What happened
Shares of insurance technology company Lemonade (LMND -2.41%) lost 24% of their value in April according to data provided by S&P Global Market Intelligence. The company didn't report any news, but the banking crisis led to further investor pessimism overall and specifically in the fintech sector.
So what
Lemonade delighted investors and customers alike when it rolled out its artificial-intelligence-based insurance products. It relies on machine learning to power its policy underwriting, and all of its operations are designed with customer satisfaction in mind. It's almost entirely digital, and it allows policy holders to donate remaining policy funds to charity, earning it B Corp status.
Lemonade started with cheap renter's insurance, and it has now launched homeowner's, pet, life, and auto insurance products. Its strategy is to acquire younger customers when they're looking for smaller policies and grow with them as they purchase homes and cars and need more coverage.
This has all led to robust growth. Premium per customer continues to rise as expected with the growth strategy, and it increased 30% year over year in the 2022 fourth quarter to $346. In-force premium, which is the average premium per customer multiplied by total customer count, and gives the average aggregate policy amount for the quarter, increased 64% in the fourth quarter to $625 million.
However, investors are growing anxious about Lemonade's ability to shrink its loss ratio. The loss ratio is the measure of how much of a policy an insurance company pays out, and the higher it is, the less money the company is keeping. After initial progress in bringing the number down, it's been struggling to keep it low.
Now what
Lemonade went on a launch spree over the past two years and heavily invested in rolling out new products in new markets. It also acquired an auto insurance company to ease its entry into that space. Management has said that it will now pivot to lower expenses and improve profitability.
In some sense, investors are seeing this as too little, too late, and they keep sending the price down further. Its prospects haven't been helped by the overall turmoil in the financial sector. Lemonade stock is down 20% in 2023 despite the S&P 500 being up 7%.
However, it's never really too late to turn things around, especially for a company growing as fast as Lemonade. Investors won't hold this period against it if it demonstrates improvement in profitability. Lemonade reports 2023 first-quarter earnings later today, and the price could jump on better-than-expected results.
