This Hidden AI Gem Is Poised to Revolutionize an $3 Trillion Industry

Insurance is a $3 trillion market that touches nearly every household, vehicle, and business. It's one of the largest industries on Earth, yet also one of the hardest to disrupt. Regulated to the teeth and hardened by decades of risk aversion, it hasn't exactly welcomed start-ups with open arms.

Enter Lemonade (NYSE: LMND), the artificial intelligence (AI)-native insurer. Since its launch, the company has aimed to reshape the insurance model by replacing agents with AI. Bots manage onboarding, handle claims, and even help price policies. It's a model that has attracted attention, but has struggled to deliver consistent profitability.

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That struggle has been reflected in the stock price. Since peaking in early 2021, Lemonade's shares have fallen approximately 82%, as investors grew weary of its persistent losses, high customer acquisition costs, and the broader market's shift away from unprofitable growth stocks amid rising interest rates.

However, recent developments suggest a potential turnaround. The latest quarter brought stronger growth, tighter execution, and Lemonade's first brush with positive free cash flow. With shares down about 20% since January, could Lemonade be setting itself up for a comeback?

Let's take a peek.

Image source: Getty Images.

Reinventing insurance with AI

To figure out whether Lemonade's stock is mispriced, you first have to know what you're buying.

Lemonade isn't a legacy insurer dabbling in tech. Rather, it was built with a radical idea: that software can handle the core functions of insurance (pricing, underwriting, and claims) more efficiently than people. Since 2015, it has been testing that thesis at scale.

Bots like "Maya" and "Jim" handle customer interaction. (Fun fact: Jim paid a claim in three seconds, which Lemonade claims is a world record.) But the real story happens behind the scenes. Lemonade uses machine learning to price risk and predict customer value. That data helps the company spend its marketing budget where it's most likely to pay off, which can lower acquisition costs and generate stronger margins over time.

The company offers renters, homeowners, pet, term life, and car insurance. Of the bunch, car insurance may be the biggest opportunity. It's a $365 billion market, and Lemonade's footprint so far is modest, but growing. After launching in Colorado this quarter, its auto product now reaches states representing about 40% of the U.S. market. That's 60% of untouched market that Lemonade hasn't tapped -- a wide runway if the company continues to scale its auto offering.

For all the buzz around its AI, however, the real test has always been the bottom line.

From burning cash to breaking even

In Q1 2025, Lemonade crossed a milestone, topping $1 billion in in-force premium (IFP) for the first time. That figure, which reflects the annualized value of all active policies, has now grown for six straight quarters.

More surprising, Lemonade kept its gross loss ratio steady at 73%, even with wildfire claims weighing on results. This loss ratio, which indicates the percentage of premiums paid out in claims, sits within the company's target range of 75%, but it's still higher than industry leaders like GEICO, which reported 69% in the same quarter. For a smaller player still expanding into higher-risk products like auto, however, holding the line on losses in a tough quarter is a step in the right direction.

The top line looks good too. Revenue increased 27% year over year, reaching $151.2 million. And while the company isn't profitable yet, it expects to hit breakeven on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2026, meaning its core operations would no longer run at a loss.

It's progress. However, it doesn't guarantee smooth sailing.

A long-term plan with short-term doubts

Let's start with tariffs.

Lemonade has flagged that a proposed 25% U.S. tariff on automotive parts could nudge its auto insurance loss ratios higher by single-digit percentage points. Auto repair costs are already bloated, and Lemonade's telematics-driven pricing only works if the claims side stays predictable. Tariffs would throw a wrench in the model, literally and figuratively.

Then there's customer retention. Annual dollar retention dropped to 84% in Q1, down from 88% last year. The drop wasn't accidental. Lemonade scaled back exposure to certain markets, most likely those in catastrophe-prone areas. It's a disciplined move, but it could also mean slower growth in a key product line.

Lemonade is also playing catch-up to legacy insurers like GEICO and Progressive, which have both grown earnings on the back of scale, pricing power, marketing efficiency, and underwriting maturity. These companies have decades of pricing data, millions of policyholders, and brand reach that stretches all the way to the Super Bowl. Lemonade may be getting better, but it's still far from matching the scale of its larger peers.

This is why Lemonade still trades more on potential than performance. Until it proves it can compete on margins, investors are likely to remain cautious. If you'd rather not wait around to see if software can out-underwrite decades of actuarial tradition, Lemonade may not be the right investment for you. If, on the other hand, you believe Lemonade's AI-native model will revolutionize the insurance industry over time, today's price could be a compelling entry point.

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Steven Porrello has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade and Progressive. The Motley Fool has a disclosure policy.