Lemonade (NYSE:LMND) stock popped 5.4% on Nov. 3 after the online insurer launched its long-awaited auto insurance service, Lemonade Car. The new feature is currently available in Illinois, and the company will subsequently introduce it in Tennessee before rolling it out to additional states.
Lemonade announced its plans to enter the auto insurance market back in April and started accepting early registrations, but it didn't reveal a clear launch date during its latest quarterly report in August.
Let's see why Lemonade Car is attracting so much attention, and figure out if its arrival actually makes Lemonade stock a better investment.
An expanding portfolio of insurance services
Lemonade simplifies the byzantine process of purchasing insurance with a streamlined app powered by AI algorithms and chatbots. The app can insure its users in as little as 90 seconds and process claims in just three minutes.
That simple approach makes it popular with younger, first-time insurance buyers -- about 70% of Lemonade's customers are under the age of 35. New users have been switching from traditional insurers like AllState and Travelers.
When Lemonade went public last July, it only offered homeowners and renters insurance. It subsequently launched pet and term life insurance plans, but it still generates most of its revenue from the first two categories (approximately 86% of its in annualized premium for customers as of the second quarter).
Therefore, the launch of Lemonade Car should accelerate its diversification away from homeowners and renters policies -- which cost less and face more unpredictable headwinds (such as climate change and natural disasters) than other insurance plans.
Can Lemonade disrupt the auto insurance market?
The auto insurance market is heavily saturated, but Lemonade believes its streamlined, app-based approach will win over customers.
Lemonade Car will offer low prices to safe and low-mileage drivers, as well as owners of environmentally-friendly electric vehicles (EVs) and hybrid cars. Its app will use telematics to track driving habits, detect crashes in real time, provide on-location roadside assistance, and contact emergency services.
It will also allow users to access emergency battery recharging services for EVs, contact towing services, and track repairs and other body shop work. Lemonade says the service will file "more claims in a shorter period of time and with greater efficiency than traditional insurance systems."
Lemonade intends to offer "significant" bundling discounts to customers who purchase Lemonade Car alongside its other insurance services. This strategy could lock in more customers, increase the stickiness of its ecosystem, and help fulfill its long-term goal of becoming an all-in-one digital platform for homeowners, renters, life, pet, car, and umbrella policies.
But will Lemonade Car move the needle anytime soon?
Lemonade Car's launch should allay some concerns about the company's ability to fulfill its ambitious long-term goals, but it probably won't meaningfully boost its revenue until it's available in more states.
Lemonade only generated 4.3% of its gross written premiums (GWP) in Illinois in the first half of 2021, making it the insurer's fifth-most important state. Tennessee wasn't even listed among its top-ten markets.
To actually move the needle, Lemonade needs to launch Lemonade Car in California, Texas, and New York -- its top three states, which together accounted for 58% of its GWP in the first half of the year.
Therefore, investors shouldn't expect Lemonade Car to generate significant revenue over the next few quarters. But over the long term, the business can grow and pave the way for its expansion into other insurance markets.
Not much has changed (for now)
Lemonade ended last quarter with 1.21 million customers, and it could still gains tens of millions of new customers if it disrupts legacy insurers.
However, traditional insurers aren't simply sitting still and allowing Lemonade to take over the digital market. AllState, Travelers, and other big insurers have been upgrading their mobile apps and services, and they can still afford to undercut Lemonade with lower prices.
Lemonade is still growing rapidly. For the full year, management expects gross earned premium to rise about 81%, while total revenue (which was temporarily throttled by the launch of proportional reinsurance agreements) increases 31%. Analysts expect revenue to grow more than 60% next year as its year-over-year comparisons normalize.
But Lemonade also remains deeply unprofitable. Even after declining over 60% from its all-time high, the stock still isn't cheap at 22 times next year's sales. The company has a lot to prove, but Lemonade Car's arrival indicates it's heading in the right direction.