One can seldom say that reviewing an SEC Form S-1, IPO registration statement, is interesting. Sure, you can learn much about a company that is planning an initial public stock offering, but that level of excitement is reserved for financial banks and investors. But that expectation has been shattered by the form recently filed by digital insurer, Lemonade, Inc. Not only is its filed Prospectus Summary a full eighteen pages long, it contains the words ‘delight’, or ‘delightful’ ten times. As was the case five years ago, Lemonade has taken what was stodgy and made it, well, different. image
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Lemonade is a company that started with two entrepreneurs, Daniel Schreiber and Shai Wininger who knew little of insurance, but knew much about launching a company, were veterans of digital innovation, and were experienced in marketing unique concepts. And, the two determined early on that the administration and selling of insurance was not the key to entry into the market, but that marketing to and building interest from similar insurance neophyte customers was. In addition, the early vision for the firm was as a peer-to-peer insurer, bypassing the monolithic traditional carrier sells and customer buys model. The firm’s P2P model was not quite that pure but the concept of mutual benefit remained a cornerstone- if claims are not made in typical frequency then charitable organizations will gain a benefit from surplus.
Fast forward from 2015 to June 2020- the firm’s concept is ingrained within the insurance industry, may just be the most discussed insurance topic other than COVID-19 business interruption, and is now the current talk of the IPO town.
I am not going to belabor an analysis of financials for the firm- right now the most optimistic assessment is there are some fundamentals that are trending in the direction the market would like to see. The company cedes a majority amount of premiums and claim costs to reinsurers otherwise this conversation would not be occurring. The firm has been able to leverage the experience and effectiveness levels of officers in building an investment total to date of $480 million (including $300 Mn from SoftBank). The raise has allowed the firm to grow its geographic footprint to include many US states and now an entry into Europe. Here is where a typical IPO filing for a financial firm is off track- Lemonade is growing its profits in a wrong direction. If 2019 indicated a $109 million net loss for the firm, and Q1 for 2020 is showing a $36 million net loss, the growth valuation of $2 billion is more tenuous. Upon announcement of the IPO there were insurance observers of the InsurTech sort who were asking how they could short the stock offering.
For this article the traditional assessment of the IPO supporting financials will be diminished in importance because few expect Lemonade to be profit generator based on prior year’s financial reports. A traditional extrapolation of financial value based on NPV of future earnings can’t get past the no worth valuation. But then, Lemonade has followed a non-traditional path since its inception.
Looking back at the advent of its value proposition- digital sales and service founded on cutting edge technology and information analysis, and on the firm’s early adaptation of behavioral economics, a different view can be taken of the IPO action. The firm engaged a world-renown behavioral economist, Daniel Ariely, who in collaboration with the founders’ vision leveraged the concept of game theory in selling its premise- insurance as an iteration of the Prisoner’s Dilemma, a decision pathway where no one really wins because there is distrust of the other party in a decision, or game’s outcome. Daniel Schreiber publicly took the concept further, stating the firm employed a ‘Ulysses Contract’ approach to the distrust relationship, tying its financial hands such that there would be no ability to succumb to temptation of traditional insurers and denials of coverage being a flow of premiums to a firm’s bottom line. I have had prior discussions with Mr. Schreiber about same and published perspective here, and while during the past two years game theory and behavioral economics have been not on the firm’s public radar, we just might be seeing the return of the softer sell within the IPO summary.
In previously stating the prospectus summary having inclusion of ‘delight’ ten times there was a point to be made- most IPO prospectus summaries provide in a few pages the vision or mission of the firm, how its operational functions are tied to the pursuit of the mission, its financial performance to date and how its future performance is planned to support the investment of those who subscribe to the IPO.
Lemonade does not have the option of leveraging financial results on a sure path to NPV calculable to the IPO proceeds. It’s early days for the volume of shares offered and the expected price per share to be published, but even the marker amount of $100 million will be eclipsed by 2020 net losses (Q1 net losses already at $37 million.) IPOs can be used for many reasons, and even though the firm notes that proceeds will be used for growth operations, the proceeds could be applied to ensure conversion of 31 million preferred shares to common at a value that the holders could choose to be an exit value (resell of shares) that is favorable, or perhaps retirement of SoftBank’s $300 million investment in order to add some liquidity to SoftBank’s balance sheet. (This is conjecture only- the author has not specific knowledge of any post IPO scenarios.)
What I suggest- the IPO’s story is being told in the twenty or so pages in a clever IPO marketing scheme that is not dissimilar to the roll-out and growth of the firm- behavioral economics with a dose of group psychology. Consider- in the Lemonade prospectus summary text one finds beyond the ten uses of ‘delight’, the following atypical IPO verbiage of:
- Love– four uses, as in “Why we love insurance”
- Giveback– four uses, as in “Giveback is a distinctive feature”
- Graduation– two uses, as in “found in a phenomenon we call ‘graduation’ “
- Breezy, playful, values, encourage, attractive, and encourage
The prospectus summary is less a financial and business conceptual document as it is a comfort manifesto, reassuring potential investors that the purchase of shares is a collective good. It’s no longer the Prisoners’ Dilemma because the firm has built a customer base and industry cohort that trusts the firm and its leaders. The fact that financial success is not there yet- immaterial if the closed loop data aggregation machine is functioning and claims can be settled virtually and in seconds. There is a value to the method and that is the apparent underpinning of the offering. Growth of the digital access concept has driven web traffic to the firm’s site in a pace more than double of three years ago (page views more than quadrupled) and if nothing else, the value of the firm’s domain is in the high five figures 🙂 . Company leadership acknowledges that product mix must evolve (or customers need to graduate to more lucrative lines than renters), CAC cannot remain excessive, and reinsurance ceding of more than 50% of premiums and loss costs can only last so long for a full stack carrier.
A post-COVID environment might be a springboard for a favorable IPO, as might be interest of private equity (plenty of capital in the market), or from existing investors. The firm’s concept is five years’ old and at the prior threshold of involvement for the co-founders. Plenty to consider outside of pesky financials. Many delightful, playful, re-imagined, breezy, loved and attractive concepts to perhaps ensure full subscription of the IPO.
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