Why Lemonade Could Be the Next Multi-Bagger in Insurance

Why is Lemonade Insurance generating so much excitement among investors? In this article, I'll break down the three key reasons why this disruptor could become the next giant in the insurance industry.

If this is your first time hearing about the business, Lemonade is an insurance company for the property casualty market. Similar to Progressive, Geico, or State Farm, they sell insurance for renters, home, pet, car, and a little bit of life.

Here’s a quick snapshot of Lemonade as they stood on Investor Day in November 2024:

As shown above, Lemonade serves over 2.3 million customers across most of the US, with Renters and Pet insurance making up roughly two-thirds of their revenue.

If we look at their competitors and the insurance industry in general, it is ripe for disruption. The average age of the top ten competitors in the space are nearly a century old.

• State Farm - Founded in 1922

• Progressive - Founded in 1937

• Berkshire Hathaway & Geico - Founded in 1936

• Allstate - Founded in 1931

• Liberty Mutual - Founded in 1912

• Travelers - Founded in 1853

• USAA - Founded in 1922

• Chubb - Founded in 1882

• Farmers - Founded in 1928

• Zurich Insurance Group - Founded in 1872

Lemonade is the new kid on the block, founded in 2015, and is seeing impressive early results, having recently guided to 10x their business at investor day with a 30% CAGR for the foreseeable future.

So why could Lemonade be the next insurance multi-bagger? Here are the top three reasons:

Bull Thesis #1: Low-End Disruption

Low-end disruption is when a business goes after unloved market segments. Typically, these segments have low margins and it's very hard for legacy businesses to make money.

In insurance, the low end is pet and renters insurance. Let's take a look at why renters insurance is low-end and unloved:

Renters insurance is a very cheap product. It typically ranges from as low as $5 a month, with the typical average of about $15 to $20 a month.

Knowing the above, let's do some napkin math.

That's about $200 in revenue a year for a typical renters insurance policy.

Assume the average losses that are paid from policies are about 50%, so $100 a year.

Legacy insurers traditionally sign up older cohorts and customers. These customers often sign up via the phone, or in-person. That means they are interacting with human beings. Human beings who get paid for the time spent interacting. If a renters insurance customer spends hours on the phone calling back insurance agents to get a claim, much of that $100 a year in profit is eroded to $0.

This is in stark contrast to Lemonade, which is almost entirely digital.

Lemonade customers all sign up through their app, with AI Maya, a bot. And, whenever a customer needs to file a claim, they do so through AI Jim, also a bot.

Not only that, over 55% of Lemonade claims are fully automated, meaning they never need review by a person.

As a result, Lemonade has a much lower variable cost to serve a customer. This is how Lemonade competes through low-end disruption. They have a cheaper variable cost to serve customers, so they target the least profitable segment of legacy.

The only reason they are able to compete here is because they are extremely efficient. If Lemonade was an inefficient company, then scaling renters policies would mean they actually would become less profitable, not more.

In low-end disruption, businesses first compete for these low-end products. Then they move up market to bigger, more attractive margin businesses. The low-end isn’t the end goal, it’s simply a way to get their foot into the market, connect with a customer, and later upsell them to a higher margin high profit product.

This thesis is commonly explained through Clayton Christensen's acclaimed Silicon Valley book, The Innovator's Dilemma.

Bull Thesis #2: Taking The New Cohorts

The business that takes all the new customers, i.e., new cohorts, is the business of the future.

People used to do business in their local community, then they did business over the phone, then online, and now via mobile apps.

However, this change is not immediate. For example, you probably have an older relative who still signs up for things in person, at a branch or with an agent. That's because people are comfortable with whatever method of distribution was most popular during their time.

This is true in every industry. For example, look at television. Who is more likely to have a Netflix subscription vs. watch analog TV, young or older people? Twenty years from now, what do you think is going to happen to analog TV?

The same is true in insurance as it is in banking and shopping and everything else.

So who is winning the new cohorts in insurance? Lemonade is a mobile-first, completely digital experience. They pay claims digitally in as little as 2 seconds from when they are filed. Lemonade is also the #1 insurer in market share of first-time renters under the age of 35.

Here’s a chart from a few years ago from a survey by Google, showcasing Lemonade’s dominance in new cohorts.

As more Gen Z customers become buyers of insurance, they are more likely to sign up for insurance through the app store and choose Lemonade, just like they are to have Netflix instead of cable TV.

The same will be true of Generation Alpha and other generations to follow.

If you’re interested in learning more about how digital distribution is affecting businesses, you might also want to read my article on The Generational Shift in Distribution That Will Define the Next Decade of Winners.

Bull Thesis #3: The AI Advantage

Finally, we have the AI advantage of Lemonade. Lemonade is pursuing an AI-first strategy toward insurance.

• They are a 100% modern digital tech stack on the cloud.

• Because Lemonade is fully digital, every data point can be collected and interconnected to every other process.

• Lemonade actively pursues developing and using AI over hiring people.

This is almost impossible for other insurers to replicate.

For one, legacy companies are based around managing people and physical locations, not about managing AI and digital tech stacks. If you want a full detailed reason, read my article on $LMND Bear Case Debunked: Why Palantir AI Won't Save Legacy Insurers.

Here's an example showcasing how legacy is not prioritizing AI, as stated by the head of insurance at Berkshire Hathaway:

As we can see, legacy isn't making a concerted effort around AI.

The other reason is legacy has an outdated tech stack. Geico spent 20 years trying to update their systems onto the cloud, and just started repatriating to physical servers again.

Geico, for instance, also stated they have over 600 systems. These systems create technical bottlenecks for them (their words, not mine). These systems are on legacy coding, with millions of lines of code and are interconnected in unintuitive ways to other parts of the business.

Here's another quote from the head of insurance operations at Berkshire Hathaway:

We also have to consider that legacy businesses do a lot of their work off the tech stack.

For instance, customers can sign up for insurance at a branch in person or over the phone. They also can file claims with a person over the phone. This is opposed to Lemonade, where virtually all systems are done digitally, over the cloud.

It is a huge structural advantage for taking advantage of AI, where systems like customer acquisition can communicate 100% of known information to the claims process, cross-sales process, and more.

Lemonade has a long list of how it is using AI to automate systems. While these may not make an immediate boost in profitability of the business, as the business scales, their effect will be more transparent. The reason for this is fixed costs take up a bigger portion of expenses in the early growth phase of a company, whereas marginal expenses become a bigger portion of a mature business.

Here are some impressive ways Lemonade is utilizing AI:

• Lemonade uses AI-powered review for claims. For example, they review pet medical records to understand a pet's medical history with AI. This allows them to analyze and validate pet medical records with unmatched velocity and precision.

• 55% of Lemonade's claims are fully automated.

• 45% of customer tickets and 40% of email tickets are fully resolved with AI.

• Lemonade has developed an AI customer service call system where customers can resolve issues by talking with an AI representative, rather than a physical associate.

Lemonade reports as they increase automation through AI, customers report high customer satisfaction scores as AI is both more accurate and quicker, while less prone to error in solving customer issues.

While Lemonade is working toward becoming a fully autonomous organization, building AI customer service processes, companies like Progressive instead announced hiring 12,000 associate employees this year to assist with growth.

This is in contrast to Lemonade, who is also scaling near 30% year-over-year in premiums, but with headcount only increasing a few percent year over year.

Take a look at their premium growth vs op-ex (excluding sales & marketing) expense growth:

In fact, Lemonade believes they don't need to increase headcount much at all over the coming decade. They have guided to approximately $10 million in IFP and $4 million in revenue per employee.

Meanwhile, the industry average is around $1 million in IFP per employee. That gives Lemonade a 400% to 1000% efficiency advantage when it comes to headcount per premium!

In Summary: The Lemonade Insurance Bull Case

These three factors: low-end disruption, the new cohort advantage, and AI, make Lemonade a compelling investment thesis.

As we can see, Lemonade:

• Has the lowest variable cost in handling claims (once at scale) due to its inherent digital structure.

• Is taking the highest share of first-time cohorts for the categories they compete in.

• Is best structured as an organization and tech stack to fully leverage AI.

As of the time of writing, Lemonade is only a $2 billion market cap company. Compare this to Progressive, which is valued at over $160 billion, or over 80x what Lemonade is today.

While Progressive is the leader today, Lemonade is primed to be the leader of tomorrow. At less than 1.5% of their largest competitor's market cap, the potential is enormous. This could be a massive multi-bagger investment in the making.

If you enjoyed this article, consider subscribing for more coverage and drop a comment below!

ALSO READ: Geico's Wait and See AI Strategy Revealed at Berkshire Meeting Puts Lemonade Ahead

Our content is provided subject to our Disclaimer.