Lemonade: The Next 10X Opportunity?

The very first video I made on my YouTube channel was dedicated to answering all of the objections that have been made about the permissibility of insurance in Islam.

This video was made more than 4 years ago and since then I haven’t heard any coherent responses to the arguments I made which has further increased my conviction on this matter.

At the time, my opinion that insurance is not haram was held by a tiny minority; today, this position is more commonplace.

Once one understands that the subject of sale in an insurance contract is an amount of financial protection, its permissibility becomes clear.

A common argument I hear in this regard is that insurance may not be haram per se but because insurance companies rely heavily on receiving and paying interest, this makes them haram to deal with.

However, a company's reliance on interest is not a consideration that is unique to insurance companies.

All companies have to be analyzed from an operational ethics perspective to determine if they are halal or haram to invest or buy products from.

The Business of Insurance

Insurance is one of the largest industries in the world.

Property, casualty, and life insurance premiums amount to approximately $5 trillion globally.

Most homes, cars, and businesses in the United States have some type of insurance coverage, and laws often mandate insurance, making it a non-discretionary product that remains largely unaffected by economic cycles.

Adding to the attractiveness of the insurance business is that people typically buy insurance in some form or another for their entire adult life. This means the lifetime value of a customer (if you’re able to retain their loyalty) is quite high.

Consequently, it’s no wonder that in the United States, 12 of the Fortune 100 companies are insurance companies, and their average age is about 125 years old.

Having said this, these mammoth companies are not easily changed and long-standing operating methods are tough to move away from.

This makes the insurance industry ripe for disruption.

Enter Lemonade Insurance, ticker symbol LMND.

Lemonade's Elevator Pitch

Lemonade is an insurance technology company with an innovative business model that uses artificial intelligence to underwrite insurance and process claims.

Roughly 70% of Lemonade's current customers are under age 35.

It currently offers homeowners, renters and pet insurance in the U.S., Germany and the Netherlands.

Their Business Model:

Lemonade’s business model differs from that of typical insurance companies in that it keeps a flat 25% fee of a customer’s premium while setting aside the remaining 75% to pay claims and purchase reinsurance.

The flat fee that Lemonade collects reduces the volatility of earnings for Lemonade because it makes it a function of how many premiums they collect and not how much they pay out in claims.

The flat fee also does something extremely important - it removes the conflict of interest present between traditional insurance companies and their customers.

With traditional insurance, whatever the insurance company doesn’t pay out in claims it keeps to itself as profit. Accordingly, they have an incentive not to pay out claims.

With Lemonade, after collecting it’s 25% flat fee, any unclaimed premiums go to a nonprofit of the user’s choosing in an annual “Giveback.”

Last year Lemonade donated $631,540 to charities of their customer’s choosing.

Aside from their innovative business model, Lemonade is a leader in their use of technology to underwrite and process claims.

I know this from personal experience. I am a customer of Lemonade and the experience I had signing up for their service was perhaps the best experience I’ve had with an insurance company, ever.

Their app is super accessible and intuitive, and their prices (in the case of the renter’s insurance I was looking for) were about half of what I was offered from a different company.

Part of the reason for their advantage is because Lemonade uses artificial intelligence to provide insurance policies and handle claims.

In 2016, a customer filed a claim for a stolen coat; after answering a few questions on the app and recording a report on their iPhone, Lemonade's claims bot set a world record by reviewing, approving and paying the claim in three seconds.

Company Outlook

Lemonade currently has a market value of around $4.2 billion dollars.

Needless to say, in an industry worth trillions, there is substantial room for growth. And grow they have…

Lemonade ended Q1-20 with 729,325 customers, up 96% YoY and 13% QoQ.

Having reached $1m ARR in Q2 2017, Lemonade’s ARR passed $10m ten months later, and went from $1m to $100m in 2.5 years.

The Speed at which Lemonade reached this milestone exceeded that of other companies such as Slack, ServiceNow and Shopify to name a few.

Lemonade is currently unprofitable and will remain unprofitable for some time to come as it attempts to grow aggressively and reinvest in research and development.

However, I think their superior user experience and business model will allow them to continue their impressive growth for some time to come.

However, what will really give Lemonade a sustainable advantage is if they get the artificial intelligence part of their business right.

If they are able to use the data they get from their customers to refine their predictive algorithms and artificial intelligence, as they are advertising in their prospectus that they are doing, Lemonade could become a massively dominant company in the insurance space for many years to come.

Once you have an advantage in artificial intelligence, the more customers you are able to attract, the more data you collect, the more learning your algorithm does, the bigger your advantage becomes, the more customers you are able to attract and so on.

This is why Google has been the best search engine since its inception. Their algorithm started learning before the rest, which made them better, which brought them more customers, which brought them more data, which improved their algorithm even more, which brought them even more customers and so on. This is also why I think no one will be able to catch up with Tesla in self-driving.

Lemonade is the only insurance company that I see seriously trying to use artificial intelligence to automate the insurance business from start to finish. If they can get this virtuous cycle going, it’s really difficult to stop.

Lemonade's Halalness Rating

Highlights:

• Zero Debt

• ~3% in income from interest on debt.

• A fundamentally Islamic business model that eliminates conflicts of interest between contracting parties.

• Insurance is a social good when done ethically.

• Halalness Rating of 9.5/10

Lemonade's Financials

Lemonade is debt free.

In the first three months of 2020, Lemonade had 0.9 million in investment income. Assuming this was made up entirely of interest, this represents only ~3% of total revenue during this period.

Accordingly, I can comfortably say that earning and paying interest are not integral parts of Lemonade’s business model.

Is the business of insurance a useful business for society?

Our finances will always be at risk - Medical risks, the loss of a breadwinner, accident risks etc. These risks have the potential to leave people financially devastated. Insurance is a way for people to offload part or all of these financial risks to another party that is better able to bear them in exchange for a fee.

Imagine we’re all walking around with backpacks on and a bunch of large rocks in these backpacks. Each rock represents a financial risk. Insurance allows us to take some of these rocks out of the backpack on our back and give them to someone else who has a stronger back and more willingness to carry in exchange for a fee. This frees us up to do things that we wouldn’t have been able to if we had to carry all these rocks ourselves with no help.

So yes, insurance is a social good.

Lemonde's Islamic business Model

I’ve been studying Islamic finance for the last 10 years. A common theme you’ll notice in Islamic economics is that Islam strives to eliminate conflicts of interest between the contracting parties. I believe Lemonade’s unique business model does this to a large degree by making their profits completely independent from the payouts their customers receive.

Halalness Rating

In light of the aforementioned, I’m very comfortable with Lemonade’s business and will give it a halalness rating of 9.5 out of 10.

Summary

I think Lemonade Stock (LMND) has a promising financial outlook that I expect will exceed my personal hurdle rate of 30% annually, and a high halalness rating.

I have already started building a position in this stock, I’ve added it to the Practical Islamic Finance portfolio in M1 Finance, which you can now follow by clicking on the link in the description.

Disclaimer - this article is not meant as financial or investment advice. I am not your financial advisor or your investment manager. Do your own due diligence and invest accordingly. Never invest money you can’t afford to lose.

If you’d like to invest some money with the fund I manage which invests in a unique asset class that is uncorrelated with the market, and you earn more than 200K annually, go to fundmebff.com and apply to become an investor.