The $2B Reason Lemonade Stock Could Soar in 2022

In this clip from "The 5" on Motley Fool Live, recorded on Jan. 18, Motley Fool contributor Trevor Jennewine discusses how Lemonade (LMND 1.64%) stands out from the competition by leveraging artificial intelligence to reduce expenses and improve efficiency.

Trevor Jennewine: I think a lot of Fools know Lemonade pretty well. This is a tech-powered insurance company. Specifically, Lemonade uses artificial intelligence to make business more efficient than traditional insurance providers. For instance, rather than having agents engage with consumers, consumers interact with AI-powered chatbots to purchase policies and file claims. That helps reduce friction on the consumer side, but it also means Lemonade needs fewer employees per customer, which keeps its payroll expenses low compared to competitors. Its digital platform also captures about 100 times more data than standard applications used by legacy insurance providers. That's according to a Lemonade blog post. That data feeds Lemonade's AI models, which theoretically helps the company quantify risks more precisely. That's really the name of the game in insurance. It's all about risk. The better you understand the risk, the better you can price your policies and the less likely you are to lose money on claims. There's an important metric there. It's called the loss ratio, which helps you gauge the efficiency of an insurance company's underwriting business. The loss ratio is equal to the paid claims divided by earned premiums. How much money is going out in claims versus how much is coming in from premium payments, and I'll come back to that in a second. Essentially, Lemonade has this really user-friendly platform designed to capture and deploy a lot of data and ways that traditional insurance platforms can't. I think that shows up to a certain extent its financial performance. Over the past year, in the third quarter, gross profit hit $11.7 million, that's up 60%. The company's net loss did widen to $1.08 per diluted share. Growing gross profit quickly. Customers also rose 45% to 1.3 million. The in-force premium was up 84% to about $347 million. This is the annualized value of all the premiums that it has in place. You've got customers growing, in-force premiums growing. The premium per customer is also up about 26% to $254. Some of the things I'm most excited about, the company recently launched Lemonade Car in Illinois in November. This is its auto insurance product. To accelerate its entrance into that industry, they shortly after acquired Metromile, which is an AI-powered car insurance company that uses telematic devices to capture data based on how well you're driving, how hard are you breaking, how fast are you taking turns, and then it uses that information, runs it through AI models to price policies. By acquiring Metromile, Lemonade supercharges its own AI models and gets over three billion miles worth of data for Metromile. Lemonade Car in general brings the company's market opportunity to over $400 billion. There are opportunities for synergies here, for instance, Lemonade's management believes that existing customers already pay about a billion dollars each year for auto insurance and so now they can bundle their homeowners and renters policies with car insurance policies. That's a tactic that a lot of insurance companies take, and up until recently, Lemonade has not been able to do that, so a big opportunity. I'm looking to see what management has to say about that acquisition. The company paid $500 million for Metromile. Not tons of money, but then again, Lemonade's market cap is $2 billion. Looking to see how that acquisition is going and then early results from Lemonade Car in general. I mentioned loss ratio earlier. In the most recent quarter, the company's loss ratio was 77% and that was up from 72% in the prior year. To put that in context, the property and casualty insurance industry average is about 69.6% and that was through the first half of 2021. Lemonade is above the industry average. That's not great. I would like to see it the other way around. Then again, it's a young company. They're still collecting data. One of the driving forces behind Lemonade being higher-than-average, I think is that they are shifting away from renters policies. That doesn't mean that their renters business is doing bad, it just means that their homeowners and pet insurance businesses are growing more quickly. Last year in the third quarter, renters policies accounted for 70% of the business. That number has dropped to 53% in the most recent quarter, and as I said, homeowners and pet insurance are taking share. That's good, to see the company diversifying, especially into higher-priced policies like homeowners. But Lemonade's homeowners business has a higher loss ratio right now. That being said, management did note that during the most recent quarter, its homeowners' loss ratio improved by 52 percentage points, so there's a lot of moving variables here. I want to see how that shakes out. Like I mentioned, I'd ultimately like to see that number below the industry average. Will that happen in the next quarter? I doubt it. But two years, three years down the road, that's where I'd like to see it. That being said, if you're a risk-tolerant investor, I like the stock as a long-term investment. It has been really hammered, as you can see in the chart on the right, it is down 78% from its all-time high, so just absolutely hammered.