Insurance technology company Lemonade (LMND 7.59%) has had a rough week. Through Thursday’s close, the stock had lost nearly 13% of its value and at one point touched a fresh 52-week low.
There are two driving forces behind the move. For one thing, the overall stock market has been under pressure due to inflation, interest rate, and recession fears. The S&P declined 5% through the first four trading days of the week, so this certainly had something to do with it.
However, most of the move can likely be attributed to Lemonade’s first-quarter earnings, which were released on Monday afternoon. On the one hand, Lemonade’s business grew impressively, with in-force premiums up 66% year over year and strong early results in the auto insurance rollout.
While the growth was a strong point, underwriting was not. Lemonade targets a 75% loss ratio, meaning that for every $100 it collects in premium, it pays out $75 for insurance claims. The rest should cover the company’s expenses and (hopefully) produce a profit. Well, in the first quarter, Lemonade’s gross loss ratio was 90%, not even close to the company’s target.
As you might expect, the elevated loss ratio is causing Lemonade to lose money — fast. For the full year, management expects $205-$208 million in revenue and an adjusted EBITDA loss of $265-$280 million.
Clearly, this cash burn won’t be sustainable forever, and that’s why the stock has been under pressure. Lemonade’s technology is certainly disruptive, its customer service is fantastic, and its customer base is growing rapidly. But if they are to be successful, management has to get the losses under control.