OPTO Sessions

LMND Stock: The Investment Case for the Lemonade Share Price

Digital insurer Lemonade is shaking things up in the insurance sector. Tim Bixby, the company’s Chief Financial Officer, joins OPTO Sessions to highlight why he believes the insurtech is a sensible bet for forward-thinking investors and how its understanding of big data and artificial intelligence is equipping it for success.

Lemonade [LMND] has “a desire to be prepared for the world that is coming”, one which is “now accelerating dramatically with generative AI”, says Tim Bixby, the firm’s Chief Financial Officer, on OPTO Sessions this week.

Founded in 2015, the disruptive insurer has long been ahead of the curve in insurance, a centuries-old sector that sometimes feels stubbornly resistant to change.

The ‘insurtech’ firm offers attractive premiums via a mobile app and online platform that’s heavy on chatbots, fast and simple for customers to use, and, according to its website, “hassle-free”.

Crucially, artificial intelligence (AI) is at the heart of its cutting-edge approach.

The Insurance Information Economy

Key to the case for investing in Lemonade, says Bixby, is the understanding that insurance companies hold something ever-more valuable in the digital age: an “extraordinary scope, density and volume of data. “For centuries, insurance companies have arguably been the keepers of vast troves of data. But over the last few decades, that’s really shifted to Silicon Valley: to the Googles [GOOGL] and Facebooks [META] of the world. But the opportunity is still there.”

He gives the example of customer data around driving behaviours, extracted from Lemonade’s car insurance policies: “For nearly 100% of our car customers, we capture nearly 100% of their driving data.”

By contrast, “The most adept legacy players in the car industry — even the most advanced providers like Progressive [PGR] — are really only capturing a very small subset of their customers’ data.”

Lemonade can use such data sets to “be more effective and manage claims in a smarter way”, as well as refine pricing schemes. “Every day, we get a little bit better at pricing that individual risk in that individual customer.”

“We can enable a lower price and still make a profit”

This optimisation helps Lemonade to balance profit potential while benefitting customers with lower premiums. “For example, we’re already seeing really impressive loss adjustment expense or the cost of managing claims. We can compete with the largest incumbents in terms of that metric already.

That enables Lemonade to service its customers “more profitably”, begging the question: “Do we want to return some of that benefit to the customer in the form of pricing… or, do we want to generate a better expense or loss ratio for Lemonade? We make that choice.”

With its renters’ insurance offering, for example, Lemonade has chosen the former: “We can enable a lower price and still make a profit.”

Digital Natives

Lemonade offers something else invaluable, says Bixby: “100% of our customers are digitally enabled, digitally acquired. They have an app downloaded, they’ve come to the website.

“We’re starting with an advantage: 100% of our customers in a single platform.” By contrast, app users are only a subset of legacy players’ customer base.

“In insurance, there’s a human aspect that you don't want to get away from”

Then there’s Lemonade’s ever-expanding use of AI, which both safeguards its business and serves its customers online. Already in 2018, Lemonade was generating fire and storm warnings by leveraging AI and open-access NASA satellite data. In addition, Bixby points to car insurance once again. AI can assess patterns of driving behaviour and risk that go beyond “things that are obvious, like aggressive braking and speeding… AI can tell you how those patterns fit together and drive a better understanding of the customer and their risk, and therefore pricing, that wouldn’t necessarily be intuitive to the human underwriter.”

Additionally, Lemonade uses a generative AI framework that handles approximately 20% of customer emails, according to Bixby. He concedes this may be enough: “In insurance, there’s a human aspect that you don't want to get away from”. However, what he terms Lemonade’s “amazing user experience” is achieved in part “by reducing costs, by providing better, faster service at a lower cost. In many cases, that’s due to automation.

“If we can get the customer what they need faster, in an automated way, that can create customer delight.”

Financially Sound Future

Lemonade, which was listed on the New York Stock Exchange in July 2020, is on the path towards profitability, though challenges remain. Amid rising inflation and difficulties filing for new approvals with regulators, Bixby acknowledges a recent “notably tough environment”, especially for young companies.

But there is light at the end of the tunnel. “The last two or three quarters have really cemented our confidence that the worst of the headwinds are behind us.”

Central to Lemonade’s attractiveness as an investment prospect is its ability to grow its customer base, something the latest figures suggest it’s managing well.

Lemonade achieved 20% year-over-year growth in its in-force premium for Q4 2023. Bixby says it’s aiming to “accelerate that growth to the high 20s over the course of 2024”.

Meanwhile, Q4 revenue leaped 31% year-over-year. “One of the nice aspects of Lemonade is we can grow and become more efficient and improve our loss ratio. It is typical in the insurance business you get to choose one or two of those; it’s hard to do all three.”

Lemonade operates across multiple continents — also rare in insurance — with a presence in Europe, including the UK, and 50 US states.

“Each country’s a little different; in Europe, it’s much more common to shop around based on price comparison websites and things like that. That gives us a real advantage.

“Because when you’re in a market where you can rapidly adjust prices, we’re ideally suited for that with our platform and our data-driven approach.”

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