Three years ago, Lemonade (LMND -2.56%) wasn't even a public company. But since its debut as a market darling in July 2020, its stock has lost 67%.

It has gone through a whirlwind of ups and downs, progress and setbacks, and lots of product launches in that time. Now, management believes the company is in a position to scale and get on the road to profitability. What's a likely scenario for how Lemonade will look three years from now? 

How does Lemonade look today?

Across most metrics, Lemonade is demonstrating strong growth. Its in-force premium -- or premium per customer multiplied by customer count -- increased by 54% year over year in the second quarter. That growth was powered by increases of 18% in premium per customer and 31% in customer count. In-force premium is the insurance company's preferred top-line metric, but its revenue increased too -- by 77% from Q2 2021's number.

Those gains came in a difficult economic climate that has left many companies losing ground or struggling to grow. But as Chief Executive Officer Daniel Schreiber pointed out in the second-quarter shareholder letter, insurance is an industry that's not typically affected by recessions and bear markets. Policy holders generally keep their policies active throughout economic cycles, which is one reason that insurance stocks are considered dependable value plays. As a tech-driven insurance upstart, Lemonade doesn't quite have those features yet -- but it does have the recession-proof model.

Many growth drivers

From the renters policies it originally offered, Lemonade has quickly expanded the range of insurance products in its portfolio, adding pet, homeowners, life, and auto insurance. It built its model to acquire customers when they're young, and then cross-sell and upsell new products to them as their insurance needs grow. That strategy aims to achieve a high lifetime customer value at a low customer acquisition cost. 

Lemonade is also forging partnerships to increase its visibility, such as the one it announced last week: It's partnering with pet supply company Chewy on its pet insurance offering. And it continues to expand into new markets.

Management noted in the Q2 shareholder letter that it's well-capitalized at this point, and that considering the higher interest-rate environment, it now plans to reach profitability without raising any more capital. Investors reacted positively to this news, and the stock price spiked. If Lemonade retains its cash and pays off debt without raising more capital over the next three years -- which is what management anticipates -- it should be in a fine cash position.

Still figuring things out

The main problem Lemonade has been having is keeping its loss ratio low. Loss ratio measures how much an insurer pays out in claims compared to the amount of money it collects in premiums, so a lower number is better. But Lemonade's loss ratio has been rising during the past year.

Lemonade loss ratio.

Lemonade loss ratio. Image source: Lemonade shareholder's letter.

This is mostly the result of it being a new company that's still figuring out its rating system. It's also due to having many new customers. The company has only been around since 2015, so really, all of its customers are pretty new. But among its relatively longer-established customers, its loss ratio is lower. Legacy insurance companies have millions of customers that have been with them for decades. As Lemonade gradually builds that type of customer base, and as it gets a better handle on policy pricing, its loss ratio should come down. 

The path to profitability

The announcement that Lemonade won't be raising more cash in the near term was paired with the news that management is switching its focus from hyper-growth to profitability. Previously, Lemonade was in the enviable position of being able to raise a cash hoard while doing so was cheap. It used that cash to pursue rapid expansion. Now, management can ease back on the gas pedal and let the company scale without further cash infusions.  

However, it will be an uphill climb. The company's losses have been mounting, especially those related to its acquisition of digital car insurance specialist Metromile. While that purchase paved the way for company's entry into the auto insurance niche, it also tacked another source of red ink onto Lemonade growing losses. The company's net loss widened from $55.6 million in Q2 2021 to $67.9 million in Q2 2022.

Management expects losses to peak in the third quarter and then start coming down. It feels that it has turned a corner now that it has launched so many products, and with more than 1.5 million customers, more are "seasoned" at this point than "new." The unknown is how long it will take before declining losses turn into profits, although management has said it plans to lay out its strategy for getting to profitability at its investor day event in November.

The humbled stock price

Between its rising loss ratio and its growing bottom-line losses, investors have lost their enthusiasm for Lemonade's stock. But in three years, the company's situation could look very different. Among the things we can expect to see: a much higher customer count; more deals with complementary companies; more cross-selling and upselling; and higher revenue. Its loss ratio is also likely to improve, but that's less of a given. As for profitability, that may take longer to achieve, but it's certainly a possibility three years from now.

Lemonade's long-term outlook appears to the strong. However, investors may want to see some more progress before opening a position. The company reports its third-quarter earnings on Nov. 8.