Warren Buffett didn't have a lot of nice things to say about insurance technology companies during the recent Berkshire Hathaway annual meeting. He said he wouldn't want to own any of them and noted that they've reported huge losses and eaten up capital.
At the same time, Berkshire's head of insurance operations, Ajit Jain, said the conglomerate is trying to move into digital processes, but that it's proving much more challenging than he expected.
There are now a number of digital insurance companies on the stock market, with Lemonade (LMND 1.64%) being one of the most talked about. Is Buffett missing out on an opportunity here?
Should investors stay away from insurance technology?
Buffett isn't known for taking risks or jumping onto new technology early. But his measured, value-oriented approach to investing has soundly beaten the market over the long haul.
However, he has admitted to missing the boat on some stocks -- for example, Amazon, which Berkshire bought for the first time in 2019.
"Obviously, I should have bought it long ago," he said in 2017. "I didn't understand the power of the model." And, as he put it bluntly in his 2022 shareholder letter: "Over the years, I have made many mistakes."
He remains skeptical about the new obsession with artificial intelligence (AI). "It can do all kinds of things," he said at this year's annual meeting, "and when something can do all kinds of things, I get a little bit worried." But he has invested in companies that are in part AI-plays, such as Apple and Amazon.
Can Berkshire Hathaway catch up to Lemonade?
Jain admitted that bringing Geico's technology up to date will be a taller order than he initially expected. "It has more than 500 -- actually, more than 600 legacy systems that don't really talk to each other," he said on the conference call. "And we are trying to compress them to no more than 15, 16 systems that all talk to each other. That's a monumental challenge."
Lemonade, on the other hand, is a much smaller company, but it's built to be the type of agile, streamlined company that Jain envisions transforming Geico into.
What might be an even bigger edge for Lemonade is its generative AI. The company released a compelling and slightly hilarious investor day presentation with examples of generative AI creations, including a ChatGPT-crafted Shakespearean sonnet and an impressionist-style painting produced by DALL-E, all based on insurance-related prompts.
More to the point, the below schematic explains Lemonade's AI-based insurance model.
Image source: Lemonade.
Management explained that it has used hundreds of millions of data points to train 50 machine-learning models. But the main point is what Jain was saying -- all of it is connected and works together.
How does that help Lemonade? One example is that the more data points that come together but cover all the various factors that impact policy pricing, such as age, location, work, and so on, the more predictions it can make and the higher the accuracy of its predictions. And the more customers, policies, and interactions it has, the more precise it gets. Lemonade management describes it as a flywheel that is making exponential progress: It has already grown from 8.5 million predictions made in 2020 to 110 million in 2022.
It also saves money. Although Lemonade is still posting high losses, its model feeds into a low-cost operational system. It says that Cooper, its internal process manager, does the equivalent of 10,000 human working hours annually, and that the onboarding chatbot Maya sells 98% of Lemonade's policies without any human interaction.
These are two examples, but there are many more.
Should Buffett fear Lemonade?
It does look like Lemonade has a real advantage, but that's not as apparent in its financial results right now as it's still in growth mode, with high expenses and losses. That gives companies like Geico time to catch up, but legacy insurers may never quite morph into the fully digital insurance companies that Lemonade and its cadre are. That doesn't necessarily mean Geico will become obsolete, but many buyers will choose the experience of a tech-first company, especially if it means getting better prices.
Buffett could hedge his portfolio with some insurance technology stocks, but that's not likely to happen anytime soon based on his comments this year. Then again, he's made many mistakes before. Just ask him.
As for the individual investor, there's risk in buying a company like Lemonade right now. But it looks like its advantages will eventually give it a leg up on traditional insurance companies.
