Lemonade Stock: Building a Comprehensive Insurance Float (NYSE: LMND)

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Right now, I encourage investors to think in a growth mindset and be open to taking a little risk. In the space of just a few months, the market’s attitude has shifted from a “gun-ho” trend that went all-in on expensive tech stocks to one that now cautiously avoids any growth stocks that has no cold and hard income. to display on the bottom line.

Slowly, however, risk appetite seems to be picking up – and investors have a fantastic opportunity to invest in some old high profile stocks at a fraction of their previous value. Lemonade (NYSE: LMND), in particular, is a major decline worth watching. This stock is down more than 40% since the start of the year, and almost 80% from all-time highs:

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Data by YCharts

Lemonade is building an all-in-one insurance platform that’s far more sustainable than where it started

Now note that I haven’t always been positive about Lemonade. For the majority of its early days as a public company, I expressed my skepticism about A) the scale of the company and its ability to achieve profitability, and B) its outrageous valuation.

Since then, however, the valuation has only eroded as the company’s fundamentals begin to shine through. While it’s true that Lemonade has yet to repair its massive losses, I like the diversification the company brings to the table. In particular, I believe Lemonade’s acquisition of Metromile, which now serves as the cornerstone of the “Lemonade Car” branded insurance offering, brings Lemonade into a huge new market.

Speaking on the benefits of diversification during the fourth quarter earnings call, CEO Daniel Schreiber noted the following:

As we enter 2022, we find ourselves in an enviable position, having launched pet, life and car in the last 18 months. We believe we have reached critical mass in both our technology and our product portfolio. Of course, we have ambitious plans for new products and new technologies for the years to come. But for the first time, both pillars are now complete enough to build. This allows us to shift resources from manufacturing technology and products to exploiting our technology and products in new ways. This means leveraging our technology to reduce our expense ratio through automation and our loss ratio through machine learning while increasing our CAC/LTV ratio through cross-selling and bundling.

None of this is entirely new. We’ve been investing in scale, automation and precision for years, but we’re on the cusp of a change in degree that we believe will equate to a change in nature. When we were in the monoline, cross-sell, and bundle business, perhaps the biggest LTV unlocks weren’t really available to us, and our technology investments were largely consumed by building products. The balance will now shift, and we anticipate that over the next few quarters and years, this shift will take our business to new levels of efficiency, growth and profitability. One outcome is that we expect 2022 to be a year of peak losses, with our EBITDA improving each year thereafter. […]

Take our fellow insurtechs on one side. To a first approximation, all other insurtech companies are a single-product company, offering auto, home, life, pet, or rental insurance, while Lemonade offers all 5 on a unified platform. While specialization has its benefits, a monoline strategy increases concentration risk, caps LTV, prevents clustering, forcing customers to hire competitors, and generally means growth comes exclusively from adding customers. rather than their growth.”

In other words, other tech insurance companies (including Metromile, which Lemonade gobbled up) failed precisely because they were spending tons of marketing dollars to trick customers into producing just one contract. insurance. Lemonade, however, now has five different products for sale: Pet, Life, Car, Home, and Renters – all but the latter two being natural cross-sell opportunities. By gaining more of a customer’s wallet share, as well as diversify the portfolio’s underlying risk across different categoriesLemonade can now build a scalable and eventually profitable insurance model.

I’ll repeat something I’ve said before in defense of Lemonade: insurance is about scale, and by investing in new categories, Lemonade can aim to build a new insurance conglomerate that rivals legacy giants. like AIG (AIG) and Progressive. Insurance (PGR), with the lower-cost online sales model that ultimately drives higher margins and better customer influx (particularly because the way people buy insurance is changing: with Lemonade holding the key millennial demographic, more insurance industry market share will spill over to insurtech incumbents like Lemonade).

Here is Lemonade’s own statement, taken from its recent fourth quarter letter to shareholders, on how the company has a competitive advantage over other tech insurance players as well as traditional insurers:

Lemonade vs Competitors

Lemonade vs Competitors (Lemonade Q4 Shareholder Letter)

Valuation: Lemonade trades almost for free

Excessive investor pessimism over Lemonade has caused the stock’s valuation to plummet to levels that can almost be considered free. At the current share price near $23, Lemonade trades at a market capitalization of just $1.60 billion. However, after deducting the $1.07 billion in cash from the company’s most recent balance sheet, Lemonade’s result the company’s value is only $523 million.

We should note here that we applaud Lemonade’s prescience for raising additional capital in early 2021 at a whopping $165/share, raising just north of $500 million for the company’s coffers. This amount of cash covers approximately two years of Adjusted EBITDA losses (and according to the company’s previous statement, 2022 is expected to be the “valley” year with the worst Adjusted EBITDA, before the “flywheel” strategy insurance” does not start to produce a leverage effect in 2023). If Lemonade had waited until 2022 to raise that capital, its declining share price would have only brought about $100 million to the balance sheet, which would leave Lemonade struggling now.

Lemonade currently expects to end FY22 with $530-540 million in premiums in force (IFP). Recall that Lemonade paid a ~2x multiple of the IFP for Metromile. At present, Lemonade’s enterprise value is trading just below

Lemonade Directions for Exercise 22

Lemonade Guidance for FY22 (Q4 Lemonade Shareholder Letter)

Growth indicators still solid

We also note that Lemonade continues to generate phenomenal growth, driven by cross-selling between its products. Some of the key measures are presented in the table below:

Lemonade Customer Key Metrics

Lemonade Customer Key Metrics (Q4 Lemonade Shareholder Letter)

Lemonade grew its total customer base by 43% year-over-year in the fourth quarter to 1.43 million total customers. His in-force premium, meanwhile, has increased 78% y/y to $380.1 million (IFP’s forecast of $530-540 million for next year represents 39-42% year-over-year growth).

Perhaps the most notable metric to cite: Lemonade is increasingly successful in retaining customers. The company’s dollar retention rate climbed to 82% in the fourth quarter, up 3 points from the prior year and a significant improvement from the 70s in 2019/early 2020. More Lemonade ecosystem products have a positive impact on all indicators.

Now, note that Lemonade’s loss ratios remain high, with gross loss ratios at 96% in the quarter (meaning every policy written is roughly breakeven).

Lemonade loss reports

Lemonade Loss Ratios (Q4 Lemonade Letter to Shareholders)

However, there is a nuance behind this figure: the gross loss ratios in the fourth quarter were impacted by historical losses which did not carry sufficient reserves. However, accident loss ratios in the fourth quarter were not higher than in the third quarter.

Shai Winiger, the company’s co-CEO, expressed confidence in Lemonade’s ability to turn around loss ratios during his prepared remarks on the fourth quarter earnings call:

Nevertheless, we have seen a few quarters with high loss ratios. The underlying cause is the welcome and intentional shift in our business mix, with US-based tenants representing less than half of the portfolio today, compared to around 2/3 a year ago. The lines of business that have captured this share, home and pets, have higher loss ratios than our portfolio of more mature and stable tenants.

We have plans in all of our new product lines for underwriting profitability and these are driving steady improvements in pet and home loss ratios. These improvements were outpaced by the growth of these products, meaning that our aggregate loss ratio increased even though our product-specific loss ratios improved. Over time, one should catch up to the other, so we expect shedding rates for all Lemonade products to be below 75% in due course. In the short term, however, our new products are likely to be above this target, even if they are trending lower. This is a natural, temporary cost of scaling new businesses.”

Key points to remember

In my view, there’s a lot of undue pessimism towards Lemonade right now, which creates a well-timed opening for investors willing to take on some short-term risk and volatility to buy a future insurance giant. . Insurtech is still a relatively nascent space, but few companies other than Lemonade have the name recognition and ambitious plans to become a multi-product insurer. Stay a long time here and buy the dip.