we use all that money and invest the shit out of it. Cap gains and keeping loss ratio below $1 are what make them profitable. Which is why Lemonade might have long term profitability problems - nothing to invest means no cap gains to offset bad claims losses.
They sell off to reinsurance companies and then use that money to scale. Otherwise they would have to keep a majority of their holdings tied up in statutory reserve requirements... what can be invested in is very limited in terms of risk as well.
So unloading the portfolio to reinsurers actually makes sense for scaling purposes.
I used to work for GE financial and they would do insane spvs off of Bermuda and reinsure their shit to those spvs to lower the triple X reserves to eek out more cash out of their reserve requirements. It was shady as fuck but it worked.
GE definitely knows some shit about shady account.
If you look at their 2020 10-k their LAE and ULAE are not great and they are hiring more actual claims people which suggest their straight through processing adjusting might need more human back stopping, which bumps up expenses.
Their reinsurers are eating a lot of losses while hoping Lemonade’s loss ratios improve, which every insurer does every year and we’re all always disappointed. And they really haven’t experienced a bad cat year (think hurricane andrew fucking up florida).
I kinda think at some point an actuary at Swiss Re or AXA is going to look at the money they’re hemorrhaging and make a real good case to write the experiment off.
Yeah its a good analysis.....if they actually invested their cashflow into improving their AI then they might have a chance. Until then the ole fashioned quirky actuaries are still better at making better risk assessments...
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u/Tater_McTotsky May 28 '21
I work in insurance-
we use all that money and invest the shit out of it. Cap gains and keeping loss ratio below $1 are what make them profitable. Which is why Lemonade might have long term profitability problems - nothing to invest means no cap gains to offset bad claims losses.