Lemonade ( LMND -2.80% ) 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 is going to experience growing pains along the way. Although it has increased its customer base and policies written rapidly through its renters and pet insurance products, it has also seen expenses rise just as fast. Increased claims and an aggressive customer acquisition strategy have resulted in mounting losses -- which may be why its stock is down more than 70% from its peak earlier this year.
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Revenues are up, but so are losses
First, let's focus on the positives for Lemonade in the third quarter. The company brought in $35.7 million in revenue, up 101% from the same quarter last year. This came as net earned premiums increased 105%. However, its loss expenses, or the amount paid out to settle insurance claims, jumped from $6.7 million last year to $17.5 million in this most recent quarter.
As a result of higher losses, Lemonade's loss ratio jumped from last year. The loss ratio is used in insurance and compares losses paid out to premiums earned. A ratio below 100% means the company is retaining more premiums than it pays out in claims. The lower the ratio, the better the profitability for the company. Lemonade management's goal is to remain below a 75% loss ratio for all of its businesses.
Lemonade's gross loss ratio was 77% in the third quarter, up from 72% in the same quarter last year. In 2021, its loss ratio of 88% is up from 71% last year. Winter storms across Texas and Oklahoma hurt the company earlier this year.
Let's look at our legacy insurance companies to put this loss ratio in perspective. Through the first three quarter of 2021, property insurer Chubb has a loss ratio of 59%. Automotive-focused insurers Progressive and Allstate have loss ratios of 76% and 71%, respectively. From a loss-ratio perspective, Lemonade has seen improvements and isn't far off its more established competitors.
Adding new customers comes at a cost
Lemonade is adding customers at a rapid pace, and expenses are up as a result. The company has invested heavily in technology while upping marketing expenses to add customers. In the third quarter, technology development was $14 million, up 170% from last year. Meanwhile, marketing costs of $42 million were up another 90% from last year.
This, along with higher loss expenses, hit the bottom line. Its net loss came in at $66.4 million during the quarter, more than double last year's net loss of $30.9 million in the comparable period.
While these elevated expenses affected Lemonade's bottom line, 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 during the quarter, while its customer count grew 45% from last year to 1.3 million.
Image source: Getty Images.
Lemonade looks to convert current customers to its newest product
Lemonade continues to expand. On Nov. 3, it said it was rolling out its car insurance product, Lemonade Car. The product now is available in Illinois, and the company expects to introduce it nationwide soon.
This opens up a significant opportunity for the insurer. Estimates peg the U.S. car insurance industry at around $300 billion. That's 70 times larger than the renters and pet insurance markets that Lemonade now serves.
One move it made to speed up this rollout is the acquisition of Metromile, a car insurer that is cut from the same cloth as Lemonade. Metromile also uses big data and AI to revolutionize car insurance and focuses on a pay-per-mile model. It is licensed in 49 states and currently writes policies in eight. The acquisition boosts Lemonade's auto insurance endeavors, giving it more than 95,000 policies in force.
However, Metromile has had net losses of $171 million this year, up from a $36 million loss the year before. Metromile itself is still a young and growing company, so Lemonade will take on losses as it combines the two businesses.
Image source: Getty Images.
The stock will see volatility as it forges ahead
Lemonade has the potential to be a stellar company. Its focus on AI and automation to underwrite policies could pay off, especially now with its Lemonade Car insurance product.
However, it has work to do before it can become profitable. The company is undergoing rapid customer acquisition and will incur higher expenses as it builds out its car insurance product alongside its other insurance lines.
As the losses pile up, its stock will continue to see volatility. Its disruptive potential makes it a speculative stock suitable for growth investors with a long-term perspective in mind and who are willing to withstand the ups and downs in the meantime.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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