Lemonade (NYSE: LMND) is a young company looking to disrupt an old industry: insurance. The company offers a platform that streamlines the way customers deal with insurance, from the buying process to filing claims.
As a young company, Lemonade will experience growing challenges along the way. While it has grown its customer base and underwritten rapidly through its tenants and pet insurance products, it has also seen its expenses increase just as rapidly. Rising claims and an aggressive customer acquisition strategy have resulted in growing losses – which may explain why its inventory is down more than 70% from its high at the start of the year.
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Incomes are up, but so are losses
First, let’s focus on the positives for Lemonade in the third quarter. The company posted revenue of $ 35.7 million, up 101% from the same quarter last year. This happened as net earned premiums increased 105%. However, its loss costs, or the amount paid to settle insurance claims, fell from $ 6.7 million last year to $ 17.5 million in the last quarter.
Due to higher losses, Lemonade’s loss rate skipped last year. The loss ratio is used in insurance and compares losses paid to premiums earned. A ratio of less than 100% means that the company withholds more premiums than it pays in claims. The lower the ratio, the better the profitability of the company. The objective of Lemonade’s management is to stay below a 75% loss ratio for all of its activities.
Lemonade’s gross loss ratio was 77% in the third quarter, compared to 72% in the same quarter last year. In 2021, its 88% loss ratio is up from 71% last year. Winter storms in Texas and Oklahoma hurt the business earlier this year.
Let’s look at our old insurance companies to put this loss ratio into perspective. During the first three quarters of 2021, the property insurer Chubb has a 59% loss rate. Automotive Insurers Progressive and Allstate have loss ratios of 76% and 71%, respectively. From a loss ratio perspective, Lemonade has seen improvements and is not far behind its more established competitors.
Adding new customers comes at a cost
Lemonade is adding customers at a rapid rate and expenses are increasing accordingly. The company has invested heavily in technology while increasing its marketing spending to attract customers. In the third quarter, technology development amounted to $ 14 million, up 170% from last year. Meanwhile, marketing costs of $ 42 million are up 90% from last year.
This, along with higher loss expenses, affected the bottom line. Its net loss was $ 66.4 million in the quarter, more than double last year’s net loss of $ 30.9 million for the same period.
Although these high expenses affected Lemonade’s results, the company is rapidly expanding its customer base. In-force premiums, or the total value of Lemonade’s current policies, increased 84% to $ 347 million in the quarter, while the number of its customers increased 45% from last year. to reach 1.3 million.
Image source: Getty Images.
Lemonade seeks to convert existing customers to its new product
Lemonade continues to develop. On November 3, he said he was the deployment of its automobile insurance product, Lemonade car. The product is now available in Illinois and the company plans to launch it nationwide soon.
This opens up an important opportunity for the insurer. Estimates put the U.S. auto insurance industry at around $ 300 billion. That’s 70 times larger than the tenant and pet insurance markets that Lemonade now serves.
One of the measures taken to accelerate this deployment is the acquisition of Metromile, an auto insurer that’s cut from the same fabric as Lemonade. Metromile is also using big data and AI to revolutionize auto insurance and is focusing on a pay-per-kilometer model. He is licensed in 49 states and currently writes policy in eight. The acquisition strengthens Lemonade’s auto insurance efforts, giving it more than 95,000 policies in force.
However, Metromile suffered net losses of $ 171 million this year, up from $ 36 million the year before. Metromile itself is still a young and growing company, so Lemonade will assume losses by combining the two companies.
Image source: Getty Images.
The stock will experience volatility as it progresses
Lemonade has the potential to be a stellar business. The focus on AI and automation to underwrite policies could pay off, especially now with its Lemonade Car insurance product.
However, it has some work to do before it becomes profitable. The company is experiencing rapid customer acquisition and will incur higher expenses as it expands its auto insurance product alongside its other lines of insurance.
As losses accumulate, its stock will continue to experience volatility. Its disruptive potential makes it a speculative value suitable for growth investors with a long-term perspective in mind and who are willing to endure the ups and downs in the meantime.
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