Lemonade's (LMND -0.56%) novel approach to insurance combines artificial intelligence (AI) and big data to make its business more efficient. Rather than agents and forms, the company uses AI-powered chatbots to sell policies and pay claims, creating a faster, more enjoyable customer experience. Lemonade also donates a portion of excess premiums to charity in an attempt to win customer trust and loyalty.

Given the multitrillion dollar size of the insurance market, many investors are excited about the company's long-term prospects. But since hitting a 52-week high in January, shares of Lemonade have dropped about 50%. And during that period, three insiders sold over 1.3 million shares. Should investors be worried?

Which insiders are selling

Since December, Chief Financial Officer (CFO) Timothy Bixby has sold 90,000 shares, valued at $10.8 million. Co-founder and CEO Daniel Schreiber has unloaded 687,500 shares, pocketing roughly $80.4 million. And fellow co-founder and Chief Operating Officer (COO) Shai Wininger has sold another 536,500 shares, totaling $63.1 million.

Dice showing three faces -- buy, sell, and hold -- sitting on a stock chart and next to a stack of one hundred dollar bills.

Image source: Getty Images

On the surface, this selling spree might seem alarming, but things get a little less worrisome when you look more closely at each transaction. For example, Bixby still owns 230,000 shares, meaning he sold only 28% of his holdings. More importantly, Schreiber still owns 2.7 million shares directly, or 4.8% of the company. And Shai Wininger owns another 3.4 million shares directly, or 6.0% of the company. In other words, Schreiber and Wininger together still own more than 10% of all outstanding shares.

What's more, the pair of co-founders indirectly owns another 12 million shares as part of a three-member joint investment committee, which also includes Japanese holding company SoftBank. That amounts to an additional 21.1% of voting power shared among these three parties.

The bottom line is that Lemonade executives are still very much invested in the company, meaning they are incentivized to run the business in a way that creates long-term value. Put another way, their heavy ownership means their interests are aligned with shareholders.

What should investors do

The bull thesis for Lemonade is relatively straightforward. By using big data and artificial intelligence to quantify risk and manage its business, Lemonade should be able to operate more efficiently than traditional insurers. For example, more data should make the company better at underwriting policies and preventing fraud, and those advantages should translate into lower claims payments (as a percentage of total premiums) for Lemonade. And while the company donates up to 40% of excess premiums to charity, paying out less in claims would still make Lemonade more profitable.

Additionally, Lemonade's use of AI means the company needs fewer employees per customer, compared to its rivals. That cuts payroll expenses, so Lemonade should be able to offer insurance policies at lower prices over time. That, in turn, should help the company continue to add customers quickly, which will also drive profitability down the road.

Despite the spree of insider selling, nothing about this thesis has changed. Moreover, key Lemonade executives still own a large chunk of the company. That's why shareholders shouldn't get too worked up about these transactions.

The bottom line

It's never comforting to see insiders sell, but investors should always consider the full situation before jumping to the wrong conclusions. For instance, this recent selling spree would look much worse if Lemonade stock was plunging and executives were unloading every last share they owned, but that's not what happened. 

Lemonade insiders are just like other investors, and this was probably more about portfolio diversification than anything else. Regardless, Lemonade still looks like a good stock to own for the long term.