What happened
Shares of insurance start-up Lemonade (LMND 8.23%) were up 5.5% today as of 1:35 p.m. ET. It's a small shred of reprieve after yet another brutal week. The stock briefly plumbed all-time lows the day after the U.S. Federal Reserve increased its short-term interest rate by 0.75%, the biggest one-time increase since the mid-1990s.
As a reminder, higher interest rates decrease the present value of risk assets like stocks.
Image source: Getty Images.
So what
Stocks like Lemonade are particularly susceptible to extreme turbulence during periods of economic uncertainty. Though this company is quickly growing its number of insured, its ability to manage claims in an efficient manner remains a hot debate. As a result, Lemonade loses money. With interest rates rising and excess liquidity in the economy being mopped up by the Fed right now, Lemonade is an out-of-favor stock.
It's been extremely tough going as a result. Lemonade shares are down 59% so far in 2022 alone.
Now what
Would-be investors (and present shareholders) of Lemonade need to weigh the positives of this business versus the very real risks. Lemonade is rolling out new insurance products and picking up lots of new customers, and as a result its in-force premium was up 66% year over year in Q1 2022. The pending acquisition of Metromile could also drastically speed up the rollout of car insurance. Lemonade had $827 million in unrestricted cash and investments on hand.
However, losses continue to be a real cause for concern. The loss ratio of 90% in Q1 was again well above the target range of 75%, leading to doubt that the start-up's software technology is up to the task of managing insurance risk and collecting adequate premiums from its insured base. Management insists this metric will improve with time as Lemonade gets larger, but such developments take time.
In the meantime, continue to treat Lemonade as a high-risk, potentially high-reward insurance stock. Keep any investment very small accordingly.
