Lemonade improves in 2 important ways


The market continues to push down shares of the insurance technology company Lemonade (LMND 13.30%). This former market darling is now 90% off its peak of $164 just over a year ago, and bearish investors seem to have moved on.

But that doesn’t mean this stock is history. The business is showing strong growth in many areas, and is showing improvement in the two areas where it has struggled the most: claims ratio and net loss. So let’s see where it’s at and if it’s a good time to buy stocks.

Image source: Getty Images.

Improved loss ratio

The improvement here is relative since Lemonade is still underperforming compared to its metrics from two years ago. The loss ratio measures how much of a policy it pays out in claims, so the lower the better. In other words, the lower the number, the more money the company makes. Here’s how it’s developed over the past two years:

Table of lemonade loss rate.

Image source: Letter to Lemonade shareholders.

It had mostly shown sequential improvement before the first quarter of 2021, falling below its 75% threshold, which means it’s making money (Lemonade has agreements with third-party reinsurers, and at that time it had to cede 25% of the value of a policy) . It had its first real challenge last year in the first quarter with the Texas freeze, and that’s why this year’s loss ratio looks much better – 90% this year versus 121% last year.

CEO Dan Schreiber explained in the shareholder letter that the company’s learning base of data will lead to better loss rates over time. He says the models “do a wonderful job of predicting each new customer’s lifetime churn rate, as well as their likelihood of churn or cross-selling, and combining them into a lifetime value (LTV) assessment.” . He added that the first quarter new business, combining five sets of data learnings, shows a cohort of policyholders who are within the target range of 75%. He also blamed inflation for claims payout increases as policy rate increases lagged.

Ninety percent is an improvement over last year, but it’s still far from the company’s comfort zone, and it may take time to stabilize.

Net loss better than expected

It is also relative, since the net loss increased compared to last year, but not as badly as expected. Net loss was $75 million in the first quarter, compared to $49 million a year ago. The net loss per share of $1.21 was better than the expected Wall Street consensus of $1.39. The adjusted earnings before interest, tax, depreciation and amortization (EBITDA) loss of $57 million was above company expectations of $65 million to $70 million.

Happy customers join and buy more

It would make no sense to conclude here without mentioning how the company is growing in terms of customer numbers and premium increases. Gross earned premiums (GEP), or total premiums, increased year-over-year to $96 million, and the number of customers increased year-over-year to 1.5 million . The premium per client increased by 22% to $279. GEP and revenue of $44 million were above previous guidance.

The growth in in force premiums, or the premium per client multiplied by the number of clients, demonstrates this well.

Table of current bonuses of lemonade.

Image source: Letter to Lemonade shareholders.

In many ways, the company is on track and showing solid growth. Its price-to-sales ratio has decreased to a more reasonable 10, which makes it look extremely cheap given its growth rates. And as Schreiber pointed out, an insurance company‘s revenue is typically GEP, and if measured that way, the price to GEP ratio comes out to less than four, a very competitive number.

So should we buy stocks? Only if you can manage the risk and have a long-term horizon. And if you already own shares, you might want to keep them.


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