Lemonade has learned the lesson of its fellow SoftBank portfolio companies
In its pre-IPO prospectus, Lemonade presents a clear, yet highly optimistic, perception of the current business reality
Lemonade may be burning money but it still has $275 million in its pocket from private investments that amounted to nearly $500 million since its establishment. The main motivation for Lemonade to become public is to strengthen its brand and expand beyond the millennial market, where it is extremely dominant. Older clients tend to prefer insurance companies that are established, well known, and transparent and going public can help Lemonade achieve this reputation. Covid-19, which pushed the transition of every aspect of life to the web, also gave Lemonade’s IPO some backwind.
Lemonade’s prospectus proves just how much the company needs clients that are better off. Currently, 70% of Lemonade’s customers are under 35 and its business model is based on the assumption that they will remain loyal to it as they age and accumulate more assets. Of Lemonade’s customers, 90% have never bought insurance from another company.According to data from the Federal Reserve System, at 35, the average American has assets amounting to just $11,000 but by the age of 50 this number goes up between 10 and 15 times, reaching up to 25 times higher by the age of 75. For Lemonade, this means that even if the average client, paying a median price of $60 a year for an insurance policy, will remain loyal to it, it will take 15 years for their policy to reach between $600 and $6,000 a year In fact, should Lemonade continue to focus only on the young market, becoming profitable could prove difficult or even impossible. Every dollar Lemonade spends today on marketing, takes it two years to pay back. This means the company only profits from clients starting their third year with the company. Lemonade’s business model is based on a swift policy approval process and the automatic handling of most claims by its algorithm. According to its prospectus, a third of all claims are resolved without human interference, allowing Lemonade to employ a far smaller workforce compared to traditional insurance companies. According to its filing, one Lemonade employee handles 2,000 clients, while, at traditional insurance companies, each agent is only responsible for 150-450 clients. As of now, Lemonade only sells home and renters insurance policies, which are considered relatively simple and low risk, unlike health insurance, for example. Lemonade approached local authorities in the U.S. early on to provide insight that will help it assess the main risk factors of home insurance, such as when the property was built and how well it is being maintained. “As soon as a potential client in Manhattan enters their address, Lemonade already knows all about it,” one insurance executive told Calcalist on condition of anonymity.
When it comes to home contents insurance, the main risk factor is clients inflating the damages incurred in case of a break-in. To ward off some of this risk, Lemonade developed a giveback model, specifically oriented at socially involved millennials. According to the unique model, Lemonade takes a flat fee off of insurance payments and donates any unclaimed funds to a charity of the client’s choice at the end of every year.
Lemonade’s growth has been very fast but its income is still relatively low for a company already valued at $2 billion. Between 2018 and 2019, Lemonade tripled its revenue, which still amounted to just $67.3 million. For the first quarter of 2020, it reported $26 million revenue, which means it is expected to exceed $100 million by the end of the year. This ultimately means that while Lemonade’s current valuation goal appears to be well calculated, it still amounts to over 20 times its annual revenue in 2019 and 15 times its expected earnings in 2020.One term that is prominently absent from Lemonade’s prospectus is retention rate, one of the most important factors for a subscription-based insurer that depends on preserving clients for the long term in order to attain a profit. Lemonade is most vulnerable in this field as its entry premiums are relatively low and holding on to its clients and selling them more expensive policies in the future is at the basis of its business model.
Lemonade also considers itself a tech company and, as such, pays its employees generously, especially those directly involved with artificial intelligence and machine learning, as these two elements are critical to its model.As a result, since its establishment five years ago, Lemonade incurred $234 million in losses and is still far from achieving profitability, reporting $36 million in losses for Q1 2020. In previous years, Lemonade’s annual expense on marketing alone was higher than its revenue.