Will lemonade recover in 2022?

Actions of an insurance expert powered by artificial intelligence Lemonade (LMND 0.12% ) have not been treated well in 2021. The stock has fallen more than 65% since the start of the year. It came after a combination of tough knocks for the business, particularly in the first quarter.

Some of the decline is justified, but I think the stock market has overreacted. Above all, the low share price does not seem to explain a recent acquisition and the launch of a large product: Lemonade Car. If the company can focus on collecting more data for its AI and use its recent buyout of MetroMile To mature its new product, I think Lemonade investors could see a generous rebound in 2022.

Image source: Getty Images.

Lemonade offers insurance in a unique way. The company’s decision-making process, both for inquiries and complaints, is primarily driven by artificial intelligence and computerized robots. The upside is that applicants can be approved for insurance or claims in seconds, and this user-friendly approach has seen the company see rapid adoption. Lemonade was the fastest insurance company to reach 1 million customers, and it currently has over 1.3 million customers. As a result of this rapid scale-up, the company has also been adding products at a steady pace, including two in 2021 alone. The main and most exciting addition, of course, is the insurance product. Lemonade automobile.

Why it fell

This rapid change in the product offering is the number one reason stocks fell. Due to Lemonade’s focus on AI, as the company expands into new products, its AI has to take time to collect data and learn from it. This process allows Lemonade systems to become more precise in their decision making.

However, there is a downside to this important step.

While Lemonade’s AI isn’t completely useless when launching a product, it’s less accurate than it would be in the future when it has more data about the product’s industry. With two new products this year and its pet and home insurance also relatively young, Lemonade has been less effective than it would like.

The company is targeting a claims rate – the percentage of Lemonade’s premium that it pays in claims over the period – of 75% over the long term. For the first nine months of 2021, the company’s loss ratio was 88%, well above the target of 75%. This was due to the company’s additional product launches – which have high but improving loss ratios – and a difficult first quarter.

In the first quarter of 2021, Lemonade was hit hard by the Texas Freeze, where much of Texas was hit by a severe winter storm. This caused numerous power outages and damage to the home for its customers, resulting in nearly a year of claims within days for Lemonade. Obviously, these claims were justified, but this event still hurt Lemonade, resulting in a loss ratio of 121% in the first quarter. Investors, of course, were not happy with this.

Finally, after the company went public in mid-2020, the stock was put up for bid due to Lemonade’s attractive use of AI and strong interest in newly opened companies. at the time. However, as this IPO hype wore off, many investors fled, causing stocks to sink over the next six months.

Could he recover?

In its third quarter, the absence of breakthrough catastrophes in Lemonade’s coverage areas significantly reduced the company’s claims ratio from the 121% ratio it posted in the first quarter. He’s still trading at 23 times the sales, which is way lower than the 100 times the gross sales he’s seen before. This gives investors a much more bearable starting price.

Therefore, Lemonade should focus on improving its loss ratio. If it can do it and get it below the 75% management target set for itself, the business could experience a recovery. The main way for the business to achieve this is to simply give its AI more data, which allows it to mature and make more precise decisions. With some of its products, claims rates have already started to improve. Lemonade’s loss rate for pet insurance improved 4% sequentially, while homeowners’ loss rate improved 52% year-over-year.

With Lemonade Car, the company has taken a slightly different approach. Instead of waiting for their AI to learn organically, Lemonade decided to acquire a company that already has data on over 400 million trips and billions of miles driven. The takeover of MetroMile in the third quarter raised Lemonade’s hopes of rapidly expanding its auto insurance segment with data from MetroMile. With this massive influx of training data, I think this business could be successful, and it could produce more accurate decisions, resulting in a top notch rate of loss early on.

A big bet

The idea of ​​accelerated AI training isn’t a sure thing for the company, and this process could take a few quarters to see improvements if customer growth slows down. However, if it can continue its 45% year-over-year growth in customer base in the third quarter and 26% year-over-year growth in premium per customer, it shouldn’t be. be a problem.

Here’s the gist: The lemonade got hit in the gut as a few negative factors came together, as the business all improved. Its new acquisition fuels an exciting opportunity for Lemonade, and the new auto insurance product could become a driving force for the company’s future loss ratio success. With this new acquisition and the constant improvement of its existing products, I believe Lemonade could recover vigorously in 2022.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.