Reason lemonade stock of $2 billion could skyrocket in 2022

In this clip from “The 5” on Motley Fool Live, recorded on January 18Motley Fool contributor Trevor Jennewine explains how Lemonade (NYSE: LMND) stands out from the competition by leveraging artificial intelligence to reduce expenses and improve efficiency.

Trevor Jennewin: I think a lot of crazy people are pretty familiar with Lemonade. It is a technology-driven insurance company. Specifically, Lemonade uses artificial intelligence to make businesses more efficient than traditional insurers. For example, rather than having agents interact with consumers, consumers interact with AI-powered chatbots to purchase policies and file claims. This helps reduce friction on the consumer side, but it also means that Lemonade needs fewer employees per customer, which keeps its payroll expenses low compared to its competitors. Its digital platform also captures around 100 times more data than standard applications used by traditional insurers. That’s according to a Lemonade blog post. This data feeds into Lemonade’s AI models, which theoretically help the company quantify risk more accurately. It really is the name of the game in insurance. It’s all about risk. The better you understand the risk, the better you can price your policies and the less likely you are to lose money on claims. There is an important metric here. This is called the loss ratio, which helps you gauge the effectiveness of an insurance company’s underwriting activities. The loss ratio is equal to paid claims divided by earned premiums. How much money comes out of claims versus the amount that comes out of premium payments, and I’ll get to that in a moment. Essentially, Lemonade has this really user-friendly platform designed to capture and deploy a lot of data and methods that traditional insurance platforms can’t. I think that to some extent reflects its financial performance. In the past year, in the third quarter, gross profit reached $11.7 million, an increase of 60%. The company’s net loss widened to $1.08 per diluted share. Gross profit growth rapidly. Customers also increased by 45% to 1.3 million. The premium in force increased by 84% to approximately $347 million. This is the annualized value of all the bonuses he has in place. You have growing customers, growing in-force premiums. The premium per customer is also up about 26% to $254. Among the things I’m most excited about, the company recently launched Lemonade Car in Illinois in November. It’s his car insurance product. To accelerate its entry into this industry, soon after, they acquired Metromile, an AI-powered car insurance company that uses telematics devices to capture data based on how well you drive, how strong how fast you brake, how fast you turn, and then it uses that information, runs it through AI models to set policies. By acquiring Metromile, Lemonade supercharges its own AI models and obtains over three billion kilometers of data for Metromile. Lemonade Car in general brings the company’s market opportunity to more than $400 billion. There are opportunities for synergies here, for example, Lemonade management estimates that existing customers already pay around $1 billion each year for auto insurance and can now bundle their homeowner and renter policies with car insurance policies. It’s a tactic that a lot of insurance companies use, and until recently Lemonade hasn’t been able to do that, so a great opportunity. I’m waiting to see what management has to say about this acquisition. The company paid $500 million for Metromile. Not tons of money, but again, Lemonade’s market cap is $2 billion. Looking to see how this acquisition is going and then the early results for Lemonade Car in general. I mentioned the loss rate earlier. During the last quarter, the company’s loss ratio was 77%, compared to 72% the previous year. To put that into context, the P&C industry average is around 69.6% through the first half of 2021. Lemonade is above the industry average. It’s not great. I would like to see it the other way around. Again, this is a young company. They are still collecting data. One of the driving forces behind Lemonade being above average, I think they are moving away from tenant policies. This doesn’t mean their renter business is doing poorly, it just means their homeowner and pet insurance businesses are growing faster. Last year, in the third quarter, tenant policies accounted for 70% of business. That number has fallen to 53% in the last quarter, and like I said, owners and pet insurance are taking their toll. Good to see the company branching out, especially into more expensive policies like proprietary. But the Lemonade owner business has a higher loss rate right now. That being said, management noted that in the last quarter, its owner claims ratio improved by 52 percentage points, so there are a lot of moving variables here. I want to see how it goes. As I mentioned, I would like to ultimately see this number below the industry average. Will this happen in the next quarter? I doubt. But two years, three years later, that’s where I would like to see him. That being said, if you’re a risk-tolerant investor, I like the stock as a long-term investment. It’s been really hammered, as you can see in the chart to the right, it’s down 78% from its all-time high, so just plain hammered.

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