Is This Lemonade's Secret Weapon as a Fintech Stock?

Although Lemonade's (LMND -0.46%) stock is down a whopping 82% since its July 2020 initial public offering, this company is undoubtedly still a disruptive, innovative force in the gargantuan insurance industry. By focusing on its core capabilities in data, analytics, and technology, Lemonade is providing a superior user experience. 

But besides the use of artificial intelligence (AI), which is fully integrated into Lemonade's business model, there's another interesting development happening with this popular fintech stock. And it might just be Lemonade's secret weapon in taking on the big boys in the insurance industry. 

Using technology to attract younger customers 

It's really hard to understate Lemonade's huge gains thus far. Existing customers can file claims and receive a payout in as little as three minutes. And new prospects can get a policy quote in as little as 90 seconds. Compare this to the traditional industry setup, which often requires a visit to a broker's office. This direct-to-consumer model has resulted in Lemonade growing its revenue 281% between 2019 and 2022, with its customer base now totaling 1.8 million, a near-tripling over the past three years. 

Speaking of the customer base, naturally, it skews young. Younger consumers are more digitally adept than their older counterparts, a group that might not even be familiar with Lemonade's products. According to the company's investor day presentation, 22.1% of first-time renter's insurance customers under the age of 35 signed up with Lemonade. This is a higher percentage than any other provider. State Farm is a close second, followed by GEICO and Progressive. 

Set up for long-term success 

Attracting a younger demographic benefits Lemonade in a very important way. With a leading share in the market for new renter's insurance policyholders under 35, the business might very well be bringing on customers who have never purchased an insurance product. And this has its benefits. 

As these young customers get older and reach significant milestones in their lives, they are likely to continue their relationship with Lemonade, which has one of the best user experiences on the market. After renting an apartment, a person could get a pet, buy a car, buy a house, and eventually have kids. This trajectory fits with Lemonade's other products, such as insurance for pets, autos, home, and life. 

What's more, Lemonade says that less than 4% of its customers use multiple products from the business, a much lower figure than the 60% rate at incumbent insurance companies. The ability to cross-sell to existing customers, versus trying to find brand-new customers, would likely result in much lower sales and marketing expenses over time. This situation could bode well for the company's long-term future, should these customers stick with Lemonade as they get older.  

Cracks in the business model 

Although this all sounds positive, Lemonade is not without issues. Most notable of these concerns is the company's lack of profitability. The business posted a net loss of $241 million and $298 million in 2021 and 2022, respectively. The chief executive officer did say that he believes the worst of the losses are a thing of the past -- maybe an encouraging sign for shareholders. 

To get to positive net income, Lemonade is trying to improve its gross loss ratio, which is the dollar amount of claims paid as a percentage of premiums earned (a lower figure is better). "From a Lemonade perspective, a loss ratio that's well under 75%, if not under 70%, is the long-term plan and the long-term goal," Chief Financial Officer Tim Bixby said on the Q4 2022 earnings call. 

However, the business's gross loss ratio was 90% in 2021 and 90% in 2022. The promise is that Lemonade's AI-driven risk models can get better over time, but this hasn't shown up in the numbers yet. As a result, management might need to think about updating how it underwrites customer risk. 

Investors who are willing to accept these challenges, in favor of the superior user experience and younger demographic, might still be compelled to own the stock.