Lemonade (LMND 1.64%) is making strides with its artificial intelligence (AI)-powered insurance business, which seeks to upend the industry. It recently posted solid fourth-quarter results, showing that its models are improving and pricing policies better. Is now a good time for investors to buy the stock? Let's dive into Lemonade's business and find out.
Lemonade's AI-powered business is rapidly growing
Lemonade leverages AI to streamline the insurance process, automating everything from buying policies to handling customers' claims. The company's model leverages its trove of data and AI models to personalize quotes, reduce customer onboarding time, and resolve up to a third of customer claims.
In its early days, Lemonade focused on renters' insurance, targeting young adults to turn them into lifetime customers as it rolled out new products. With that in mind, homeowner's insurance was the next logical offering to add to its lineup. In addition, Lemonade sells pet, life, and automotive coverage.
Lemonade's growth strategy has paid off. At the end of 2023, the insurance company had more than 2 million customers, representing a 12% increase from the prior year and double its customer count from three years ago. In addition, its policies in force increased by 19.5% while its gross earned premiums increased by 37%.
Its underwriting profitability is gradually improving
The insurance technology company has succeeded in achieving growth and adding customers, but that growth has come at a significant cost. Last year, the insurance company posted a net loss of $237 million. Over the past three years, Lemonade's business has had net losses of $776 million. Much of this comes as Lemonade integrates its various insurance products into its AI-powered risk pricing algorithm.
LMND Revenue (TTM) data by YCharts
In the highly competitive insurance industry, what matters is taking in more premiums than you pay out in claims and expenses. We can see that Lemonade is improving its model when we analyze its loss ratio. Lemonade calculates the loss ratio as the ratio of losses plus loss adjustment expenses minus amounts paid to reinsurers divided by net premiums collected.
Lemonade's long-term goal is to achieve a loss ratio of about 75% consistently. This means that its losses equal roughly three-quarters of its total premiums. Last year, Lemonade's net loss ratio was about 89%, an improvement from the prior year's 97%.
By all measures, Lemonade's fourth-quarter results were pretty solid. In the quarter, Lemonade's revenue rose by 31% year over year while its net loss shrank from $63.7 million to $42.4 million. It surpassed the high end of its revenue and in-force premium guidance, and its net loss ratio improved to 78%.
Chart by author.
Lemonade has made some good progress, but the shares still fell 27% the day after its earnings announcement. One cause of concern for investors was the company's expectations for the upcoming year. The company's forecast for revenue was lower than expected and it said it would ramp up growth again in 2024, which could cause expenses to tick higher and put pressure on profitability again.
Is it a buy?
Lemonade is an intriguing company leveraging AI to disrupt the insurance industry -- a significant challenge. When investing in an AI-powered company, it takes patience for it to accumulate the data and dial in the model.
During the past few quarters, Lemonade has improved its profitability and loss ratio. With the company reentering growth mode, it could see pressure on its bottom line. The next step is to see if it can scale up its model more without incurring significantly mounting losses.
Lemonade stock is down 91% from its all-time high and trades at 2.7 times sales, near the lowest end of its valuation since the company went public. The company is making strides but still needs to execute to achieve consistent profitability. With that in mind, now may be a good time to buy for investors with a higher risk tolerance who are willing to hold for the long haul.
