Here’s Why Lemonade Stock Is Worth a Look Right Now

Insurance disruptor Lemonade (NYSE:LMND) hasn’t exactly been a great performer recently, with shares down about 45% year to date. However, in this Fool Live video clip, recorded on Sept. 23, Fool.com contributor Trevor Jennewine discusses why he’s still bullish on the company’s long-term growth potential. 

Trevor Jennewine: I’m going to start with Lemonade. For anybody that’s not familiar with the company, Lemonade is a tech company that sells insurance. That sounds a little bit strange. Before I jump into what makes Lemonade different, I want to point out a few things about traditional insurance companies. Most of the big players in the industry were founded about 100 years ago or longer, and of course, they’ve made updates over time, but they still weren’t built to capture the volume and variety of data that modern technology can produce.

For that reason, their businesses that are highly dependent on human workforces. For instance, agents and brokers help consumers buy insurance, actuaries set premium prices, and adjusters handle claims. Lemonade does things a little bit differently. Its digital platform was built for those types of data, and it relies on artificial intelligence to make its business more efficient in a number of different ways.

For instance, when you buy insurance or file claims, you interact with AI-powered chatbots, and this accomplishes two things. It removes friction from the onboarding process, or it creates what management calls the delightful digital experience. It also allows Lemonade to capture a lot of data. In fact, management believes its platform captures 100 times more data per customer than legacy systems. That includes all of the data points that you would capture with the traditional homeowners insurance application.

There are other types of data in there, too, for instance, how long do you spend looking at each individual question or do you answer them all very quickly? Do you linger on any particular one? Are you buying insurance in the middle of the night, or is it during the day? Are you buying insurance from a desktop or mobile device? Those data points may seem unrelated, but when you put them all together, Lemonade estimates the collect about 1,700 data points per person.

So when you put all those data points together, the idea is that a pattern will emerge over time and so Lemonade can correlate its datasets with the risk of a claims payment. Over time as Lemonade collects more of that data, its AI models become more intelligent, and the idea is that helps Lemonade quantify risks more precisely. That translates into better underwriting and fraud detection, ultimately meaning that Lemonade should pay out less on claims. The company should have a cost advantage.

To measure this, investors should pay attention to a metric called gross loss ratio. This is just the percentage of premiums that are paid…