The past few years have seen changes in the insurance industry driven by new entrants focused on using technology to lower costs. Lemonade (LMND 1.89%), a relative newcomer to the insurance business, was founded in 2015 and started selling renter's and homeowner's insurance in 2016. Lemonade bills itself as a new kind of insurance company, taking a flat fee for its profit and donating excess premiums collected to charity, assuming anything is left after claims are paid. The company also leans heavily into technology, using chatbots to sell policies and process claims and artificial intelligence to automate other aspects of the business.
Lemonade's customer-centric approach led to rapid growth in its first few years. It quickly became clear, however, that Lemonade had a glaring hole in its product portfolio – auto insurance. Statista reports that there were around 276 million vehicles registered in the United States in 2020. Given that motorists need to have insurance to drive their vehicles, it's clear that auto insurance is a huge market. It's a market Lemonade needs to be in to execute on its strategy of growing with its customers. Having a core renter's and homeowner's product is fine for the early stages of the company's growth when it was focused on urban centers. But to grow into the suburbs and follow its initial customers as they moved into larger houses in areas where cars were plentiful, an auto insurance product was necessary.
Lemonade car gives way to Metromile acquisition
Management of course knew this and announced Lemonade Car in late 2021. The problem with that launch was that it was a small-scale roll-out, and it came over six months after Lemonade opened up early registration for the new product. Management apparently thought things weren't moving fast enough, because less than a week after launching Lemonade Car, the company announced its acquisition of Metromile, another tech-focused insurance start-up. Unlike Lemonade, though, Metromile was focused on auto insurance, and at the time the deal was announced already had licenses to sell auto insurance in 49 states and $100 million worth of in-force premiums.
The Metromile deal closed in July of last year. As it turns out, Lemonade's timing in its entry into auto insurance may be fortuitous. A recent survey from J.D Power found a significant decrease in customer satisfaction in both auto and homeowners' insurance. Interestingly, the decrease was most pronounced among insurance bundlers, those customers who get auto and home insurance from the same provider. The survey found a 10-point satisfaction decrease among bundlers, with recent increases in auto insurance rates being a key driver of the decrease in satisfaction. Retention rates in the industry among bundlers tend to be higher than among non-bundlers, making bundlers more valuable, but that also cuts both ways. The J.D. Power survey found that one-third of bundlers said they would switch home insurance providers if they switched their auto insurance to save money.
Can Lemonade act fast enough to attract dissatisfied customers from competitors?
Enter Lemonade, with their recently beefed-up auto insurance capabilities from the Metromile deal. Lemonade potentially wins in two ways here. First, since it doesn't have very many auto insurance customers yet (and very few bundlers), the decrease in satisfaction the survey highlights isn't hitting the company. Second, with its new offerings in auto insurance, the company is well-positioned to benefit from customers shopping around for alternatives. This same survey noted that Lemonade's popularity and visibility are increasing, with 34% of respondents saying they definitely or probably will purchase a Lemonade policy if one is offered in their state.
While this situation does look good for Lemonade, there's a huge caveat. The company doesn't have a bundled auto product available in most of the country yet. Lemonade is still integrating Metromile into its larger operation. In the last earnings call, management said that Lemonade's car product (including both the legacy Lemonade Car and the recently acquired Metromile policies) was available in only ten states. Management still has a lot of work ahead of them to create a combined Lemonade/Metromile product and roll it out, as part of a bundled offering, in more states. Management says shareholders should expect additional state launches over the course of 2023.
If you are a Lemonade shareholder, what does this all mean? Well, it means you should be cautiously optimistic, but you should also pay very close attention to quarterly results and management comments over the next few quarters. The market is handing Lemonade a golden opportunity. The company has a chance to jump-start growth with a compelling auto and bundled product and grab new customers at the expense of other insurance companies who are seeing their satisfaction numbers drop. It's all about execution, though. If Lemonade can't get a compelling auto insurance product rolled out in more states before their competitors solve their customer problems, it may end up squandering the opportunity in front of them. For Lemonade management, 2023 is the year they needs to deliver on the company's potential.
