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Here's Why I Just Bought More Lemonade Stock

By Matthew Frankel, CFP® - Oct 21, 2021 at 6:23AM

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The insurance disruptor is down big from its highs, but one of our experts is adding shares.

Insurance technology company Lemonade ( LMND -8.90% ) has lost about two-thirds of its value since its peak earlier this year, but is it worth a closer look now? In this Fool Live video clip, recorded on Oct. 11, Fool.com contributor Matt Frankel, CFP®, discusses why he recently added shares to his own portfolio.

Matt Frankel: Lemonade, one of the reasons it's interesting right now is because it's lost about two-thirds of its value from its 52-week high. It peaked at about $188 a share. It's under $65 as I'm talking. Still not a cheap stock, it trades for 44 times sales. It was really expensive at one point. Lemonade offers three main types of insurance right now. They have renter's, homeowners, and pet insurance. They also have life insurance, but that's not a big portion of their premiums right now. Renter's is the lion's share that makes up 56% of their insurance book at the moment. Homeowners is another 30%.

Between renter's and homeowners, that's pretty much all of it. Pet insurance, they launched about a year ago. That was number -- about 13%. They started offering life insurance last year. They just started really investing into it in the second quarter. Really it hasn't ramped up too much, just about 1%. Renter's is their bread and butter and has been since they started.

The really key thing to know is renter's insurance is cheap. The average renter's insurance policy is about $15 a month. It's a low-cost form of insurance that millennials and younger people, I guess Gen Z, the younger generations need but have historically avoided because the traditional insurance model has not been good. You have to deal with that multi-day process and getting insurance underwritten. For a policy that's $15 a month, a lot of people just didn't want to do that. This is what allowed Lemonade to build its customer base to 1 million. It's currently at about 1.2 million. In one-fourth of the time it took State Farm to do it. It's a dramatic growth rate over its short history.

The reason I want this company in my portfolio is not because I have any interest in owning a renter's insurer. It's because of their platform, their AI-powered technology that lets them do a more efficient job of underwriting, processing claims, giving quotes than any of its competitors. It has all these big insurance markets to go into specifically auto insurance. I mentioned they offer life insurance, which is the biggest market that they operate in. Life insurance is an $880 billion market in the U.S. alone, and Lemonade operates in foreign countries as well. But people don't need life insurance. As a certified financial planner, I generally recommend people buy life insurance, but it's not something that you need. Auto insurance is something that people need.

Auto insurance, just to put their markets in perspective, renter's insurance, the core market is a $4 billion market in the US. Homeowners insurance is $119 billion market. They land their younger generations as renter's insurance customers, and graduate them into higher-cost homeowners policies as they get older and become homeowners. Kind of a land-and-expand model in their two core businesses. Pet insurance is currently a $2 billion market in the U.S. with less than 1% market penetration. Pet insurance is a rapidly growing market and it's still in the very early stages. I really like they're doing that. Life insurance I mentioned has an $880 billion market in the U.S. But like I said, it's a product that their core customers don't necessarily need. It's really tough to convince younger generations that they need to voluntarily go and buy life insurance. I've tried. I'm a financial planner. I've tried to do it a few times. They generally are not that receptive to the idea.

But auto insurance is a $288 billion market in the U.S. alone, $740 billion globally. It's something that most of Lemonade's existing renter's insurance customers need. Lemonade estimates that its current customer base, spends more than a billion dollars a year on auto insurance premiums. It has received overwhelming interest in Lemonade car product. We haven't really gotten a great timetable, which is one of my biggest problems with the stock right now. I want a better timetable in the third-quarter earnings reports. They were very vague in the second quarter. But other than that, this is a stock that has a lot of potential if they can replicate their renter's insurance success in the auto insurance market.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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