Companies that recently did initial public offerings (IPOs) were all the rage in 2021. Every day, a newly public company saw its stock rocket higher.
One company that enjoyed early success was Lemonade (LMND -0.46%), the upstart insurer looking to flip the industry on its head. The company has an appealing mission, aiming to be an insurer with brains and a heart. However, it has undergone turbulence during the past year-and-a-half.
A $1,000 investment at its IPO would have taken you on a roller-coaster ride. Here's why.
Lemonade: The insurer with a conscience
Lemonade's mission is to reimagine how people buy insurance. The company leverages data and artificial intelligence (AI) to help customers buy renters, homeowners, pet, and car insurance.
It uses vast data to help customers get policies and settle claims effortlessly, aiming to appeal to a younger generation with its speedy processes and by donating excess profits to charitable causes.
If you invested in its IPO, you'd have this much today
If you invested in Lemonade's IPO the day it went public on July 2, 2020, you would've been in for a wild ride. A $1,000 investment in Lemonade would've peaked in early 2021 at more than $2,400 as investor optimism pushed the stock higher. Since then, the investment has fallen over 85%, and that initial investment would be worth $332 today.
As long-term investors, it's essential to know that IPO stocks are risky, meaning you're likely to endure some emotional ups and downs. That's why it's crucial to diversify your investments and ensure you spread your stock investments across 25 stocks or more.
Its business was tested early on
Early in its history, Lemonade focused primarily on renters and homeowners insurance. The idea was that its target customers -- millennials and Gen Z -- would buy renters coverage from Lemonade and then buy homeowners and other policies down the road.
Lemonade faced its first big test as a publicly traded company early in 2021, when winter storms tore across areas of Texas and Oklahoma. The unexpected storms hit Lemonade hard, causing nearly $7 million in losses.
The net loss ratio is a key metric insurance companies use to see how profitably they underwrite policies. The ratio is the total losses paid, net of reinsurance, divided by the premiums earned. Over the past three years, the industry average loss ratio has been 71%, and Lemonade's management aims to keep its below 75%.
In 2021, Lemonade's loss ratio jumped to 120% in the first quarter after coming in at 72% in the year prior quarter. That sent the stock tumbling.
Data source: Lemonade regulatory filings. Industry data from the National Association of Insurance Commissioners. Chart by author.
Management told investors part of the losses were also due to the company's expanded product offerings in homeowners and pet insurance. Before 2021, two-thirds of its policies were renters insurance. Now, these account for less than half of its policies.
What I want to see before buying Lemonade
The company expanded its auto insurance business last year when it agreed to buy Metromile for $500 million in an all-stock deal. The move accelerates Lemonade's push into the $300 billion market.
The two companies also have similar goals, as Metromile leverages data and AI to write its policies too. However, Metromile has also struggled to turn a profit, and the combined company has a ways to go before it makes money.
Lemonade will continue to go through growing pains as it expands its business which is why I'm avoiding the company for now. However, I'm keeping a watchful eye to see improvements in its net loss ratio and profitability as it fine-tunes its pricing models in the coming quarters -- which could ultimately set the stage for the next move higher for this disruptive fintech.
