Insurance technology company Lemonade (LMND 9.41%) announced fourth-quarter earnings this week that were better than expected. Gross earned premium increased 92%, in-force premium (a measure of the aggregate annualized premium, and what the company sees as its top indicator of growth) rose 87%, and adjusted gross profit increased 86%. The company delivered a small beat on revenue, but management noted that some restructuring of its reinsurance program made direct comparisons misleading.
Wall Street wasn't thrilled with the report, and the stock price sank. But there are many reasons for investors to be confident about Lemonade's future. Here are three of them.
1. Happy customers mean more business
One of the more important metrics to note from the report was premium per customer, which increased 20%. Several factors led to that rise, among them growth in the number of policies purchased per customer, as well as more expensive policies being purchased.
The company started by offering renters and homeowners insurance. It launched pet insurance in Q3 and life insurance in Q4. Half of all in-force premiums from pet policies came from existing customers, and a cross-purchase into pet insurance raises the median customer's total premium by a factor of four.
Lemonade wants to bring in its new customers while they're young, spending a certain amount of money to acquire them before they hit major life events, and then hold onto them as they grow into needing more policies. COO Shai Wininger said he was happy with how the first stage of the rollout of its term life product was going; that effort is purposefully being kept small while the company collects data. Cross-sales to existing customers accounted for almost half of its sales of life insurance policies, as well.
Lemonade sees this model as a key to its future sales and profitability -- once it has laid out the customer acquisition costs for its renters' insurance policies, it's positioned to profit from the sales of more expensive homeowners insurance policies to those same customers later, without having to spend more on marketing. And if its renters' insurance customers are satisfied with its service, they may also purchase pet and term life policies.
2. Now available in 50 states
When Lemonade went public in July, it offered some type of insurance in 27 states. With new types of insurance and geographic expansions, it now operates in all 50 states. And it's still rolling out more services in more states.
It also expanded to France in the fourth quarter, in addition to Germany and Holland, where it already operated.
3. Homeowners insurance is becoming a greater portion of the whole
Homeowners insurance moved from providing a quarter of the total premiums to a third in Q4. As customers grow with Lemonade, they're switching to more expensive policies, and those are what will eventually power faster sales growth.
Over 40% of Q4's new policies were non-rental policies, which demonstrates its ability to attract homeowners as customers even those who are just discovering the company. This makes for lower customer acquisition costs and greater lifetime value.
The rest of the story
The report wasn't all rosy, which is why investors weren't so happy. One issue was that while customer count increased by 56% year over year, it only grew by 8% from Q3. Still, the company has reached 1 million customers in four years, much faster than its competitors in traditional insurance. CEO Daniel Schreiber said the company isn't judging its success by its customer count, but by the "growth and profitability of our entire book of business."
Lemonade's loss ratio stayed about flat year over year. Schreiber said that was because of what he called a "new business penalty." New business has a higher loss ratio, and that overshadowed the lower loss ratio from its older policies.
More concerning, the company gave underwhelming guidance for the first quarter.
Schreiber mentioned several times that the company is working on a new product launch -- its biggest yet -- and said expenses are expected to increase in Q1. The lower-than-anticipated guidance for Q1 also takes into account that Lemonade will be using the first half of 2021 to fine-tune its term life business and waiting to scale it up.
This feeds into the company's model of slow and steady progress. The main message Schreiber is sending can be summed up in a single quote: "We want to build a huge company over time and be extremely profitable." Investors therefore shouldn't expect overnight success from this insurance upstart, but rather long-term innovation and growth. I think Lemonade can get there.