As Lemonade (LMND +0.54%) goes through the ups and downs of its first year as a publicly traded company, it certainly isn't sitting still.
The insurance technology company was one of the hottest IPOs of 2020, opening at roughly $50 in its market debut that July and hitting a high of $183 this January. But it's lost more than half its value since that time, mostly after a disappointing fourth-quarter earnings report.
Lemonade is still fairly new and very much in growth mode, and in the past year it has added pet and life insurance. To hear management tell it, the best may be yet to come. On the fourth-quarter conference call, COO Shai Wininger said the company is working on a new product that "may well be the most significant launch we've ever done." What could this mysterious project be?
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One new project at a time
Lemonade wants to revolutionize the insurance industry, which it sees as ripe for disruption. It works with artificial intelligence (AI) and data mining to provide a faster and simpler user experience for a target market that's used to online shopping and video communications.
Some critics say the concept isn't new at all, and many traditional insurance companies now work with chatbots as well. Lemonade's system may be similar, but it's also faster -- approving claims in as little as one second -- and often cheaper. It appeals to a young clientele, who are settling down with a first home and often purchasing insurance policies for the first time. Lemonade is targeting this group, with an average age in their early thirties, and hoping to create lifetime value with an assortment of insurance products.
When Lemonade went public last July, it only sold homeowners and renters insurance. At the beginning of the third quarter, it launched pet insurance, and at the beginning of the fourth quarter, it introduced term life insurance. Both of these ventures work within the same AI-driven model and digitally powered system as the homeowners and renters products, with fast approval sans human interaction.
Besides opening up the company to new markets, these products are meant to unlock greater value from each customer as they sign on for more products, with higher premium per customer, lowered customer acquisition costs, and long-term retention. As of the fourth quarter, half of pet and life policy purchases were from existing customers.
Lemonade is launching new products at a rapid rate, and it's far from finished. In fact, its biggest project seems to be right around the corner.
"The most significant launch we've ever done"
On the fourth-quarter call, CEO Daniel Schreiber said that Lemonade has more people working on a yet-to-be-announced project than any other product. Both Schreiber and Wininger made several references to a massive project that they couldn't discuss, but Schreiber did stress that "as with new geographies, our ambition for new products is expansive."
Management said that when it was entering life insurance, it didn't have a lot to lose. It already has the infrastructure to handle different products, which means less upfront cost to create it, and it also has more than 1 million customers to market it to without extra marketing expense. That goes for future launches as well.
The most obvious next steps for Lemonade would be auto or health insurance. There are already insurtech companies that provide each of these, such as Root, which offers digital auto insurance and would be Lemonade's most similar competitor. Root hasn't caused nearly as much of a stir as Lemonade, possibly because it's not growing as quickly, leaving investors with a lot of questions. If Lemonade joins this space, it's a strong complementary addition to its suite of products for the young and working. I see that as a great move to branch out and fuel sales in an area where there isn't a lot of digital competition.
At the same time, management's framing of the new product as a huge endeavor makes it sound like something bigger, which naturally leads to talk of health insurance. This, however, comes with a lot more regulation and many different moving parts. That's already beyond the scope of the company's current infrastructure, and it's not the intuitive next step. There are also companies operating in this space, such as Oscar Health. If that's where Lemonade is going, it is indeed ambitious and requires the investment the company is putting in. I would be surprised, though, to see health as the next step, and imagine it further down the line.
As a shareholder, I'm excited to find out what the new product is, and based on Lemonade's history, I believe it will add value to the company long term.
