Lemonade (LMND -3.36%) seeks to be an insurance market disruptor, which isn't an easy task during a time of sticky inflation. Just achieving a profitable financial profile will be a major hurdle for Lemonade to clear in 2023, if it happens at all by then.

Whether Lemonade and its shares can recover in 2023 depends, to some extent, on forces outside of the company's control, like inflation and interest rates. Still, Lemonade needs to overcome these obstacles and keep one particular ratio in check, lest the company widen its earnings loss further in the coming year.

A pair of value-added deals

By far, the most impactful company-specific events for Lemonade during the past six months were the deal with Chewy (CHWY -0.73%) and the acquisition of Metromile. With Chewy, Lemonade will provide customized insurance plans for Chewy's customers (or, more accurately, for their dogs and cats). Lemonade is providing its Lemonade Pet plans, while Chewy is bringing its CarePlus financing options to the table, hopefully to the benefit of the customers and shareholders.

During Lemonade's third-quarter 2022 conference call, no specific results for the Chewy partnership were provided. However, Lemonade CFO Tim Bixby cited Chewy's loyal base of 20 million customers as a potential source of cross-selling business in the coming year.

Then there's the Metromile acquisition, which Lemonade reportedly finalized for less than $145 million in stock. That might turn out to be a pretty good deal since, at the time of the acquisition, Metromile had over $155 million in cash and more than $110 million in premiums.

One explainable metric and another troubling one

Speaking of Metromile, the acquisition of this auto insurer helps to account for one startling statistic. It might surprise you to learn that Lemonade's in-force premium jumped from $346.7 million at the end of 2021's third quarter to $609.2 million at the end of the third quarter of 2022, for a 76% year-over-year increase. If 32% of that premium growth was attributable to the Metromile acquisition, then clearly, Lemonade is already reaping the benefits.

There's one issue that hopefully won't spill into 2023, though. Lemonade's 94% third-quarter gross loss ratio, up from 77% in the year-earlier quarter, indicates that a huge chunk of the insurance premiums that Lemonade takes in is being used to pay out claims. Co-CEO Daniel Schreiber warned investors that the Metromile acquisition would have at least a short-term adverse effect on loss ratios, likely around three to five percentage points. My hope is that Lemonade can shrink that figure in 2023.

Lemonade can recover in 2023, but it won't be easy

What's troubling about Lemonade's third-quarter conference call is that Bixby mentioned the company's startling 94% gross loss ratio but didn't properly explain it or establish a plan to address it. He did, for what it's worth, explain Lemonade's 33% increase in operating expenses by citing "increased personnel expense" (understandable in light of the Metromile addition), "stock-based compensation expense, and legal and professional fees."

That 94% shouldn't be glossed over, however, and it's undoubtedly taking a toll on Lemonade's bottom line. Lemonade's stakeholders can celebrate the company's slight Q3 earnings beat if they want to, but a net loss that widened from $66.4 million in the year-earlier period to $91.4 million in the most recently reported quarter is nothing to be proud of.

This isn't to suggest that Lemonade's management is unaware of the company's problems. It's a good sign that Lemonade's targeting a 75% loss ratio with an eye to achieving profitability at some point. Thus, Lemonade's shareholders should see Lemonade's reasonably likely "recovery" in 2023 not as near-term profitability but as loss-ratio management and bottom-line improvement. Better yet, Lemonade's management should present a clear-cut plan to achieve this, beyond touting the Chewy and Metromile deals, impactful as they certainly will be.