This AI stock is disrupting the insurance industry
In this episode of The five, Jason Hall, Auri Hughes and Taylor Carmichael discuss their favorite fintech stocks. Jason names small-cap company Lemonade (NYSE: LMND), which restructured financial incentives for insurance to make the experience of buying and using a policy faster and more enjoyable for customers. This is the start of this company’s adventure, but Jason is very optimistic.
This episode was recorded live on August 31.
Jason Hall: I’m telling you about a company that I’m more and more interested in, and I mentioned it, and it’s one of those specialists, but I think it’s a specialist in a gigantic market that companies like Lemonade have a great capacity to operate, and that is assurance. You think of Lemonade and its mission here, which is to really change the dynamics of how people view insurance companies and the relationship they have with them, and decouple a lot of the financial incentives. Because the bottom line is that the way insurance companies have been built forever is to have someone agree to insure something and then give money to the insurer, and then, when people go to pay the claims, there is a very clear financial incentive not to pay their return. Don’t pay for this claim, find a way not to pay this claim.
What Lemonade has done is, again, decouple that. They’ve built this model where the income comes in for the premium, and the company has a fixed percentage of it, that’s their take. They take that and then look to use reinsurers to insure additional liabilities and additional risks beyond the percentage they keep, that float they keep.
Again, the idea is that if someone files a claim, it doesn’t help Lemonade, it doesn’t keep money on its books, for [not] pay this claim. On the other side of the relationship, one of the things Lemonade does is when a member signs up, they ask for a favorite charity. What Lemonade does is that at the end of each period, the funds left over after paying claims and after paying reinsurance, they split up and donate to all the nonprofits that people identified. that they wanted a portion of those remaining profits to go to. If I like Audubon Company or whatever my charity is, and something happens to my laptop and it breaks, I’m not necessarily going to try to overestimate the cost of this insured claim, because I know that means my favorite charity is also a bit screwed up here too. The idea is to improve these alignments between all the different stakeholders. And so far, it looks like it’s working.
The company has also improved the customer service experience, things like using technology and to some extent AI to issue policies faster, pay claims faster, and remove a lot of those points. friction system to facilitate every aspect of the relationship.
Focusing on the younger cohorts – this is all done through their app or their website, so you’re not going to go to an insurance agency and sit with an agent who offers you insurance from two or three companies, maybe one or two that there are better financial reasons for him to sell you one of his policies. It makes the experience easier. Lemonade has more control over the relationship, and it sounds like how so many of our other financial and business relationships happen, especially for the younger generations. You develop that relationship with someone when they have an apartment and they need home insurance, and then when they buy a house, you’re the first person they’ll talk to about home insurance. They regularly add more and more different lines, it is this diversification which, I think, is an opportunity in their company.
I will say this, the stock, the market cap is less than $ 5 billion. I struggled with Lemonade when it was $ 7 billion, $ 8 billion, $ 10 billion in market cap, but at $ 5 billion, I absolutely love this company. I think he has incredible prospects of becoming a $ 20 billion company, a $ 50 billion company in 10 or 15 years. I think there is potential there, really really.
Taylor Carmichael: Jason, can I ask you? I looked at Lemonade for insurance actually, for auto insurance, and they don’t. I was wondering, do they have plans for this or is there a reason they don’t do auto insurance?
Room: I think it’s just that they are gradually unfolding geographically and in different lines. Relatively recently, the company added home insurance, and they’re really meaningful and thoughtful about how they deploy it. For example, we sold the house we are in now. We will be staying here for another month so we needed a tenant insurance policy to cover our belongings before we moved out. I have a quick rental policy and then the process for the house we are buying in another state, in which our current carrier does not operate. We are changing carriers. I went to their website and tried to get a quote for the insurance. We were looking at a few different houses. I could easily get a quote for one. The other house that was three kilometers away, they didn’t offer an insurance policy for it. The difference was the age of the house and a few little things that I guess were riskier. They are very specific about managing how they deploy the different types of insurance and the type of risks they want to take. The fact that they really think about the risks they take as they increase, I think that’s really important, because managing your risk as an insurer is the most important thing you do. you can do. If you are unable to successfully underwrite, you may have to charge more, even if you use reinsurance. Because you have to pay these premiums, and those premiums will go up if your underwriting isn’t good.
Carmichaël: Are they using AI to do this?
Room: I’m not sure exactly how they use AI in all aspects of their business, but they tout their AI and how quickly they can return a quote that says they, definitely, have access to the data they’re. able to analyze and use fairly quickly. To what extent is this driven by AI and machine learning I can’t answer, but they claim to use it.
Carmichaël: It sounds really interesting. Another question. When they find a reinsurer, doesn’t that just push the problem of non-reimbursement to another insurer? I guess the way it works is lemonade works in your corner because it doesn’t hurt their numbers, so they’re pushing this other reinsurer to do what’s right and do what’s right. This is how it works ?
Room: Law. You file a claim and sometimes they can approve the claims literally within seconds. It’s pretty amazing how fast they do it. And then they have a process with their reinsurers that they’re working on to get a full settlement on this. I don’t know exactly what it is – obviously with every reinsurer and every policy I’m sure it’s different. I think the most important thing for me, Taylor, thinking about all of this is that I’m curious as to how much there is about how they are able to respond today and in this young phase of their existence, if that continues to be the case. Will that still be true in a year or two, five years, or will their process change and evolve over time. I tend to think they’re on to something and they’re going to continue to be able to meet those expectations, but it’s their underwriting that’s really going to meet them.
Carmichaël: I guess the important thing is also to have a strong brand and customer loyalty. You make your customers happy … I don’t like changing insurance. If you catch these customers when they’re young … why did they choose the name Lemonade, anyway? Do you know this?
Room: Honestly, I don’t know the story. Auri, do you know this story by any chance?
Auri Hughes: No. This is a topic I need to get acquainted with – it became very popular overnight.
Carmichaël: It’s interesting, because I just found out the other day why Figs is called Figs. It’s because she loves figs, she loves fruit. Maybe they literally like lemonade.
Room: I wonder if you’re thinking of – you’re using insurance. Life just gave you lemons.
Carmichaël: Ah, there you go, Jason.
Room: I guess.
Carmichaël: I have arrived. That’s it. It is really good. Life, give you lemons, here’s lemonade. It’s actually quite smart. Maybe the AI found this.
Room: It might be. Machines tell us what to call them.
Carmichaël: HAL said, “Lemonade.” I can’t do my robot voice.
Room: I’m sorry you can’t do this, Taylor.
Carmichaël: [laughs] Did the stock give you … Jason, have you been in this for a while?
Room: I only have a small amount, and the stock at the moment has dropped significantly. In fact, let me share a graphic here. It’s market cap, but we can put a price here. Again, I was interested in the company throughout this, but the evaluation was only a big concern. I have bought quite a bit in this area a few times. I opened and then added a position. But I, again, continue to love this business and it is growing like crazy. They’re adding users, and they’re adding lines, and people are taking more and more different types of insurance. Pet insurance is an important thing that they started out with. That and rental insurance, I think, were the two big things they started with, but they’re adding more and more lines.
Carmichaël: I will add them to my watch list. You interest me in them now. I’ll watch them.
Room: Tom Gardner really caught me on this one, so that should tell you something.
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