What happened
Shares of insurance technology company Lemonade (LMND 1.64%) fell 13% in March according to data provided by S&P Global Market Intelligence. Investors are still unenthused about the company's progress toward profitability.
So what
Lemonade is one of several stocks that took the market by storm at the height of the bull market. It uses artificial intelligence to power its insurance products, which it says results in better and cheaper services. It quickly reached the million-customer mark and has been demonstrating robust growth in revenue and policies.
However, it hasn't been as successful in reining in costs and achieving a viable loss ratio. To be a competitive insurance business, an insurance company has to be able to price policies to cover potential payouts. Lemonade's high loss ratio means it's paying out too much to be a profitable business.
Image source: Lemonade.
Management told investors that the 2022 third quarter would be the peak of losses, and from then on it would move toward profitability. Losses were better in the fourth quarter. Adjusted EBITDA loss was $52 million, down from $66 million last year, and net loss was $64 million, down from $91 million last year.
Now what
Lemonade continued to post strong growth in the 2022 fourth quarter. In-force premium was up 64% over last year and policy per customer increased 30%. Gross loss ratio, as high as it was, decreased 7% year over year.
It has now launched a full suite of products, at least one of which is available in every U.S. state, and it also has operations in parts of Europe. Part of its strategy is capturing market share while customers are young and then upselling and cross-selling products, which leads to higher policies at lower customer acquisition costs.
The company spent the past two years launching products, resulting in heavy rollout expenses. Management says it's now pivoting its focus to lowering the loss ratio and generating profits, while at the same time continuing to grow the top line.
Lemonade stock is down nearly 50% over the past year, and it trades at a price-to-sales ratio of 3.6. That's incredibly cheap for a growth stock, but the level of risk remains high. Investors should see a few more quarters of progress toward profitability and an improved loss ratio before considering this stock a buy.
