does lemonade diverse a spot in your portfolio we'll tell you the bull and
bear case in about five minutes my name is Brian Feroldi and my name is Brian Stoffel
and i recently did an hour-long deep dive into lemonade's business model here's everything that
we found brian for those that are unfamiliar with lemonade what does this company do so this is an
insurance company and that ifp is in force premiums it just means where they're getting their
money in terms of premiums from their customers now right now renters insurance as you can see
makes up over half of the business homeowners insurance about a third pet and life insurance
have only recently been introduced and we know that car insurance is coming soon now it's worth
noting that the company has an interesting model in which they offload about 70 percent of their
insurance premiums in the risk and they sell that to re-insurers or insurers of insurance companies
and they only keep a small part for themselves they also make it so that they only keep about 25
of premiums to run their business and to turn a profit the rest of it goes towards paying out
premiums and if there's anything left from that they let their policyholders vote on where to
donate that to charity i think that's a really big plus for this company and is one of the many
areas in this company is appealing to millennials what really makes lemonade stand out from other
insurers is they're hyper focused on using ai to not only acquire customers but to pay claims they
have two consumer facing bots the first is called ai maya and that's a consumer experience bot that
helps you get on board and become a customer once you have an incident and you need to pay a claim
then you talk to ai jim and that's a claims paying bot that is not only getting smarter over time
but also has the world record with paying out claims in seconds that's highly appealing to
consumers well how is this company doing as you can see from the chart on the left this company is
rapidly attracting new customers as of the second quarter of 2021 they had 1.2 million customers
on their platform not only was that up hugely over the prior year but the majority of these
customers are brand new to the insurance market that means that they are primarily
millennials that weren't paying for insurance beforehand importantly a big part of the thesis
for this company is that's going to attract new users and convince them to upgrade over time and
we can see that happening with their premiums per customer so as they age and get married
buy a house have kids the amount of insurance that they buy from lemonade should continue to grow all
right and we also need to check out their loss ratio because this is just telling us are they
doing a good job of assessing the risk of each potential policy holder as you can see the loss
ratio is continually trended downward over time which is a great sign that this is working that
bump you see was from the texas freeze and texas was a major part of their of their sales when that
happened so that was a one-time blip importantly because they offloaded a lot of it to re-insurers
it didn't hit the company as hard as you might think the important thing is that it continues
that trend line downwards so what's the bull case moving forward well first off the company is
rapidly attracting new customers if they continue to do so there's no doubt in my mind this will be
a successful investment two we want to see this company continually upsell its customers over time
that means it has to keep them loyal and buy more product third the opportunity in insurance market
is enormous it's multi-trillion dollar industry and lemonade also has global ambitions that's
rare for an insurance company but we also need to check out the bear case so the first one is
the competition most of this market is dominated by huge insurance companies that have been around
for over 125 years meaning that they have staying power the second major risk we need
to be aware of is the fact that the company is simply unprofitable that's not surprising giving
where they are in their growth cycle but they need to move towards profitability and third
reinsurers they play a huge part in this business model as long as those loss ratios stay low
the company lemonade should have no problem offloading much of that to reinsurers but if
they don't that could be a problem and we need to make sure that the reinsurers are healthy as well
before we tell you how this company scored in their checklist wanted to give a shout
out to the motley fools flagship service stock advisor stock advisor has a history of thumping
the market's returns and both brian and i were paying members for many years if you're interested
in giving stock advisor a try fifty percent off visit google.com for realty all right brian how
did this company score on our checklists well for me it got a 65 which is a pretty good score given
that this company is still new to the mark the thing i punished it for were financials mostly
it was a low gross margin it was unprofitable and it was nowhere close to providing free cash
for me it got a nine and a half and part of that is because i don't penalize them for the
same things you do but i was also generous when it came to the moat it really comes down to the
fact that they need to prove that they do have a brand that millennials will flock to and that
they will stay with it and buy more insurance as time goes on if they can do that they deserve this
score if they can't they don't so what should investors watch moving forward well the first
thing to keep an eye on is premium per customer that metric will tell us if lemonade is doing
a good job at keeping its customers and upselling them over time second we need to watch those loss
ratios as we've seen they were trending in the right direction they need to continue trending
downwards over time third when is this company going to generate profits and free cash flow
the company has the balance sheet to withstand years of losses if it wants to but eventually
for this investment to work out it's going to have to generate free cash flow and profits
overall both of us were very impressed with lemonade and we understand why this company is
growing so rapidly if it could become profitable and make this model work internationally the sky
is the limit for this stock if i were a millennial that would probably be where i would go too sure
well thanks for watching if you want to see our hour-long deep dive click the link you see on the
screen my name is brian ferraldi and my mission is to spread financial wellness my name is brian
stoffel and my mission is to minimize finances as an obstacle to wholehearted living brian's out