in flight was a technical marvel to be dissected and also represented artistically (and more). Winninger fits into the DaVinci mood, Schreiber believes, a Steve Jobs-level talent. This is more than high praise, but development of the efficiency-oriented ‘digital substrate’ seems to justify the encomiums. [Although there was just one Leonardo DaVinci.}
Efficiency, Efficiency and More Efficiency
Before Lemonade took flight, Daniel Schreiber and Shai Winninger researched the software solutions or products that formed the basis of most insurance companies’ technology. They came away unimpressed and just as determined to build a different kind of infrastructure – one that would make insurance processes much smoother.
Efficiency is an obsession at LMND. Schreiber provided an example of this focus in the conversation with Dave Lee. If a financial manager comes to him with a request for additional staff, the leadership may decide that the need is better served by hiring another engineer.
The Appeal to Investor Social Awareness
Lemonade is very aware that many customers and investors in this era are concerned about social issues. Accordingly, LMND lets users ‘send’ unclaimed premiums to a charity of their choice. Some might consider this virtue signaling, but it is also a smart business to help customers participate in the larger social setting.
The Bull Case
The Lemonade bull case, as with any company’s bull case, flows from 1) a solid business model and 2) successful execution of that model, including setbacks along the road. The third piece of the puzzle relates to both setbacks and changes in sector and market conditions. I would define this as adjusting to changed circumstances.
So does LMND’s business model make sense, is the company executing well, and does it have the flexibility to adjust to changing circumstances?
I believe that the company’s business model makes sense. It is intelligent, based on the research of the insurance industry by Lemonade’s co-founders. It relies on an understanding that we live in a digital age, and customers expect clean and swift interactions with service providers. About those interactions, it appears from the perusal of various review sites that customer satisfaction levels are good but not great.
The legacy companies are not nearly so nimble. Here is Schreiber again, discussing the insurance space and his surprise that not more ‘newcomers’ are challenging the giants: “It is a prize worth fighting for but there are not many people in the fight.” About barriers to entry that might intimidate some prospective participants, Daniel Schreiber quotes a conversation with a Fortune 50 insurance company CEO remarking that his large firm owns just 4% of the total market share.
Lemonade also appears to be executing fairly well. It is clearly in a high-growth phase and enjoys the momentum of being a recent IPO and owning the image of an innovative player. Customers generally are positive about the interaction with Lemonade’s interface. The question of how well LMND will adjust to inevitable setbacks and changing circumstances is a wildcard. The evidence so far suggests a savvy leader with a strategic vision, a clear plan, and the ability to execute that plan. Now let’s take a look at performance metrics and risks it faces along the way.
LMND Performance Metrics
This is where things get somewhat tricky for Lemonade and its shareholders. This is likely an inherent function of being a start-up in an early growth phase. The data is generally positive with some exceptions. Some metrics are also missing for certain categories, at least on the Morningstar Lemonade analysis, which I used for additional stocks covered (AAPL, ALB, TSLA).
Currently, LMND has a market cap of just over 5 billion dollars. At about $92 per share as of this writing (10 December), it sits at an all-time high since going IPO in early July.