Two of the most interesting stocks in the insurance industry are Lemonade (WKN: A2P7Z1) and Markel (WKN: 885036). Lemonade wants to revive the industry and only went public in July. Markel has been around for years, but it has remained rather unknown as “Baby Berkshire”. The nickname comes from the fact that the business model is similar to that of Berkshire Hathaway.
Investors should of course know both.
Lemonade … a refreshing share
Lemonade is seen by many as a troublemaker in the industry. The company offers insurance for renters, homeowners and pets in the USA – all of which is not strange at first. But instead of using brokers, Lemonade uses software, bots and AI to offer tariffs to potential customers and process claims. It’s all digital, with no paperwork or bureaucracy.
Customers who need to make a claim can use the Lemonade app and click “Claim”, and the artificial intelligence platform will do the rest by running dozens of algorithms in seconds. About 30% of the claims are approved and paid in seconds, while the rest, which is considered more complicated, is passed on to people. Lemonade charges a flat fee from its premiums, the rest is used to settle claims. Any excess rewards that remain afterwards will be donated to charities of the customer’s choice.
With this unusual model, Lemonade would not benefit from delaying or denying claims. That is why there is no incentive to do this – but every incentive to process it quickly and fairly. This is different from traditional insurers, who have an incentive not to pay claims. A key indicator of the success of Lemonade is the falling damage rate, which represents the ratio of the damage paid to the premiums earned. The damage rate has steadily decreased since 2017 and is now 72%, which is excellent compared to 78% a year ago. Anything below 100% means the company is profitable, so 72% is low. Part of the decrease is due to the company’s careful underwriting in forest fire and hurricane areas.
Another important benefit of lemonade is its low overhead costs. Since Lemonade does not have any branches and its services are largely automated, the costs are significantly lower than those of the competition.
In the five years since inception, Lemonade has seen strong growth, especially among young policyholders. Around 90% of customers are first-time buyers of insurance. It had 941,000 customers in the third quarter, compared to 562,000 a year ago. The premium per customer has increased to $ 201 from $ 169 a year ago. Gross Premium Earned – the amount Lemonade earns from the premiums – doubled year over year to $ 42.9 million. Gross profit increased 82% to $ 7.3 million while the profit margin was 41%. A year ago it was 21%.
Investors seem to appreciate this model. The stock gained 139% on the first day of trading and has risen more than 40% since then.
Still, the company is not yet profitable: it had a net loss of $ 30.9 million in the third quarter, slightly better than its net loss of $ 31.1 million a year ago. As a start-up, Lemonade still spends more than it earns. Sure, you invest in technology, operations and personnel in order to continue to grow. But that should soon change as profits rise.
Markel: not your typical insurer
Like Lemonade, Markel has a different business model than most insurers. It offers specialty insurance, but is also an investor in public and private companies. In these two aspects, the company is similar to Berkshire Hathaway, hence the nickname “Baby Berkshire”.
Markel offers Excess and Surplus (E&S) insurance, which covers areas that are not covered by most companies in the industry. For example, insurance for special events or policies for high-risk companies. Markel also offers reinsurance – basically insurance for insurance companies that allows them to cover themselves against the risk of major disasters. Markel reported $ 1.39 billion in bonuses earned in the third quarter, up from $ 1.3 billion a year earlier. That’s a ratio of 97. If this metric is below 100, it means that the company is earning more premiums than it is paying out in damages. The ratio has been consistently over 90 for the past few years, which is evidence of Markel’s disciplined underwriting process.
The premiums earned are invested in a portfolio of around 113 stocks, including Berkshire Hathaway and Amazon. Profits from this source of income fluctuate with the markets, but over the past decade the portfolio, valued at $ 22.3 billion, has returned 15.2% on an annualized basis. The third source of income is Markel Ventures, which invests in private companies. Last year it generated sales of USD 2.1 billion and profits of USD 264 million.
The company’s share price is down about 13% this year, but it has been incredibly consistent over time. In the last ten years, there has only been one year with negative annual returns. Plus an annualized return of over 12% over the last ten years to 2019.
Which insurer is the better buy?
While Lemonade could certainly bring about a disruptive change in the insurance industry with its unique business model, it may be too early to judge. The company’s growth is promising, but earnings are still lacking. You are still faced with the challenge of expanding beyond the current market of predominantly young customers. Still, Lemonade’s potential is unmatched, and both companies make good long-term investments.
As a more conservative investor, I would go for the more established performer. Markel has a great business model and with its diverse revenue streams it has proven that it can consistently generate high profits. Although the company has a high share price – around $ 994 – it’s a good value with a price-to-book ratio of around 1.2. The stock is therefore not overvalued and should continue to generate double-digit returns over the long term.
The post lemonade vs. Markel – which stock is the better buy? appeared first on The Motley Fool Germany.
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The Motley owns shares of and recommends Amazon, Berkshire Hathaway, Lemonade, Inc., and Markel. Dave Kovalevski has no position in any of the stocks mentioned. this article was published on December 7th, 2020 on Fool.com and has been translated for our German readers.
Motley Fool Deutschland 2020
Photo: Peter Roegner
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