Although it’s not an industry typically referred to as “hot” or "innovative," those two words could definitely describe parts of the insurance industry in 2024. Among the 80 largest insurance stocks trading on U.S. exchanges, only two have a negative total return this year.  On average, these stocks have returned 57% as of the Dec. 4 close, blowing the S&P 500 out of the water.

One company that has had a particularly good year is Lemonade (NYSE: LMND). Shares are up 186% as of the Dec. 4 close. So, what has the market so excited about Lemonade this year? I’ll provide an understanding of what exactly makes this insurance company different and answer that question. I’ll close by providing my view on this financial services stock going forward.

Lemonade: Bringing Innovation to an Age-Old Industry

Lemonade has become known for implementing the most talked-about technology over the past few years into insurance: AI. Despite the AI arms race among hyperscalers investing billions to further the technology, analysts have sometimes struggled to pinpoint the tangible benefits AI is creating. Personalized advertising, driven by companies like Meta Platforms (NASDAQ: META) and AppLovin (NASDAQ: APP), is one clear example.

Insurance makes a whole lot of sense as another area where AI can be highly beneficial. Insurance is about analyzing large amounts of data. By analyzing historical data, insurance companies attempt to accurately assign a probability to an insurance claim occurring. It also helps determine how much they would have to pay out if a claim occurs. Insurance companies know they will have to pay out some money for claims. But their goal is to, in aggregate, charge more in premiums and deductibles than they pay out in claims. This is how they make a profit.

They also have to keep their rates competitive so that customers will buy their insurance over another insurer. Calculating the right amount to charge based on these competing priorities is all about analyzing data. This is where AI comes in. Using AI can allow insurance companies to better calculate what they need to charge, maximizing profitability and potentially offering lower rates than the competition. This is a big part of how Lemonade uses AI.

Aside from helping to set prices, Lemonade is also using AI to lower its internal costs. The company sells 97% of its policies and pays 55% of its claims without human intervention. Since 2021, this has helped the company increase the value of its in-force premiums by 25% per year while only increasing headcount by 2% per year. These factors show how using AI can truly be a massive advantage in the insurance industry.

Recent Earnings and Investor Day Leave Markets Swooning

Lemonade’s shares fluctuated rather mildly through much of the year. But, they started to explode upward after the firm released fiscal Q3 earnings on Oct. 30. From that date, shares were up 146% as of the Dec. 4 close. Revenue growth of 19% came in solidly above expectations, and the company’s gross margin improved by a staggering 8% from the previous year. If Q4 goes as expected, the company will achieve positive net cash flow for the full year, a big achievement.

Markets also clearly liked what they heard at Lemonade’s Investor Day on Nov. 18. Shares rose 47% in the two days after the event. The company laid out an ambitious goal to grow the value of its in-force premiums from $1 billion to $10 billion. It’s looking to grow at around 30% per year, reaching this goal in eight to nine years.

Lemonade: Great Business, But Price Looks Frothy at Present

Overall, I am a big believer in what Lemonade is doing from a business standpoint. In my mind, legacy insurance providers need to watch out for companies like Lemonade that are truly innovating. I can see Lemonade reaching its $10 billion goal. However, this doesn’t mean Lemonade’s value hasn’t gotten ahead of itself at this point. Lemonade certainly looks expensive when looking at several valuation multiples among the 80 insurance stocks mentioned above. Its forward sales multiples are higher than 89% of those stocks.

Lemonade feels like a stock that has extremely high expectations now. It wouldn’t surprise me to see shares sell off significantly at their next earnings release due to this. Wall Street analysts might say the same. The average price target indicates significant downside potential. Despite this, I still see Lemonade as a company that can be a big winner in the long term.