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Will Hurricane Ida Wipe Out Lemonade?

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The digital insurance company saw its loss ratio skyrocket in the first quarter after the Texas freeze. Can it withstand Hurricane Ida?

Some investors are getting weary of Lemonade's (LMND 0.79%) volatility, and Hurricane Ida threw yet another punch at the company's progress. How bad can we expect the damage to the company to be? On this video recording of "Deep Dive 45: Lemonade, Part 2," Motley Fool contributors Brian Withers, Toby Bordelon, and Jennifer Saibil talk about what the natural disaster might mean for Lemonade in the next quarterly report. This video was recorded on Motley Fool Live on Sept. 13

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Toby Bordelon: It all comes down to underwriting. Surprising. You've got to price it. You see something like a big, I'd say what will happen in the Gulf Coast with the hurricane. Maybe you adjust a little bit, maybe you invest more conservatively and so you know, you can price things accurately. Maybe you rely on reinsurance that's what Lemonade is doing. But if these natural disasters actually do objectively keep getting worse, there's a difference between getting worse and causing more damage because of society gets more complex, we build more. The same level of storm might cause more value in damage, so you got to think about that too.

But if you see them start causing more damage, you're going to see the price is just going to go up. They're going to have to raise their prices, and you may see in some instance the insurance companies just refused to write premiums in some areas. They're going to do that for their own protection. If I can't do this profitably or I just don't know how to price it, I have no freaking idea, I don't know what the storms going to be like in the next decade, no insurance. I'm just not going to cover that. Then what is that to you. If they say, "Look, you want to go to your house in high-risk fire area, so remote and remove from emergency services, that's going to be so hard to protect you if something happens, that's cool. That's your business. But we will not provide coverage."

Then, is that a net benefit? Do you think about social benefit here? Do you start to see the free market kind of push people toward doing other things, making other choices if they can't get the coverage, maybe. I don't know. But I think the overall point here is I think they are absolutely going to survive because they understand that risk. They will either be able to price it appropriately for a small profit, or they'll just say, we're not going to be in that business, and they'll pull out and then people have to do something different.

Maybe even Sea State come in and say, well, we don't want to cover it from our disaster fund. Maybe it's not a good idea if people build there. Maybe we just don't issue permits or something like that. You'll see people adapt, I think is the bottom line for this. I don't know if you guys have any thoughts on that, but I would not look at disaster than say it's going to distort the industry. I think you're going to see them adjust their pricing and people either pay it or have to make different choices.

Brian Withers: Yeah. Well, interestingly enough, I know Ida did some damage to a town called Manville in New Jersey and we actually lived within a couple of miles of their when we lived in New Jersey and drove through the town all the time and this was not a surprise to anyone that this happened and the flooding happened. They actually had done what you said Toby, is after a couple of floods, they made some of the land where some of the houses were.

They got the people out and sold their houses to the state for pennies on the dollar and moved them out somewhere else. But it's hard when it's like this whole town on a 10-year cycle gets flooded as to as to what you do. Paul follows it up with says, "The estimated costs of IDA are over 30 billion. Any idea how much Lemonade's exposure is? Does it make sense to wait to add until Lemonade releases an estimate of its exposure." We had a similar question last time about, I want to say Texas freeze.

Toby Bordelon: Yeah, Texas freeze. We had similar question. The Texas freeze and also asking about IDA, it actually looks like IDA is not going to be that bad from an insurance standpoint. It's obviously there's a lot of damage and there's a lot of liability there. But I have looked at a couple of analysis I've seen, and one word I keep hearing is manageable. It seems like they've got this about right, and remember Katrina was massive.

I think a lot of insurance companies really rethought their models and they're pricing, and their risk exposure when Katrina hit. It seems that they might have done what they needed to do. You're not seeing, at least I might seeing a lot of [inaudible 03:34:41] and Epic disaster company didn't go bankrupts over this. They seem to have it about right. It looks like reinsurance is going to take a lot of this loss, which is what it's for. Reinsurance is for that low frequency catastrophic disaster. Re-insurers are supposed to know how to plan for that. It might only happened once in a decade, but you'd be ready for it to cover all of these reinsurance losses.

So far, my best guess with IDA is that the damage is going to be about where they expected from a major storm like this and about on track, not to say it's not going to cause some pain and would you see some price increases in premiums? I'm sure you will. But it looks like they're getting better at pricing this, so that might be a good sign.

Brian Withers: Yeah. Awesome. Jennifer do you a question you want to share with the members? Hit the mute. Turn off your mute Jennifer. I'm sure what you said was brilliant. [laughs]

Jennifer Saibil: Of course. I don't know if you guys mentioned this and I just missed it, but I'm wondering it doesn't actually sell renters or homeowners in Louisiana so even though they obviously like say New Jersey and there were other states that did suffer from Idaho. The name brunt of it actually won't affects Lemonade just because of that reason. 

Toby Bordelon owns shares of Lemonade, Inc. The Motley Fool owns shares of and recommends Lemonade, Inc. The Motley Fool has a disclosure policy.

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