It's earnings season for many public companies, but investors in digital insurance specialist Lemonade (LMND -0.46%) seem to be more interested in service expansion announcements than earnings announcements at the moment. On Wednesday, Lemonade officially got into the auto insurance trade and is now underwriting policies.
It's likely the big news will be discussed further when the company releases third-quarter earnings results on Monday, Nov. 8, after the markets close.
Both announcements should be exciting news for the company and its investors, and Lemonade stock got a nice 5% bounce on the auto insurance news. But that was a short-term gain. Let's see why a move into auto insurance matters in the long term for this company and its stock.
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Entering its biggest market yet
When Lemonade became a publicly traded company less than a year and a half ago, it only sold renters and homeowners insurance. Since then, it has quickly expanded to now also offer pet and term life policies. As of Wednesday, it also offers car insurance (only in select markets for the moment).
Car insurance is a big deal. It's a much, much bigger market than all of Lemonade's other markets combined. Management says it's a $300 billion opportunity, which is 70 times the renters market and three times the homeowners market. It's almost as if everything else was a training session to work out its system in preparation for jumping into the auto insurance field.
Since it's Lemonade, there are some important differences in its car insurance model from traditional insurers. One is its use of telematics to determine policy pricing. Telematics is tracking driving behavior to evaluate risk, and it's not unusual for modern insurance companies to use it when assessing customers to give a policy premium quote.
Lemonade's main competitor in this area is probably Root (ROOT 1.44%), which also offers digital auto insurance using telematics. Lemonade car users will have to download an app that tracks driving behavior, and Lemonade will run data such as driving speed, sharp turns, etc. through its algorithms to determine a policy price, with safer driving generating lower prices. The platform also uses this data to see if there's been an accident or if a driver needs roadside assistance, which it offers.
Lemonade also encourages greener driving, and electric vehicles (EVs) or hybrids also receive a discounted policy. Finally, as per its social mission and quirky perks, Lemonade will plant trees to combat carbon pollution, with the number of trees per customer corresponding to driving miles logged.
Can it succeed?
There are roughly a million reasons to suggest this endeavor will go well -- because Lemonade has over 1 million customers that already have insurance plans of some type. One of the foundations of its marketing model is acquiring customers for smaller plans and converting them into "life cycle" customers with multiple policies. One of the hallmarks of the new car plans is bundling, and Lemonade is offering further discounts for customers who sign up for a bundled package with another type of insurance. Considering Lemonade's high customer satisfaction scores, it can expect a strong showing from its existing base.
However, Lemonade Car is currently only available in Illinois, with Tennessee rolling out next. So it will take time for Lemonade car to provide significant revenue to the top line.
A big win for this growth stock
The market seemed to be happy with Lemonade's announcement, and the stock, which has been falling since the summer, finally gained some traction. Investors appear more confident now because Lemonade has a huge market opportunity and the means to capture market share.
But potential investors should be aware that, even with the latest price bump, Lemonade's stock price is still down 44.6% year to date and down 64% from 52-week highs set in mid-January. In the short term, the car insurance launch won't be impactful on the overall business. But long term, there's a lot of potential here, and investors might want to consider buying shares of Lemonade while the price is still low.
