The market continues to send down shares of insurance technology company Lemonade (LMND 13.30%). This once market darling is now 90% off its high of $164 just over a year ago, and pessimistic investors seem to have moved on.
But that doesn’t mean this stock is history. The company is posting strong growth in many areas, and it’s demonstrating improvement in the two areas where it’s had the most challenges: loss ratio and net loss. So let’s see where it’s going, and whether it’s a good time to buy shares.
Improved loss ratio
Improvement here is relative since Lemonade is still underperforming its metrics from two years ago. The loss ratio measures how much of a policy it pays in claims, so the lower, the better. That is, the lower the number, the more money the company makes. This is how it’s developed over the past two years:
It had been mainly showing sequential improvement prior to the 2021 first quarter, coming below its 75% threshold, meaning it makes money (Lemonade has agreements with third-party reinsurers, and at that time, it required ceding 25% of a policy value). 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 letter to shareholders that the company’s foundation of data learning will lead to better loss ratios over time. He says the models “do a bang up job of predicting the lifetime loss ratio of each new customer, as well as their likelihood to churn or cross-sell, and combining these into a Lifetime Value (LTV) assessment.” He added that new business in the first quarter, combining five rounds of data learnings, shows a cohort of policyholders that are within the target 75% range. He also blamed inflation for rises in claim payouts while policy rate increases lagged.
Ninety percent is an improvement over last year, but it’s still way out of the company’s comfort zone, and it may take time to stabilize.
Better-than-expected net loss
This is also relative, since net loss increased over last year, just not as badly as expected. Net loss was $75 million in the first quarter, versus $49 million last year. Net loss per share of $1.21 was better than Wall Street’s expected consensus of $1.39. The adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $57 million was better than the company’s expectations of $65 million to $70 million.
Happy customers are joining and buying more
It wouldn’t make sense to close out here without mentioning how well the company is growing in terms of customer count and increased premiums. Gross earned premium (GEP), or total premiums, increased year over year to $96 million, and customer count increased year over year to 1.5 million. Premium per customers increased 22% to $279. GEP and revenue of $44 million came in higher than previously guided for.
Growth in in-force premium, or premium per customer multiplied by customer count, demonstrates this nicely.
In most ways, the company is following its expected trajectory and demonstrating solid growth. Its price-to-sales ratio has decreased to a more reasonable 10, making it look compellingly cheap considering its growth rates. And as Schreiber has pointed out, an insurance company’s top line 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 you buy shares? Only if you can handle the risk and you have a long-term horizon. And if you already own shares, you might want to hold on to them.
