What happened
Shares of Lemonade (LMND -5.50%) sank another 16% in September, according to data provided by S&P Global Market Intelligence. That was on the heels of a mixed earnings report that disappointed investors with some key points and general market pessimism for stocks that the market is already down on.
So what
Lemonade caught investor attention with its artificial-intelligence digital insurance platform when it first went public. It's impressing customers as well. Customer count hit 1.9 million in the second quarter, a 21% increase over last year.
The company's growth strategy entails reaching new customers and cross-selling new and more-expensive policies to existing customers. This is working splendidly, and the average policy premium increased 24% over last year to $360. Gross earned premium increased 53% to $164 million, and revenue was up 109% to $105 million.
Sounds amazing, right? As much as Lemonade's growing, however, there are two metrics that are holding investors back.
One is net loss. While it hasn't increased, as management promised, it's still very high, and it's not improving so quickly. In the second quarter, net loss was $67.2 million, down a smidgen from $67.9 million last year.
As it scales, the net loss should improve; CEO Dan Schreiber said that the amount of premiums is growing five times faster than expenses, which should lead to profits at some point.
The other metric that is perhaps more worrying is the loss ratio. That measures how much in premiums Lemonade pays out in claims, and it must get this under control if it's going to be viable in the long term. It went up by 8 percentage points from last year to 94%, too close to the 100% that would mean it's paying out every dollar it gets in claims.
Management explained that its older products are, in fact, demonstrating a much lower loss ratio, and that this increase is part of launching new products. However, it's taking much longer than investors are comfortable with to begin showing lower loss ratios.
Now what
Management is guiding for more growth, but to see it decelerate to an 23% increase year over year in gross earned premium in the third quarter. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are expected to register a $50 million loss, an improvement from $66 million last year. But all eyes will be on the loss ratio.
Lemonade could have a great long-term future, but investors might want to see more progress before buying shares.