Insurance technology company Lemonade (NYSE:LMND) has certainly grown impressively. In the most recent quarter, the company's in-force premium nearly doubled year-over-year, while its loss ratio narrowed considerably. What's more, Lemonade reported that it ended 2020 with more than 1 million active customers -- after just over four years in business. It took both State Farm and GEICO well over 20 years to reach that same milestone.
Lemonade's business model seems to be resonating with consumers, especially younger generations who simply don't want to deal with insurance agents, lengthy applications, or confusing and inefficient claims. Lemonade customers can get insurance quotes in seconds, buy policies in minutes, and get paid for claims at speeds that customers of traditional insurance companies often have trouble believing. In fact, just before writing this, I read a tweet from a customer who filed a pet insurance claim with Lemonade and was shocked that the claim was processed in six seconds after submitting the required documentation.
The biggest question Lemonade has to answer
Lemonade has been a massively disruptive insurance company. Its AI-based platform gives it a big competitive advantage. However, the company's success up to this point has been concentrated in a few key markets -- specifically homeowners insurance, renters insurance, and pet insurance.
All three of these are relatively small pieces of the $5 trillion global insurance market, and all are relatively easy to underwrite, which is why the company has been able to write policies and process claims in seconds. But to justify its $8.7 billion market cap, which translates to about 88 times trailing-12-month sales, the biggest question I have is, "Will Lemonade be able to replicate its success in other, larger insurance markets?"
Life insurance will be a big test
To be sure, the company's current markets aren't tiny, especially homeowners insurance, which has a current market size of about $100 billion in the U.S. Renters and pet insurance are considerably smaller. Renters insurance is a $3.8 billion market in the U.S., while the North American pet insurance market is about $1.7 billion. So, with a current market opportunity of about $105 billion, there's still considerable room for Lemonade to grow.
However, life insurance has a market size of more than $730 billion in the U.S. alone (remember, Lemonade is rapidly expanding in Europe as well). That's nearly seven times the company's current addressable market.
Not only is the life insurance market enormous, but it is also a type of insurance that's just begging to be disrupted. As a homeowner with a term life policy myself, I can tell you firsthand that obtaining homeowners coverage is considerably easier than getting term life insurance. Life insurance often involves meetings with insurance agents (salespeople), submitting to a time-consuming medical exam, and lots of paperwork. If Lemonade can replicate its success in its current insurance submarkets in life insurance, it could be a game-changer.
On the other hand, life insurance could prove more difficult to disrupt. Underwriting life insurance is more complex, and there's no guarantee that Lemonade's AI-based approach will translate as effectively. I think it will, but it is a big unanswered question.
If Lemonade is successful at broadening its disruption, the sky's the limit
Lemonade recently started testing out a term life insurance offering (you can now get a quote on Lemonade's website), so we should start to get a little more clarity on how things are going in the coming quarters. The company has hinted that it ultimately wants to pursue other types of insurance, such as auto, in the future. If we start to see positive life insurance results, it will be much more plausible for Lemonade to eventually grow into a one-stop insurance shop that eliminates most of the traditional pain points of buying insurance.