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fintech disruption II fintech disruption II


FinTech Disruption II: Lemons to Lemonade

 4 min read / 

Insurance is a tough sell. Everybody needs it in some form, but nobody really wants it. It is strange to think that the highest value of a purchase consists in never needing it. Life insurance is an obvious example: it’s binary and never benefits the insured except in the sense of peace of mind for the beneficiary. Property and casualty is different –  claims are more frequent and the insured can receive direct benefits – but the principle of paying to protect against a contingency that ideally will never occur is similar.

Insurance is complicated. There are several types: life; property and casualty; and within property and casualty, there is auto and home. The key concepts are: loss spreading through assembling large pools of risk (ensuring there are enough insureds who never claim to balance out those who do); underwriting (making sure that the quality of risks insured do not diverge from the statistically expected loss experience); and, much popularized by Warren Buffet (of Berkshire Hathaway fame), the concept of float. Float means that, because the insurer collects the premium in advance of paying out on claims, there is a surplus of funds that can be invested. The returns on the investment of float produce extra revenue beyond the premiums collected from the insureds.

The economics of float explain the behavior of many insurance companies in seeking to delay payment of claims: the delay works in their favor by increasing investment returns.

A New Model

Lemonade aims to do things differently. Set up in the fall of 2016, as a B-Corp (held to a specified standard of social impact), Lemonade offers renters, condo, co-op and homeowners’ insurance. The pitch is: easy access through an app; transparency; quick claims payment; and a slice of social impact. The details are as follows: 20% of premiums pay overhead and shareholders’ return; 20% purchases reinsurance; 20% funds insurance reserves; the balance of 40% is available to be given back to certain designated causes, assuming it is not needed to pay for claims beyond what are expected.

The B-Corp certification has no particular tax advantages compared to a regular C-Corp. It is a for-profit, rather than not-for-profit status. The key differentiators are:

  1. Use of proprietary algorithms and chat-bot technology to reduce expense ratios to among the lowest in the industry;
  2. Use of algorithms to reduce fraud and underwriting losses;
  3. Alignment of policy-holder interests through giveback program

Lemonade‘s history is too short to draw meaningful data from reviews. There are complaints, but complaints are always a self-selecting group and are by definition noisy. There are satisfied reviews also. There is necessarily tension in resolving claims and insurers are obliged to take steps to protect the insured pool from frivolous and fraudulent claims.

Looking Ahead

History is also too short to determine whether Lemonade’s algorithms will produce consistent loss ratios. Currently, Lemonade operates in four states – New York, New Jersey, Illinois and California. Its stated goal is to operate in 47 states by the end of 2017. Regulation in the insurance business is state by state and standards vary. What worries insureds is whether the insurer will have enough capital to pay claims when made. Lemonade aims to address this concern by ensuring that it buys reinsurance, pushing off responsibility for a portion of claims paying to other insurers, in Lemonade’s case, Lloyds of London in addition to setting aside a disclosed portion of premium for claims payment. Whether this is sufficient remains to be seen – so far, so good.

So, how disruptive is Lemonade? It is required to submit to the same state by state regulation as other insurers. It is not immune to underwriting losses and it is certainly utilising the traditional reinsurance markets. How is Lemonade improving the insurance experience for the insureds? Perhaps by reducing costs. Perhaps by increasing ease of access. Perhaps by easing the process of claims processing. Perhaps, finally, by increasing insured’s understanding of how their insurance policy works, what the costs are and how the price of insurance is derived.


Lemonade is not disruptive in the same way that Uber or Airbnb have been in allowing drivers and homeowners to tap into underutilized capital resources to generate a new source of income. Transparency and enhanced understanding are not, however, trivial. They help increase the accountability of service providers. While the principle of profit sharing in the mutual insurance industry is not new, the frequency of policy rebates in recent years has not been high. If Lemonade is successful in delivering its givebacks as advertised, this will raise expectations among the insured community and put pressure on the other mutual. Not spectacular yet and clearly too early to tell, but a promising start.

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Carillion’s Collapse: It’s The Management, Stupid!

 5 min read / 

Carillion Collapse Management

When UK-based construction company Carillion PLC finally hit the buffers after months of pointless government efforts to prop up the public sector contractor, it wasn’t long before the finger of blame again pointed to Public Private Partnership (PPP) projects for the financial mess.

It’s a familiar argument that is promoted reflexively in a lot of the UK press because it fits an anti-corporate narrative. It follows the line that when public authorities invite private sector businesses to design, build and operate a public asset, the result will be huge profits for the contractor, its bankers and its shareholders while the public sector carries the bag for bailing out projects when they fail.

In the case of Carillion, that narrative got a boost from a National Audit Office report this week that stated that there’s still insufficient evidence to show that the UK’s Private Finance Initiative (PFI) program delivers value for money. It also said that the cost of PPP/PFI to taxpayers comes to £200bn, a particularly uninformative claim, considering that the equivalent public sector contracting almost always goes over budget and costs taxpayers untold billions of pounds through inefficiency, non-delivery and cost overruns, yet is rarely reported about in the press.

Boost for Nationalist Agenda

The NAO report will boost the Labour Party’s current position that all such projects should be nationalized, whatever the cost.

The only problem with the way that this has been reported is that PFI is not why Carillion collapsed.

In fact, the main reasons for Carillion’s collapse are that it failed to deliver on a wide range of contracted services, so it wasn’t being paid, even as it took on more projects and more and more debt, estimated to total £900m. The company also continued to boost dividends, despite a widening pension deficit, which now sits at £587m. Finally, Carillion incurred cost overruns and delays in the delivery of many public sector projects, of which only three were PFI.

The idea that PFI was to blame for Carillion’s collapse and that taxpayers are now on the hook for the many public sector projects is going to stick, even though it’s nearly as inaccurate as the claim that the company, its investors and its bank finance providers are profiting from the company’s demise.

The Guardian, for example, singled out three PFI investments, including two troubled hospital construction projects, for their contribution to the collapse of the company. These included the £335m rebuilding of the Royal Liverpool University Hospital and the £350m Midland Metropolitan Hospital, both of which ran into expensive delays.

But the media focus on Carillion’s mishandling of three PFI contracts ignores the larger issue, which is the company’s own inability to manage risks associated with the delivery of any of its services. 

There is a legitimate debate around whether PFI and its successor, PF2, deliver value for money to public sector institutions such as The National Health Service (NHS). This is because of the higher financing costs for private sector borrowing and thus the significantly higher cost to NHS trusts of having the private sector operate and maintain these assets once they are built.

Bottom Line Focus

At the end of the day, what matters most is the company’s ability to deliver. We’ve seen this before when another opportunistic PFI company, Jarvis, got in over its head and collapsed.

There have been more than 130 health-related PPP projects in the UK since the PFI scheme was established in 1992. Almost all of the large hospital projects were delivered on time and on budget using PFI during the Labour government from 2001 to 2010. This was followed by a sharp fall in waiting lists for surgery and other essential healthcare services across the country.

The issue in this instance should not be the delivery model, but rather the company that is responsible. In Carillion’s case, there is ample evidence that when it came to running the projects that were at the core of its business, nobody effectively managed the rising costs and declining receivables, even as they inexcusably boosted the dividend in each of the 16 years since the company was founded.

The end result, while enriching a few investors, was a precipitous share price decline since the middle of 2017 that more than erased those gains. The company’s lenders are also reported to have started writing down the £835m of committed bank facilities and £140m in short-term facilities, though their exposure could be much higher.


Own Work

Business as Usual?

Despite all the handwringing, there is no shortage of public sector contractors who will happily take over the many public sector construction and support service contracts that Carillion’s collapse will require the government to put up for tender.

This will follow an established protocol that is designed to ensure that essential services are not interrupted. The larger, more troubled Carillion projects will take longer to renegotiate but will ultimately find replacement companies to deliver them. Work interruptions are likely to be limited, and people who have been laid off as a result of the collapse will quickly find new work, particularly given the current healthy state of the labour market. The takeaway from all of this is simply that bad businesses, whatever their line of work, go to the wall and better ones replace them.

Keep reading |  5 min read


Whatsapp Launches New Venture Aimed at Businesses

 1 min read / 

whatsapp business

Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.

This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.

Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.

Keep reading |  1 min read


Amex: Troubled Credit Card Company Reports $1.2bn Net Loss

 2 min read / 

Amex annual report

On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.

Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.

For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.

In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90.  JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.

“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.

American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.

Keep reading |  2 min read


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