Many investors soured on innovative insurance company Lemonade (LMND -3.86%) when it didn't live up to its initial hype. But it's come roaring back, and all of a sudden, there's huge interest in it again. And it's only the beginning.
Here's why investors should pay attention.
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AI is changing insurance
Artificial intelligence (AI) became a top trend on Wall Street about three years ago, but Lemonade has been using it to redefine insurance for almost a decade now. AI in insurance makes a lot of sense, since the industry relies on algorithms, and AI and machine learning can analyze the data more efficiently than humans.
Lemonade has grown by leaps and bounds over that decade. In the second quarter, for example, in-force premiums increased 29% year over year -- an acceleration -- and customer count increased 24%.
Obviously, Lemonade isn't the only insurance company leaning into AI today. But its management says it has an advantage over both newcomers and old-timers. In terms of new competition, Lemonade has a leg up because it already has a decades-worth of data to inform its algorithms. The loss ratio is somewhat correlated to the age of a product, and the older and more refined the product and the data, the better the ratio.
For example, home insurance, Lemonade's oldest product, had a 60% loss ratio in the second quarter, lower than 67% for the company total. It will take time for new competitors to catch up, and in the meantime, Lemonade widens its advantage.
As for older companies, they weren't built on a digital substrate like Lemonade was. Unifying all of their disparate systems will be no simple matter. The competition's models were built differently and designed for a lot of human intervention, and there's no easy way to convert all that to the kind of interconnected model that Lemonade has utilized from the start.
Lemonade stands out, and now it's also getting closer to profitability. When it reaches that stage, it will have a clear advantage over its various competitors. That's good news for investors.
