Insurance technology company Lemonade (LMND 1.44%), which uses an AI-powered platform to improve the customer experience with several types of insurance products, recently reported its first quarter earnings. While the market reacted somewhat positively to this earnings release, the stock is still down by roughly 90% from its all-time highs.
There was certainly a lot to like from Lemonade's earnings report, but there are still some pretty large red flags investors need to keep in mind. Here's a quick rundown of the current state of Lemonade's business, and whether it might be worth a closer look for patient investors.
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Lemonade's business is growing impressively
All of Lemonade's growth metrics look impressive. The insurance company now has $419 million of in-force premium, which is 66% more than it had a year ago. The average customer is paying 22% more for their insurance, thanks to a combination of bundled products and many customers "graduating" from renters insurance to more expensive homeowners insurance. And in the quarter, Lemonade generated $96 million in gross earned premium, a 71% year-over-year growth rate.
It's also worth noting that this growth was largely fueled by Lemonade's core insurance products of renters, homeowners, and pet insurance. The most exciting part of the business (auto insurance) has only rolled out in two states so far, with more to come and the Metromile (MILE) acquisition still pending.
In addition, the early results of bundled insurance are impressive. After one full quarter of offering Lemonade Car insurance in Illinois, bundling rates grew 40% versus other Lemonade markets.
Underwriting is a big question mark
Lemonade prides itself on being a technology company, but at the end of the day it's still an insurer. And insurers have to get underwriting correct in order to make money.
Now, Lemonade uses a somewhat different business model than other insurers, making extensive use of reinsurance agreements to limit losses. The company's stated goal is to keep its gross loss ratio -- that is, the percentage of premiums it pays out for claims and reinsurance -- to less than 75%.
In the first quarter, Lemonade's gross loss ratio was 90%. This means the company is paying out 90% of its premiums collected before its other business expenses. Sure, this is a bit of an improvement both sequentially and year-over-year, and to be fair, inflation hurt the numbers a bit (claims are being paid out at higher costs, but customers still pay the same premiums for a while). But that's a long way from a sustainable loss ratio.
As you might expect, the high gross loss ratio is causing Lemonade to lose money. A lot of it. In fact, for the full year, Lemonade is expecting revenue of $205-$208 million and an adjusted EBITDA loss of at least $265 million. And that's an adjusted loss. On a GAAP basis, it will likely be significantly worse.
The stock is very cheap, but for how long?
Lemonade can deal with these losses for the time being. The company has over $1 billion in cash on its balance sheet, and will get more when the Metromile acquisition closes, which Lemonade expects to close during the second quarter.
And speaking of the cash, it's worth noting that Lemonade's market cap is just $1.15 billion. With just over $1 billion in cash and investments and no long-term debt, investors are essentially getting the business for just over $100 million. But as the company is losing hundreds of millions annually, that could change rapidly.
In a nutshell, Lemonade's business is growing, its customer satisfaction is off-the-charts strong, and its most promising insurance product is still in the early stages of its rollout. But the billion-dollar question is whether Lemonade can figure out how to be a profitable insurer in the not-too-distant future. If it can, the current valuation will look extremely cheap. But that remains a big "if."
