5 ms·

In parallel to this growth of topline and increasing efficiencies, our gross loss ratio declined steadily from 161% in 2017, to 113% in 2018, to 79% in 2019 and

by xfour 6y ago

In parallel to this growth of topline and increasing efficiencies, our gross loss ratio declined steadily from 161% in 2017, to 113% in 2018, to 79% in 2019 and to 72% for the three months ended March 31, 2020. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics." Seems like a struggle to get to profitability. With the ratio of closing the gap slowing, sure looks like it's getting harder. This is what bugs me about these companies, after years of running the business and doing 1 Billion in revenue it's still a coin flip whether they will ever be profitable. How is this any different from the first "Internet Boom" except that they've been floated to a much bigger revenue number by VC losses. So now the VCs want return on investment. The public is getting a chance to buy, and some will, and the VCs make out, the founders probably already did by selling to the VCs, but where is the value creation? Just a shell game.

jgalt212 6y ago
Thanks the Fed's policy of Leave No Investor behind, the NASDAQ is +10% on the year. So many of the deals will get done, somewhat irrespective of L/T, M/T profitability. Investors have too much cash and no where good to put it.
im_down_w_otp 6y ago
> "the founders probably already did by selling to the VCs" That is the opposite of how that works, FWIW. Unless the founders took VC money to pay themselves multi-million Dollar salaries or something?
- rcar 6y ago
  Founders often get the opportunity to cash out some of their stake in the company in mid and late VC rounds.
- relaunched 6y ago
  It's fairly common, in a strong series C round and beyond for founders to take money off the table, especially when the VC appetite demands it. Typically, founders can sell as much as 10-20% of their vested shares, which can be worth 10s of millions of dollars or more.
  - gabeh 6y ago
    I can confirm this goes beyond the founding team, I've sold shares as a part of raising capital at the last two places I've been employed. I was an early hire at both and held the CTO title. Series C in 2014 and most recently series B at the start of 2018. I also seek out opportunities to unload my equity in the secondary market, but I'm usually taking a haircut there vs the premium investors that are looking for a bigger share will pay during a capital event. I'm a bird in hand guy when it comes to equity at the fast-growing private companies I tend to be attracted to. I'm almost certain I'd feel differently if I had a larger stake or founder-level attachment to what was being built.
    - rohan404 6y ago
      Out of curiosity, how did you find investors to sell to for secondaries?
- sbilstein 6y ago
  Sometimes VCs will purchase founder equity for cash.
hardikgupta 6y ago
Loss ratio is a specific measure in the insurance industry. You don't need to get to 0% loss ratio for the company to be profitable and ~70% loss ratio isn't bad for a relatively new company. Typical P&C insurance companies have loss ratios ~ 50%.
- hogFeast 6y ago
  The relevant metric here is: Do you gain more in expense reduction than you lose in loss increases? By itself, the loss ratio tells you nothing because the pitch here is really that they can reduce expenses, not that they can reduce losses. And I think the way they present this is slightly misleading. They only handle 1/3 of claims by computer in their entirety. The innovation is really on the front-end. And whilst this is probably a big part of costs, it isn't exactly huge. In addition, this is something that is fairly easy to replicate. The specific claim made is: we have a "flywheel" (as ever, every company has one of these in 2020) whereby we use data to reduce costs and losses. This seems, from what I can see, false.
- londons_explore 6y ago
  Whoa - if typical loss ratios are around 50%, surely there is a big opportunity for someone else to swoop in with cheaper insurance products?
  - Skunkleton 6y ago
    I'm not so sure. Insurance companies exist based on probabilities. How much margin do you need to make a given profit worth the risk? What about that dollar you brought in where you ended up paying out $10?
  - phamilton 6y ago
    Hence Lemonade.
  - ssharp 6y ago
    You still have to support the policy, process claims, customer support, etc. The biggest expense on a unit-economics level, post claims paid, is marketing -- acquisition and retention costs. If you look at the auto insurers, it's incredibly competitive and everyone is trying to balance those unit costs with the loss ratio. They are all moving targets but premium pricing is heavily regulated meaning your pricing will 100% come under scrutiny from some states (this must be done individually for every state in the U.S.) so any changes to pricing tends to be a complex process that could take months, if not a year+ (in some states) to take effect. So when you get pricing wrong and are taking a big claims loss, it takes some time to dig out of that and you'll also piss off lots of customers who got in "cheap" and are now getting a rate increase. And when you get pricing wrong and you're loss ratio starts looking better, your competitors may be out-pricing you, making you uncompetitive until your adjustments are improved.
harryh 6y ago
It sounds like you don't know what "loss ratio" means in the context of an insurance company. Loss ratio is the % of premiums collected that are paid back out in claims. If the number is below 100%, then your core insurance business is profitable Of course, this doesn't mean your company is. Insurance companies have many expenses beyond paid claims. But loss ratio should never get to 0% and, by definition, can't be negative. 72% is pretty good for a relatively new insurance business.
- gen220 6y ago
  Here to echo. I work in insurance and 72% is actually very good when you consider (1) their trajectory of how long it took them to get there (2) how strongly they're investing in growth, which is very expensive.
  - nikanj 6y ago
    How to get there: 1) Grow really big with VC money (You'll need this for step 3) 2) Stop paying out claims with made-up reasons 3) If someone sues you to get their payout, use your massive resources to bankrupt them with legal fees
  - phonon 6y ago
    The 72% does not include overhead or sales and marketing, just losses and LAE. I wouldn't call that very good. Their combined ratio is more like 200%
    - divbzero 6y ago
      Thanks. I was looking for their combined ratio. I suppose it’s not surprising that overhead is high for a fast-growing company. As with many startups, GAAP only reveals part of the story and more fine-grained metrics are needed to gauge potential future profitability. For those unfamiliar with the combined ratio, taking a stab at an explanation by simplified analogy… For most normal companies: Revenue − Cost of goods ——————————————————— Gross income − Operating costs ——————————————————— Operating income − Interest expense ——————————————————— Net income For insurance companies: Premiums − Losses ——————————————————— “Gross income” − “Operating costs” ——————————————————— “Operating income” + Investment income ——————————————————— Net income Most normal companies use profitability metrics: Gross margin = Gross income / Revenue Operating margin = Operating income / Revenue Insurance companies use inverted expense ratios: Loss ratio = Losses / Premiums Combined ratio = (Losses + “Operating costs”) / Premiums (The above is obviously simplified, for the sake of illustrating by analogy. For instance, insurance companies usually won’t have “Gross income” in their financial statements, and “Operating costs” and “Operating income” are typically called “Underwriting expense” and “Underwriting gain”.)

by xfour 6y ago

jgalt212 6y ago

Thanks the Fed's policy of Leave No Investor behind, the NASDAQ is +10% on the year. So many of the deals will get done, somewhat irrespective of L/T, M/T profitability. Investors have too much cash and no where good to put it.

im_down_w_otp 6y ago

> "the founders probably already did by selling to the VCs" That is the opposite of how that works, FWIW. Unless the founders took VC money to pay themselves multi-million Dollar salaries or something?

rcar 6y ago
Founders often get the opportunity to cash out some of their stake in the company in mid and late VC rounds.
relaunched 6y ago
It's fairly common, in a strong series C round and beyond for founders to take money off the table, especially when the VC appetite demands it. Typically, founders can sell as much as 10-20% of their vested shares, which can be worth 10s of millions of dollars or more.
- gabeh 6y ago
  I can confirm this goes beyond the founding team, I've sold shares as a part of raising capital at the last two places I've been employed. I was an early hire at both and held the CTO title. Series C in 2014 and most recently series B at the start of 2018. I also seek out opportunities to unload my equity in the secondary market, but I'm usually taking a haircut there vs the premium investors that are looking for a bigger share will pay during a capital event. I'm a bird in hand guy when it comes to equity at the fast-growing private companies I tend to be attracted to. I'm almost certain I'd feel differently if I had a larger stake or founder-level attachment to what was being built.
  - rohan404 6y ago
    Out of curiosity, how did you find investors to sell to for secondaries?
sbilstein 6y ago
Sometimes VCs will purchase founder equity for cash.

hardikgupta 6y ago

Loss ratio is a specific measure in the insurance industry. You don't need to get to 0% loss ratio for the company to be profitable and ~70% loss ratio isn't bad for a relatively new company. Typical P&C insurance companies have loss ratios ~ 50%.

hogFeast 6y ago
The relevant metric here is: Do you gain more in expense reduction than you lose in loss increases? By itself, the loss ratio tells you nothing because the pitch here is really that they can reduce expenses, not that they can reduce losses. And I think the way they present this is slightly misleading. They only handle 1/3 of claims by computer in their entirety. The innovation is really on the front-end. And whilst this is probably a big part of costs, it isn't exactly huge. In addition, this is something that is fairly easy to replicate. The specific claim made is: we have a "flywheel" (as ever, every company has one of these in 2020) whereby we use data to reduce costs and losses. This seems, from what I can see, false.
londons_explore 6y ago
Whoa - if typical loss ratios are around 50%, surely there is a big opportunity for someone else to swoop in with cheaper insurance products?
- Skunkleton 6y ago
  I'm not so sure. Insurance companies exist based on probabilities. How much margin do you need to make a given profit worth the risk? What about that dollar you brought in where you ended up paying out $10?
- phamilton 6y ago
  Hence Lemonade.
- ssharp 6y ago
  You still have to support the policy, process claims, customer support, etc. The biggest expense on a unit-economics level, post claims paid, is marketing -- acquisition and retention costs. If you look at the auto insurers, it's incredibly competitive and everyone is trying to balance those unit costs with the loss ratio. They are all moving targets but premium pricing is heavily regulated meaning your pricing will 100% come under scrutiny from some states (this must be done individually for every state in the U.S.) so any changes to pricing tends to be a complex process that could take months, if not a year+ (in some states) to take effect. So when you get pricing wrong and are taking a big claims loss, it takes some time to dig out of that and you'll also piss off lots of customers who got in "cheap" and are now getting a rate increase. And when you get pricing wrong and you're loss ratio starts looking better, your competitors may be out-pricing you, making you uncompetitive until your adjustments are improved.

harryh 6y ago

It sounds like you don't know what "loss ratio" means in the context of an insurance company. Loss ratio is the % of premiums collected that are paid back out in claims. If the number is below 100%, then your core insurance business is profitable Of course, this doesn't mean your company is. Insurance companies have many expenses beyond paid claims. But loss ratio should never get to 0% and, by definition, can't be negative. 72% is pretty good for a relatively new insurance business.

gen220 6y ago
Here to echo. I work in insurance and 72% is actually very good when you consider (1) their trajectory of how long it took them to get there (2) how strongly they're investing in growth, which is very expensive.
- nikanj 6y ago
  How to get there: 1) Grow really big with VC money (You'll need this for step 3) 2) Stop paying out claims with made-up reasons 3) If someone sues you to get their payout, use your massive resources to bankrupt them with legal fees
- phonon 6y ago
  The 72% does not include overhead or sales and marketing, just losses and LAE. I wouldn't call that very good. Their combined ratio is more like 200%
  - divbzero 6y ago
    Thanks. I was looking for their combined ratio. I suppose it’s not surprising that overhead is high for a fast-growing company. As with many startups, GAAP only reveals part of the story and more fine-grained metrics are needed to gauge potential future profitability. For those unfamiliar with the combined ratio, taking a stab at an explanation by simplified analogy… For most normal companies: Revenue − Cost of goods ——————————————————— Gross income − Operating costs ——————————————————— Operating income − Interest expense ——————————————————— Net income For insurance companies: Premiums − Losses ——————————————————— “Gross income” − “Operating costs” ——————————————————— “Operating income” + Investment income ——————————————————— Net income Most normal companies use profitability metrics: Gross margin = Gross income / Revenue Operating margin = Operating income / Revenue Insurance companies use inverted expense ratios: Loss ratio = Losses / Premiums Combined ratio = (Losses + “Operating costs”) / Premiums (The above is obviously simplified, for the sake of illustrating by analogy. For instance, insurance companies usually won’t have “Gross income” in their financial statements, and “Operating costs” and “Operating income” are typically called “Underwriting expense” and “Underwriting gain”.)