An Interview With Lemonade Co-Founder Daniel Schreiber

Insurance disruptor Lemonade (LMND -0.06%) may not be one of the year's best stock performers, but there are big things happening in the business that could drive serious long-term shareholder value. In this special episode of Industry Focus: Financials, Lemonade's co-founder and co-CEO, Daniel Schreiber, joins Fool.com contributor Matt Frankel to discuss how the business has reached this point, why the Lemonade Car rollout is so exciting, and much more. 

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Nov. 29, 2021.

Matt Frankel: Fools, this is normally the 11:30 Industry Focus show, but we have a special treat today, I am joined by Lemonade Co-Founder and Co-CEO. I believe I got the title right, Daniel Schreiber, how are you, Daniel?

Daniel Schreiber: Great. Good to be with you, Matt.

Matt Frankel: Excellent. Lemonade's one of our favorite stocks to talk about on the show, and one of our favorites to cover at The Motley Fool. But for those who might not be familiar, Lemonade's an insurance company. You can go ahead and give us a quick description of what makes Lemonade different than the rest of the insurance companies.

Daniel Schreiber: Lemonade is a young company where we've been in market just over five years. What we do is we really bring all the best of social sciences and computer sciences to this sector that has had precious little of either. What that translates into is, if you're buying renters insurance, homeowners insurance, pet insurance, life insurance, car insurance, you can do it in a matter of seconds, you can get paid in a matter of seconds all from the comfort of your mobile device. If you're making a claim, you hold up the device, you take a video of yourself and you can get paid in as little as three seconds, and leftover money goes to charity. There is a social impact that I mentioned where certified B Corp and trying to align interest with our customers and using charities as a way of diffusing some of the distrust that really plagues industry today is pretty central to what we do at Lemonade as well.

Matt Frankel: Why has it taken so long to disrupt the insurance industry? Insurance has been a terrible process for decades, this isn't a new problem. Why has is taken companies so long to really dig into this?

Daniel Schreiber: I guess things have been going pretty well for the insurance companies. If you're the CEO of one of the incumbents, the last thing in the world you want is to rock the boat. You were built a 100, 150, 200 years ago on the best that there was to offer back then but you would never architect your business for the 21st Century using 18th Century technologies, and that's what they had to do. They had no interest in upsetting the [inaudible 02:32:35] , so to speak, and for newcomers it's been surprising, I agree with you, this is such a vast industry, unloved by consumers, but used by all of them. That just screams out for disruption and for innovation, but it's also been scary for technologists. Even we when we started down this road, investors would say to us, you don't get insurance, you don't know insurance, you come from other worlds, and there's this halo of its too regulated, too capital-intensive, and those kind of barriers were setup and deterred a lot of people I suspect.

Matt Frankel: Is that why you started with renter's insurance? It's one of the things that's always been on my mind, is it because it's kind of a lower price point, is it because it was targeting the millennial generation, is it that's already tech savvy, or is it all of the above?

Daniel Schreiber: A central plank of our strategy is to target consumers when they are first time buyers of insurance. If you've watched TV for more than five minutes in the last month, you were hit with a TV commercial that said switch and save, and that really is the central plan for strategy of all the insurance companies in all different forms. First 15-minutes, can save you 15 percent or liberty mutual, and all of those guys. We're playing a different sport. We're not trying to take customers from other people, we're trying to attract first-time buyers of insurance, and about 90 percent of our customers are first-time buyers of insurance and renters tends to be the on-ramp into the world of insurance. That is really the best way to attract young consumers, first-time buyers, and then as they go through life cycle events, they move from renting, to that condo, to the home in the suburbs, they buy a car, they have kids, they want life insurance, all of those things, they acquire pets. All those things really mean that they're spending on premium is likely to 10x and 10x again over their subsequent years. Get them young, delight them, and they'll stay with you for life is really our strategy.

Matt Frankel: Is that how you got to a million customers in a fraction of the time of anybody else? I have to think that the low price point has something to do with it. But is it kind of that you're getting these customers when they're first entering the insurance market?

Daniel Schreiber: Yeah, absolutely. I think the thing that attracts consumers to Lemonade is a cocktail made up of value that you just spoke about, values and experience. If you take those apart on value, our renter's insurance really allows first-time buyers of insurance to save roughly 50 percent, not 15, 50 percent. You can see dramatic savings by buying Lemonade as opposed to someone else, and that's because it's all digital, no brokers, no middleman, and there's just a lot of collapsing of costs, not at the expense of the experience, but to the delight of their customers. That's the second plank because you end up buying insurance in 90 seconds, getting paid in three, doing it from the comfort of your pajamas. You're hitting the value, you're hitting the experience, and then the values piece, the distrust of insurance companies is deeply rooted in the sense that you are in a zero-sum conflict with your insurance company, they make money by denying your claims. We worked with really world-leading behavioral economists in the early days to try and restructure insurance so that it wouldn't have that, and changing a two-player bilateral conflicted game into a trilateral gain by bringing nonprofits into the room and saying that underwriting profits will go to non-profits. That weaving in social impact into the base product is of great attraction, I think to all consumers, but to younger consumers disproportionately.

Matt Frankel: You just mentioned that excess underwriting profits are donated to charity. At the end of the day, this is a business for investors, this is a show for investors, you're in business to make money, obviously. Where does Lemonade's profits come from? Can you walk us through the split on where if say I pay my renter's insurance premium, where does the money go?

Daniel Schreiber: Absolutely. While we do give money to charity in our last give back, it's an annual event, we give about two million dollars to charity. I never apologize to my investors for the fact that we give money to charity because I think it's a creature to the shareholder value. I'd see very little that is noble about taking shareholders money and giving it charity. Being generous with other people's money is not generosity at all. What we're really doing is using the give-back, using charity in order to solve the business problems of distrust and consumers not wanting to buy insurance from you, not staying loyal to you, all of these things get solved by changing the nature of the game and give back is part of that. But in answer to your question, you give us $100, 75 cents on those dollars are going to come back to you in one form or fashion, either because you make claims and collectively a million people give us $100. Either because you make a claim and then we will give back the money to you as part of the claim pound or if there's money left over, up to that 75 percent, we will then give it to a charity of your designation. One way or another we consider it your money with a capital, your, a plural your, but 75 percent is going back to our customers one way or the other. 

Twenty five percent is retained by us. Then 25 percent has to cover our expenses and allow us to account of profit as well. Now, traditional insurance companies have what's known as an expense ratio of about 30 percent give or take, which means that for every dollar about 30 percent goes on their expenses. If we were going to be as inefficient as everybody else, we would never make a dime. But already today among the incumbents, the most efficient have a 14-15 percent expense ratio. Companies like GEICO, Progressive, USAA, who are really the best of the bunch. If you assume that we even don't do any better than them, we just go toe-to-toe with the best of the incumbents, I think we'd be able to do better than them or best them, you'd still see a 10 percent net profit, and that's before you have all the things that insurance lives on like investment income and other products that you can lay on top of their core product. That gives you a sense of where the money goes.

Matt Frankel: That answered a really important question for me, the investment income question, because that's something I don't really hear about too much when it comes to Lemonade here. I've heard the 75-25 before. But so you are planning on building up a portfolio and generating investment income and having that be a significant source of future revenue, correct?

Daniel Schreiber: It's interesting because if you speak to a traditional insurance company, that is the theme source of the income. That combined ratio, which is the loss ratio plus the expense ratio, tends to hove at around to a 100, there's nothing left as very thin margins. But first, we expect to be making much healthier margins. Our gross margins today tend to be in the low twenties, we do see ourselves as operating with a healthy margin before you come to investment income, and in our thinking, investment income is on top of our core business model. It's not a substitute for it. We think of ourselves as more as a tech company, as a platform that takes a margin for transactions rather than simply an investment income based insurance company.

Matt Frankel: I mentioned earlier that the insurance business has taken decades to disrupt. But now that we're getting there, you're not the first only company doing this, there are other tech focused insurance companies out there, you're acquiring one of them which we'll get to in a little bit. But what makes Lemonade different from all of these other insurance tech companies that have sprung up over the past few years?

Daniel Schreiber: I have to say that I'm continuously surprised by how few there are, given how encumbered the incumbents are and how big the prices are at the end of the rainbow, you'd have thought that there'd be a lot more people fighting this good fight. That's some relief and the competitive landscape actually hasn't developed all that aggressively. When we launched Lemonade we kept looking over our shoulder expecting there to be a whole lot of other start-ups chasing us down and that never fully materialized. If you think about in the life insurance space, you can name one or two companies, you could probably name Ladder Life, maybe Ethos, you'd struggle to name a third. In the home insurance space you'd name Hippo and you'd stop, you wouldn't name a second. In the car insurance space after we acquire Metromile, there's one left, it's Root. In the health space you'd name Oscar, it's really slim pickings. But I'd say two or three things in direct answer to your question. One is that this is such a stunningly big marketplace that we wish all of the other Insure techs tremendous success. Our success is not dependent on their failure, they can be hugely successful and that really doesn't impinge on our potential at all. We wish them well, we are really combating the incumbency which is so huge, trillions of dollars, that's where I is focused not on other insure techs. 

But there are other significant differences between us and the other insurers. I think the most striking one ties back to what I said earlier about our strategy of acquiring customers young and then growing with them, all of the other Insure techs that I just listed and that I can think of, are monoline businesses. They do just life insurance, just home insurance, just car insurance, which means that they are this pure play in a single line. We don't know how you make that successful, at least we didn't want to fight that fight because customers tend to buy multiple products from the same insurance company, and we see that today with our homeowners insurance, the inability until recently to offer car as a bundle meant that we were operating in that space with one hand tied behind our back because we were sending consumers off to State Farm to get their car insurance and State Farm quickly offered them a bundle and you'd see some churn through that. The pure-plays and everybody else in this marketplace is a pure-play is a strategy that we struggle to understand, and I wish them well. I'm sure they'll make the most of it, but hard for me to see how you make a success as a pure-play company in this space.

Matt Frankel: You just mentioned State Farm, on that note, what would prevent a State Farm from replicating your business model?

Daniel Schreiber: I chuckle. Where to begin? We've learned a lot of respect for incumbents like State Farm. I laugh not because they're not tremendous companies with great heritage led by fabulous people, they are all of those things, but because the challenges that they face in the 21st century are incredibly tough, may even be insurmountable in the long term. If you own State Farm or Allstate, any of these companies with state and farm in their name, you have tens of thousands of brokers. You took the job as the CEO thinking that that was a tremendous asset and a defensible barrier to competition, and now you're wondering whether that asset isn't really a liability in the era of direct to consumer digital distribution, and then you've got channel conflict and you can't really go digital and it's holding you back rather that propelling you forward. You were told all these wonderful stories about the technology that you built up since the 1980s, and now you come in and you realize that this is just an albatross around your neck. What you want is a black box, what you've got is a black hole and you keep pouring money into it and nothing really good comes out of it. 

You spend decades grooming your team for legacy preservation because you're a 200-year-old company and you thought that the going was good and it would continue that way, and suddenly you're faced with digital disruption and the need for business transformation and you just don't have the culture, you don't have the people. Frankly talking to investors, you don't have the investor base. I've spoken to some CEOs with the largest companies who see the writing on the wall. They say to me these amazing sentences like, "Daniel, I fancy your chances more than fancy my own," which is a stunning thing to hear from some of the largest in terms of the world. When you spend time with them, you understand that even though they know what needs to be done, it would be a huge disruption to their existing business and they won't get support from their shareholders because they have shareholders who don't read The Motley Fool. They've got shareholders who are these large institutions that just want their stable five percent dividend year in year out and will not support strategies that involve transformation. They are hemmed in from their culture, from their technology, from their shareholders. It's the classic innovator's dilemma.

Matt Frankel: I see why you chuckled when I asked that. You mentioned investors. I know you don't want to comment on your stock price performance because if you did, you'd be the first CEO I've ever interviewed that did. But do you think the market has a difficult time valuing your company? A lot of insurers trade for a one time sale or something to that effect. I think even after recent performance, you had something like 30 times your sales. You think the market struggles with where to value you?

Daniel Schreiber: Well, one area of struggle or confusion is actually embedded in your question as well, which is, what exactly are you multiplying by? Usually you're right, insurers will trade up one time or two times or something in between the that book, which is the total premiums. For most insurers, total premiums and revenue are synonyms. It's the same thing. For Lemonade, it isn't. The reason it isn't is just because of GAAP accounting practices that don't allow you to recognize premium that is reinsured through our proportional reinsurance treaty, you don't recognize that as revenue. Even though it is part of your premium, if you choose to reinsure it in a particular way, GAAP accounting practices mean that you don't count that as revenue. We do that to 70 percent of our book, and what that means is that 70 percent of our premiums are not recognized as revenue. If you actually look at our topline, which is influenced premium, which allows you to disregard what kind of reinsurance we have in place, we are at less than 10 times that. We're something like nine times or eight times depending on the day and the share price. It is still a healthy premium, but it's not 30x, it's 8, 9x total book rather than 30x, and that revenue thing can be very misleading. 

I think why we're getting 8, 9, 10x a book, it's really because nobody who's investing in Lemonade today is investing because of what we have investing of what we might become. I think this is very much a long-term strategy. I know that's certainly the way you at Motley Fool talk about our stock, is five, 10-year horizons. If you believe that insurance is a market that is right for disruption that insurers that will thrive in the 21st century are those that are created in the 21st century, that Lemonade can 10x from where we are and then 10x again and still be a medium-sized insurance company, and that we will end up at that point with lower cost, superior products, superior underwriting, then you can start seeing why actually paying those multiples today can make a lot of sense in the long term, it may be a smart thing to do. You really can't compare us to companies that have zero growth when we're growing at close to 100 percent year on year and say apples to apples. Clearly those are the drivers of our investor base and we welcome that.

Matt Frankel: Speaking of growth, I want to pivot to the most exciting reason I want to talk to you today is Lemonade car, Metromile. You've just rolled out Lemonade car, your auto insurance platform, and anyone who's read anything I've written about your company knows that's the part that I'm most excited about going forward. You rolled out in one state, Illinois, I believe it is, and Tennessee is following soon. Why so gradual? Why is the national rollout so difficult?

Daniel Schreiber: We've done this with all of our products, I have to say, they've always started with a single state and we move very quickly and in every state you can buy at least one of our products and then in most states, you can buy all of our products. But sadly tragically in the United States, there is no federal regulation of insurance, it's all state by state. We really have to deal with 51, including DC, different regulators and they all want to go through the process, and they all approve us at the pace that they approve. We end up at a good place but it is staggered. Then we just have the choice of we got approved by Illinois, do we wait until there's a critical mass or do we just launch? Our philosophy has always been go as quickly as we possibly can. We're ready to go nationwide. The approvals will come in. I think with fairly rapid fire now. Of course the Metromile acquisition gives us a lot of licensing coverage as well. Once that closes and we're several months, maybe six months is my guess away from closing that, you'll suddenly see a step function increase in how much coverage we have, how many licenses, how much in forced premium.

Matt Frankel: For the Metromile acquisition, there's three real reasons I could see to acquire just from reading through your presentation on it. One is the 49 state licenses which you just mentioned. There is the company's proprietary data, which is massive, and then there is the insurance book, which I believe is about $100 million in forced premium. Can you talk about how those three things really fit into your growth strategy?

Daniel Schreiber: Absolutely. The overwhelming focus of the acquisition is what you call the data but more broadly, the system they have built in order to understand and price and underwrite risk at a level of granularity that nobody else really can. The way car insurance works today in the United States almost entirely, I'm generalizing but only a little bit, is based on proxies. I get your credit score, I ask you for your gender, your age, your education level, I'm even going to ask your marital status. It turns out that all of those things are correlated to what risk you represent on the roads today. It's statistically sound but it really means grouping large swaths of humanity into a monolithic group because they all have the same credit score or the same gender. What Metromile has done in a way that I think is unmatched, certainly in the United States, possibly worldwide, is they said we're not interested in credit score correlations to driving. We want to get down to the most granular level we can. We want to be able to price at the level of one-mile driven by this person and then you can aggregate it up. But we want to get down to really granular pricing, looking at how much you drove, how you drove, getting granular data at several hertz or multiple times a second they are pulling their technology to see whether you're driving, where you're driving, what time of day you're driving, how you're driving, all that stuff. That creates just an incredible detailed textured map of what represents what risks. It's invisible to the incumbency entirely.

They haven't been pricing this way, they don't have these datasets, they can't price at that level of precision. Now, car insurance is a massively competitive market. You have nothing but respect for the companies we're coming up against, the GEICO's, the Progressives of this world, fearsomely impressive. I think left to our own devices, we would get there. It will be a multiyear process. We would launch, we would let our system and our telematics and our sensors collect the data. When we got critical masses, we'd be able to find the correlates between all of those signals and claims. But it will be an expensive road to go down because while you're learning, you're turning out that you'll be mispriced, you're underwriting it imprecisely, and therefore you're being hammered along the way. We will still have some tuition fee to be paid, no doubt. 

But I think Metromile shortens that tremendously and that's really the overarching thing. If you think about the strength that Lemonade brings to car insurance, the product, the design, the marketing, the bundling. We've got tremendous assets that I think gives us a huge competitive advantage, but we lack the heart, which is pricing and underwriting insurance for car with precision. If you think about Metromile, they're almost the mirror image of that. They don't have bundled products, their marketing has been OK, but this is what they are. They are a data science company focused on car insurance. You combine the two, you end up with something pretty powerful that at least as a theory. You layer on top of that the fact that they've got a quarter of a billion dollars in the bank, 49 state licenses and incredible skilled workforce, and you just see the value of the deal accruing I think in a way that is extraordinary.

Matt Frankel: Speaking of the value of the deal. Since you announced it, your stock prices fall, which is important because it's an all stock deal. If I'm doing the math, you're paying just a little bit over what the cash that Metromile has right now. Is this just a real steal or am I missing something about the terms of the deal or anything like that?

Daniel Schreiber: You're not missing anything in terms of the deal. I think that for Lemonade, this is an extraordinarily good deal, strategic, affordable, a bit of a game-changer. I think financially is a stupendous deal. But I have to tell you, I think this is a win-win. I think if you're a shareholder of Metromile, this is a stupendous deal for you too because the path that you are on was a tough one and there's a reason why their stock price was struggling. Because when you don't have a lot of capital and you've got a depleted stock-price, you don't have access to a lot of capital and you don't have an install base that you can upsell and cross-sell to. All of those things really do put a ceiling pretty low on what you can do or makes it very difficult or risky. 

I think that for us this is a tremendous unlock. The 19-1 ratio was brought by taking their price, our price, and just looking at the market value. This wasn't some big discount, it was actually a premium to add a stock was already trading, so we weren't in any way taking advantage. We were actually paying a premium for their stock price. Then you think about if you're a Metromile shareholder, will your investment likely be worth more because of this deal over time and I would argue emphatically that it will. It suddenly unlock 1.4 million customers that can buy this technology. It unlocks homeowners that you can bundle with. It unlocks a brand that is better known and available in more states and it allows you not to duplicate all the spend on all the technology of running an insurance company. There are tremendous efficiencies to be had there as well. Which is why as I say, I think a great deal for us, but a compelling deal for the Metromile's shareholder base as well.

Matt Frankel: I know we have to let you go soon, but I just have a couple of more questions left.

Daniel Schreiber: Please.

Matt Frankel: I know the car insurance is probably the most exciting opportunity, but it's not the only other insurance vertical you've launched recently. Our life insurance launched, I want to say about a year ago, a little more than a year ago. It's only about two percent of your business right now. Why hasn't that caught on in the way that you hope Lemonade car will?

Daniel Schreiber: It's a great question. I think they launched slightly under a year-ago, but they're about 45 weeks ago, something like that. A couple of things to say about that. One is by some yardsticks it's actually doing very well. Of course, our denominator is now pretty big, so to become two percent or something pretty big becomes increasingly difficult. If I just map out the growth rate of our first launch product, renter's insurance, and I have this on the dashboard, its growth curve and the growth curve of life insurance since we launched it over the last 45 weeks. Life insurance is actually 3x where renters was at this point. That's just one point to bear in mind, the denominator can be confusing. When I strip that away and just look in absolute dollar terms, our life insurance is generating three times what our renter's insurance, which is our bread and butter, was at the same stage. That said, and it's doing it at 90 plus percent gross margins because we don't write on our own paper. We're not licensed to do life insurance on our own paper. We are reselling an insurance product that is on somebody else's paper, which means pure margin, which is also pretty interesting. 

But having said that, life insurance is, and we knew this to be the case, we even spoke about it a launched investor meeting, shareholder letter, and investor call. Life is a very tough business. The insurance techs that have tried to do well on a stand-alone basis just with life insurance have struggled, their customer acquisition costs are very high. and this has been a market where we haven't seen pure-play digital players do all that well with very few exceptions. For us, this was predominantly about rounding out the offering for our insureds, making sure that thesis about getting them young and then catering to their totality of their needs over time is fulfilled in full. Because it's not on our paper, because it's something that we are reselling, technically the experience is still pure Lemonade, but from an accounting or plumbing point-of-view, it's written on somebody else's paper. That also means that the work with the regulators is mediated by a third party, which makes it quite cumbersome. For all of those reasons, we think it's doing exactly what it needed to do. It's growing faster than renters, customers are bundling, and I think that will remain the central way in which they buy life insurance is they'll come in for renters or for home or for car, for something else, and they'll add on as opposed to the more native [inaudible 02:58:03]. Pet insurance is two-thirds new customers on-ramping. That's true for renters, that's I think going to be true overtime for car, and then we get cross-sells in all the directions. That's what we've seen in the other products and what I anticipate happening going forward as well.

Matt Frankel: Last one, I will give you the last word here. Let's fast-forward 10 years. You mentioned we are long-term investors here at The Motley Fool, so 10 years from now it's 2031. Where is Lemonade?

Daniel Schreiber: Our mission is to become an iconic brand for the 21st century and really become the dominant brand in the insurance space. Trying to create these companies that last for centuries 200 billion dollars, that's the price, that's what we're going for. I think whether it's for 10 years or 20 years, but our goal will be over the coming years, to 10X our business and then to 10X it again. You're talking about going from something that's approaching 400 million dollars of in forced premium from to billion to 40 billion. At that point we will be a medium size insurance company. But over the time horizons that you're talking about, that will be what we want to do, 10X and 10X again, so to 100X our business. It's amazing to think that we could 100X our business and still be half the size of State Farm. [laughs] Just giving you a sense of how much headroom we have that we could go 100-fold and still be half the size of State Farm. We do want to get to that point. It's not just about growth. We want to get to that point when we are best in costs in terms of automation and therefore cost structure, best in class in terms of brand and therefore loyalty and customer satisfaction, and best in class at pricing underwriting risk because we built on this digital substrate.

Matt Frankel: Excellent. Well, Daniel, we're right up against 12 o'clock. Thank you so much for joining me. This was a great conversation. I hope that you'll be back soon.

Daniel Schreiber: Thanks Matt. Bye for now.