Is this Lemonade’s secret weapon as a fintech stock?

Although Lemonade‘s (LMND 6.56%) the stock is down a whopping 82% since its IPO in July 2020, and this company undoubtedly remains a disruptive, innovative force in the giant insurance industry. By focusing on its core capabilities of data, analytics and technology, Lemonade delivers a superior user experience.

But besides the use of artificial intelligence (AI), which is fully integrated into Lemonade’s business model, there is another interesting development happening with this popular fintech stock. And it might just be Lemonade’s secret weapon when it comes to battling the big boys in the insurance industry.

Using technology to attract younger customers

It’s really hard to underestimate Lemonade’s huge gains so far. Existing customers can submit a claim and receive a payout in as little as three minutes. And new prospects can get a policy quote in as little as 90 seconds. Contrast this with the traditional industry setup, which often requires a visit to a brokerage office. This direct-to-consumer model has resulted in Lemonade growing revenue by 281% between 2019 and 2022, with its customer base totaling 1.8 million, nearly tripling over the past three years.

Speaking of the clientele, naturally, it skews young. Younger consumers are more digitally savvy than their older counterparts, a group that may not even be familiar with Lemonade’s products. According to the company’s Investor Day presentation, 22.1% of first-time renters insurance customers under the age of 35 signed up with Lemonade. This is a higher percentage than any other provider. State Farm is a close second, followed by GEICO and Progressive.

Set yourself up for long-term success

Attracting a younger demographic benefits Lemonade in a very important way. With a leading share in the market for new renters’ policy holders under the age of 35, the business can well attract customers who have never purchased an insurance product. And this has its advantages.

As these young customers grow older and reach significant life milestones, they are likely to continue their relationship with Lemonade, which has one of the best user experiences on the market. After renting an apartment, a person could get a pet, buy a car, buy a house and finally have children. This tier fits with Lemonade’s other products, such as pet, auto, home and life insurance.

Also, Lemonade says that less than 4% of customers use multiple products from the business, a much lower figure than the 60% rate at established insurance companies. The ability to cross-sell to existing customers, versus trying to find entirely new customers, is likely to result in much lower sales and marketing costs over time. This situation can bode well for the company’s long-term futureshould these customers stick with Lemonade as they get older.

Cracks in the business model

While all of this sounds positive, Lemonade is not without its problems. Most notable of these concerns is the company’s lack of profitability. The business posted a net loss of $241 million and $298 million in 2021 and 2022, respectively. The CEO said he believes the worst of the losses are in the past — perhaps an encouraging sign for shareholders.

To achieve positive net income, Lemonade tries to improve its gross loss ratio, which is the dollar amount of claims paid as a percentage of earned premiums (a lower number is better). “From a Lemonade perspective, a loss ratio well below 75%, if not below 70%, is the long-term plan and the long-term goal,” CFO Tim Bixby said on the fourth quarter 2022 earnings call.

However, the business’s gross loss rate was 90% in 2021 and 90% in 2022. The promise is that Lemonade’s AI-powered risk models may improve over time, but this hasn’t shown up in the numbers yet. As a result, management may need to think about updating how it underwrites customer risk.

Investors willing to accept these challenges, in favor of the superior user experience and younger demographic, may still be forced to own the stock.