Lemonade (LMND 1.64%) posted another quarter of outstanding growth and improving profitability in the 2023 second quarter. But like many of its reports since going public in 2020, this one also showed a struggle with its loss ratio, or how much it pays in claims versus premiums collected. Can it ever get this important metric under control? Let's check out the possibilities and see where it could be at this time next year.
High revenue growth, more customers
At least one area where Lemonade isn't showing any signs of trouble is in increasing its top-line metrics. These continue to grow at high double-digit percentage rates. In-force premium, which is the average policy multiplied by customer count and is what Lemonade uses for its main top-line metric, increased 50% over last year. The average premium per customer increased 24% to $360, and the customer count increased 21% to more than 1.9 million. The customer increases are quite impressive, as it's grown to nearly 2 million customers in a relatively short time.
This is an important part of Lemonade's growth strategy, which is capturing clients when they're young and upselling and cross-selling as they grow into new life-cycle events. It's evidently working, as illustrated by the robust increases in average policy amounts and total revenue. Revenue increased 106% over last year to $56 million.
These numbers probably will continue growing during the next year. Insurance isn't an industry that's typically affected by trends like inflation since people need their policies under any circumstance. However, it could feel the impact if people buy fewer cars and homes. So far, the impact has been soft. It could also benefit from people looking for better-priced policies in a tight environment.
That annoying bottom line
Lemonade stock has suffered as the company continues to post high losses and an increasing loss ratio. The loss ratio measures how much Lemonade is paying out in claims, which is why you'd want to see it decrease. In fact, it would have to decrease for Lemonade to be a viable business long-term.
Investors cheered a large improvement in the 2023 first quarter, but that didn't continue into the second quarter. The loss ratio increased eight percentage points in the quarter over last year's number to 94%, well above the company's target range of 70% by 2027.
Management said that this was due to unseasonable weather catastrophes (CAT) and that loss ratios were up for the entire industry. It claims that its underlying trends ex-CAT were in line with expectations. It also pointed out that an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss of $52.7 million came in better than expectations of $55 million to $58 million. That suggests its reinsurance program is working.
There were signs of health in the loss ratio, notable that for renters insurance, its oldest product, the loss ratio was below 50% for the first time, including CAT.
Lemonade loss ratios in the second quarter. Image source: Lemonade.
That's excellent progress, and it inspires confidence in the company's ability to get there company-wide. But I wouldn't bet on that happening within one year from now.
As for net losses, they persist. Management promised that it would reach peak losses last year, and so far, it's come through on that. But the net loss was still $67.2 million in the second quarter, only slightly less than $67.9 million last year.
Management noted last quarter that its growth rates had exceeded its expectations because it was attempting to slow growth while it waited for regulatory approval for premium rate increases. Many of these rates have been approved now, and they're significant, such as a 30% increase in homeowners rates and a 23% increase in pet rates in California. These should lead to more profitable growth in the coming quarters.
Lemonade stock is still down
Lemonade stock is up 17% this year, but it's still down more than 90% from highs in 2021.
As it continues to demonstrate robust growth and improved profitability, the stock should keep climbing. At this time next year, I would expect to see all of these things happening. But if it can't get a better handle on the loss ratio, its stock price could keep disappointing shareholders.
