If you haven't jumped on the Lemonade (LMND +1.14%) bandwagon yet, now might be a good time. The digital insurance company said that it would launch life insurance in the coming month, and that could be a huge catalyst for further sales growth.
Lemonade stock is already trading at a high valuation -- 73 times sales -- and it might be a target for a short squeeze. But this isn't a dying GameStop. It's a hugely growing company, and life insurance is the right next step. Let's see why.
Insurance technology for a better experience
Lemonade began with homeowners and renters insurance and launched pet insurance this past July. The company said on the third-quarter conference call in November that it would launch life insurance within three months, which is coming up shortly.
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CEO Daniel Schreiber explained: "Our experience three months past launch affirmed our strategy of acquiring customers young when their needs are modest, and ensuring they get a fabulous experience with Lemonade so that as they progress through predictable life cycle events."
In the third quarter, for example, 12% of condo policy holders were graduates from renters insurance. When a renter with a $150 policy moves up to a homeowners policy that costs $900, Lemonade gets the extra $750 for zero acquisition cost. This is one way to increase sales without incurring customer acquisition costs.
And that's likely to happen a lot more. The company is only four years old, and its average customer is 33 years old, the same age as the average first-time home buyer, and the average age for when college graduates have kids. Putting this all together, life insurance is a great bet for Lemonade to take on.
Why Lemonade can do it better
Lemonade COO Shai Winninger pointed out that other insurance companies have struggled to make digital term life insurance work economically, and Lemonade is going ahead with the project despite its own uncertainty. But he said there were two factors that weigh in its favor. First, traditional insurance companies are starting digital from scratch. Lemonade already has a complete digital infrastructure, which it can easily scale to include new products. Second, Lemonade has a million customers in early lifestyle stages that it can market the product to for free. This means Lemonade has very little to lose by introducing life insurance, but the potential upside could be huge.
The term-life insurance market is valued at $800 billion and is expected to grow by more than 10% annually compounded over the next decade. Lemonade can take a big bite out of that.
Winninger noted that Lemonade prefers to operate through uncertainty and get rid of bad bets when data becomes available. This gives it the best chance of making the highest returns, even though it also comes with volatility. That's a really important quality in a growth company.
Lemonade envisions offering whatever types of insurance its customers need, moving from pet to life to car and so on. If the past can tell us anything about the future, Lemonade will keep disrupting the insurance industry, launching new products and entering new markets. In the third quarter ended Sept. 30, 2020, in-force premium (IFP), or the average aggregate premium, increased 99%. IFP for renters graduating to homeowners increased 300%.
Lemonade's appetite for risk means it can keep innovating and taking on what works. Lemonade has a bright future, and life insurance is only the next step.
