Will this beaten action bounce back? 3 things to know

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Lemonade (NYSE: LMND) looked as refreshing as the drink after debuting as a public company in July 2020. But after an initial push that took it to a high of $ 163, this next-gen insurance company may have being left a bitter taste in the mouths of some investors because the stock fell.

Lemonade is down about 45% this year, trading at around $ 67 a share. Is this stock worth keeping or should you throw it away? Here are three things to know about lemonade that can help you make up your mind.

Image source: Getty Images.

1. Lemonade has a different business model

Lemonade sees itself as a disruptor in the insurance industry. The company is truly a tech company that provides insurance, and everything is done through its app – bill payment, customer service, account management, filing claims, and collecting benefits. Lemonade offers insurance to renters, homeowners, term life and pets, although it plans to branch out.

Lemonade does things a little differently from traditional insurers. With most insurances, the customer pays a monthly premium, and this premium is used to pay claims, if necessary. The insurer keeps what is left as profit or reinvests it.

Lemonade also charges a monthly fee or a premium, which is split into two buckets. A bucket, about 25%, covers administrative and operating costs, with any remaining money serving as profit. The other compartment, around 75%, is used to cover claims. If this money is not fully used at the end of the year, the excess is donated to the charity chosen by the client. By the end of the second quarter of this year, Lemonade had already donated $ 2.3 million, double the amount of last year.

This helps create a high degree of trust and loyalty as Lemonade’s Net Promoter Score (NPS) is 47, which is off the charts for the insurance industry, where the average is in single digits.

2. Lemonade uses AI to collect data and write policies

Another way Lemonade differs from the average insurer is that it uses artificial intelligence to collect more efficient pricing data and policies. An AI-powered chatbot only asks a dozen questions of new customers, but this interaction allows Lemonade’s AI to collect around 1,700 data points about the average customer. This is much more than for most insurance companies.

The more data Lemonade collects, the better its algorithms, allowing the company to better quantify and price underwriting risk. The better the underwriting, the lower the loss ratio, i.e. the percentage of premiums paid in claims. This, in turn, leads to lower premiums, as the risk is assessed more accurately.

In the second quarter, Lemonade had a gross loss ratio of 74%, which is close to the average for market leaders – around 72%. Aside from the first quarter of 2021, where it peaked due to the Texas freeze, Lemonade’s ratio has steadily declined over the years.

Another benefit of Lemonade’s AI is that it doesn’t take long for customers to purchase insurance or file claims. Using chatbots, it takes around 90 seconds to get insured and around three minutes to file a claim and get paid, in most cases. This reduces the need for staff and overhead, although more complex complaints can be passed on to employees and take a little longer.

3. Lemonade goes into auto insurance

The auto insurance market is fiercely competitive, but it’s also huge: at $ 300 billion, it dwarfs the pet, tenant, and homeowner insurance market.

Lemonade is entering this market with Lemonade Car, which it plans to launch next year pending regulatory approval.

It will collect data on how customers drive through the Lemonade app on their phone

, measure speed, braking patterns, fuel consumption, crashes and a host of other data points. This will help the company to tailor policies based on driving performance. This type of data collection is called telematics, and while other companies are using telematics, Lemonade believes their technology and processes stand out, allowing them to collect more data, which leads to better subscription.

Another key part of adding auto insurance is that it will allow Lemonade to bundle services in the same way as its competitors. Managing Director Daniel Schreiber, speaking on the company’s second quarter earnings call, said the combination will help drive customer loyalty, which is now around 82%:

We are quite optimistic that the car-to-home package will be an important driver of value. It is very common for … customers to bundle home and car together which our competitors are able to offer and which we have not been able to do to date. So, adding automotive products should… allow us to improve owner and tenant conversion and retention rates and accelerate business growth.

So what does this mean for this slaughtered stock? Lemonade has a long way to go before it becomes profitable, which is not uncommon for a start-up. But the gains it has made in attracting customers and improving its gross loss ratio, as well as customer retention, indicate that its model is working. And auto insurance could be a game-changer for Lemonade. Expect volatility, especially as it begins to ramp up auto insurance business, but the long-term view for this stock is pretty good.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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