There is no argument that insurance disruptor Lemonade (LMND 1.64%) has products that resonate with customers. Thanks to its user-friendly application and claims processes, the company has grown its customer base to nearly 2 million people.
However, the problem has always been profitability and sustainability. For much of the past few years, Lemonade has been losing money at an alarming pace. There have been serious doubts about the business' ability to reach profitability before it runs out of money -- and with shares down by 93% from all-time highs and a terrible environment for raising new growth capital, many investors have stayed away.
In its most recent earnings report, Lemonade not only surpassed expectations for the current quarter, but gave investors some positive surprises when it comes to the path to profitability, and the progress Lemonade has made toward achieving positive cash flow. Management has given investors some clear dates by which it expects to achieve two key profitability metrics.
Lemonade's results look strong
Lemonade's third-quarter numbers look solid, both in terms of growth and progress toward profitability.
The company reported $719 million of in-force premium, up by 18% year over year, which is very strong considering management's strategy of prioritizing profitability over all-out growth. The company finished the quarter just shy of 2 million customers and expects to achieve that milestone this month, less than three years after reaching the 1 million mark.
While Lemonade's loss ratio is still not quite at the 75% target management is aiming for in order to achieve long-term profitability, it came in at 83% -- 11 percentage points better than a year ago. Lemonade predicts that its newer cohorts of insurance customers will have lifetime loss ratios well under the 75% mark, and so far the company's projections for customers added since mid-2022 have proven accurate. Operating expenses declined significantly year over year as well.
As a result of the growth in the business and improving underwriting, Lemonade's net loss has narrowed considerably, from $91 million a year ago to $62 million today.
Is a path to profitability emerging?
Previously, Lemonade said that it expected to achieve profitability without raising any additional capital, but it didn't give any dates in the near future. It also had more than $1 billion on its balance sheet at the time, so investors took this with a big grain of salt.
However, Lemonade now says that it expects to be cash flow positive by late 2025, sooner than management previously expected. And with $945 million on the balance sheet and just over $100 million of cash burn in the first three quarters of 2023 (and declining over time), this would mean that Lemonade would achieve positive cash flow while retaining hundreds of millions of dollars in unrestricted cash.
Not only that, but management expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) profitability to follow shortly after the business turns cash flow positive.
A remarkably low valuation and excellent momentum
Even after its post-earnings pop, Lemonade has a market cap of about $880 million, which is actually less than the $945 million in cash and investments it has on its balance sheet. In other words, the market is actually giving Lemonade's business a negative valuation.
To be sure, there's a lot that will need to go right -- especially when it comes to getting its loss ratio under control -- before Lemonade can actually achieve consistent profitability. But things are clearly moving in the right direction, and if the company can use its momentum to reach profitability without burning through the rest of its cash, this could end up being a home run for patient investors.
