Artificial intelligence (AI) has taken heart stage, capturing consideration with its transformative potential throughout varied industries. With the launch of OpenAI’s ChatGPT, we have seen how AI can redefine the future.
Extra firms are adopting AI, too. In accordance to a McKinsey survey, 65% of companies repeatedly use generative AI, which is twice the fee in contrast to one yr in the past.
Lemonade (LMND 4.06%) has been a front-runner in leveraging AI to upend the insurance coverage trade. Its aim? To simplify every thing for purchasers, from getting quotes to submitting and settling claims.
Nonetheless, it hasn’t been all clean crusing. As Lemonade experiences fast development, fine-tuning its risk-pricing fashions stays a key problem. However, the firm has made notable strides throughout the previous few quarters, however is it sufficient to make the inventory a purchase right now after it rose greater than 70% this yr? Let’s look nearer at its journey and the place it could go from right here.
Lemonade is making strides in enhancing its underwriting
Lemonade’s development trajectory is tough to ignore. Throughout the previous a number of years, this progressive insurer has broadened its choices past its unique product of renters insurance coverage, to householders, automotive, pet, and life insurance coverage.
The numbers communicate for themselves: Lemonade now has greater than 2.3 million clients, a considerable soar from 1.9 million only a yr in the past, a 16.6% rise. When it comes to premiums, the firm has earned $213 million in the third quarter, up from $173 million final yr, a 23% enhance yr over yr.
Nonetheless, one metric that caught my eye was the web loss ratio. At 81% for the third quarter, it has proven enchancment from final yr’s 88%. Whereas Lemonade additionally tracks a gross loss ratio, I lean towards the web loss ratio as a result of it accounts for essential reinsurance bills. Reinsurance is essential; it is like insurance coverage for insurers, shielding them from catastrophic losses that would doubtlessly jeopardize their stability. By together with this in the equation, we get a fairer threat evaluation.

Chart by creator.
Insurers have benefited from favorable traits in 2024
Though it is encouraging to see the loss ratio enhance, it is price noting that this pattern could possibly be extra reflective of broader trade actions quite than particular enhancements on Lemonade’s half.
Final yr was tough for property and casualty (P&C) insurers, which misplaced $24 billion collectively. Issues have improved industrywide; in the first half of 2024, P&C insurers had a $3.8 billion underwriting acquire, which has undoubtedly been a tailwind for insurers like Lemonade.
And, despite the fact that it’s shifting in the proper route, Lemonade continues to lose cash. In the third quarter, Lemonade reported a web lack of $67.7 million, in contrast to the $61.5 million loss in the earlier yr.
LMND Revenue (Quarterly) information by YCharts
Is Lemonade inventory for you?
Lemonade is on an encouraging path because it makes strides in enhancing its loss ratios. Though it hasn’t fairly hit administration’s goal loss ratio of 75%, it is considerably nearer than at any time throughout the previous two years.
This pattern exhibits that the firm is enhancing its AI fashions and turning into more proficient at assessing the dangers related to its insurance policies. Aggressive traders might think about the enchancment in the loss ratio as a constructive signal of issues to come and construct a small place in the AI insurer.
That stated, the total insurance coverage panorama has improved, with many firms reporting decrease loss ratios. Given this backdrop, I am taking a extra cautious method and can proceed monitoring its web loss ratio and profitability earlier than shopping for the inventory.