With its most recent earnings report, Lemonade ( LMND 4.94% ) still has a lot to prove. In this video clip from “The Future of Fintech” on Motley Fool Live, recorded on Feb. 24Fool.com contributors Matt Frankel, Jason Hall, and Danny Vena discuss how it may take more time for the company to find its sweet spot in the insurance industry.
Matt Frankel: I see a couple of questions, is Lemonade a buy?
Jason Hall: Maybe.
Frankel: Being that I already have a substantial position, I’d be hesitant to put new money into it right now, but I’m not going to sell. They have a lot to prove and one point I made in an article I wrote this morning, that 96% loss ratio, this is a small insurance company and they’re losing that much, so if they had a few billion dollars of premium in force and had a 96% loss ratio, something like that could be devastating. So, I really want to see them figure this out, especially before they get much larger because those loss ratios will get magnified. Danny.
Danny Vena: The thing that I learned from this, actually, and I’m not a Lemonade shareholder because Jason was very convincing last year in saying they needed to understand underwriting, and insurance is a business that I don’t typically follow, and so the lesson that I learned when we were talking about this yesterday, and I was looking at the results, and I saw revenue numbers, and other numbers that I thought, well, this doesn’t look all that bad, maybe the stock is down because of the guidance.
It wasn’t until you guys pointed out the loss ratio that it became clear to me why the stock was down so much, so I think it’s important to listen to the people who are experts in the field or at least know it well enough to Understand what it is the company is doing and why the stock is falling the way it is.
Just from my perspective as a guy who is not an insurance expert, it’s still clear to me that we don’t know enough about how this platform that they developed is going to perform over the long term, in terms of the insurance underwriting and in terms of whether or not it’s going to be a better mousetrap in the insurance industry when it comes to using that AI to better develop these policies or to sell these policies to people. I think that’s important information, and like I said, I learned something and what I learned was how much I don’t know about the insurance industry.
Hall: I don’t want people to look at the stock price today and just assume that it’s lower-risk now than it was a year ago. I think that there’s an argument that, because they haven’t proven the underwriting side, the risk might be a little higher.
The risk-adjusted opportunity looks really good because you can buy the company for a lot lower valuation, but if they have to execute. If they don’t, you can still lose 100% of your investment, right Matt?
Frankel: You’re essentially buying the net cash on the balance sheet, you’re getting the business for free at this point.
Hall: The enterprise value is $300 million, so you take the cut right after you take the cash out.
Frankel: That was before today’s drop.
Hall: No, that’s about right now.
Frankel: Is that about where it is right now?
Hall: That’s about where it is right now. But yeah, either way, that’s incredible. It was $9 billion a year ago, it’s $300 million today.
Frankel: So, Vihan says, “There are monsters like GEICO [a part of Berkshire Hathaway ( BRK.A 2.14% ) ( BRK.B 2.16% )] and State Farm, which Jason’s brought up with the auto insurance, who have been in this industry for a long time, should have AI in place, how can Lemonade compete in this space? Unless there’s a super offer from competitors, I might think of switching.”
I’m going to put this in Slido right now. I interviewed Lemonade’s co-founder and CEO, Dan Schreiber, not that long ago, and he addressed this really well, about how legacy insurance companies, their shareholders have certain expectations of their business model. It would be a dramatic pivot to not only build out the AI, which a lot of them do use AI to some degree, but to pivot to the reinsurance model that Lemonade uses, the completely automated model they use, it would be a giant pivot in their business, and with a company that has, say, $20 billion in premium in force, that would be a very heavy lift. It would just be too much for a pivot is the short answer. But I’d encourage you to take a listen to the interview I just posted in Slido.
Hall: I think it’s important to remember too that yeah the five largest insurers have like 60% of the market. You’ve got State Farm, GEICO, USAA, Progressive ( PGR 0.33% ), Allstate ( ALL 0.32% ), I think those are the five largest. But there’s dozens and dozens that have that remaining 40% of the market, which is a couple hundred billion dollars.
It’s a lucrative market that there is an opportunity to take share. What do they have in force now? Less than $600 million? You’re muted, Matt. It’s not Monday, you’re not allowed to mute on Thursdays, it’s just Mondays.
Frankel: There you go, they have about $400 million.
Hall: There you go. If they figured out, this could be a massively rewarding investment, even if they just get to a few billion dollars. That’s the thing, and still, be well outside of the top ten. There’s an opportunity.
Frankel: Dan Schreiber said their long-term plan is to 10X and then 10X again, and at that point, they would be a mid-level insurance company.
Hall: There you go.
Frankel: They are very small today, $380 million, I think it is in force premium, is not very much in context, but they operate in relatively inexpensive insurance markets right now like renters insurance. As they build out the car insurance business, hopefully, that will get bigger much quicker and hopefully, they could figure out how to do it profitably. That’s the million-dollar question.
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