This Week in Coverager (week ending 9/25/2020)

This week, Avi and Nick welcome telematics expert Mitchel Harad as they discuss Root’s IPO.

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Transcript

Nick
And we're live. This is This Week in Coverager. This is the podcast where we discuss some of the hot topics of the week in Insurtech, FinTech Edtech, or some combination of those, but articles that have appeared on Coverager. My name is Nick Lamparelli, as I'm in podcasting headquarters in Springfield...No, I'm in Naples, Florida. Sorry, hope you enjoy the background. And as usual, in New York City, I have my co host, Avi. Good afternoon.

Avi
Hello!.

Nick
And we have a guest host. And this is going to be, we hope, a recurring thing where we can have experts in different areas of sure tech insurance, FinTech, and all of those who can come in and sort of give us a little bit additional insight versus, you know, the kind of the opinions of Avi and myself, where I think I think we're fairly boisterous. So Mitchel Harad, is joining us. And he used to be vice president of marketing at Metromile is currently the marketing strategy consultant to Highroad, which is State Farms UBI startup and you're gonna see that couldn't have picked better timing. So, Mitchel, welcome.

Mitchel H
Thank you. Thanks for having me. I've really been enjoying the show.

Nick
Yeah, thank you for coming on. Appreciate it. And so I'm going to kick it over to Avi to talk about, I think, what will be the one and only topic but a fairly big one. For this week, that's ending Friday, September 25. So Avi, what was the hot topic of the week?

Avi
So the big topic, of course, Root, it was reported by Reuters, that Root is, hired Goldman Sachs for an IPO, they're looking for an IPO. If you read Coverager, then it shouldn't surprise you we told you a little bit about recent job openings that the company was looking to fill, which indicate that the company is looking for an IPO. So before, you know, kind of we we kick it off, Mitchel, what is your impression of Root?

Mitchel H
Sure, so you know, my view of Root has been as a competitor in the UBI space. And certainly, you know, we're competing with every traditional auto insurer as well. You know, it's a very mixed story. There's a lot there that certainly as a competitor, and as a marketer, I find really impressive, and I tremendously respect. You know, most importantly, they came at customer acquisition through a completely brand new model, really brought a lot of innovations to the table created something that resonates quite clearly, with consumers. And they're figuring out how to get them in the door, pretty affordably and it's scale. And that's impressive. No doubt about it, you know, the flip side of the coin, they're losing money on all those consumers. And they had been for some time, and it looks like they're going to continue to do so for some time. And you know, and in insurance and financial services, it can be really easy to sell the product can be a lot harder to sell it to the right people. Sometimes that's part of the strategy. And sometimes it's some things you got your business you need to get right. So you know, a lot a lot to see how it plays out there.

Nick
Yeah, I think they're I think their timing couldn't have been better. So you brought up it's, unprofitability. And I think given Lemonade's IPO, I think they're really I think, could be timing this like really well, in terms of the types of investors that are willing to sort of overlook that. You know, and so a question, a question I would have for you, Mitchel, is that, given the unit economics of this, what what would be the some of the potential downside to them? If they or let me flip this around? Sorry? Is this a pricing thing where they could raise the price? Or is there what sort of alternatives do they have to try to get profitable? How would that affect growth?

Mitchel H
Sure, so you know, there's a number of levers there. I mean, ultimately, it's always pricing, right. It's, you know, are they pricing risk appropriately? And I think the key thing is and nobody outside the company really knows, to what extent may they be purposely underpricing as a way to attract that business with a plan of you know, we're going to cross sell products, raise prices later, shift the mix as we go. So, you know, certainly can't sit here and say that they're not getting exactly what they're trying to do. However, my strong sense and that of many others in the industry is that, you know, they are casting a pretty wide net, growing, you know, incredibly fast I was actually just looking at their state coverage map, this morning. And you know, I think since I looked at it even just a couple months ago, they've added another 6/7/ 8 states, each of which, of course, is going to be a unique market with unique pricing. It seems like a pretty substantial amount of unchecked growth, with a really keen focus on the top line mattering the most. And again, certainly respect the results, if that's the goal. But where it flows through is create a situation where their survival is dependent on continuing to raise massive nine figure slugs of equity. And certainly an IPO could position them well, for a longer period of time to keep that going. But at some point, the musical chairs stop, and you need to be generally self sufficient. And so you know, your choices for doing that are continuing to raise prices, narrowing your underwriting as you go forward, which is going to slow growth being more selective and who you take on, or perhaps, you know, they know more than we give them credit for more than we realize, and the opportunities they have on profit and some other things.

Avi
You know, you mentioned the goal, and what is the ultimate goal? I think that's the the ultimate question. You know, obviously, it's very difficult to build an insurance company the right way, when you're under a timetable, you raised a lot of money, you need to grow very fast. So sometimes that doesn't go hand in hand. But I think one of the, I mean, Root did a lot of smart things. Obviously, their model is no different than progressive or Geico. They don't have any unique insights they claim they do. But that's not true. But they keep on with this perception. And Shefi likes to say that perception is reality. That's the message that they deliver, we're different. We're fair, we track how you drive, there's so many issues with the model, but because they are so vocal, because they do come with a very unique model that's unlike any other in the industry, just now Progressive kind of went that route a few months ago saying, hey, come try us before you buy. And you know, we'll give you a quote. So so the reacting, which is just that, by itself, I think is an accomplishment to get Progressive to react. But no one is really doing what Root is willing to do. And that's why they're seeing that growth. And as you said, Mitchel, it's going to take them to the next step, they're going to go for an IPO, which is probably going to do good for the company. And then then the real game starts with maybe they could do other things, they'll have more buying power. And they could really sit down and try to figure it out what their true model is, of course, consumers, not all consumers have a short memory. And their model is very problematic with the fact that when you say that you offer a price based on how the consumer drives and the consumer doesn't have tickets or any violations and renewal, there's an increase that consumers saying what's going on? Why should I stay then?

Mitchel H
Absolutely, I mean, I think there's, to me, it's more sort of the things that they don't talk a lot about, that raise some of my concerns, you know, for example, I'm in California, there is no UBI in California. So how, how am I being priced by them, and what advantage do they have versus anybody else, you know, as a newer as a newer carrier in the state, they're at a disadvantage, they don't have a book, they don't have experience here. When I look at the renters, or homeowners or products, you know, I'm unable to discern what meaningful advantage they have versus any other carrier that's been doing that for many, many years. And you know, those things are sort of, you know, certainly on the margins of where a lot of that growth has come from, you know, I also find it really curious on the claims side of things, and one thing that could be opportunity to come, or opportunity missed, you know, with sort of the unusual pricing of we're gonna we're gonna evaluate your driving and those initial 2/3/4 weeks of your term, you know, you're giving up what I do think is that really strong value where I've seen as that really strong value of telematics, that's going to claim side of thing. And it seems that that data, you know, I believe my personal opinion is that data has higher value in claims than it does on pricing. There's, they have the opposite view with themes, but even not require that data, which means on cases you're not collecting it, the ability to leverage that to bring down your claims and their sky high LAE. Those Those are things to me that raise some flags about how valuable How much is the data usage and how much of it is a great story to tell.

Avi
Well, Nick, this is a question for you in terms of, you know, the claims, the whole concept of you know, the route model is to attract better drivers. That's their concept, and they have a lot of claims. So do you think it's a case where for two to three weeks, I'm going to drive like my grandma, I'll get a rate from them. And then I'll just be My usual self?

Nick
Well, I think Michel will agree with this, that that's kind of like the history of insurance, the biggest, the biggest issue that we've run into is misalignment, where you have either a moral hazard or adverse selection, you're attracting the wrong customer, the customer that's attracted it, I don't know of too many situations where the, the customer has been attracted by the price, and that has worked out well, frankly, you know, and so being a low cost provider is actually like a really dangerous position to be in. And so I think of, you know, I, you know, for auto, I usually think like Geico as being, you know, one of those companies that I would classify as is competing with the low cost, but they have like significant actuarial models, for the types of accounts they want to go after, where they can price it, they have a long history of being able to do that. But I think more importantly, they're backed by a company with an absolutely gigantic balance sheet. And so in order to be the low cost provider, you have to you have to have assets, like you need to be able to slim your margins down on your underwriting to razor thin areas, and make up for it somewhere else. And I always wonder, like, wait, Mitchel, maybe you can answer this, like with the with the telematics, does it provide enough...ooomph...on the underwriting side to overcome it, assume someone has no float? Assume, you know, and in Root's case, they likely don't have anything that significant. Will the telematics give them a competitive advantage on the pricing? where they could leverage that to the low cost? Like, I don't think the economics would work. But you know more about how that works. It just doesn't seem like there's enough there to be able to get that sort of advantage.

Mitchel H
Yeah, I mean, my view on telematics data, especially for pricing is it's interesting, but it tends to generally be secondary. You know, if you can tell me, I could only use three or four data points, which some states like California effectively do. You know, I'm going to look at things a lot more like gender, age, zip code, credit quality, and California, driving history, things like are you a hard breaker? Do you accelerate? Those are certainly interesting things to know. But I wouldn't put them as primary pricing factors. And so you know, Root again, I don't know their prices, specifically, they claim their marketing materials that the UBI data is more than a third of how they underwrite, they've made the claim that they want to actually move off of credit data completely, in the years ahead. There's always, you know, I definitely believe in we've seen it in a lot of industries, especially financial services, that there are alternative data sets, as data become just just mushrooms in size in everything we do. I absolutely believe that the way we're doing things is never as good as it can be. But I do cast a somewhat dubious eye on what the incremental value of the telematics data is, from a pricing perspective. You know, the other thing that I find really curious is, Root has a strong need to improve that book through a higher quality customer and usage of pre screen credit data to market the customers, identify people with good credit who are likely to convert and likely to be quality customers. Pretty proven effective strategy. I haven't seen them doing much of that in the market. They're not a big direct mailer, for instance, you know, their online tends to be seemingly tends to be you know, targeted a little more broadly and not through pre screen credit for them to make a statement that you know, the future actually is us to move the opposite direction...it's a big bet. And I don't know this that they've again, nobody knows and perhaps they do have it all figured out. And it's just an early days. But it seems to me a lot more tech and a lot less been earned Sure.

Avi
Yeah, I think I mean, we've seen with Root in recent years, they started to increase rates significantly made a lot of consumers unhappy, which is obviously you know, the case with insurance. So you know, the you wonder what are they going to do because you know, this is their model the way they do they do a lot of YouTube advertising for example, a lot on Facebook and things like that. They're targeting a very specific customer. Yes, they have a renters and homeowners product now but I don't know if someone a bit more sophisticated with a bit more money is going to do the test drive, keep their app on and and do the whole thing. So you wonder what they're going to do. But I can tell you why I like this strategy. And it's not from a good place. So there are so many new drivers coming into the market every year. And not many know about Root like within Insurtech terms, Root is a big player, everybody knows Root. But compared to GEICO, Progressive, not everybody knows what this company is about. And they believe the driver of potentially saving money 50%-52%, whatever that is, which is always going to be very appealing. And this is something they're not afraid to promote. Like, if you go and look at other Insurtechs in the car space, they talk about, get better rates or fair coverage, or what is that like 52%, I see the number, I know what 52% means because they know how much I'm paying. And they're very aggressive about that. And it's really, really is helping them grow. And I wonder when they go for an IPO when they show their real numbers, it will be interesting to see who has a better cost of acquisition, Lemonade, or Root. To me, obviously, you cannot compare renters to car insurance, but two companies that took a very different approach. And really Root is the thing you could give them credit. And I think that's a huge advantage. They're not afraid to make customers angry. They're not afraid to make customers angry, they're not afraid to lie. And they lie in a lot of their advertisements. Because if you say 35% of your rate is based on how you drive, and I've, I'm paying $100 now, but next renewal might cost is now $200. Is it still 35%? If nothing has changed? How does the math work here? So that's the thing about Root they're not afraid to? I mean, it's misleading customers is not the way to put it. They're not afraid to do it. They're growing. Some customers yes they see the savings, they're happy, some are not seeing the savings. And this is like a complete to me like the opposite direction of Lemonade. Lemonade went all in to please consumers as much as possible with the claims, automatic claims whenever they can, they kept the rates as low as they can for a long time. Now they're increasing, you know, $1 not a big deal. But these are two companies that are not afraid to, to be out there and do what is necessary to acquire customers. Because really, you can just say, oh, we're different.

Nick
Yeah, well, I agree with that, in a lot of ways, but I'm also wondering, Mitchel and Avi, there are other competitors. Mitchel, you were from Metromile. Now you're in the lab for State Farm. Progressive starting to roll out UBI. So I'm thinking from a defensible position? Is it defensible? Like they already have competitors? I don't...I'm not...I think it would be I don't want to say it's fairly, it would be fairly easy for a lot of legacy carriers to come in. But it doesn't seem like UBI by itself is provides anything that's going to be defensible.

Mitchel H
Well, I forgot to mention Allstate and Liberty Mutual and others. And you know, certainly I've seen even Allstate in particular, that, you know, their pay per mile on their UBI products a lot more front and center than they were even six months ago, in their marketing. And, you know, I think there's opportunity in the marketplace right now for Root and other upstarts to really develop UBI products. I think what you've seen with the incumbents is, you know, they're in the risk management business, and it's a hedge. I think there's probably pretty wide acknowledgment that telematics has data and in some shape, or form, it's going to be the wave of the future, in some shape or form, but that probably comes at the expense of profitability on the current book. And so, you know, you see pretty much every Major, rolling forward with some shape or form of telematics bottling, being walked out pretty slowly. No one seems to want to dive into the pool until somebody else does. But that really, to me looks like an anvil hanging over Root's and others, other carrier's heads. You know, I think the more successful Root is, I think, the faster they bring that competition into the market, and it is in the ready position. And then you know, you've got the challenge of every upstart carrier has, which is Root doesn't have the brand that everybody else has, I mean, really, probably the third or fourth best known insurer out of Ohio, and so, you know, their success is going to breed competition. I think that competition has been moving slowly because it does cost it does cause profitability issues with the current book. But once one of them dives in they're all going to dive in pretty fast.

Avi
and yeah, well that I mean it's the ultimate question and you know, when we were with Assaf on the podcast, and he was talking about is a big companies a big insurer going to risk what they currently have to experiment and see if it's valuable and that is the ultimate question. I think most people understand that telematics data, right now, the smartphone based telematics is a broken product, you don't really know you don't know who's driving, you think you do, that's what they claim, that's not the case, when automakers are really going to go into UBI. And they're going to say, hey, Nick, I know that you're not looking on the road, I'm going to stop the car, then insurance companies are going to say, Oh, boy, you're really preventing risk now, I want to be on board, then we'll see a lot of competition. But I don't see any insurance companies willing to go like even Progressive when they launched their new product. In a clear attempt, you know, against Root, I don't see Progressive going and telling customers, you could save up to 50%, I don't think they'll do that. Because you know, they have a reputation. As you said, Mitchel, they have a brand, they don't want to risk it. So I don't know if really, anyone is going to go after them from insurance. But once you know, the trick is kind of discovered, then people are going to say if there is any value, we'll do it. But I don't see any insurance company willing to play the exact game as

Nick
So you're getting into you're getting into something that's interesting here, because Mitchel already brought up California doesn't allow UBI. So that's

Avi
Hold on. But with Tesla, Tesla, I don't know. But Tesla is talking about using it. And they're very confident that they'll be able to use telematics. And the commissioner is saying that they're open to discussions. So maybe Tesla knows something that we don't and maybe Tesla is the company that will get California on board, because Tesla is a real brand, not like others. Okay, it will be interesting to see what happens.

Nick
Okay, so Mitchell, could that happen?

Mitchel H
Yeah, I think eventually, you know, as you see propagate through different states, California will in some shape or fashion come on board as well. They're not there now. But certainly, I think that's a train that's slowly moving down the tracks. You know, I think the big issue with the telematics and competition is, from the consumer perspective, it's sort of a, it's a double leap of faith, it's I'm not, it's not only I'm going to try out this new kind of insurance, that prices things differently. And, you know, everyone thinks I'm a good, they're a good driver. But what if they're not? So you sort of have this risk of being judged? I think it's going to work for me, I think it's going to, to help me save some money. And I'm going to try it with this little or unknown brand, who are they going to be there when time for a claim. And so you know, certainly as you get past, sort of, you know, the youngest consumers for insurance, we tend to be more adaptable to those things, there are plenty of people, our age and older, who will say, you know what, I'm happy to save 15% and go with a Progressive or Liberty Mutual or State Farm, then maybe save 30% with this company that might not be there or jerk me around when I finally have a claim?

Nick
Well, I'm thinking of the Lake Wobegon effect. So how many people actually think they are better than the average driver? I think a lot of people think they're better than the average driver. And I think a lot of people would be wrong about that. And so that gets to the, you know, total addressable market. If, listen, all you have to do is drive on the roads, people are pretty bad. You know, they're just they're not, and there's not enough a lot of law enforcement that you can have out there. So for the most part, I mean, how many times have you guys driven like, at 65 miles an hour on the highway?

Mitchel H
Every time officer!!!

Nick
Well, that's the that's the right answer on this, I, I would say Mitchell, other people, most other people I see on the highway are going much faster than that. And so you see, all of you know, people that are, you know, sneaking through yellow to red light, going through yields without looking, I would say it's the majority of people would probably begin to fall outside of what some algorithm would say is "good driving". Therefore, if that's the case, and if people are being judged on that, and then ultimately priced on that, my guess is that, ultimately, they're going to get some sticker shock. And it's just going to be, it's going to be easy. They're going to say, screw this. So I think I think there's like a double edged sword here, in that it could limit like it could prevent the size of your market. You could you know, they with a low price, you can get this, you know, big market share. And then once your UBI really kicks in, if the regulator's allow you to do it, you know, it could be that situation where like I described where you're getting punished, you know, hey, you're going 75 in a 65, hey, you're doing you know, you're doing all of these different things that we consider to be predictive of, you know, poor driving and we're going to charge you that and then they're going to leave Which might be good because it might leave you with like really good drivers, but it gets to, to me the IPO and where that valuation goes, that's what I'll be looking at, I have no doubt that they can be a successful company. Just like I have no doubt, Lemonade can be a successful company. But I see enough roadblocks in all of these things that are coming around. It's like, there's, there's there are natural governors in the system, where it's like, I don't think they can get that big, with just that advantage.

Mitchel H
Well, so you touched on something there, Nick, that I think is important. And that's kind of the the big brother effect of all this, you know, you you are consenting to be watched. And all you do, and you are rewarded or punished based upon it. And again, I think sort of what one of the steepest challenges for any insurance upstart is, you know, brand, credibility, legitimacy and trust. And in this case, where you are giving consent, through your phone, through your car, through third party plug in device, for someone to watch every single thing you do and judge you and presumably punish you when you go wrong. Again, a lot of consumers are awfully wary about doing that period, when I can watch, you know, State Farm or Allstate commercials and feel good about these companies that have been around for decades and have established that credibility and trust, I'm going to be more willing to go in that direction, then who the heck are these guys? You know, and that's really one of the big headwinds that I think is understated in this industry.

Nick
So here's a potential another headwind, Avi, how many how many articles Do you think Coverager has posted on autonomous vehicles?

Avi
You know, listen, it when you really look at technologies carmakers have, and then you look at Root smartphone telematics, you know, you can but but not laugh, it's a joke. It's really a joke. And if you were really in the business of preventing risk, if that's what we're here to do, then I need accurate technology that could say that Nick is sleepy, or that Nick is really texting, not, you know, having his phone play while he's driving. And it's perfectly fine, because he's not touching it. But the Root app thinks that you're playing with your phone. Now, forget that for a second, like the fact that they only do it for the two or three weeks test drive, they do track you if you leave it open. So they keep that going. But they don't require you to have that in the background. So what is the benefit? Like? What is the benefit of actually getting that telematics setup because again, everybody could game the system for two to three weeks. So this is it. And at the end of the day, neck, the you know, Mitchel, you talk about the type of consumer that comes in the door, wants to be watched, willing to give up their privacy to save some money. If a customer is driven by price, and you get them by price, you're going to lose them on price. And when Root increases the rates, because they'll have to make their book profitable, then they're going to lose customers. Now, again, it's going to be like that. hamster on a wheel, they'll keep on getting new drivers that come into the market that don't know about Root yet. So it's gonna continue on and on and on. The real question is, when they go for an IPO, and assuming it's successful, what's going to be their next move? Are they going to stick with insurance? Are they going to build out their enterprise product like they have now? Are they going to acquire a company or are they going to do other things? I think that's going to be a big question, but

Nick
Okay, so what yeah, that's Michel. that's a that's a good question. Maybe, maybe the you know, the the business model itself is not insurance. Maybe the maybe insurance is a minimum viable product to a technological platform that they can then license as, like SaaS or something else. To the rest of the industry is that a possibility?

Mitchel H
You know, I think the enterprise model a lot a lot of Insurtechs are trying to take on and sort of, you know, I think the key thing we talked about earlier discussion is add them all up together, and they're not 1% market share. And so it is a big, long climb. I saw something recently, I'm unsure of its accuracy, but I think it had Root at just sort of just outside the top 100 P&C carriers, even after all their success. So you know, certainly mastering this technology and then putting it into marketing machines. With with 10s, or hundreds of 10s of millions of customers and billions of dollars in budget. That can be attractive. But it's awfully tough to say, Hey, we built this business, we're great at it. Give us your public, your public capital dollars. Yeah, we're gonna switch and do something different. And so you know, I think I certainly think that they remain committed to, you know, figuring this out and probably the aspirations are to go from not a top 100 P&C carrier to much higher

Nick
Yeah, and I think it should be stated, like, you know, a lot of a lot of the negativity negativity you might be hearing out of my voice is just I'm trying to put myself in the shoes of an investor thinking of, you know, what's the what's the enduring value here. And similar to Lemonade, I'm struggling to see it, because I see, I see too many headwinds. I like, I like that word, Mitchel, because I see, you know, I see a lot of competitors in the space that are already doing this, that already have bigger names doing this. So it I am going to struggle to sort of give them credit for anything that's distinctive in their technology unless I can, like, immediately measure it, but their, their current unprofitability tells me that they can't leverage it, that there's, there's still something amiss there. But then it gets, you know, it gets bigger, it's like, we don't even know if the UBI makes a difference. We don't know if they're going to be able to get to the entire United States because of regulatory issues. And it could be it could be 50 different types of programs, that they're going to have to have 50 different actuarial models, which means that a really tremendous amount of overhead, you know, on the actuarial side, which, if that's the case, then you still have to give the advantage to the incumbents who already have those systems set up, you know, the, the State Farms, GEICOs, and the Progressives already have, like, really well defined actuarial systems that know how to do all of this. And then there's the Tesla. So you have Tesla, you have other car makers, who are going to potentially start offering their own insurance, and autonomous vehicles, which I mean, white paper after white paper is basically predicting the Doom of the auto insurance industry. And here's an IPO and I'm seeing Not that there's anything wrong with them, or they couldn't be a very successful company. I just, to me, it's like I don't see any enduring value. Like it just I don't see anything that sort of stands out that says, I have to invest, I should invest my money in this. This is going to be an Uber like investment. I don't see anything like it just seems kind of like middle of the pack, not an insult to them. Salute to their technology just as an investor, I wouldn't touch it.

Mitchel H
Yes, I mean, a lot of questions there. I i've been fielding many, many calls from investors who are looking to get acquainted with the company and the industry. Conversation tends to go a lot along these lines. And really, for a company that again, I think it is worth underscoring. we're only talking about a movie, I have had so much success to this point. And I absolutely respect that. But there's a lot of red ink there. And there's not a clear path or clear story they've told on how that's going to turn around. And really, I think one of the things that that strikes me as a concern is they've just taken on so much so quickly, from new products to you know, a state rollout that seems to be one every couple of weeks, to, you know, just the pace, they've expanded that company. It's tough to keep all those things on track with that pace of growth at the same time. And, you know, I think one concern, I think warrants calling out as well, as you know, with any business, it's the people, and again, highly, highly laudatory to what they've accomplished so far. But you know, and they've been hiring lots of people, and some of them, they've made plenty of good hires. But you need to build up so many organizations so quickly, with people who understand how to scale, I found it very curious that at a time when the world is getting, you know, more global and it's crazy COVID, you're so embracing, remote, they're extremely fixated on keeping virtually everybody in Columbus, Ohio, which is extraordinarily limiting to your talent pool, both on the insurance side and the tech side. You know, you've got obviously then an overweighting of Nationwide alumni at Root, which is, you know, lost some ground and in recent years to other carriers. And on the technology side, again, Columbus is a fine city and Ohio State is created a nice community there. But it's a pretty limited talent pool that they're drawing from. And, you know, it's really sort of three stages a company compressed together really rapidly from we need to build great tech and great marketing that we need to get smart very quickly in insurance. And now we need to learn how to scale and get to profitability. Just so much going on there in such a short period of time. It reminds me a lot of ways like the dot.com days, let's just grow, grow, grow and take advantage of a probably record setting IPO market, and don't worry, we'll we'll grow our way out of negative margin somehow.

Nick
Yeah, Avi I, we've talked about this. There. There aren't a lot of successful histories...stories of companies that did have explosive growth in insurance. And I think, you know, generally, you know, we have, we have a lot of years of experience between the three of us. You know, it's, it's, I think it gets to what you say all the time, it's like, once you start raising prices, people, people will then feel start feeling it saying, Hey, what's going on? And they will start shopping, and you, you do you do generally see an outflow of customers. And I think that is, to me, that is probably the single biggest issue that, you know, these, we'll call them tech companies is it's trying to take a tech model where it's like, let's get massive growth. We don't, you know, typical tech venture style, massive growth. You know, we'll lose money, but we'll make it up at some point in the future...and the history of insurance has not been kind to that kind of narrative.

Avi
You know, I think, I don't think they care. I don't think Root cares, I don't think Lemonade cares. I think their investors, the founders, they could say what they want about being here for 100 years, maybe their companies will be here for 100 years, I don't think the founders will be around that long. they'll move on. And, you know, I think for them that this is the ultimate success voting for an IPO, getting to a place where you have more money to play with, and your stock can go up and down in a matter of days and hours and minutes. That's a place they want to be in because obviously, I don't know if many insurers that would think to acquire a Root at $6 billion valuation. I don't know what company would do that. But, you know, this is the ultimate success for them. And you know, good for them. They didn't stop. They went all the way, not like other, you know, you see a lot of their competitors pivoting, working with agents trying to do this, trying to do that. They saw the vision, they didn't quit, they went all the way. Who cares if it's profitable or not? investors are probably going to be sold in Division. Just like with Lemonade. They're going to sell Oh, yes, we're different. We're fair. We're this. We're that. And, you know, again, this is the ultimate success for them. I don't know, if they could have had a better outcome, of course, if they could have been profitable and all that, but, I mean, who's profitable across the world.

Nick
So then that gets that brings me to, I think, you know, we've, we've sort of nitpicked maybe Root and, you know, talked about a lot of the headwinds now and giving them credit where credit is due. But let's put it in context of other digital startup insurtechs. So, Lemonade is they call themselves a homeowner's company. They're looking to do more homeowners that's in their S-1, that's a big part of their I think they're what they what they perceive to be their future enduring value as we get them in as renters, and then graduate them to homeowners. Root does homeowners but they also do auto, then I think of Hippo, which only does homeowners but they go more vertical in that area. So you know, I think expectations would be at some point Hippo would also go public. And so just focusing on that on the group, not just those three, but any of the quote/unquote, insure techs that are carrier based, that are doing auto or homeowners or a combination of the two, I still feel like they can all be successful, but they can't all have that massive valuation. Like, ultimately, at some point, they're going to be competing against each other. Right. And, you know, someone that's looking to buy homeowners insurance gonna have a lot of options for a lot of companies that are, you know, have that deep that digital DNA, right. And so, it's, what do you guys think about that? What do you guys think of just just look at the Insurtech community as they become IPOs they can't possibly all justify their valuations. And in a lot of ways, they could be an existential threat to one another, given their size.

Mitchel H
You know, it reminds me a lot. You know, it's all 2014 IPO market, obviously, really making a lot of headlines on pace to probably be the biggest year ever. And kind of the two periods before that were 2014. And then the end of the dot.com days in 99. And 2000. 2014 is when you had the first fintechs go public in my life before insurance. You know, I was at Lending Club where we had the biggest US IPO that year. And I think that record stood for like three years. And you saw OnDeck Capital come out, I think weeks later, looking a lot like a company that wasn't ready but taking advantage of the opportunity. You had Ratesetter in the United Kingdom. All three of those companies five years later are down more than 90%, or no longer independent at a price that was down by more than 90%. And, you know, I, I don't fault Root or anyone else or Hippo, probably the next candidate that says, hey, here's a market that you know, is receptive to what we have to offer, they would be foolish not to take advantage of it. But as you know, those earnings, you know, you've seen already Lemonade down a third quickly, and they still have a lockup, that's going to end in probably another three months or so where now there tends to be another pretty good drop from there, especially if the earnings keep looking like like they have been, could be a pretty narrow window for Insurtech. And you know, that can really set the entire you know, and then in a market that has a unending and voracious appetite for capital, that capital can ebb and flow. Clearly, with Lemonade and Root riding high. It's a great time, both public and private markets. That pendulum can swing pretty quickly. And I think that might be what we're in for. Okay, get it while the getting's good.

Nick
Well, yeah, so So Avi, I was I was having a bit of a, an online conversation at Seeking Alpha, about Lemonade, because someone someone made a post, and I decided to comment because I'm a glutton for punishment on it. And, you know, I brought up the whole reinsurance aspect of the business and how, you know, as a capital light structure, they're completely dependent on reinsurance, they've, they've essentially sacrificed a lot of the near term upside. Right. And someone actually responded and just said, No, well, that's what reinsurance is for it's so that they can take on more risk. And they'll just raise more money so that they can have less dependency, but you listen to what Mitchel says it's like that window could close. Like, in think about that, think of this, this as an investor, potential investor into those companies. If if they if they get to the point where they're expecting the public markets, to kind of feed their balance sheet. Right, that's, that can't work! The economics around that are just like really horrible. And so I'm, I'm worried for them if Mitchell's right, I'm worried for them. Because then if the growth at any cost, I think is going to come at a cost, when they need to raise more money to be able to reduce some of their reinsurance overhead or other expenses.

Avi
You know, I'll tell you this, I bet you every other Insurtech founder would love to be in the shoes of Root or Lemonade with, you know, challenges. And it's just, you know, really is a perspective like, what what is your ultimate goal? What are you here for? And just this week, I saw the story of Nikola motors with the founder, Trevor Milton. Crazy. I mean, if it's true, it's just crazy what you can do by selling a vision that has no relation to reality. So it really I mean, it's such like great questions and Time will tell if you know their valuation will justify itself or not. But you know, it's the biggest question is like, really? What's in it for the insurance industry? Like, what are some valuable learnings? You could take from Root or Lemonade? Like, can you take something from what these companies have built? Take it back home, apply it and be a better company and be a better Progressive be a better Geico be a better State Farm? Is there anything you could take from these companies? That to me is a question which I don't know if the answer is yes, I don't know.

Nick
No, I have an opinion. Do you have an opinion? Mitchell,

Mitchel H
I can say I think they could last and summit. I think the challenge for all these Insurtech is they have to do everything. And they've got to figure out how to build a different product, how to market it, how to build a book, how to price it, how to handle claims, how to reinsure it, they need to do everything. And I think nobody's good at doing everything, especially with very little history behind you. And what that can do is sometimes wash over what they are extraordinary at, I mean, I'm a Lemonade customer, it is truly delightful. I wish I could work somewhere that could pump out product is great is that it's it's amongst the best I've seen almost anywhere. And I'm not really used to talking about with delight and a smile, my renter's insurance. You know, you look at Root, and their ability to acquire customers cheaply at scale, through a method that most people didn't realize existed and certainly didn't exist in insurance. It's extraordinary. The challenge is, they may be great at those things. But then, you know, there's the other 85% of your business that you need to run. The flip side is if you're a large traditional incumbent, you may have most of those other things you know, at competent to good, but it can be really hard to innovate. And that's where the challenge comes from. I know Avi, I saw something you put out, I think was you a week or two ago as well about how sort of all of the You know, internal startups really haven't caught fire either. It's really hard to innovate in a big insurer. It's really hard to master all those big insurance tasks as an upstart. But there's obviously some some positive things in both of those worlds. I think someone will figure out how to do it at some point. But but it's tough. And I think it's, it's easy to be critical and sometimes deserve it of here's all the stuff they're not they're not getting right, or that is worrisome. But we wouldn't even be having this conversation if they hadn't had just, you know, they've racked up a lot more wins and losses and the half dozen years or so they've been around so far. Yeah.

Avi
Yeah, I think at the end of the day, you know, you say what things they do well, and yes, they do things very well. The thing is, if you look at really the bottom line, that's not a good thing for your business, to lie to customers and acquire them under a certain perception, and then upset them. That's not good business. It's good business for an IPO. Because by the time they get upset, and they write a review online, you're you know, well ahead and everybody's succeeding. But, you know, this is the thing like this is where a lot of carriers they don't want to do these initiatives, because they say it's not profitable. It's not worth it. This is not really something that's going to move the needle for me. But you're right, it's it's easy to be critical. And, you know, we're we're critical a lot at Coverager. I think that's why people like us, I think, but but but no, I think at the end of the day, the problem is, and this is where the problem, I think starts is when companies like Lemonade and Root and they say, Well, this is how you do it. Or we found the right model. And it's about delighting customers. I don't know. I mean, what Wait, wait a little bit when they increase your rate? And wait, if you have a bad claim, and then we'll see if the nice app was worth it. Maybe, Maybe not. So that's that's the ultimate question. But, but again, time will tell we'll need a lot of more time for these companies to prove that their model was actually better and in terms of acquiring customers, and delighting them and service and all that stuff.

Nick
Well, we have we have a customer right here with Mitchel for Lemonade, so. Yeah, yeah. Okay, so, so but but I know you I know if if they raise the price, $1 you're out of there. But Mitchel appears to have to have been delighted. So I'm wondering, how do you split the world? When it comes to Lemonade? How much does price factor into this for you? You're delighted. But what if what if the price, What if the price doubled? Would you still be delighted?

Mitchel H
Yeah, I mean, I think you know, renter's insurance is just to me such an odd odd product. I mean, I have a probably pretty lavish coverage. And my premiums, I think $28 or $29 a month. So, you know, it's, it's not something I think about often

Nick
did you shop it?

Mitchel H
I think I did. I don't recall, I've been with him a few years now. I've had, I've had coverage previously, not with them. So not totally new to it. I have not had a claim. So I can't speak to that experience. You know, as someone in the industry of product marketing and insurance, like I absolutely, you know, I envy and think all the accolades that they've earned for their approach to product design, or how they've executed for the brand they've created that like, it is absolutely top of the game, you know, at $28 or $29 a month. I don't think about it a whole lot. Again, I haven't had a claim, you know, well, that's

Nick
that's what I think they brought to the table Mitchel, that exactly what you described, there's a it's more of a, you know, customer centric mindset for, you know, how do we want the product to behave? And I think that's the the top, you know, skill, or the top priority that they brought in that I think the industry itself, Avi has to pay attention to.

Avi
But that's what that's what limited Lemonade, they think just this week, I saw a filing for Florida. For renter's insurance, they're a new program. So that's what's limiting them, because they know they cannot deliver this delightful experience when they buy car insurance or like homeowners insurance and doing some changes of

Nick
Yeah, do they think that?

Avi
I think so. I think they know that they can't, they can't go into other lines of business. They're not willing to do what Root does. They're not willing to get tweets about? How do you know if I'm driving? Why did you increase my rate? With Lemonade, everything is positive. That's the thing. Most of their comment, everything is positive because they kept that positive. But But again, that's the limit. Because if you really want to grow, you need to get dirty, and that's something that they don't want to do. But they were able to see success being nice. But again, will they ever be able to take on State Farm or Allstate not not like this, they'll need to really Start to be mean and not care about customers like, you know, Allstate and State Farm. They don't care. That's the, that's the policy. We're not covering you or it's expensive. That's the price. That's what you have to pay. But, I mean, do different tactics. And I always find that with tech people and no offense Mitchell, we're an insurance we see these, uh, you know, apps we like to do them and I have with State Farm and Lemonade just for business purposes. I find for tech people, we have like the tech stuff, the cool digital stuff, but for a person that is buying insurance, because it's necessary, and they just need it, because the landlord said, then they will look for the best price, which happens to be Lemonade still. But I mean, that's what's going for them. The prices, the nice experience, no way they could have pulled off what Root did, because that really means, you know, doing a lot of stuff that they wouldn't be happy doing.

Mitchel H
Yeah, I'll push back on you there, Avi and that I think establishing a positive customer perception and reputation is enormously challenging in any industry and 10 X in insurance. You know, people love to complain about price changes and real or perceived lapses in claims payout. And so you know, I think that's a major accomplishment, I know that every single insurance product team I've ever spoken with, has dissected every single pixel of what Lemonade does, yet none of them have been able to recreate it. And so I think is, you know, I think is a very strong competitive advantage they have in both creating that reputation and that quality of product. And having people in process that's able to replicate that, to me, I still find it really curious about having renters as your core product. And just the economics there because the price point is so low. I don't know what the average, I don't know what the average premium is. But I would guess it's less than $20. And maybe even closer to 10. For most customers, I think I'm an outlier there. So it just doesn't leave a whole lot of economics to work with. But being able to deliver that quality of product and that quality of experience, and build and leverage that kind of reputation. I think if you can identify other markets where there's that opportunity, the ability to execute on that's pretty rare. And certainly one that, you know, that to me is a competitive moat that is just really hard to copy. And I say that because I've seen pretty much everyone try to copy it.

Avi
Well, I can tell you that COVID-19 is not doing well for Lemonade, because from latest research, and this is something they mentioned in the recent earnings call. renter's insurance is a very unstable product. Because apparently when you have a pandemic, people go back and move in with their parents. So they give up their apartments and no more renter's insurance. Look at the end of the day, Lemonade did great. A lot of companies tried to copy them. And they didn't go all the way. Because again, I think some of them said, Wait a second, I mean, we don't have the capital to do it, or it's just not smart business for lemonade was clearly smart IPO, everybody's happy. But if you want to be pretty, then you can be pretty. But if you really want to get to the business of insurance, like I can tell you I bought pet insurance with Lemonade. And even the basic of you know, kind of accessing my medical record my pet's medical record and reading it in a timely manner to see that wasn't there, it took six days for the underwriter to tell me what's excluded from the coverage. So that's a little more sophisticated product for them a pet insurance, just imagine what it would be for them to go into car insurance. You know, when claims like these are serious claims that you cannot do with AI Jim, you just can't do a video when you're injured. You know, I this is my, my problem. So, I mean, but again, at the end of the day, I think Root and Lemonade are a case of great execution, really great execution, they knew exactly what they were doing. They had some hiccups along the way, but they stayed the course. And they're seeing you know, the the benefits, because no one else was willing to do what they did. And I mean good for them. But now is really I think after the IPO, we'll see what they do. We'll see what's happening with Lemonade, then we'll know where the industry is moving in general and if there really are elements where companies will copy what Lemonade and Root did.

Nick
Okay, well, I think we got to that point where we're starting to beat it beat a dead horse. So getting close to the top of the hour here. So Mitchel, thank you for being a guest host...insights were fantastic. That was extremely helpful. Probably wouldn't be a bad idea to have you back on after the IPO. So we can talk about you know, what did happen, you know, whether it went really well or not. We'll gonna probably have to talk about that. But thank you, I appreciate it.

Mitchel H
Thank you. Thanks for having me. It's been conversation indefinitely that Root...that's one will be an exciting read.

Nick
Yes, it will. It will. avi per usual. Thank you. And for everyone out there, this is the week ending September 25. Please be safe out there. Please subscribe, click the like button and give us comments and engage with us. If you don't like what Avi said, let me know about it so I can so I can tease them. Anyways, for Mitchel and for Avi. Everyone. Have a great week. Thank you.

Mitchel H
Thanks

Avi
see ya.

Transcribed by https://otter.ai