Breaking Down Lemonade's $300 Billion Market Opportunity – The Motley Fool

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One of the hottest fintechs to go public in recent years is Lemonade ( LMND -5.60% ). The budding insurance company saw its stock reach $188 per share at one point in early 2021. But markets have been punishing unprofitable growth stocks, and Lemonade is down 87% since then.
Lemonade is adding customers rapidly and expanding its insurance products, but it’s racking up losses. With the insurer pushing into the $300 billion auto insurance market this year, is now the time to buy Lemonade?
Lemonade looks to reinvent the way people buy insurance. The company leverages data and artificial intelligence (AI) to help customers shop for renters, homeowners, and pet insurance. It also uses chatbots to help customers buy insurance and settle claims in as little as three seconds.  
In an effort to scale up, Lemonade is adding car insurance to its lineup. That annual market is estimated to be about $300 billion — 70 times the size of the renters or pet insurance markets.  
Image source: Getty Images.
In a press release, Shai Wininger, the company’s chief operating officer, said that Lemonade Car “will use technology to handle emergencies and pay claims fast, will offer great prices to safe drivers, and will be especially attractive to drivers of [electric vehicles] and environment-friendly cars.”  
However, Lemonade faces fierce competition from legacy insurers. The top five largest auto insurers control 70% of the total market, with State Farm in the No. 1 spot with 23%.  
Source: National Association of Insurance Commissioners. Chart by author.
To accelerate its push into the auto insurance market, Lemonade announced the purchase of Metromile ( MILE -4.88% ) in November 2021 for $500 million in an all-stock transaction. Metromile should fit perfectly with Lemonade’s business because it also leverages big data and AI to write its policies.
Through last year, Metromile had written policies across eight states and is licensed to write policies in 49 states. Lemonade is also adding over 98,000 policies in force from Metromile, which last year had direct earned premiums, or premiums earned before accounting for reinsurance, of $111 million, representing a tiny fraction of the total auto insurance market.  
While Lemonade is adding Metromile’s customers, it’s also taking on a company that has struggled to turn a profit. Last year, Metromile’s direct loss ratio, or the percentage of losses to earned premiums, was 78%, higher than the loss ratio of its major competitors. These losses, coupled with over $102 million in sales expenses, resulted in Metromile losing $216 million in 2021, more than its $120 million net loss the year before.  
Source: National Association of Insurance Commissioners, Metromile 10-K Filing. Chart by author.
Both Metromile and Lemonade’s existing businesses have a way to go before becoming profitable. Last year, Lemonade lost $241 million as its net loss ratio, or losses and loss adjustment expense less amounts ceded to reinsurers divided by net earned premium, ticked up to 93%, exceeding management’s target ratio of 75%.  
The expansion into auto insurance will help Lemonade cross-sell to its existing customers. But while it’s adding customers rapidly, Lemonade will face growing pains as it figures out how to price its new insurance policies effectively — which is why I’m avoiding this stock for the time being.

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