Investors hoping for better news from Lemonade (LMND -0.46%) were in for a rude surprise last week as the company released its fourth-quarter earnings report. It was a typical report from the insurance technology company, which means that it showed signs of high growth, but also a higher loss ratio and increased losses.
Management says it's all part of the plan, and that the company's strategy is working the way it's supposed to. Should investors wait it out?
Too big too fast?
Lemonade excited investors when it went public last year. It's a digital insurance company with an artificial intelligence-powered platform that makes signup simple and fast, and insurance claims can get approved in as little as one second. This is a big departure from the decades-old traditional insurance model, where customers typically have to sit with an agent at an office and fill out paperwork for both creating a policy and filing a claim.
Image source: Getty Images.
Lemonade sees itself as in a class of its own. It stands out from traditional insurance providers because of its digital and customer-centric model, but it also stands out from the crowd of other insurance technology companies, which are all focused on one type of policy. For example, Root sells digital car insurance, and Hippo sells digital homeowner's insurance.
Lemonade has broad aspirations to be a one-stop shop, with technology that simplifies the entire process. It packed much of its growth into 2021, where it went from selling renters, homeowner's, and pet insurance to adding term life, and most ambitiously, auto insurance in the form of Lemonade Car.
As you might imagine, those ventures cost a pretty penny, and the rollouts had an enormous effect on the bottom line. In particular, management expected cheers after announcing that it acquired digital car insurance company MetroMile, but got jeers instead because it's also acquiring the company's huge losses.
Management says now that it has all of these products in place, it's ready for the next stage of growth, which is expanding revenue and customer count, leading to profits down the line. The company said: "While we will continue to develop new products and new technologies for many years to come, for the first time we believe we've achieved a critical mass of both, enabling us to shift resources to harnessing our technology and products in new ways." For shareholders who have hope, Lemonade says it expects peak losses in 2022, so don't expect any great turnaround this year. You should, however, anticipate more rapid growth.
Growing by leaps and bounds
Lemonade may not be a growth stock based on its stock price, but its business is booming. In the 2021 fourth quarter, in-force premium (IFP) increased 78% year over year, although that's a bit of a slowdown from previous quarters. IFP is the company's most accurate representation of where the business stands, since it provides a snapshot of premium present at a given moment in time.
Policy per customer increased 25% over last year to $266, which means customers are buying higher-priced policies or bundling several policies together, both good signs. Customer count increased 43% year over year to more than 1.4 million, and revenue rose 100% to $41 million.
Now for the bad news. The loss ratio, or the difference between premiums collected and the amount paid on claims, widened 23 points to 96%. Management attributed part of that to an "unfavorable prior period development due to a handful of older large losses for which we under-reserved."
Although the company is banking on its artificial intelligence model to provide more accuracy when writing policies, it's not there yet. It also reiterated, as it does every quarter, that new products have higher loss ratios, so while the older products have seen improved loss ratios, the new products are pushing the ratio up.
Finally, Lemonade posted a massive $70 million loss, almost double the amount of revenue. Cash, cash equivalents, and investments totaled $1.1 billion, padding the balance sheet, so there's no worry there.
As for outlook, the company expects a 62% year-over-year increase in IFP in the first quarter and a similar net loss to the fourth quarter, or $65 million to $70 million.
Where does that leave investors? Kind of in limbo for 2022. With expected peak losses and new products still contributing to a higher loss ratio, shareholders shouldn't expect any great stock movement this year. If you own shares and you don't need the money now, I would hold on for the long-term bet. New investors may want to wait to buy until the stock shows some more momentum.
