July 2020, in the midst of lingering pandemics that restrict physical activity, Lemonade for the first time was listed in the stock market. A year later, the stock price of this insurtech company reached 86.97 per share, almost triple its IPO price. Here we show you why zipping a certain business into apps – once again – doesn’t necessarily lead to financial advantages. We compose Lemonade as a disruptive tech stock analysis to offer better insight for readers about this issue.
. . .
Too Long, Didn’t Read
- Many Tries, Most of Them Fail. Sometimes, AI is not That Intelligent.
- Lemonade – Apart from All its Promise – actually is an ordinary insurance company with apps. It doesn’t disrupt anything and doesn’t change the game.
- We can’t find the competitive advantage of Lemonade, too much competition in this industry.
Eliminating The Boring and Complex Insurance Business is the Promise offered when we compose Lemonade as a Disruptive Tech Stock.
Warren Buffett ever said that GEICO is one of his greatest investments. The premium that is paid regularly by the customer (the policyholder) provides cash flow to be circulated into his other business. Even till now, the insurance business has still become the backbone for Berkshire Hathaway and The Oracle of Omaha. You can refer here to how vital the insurance business is for Berkshire.
Insurance and AI seem to be the real deal.
Back to our Lemonade, the New York-based company tries to present you with another face of the insurance business – its homepage brings that spirit. And, it really does it. The most painful element in insurance for customers, the coverage, done extremely fast.
to get insured
to get paid
Coverage is a certain amount of money that is paid by the insurance companies to policyholders when an unexpected event occurs – like your Tesla get crash or your home hit by a Kryptonian meteor.
Lemonade says that its ultra-fast coverage payment is due to its AI technology. This is the key difference between conventional and insurance that was built for 21 century. As its homepage said: the AI that replaces human interaction.
Customers – some of them – may be happy, but not us. We know that it is really premature to make a judgment but, AI itself is not that smart or intelligent.
Some investor may argue us that AI has promising future. Any business empowered by AI becomes hype. Some may take the example of how AI extremely beats existing technology or any intelligent being. Magnus Carlsen, the world chess champion, was tortured by Stockfish, the most advanced chess machine. If AI could defeat the world champion, so it has outsmarted all of us, including insurance agents.
Truth is, AI is optimized for the game with clear and exact rules, like chess. AI is best for repetitive tasks with no adaptation capability like the human brain. Thus, if you believe that AI will solve every complex insurances problem, you have overestimated its capability. The insurance problem is much complex than the battle against Queen Gambit or Giuoco Piano.
Don’t get me wrong, AI will reshape the industry – any industry, it will expand the scale and enhance the efficiency, but it doesn’t mean to be autopilot. Think like Reddit, Quora, how often do you get the information you need? How much meaningful information do you get? In the end, you just ask – How good are they?
We will be back for AI, but let’s move to another spect.
AI and Charity – Lemonade is Refreshing. But, Is It that Good?
The first iPhone changes how we interact with computers. To surf the web, calculate, design, listening music, texting friend – all done in your hand. iPhone makes our interaction much more efficient and convenient. This is the true disruption, something that we don’t find in Lemonade. Let us visit the business model of insurance at a glance.
It is quite simple. The policyholder pays a certain amount of money regularly: weekly, yearly, quarterly, whatever. The policyholder could be anyone: A wife who has a husband who works in a hazardous area, a Tesla owner who wants his car always in fine condition, a pet owner who worries his cutie will bite someone, a home dweller who fears hurricanes- anyone who needs protection against unexpected situations. If that unexpected situation really happens, the insurance company pays the coverage.
WIth respect to that business model, we can’t imagine any game-changer. What Lemonade offer is just better marketing, the rest is the same.
Let’s try another aspect: cost.
Suppose we have something that worth $1,000 to be insured then the comparison will be:
Lemonade Fee: $200
Reinsurance: $200 (internal) + $200 (external) = $400
Claims & Charity: $400
Old School Insurance Company
Reinsurance: $0-$250 dollars
See? It’s just the same. We don’t find any better offer.
Ok, fast coverage.
For policyholders, in most cases, it doesn’t matter how fast the coverage is processed. They prefer a larger amount and quality of coverage. We mean, the more case that is covered by the insurance. For instance, some insurance doesn’t cover COVID-related loss, you don’t want that. Insurance is our insulation against the worst. You know what the worse? The insurance doesn’t cover your loss for any reason.
Fast doesn’t change the game.
Lemonade as a Disruptive Tech Stock Analysis: Competitive Advantage
We have to admit that it really cool idea, AI assistants including Maya as a chatbot could handle 4-time customers than ordinary employees. As a result, It will bring down the expense and improve company profitability. But running a company isn’t that straightforwardly simple.
The first problem is, Lemonade need to reach a certain number of customer to cover its operating cost, which leads us to another circular question. When does that happen? Or, in our perspective, will it happen?
Lemonade is not cheaper.
It also covers fewer cases.
Customers matter most about those two. More covered cases and cheaper premiums.
So, why bother?
Also, Big data doesn’t help.
20 – 50
data / customer
Impressive isn’t it?
lemonade says that AI controls the workflow and prevents fraud – a big claim. We don’t think AI is that smart. Underwrite policies and pay claims are easy, so we believe AI could handle it. But to make a consultation, interaction, it is a different league. Moreover, Big data about your customer behavior also doesn’t make a great difference. You aren’t Google or Facebook that can feed your customer with the information.
Let us state again. Insurance matters most about cheaper premiums and wider coverage.
Lemonade as a Disruptive Tech Stock: Competition
The insurance industry is battle royal – like smartphones, autos, and laptop manufacturers. Too many players on this battlefield making the profit is marginal. 60% market is dominated by big dogs – the rest may make a slighter profit margin. And, to be honest, the “AI” model for insurance isn’t monopolized solely by Lemonade, a company like Root has a better advantage. And, the conventional insurances that have deeper pockets and resources could also exploit the AI. Surely this will Lemonade some trouble in the future.
Moreover, in the days when insurance against unwanted situations becomes more essential, the insurance company doesn’t compete only with its kind. But also with another non-profit entity and even an individual. The first is surely government, they kindly cover a group of people that are unwilling to cover or has no capabilities to cover. Another is RRG or risk retention groups (RRGs).
RRG deals with a specific situation that rarely occurs but is uncovered by conventional insurance. The strength of this business model is in its agility. They are governed by local law thus they can operate efficiently without facing complexity like old school insurance companies.
And another threat is being cast by large enterprises like Amazon with its Amazon Care. The combination of these competitors whether it is internal or external needs to be considered for the investor who is willing to put its money on Lemonade, or even an insurance company in general.
Financial Report Analysis at a Glance
Let come into the financial report to get a better insight. Lemonade is surely a bomb. In 2020, Lemonade has a 77.3 M premium – more than three times its 2018 figure with a 21 M. Nonetheless, this spectacular growth can’t offset the operating expense. In Full Year 2020, Lemonade still recorded a loss.
Two most sky-high expense is its policyholder benefit and claim, and marketing. What makes it worse is: these two-component isn’t a fixed expense. Mean that even you get more and more number of customer, it doesn’t translate into financial profit.
Another eye-watering item is its cash flow. The Operating Cash Flow from Operation is in negative territory, meaning that the company is burning cash instead of creating it. The good news is the other component is alright, no too much acquisition or capital expenditure.
Lemonade as a Disruptive Tech Stock: Final Thought, Bull Case.
This article seems to be a bear case for Lemonade, yes it is. But we have to be fair, we have to analyze the possibility of the bull case of Lemonade. Another aspect that makes Lemonade could be something is because its build online from scratch. While another insurance company relies its marketing on personal and emotional presence, Lemonade sells its AI. This means it can reach global faster than its old school competitor A potential customer just needs to install the apps and get insured. Its simplicity will boost its market penetration.
But, let me close this article with the following paragraph.
We want to ask you.
If you need to trust someone or some entity to cover you in case you expect an unwanted situation. What are the criteria? a sophisticated AI with a sexy name on your iPhone screen or someone who can meet you, give an explanation – someone you can ask for advice?
Insurance is about trust – you need to meet people. The chatbot and technology – in this case – making the barrier instead for the customer and the company. The insurance business is a long game, making AI doesn’t guarantee the endurance of this journey.