Artificial intelligence (AI) has taken center stage, capturing attention with its transformative potential across various industries. With the launch of OpenAI's ChatGPT, we've seen how AI can redefine the future.

More companies are adopting AI, too. According to a McKinsey survey, 65% of businesses regularly use generative AI, which is twice the rate compared to one year ago.

Lemonade (LMND 4.06%) has been a front-runner in leveraging AI to upend the insurance industry. Its goal? To simplify everything for customers, from getting quotes to filing and settling claims.

However, it hasn't been all smooth sailing. As Lemonade experiences rapid growth, fine-tuning its risk-pricing models remains a key challenge. Nevertheless, the company has made notable strides during the past few quarters, but is it enough to make the stock a buy today after it rose more than 70% this year? Let's look closer at its journey and where it can go from here.

Lemonade's growth trajectory is hard to ignore. During the past several years, this innovative insurer has broadened its offerings beyond its original product of renters insurance, to homeowners, automotive, pet, and life insurance.

The numbers speak for themselves: Lemonade now has more than 2.3 million customers, a substantial jump from 1.9 million just a year ago, a 16.6% rise. In terms of premiums, the company has earned $213 million in the third quarter, up from $173 million last year, a 23% increase year over year.

However, one metric that caught my eye was the net loss ratio. At 81% for the third quarter, it has shown improvement from last year's 88%. While Lemonade also tracks a gross loss ratio, I lean toward the net loss ratio because it accounts for necessary reinsurance expenses. Reinsurance is crucial; it's like insurance for insurers, shielding them from catastrophic losses that could potentially jeopardize their stability. By including this in the equation, we get a fairer risk assessment.

Although it's encouraging to see the loss ratio improve, it's worth noting that this trend could be more reflective of broader industry movements rather than specific enhancements on Lemonade's part.

Last year was tough for property and casualty (P&C) insurers, which lost $24 billion collectively. Things have improved industrywide; in the first half of 2024, P&C insurers had a $3.8 billion underwriting gain, which has undoubtedly been a tailwind for insurers like Lemonade.

And, even though it is moving in the right direction, Lemonade continues to lose money. In the third quarter, Lemonade reported a net loss of $67.7 million, compared to the $61.5 million loss in the previous year.

Lemonade is on an encouraging path as it makes strides in improving its loss ratios. Although it hasn't quite hit management's target loss ratio of 75%, it's significantly closer than at any time during the past two years.

This trend shows that the company is improving its AI models and becoming more adept at assessing the risks associated with its policies. Aggressive investors may consider the improvement in the loss ratio as a positive sign of things to come and build a small position in the AI insurer.

That said, the overall insurance landscape has improved, with many companies reporting lower loss ratios. Given this backdrop, I'm taking a more cautious approach and will continue monitoring its net loss ratio and profitability before buying the stock.