On this episode of The Five, Jason Hall, Auri Hughes, and Taylor Carmichael discuss their favorite fintech stocks. Jason nominates small-cap company Lemonade (NYSE:LMND), which has restructured the financial incentives for insurance to make the experience of buying and using a policy faster and happier for customers. It’s early in this company’s journey, but Jason is very bullish.
This episode was recorded live on August 31.
Jason Hall: I tell you a company that I’ve become more and more interested in, and I mentioned it, and it is one of those specialists, but I think it’s a specialist in a gigantic market that companies like Lemonade have a great ability to leverage, and that’s insurance. You think about Lemonade and its mission here, which is to really change the dynamics of the way people think about insurance companies, and the relationship they have with them, and decouple a lot of the financial incentives. Because the bottom line is, the way insurance companies have been built for forever is to have somebody agree to insure something and then to give the insurer money, and then, when people go to pay claims, there’s a very clear financial incentive to not pay them back. To not pay for that claim, to find a way to not pay that claim.
What Lemonade has done is to, again, de-couple that. They built this model where the revenue comes in for the premium, and the company has a set percentage of that, that is their take. They take that and then they look to use reinsurers to insure additional liabilities and additional risks beyond that percentage that they retain, that float that they retain.
Again, the idea is if somebody files a claim, it doesn’t help Lemonade, it doesn’t keep money on their books, to [not] pay that claim. On the other side of the relationship, one of the things that Lemonade does is when a member signs up, they ask them for a favorite charity. What Lemonade does is at the end of each period, leftover funds after they’ve paid claims and after they’ve paid reinsurance, they divide up and give to all of the nonprofits the people identified that they wanted a portion of those leftover profits to go to. If I love the Audubon Society or whatever my charity happens to be, and something happens to my laptop and it breaks, I’m not going to try to necessarily overestimate the cost of that insured claim, because I know that that means my favorite charity is also getting a little bit screwed here too. The idea is to improve those alignments across all of the various stakeholders. And so far, it seems like it’s working.
The company also has improved customer service experience, things like leveraging tech and, to some extent, AI to issue policies faster, to pay claims more quickly, and remove a lot of those friction points from the system to make it easier for every aspect of the relationship.
By focusing on younger cohorts — this is all done through their app or on their website, so you’re not going to an insurance agency and sitting down with an agent who’s quoting you insurance from two or three companies, maybe one or two that there are better financial reasons for him to sell you one of their policies. It makes the experience easier. Lemonade has more control over the relationship, and it feels like the way so many of our other financial relationships and business relationships happen, particularly for younger generations. You develop that relationship with somebody when they have an apartment and they need renter’s insurance, and then when they buy a house, you’re the first person they are going to talk to about homeowners insurance. They are steadily adding more and more different lines, that’s that diversification that I think is an opportunity in their business.
I’ll say this, the stock, the market cap is less than $5 billion. I struggled with Lemonade when it was $7 billion, $8 billion, $10 billion market cap, but at $5 billion, I love this business. I think it has just incredible prospects to become a $20 billion business, a $50 billion business in 10 or 15 years. I think there’s the potential there, I really really do.
Taylor Carmichael: Jason, can I ask you? I looked at Lemonade for insurance actually, for car insurance, and they don’t do it. I was wondering, do they have plans for it or is there a reason they are not doing car insurance?
Hall: I think it’s just they’re steadily deploying geographically and into different lines. Relatively recently, the company added homeowners insurance, and they’re being really meaningful and thoughtful about the way that they roll it out. For example, we sold the house that we’re in right now. We are going to be here for another month, so we needed a renter’s policy to cover our belongings before we move. I got a quick renters policy, and then the process for the house that we’re buying in another state, which our current carrier doesn’t operate in. We’re changing carriers. I went on their website and attempted to get a quote for insurance. We were looking at a couple of different houses. I could easily attain a quote for one. The other house that was two miles away, they wouldn’t quote an insurance policy for it. The difference was the age of the house and a couple of little things that I guess they decided were more of a risk. They’re being really specific about managing how they are deploying different kinds of insurance and what kind of risks they want to take on. The fact that they are being really thoughtful about the risks that they’re taking on as they scale up, I think is really important, because managing your risk as an insurer is the most important thing that you can do. If you can’t successfully underwrite, eventually you’re going to have to charge more — even if you’re using reinsurance. Because you’ve got to pay those premiums, and those premiums are going to go up if your underwriting is not good.
Carmichael: Are they using AI to do this?
Hall: I’m not exactly sure how they’re using AI across all of the aspects of their business, but they do tout their AI and how quickly they can turn around a quote says that they’ve, definitely got access to data that they’re able to parse, and use pretty quickly. How much of that is driven by AI and actual machine learning, I couldn’t answer, but they claim that they’re using it.
Carmichael: It sounds really interesting. Another question. When they find a reinsurer, doesn’t that just push off the issue of not getting paid back to another insurer? My guess is, the way that works is Lemonade works in your corner since it doesn’t hurt their numbers any, so they are pushing that other reinsurer to do what’s right and to do what’s fair. Is that how it works?
Hall: Right. You file a claim and they can sometimes approve claims literally in seconds. It’s pretty incredible how quickly they’re doing that. And then they have a process with their reinsurers that they work through to get made whole on that. I don’t know exactly what that is — obviously, with each reinsurer and each policy, I’m sure it’s different. I think the bigger thing for me, Taylor, thinking through all of those, is I’m curious to find out if a lot of the things about the way they are able to respond today and at this young phase of their existence, if it continues to be the case. Will it still be true in a year or two years, five years, or is their process going to — it’s going to change and evolve over time. I tend to think that they’re on to something and that they’re going to continue to be able to meet these expectations, but their underwriting is what’s really going to answer that.
Carmichael: I guess the important thing, too, is also getting a strong brand and customer loyalty. You make your customers happy… I don’t like to change my insurance. If you grab those customers when they’re young… why did they pick the name Lemonade, by the way? Do you know that?
Hall: I honestly don’t know the story. Auri, do you know that story by any chance?
Auri Hughes: No. It’s one I need to get up to speed on — it became super popular like overnight.
Carmichael: It’s interesting, because I just discovered the other day why Figs is called Figs. It’s because she likes figs, she likes the fruit. Maybe they just literally like lemonade.
Hall: I wonder if you’re thinking about — you’re using insurance. Life just gave you lemons.
Carmichael: Ah, there you go, Jason.
Hall: I’m guessing.
Carmichael: Nailed it. That’s it. That’s really good. Life, gives you lemons, here’s some lemonade. That’s actually pretty smart. Maybe the AI came up with that.
Hall: It could be. The machines are telling us what to call them.
Carmichael: HAL said, “Lemonade.” I can’t do my robot voice.
Hall: I’m sorry you can’t do that, Taylor.
Carmichael: [laughs] Has the stock been giving you… Jason, have you been in there for a while?
Hall: I only own a small amount, and the stock right now it’s come down substantially. Actually, let me share a chart here. This is the market cap, but we can put a price on here. Again, I was interested in the business all through here, but the valuation was just a big concern. I’ve bought a little bit in this area a couple of times. I’ve opened and then added a position. But I do, again, I continue to like this business and they’re growing like crazy. They’re adding users, and they’re adding lines, people are taking on more and more different kinds of insurance. Pet insurance is a big thing they started with. That and rental insurance, I think, were the two big things they started with, but they are adding more and more lines.
Carmichael: I’m going to add them to my watch list. You’ve got me interested in them now. I’ll take a look at them.
Hall: Tom Gardner really turned me on to this one, so that should tell you something.
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