Disclaimer: I am not an insurance expert so please feel free to comment / correct me if you see any mistakes in the logic/analysis outlined below.
What insurance coverage do Uber / Lyft provide?
In all markets outside of New York City (more on that later) almost all Uber and Lyft drivers have rideshare insurance provided by and paid for by Uber / Lyft. Given most rideshare drivers use their vehicle for personal use as well, the best way to think about insurance is as follows.
Personal Driving: Individual's standard auto policy covers them
Uber/Lyft Driving: Uber/Lyft’s $1m+ policy covers them when a passenger is in the vehicle (coverage at a few different stages as well, such as the App being on, but no passenger - please see graphic below)
In New York City, for several reasons we won’t get into in this note, the insurance is paid for by the driver (as you can even see implied by the footnote at the bottom of the Lyft graphic).
How are insurance costs reflected in Lyft's financials?
To set the stage for our financial analysis let’s lay out the basics of how the insurance equation should conceptually work.
- Lyft pays premiums to an insurance company
- If a claim is made the insurance company processes the claim and, if need be, pays out
So, simplistically, we should expect to see a fair amount of insurance premiums being paid by Lyft as a cost item in the Income Statement. When we look at the Income Statement, we don’t see a separate line item for ‘Insurance Premiums / Costs’, however, we do get a ‘Cost of Revenue’ line that appears to incorporate two major items: (1) Insurance Costs & (2) Payment Processing / Hosting. Furthermore, we are told what the breakdown of the increases are from 2016 to 2017 and from 2017 to 2018.
Source: Lyft S-1
Based on the above, I believe we can logically conclude between 50%-55% of the ‘Cost of Revenue’ line relates to insurance (at least in 2017 / 2018). This is how that would look.
So, end of story right? Seems like Lyft paid ~$650m in insurance premiums and has an insurance model that works. However, when we look at the Statement of Cash Flows and Balance Sheet, a lot more is going on than meets the eye....
The first sign of something unusual going on is when we look at the Statement of Cash Flows and see two large add-backs:
- +$434m related to ‘Insurance Reserves’, and
- +$308m related to ‘Accrued and other liabilities’
The $911m net loss “only” becomes a $281m operating cash burn.
Obviously, there are some major cash add backs related to insurance reserves. While, I don’t like pasting large sections of text, in this case I think it is worth reading Lyft’s full note in the S-1 on its 'Insurance Reserves' and 'Management of Insurance-Related Costs'.
Inlayman's terms this appears to indicate that Lyft is paying a mix of its insurance premiums / costs to its own insurance subsidiaryand some premiums to a traditional third party insurer.
Pacific Valley Insurance Co. (Lyft's Insurance Subsidiary)
According to a recent article published in Insurance Journal(1), Lyft’s insurance unit, Pacific Valley, is managed by Marsh & McLennan Cos. and “had about $810 million in insurance reserves, [using] its unit to help bear the cost of auto incidents. Even though it also turns to outside insurers for some coverage, that subsidiary introduces volatility.” Lyft provides further detail in its S-1, specifically stating that. “Our contracts with insurance providers require reinsurance premiums to be deposited into trust accounts with a third-party financial institution from which the insurance providers are reimbursed for claims payments. Our restricted reinsurance trust investments as of December 31, 2017 and 2018 were $360.9 million and $863.7 million, respectively.” While this can get very technical and perhaps out of my knowledge base, my simple understanding is essentially as follows.
Lyft pays most of its insurance premiums (in this case reinsurance premiums) to its own insurance unit Pacific Valley, which puts that money into a restricted trust account that conservatively invests in CDs / Gov’t Debt or other conservative investments it is allowed to so it can earn income on that money, which is in escrow essentially until a payout occurs
Any claims payments then come out of that restricted trust account (i.e. insurance reserve)
Continuing the topic of Insurance Reserves, Lyft provides a reconciliation of its reserve balances.
Finally, to round out the insurance discussion, let’s take a look at what the 'Accrued & other liabilities’ balance consists of (remember there was a +$308m operating cash flow add back in 2018). So we also see two line items here that explain ~$100m in positive working capital flows related to insurance.
I am sure a very technical insurance discussion can be had, but If we simplify all the disclosed information / figures laid out in Lyft’s S-1, I think some interesting observations can be made.
Lyft's Income Statement likely had ~$650m of insurance related costs, but the immediate cash effect is much less given the cash flow add-backs related to insurance reserves and certain accrual accounts. That being said payouts will continue to occur as claims get paid out, but they also have an investment trust that earns income on the unpaid reserve
The increase in Lyft’s insurance reserves essentially grew variably with the increase in revenues. As Lyft scaled in 2017 to 2018 it didn't seem like they achieved any benefit from increases in economies of scale
It doesn’t appear that the GEICOs, State Farms, Farmers, etc. are really willing to underwrite rideshare insurance...yet (exception of a few states that are being tested out - Uber / Allstate)1
Other Observations / Questions That Arise
- How accurate are the reserve estimates Lyft is making and what happens in the event that their reserves do not cover payout obligations? Are they being conservative or liberal? Where are such massive potential claims arising from (i.e. in 2018 reserves increased by $651m offset by $221m in payouts?!)
- Given Uber has a substantial scale advantage (market share said to be >2x in the US) does it have an inherent scale / margin advantage related to rideshare insurance vs. Lyft? Uber also appears to have its own similar insurance subsidiary, Aleka Insurance1. Would it perhaps make sense for Uber / Lyft to team up on the insurance front?
How can a smaller rideshare company compete with Uber / Lyft without massive scale as it relates to insurance? Any competitor would either need massive scale or convince a third party to underwrite the insurance, which would likely be at a much higher cost than Uber / Lyft, both which have enough scale to make their own insurance subsidiaries
What is GEICO, Allstate, Progressive, Travelers take on rideshare insurance? Given they are having a hard time making money on "normal" car insurance it would appear they might have essentially no interest in doing anything meaningful from an underwriting prospective in rideshare insurance, but in a way would be the best placed to underwrite the risk?
Given NYC is the only major market the insurance cost is on the driver it conceptually makes sense that is where Juno/Via think they can battle Uber/Lyft for market share. It also follows Uber/Lyft should be immensely profitable in these markets given a major cost is not on them, but they still take the 20%-30% commission from drivers (albeit now they are subject to a new minimum wage rule)2
Please let me know if you think my logic is flawed or I misunderstood something about the insurance dynamics in these businesses. As I said I am not an insurance expert so this is some logic based deductions / conclusions I have made.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.