This Week in Coverager (week ending 10/9/2020)

This week, Avi, Nick, and special guest Hari Sundram (CEO of Verikai) have a spirited discussion on Root’s S-1 IPO filing. How should we be thinking about insurtechs that go public? Is there a way to value them? How do they compare to one another? Will these companies ever be able to get their CAC in the right range? That and more in this episode of This Week in Coverager!

Root S-1
Prior Discussion re. Root with Mitchel Harad

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And we're live. This is, This Week in Coverager. This is the podcast where Avi and myself and the Coverager team, we discuss topics for the week, be them hot news topics, topics that clicked well on Coverager. And we debate them. And as many of you know, lately, we've been having guests on to diversify the opinion a little bit. So first, I'll say hello to my co host, Avi. Good afternoon.


and Hari,


It has been a long time. Why don't you give the audience a quick introduction to who you are, and, and why your opinion is going to be valuable here.

I don't know if I can validate why my opinion would be valuable. But my name is Hari, I'm the CEO/founder of Verikai. We're at a high level, applied data company. We have 4000 variables on 260 million people. It spans a range of demographic, social econometric, financial, purchasing. But probably the most valuable important part of what we do is we from our carrier customers get lead conversion and claims information, right? effectively first dollar incurred claims over a contiguous period of time anywhere from three to five years. And from that we're able to do is project the behavioral contribution to loss ratio of every American by any product line, right. And what that allows you to do, actually, it's kind of interesting, the reason we did it, is it actually allows you to realize the gap that sort of exists between where an actuarial rate is set and where underwriting is willing to approve a person for product, and you get it, it becomes very, very clear, very quickly, actually, when you look at the information, that human underwriting is like the easiest cause of singularity, right, that's how the machines are gonna win. Because everything from from like, we can tell from the under it perspective, it's very much anecdotal and very much bias driven, right. And I kind of view it as a control that the carrier has to be able to sort of sit down and say, I can fluctuate between volume and profitability, as capacity changes. And that's it's like, sole purpose. And the thing that's changed and why I feel all that has to change is interest rates are just so low, that if you're a carrier right now, like, everything about your expense ratio is awful. They don't matter how you look at it just all awful for you, because you don't have any compound return on capital. So everything about Insurtech is great, because you look at and you say to yourself, hey, these guys want to everybody in Insurtech wants to fundamentally flatten a lot of these expense costs, right? And so that ends up being the driver. And for us, we feel that the real value is can you transfer some of that locked in profitability that's sitting there on the net premium side, and defray it against expense ratio, right? That when you look at what the cost of underwriting is versus what what it costs to actually close a customer is one really outstrips the other and people don't know. So thank you for the time. And

yeah, well,

I like being invited to a panel of opinionated people.

Well, we're gonna we're gonna get into it. So I hope there's gonna be some arm wrestling, but if you haven't been able to tell already, Hari very smart. Okay, so it's funny, like, you know, you go through your LinkedIn profile, and it's like, the dude's got a medical degree, right? And he's an entrepreneur, and he's in insurtech, and like, you know, so it's a Hey, welcome. We value your opinion on here. And so let's, let's get ready to rumble and and talk about the the one topic that we're going to talk about this week. But looking forward to getting both Avi's and Hari's opinion on it. Avi, what's the topic?

So we talked about this a few weeks ago, but now it's official, Root filed for an IPO. Talking about valuation rumors, of course, around $6 billion. So I'll start, you know, kind of what is your big takeaway from the Root filing?

I mean, I think my big takeaway from the Root filing is is that obviously like cost of acquisition completely outstrips like premium capture, right? Like, if, if you went ahead and said, I'm gonna start a full stack carrier from scratch, and you weren't living in the times that we're living in right now where the cost of capital is so pathetically low, that like, being able to sell a lot of lemonade in a stand is somehow like a great business. What you would do is if you're any other carrier like Progressive, you would just sit there point at Root and laugh, right? Like, when you're when you're Progressive, all of this is funny to you, it's all funny to you because you are the Alpha and Omega of the auto business, right? You're the only auto carrier that's been able to take credit and bury it into age, gender and industry. Nobody else has done that, right. So you have every age, gender geo rate you have has credit already built in. So when every single regulatory board goes, Oh, I got to get rid of credit, Progressive is the only one that could still keep their rates. So anybody who's, like we see it with some of our other customers. Now, effectively when we tell them what's underwritable it with the cut off is what will Progressive take the cut off is not what they'll sell the cut off is what Progressive can buy. And that tells you everything you kind of need to know about the auto business. So when you're looking at anyone on an Insurtech basis that's trying to build a full stack auto carrier, the first thing you have to do is figure out how to underwrite better than Progressive. And if you can't do that, then the only thing I'll see in your p&l, I suspect is here's new premium written, here's its loss ratio with outstrips it And oh, by the way, I have a ton of churn, right. And it's just all about, it's all about all about juggling what that means to a naive set of investors. And that's what we're really talking about. If you've signed a $6 billion valuation, that's Root. You're ignorant. That's what I'm yeah.

So let me let me ask you this. I mean, it's a it's a fair point. But we saw I think months ago, Progressive bringing back to life an initiative that happened years ago, where kind of you feel like it's a answer to Root, allowing customers to download the smartphone app. measure how they drive and maybe Progressive can help for them a better quote, definitely kind of it's looking at Root. So you think Progressive. From what I understand from you, you shouldn't be worried about Root but do you think they're worried about Root? Do you think Root is not bothering Progressive or Geico?

No, I think I think I think nothing bothers Geico, right? Because the way Geico does business is, you just when you walk into the Geico building, you just hope the lamps don't fall on you. Right? Like that's how they, their ability to keep the expense ratio low is they spend nothing on operating costs. So you know, Geico is like Warren Buffett's like wet dream as a business because the expense ratio contribution in that business is just so low. So Geico is not about like underwriting better. That's not that's not their, that's not their game, for Progressive, so the thing that's really interesting is that Progressive abandoned the whole thing and abandoned the whole dongle, but they got rid of the whole dongle thing, because you know, what they learned? what they learned was the people who opted into that dongle already low loss ratio, right? People with highly compliant behavior are the people that opt in to say, I'll take the dongle. And so they're sitting there going like, great, we went ahead and manufactured a dongle, it's got this kind of cost. And it's actually not really something that's going to change the loss ratio of the people that have opted in the one benefit that that dongle had, and they sort of buried it at the time because they didn't think it would matter is it have great marketing value. So it had a lot of marketing value around people who believed that that like the fact that they have that dongle in there somehow got them a better rate. What people don't realize is that having that dongle in there just means you're not going to get rerated as badly. So you can sit there and say that that's a better rate. And I suppose in theory that it is but I argue like, if your underwriting wasn't completely idiotic, you would actually get the rate right the first time anyway. But assuming that you can't get the rate, right rate right the first time because you have need more volume than the value that you create, then you sit there and you say, great, like, I just want to minimize how much the rerating is going to be. And so for Progressive, like being able to sell that conceptually, it was really that it's the same reason we do good driver discounts, right, the good driver discounts because the thing that's killing auto is churn, right? It's not it's it's the the initial rate and the re rating that that now is really obvious from an internet places where I can just go get a better rate from somebody else that's posted in some comp rater means there's no loyalty, right? It's like they The only people that are loyal to auto are dual eligibles. In fact, what we found is the best auto customer that isn't an auto customer to go after is somebody who just got married, or is going to get married this year. They're phenomenal. Right? The cost of buying them and market is low and their rate of return from a loss ratio perspectives unbelievably high, because their accident profile goes down, once they get married. They usually end up ensuring more than one car so you get multiple policy values. And they stay on policy they don't churn right so it that's my I think I think like when I look at what Progressive decided to do there, I think they'd said do it because they realize, Oh, I remember that it had marketing value. Like I'm gonna go ahead and put it out as marketing value because these guys again at Root are doing my marketing for me like the minute they go and say that that's interesting. I can just dust that thing off and put it out there. Progressive isn't changing the rates because if anything that thinks that I can tell you that for a fact, that I know.

Well, interesting point Progressive made an all time high today. So what does that mean? Right? Like, you know, it's i think I glean a couple of elements from what you just said. One is I scan through the S1. And as I was reading the purpose of who they are and what they do, and I'm gonna, I'm going to caveat this to the audience, I'm putting my investors hat on. So if it comes off a certain way, I'm just going to look at it, would I invest in this company? And as I was reading it as an insurance professional, it's like, this wasn't written for me.


Right. Like this was written for someone that doesn't know a lot about insurance. So

Doesn't know anything about insurance? Yeah, it's a lot like lemonade, right? It's just you don't Yeah, nothing about insurance. You may know a lot about marketing, but not a lot about insurance.

Yeah. So. So that's that's sort of stood out. And I'll go back to Avi, a couple of the, you know, when Root has been brought up before, in other This Week in Coverager? Is I again, putting my investor or VC hat on? I struggle with auto like when I think of what's the total addressable is huge, right. But I keep hearing about autonomous vehicles, I keep hearing about the the future death of auto insurance. I've seen Warren Buffett comment on it. I knew it wasn't imminent. But from it, like from an investable point of view, I'm just like, that's not as an if I were a VC, I would be extremely worried. I think there's probably limited upside, they would need to move, move quickly, steal market share, do it profitably, really jack up the valuation of the company, because the end might be near, you know, 10 years from now, 15 years from now. So those those kinds of things stick out to me.

Oh, yeah. I mean, it took it took root just a few years to get to that massive valuation. So they are quick. And obviously the you know, you talk about the potential autonomous cars, connected cars, they Ford wants to now become maybe not an insurer, but offer insurance to their client base using their data within vehicle cameras and other technology. They could forget about the underwriting ones like and they can really help prevent risk. They can do that. No one else can and automaker can, but you know, Root got to the end zone. That's the thing. They they got to that point.

Yeah, yeah, absolutely. Hats off.

Absolutely. Like, yeah, like, like, let's put it this way, right. I literally, I met a buddy of mine, a really good friend of mine, who got catfished (lured) by a girl right on the internet and ended up marrying her. So hats off to her for catfishing him and also

really, really impressive. Like,

it doesn't mean it isn't like, like, God awfully stupid. But it is it is great that you can get there like they see that. Here's the problem. The problem with here's, here's why it's a problem. Why it's a problem is because every one of us that's on this call and all the people that are listening, we're committed to this ecosystem. This isn't a quick buck for us, right? We're not in here, just to be able to sit there and say, Hey, like, you know, I, like I've got a really interesting like home insurer, because what I do is I sit there with every mortgage originator and I get first shot of the policy, right? That the To me, that's not I mean, to me, that's a great that's a great idea to do a great business. That's no argument there. But like, the minute you run out of...everything in insurance is about underwriting the matched the CPA (cost per acquisition). That's all it is really fundamentally and I and I argue that Insurtech's real value because you You nailed it, right? And when you said it, which is the real value of Insurtech is I'm the policyholder, here's tech, here's a reinsurance right, they're the ones with all the capacity it's not these carriers are the reinsurance ones with all the capacity. There isn't a single reinsurer in the world, not one that if you went ahead and you were like in a in an elevator stuck with them, and you turn them and said, Hey, listen, would you like to just write policies directly? And they'd go? Yes. Like, like, like, yeah, I have a ton of capacity. But that's my problem. I have nothing but cash...

They don't know how to sell.

Yeah, exactly know how to sell. So the minute that all these like Insurtech companies can actually go ahead and accelerate that process of selling, which is why they're all targeting it right? They're all like fundamentally every single Insurtech is doing the same thing, which is I'm going to talk about broker/agents last I'm going to come into market and say on this like, I'm going to call myself an insurance carrier you don't know the diff between MGA and insurance carrier. I'm really an MGA but call myself a carrier. I'm going to be a brand I sit on somebody else's paper. I get out there and everybody goes, ooh Hippo that makes a lot of difference for home like nobody in the on the on the front end has any idea what it really is, what's really happening and what I find interesting is a lot of the guys who've made it to the finish line, not to be like, gender bias or anything, men, women, whatever making the finish line, a lot of them come from marketing backgrounds, they don't actually come from like hardcore insurance backgrounds like claiming underwriting anything, they come from marketing, and they many times don't even come from marketing in insurance. And that's great, right? Because what it what it tells you is that, that's, that's fine, that tells you that's a viable pathway to get where you want. But you make a great point, and there's gonna come a time. And I don't think that future is just so radically far in the future. It's really interesting. Like Elon Musk posted like somebody posted something about Elon Musk and like rethink, I want to find a really brilliant actuary. So I wrote musk a private message. And I said, you don't need a brilliant actuary, you just literally need to know like, like, if there's anything about the owner behavior lead that that you put in the setting of a car in any way, shape, or form, that could affect the possibility of you getting an accident, right? Because the minute you can underwrite the manufacturer, right, the manufacturer's risk of a car itself, it means that you uncouple it from the one thing in auto insurance that nobody can actually leverage to predict, which is the behavior of the individual when they're not in the car. We talk about all these other things that people do. But I can tell you, because I know this for a fact, if you're the kind of person who pays his mortgage late, you're also more likely to get into an accident, you're also more likely to file against your home claims like this, this is nothing wrong, anybody. This you're not going to sit down now. You're fairly obvious. You uncouple that, right. The minute you say, I'm going to have the Smart Home underwrite itself, the Smart Car underwrite itself. Your your underwriting and your actual rate are now almost completely aligned. Because the only reason that delta exists is the individual's behavior. That's the only reason that that delta is really driven. So that's my minute by looking at auto insurance. That's my take on auto insurances is I mean, and I don't think it'll be overnight. And the reason will be overnight is because I suspect the autonomous cars autonomous cars require, right like one of the one of the big issues that even Tesla has is that that the lot of things that you do in, in mass production are hard to do with electric cars today. But that won't be that that won't be the case long term, right? Like you will come to a point where you'll be able to do production level vehicles that are electric, you'll be able to production level vehicles that are autonomous. And yeah, at that point, like if I'm the autonomous manufacturer, I'm going to sell the auto insurance right through the car...I'm going to sell it well, if you sell these Right,

well, well, Avi brought up you brought this up a couple weeks ago. And I mean, they have the superior technology, it's whatever they're going to put in the car is better than what's on the phone. There all kinds of all kinds of drawbacks to having it on the phone. I'll be like you if you were meant to battery, that's

what I said. I think Root really, in my opinion, the Root should build a better battery, because then they'll be car insurer. Sure, but also sell batteries, maybe Apple will buy them

I think I think it's a gimmick. I think it's a gimmick. You know,

you talked you talked about marketing. And this is that in talking about Progressive and to think. And it's funny again, because they they admit with the battery problem, because even the best marketing plan, when it's not based on a good foundation, you'll find holes, you know, that happens. And this is what happened with Lemonade, and it's happening with Root. So they're saying that they're going to use telematics the smartphone to continuously measure how people drive beyond the test drive period. Now, you start to think one second, who is this company that says that we're only going to measure it for three weeks, because that will be the indicator of how you're going to drive for the rest of your life. Everybody can game the system, people know it and just looking at their loss ratio during the pandemic, of course, less driving, so the numbers go down. But you know, you compare it for example, to Progressive as you mentioned, what a difference because still route relies on young consumers that still have to drive even during the pandemic, they may be essential workers or whatever that is. So and when you look at Metromile, for example, this is a good comparison because Metromile you could say a lot of things about them, but they are very clear, communicating what the product is. Who's it for people that don't drive much their loss ratio in the second quarter, just the second quarter went down from the first quarter from 74% to 14%. Metro mile and because of the driver demographic people maybe don't drive it to begin with. So a pandemic even I don't need to go out no big deal. I don't need to go to the office anyway because they probably don't drive my car and that's why I need a pay per mile insurance. So you see that Then it really is about attracting the right customer. And I feel like with Root, you know, obviously it worked for them for the IPO. And I bet you it's gonna be a great IPO. But they've attracted a good consumer, like you said, with a dongle, I'm willing to let you see how I drive, I believe that I'm a good driver. But then they also attracted the people that said, let's game the system for two, three weeks, I'm going to drive like a grandma. And they did it and the bad risk and bad loss ratio and all of that.

Yeah, I mean, listen, like, like the beauty of doing what I've always really liked Metromile, right, who knows where they'll and my only my only point about Metromile is the volume of of inventory that exists, unfortunately, for them is just not, it's just not large, right, since it's not gonna be large enough for them to sit there and say I'm sustainable. But I would believe that because of the loss ratio Delta they have, they can start to say that you can basically use the pay per mile as a almost like a captive right, you can use a pay per mile margin to sit down and say, I'm going to take on some stuff that's like more non standard more risk, whatever just sort of blend out your your portfolio route chose the exact opposite, like thinking, which is, I'm going to go ahead and sell this thing to everybody who's got a mobile phone. And some of these people will stay on the mobile and some, some of them won't. But the thing that's the most interesting, and and it's interesting because we actually have a customer where they have all of that telematics in the car. And so it's a car manufacturer, right. And the thing that's really intriguing is, the behavior of the individual still completely overlays, everything that's in that car as not, not a surprise to any of us, obviously are here. But more interesting was they had also looked at the mobile the mobile option, right, because that's the easiest way to get somebody to opt in, as you imagine. And what they found was that effectively, what you're able to do is that ecosystem of people that you're willing to go ahead and give that to their frequency risk goes down, or is low anyway, the probability of severity is is as randomized as it would be for anyone else. And so what Root believes that they can do is they can sit there and say, Okay, I'm going to give this to everybody, I'm going to go ahead and give a discounted rate because you're willing to opt in anybody who's only on it for three weeks, and does the grandma thing. They're gonna get rerated and right off the business, anybody who has something happen, right, from a security perspective, they're going to get re rated or written off the business and I'll keep the rest. Here's the problem from what I can see from this one is the churn on their book is really high. Like that's not, that's no, like, that's not like, like, the thing that people know in auto is and it used to be true 10 years ago was if you weren't on a book for three years minimum, right? That's where an auto carrier net fcpa broke even. Do you know what that number is? Now it's 18 months 18 months? Okay? So if you can't keep somebody on policy for 18 months, right, like you're gonna use State Farm like what do they lose like 10 billion or something? I don't even remember what it was they lost but like a lot of that was turned right just straight up churn. So you can't you cannot support a business in auto auto comes down to retention it doesn't it retention is part of that CPA, if you can't keep a person on an auto policy for some period of time in 18 months which animal gets shorter right then you can't grow this is not Yeah, so I that's what I say I think it's marketing is a great marketing job.

It probably explains the bundling with homeowners right so they they probably know that

but I only five I think they they mentioned that the rest one only 5.4% opted to bundle the renters with a car insurance Yeah. In eligible states but the high number

no and the beauty of it is is that if you bundle hold with auto your churn rate drops, you bundle renters with auto it doesn't renters is auto doesn't actually reduce your churn rate enough, because as you would imagine, those people are transient. renters as I like this is the product is hilarious to me the same thing I saw with Lemonade, right? where like, like people are seeing it, oh my god. Like, I'm like, you're selling renter's insurance, okay, right. That's the thing that people buy to like, like, insure their jewelry, and it's like, you buy renter's insurance, that's not a high premium product. And I so you are pouring a meaningful amount of money against a non high premium product with the assumption that you're going to be able to have to upsell more to the right people. Right. And, and they admit that,

yeah, that was on Lemonade, as one was, this is our, we're going to get a lot of them and then as they graduate, which was the Word, we'll get them into the home and, you know, maybe the future is auto in life and all of that stuff, but that was the plan.

Yeah, good luck with that plan. So Like,

yeah, yeah.

I mean, seriously, how loyal are you to renter's insurance? I mean, come on, like, I mean, if you told me that about auto I buy it like, but I don't even know. Like, I like. I mean, I obviously live in a home, but I don't even I can't even tell you who my renter's insurance was when I rented 15 year I like I have no idea what they are like, I wouldn't even know because in my personal belief, the only people that know what the brand of insure is, is one of three reasons either a you've done a phenomenal marketing job, and they know who Flo is. They know who like that's mine for them. Yeah. He you've claimed and your experience was great. Or see you've claimed in your experience was shit. That is it, the three of you want to go in and say who I am as a carrier. That's usually what it comes down to. So I do understand where they're saying they're going like other claims experience for us is great. You know, the loss ratio on renters is and frequency, it's not high. Like everything in that business is basically total loss, right? I lost my like, my jewelry got stolen, that kind of stuff. And that's why they can get away with saying, I'm gonna hand this all off to the reinsurer, because

so let me let me ask you both a question. From an investor perspective or whatever you want from an insurance perspective. If you had to choose to invest in Lemonade, or Root, who would you choose? And why?

I know I can I go first. Yeah, all you Ah, I think I think I would go Root. Um, just because I think auto and homeowners has more legs, like I think you can do more, I think Lemonade is going to struggle to go up the ladder Root could, you know, really, I think fulfill a niche if they really want it to their VC back. So they have to think really, really, really big. But I think Root has more tools to be able to they could go after a niche very easily if they wanted to, like non standard or they could do that Lemonade, CAT Lemonade. It's kind of stuck. Like their renters, they can't they're struggling to get homeowners. I just, I don't I don't see how they're going to be able. And that's the other thing. So all right, I want your opinion on that. Which one would you invest in? But in fact, they're now competing against each other? They, they I can't I can't see a situation where they both, like super thrive. But anyways, which one would you invest in Hari

is neither an option. I don't

have to choose one. I mean, like, like all of the startups have kind of seen that I've chosen that like, like, I'm gonna go the full stack option. I suspect the one that that is about the one that has the the there's there's there's one that I didn't really know very well. But there it's clear something. I forgot their name but your cover? Yeah, clear cover that that seemed kind of intriguing to me. I don't I don't know the business well enough to understand it. Meaning, I just haven't done the investigation. Right. But because I don't like what they do doesn't. I'm sure it's great. I just don't. But but is Hippo in quite honestly, like I'm not the first one to come out and say like, my experiences with Hippo as a as a customer and partner haven't been great. Right? counseling, say that. Like, because like, and I can say this with with Avi on the phone, he can go ahead and tell me that I'm completely wrong. But like, when you work with Israeli companies, you have to be very, very, you have to very much understand right out of the gate, that you are not in any way shape, or form smarter than that. Don't and don't ever assume. And quite honestly, many times it's actually functionally true. But even if it isn't functionally true, like just don't assume that if you're going to come in there and say, Hey, we can make something better, they're highly skeptical of anything that you do.

That's what my customer service in Israel sucks. Reasons now what customer is always wrong or stupid.

You know, it's the customer stuff. So the thing that's intriguing though, is when you can find a low cost of acquisition channel. Right? There's a lot more leverage that you have. So like, for for it's why like every time like a good point, very good time you would it would show up. You say Well, Hippo is going to be ready to go be a full stack carrier. I would literally run LinkedIn and like that is a stupidest thing I've ever heard. Don't you ever like that's just so so dumb, like just so completely dumb? And then somebody from Hippo will be like, no, we're still gonna be in MGA right and they're like, we'll just slide off in the universe. At some point it makes sense for them to switch the reason i think it's it's never a great idea is that in home insurance. The reason the ceding to the reinsurer is going to be really punitive, it's only going to get worse and it's going to it's gonna spread across every market. You're not going to just pay a seating premium to be in Florida. You somebody you're going to sell in Ohio and you're going to be paying a CVP for Florida. So that's it That's the reason that like full stalking home is, is it's such a dicey proposition really just because of the the hardening of the reinsurer on the other side, but the one advantage they have is by selling through those mortgage originators, they've got a very low cost channel that is actually working well with the interest rate itself, right? Like, because everybody's doing what they are on the interest rates out of the business, that that's a very, fairly low cost acquisition channel for them. And so because of that, if they ever wanted to say, I'm going to be full stack, they're not gonna have an expense ratio. I look at the s one for both Root and for Lemonade, and I'm like, there's, there's, there's no, there's nowhere on an expense ratio basis for them to go, like, you know, it's like, like, the favorite thing I always see in Coverager is is really kind of like, like, funny every time they do it. This is somebody goes in and says, like, suddenly, we're going to use agents, right? Like, they'll either be like, like, like, I'll be like, oh, they're gonna use agents told you right? Like, like, that's the reality, right? The reality is, you've got cheap capital, and you've got cheap capital coming into this market, it's going to go to words, distribution, right? Because you venture guys are dazzled by growth. And they don't care about margin in markets where the cost of capital is really low. So the thing that I think these guys have done like lemonade, and it's smart on their part is they've been in market long enough, that by pouring the by taking someone else's money to cover that expense ratio gap. They look really good. Right? It makes them look really, really good. Yeah, yes, this musical chair will end, it always does, right? Like I started my first company in 2008. Like, we sold that company to Johnson Johnson for 6 billion, if I told you how long it took us to raise our seed round, you would laugh that I would have even stuck it out. Like, like, I've seen these markets, they've come they come and they go, they really do and, and the thing that's that sucks is a lot of what people in Insurtech are doing is great. And a lot of it is going to get buried in the wave up a couple of guys that are that that that are getting a quick buck,

and so forth. So do you have an answer? Root or Lemonade?

I was gonna I was gonna pass on both. But I would agree. I would agree with Nick, like your best bet is probably Root because when you look at it, Lemonade has a two parter. The first problem is is that is that there is the whole expense ratio. Yeah, medium is so low like this. It's just

an Lemonade customer acquisition, they share 283 per customer Root is 338. So Root a little bit higher, but they get way more at

auto auto autos, much bigger premium,

much bigger premium. So of course no, but that's the thing. And you know what it's the thing is like you pay for a software engineer for renters, and for auto, they don't care about the line of business, you still pay them 150 200,000 whatever it is, but you're getting a lower premium. And so So who do you think did a better job in terms of marketing to consumers Lemonade, or Root? Lemonade?

Yeah, much better. Agree. I agree.

I think I think so too. But again, it happens just to be that the premium is so low and although they sold way more policies, and renters policies, which again is not compulsory, you don't have to have it, but they

did an amazing job but and they piggybacked off of they use they got free publicity around every corner when they first got started the the gun thing and then policy 2.0 like a lot of stuff that I think insurance professionals just kind of roll their eyes at. But their potential customers and and potential investors ate up. Yeah, lapped it up, it was just like, oh, my god, these guys are transforming the industry.

I think I think dyed in the wool, I think that there's a blind spot for dyed in the wool insurance people. It's it's marketing, that is a blind spot for them in the sense that, in essence, that when you're when you're addicted to that agent broker channel, right, like, how many carriers have you guys probably talked to that are like, we want to disrupt our agent brokers, but we don't want to know that they're being disrupted. Okay, yeah, good luck, man. Like, like, like nothing in insurance is more like true than the tail wagging the dog. That's what it does in this business. Without a doubt, if a producer goes and says, like for us, like literally the producers going, why aren't you using Vera Kai to go ahead and put the rate, like the minute they do that the carrier's like, Oh, you're right, we should like it's completely inverted. And so I think that the thing that you see and like and I give Lemonade all the credit in the world is they're phenomenal marketers comparatively to everybody else in the industry like you're there and make sense if you look at their back That's right. They are marketing people like pie. John's right is he's a marketing person like he's, he's these are mark, these are people with marketing backgrounds, right, b2b or b2c? And so they're bringing to a to an industry that is historically dependent on agents and brokers, right? And where, where marketing has historically just been about brand. And they're bringing demand Gen, like these guys, these dudes haven't seen, like, they haven't seen demand Gen monsters like these guys coming in. The problem is, is that there's that date, the demand Gen monsters coming in, have no idea what the actual margin on the product is. Yeah. So it's kind of funny, like somebody will be both right, somebody will be able to actually like, and they'll be whoever that is, will be the dominant, like, there'll be the winner, the real winner in this business. It might be an existing player, like an Amazon already, but it's probably there'll be the winner.

Yeah, I heard I think you sort of hit on something I've kind of I've talked about over several different episodes, which I think the two things that the black holes, that I think these insurtechs are just going to struggle to get any sort of energy to pull away from their gravitational pull are going to be the reinsurance. And I'm amazed at how that's downplayed. All the time, no one really brings that up. And it's just like, you know, you can't if you're that good, you can't sacrifice your upside to the reinsurer. And I say, and guess what, it's just going to get worse. reinsurance marks, markets are hardening, and they're gonna control your destiny, but no one has really, or no one that I know of has really skin to the expense ratio problem in insurance. And I was having a conversation with a friend yesterday about a small business Insurtech that's going direct and using agent brokers and he's like, what do you think about them, like, it can't work? Like you got to pick one or the other, because agents are going to know that these companies are competing against them. Like, they have other options, you know, cuz, you know, they can go to Bold Penguin or nali or a marketplace and get access to other things. And so those two things, I think, are like black holes that I think investors investors don't don't really pay attention to.

No, you're 100% right. I completely concur. Like you know, it's really a and I'm sure this goes out to the world so forget it. I guess I'll go ahead and say it but but the reality the thing that's becoming obvious to us is in certain markets that we're in we're the rate if we disappeared if we disappeared, there's no way for that like in small group health there won't be any way for the business to move other than health questionnaires which are awful, right? And so the the thing that's interesting is there's many times I sit around I go, why am I not just subordinating the right like this is silly, okay. And the reality is situation is the only reason I'm not is the reinsurer. That's the only reason the reinsurer sat there, you can get the reinsurer to give you paper in anything in P&C, because P&C is just so commoditized it's it's ridiculous, right? It's hard to get reinsurers to give you paper and things that ah, because other than like final expense or something, something very, very low weight like simplified issue term, because the rate of claiming is high and there's nothing putative when you claim whether rates gets reset, right? In life insurance, when you claim you die,

yeah, it's

over. And then health, you can claim as much as you want your rates not going to change. So that the the way the reinterviews, that business is different. I think that that's the thing that has been the most eye opening for me in this business, right? And I consider myself a novice compared to many, many other people is that that sales and marketing costs and underwriting cost are not coupled in any way, shape or form. They're not even viewed under the same p&l that effectively eyes an underwriter could there's a guy apparently, AIG, this is a true story, that when you want to go ahead and insure a yacht, he's the only dude, if he goes on vacation, you can't you can't get like, I met him. I met him once. And it's like he like he taught me is bad how he eats hotdogs, he smokes. But go outside and like and I just asked him like, okay, it's a $50 million yacht, like, why don't you write it goes. He's like, he's like, just old school. And he's like, Guys, Russia, forget it. Like, it's just like, like, I don't even know. And that doesn't even seem like there's nothing mathematical about that in any way, shape or form, right? So you sit there and you look at it, and you realize very, very quickly that the lever that exists on one side of your 100%, right, that the lever that exists on one side of the business, fundamentally should be coupled to the other side of the business. And I argue, you know, in our early days, we thought that we could tie the two together and not worry about the producer. And we found out I want to say within a couple of months that that was insane. And the reason we found out that it was insane was because you can create these things called look like audiences. Right, and you can go post them in live ramp or you know, directly you do right on Facebook. And what will happen is not a single marketing organization at any carrier will be able to do it. Right, they won't be able to last because the one thing that you as a third party don't know, is who doesn't respond, but Facebook does, and Google does, right? So because they know who won't respond, they're actually the one determining intent for everyone. So if you think that you can, like you know, how you beat Google or Facebook, you get some idiotic private equity guy to give you 350 million so you can go public and get some other idiot people to put in work, you're not going to be Google and Facebook on the intent of wanting to buy auto insurance, right. So what we realized really quickly is that the the where we're really great, and where we're, I think that there's opportunity is qualifying intent, right? That basically you can sit there and say, This is undriveable by the market, because the main thing, like progressives, manual and all statements, they're not radically different. The difference is, is that Progressive has more price availability than everybody else has. They have a they have a rate for everyone. And the minute you have a rate for everyone in auto, your cost of acquisition is going to be lower. Because you have a repo everybody, anybody who shows up at the door, you can give them something all your nonsense, cool, here's 100 bucks or your premium here, it's like, you can give a rate for anyone. So the minute you have an a, a low cost of acquisition, right, which is, which, for Progressive is directly tied to a wide rate band, like it's game on, right? And so so think about it this way, every time Root buys a customer, and every time they lose them on a rerating business, in the model, the probability that it's going to progress It is something like 35%, which is why which is why like there's this movie called Miller's Crossing, it's got this great line where where the guy who runs the entire game goes, you're only as big as I'll let you be. And that's progressive. Bill. Oh, they're only as big as they'll let you be. That's the business. That's

how it is. And I'll say, Avi, that that's sort of what I was saying. When Lemonade did their IPO, I said, Lemonade can only get as big as the reinsurers are going to let them be. Right. Like they actually control what's what's going to happen. And so I think fundamentally, is what we sort of keep circling around that same thing, but it just it comes customer acquisition is so difficult insurance that it's you need a complete Michael Porter strategy session to just focus on that. And I'll tell you, I,

you need to completely completely and utterly automate underwriting right, literally, it's got to be weak AI, that's Yeah, we connected to your YouTube.

Yes. Reduce that expense.

Yeah, yeah. Okay. Because the cost of Mark, like the cost of your expense ratio is built on these basically two things, right? Whoever is getting your intent. So it's the broker you're paying them. If it's Google, you're paying them, right. It's, it's whoever's, like getting intent. And then whoever qualifies it. And the thing that's interesting is the qualification of intent goes into net premium knowledge at the expense ratio. So the minute you take that, that qualification of intent, and you actually push it into the expense ratio, you're taking all of the margin that sits in net premium, that nobody ever divulges and you're able to pull it into expense ratio and become far more competitive. And in a high interest rate environment, you wouldn't give a shit, you would never do that. But in a low interest rate environment where things aren't compounding, that's your best bet. There isn't a better bet. Really? Yeah.

Well, Avi never, never tell me insurance is boring.

This is, you know, this was awesome. I think I mean, to me what it does, really, and I and I look at Lemonade, and I look at Root. And they were vocal, they were aggressive. They use that capital money to do something that normally you cannot, for a new company, because things take time and insurance. And you talk about marketing, you talk about brand, I feel like this is this is, to me the ultimate challenge of insurance companies, there are so many selling the exact same thing that's driven by price in an environment where consumers are now completely in control of what they hear and see. It's very difficult to get people to look at your product. And you know, we talk about the bundling of customers that just got married home in auto. They're not here to get root measure their driving for three to four weeks for saving 100 $200 every six months. They don't care about that. They have other things on their mind. But that's where again, your vocal, you do that but it does come down to marketing first, and I feel like a lot of insurance insurtechs and even insurance companies I think they haven't figured that out then it's just to me, it's fascinating to see the two different approaches of Lemonade because I'm torn personally like, who is better who is which one way and better And before before we sign off, which one would you invest in? You know what? I don't know if it's because I'm in Israeli? And they'll say, well, because you're an Israeli question. I think if the folks at Lemonade, if they stop worrying so much about how they are perceived, and if they because to me, what Lemonade did was more clever than what Root did because Root was basically like a regular salesman approach. I'm gonna be vocal, I'm gonna be aggressive, and you're gonna see it, and that's it, then it works. It works. What Lemonade did was kind of like an indirect approach, they made the industry very mad, they got all this PR, but consumers, you know, they bought it. And to me, that's amazing how you can do that. If If Lemonade is able to go to a psychologist sit down and say, help us help us be different, but somehow still maintain our cool, then I would go with Lemonade. But if they are still stuck in their old ways, I mean, Root to me Root has an expiration date. And that expiration date is once enough consumers understand that it's just a gimmick. Just like now agents with Assurance, IQ understand that it's just a gimmick. Because more Glassdoor reviews, more indeed reviews, people see the Coverager articles. So it's going to be harder for them to convert eventually. Because if everybody's saying don't go for it six months to get a rate increase, some would say, yeah, let me say for six months, but some might say, forget it. I'm not here for that. But I mean, it's challenging. But what I can tell you for other insurtechs, like you're not even in the game, because you're trying to do it the right way. And you're not vocal and you're not aggressive, and you have no no chance, you really have no chance. And the future, really, and I always say this, and I'll say it again, insurance companies do not have the right to be consumer facing brands. You can't You can't do it, the ones that will have the right are the carmakers that maybe will partner with some insurers for better underwriting to gain that, you know, unique advantage. media companies, banks, fintechs, everybody that is able to say, you know how to generate that intent. Listen, we know you just lost your job, let me send you a good ad and say, Look, you lost your job, now is the time to save money on your insurance. They can do that insurance companies, they can't they just spend their money on marketing, Google Facebook agents, whatever that is, and they can't go that deep to really improve

their marketing. To wrap it up. I I totally agree with you. It's why I actually think that the reality of this business is that, that if you're going to create a transformational tech stack in this space, it's to help reinsurers like business directly. Then you just you go to agents, you go to brokers, and you basically say, Hey, listen, forget about the rigmarole, right? You submit, you send me just this information. And I'm going to go ahead and write you a rate and the reinsurers got my back right then and and at some point, that's what the business is, what it's what it's going to become. And in fact, it's the reinsures that are going to go ahead and be the ones that you're going to use the carrier to like say, Oh, you know how to, I mean, it carriers are brands. And and the one thing that this thing has shown that Insurtech has shown is brands are destructible. For sure, right? Come in with a demand generation value proposition, you can do it. My whole thing about Lemonade, where I was like, you have a chance when we started doing pet insurance, and I'm like, Okay, I see the Venn diagram of a renter and kind of just that I can't write, like, the Venn diagram of like renters and homeowners, there is no Venn diagram. That's, that's a, that's a, that's a you progressed from one to the other. It's not, you're doing both at the same time. So I, my personal belief, when I look at both those companies is they both approached it from two different angles, right? I think Root approached it from the angle of if I go ahead, and I say that I'm doing something different from a rating perspective, it's a great marketing tool. Right? And Lemonade, when I had looked at it and said, you know, if I go in, I make it a far better claims experience. Right? Like, like, it's gonna be really an attractive product as proximity attractive. The carrier in auto with the highest retention rate is USA. And the reasons really, obviously, I'm never had a claim with USA, it's the greatest thing. You almost want to have a point like, it's the greatest thing you will ever have in your life, right? Because there's no bullshit to it, there's no like, they don't sit there and inherently distrust their customer. So both of them approach it approached the marketing talk differently, right? For me, it just comes down to total premium, and I think it's easier to get total premium in one versus the other. And, and I think

this is going to be there's going to be a question for the Coverager crowd. Who would they invest in Lemonade? And will

offer offer neither as an option just as Okay,

okay, we'll add it will add it hiree Avi, this is the week ending September 9. It was awesome to get your insights I man I learned a lot. So let's Let's do this again,

anytime, anytime. Thank you all been the virtual drinks next time.

Thanks everyone. Bye

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