Artificial intelligence (AI) has captivated investors in 2023. Technology giants like Nvidia and Microsoft have already unlocked enormous financial value from AI, and this revolution is still in its early stages.
But some companies have been developing these types of systems for years. Lemonade (LMND 1.64%), an insurance provider with technology at its core, is one of them. It relies on AI to run its entire business, from pricing premiums to interacting with customers, and it's having an incredible amount of success.
Lemonade stock is down by 89% from the all-time high it reached during the tech frenzy of 2021, but the company continues to grow rapidly by almost every financial metric. Here's why it's time to buy the dip.
Nearing 2 million customers -- with the help of AI
Dealing with traditional insurance companies is rarely a pleasant experience, especially when it's time to make a claim. It can take a number of phone calls and a significant amount of time to get a payout processed, which adds further stress to a situation that is already difficult on the policyholder. Lemonade seeks to change that across five segments: Homeowners insurance, renters insurance, pet insurance, life insurance, and car insurance.
The company developed an AI-powered model it calls Jim that is capable of processing a claim in under 3 minutes. In fact, around half of all claims by Lemonade customers are processed autonomously. In addition, the company's Maya chatbot can present new potential customers with a quote in under 90 seconds, which makes signing up a breeze.
In the third quarter, Lemonade had a record high 1.98 million customers, and it's set to cross the 2 million milestone in November.
But Lemonade's use of AI runs much deeper. It launched its Lifetime Value 6 (LTV6) AI model 12 months ago, which is capable of predicting a customer's likelihood of making a claim, their churn rate, and their likelihood of purchasing multiple policies. From there, it predicts the customer's lifetime loss ratio -- the amount of money Lemonade can expect to pay out compared to the value of the total premiums it will receive from them.
So far, LTV6 has accurately predicted the loss ratios of new customers -- in fact, it has actually been too conservative in some cases, which led to better financial outcomes than Lemonade expected. Since LTV6 was released, the company has rolled out LTV7 and LTV8, and it's gearing up to release LTV9. Each iteration is more accurate than the last, and that effectiveness is beginning to show up in Lemonade's financial results.
Record Q3 revenue and shrinking losses
Lemonade's gross loss ratio came in at 83% in the third quarter, down sharply from 94% at the same time last year thanks to its LTV6 model. It's on the way to 75%, which is the high end of where the company wants its gross loss ratio to settle in the long term (and for this metric, the lower, the better).
Meanwhile, Lemonade's in-force premiums -- the value of premiums for all active policies -- also hit an all-time high of $719 million in Q3. Those results drove Lemonade's revenue to a quarterly record of $114 million, which was a whopping 54% increase year over year. But investors were probably most impressed by improvements on the bottom line.
Lemonade delivered an adjusted (non-GAAP) EBITDA loss of $40.2 million, and while that might seem like a negative, the loss was 38% smaller than the loss the company booked a year earlier. Plus, management's guidance suggests Lemonade could be cash flow positive in 2025, with positive adjusted EBITDA coming in 2026.
Image source: Getty Images.
Why Lemonade stock is a buy now
Considering that Lemonade is still in its growth phase, reaching those profitability milestones on that schedule would be incredibly impressive -- and the company expects to get there with plenty of cash in the bank, meaning it doesn't expect to dilute investors any further by performing capital raises between now and then.
But Lemonade has barely scratched the surface of its opportunity. According to the latest available data (2021), there are at least 278 million cars registered in the U.S. alone. Last year, it cost a combined $348 billion to insure those vehicles. And that's just the addressable market for one of the five segments in which Lemonade operates.
Lemonade says it isn't aware of any other insurer with an equivalent model to LTV6, and since its subsequent releases have only been getting smarter, the company could offer consumers the most accurately priced premiums in the industry. Combine that with its seamless customer experience and it's clear to see how Lemonade might become a leading insurer in the long run.
Lemonade stock has soared by 57% since the company released its third-quarter results last week, which is a clear sign that investors think it's moving in the right direction. So, considering it's still down 89% from its all-time high, now might be a great time to buy.
