Lemonade (LMND +0.66%) stock might be the worst stock investment I've ever made. The insurance technology company's stock price is down about 75% since I joined the legions of fans who were enthusiastic about this innovative insurance company's potential and I became a shareholder. Despite the market sell-off, I'm holding on to this stock for now. And while I wouldn't recommend it for every investor right now, I still believe in the company and what it can do for the insurance industry. Here's why I still own this stock.
Lemonade's growth story is compelling
Lemonade aims to provide low-cost renters, auto, home, pet, and life insurance coverage using an artificial intelligence-driven rating system. Its high-tech business model features a mobile app and AI to generate quotes, service policies, make payments, and file claims. It promotes its ability to process claims much more quickly than the competition.
Lemonade has shown rapid growth across its products and it's negative investor sentiment is a bit head-scratching given the kind of numbers Lemonade posts. Management has a well-thought-out strategy that involves capturing younger customers, often those who are buying insurance for the first time (generally renters insurance), and turning them into customers for life by way of making the process easy, low-stress, and affordable. Over time, these policyholders take out larger policies and buy more products as they become homeowners, car owners, and more. Between growth in customers and growth in premium per customer, which happens as they buy more products and more expensive products, Lemonade's in-force premium, which it considers its top-line growth metric, continues to grow in high double-digit percentages.
Lemonade in-force premium. Image source: Lemonade.
I'm impressed with Lemonade's management
Being a founder-led company is considered an advantage to investors because founder-leaders are usually passionate and committed to their company's success. Lemonade's co-founders and co-CEOs, Daniel Schreiber and Shai Winninger, have made some moves that Wall Street has been wary about but that they believe are good for the company. The moves include launching multiple products quickly, which contributed to deepening losses last year, as well as acquiring auto insurance company Metromile, which weighed down the bottom line even more. The co-founders' ability to play the long game and keep their eyes on the ball despite the naysayers is a valuable quality.
Schreiber and Winninger let shareholders ask questions before every quarterly conference call, and they address the most upvoted questions. I appreciate their willingness to engage and their transparency.
While the company remains unprofitable, management has inspired my confidence in its ability to stay the course and reach its goals.
The opportunity looks enormous -- but the road is long
When Lemonade went public about two and a half years ago, it had been demonstrating improving loss ratios as it expanded. At this stage in its development, management is targeting a consistent 75% loss ratio, which it managed to achieve through most of 2020. But that completely went off course over the past two years, and that is the main thing souring investor confidence in the model. If it can't get the loss ratios under control, it seeds doubt in the company's viability, no matter how happy customers may be.
Lemonade loss ratio over time. The company is targeting a ratio of 75% at this stage in its development. Image source: Lemonade.
Management has given various explanations for why it hasn't consistently improved over the past few quarters. These range from one-time catastrophes that shouldn't be repeated to newer products having higher loss ratios, and considering its blitz product launches, that's not entirely unreasonable. However, investors are getting weary, especially as the macroenvironment remains volatile, which means it could be harder for Lemonade to get its ducks in order in the near future.
On the flip side, management said it would not be raising capital in the near future and would turn its focus toward profitability. We'll get an update on how that's playing out when Lemonade reports fourth-quarter earnings on Wednesday, Feb. 22.
NYSE: LMND
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I don't want to lose my investment
Finally, although my position in Lemonade is small, I wouldn't want to lose it when Lemonade might finally be rounding a corner. Investing legend Warren Buffett has pointed out that you don't need to make your money back the same way you lost it, which is food for thought for long-term investors. However, I don't like to stress about my positions. I make my decisions carefully and then more or less sit back and let my investments do their thing.
I still have confidence in Lemonade's prospects, and I'm really excited about what it does. It may take a while, but I still believe it can bounce back and create shareholder wealth.
