Tech stocks have been getting battered this spring, and fantastic first-quarter 2021 earnings results have thus far offered little reprieve from the selloff. High-growth stocks are cooling off after many of them ran up double- and triple-digit percentages since the start of the pandemic, and tech-enhanced insurance outfit Lemonade (LMND 0.04%) is among them. Share prices are down nearly 70% from their all-time highs as of this writing.
The real attention-grabbing line item in Q1 for Lemonade was its $49 million net loss (or adjusted EBITDA loss of $41.3 million), chalked up mostly to the winter storm that ravaged Texas earlier this year. On the surface, these are steep losses that exceeded what many investors were expecting. But some perspective is needed here.
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"A year's worth of claims" in just a few days
Lemonade said that it received "a year's worth of claims" in just the first few days of the Texas freeze. The company's AI-based claim payout platform got kicked into overdrive, and management was proud to report its net promoter score was 70 among these customers -- implying most were happy enough with Lemonade that they'd refer others to the insurance company. A net promoter score of 70 during winter storm Uri is actually in line with Lemonade's score in normal times, so the extra burden of paying so many claims didn't cause any deterioration in the insurance start-up's top-notch service.
But the downside was of course a higher rate of cash outflow. Gross loss ratio (a metric in the insurance industry measuring insurance claims paid divided by total earned premiums) was 121% in Q1, implying Lemonade paid out more than premiums collected on policies. Excluding Uri, its gross loss ratio would have been 71%. For the sake of comparison, its gross loss ratio was 73% in Q4 2020 and 72% in Q1 2020.
It all tallied up to the aforementioned $49 million net loss (or $41.3 million adjusted EBITDA loss) during the first three months of the year. It could have been worse, though. Lemonade started relying on reinsurance pretty heavily last year (meaning it buys policies from other insurers to limit losses during catastrophic events). In fact, the adjusted EBITDA loss was actually in line with management's guidance for a loss of $40 million to $43 million a few months ago. Again, for comparison, net loss and adjusted EBITDA loss were $33.9 million and $29.7 million, respectively, in Q4 2020. Clearly, the Texas storm added extra red ink to Lemonade's bottom line during the first three months of the year, but not by a dramatic amount.
Don't sweat the bottom line too much
At this stage of its existence, Lemonade is a growth company. The real story is how quickly it can add new customers and grow its in-force premium -- and in this department Lemonade put up solid numbers. Total customer count was just shy of 1.1 million at the end of March (up 50% year over year), the in-force premium was $252 million (up 89%), and the premium per customer was $229 (up 25%) as Lemonade continues to add new products for its insured customers. In spite of this growth, losses were still to be expected as Lemonade spends heavily to maximize its expansion.
But is a net loss of $49 million really sustainable? Not for the very long-term. However, Lemonade has ample cash on hand to cover its sales and marketing expenses and start-up costs for launching new products (like the upcoming auto insurance line later this year). At the end of March, Lemonade had $1.03 billion in unrestricted cash and equivalents on the books. That's enough to cover over five years' worth of losses at the Q1 2021 rate of cash outflow. While this company is all about growth right now, eventually those losses should narrow as it reaches a more efficient scale. Put simply, this insurance start-up is not at risk of running out of money anytime soon.
Lemonade's steep losses due to winter storm Uri in Texas aren't as big a deal as they may appear. I'm certainly not saying Lemonade stock is for every investor. It isn't. But for those investors looking for all-out growth who can patiently endure wild swings in stock price, Lemonade actually made solid progress in Q1 2021 in terms of adding new customers and policies. Don't sweat the red ink too much right now.
