Lemonade achieved another strong performance with the help of artificial intelligence (AI).
Artificial intelligence (AI) is a new tool for most companies, but it isn't. lemonade (LMND -2.03%). The company has been using this technology to transform the insurance industry since 2015, resonating with consumers tired of traditional practices.
Lemonade uses AI to autonomously generate quotes, process claims, calculate insurance premiums, and even decide where to invest your marketing dollars. The result is an insurance platform that is (often) more convenient and cheaper for customers.
The company's stock is trading 89% below the all-time high it set during the height of the 2021 tech frenzy. While the valuation was a bit unreasonable at the time, the company has grown significantly by every metric since then. In fact, after the company recently announced its Q1 2024 financial results, the stock price instantly jumped 10% in after-hours trading.
Here's why Lemonade can maintain its momentum through the rest of May and beyond.
Recreate the insurance experience with AI
Lemonade had approximately 2.1 million customers at the end of the first quarter, an increase of 12.9% year over year. Research shows that it is very popular among younger consumers, including those who may be purchasing insurance for the first time. But the company has also lured many customers away from traditional, established big insurance companies, underscoring its appetite for change.
Considering Lemonade was founded just nine years ago and operates in only five countries: the US, Germany, France, the UK, and the Netherlands, adoption has been rapid. Lemonade currently offers only five products: renters insurance, homeowners insurance, life insurance, pet insurance, and auto insurance. In other words, the company has plenty of room to expand both its product portfolio and geographic footprint.
As I mentioned at the beginning, AI has been a big driver of our success to date. Lemonade's AI chatbot Maya can give a potential customer a quote within 90 seconds, and her other AI bot Jim can pay out a claim within 3 minutes without any human intervention. can. This is a welcome departure from the traditional claims process, which often involves multiple phone calls and long wait times.
But Lemonade's use of AI goes much deeper than customer experience. To more accurately price insurance premiums, the company uses Lifetime Value 6 (LTV 6), which predicts customer surrender rates, likelihood of claims, and likelihood of customers purchasing multiple policies. The model was announced in 2022. Additionally, we analyzed product and geographic market performance to help Lemonade pivot its marketing strategy more quickly. The company is currently using LTV 9, and the new version is more accurate than before.
AI also helps Lemonade manage core metrics such as the loss adjustment expense (LAE) ratio, which measures the cost of managing claims. While it is common in the insurance industry for him to have an LAE of 10%, Lemonade's LAE is only 7.6% thanks to a highly automated claims process. In fact, Lemonade was able to reduce its headcount by 11% over the past year, even as its insurance book soared 22%. This is a testament to the power of AI.
Increasing profits and reducing losses is the secret to making investors happy
Lemonade's premiums in force (total value of policies in force) hit a record high of $794 million in the first quarter, an increase of 21.5% year over year. At the same time, the gross loss ratio decreased by 8 percentage points to 79%, putting it on clear track towards the company's long-term target of 75%.
Total loss ratio measures the amount Lemonade pays out in claims as a percentage of premiums received, and 75% or less tends to be the sweet spot for successful insurance business. Lemonade's path to reaching that goal will be fraught with challenges as it takes time to reach scale, enters new countries and releases new products.
Lemonade's average premium per customer also hit an all-time high of $379 in the first quarter and has risen consistently over the past several years as more customers choose multiple policies.
Translating all of the above, Q1 revenue was $119.1 million, representing 25.1% growth compared to Q1 2023. Considering the company's operating costs only increased by 2.7%, Lemonade was able to reduce its net loss by 28.1% to just $47.3 million. .
Lemonade investors are focused on achieving profitability, with management currently projecting that it could become cash flow positive by the end of 2024. This is a departure from previous guidance that suggested Q1 2025, and is a key reason why Lemonade stock soared 10% after the stock rally. Its earnings report. This milestone ensures that the company can become self-sustaining without the need for further capital injections.
Why Lemonade stock is a buy now
As mentioned earlier, Lemonade stock is down 89% from its all-time high of $164. Investors drove the company's valuation to unrealistic heights in 2021 amidst the tech frenzy, but the subsequent decline in the stock price represents an opportunity given the strong progress of the company's underlying business. It might be.
Additionally, the lemonade opportunity in the insurance business is huge. The company has only scratched the surface of its addressable market, as the U.S. auto insurance industry alone is expected to generate $364.9 billion in revenue by 2024.
Based on Lemonade's trailing 12-month revenue of $453.7 million and current market cap of $1.3 billion, the company's stock trades at a price-to-sales (P/S) ratio of just 2.8. I am. This is almost the lowest level since the company went public four years ago.
Insurance is a product that most people buy forever, and Lemonade's focus on technology attracts a younger customer base that may have the highest lifetime value. Furthermore, the company has little exposure to the markets in which it currently operates, and there are many, many other markets it has not yet entered.
As a result, Lemonade stock could now be a great buy, especially after its strong first-quarter report.