Lemonade (LMND 5.36%) has been a volatile rocket ship since its IPO in July 2020. The online insurer went public at $29 per share, opened at $50 per share on its first day of trading, and it currently trades in the mid-$80s -- but remains richly valued at 44 times this year's estimated sales.

The bulls believe Lemonade's disruptive potential justifies that premium. Its AI chatbots and algorithms simplify the byzantine insurance sign-up process by insuring its users within 90 seconds and processing claims within three minutes, making it an appealing choice for first-time buyers. It already offers home, renters, pet, and term life insurance plans, and intends to add auto insurance in the near future.

A smartphone user sips lemonade.

Image source: Getty Images.

Lemonade's growth, especially among younger insurance buyers, supports that bullish thesis. But the bears will point out that Lemonade's customer base of 1.1 million remains small, that traditional insurers like Allstate (ALL 1.97%) and Travelers (TRV 0.85%) are upgrading their mobile apps, and that it faces emerging competitors in the insurtech market.

Lemonade listed Allstate, Travelers, and other traditional insurers as its top competitors in its IPO filing, but it didn't discuss two other digitally native insurtech companies that have been gaining a lot of traction: Ethos Life and Kin Insurance (both privately held companies). Let's take a closer look at these two potential challengers.

Ethos Life

Ethos Life Insurance, which was founded five years ago, uses "deep technology and data science to eliminate traditional barriers to life insurance and bring the industry into the modern age." Like Lemonade, Ethos is a "mobile-first" platform that runs on AI algorithms.

Ethos can provide term life coverage to over 99% of its applicants by asking just a few questions without a medical exam, and completes the process in "minutes instead of weeks."

Ethos' goal is to "democratize access to life insurance for a broader demographic of U.S. families, including more women and more low- and middle-income families." Nearly 40% of its new policyholders in the first half of 2021 were under the age of 40, and more than 40% of its new policyholders had annual incomes of $60,000 or less. By comparison, approximately 70% of Lemonade's customers are under the age of 35.

Ethos' business model sounds a lot like Lemonade's, but it's only focused on term life insurance, a market Lemonade only entered this year. Ethos says its revenue and users have both risen by "more than 500%" over the past year, but it hasn't disclosed any exact numbers yet.

Ethos has attracted big backers like SoftBank (SFTB.Y -1.23%), General Catalyst, Sequoia Capital, Accel, and GV, as well as celebrity investors like Jay-Z, Will Smith, and Robert Downey Jr. Ethos was valued at over $2.7 billion after its latest funding round, compared to Lemonade's market cap of $5.3 billion, and this emerging start-up could eventually threaten Lemonade's life insurance plans.

Kin Insurance

Kin Insurance, which was also founded five years ago, adopts the same data-driven approach to provide home insurance plans. It claims its average customer saves $500 by switching to Kin, and it processes "thousands of property data points" to customize its coverage and prices without agents.

A home covered by a large umbrella.

Image source: Getty Images.

Like Ethos, Kin is backed by high-profile celebrity investors like NBA All-Star Draymond Green and pro golfer Rory McIlroy. Kin specifically targets catastrophe-prone regions like Florida, which is a bold strategy considering the steep losses Lemonade incurred from the Texas winter storms earlier this year.

Kin recently agreed to go public by merging with a SPAC (special purpose acquisition company) called Omnichannel Acquisition Corp. (OCA), and the new company will have a pro forma enterprise value of about $1.03 billion after the deal closes in the fourth quarter of 2021.

Kin is different from Lemonade in two main ways. First, it serves a much older market, with an average customer age of 57. Second, Kin calls itself the market's "only pure-play direct-to-consumer home insurance technology company" -- which implies it won't aggressively expand into additional insurance markets like Lemonade.

We won't know Kin's exact growth rates until Omnichannel files its paperwork, but Kin revealed that it had surpassed $100 million in annual recurring premiums back in April. It also has a customer retention rate of 92%, and it expects to more than triple its total written premiums this year.

By comparison, Lemonade's in-force (annualized) premiums rose 87% to $213 million last year, and it ended last quarter with an annual dollar retention (ADR) rate -- which is comparable to Kin's customer retention rate -- of 81%.

The key takeaways

Ethos and Kin might not threaten Lemonade yet, but they indicate Lemonade isn't the only "disruptive" insurtech company. That's probably why Lemonade keeps diversifying its platform into new markets -- it wants to widen its moat against these industry-specific competitors and lock in its current customers.

However, Lemonade could also end up as a jack of all trades and a master of none if it diversifies its platform too quickly, and its costs could skyrocket and result in even wider losses. Investors should keep these potential challenges in mind if they plan to buy any shares of this speculative stock.