September 23, 2022
  • September 23, 2022

How auto insurance could drive up the lemonade stock

By on April 3, 2022 0

DDealing with insurance companies can be unpleasant. Purchasing a policy is quite simple thanks to the internet, but filing a claim still requires human interaction most of the time, which is part of a long process that you have to go through before receiving your payment.

insurance technology company Lemonade (NYSE: LMND) uses artificial intelligence (AI) to improve the customer experience and it has attracted more than 1.4 million customers, most of whom have migrated from its much larger competitors.

The company operated in four main insurance segments before introducing auto insurance in 2021. Here’s why this addition could be a game-changer for the company.

Image source: Getty Images.

An expanding opportunity

Lemonade’s AI-driven online bot, Maya, can provide a quote for an insurance policy to a potential customer in as little as 90 seconds. And when it’s time to make a claim, you can be approved and paid in three minutes or less, without human intervention in many cases. Leveraging technology in this way unlocks the potential for unprecedented scale, opening the door to expanding into new markets.

Prior to entering the auto insurance business, Lemonade’s four insurance segments were homeowners, renters, term life and pets. Together, they represent a total opportunity in the US market of $1.1 trillion this year, but term life insurance makes up the overwhelming majority, with renters and pet insurance contributing only $7. billion dollars combined:

A pie chart illustrating the size of the insurance market.

Data source: IBIS World. Table by author.

It’s a good start for a future insurer, but there’s no denying how focused this image is. The addition of Lemonade’s new auto insurance business is therefore very welcome, as it provides an additional $316 billion of potential market opportunity.

A pie chart illustrating the size of the insurance market.

Data source: IBIS World. Table by author.

But that’s not all. In 2020, there were approximately 228 million licensed drivers in the United States, and up to 87% of them have a car insurance policy – that’s a pool of 198 million potential customers for Lemonade. Given that the company had 1.42 million customers at the end of 2021, a 43% year-over-year increase, the potential for growth by adding auto insurance is staggering.

Auto insurance could significantly increase lemonade stock

The benefits are already there. During the fourth quarter of 2021 in Illinois, the launch of Lemonade auto insurance generated three times the sales of the launch of Lemonade pet insurance during the corresponding period. And 75% of car insurance customers also purchased an additional Lemonade product, which provides incredible synergies.

Lemonade’s revenue rose 36% to $128 million in 2021 from 2020. But the company lost $246 million in net income, reflecting a significant increase in expenses as it continues to expand his activities.

Entering new segments like car insurance isn’t cheap, and it takes time to train AI models to accurately price insurance premiums. This is why Lemonade bought an AI-powered insurance broker Metromileas this company has insurance licenses in 49 US states, plus a decade of driver data, dramatically accelerating Lemonade’s transition.

In 2022, Lemonade estimates that its revenue will reach $203.5 million, a growth of 58%, which represents a strong acceleration compared to last year’s result. This highlights the expansion of the business, and while losses may linger for the next few years, it’s important to focus on price: Lemonade’s truly huge market opportunity.

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The Motley Fool owns and recommends Lemonade, Inc. Antoine Di Pizio has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.