Better Insurance Stock: Lemonade vs. Progressive

Key Points

Insurance stocks can be an excellent source of stability and cash flow in a diversified investment portfolio.

Lemonade utilizes AI to streamline its operations and is seeing improvements in its bottom line.

Progressive has a long history of outperformance in the automotive insurance sector, but recent conditions have dragged the stock down.

• 10 stocks we like better than Lemonade ›

Insurance stocks can provide stability, typically provide strong cash flow, and can weather a variety of economic environments. With their pricing power and large investment portfolios, insurance companies can also provide a hedge against rising prices and interest rates.

However, it hasn't all been smooth sailing in the insurance sector. Progressive (NYSE: PGR), a giant in the automotive insurance space, has seen its stock tumble 30% from its 52-week high. Meanwhile, the rapidly growing AI-driven competitor, Lemonade (NYSE: LMND), is down 26.5%.

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Despite their share price dips, both companies are experiencing robust business growth. Also, each fits very different investment strategies. If you have money you're looking to put to work, here's which insurance stock I would buy today.

Lemonade was built on artificial intelligence

Artificial intelligence (AI) has taken the world by storm in recent years, amid the rise in large language models (LLMs) and agents from OpenAI, Anthropic, and Alphabet. One company that has been leveraging AI for over a decade is Lemonade.

The digital-native company has built AI into the core of its business, leveraging chatbots to handle sales and claims, while its models optimize for risk and improve its underwriting profitability. It has leveraged AI to automate as much of its business as possible, with AI Maya handling 90% of policy sales and AI Jim automating up to 55% of all claims, processing and settling them within minutes.

That said, breaking into the insurance industry is no easy task, and Lemonade has faced an uphill battle as it scales and fine-tunes its risk-pricing models. Last year, the company generated $738 million in revenue, representing 40% growth. It also posted a net loss of $166 million, a drastic improvement from the last two years when it lost $202 million and $237 million, respectively.

One key metric I've been keeping an eye on for Lemonade is its gross loss ratio. This represents the ratio of losses and loss adjustment expenses to gross earned premium, and is a key metric that tells investors how well Lemonade is underwriting policies (the lower the percentage, the better). In the fourth quarter, this ratio improved to 64%, a drastic reduction from two years earlier when it was around 85%. This shows that the company is doing a much more effective job of pricing risk as it scales up its customer base.

Progressive has a long track record of outperformance in the industry

Progressive is a long-established insurance company with a strong track record of success in the industry, and it began as an automotive insurer. The company has established itself as one of the best at measuring and pricing risk, and has rewarded investors handsomely in the process. Over the past three decades, the stock has returned an impressive 17% compounded annually, comfortably beating the S&P 500 returns over that same time.

The company has done an excellent job of mitigating and pricing risk, and was one of the earliest to adopt telematics, or insurance pricing based on driving behavior. By collecting data on drivers' speed, braking, mileage, and other driving habits, the company has been able to refine and dial in its risk. This is part of the company's long-standing commitment to generating $4 in profit for every $100 in premiums collected.

Last year was another excellent one for the insurer, which wrote $83 billion in net premiums, producing $11.3 billion in net income. The company has a policy to reward shareholders with a special dividend when it has an outstanding year, and investors were paid $13.50 per share or around a 6% yield in early January.

However, the stock has taken it on the chin as competition in the insurance space heats up. Like many industries, insurance goes through different cycles of soft and hard markets. The market had been hard for years, meaning competition was low, and insurers had greater flexibility to raise premiums. It has been softening up lately. After years of double-digit hikes, the national average increase for 2026 is projected to be only 1%, which has weighed on investors' growth outlook for Progressive.

Lemonade vs. Progressive: Which is a better buy today?

For investors looking to diversify their investment portfolio with insurance stocks, Lemonade and Progressive are two popular choices. Lemonade provides investors with exposure to AI in the insurance market, which could benefit from greater automation. That said, the company is still building its foundation, and analysts don't foresee it becoming profitable until at least 2028.

Progressive faces a slower near-term growth outlook amid intensifying competition in the insurance industry. However, the stock trades at just 10 times earnings and 12 times forward earnings, and is near its lowest valuation in years. Given its long-term underwriting excellence and the recent pullback in the stock, I think Progressive is a better buy for investors right now.

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Courtney Carlsen has positions in Alphabet and Progressive. The Motley Fool has positions in and recommends Alphabet, Lemonade, and Progressive. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.