Eddie Murphy made lemonade famous in the 80’s when he imitated Elvis singing about the cool refreshing drink. Today, Lemonade is a three year-old company that offers renters, homeowners and pet insurance, mostly to people under 30, via AI driven apps. That seems somewhat exciting in the same way Ted Lasso’s trip to Europe was exciting but why would the stock of a semi-new insurance company rise 132% in the last month? Did apartments and homes suddenly stop having things go wrong? Did pets discover the fountain of youth? The company’s website encourages you to “Forget Everything You Know About Insurance.” OK, I’ll take that challenge. Here’s everything I know about insurance:
Old white men who still wear ties and carry briefcases work in insurance. They don’t have sex more than twice a month because that would be risky and insurance men don’t like to take risks.
Warren Buffet made a lot of his money in the insurance business because it’s one of the few industries that offer a predictable return. Or at least it did prior to global warming.
Insurance can be expensive but that’s mostly medical insurance. Auto and home insurance usually seem pretty reasonably priced but that’s largely because you set the payment to automatic bill pay and forget about it.
GEICO ads are consistently funny.
When it’s time to be reimbursed for damage caused by an accident, fire or another calamity, you either hear one of two things. 1) My insurance company paid on time and the entire process was pretty seamless. 2) My insurance company made me jump through a million hoops, then nickel-and-dimed me every step of the way before they finally paid a percentage of the claim. Research shows that your race may have a lot to do with which experience is more familiar.
AI Is Everything
A lot has been written about Robinhood and its role in the gamification of investing. Lemonade doesn’t really gamify insurance but it does claim to make the process simpler and faster. Starting with graphically simple black and white line drawings, the app depicts a normal neighborhood, whatever that means, and proclaims it only takes seconds to sign up and minutes to be paid. The whole process is controlled by “Maya, our charming artificial intelligence bot.” According to the company, Maya can find the perfect insurance policy in 90 seconds and get your claim paid out in 3 minutes. I’m guessing Maya also loves the NBA, NFL and MLB and would love nothing more than to cook the perfect steak and pasta dinner and cuddle with me on the couch most nights as we gamble on sports. I’m trying to stay focused and stop myself from fantasizing too much about Maya. The only thing more appealing than a new AI bot may be the potential cost savings. Here’s the way Lemonade explains it.
I went through the process on the app and was quoted a price of $48 per month to insure my current home.
“That would save us $66 a month,” I said to my wife, who ignored me because few things in life interest her less than home insurance.
“Sounds good babe,” she said
“But that can’t be right,” I said to myself. “If they can insure our home for less than half the cost of what we currently pay, there’s no way that can be profitable.”
Turns out, they can’t. But they do come fairly close. After waiting three days for a Lemonade representative to get back to me, I asked them to compare our current coverage amounts to Lemonade’s offering. For example, if someone is injured in our home, we have $25,000 of medical coverage to pay their hospital bills. The most Lemonade offers is $5,000. For personal property, Lemonade tops out at a little over $300,000 whereas our existing policy comes closer to half a million. There’s differences in “dwelling” and “dwelling extension” and earthquake coverage is included in our existing plan but is additional with Lemonade and is only offered in California and Arkansas. (is Arkansas big earthquake country?)
Lemonade’s other big selling point is charity. After the company collects fees and pays claims, any leftover money is given to charity. The company is a Public Benefit Corporation and certified B-Corp. They say that “social impact is part of our legal mission and business model – not just marketing fluff.”
That does count for something. I’d rather the excess money I pay in monthly premiums go to charity instead of lining the pockets of wealthy insurance executives. But is an app that uses AI to generate quick insurance plans enough to justify a 133% rise in Lemonade’s stock price over the past month? The Motley Fool believes so. They recently recommended Lemonade as a long-term buy because of its groundbreaking work with AI and its alignment with customers financial interests.
“The other pillar of Lemonade’s customer-centric focus is in how it aligns its financial interests with those of its policyholders,” explained Motley Fool founder Tom Gardner. By obtaining reinsurance for such a large portion of its potential exposure, Lemonade is just as interested in getting its reinsurance providers to pay out claims as the customers are. Once customers see that, they’re more likely to stick with the company — and when their insurance needs grow later in life, that builds cross-selling opportunities to further accelerate Lemonade’s expanding sales.”
Create a cool app. Use AI to make buying insurance quick and easy. Attract a young audience, wait for them to get older and then sell them a bunch of other products when they’re too lazy to switch insurance. Sounds good to me. I bought shares at $77 and will hold them for a decade, alongside my existing American Family insurance policy.
