Here's Why Lemonade Is My Top Stock for 2021

Insurance technology stock Lemonade (LMND -1.95%) went public in summer 2020, and is already trading for about five times its IPO price. However, even with such massive gains, there could still be plenty of room for Lemonade to grow its share of the $5 trillion insurance industry.

In this Jan. 7 Fool Live video clip, Fool.com contributor Matt Frankel, CFP, explains why Lemonade is his top stock for 2021 (and beyond). 

Matthew Frankel: The stock that I'm most excited about going into 2021 is Lemonade, the insurance technology company. Ticker symbol is LMND, if one of you can put it in the chat, that would be awesome, there it is already. Let me go through why I love this company so much. Insurance is normally a very awful process. I don't know if any of you have bought life insurance in the past year or so. Life insurance is terrible to try to buy. You have to go through a process of calling an agent, getting a medical examination scheduled, it's a lot of back-and-forth. It's a painful process. Lemonade is trying to take all of that stuff out of the process. If you want to get insurance quote on Lemonade's website, it takes about a minute right now, and it's really fast. The application process is really easy. Right now they are primarily focused on renters and homeowners insurance. They just added pet insurance. But the key to that is, they're really actively courting the youngest generation. Everybody needs either renters or homeowners insurance pretty much throughout their entire life. The idea by really going after the renters market, they're making the millennial generation customers at a very young age, and this could be customers they'll retain for 50 years if they do things right, because this is the type of insurance that they'll graduate from renters to homeowners, and they'll need it throughout their entire life. The growth so far has been impressive. This isn't why I love the stock, but the growth has been really, really impressive in this market. Insurance is a five trillion dollar global industry, just to give you that stat. One of my big pet pitch when I hear pitches when they quote a giant industry number, but in this case, it really needs to be said, Lemonade currently has 0.003 percent of that. They don't really need a lot of growth to really move the needle here. But over the past year, they've grown their customer count by 67 percent. They just announced they hit a million customers. That's a pretty impressive stat for a young company like this. In-force premium has nearly doubled, or actually has more than doubled over the past year. It's just a really impressive growth story. The average customer is spending 19 percent more year-over-year, indicating that they are very happy with Lemonade's product and some are graduating from renters to homeowners like I said. Some might be upping their coverage because they are so satisfied with how things are going. The claims process is really easy. The real reason I'm so excited about this is they are expanding into the most painful insurance market in the world, which is life insurance. I mentioned that earlier as my example. They are rolling out Lemonade life insurance in 2021, very shortly. Life insurance is an $800 billion market that is just begging to be disrupted. It's the most painful process, and not only is it an $800 billion market, it's expected to more than double over the next decade to a two trillion dollar market in size. This is a huge market opportunity, and the Lemonade doesn't plan on stopping there. I follow them on Twitter and they recently responded to a customer who left because they don't offer auto insurance and umbrella insurance and someone wanted to keep everything in one pot, and they replied, "Stay tuned." [LAUGHTER] "We're working on it." Even life insurance could just be a starting point. They're an international company already. They've expanded into Germany, in the Netherlands, they just expanded into France. Insurance around the world works a lot differently in some markets than it does in America, but in general, throughout the world, this is a very undisrupted market. I think this is like the payments market 10 years ago, or e-commerce 20 years ago. Insurance is in the very early stages of being disrupted. The company has the best customer reviews of any insurance company I've ever heard of. If you Google Lemonade customer reviews, they're off the charts with how positive the feedback is. The biggest negative feedback you'll see is that they don't offer more types of insurance yet, which they are working on and could be a massive game changer for the company, life insurance especially. Finally, and I'll wrap it up after this so we can get to some Q&A, because I know we're running short on time, they have a lower risk business model than most other insurance companies. Most other insurers collect premiums, they'll use some of it to buy reinsurance contracts, but generally the insurers are taking a lot of risk themselves. Lemonade is almost exclusively a reinsurance model. They collect premiums, 75 percent of the premiums they collect go into buying reinsurance contracts to cover all their losses. So it fix cost for losses. The other 25 percent goes to their administrative expenses. They give back, which I'll talk about in a second, and hopefully somewhat of an underwriting profit. Their profit margin has improved significantly, meaning the loss ratio in insurance terms improved 770 basis points over the past year. They are a very socially conscious company. They have a big give-back program. They call it their give-back, where they donate a certain amount of their proceeds to charity. Your policy holders pick. The idea is that they're attracting really socially conscious investors and they have claimed that this is actually cut down on insurance fraud because people feel like they're stealing from a charity by making fraudulent claims. It's a business model that's not only the right thing to do, but it could actually help them from a business standpoint. So Lemonade, I think is still in the very, very early stages, massive market opportunity. They can leverage their technology to achieve better profit margins than what I call legacy insurers, and the current market could be just the beginning.