It hasn't been smooth sailing for shareholders of Lemonade (LMND +2.91%) since the stock debuted on the market last July. After a quick rally, the stock plummeted in March, and it remains down 22% year to date as of Wednesday's close.
Not all investors can stomach that kind of wild ride. But often, the highest growth comes with a lot of volatility. Is Lemonade the right growth stock for you?
Disrupting its industry? Check.
To launch a new company successfully, you have to do something better than the people already doing it. Lemonade is trying to change the way people buy insurance policies by using artificial intelligence and behavioral economics.
Image source: Getty Images.
Lemonade's use of thousands of data points and its digital platform allow it to approve claims in as little as one second. Since it spends less on manpower than traditional insurance companies, it can offer cheaper rates. Its model of taking a set 25% in premiums and ceding the rest to third-party reinsurers means it's much less incentivized than most insurers to deny claims -- it keeps that entire fee as long as its loss ratio stays under 75%, which it did for five consecutive quarters before Q1 of this year. And Lemonade is also a certified B-corporation, which means it has a purpose other than making a profit. In Lemonade's case, it lets policyholders direct money that wasn't used to charity.
Most traditional insurers are joining Lemonade in the digital age, and they all use some amount of data collection in providing policy quotes and approving or denying claims. But none are as agile as Lemonade in this area since they're still moving away from legacy platforms, while Lemonade was created with this technology. That gives it an edge.
Customers are catching on, and Lemonade has amassed more than 1 million customers since it started.
Big growth opportunities? Check.
Lemonade is still starting out, and it's expanding at a rapid rate. At least one of its products is available in all 50 states, and Lemonade also operates in France, Germany, and the Netherlands.
It launched pet insurance and life insurance over the past 12 months and is getting ready to roll out auto insurance. And auto insurance could be huge. According to Lemonade, auto insurance is a $300 billion market. That's three times the homeowners insurance market and 70 times the renters market, which is Lemonade's main market right now.
The company's entry into life insurance was already a detour from its bread and butter of renters and homeowners policies, but it has the infrastructure, in terms of its machine learning and digital framework, to make it a not-much-to-lose proposition. Auto insurance takes that a step further, with a strong and happy customer base to which it envisions providing a wide range of policies.
There's already competition in the auto space, such as Root, which is a digital auto insurance company that is in many ways similar to Lemonade. Lemonade's strategy to stand out is to offer a one-stop shop for all of your insurance needs, combined with a compelling customer experience.
Image source: Getty Images.
In high-growth mode? Check.
Lemonade is demonstrating high growth through several metrics. In-force premium, or the average aggregate premiums (an average of how many policies are in effect), increased 89% year over year in the first quarter of 2021. Premium per customer increased 25%, which shows that the company's strategy of getting customers to sign up for more or higher-priced premiums is working. Revenue was down year over year, which the company attributes to a change in its reinsurance plans, in which it transfers more money, but also more responsibility, to third parties.
The company is in its early growth stages and is far from making a profit. Net loss widened from $36.5 million in Q1 2020 to $49 million in Q1 2021, and it's still investing in growing operations.
If you're a growth-oriented investor, and you can put away money and let it grow through ups and downs, Lemonade is a great candidate for long-term success.
