1. Losses are massive - Losses have actually exceed revenues in every time period to date. This is unusually high for a growth company of this size. In the most recent quarter, revenues totaled $17.8 million and losses totaled $30.5 million. Losses increased from the prior quarter primarily due to the decision to cede insurance risk to reinsurers. The company is a long way from earnings. 2. There is no clear pathway to earnings - It is unclear how the company will become profitable based on the current business model. The company is currently paying more in sales and marketing expense than it is receiving in revenues. In the most recent quarter, sales and marketing was $22.2 million which exceeded revenues of $17.8 million. If this expense is reduced, growth is likely to be reduced significantly or even reversed. Every dollar spent on sales and marketing is currently resulting in more than $1 of losses. 3. Growth is slowing fast– Growth of the customer base was 46% in the first nine months of 2020 down from 108% in 2019. In the fourth quarter, growth slowed to only 6% from the linked quarter. 4. No bundling option - Lemonade is at a competitive disadvantage to its larger competitors who can bundle car and other insurance types Lemonade doesn’t have. 5. Very high stock price - Lemonade is in fact a traditional insurance company trading at an astronomical level. Most insurers trade at 1 to 2x book value and 1 to 2x revenues. Lemonade is currently trading at 69x last quarter’s revenues annualized. 6. Ceding to reinsurers significantly reduces earnings - By ceding most insurance risk to reinsurers Lemonade significantly reduces potential profit. If you remember only one thing on this list let be this. Most insurance companies derive the vast majority of their profits from insurance underwriting in the form of premiums. Investment income is a distant second and becoming even less so due to low interest rates. Lemonade has effectively ceded 75% of its premiums to reinsurers. That means it has given away the industry’s traditional profit center. It has little to replace that with. The 25% they keep needs to cover costs. Currently sales and marketing alone are well above the 25% of premiums they are getting. 7. The ESG claim has not proven accurate yet - The company’s claim to be ESG has so far hasn’t been accurate. The company did set up a charitable foundation. The company contributed 500,000 shares of its shares to the foundation in the first quarter of 2020. It claims that up to 40% of excess premiums each year will be donated to the charity of choice of the policy holder. So far it donated $1.1 million in the first nine months of 2020 and $631,540 in 2019. Both of those numbers are well under 1% of premiums. The foundation meanwhile has no website or defined vision. Increased contributions going forward will directly increase losses. 8. Larger competitors offer online applications too - The three largest competitors for rental insurance are Allstate, State Farm and Liberty Mutual. All are much larger. All have internet applications for renters and homeowners insurance. All, unlike Lemonade, can also bundle with other insurance products. The lower price from bundling may offset any advantage Lemonade may have with its automated underwriting. 9. Automated underwriting is also done by their peers – Most of their peers have automated underwriting augmented by human interaction when needed. It is less effective overall than using a human component in reducing claims losses. Even Lemonade brings in a human for more complex applications. The move to more complex insurance like homeowners will require more human touch. 10. Limited underwriting data versus competitors - The company states the following on page 96 of its S-1 “ our extensive use of data and technology enables us to be increasingly precise at risk selection, risk pricing, and claims handling”. The reality is most competitors have decades of data to plug their algorithms into for underwriting insurance. Lemonade has barely two years worth of its own usable data. Lemonade does appear to pay for third party data to add to their own. That adds cost. Their competitors with much larger underwriting budgets almost certainly have better algorithms developed over decades. This is more of a disadvantage than advantage for Lemonade. 11. Reinsurers will call the shots - If you believe that underwriting doesn’t matter because the reinsurers are taking most of the risk think again. The reinsurers will eventually call the shots once the claims data is sufficient to model. If there are too many claims, they will increase their take from Lemonade. This will force Lemonade to either lose more money or increase the premiums. 12. Hurricane risk - Texas and Florida are two of three largest markets for Lemonade. Both are hurricane-prone. In fact, homeowners and renters insurers in those states suffered heavy losses in 2020 and 2019. 13. Insider selling has been massive since the IPO. 14. The AI bot can be duplicated - The only apparent secret sauce Lemonade appears to have is its Al Maya online bot. However, that can be easily knocked off by its larger competitors if they see it as a threat. 15. More costs are coming - The large operating losses are before all the new claims adjusters the company will need to hire to handle the increasing insurance. Lemonade not the reinsurers handles the claims. 16. Competition coming from tech companies - The S-1 on page 26 states “There are various technology companies that have recently started operating in adjacent insurance categories that may in the future offer renters and homeowners insurance products.” 17. Regulatory risk - Lemonade has not been examined by its regulator (the New York Department of Insurance) since 2018, a year when it wasn’t very active. A regulatory exam is due and its large losses will need to be considered. As a former bank regulator my experience is new financial companies trying new things often leads to errors and omissions that need to be cleaned up. 18. AI will likely have limited help with claims processing - The company claims that AI is being used for claims processing in addition to underwriting. I personally have an experience going through a large real estate insurance claim. The process took 9 months, with constant back and forth, and the eventual claim was three times the original estimate. The point is claims are much more complex than underwriting an individual customer. There are literally hundreds of potential variables. No program is going to able to handle all of them, at least yet. In the S-1 the company claims its bot, AI Jim, can handle a claim start to finish about 1/3 the time. 19. California law on bots - From the S-1 “A California law, effective as of July 2019, makes it unlawful for any person to use a bot to communicate with a person in California online with the intent to mislead the other person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order to incentivize a purchase of goods or services in a commercial transaction. Although we have taken steps to mitigate our liability for violations of this and other laws restricting the use of electronic communication tools, no assurance can be given that we will not be exposed to civil litigation or regulatory enforcement” 20. Human touch - The power of human interaction cannot be brushed aside. Humans can have empathy which is something robots or bots are nowhere close to. Humans can tell much by your tone or changes in your voice that bots cannot. The bot experience may be interesting or fun. But once things get serious it can and often will be annoying and frustrating. 21. No insider insurance background - BIG ONE. None of the directors or officers of Lemonade have an insurance background as shown by their backgrounds mentioned on the S-1. This one is very concerning. Lemonade is a technology company entering a financial segment. It doesn’t have the experience underwriting the incumbents have. 22. Little investment income - Lemonade’s competitors get a significant portion of their earnings from investment income. Lemonade currently has few investments held as assets. The two largest sources of income for insurance companies (premiums and investments) provide little for Lemonade. 23. Little traction in homeowners insurance - Based on its average premium size, Lemonade does not appear to be getting much traction in homeowners insurance. It does not provide a breakout between the two. The average annual premium per customer was $201 as of September 30, 2020 which is much closer to a renters premium than a homeowners.Notes from user.Draftkings $DKNG is also a high-risk play now.Palantir $PLTR is heavily followed. Is it really the next Facebook? A 10-bagger?Go and trade these stocks on T2BF. Short-sell them.Or go long.