Lemonade Stock Could Still Have Some Juice for Investors

Lemonade (LMND 1.64%) shareholders have been on a roller coaster, but should they be optimistic that its stock could turn around? In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributor Brian Withers discusses Lemonade's metrics, challenges, and opportunity potential.

Brian Withers: It seems like every stock I'm covering today has been thrashed in the market, and Lemonade is definitely in that category. The stock's down over 80%. With a market cap of $1.25 billion, and a cash position of just over a billion, the business is valued at practically nothing. Is this business on its deathbed? I don't think so. Let's check out how the quarter went and we'll see. In-force premiums, this is the total amount of premiums that it collects in a year, up 66%. That's really awesome because it's based on two drivers. One, the number of customers is up 37% and the amount they collect per customer is up 22%. It's nice if they're collecting customers, and those customers are spending more over time. This gross loss ratio has bounced around quite a bit, but it's down about 31%, this is the Texas freeze quarter. It's nice to see that trending a bit in the right direction. This is the gross earned premiums. This is the premium collected in the quarter. That's also trending in the same direction. If you look over the long term, over the past couple of years, you can see that the in-force premium is almost three times larger what is today than it was 24 months ago, so really continued positive direction quarter over quarter. Looking forward, the company is expecting a 60% top line growth for the full year. I think this business is on track.

Toby Bordelon: Brian, over the last couple of quarters, one question about this company has been their loss ratio, which hasn't been great. Based on that, it seems like one can draw that conclusion, it's not actually that graded writing insurance. And given that that's their core business, that would be unfortunate. Can they get that under control? Does auto insurance and the Metromile deal save them here?

Withers: Yeah, Toby. Shorter answer is no. The company still needs to get better in insurance, but the additional policies and premium will help. Let's look at what's going on with the company and put that gross loss ratio in perspective. You have to remember that the company started with just renters insurance, condo insurance and added homeowners insurance and, just a little over two years ago, that's all they had. They've since added pet, car, life and really are serving all customers now with a potential umbrella service, which was their vision in the beginning is to catch customers in the beginning of their life and in their 20s and be able to serve them as they grow older. This slide's a couple of quarters old. But you can see primarily the renters and homeowners insurance is 86% of their overall insurance premiums that they collect today. Don't even see Auto on this chart at all. It's important to remember they're continuing to evolve in these different forms of insurance and renters they have the most experience with in most states, and so that's the one that they have the most data on and the learning curve should be getting better with that faster than any of the others. You can see over time, the gross loss ratio has bounced around quite a bit and we talked about this quarter right here, the Q2 2020, was when they just had renters insurance and homeowners insurance. As they've added new pieces of insurance, the stuff has fluctuated around a little bit. Does adding Metromile help? Not really. Their gross loss ratio in the quarter was 85%. It's slightly below what they have here, but again it's another new form of insurance with new clients as they add across the country. Another thing to keep in perspective is they're concentrated in three states: California, Texas and New York. This is the gross written premiums total about 56% in those three states. You can see that part of the problem with Lemonade is their small base and, as they continue to collect customers and they continue to add people in these different new forms of insurance, they're just going to get smarter and better at this over time.