What happened
Shares of Lemonade (LMND +0.04%) are down 20.9% this week, according to data provided by S&P Global Market Intelligence, even after the insurtech company announced stronger-than-expected second-quarter 2023 results. To be sure, the bulk of Lemonade's decline this week came after its quarterly earnings hit the wires on Wednesday evening.
NYSE: LMND
Key Data Points
So what
As for headline numbers, Lemonade's revenue climbed 109% year over year to $104.6 million. In-force premium (IFP) climbed 50% year over year, to $687 million, driven by a combination of a 24% increase in premium per customer and 21% growth in Lemonade's number of customers, to just over 1.9 million. On the bottom line, that translated to a net loss of $67.2 million, or $0.97 per share (narrowing from a loss of $1.10 per share in the same year-ago period). By contrast, most analysts were modeling a wider loss of $1 per share on lower revenue of $97.6 million.
So why the drop? I think it's a combination of two things: first, the fact that Lemonade stock had rallied an incredible 115% from its April 2023 lows leading into this report; and second, some concern that unseasonable weather catastrophes (or CATs) increased Lemonade's quarterly gross loss ratio by 8 percentage points year over year to 94%.
To be clear, Lemonade's loss ratios weren't exactly unique to the company, and more than anything should be thought of as the cost of doing business as a nationwide insurer. Several other leading insurance stocks saw elevated loss ratios this quarter as well amid a seasonably unusual surge in severe convective storms, or SCSs, which refers to somewhat unpredictable CAT events involving hail, straight line winds, tornadoes, thunderstorms, and the like.
But Lemonade handled these events admirably as a young, fast-growing player in the insurance space.
In a letter to shareholders, management elaborated:
In fact, the first half of 2023 turned out to be one of the worst H1s ever recorded for SCS-related insured losses, highlighting the intensity of this year's convective weather and related perils (Gallagher). Back to Lemonade. Our reinsurance did what it was designed to do, shielding our financials from the worst of these CATs, and, indeed, our EBITDA came in ahead of expectations notwithstanding the spike in gross loss ratio and CAT related claims. This was significant, because CAT-related losses increased by more than 4x year on year, representing 21 points of our Gross Loss Ratio in Q2. [...] We're encouraged by these underlying improvements, and believe it is a solid signal that our ongoing loss ratio efforts, including improved underwriting and consistent rate filings, will continue to bear fruit.
Now what
Lemonade also modestly raised its outlook for 2023 to call for IFP at the end of the year of $710 million to $715 million (up from $700 million to $705 million previously), gross earned premium of $654 million to $658 million (up from $645 million to $650 million before), revenue of $402 million to $408 million (increased from $392 million to $396 million), and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $199 million to $196 million (raised from a loss of $205 million to $200 million previously).
In the end -- and as a Lemonade shareholder myself -- I suspect this week's drop was influenced less by the increase in gross loss ratios and much more by traders taking some profits off the table after the stock's incredible run over the past few months. As such, I'm perfectly content holding my shares and am strongly considering adding to my position.
