It's no secret that the market has been volatile for months now. Since the start of 2022, the S&P 500 has been down 17%.
Market volatility has hurt up-and-coming companies like Lemonade (LMND 1.95%), which looks to upend the insurance industry. Meanwhile, companies with steady cash flows like Progressive (PGR -0.33%) have held up better amid this recent volatility.
With Lemonade trading near its lowest prices ever while Progressive is near its highest, which stock is a better buy today?
Insurers from entirely different eras
Progressive is a company that has been around for quite a while. The company was founded in 1937 and focused on automotive insurance from the very beginning. The company was the first in the industry to have drive-in claims locations.
Progressive focuses on automotive insurance for individuals, which is its most significant business. The company also offers commercial auto insurance and homeowners insurance.
Meanwhile, Lemonade was born in 2015 and has been publicly traded for almost two years. The company first began offering renters insurance but quickly expanded to homeowner's, auto, and pet insurance.
Warren Buffet is impressed by Progressive
The difference between Progressive and Lemonade is stark -- and it has everything to do with what stage they are at as a company.
Progressive has decades of experience underwriting insurance policies and has built up a huge business along the way. According to the National Association of Insurance Commissioners, Progressive is the second-largest property and casualty insurer in North America, with $45.7 billion in direct earned premiums last year.
The company has done a tremendous job of underwriting profitable policies. One thing that helped it was its use of telematics, a technology that allows insurers to price auto insurance based on driving habits rather than demographic data.
The strong underwriting ability of Progressive has caught the attention of Berkshire Hathaway CEO and Chairman Warren Buffett. Buffett is impressed with how well Progressive measures risks while maintaining strong growth.
Lemonade is growing fast but has work to do
On the flip side, Lemonade is a young, rapidly growing company still in the very early stages of development. Last year, Lemonade's gross earned premium came in at $292 million. While this is tiny compared to Progressive, it was an 84% growth from the year before. While Lemonade is growing quickly, the company is still working toward pricing risks to achieve better profitability.
The loss ratio is one way to measure how well an insurer is pricing risk. The loss ratio is the ratio of losses and loss adjustment expenses, less amounts ceded to reinsurers, to net earned premiums. Lemonade's loss ratio came in at 93% in 2021 and 71% in 2020. Meanwhile, Progressive's loss ratio was 75% and 64%, respectively, during the same period.
Which stock is a better buy today?
Lemonade is improving its loss ratio, which came in at 89% in the first quarter, but it still has work to do to become profitable. Although the company is adding customers rapidly, its expenses are growing just as quickly as it spends on building up its auto insurance product and marketing to new customers. During the quarter, Lemonade saw a net loss of $78 million, worse than its $49 million net loss the year before.
Lemonade is becoming more attractive to me because of the improvements in its loss ratio and how fast it's adding customers. However, unprofitable stocks continue to get beat up in this market, and I'd like to see Lemonade's earnings trend toward profitability before diving into it. Meanwhile, Progressive's established business and strong cash flows make it a stellar investment for the long haul.