Breaking into the insurance industry isn't an easy feat. Established competitors have a trove of data and wide customer bases.
Lemonade (LMND -1.03%) is one company looking to make waves in the industry, with its plans to streamline the entire process by leveraging artificial intelligence (AI). It has achieved solid growth, adding customers while expanding its offerings. However, losses have racked up as it acquires customers and dials in its pricing models.
Its recent quarterly earnings announcement did give investors hope that it could be at an inflection point "considerably sooner" than expected.
Lemonade's leverage of AI gives it the potential for explosive upside
Lemonade made a splash when it went public in 2020. Its use of AI to streamline the insurance process, from buying coverage to processing claims, made it a compelling stock with high growth potential. Lemonade would leverage AI to personalize quotes, reduce customer onboarding time, and handle up to one-third of customer claims.
The company's earliest product was renters' insurance. Its goal was to target young adults and expand into other products to turn them into lifelong customers. It added homeowners' coverage to its offerings, the next logical step as young adults move from renters to home buyers. It has also added pet, life, and automotive insurance to its lineup of products.
Its growth has come at a cost
What Lemonade hasn't lacked is growth. Last year, it had 1.8 million customers, representing a 27% growth from the prior year. Meanwhile, its total revenue nearly doubled to $257 million as its expanded product offerings attracted more repeat customers. However, that growth has come at a cost. Last year, Lemonade's expenses were more than double its revenue, resulting in a net loss of $298 million.
Lemonade is working through integrating its multiple insurance products into its pricing models. It can take insurers time to balance the risks and rewards so that they can grow while ensuring the policies they underwrite are profitable.
One metric used to measure an insurer's underwriting ability is the net loss ratio. Lemonade calculates this as the ratio of losses plus adjustment expenses, minus amounts paid to reinsurers, to its net premiums collected. This useful metric tells you how well an insurer is covering its losses.
Lemonade aims to get its loss ratio to 75%, which would be right around the industry average. Last year, its loss ratio was 95%, showing that the company barely covered its losses from its premiums and has a lot of room for improvement.
It raised its revenue guidance for the year, and sped up its timeline to become cash-flow positive
Lemonade recently reported solid results for the third quarter, with its customer count growing another 12% while total revenue jumped 55% from last year. Its bottom line showed improvement, too, with its $62 million loss less than its $91 million loss last year. Its net loss ratio improved to 88%, down from its average of 98.5% in the four quarters prior.
The insurer beat analysts' estimates for the quarter while raising its full-year revenue guidance to $422 million at the midpoint, above prior guidance of $405 million.
The company also announced in its shareholder letter that it would achieve positive cash flow in late 2025, "considerably sooner than we had indicated last year." In its investor day presentation last year, the company expected to achieve positive cash flow by 2027. The stock popped following the announcement, gaining 61% in two days.
Is it time to buy?
The insurer has raised guidance and sped up its expected timeline to be cash-flow positive, news that was received well by the market. Its bottom line is slowly improving, too. Its net loss through nine months is $195 million, down from $234 million last year. However, it still has work to do to reach profitability.
Lemonade's improved loss ratio in the quarter was a good sign. Still, I'd like the company to string together several good quarters of improving ratios and profitability. While its path to profitability is becoming clearer, I'll continue to wait on the sidelines before buying the stock.