Following some massive volatility, is the innovative and sometimes controversial Lemonade a good investment?
Lemonade (NYSE: LMND) operates in the insurance industry, which has historically been highly profitable but has garnered the dislike and distrust of the consumer. Lemonade aims to change this by offering contents and liability insurance that is customer-centric and “built for the 21st century”. It currently operates in several U.S states, Germany, the Netherlands, and France, with plans to expand to all U.S states and 31 countries in Europe.
The bull case for Lemonade:
Today, the insurance industry represents approximately 11% of GDP in the U.S. and $5 trillion worldwide. Just over one-tenth of the Fortune 100 is made up of insurance companies with an average age of 125 years old, which demonstrates the lack of disruption through the years. Despite the size of these stalwarts, none of these has managed to maintain a share of greater than 4%. There is a massive opportunity for growth for Lemonade if it can capture a small portion of this highly profitable industry.
Lemonade recently reported its Q1 2021 earnings results, which left investors with much to be desired. The insurance disrupter’s revenue of $23.5 million, down 10% year-over-year (YoY), actually topped estimates of $1.62 million. In more positive news, the company’s in-force premium (IFP) metric (active accounts) jumped to $56 million, up 89% (YoY).
The earnings report did have several high points though, including;
- Total customers grew 50% year-over-year to over 1 million.
- The company held $1.2 billion in cash and cash equivalents on March 31, 2021.
- The average premium per customer grew to $229, up 25% YoY.
- Non-renters insurance accounted for half of Lemonade’s business, up from a third of new business in Q1 2020.
- The company also gave some new details about its latest product, Lemonade Car.
In a letter to its shareholders, Lemonade confirmed how far the company has come with its product offerings since its market debut in July 2020. Speaking about Lemonade Car, the company stated:
“This marks the third new product we have announced in less than a year, and the fourth major category of insurance we will offer our customers.”
Lemonade’s business model differs from other insurers by keeping a flat 25% of the premium and while the remainder is used to pay claims and give what is left to charitable causes. The use of A.I and machine learning should help to lower costs, and the unit economics should improve with scale as it expands. Lemonade’s loss ratio has also continued to decline in the last few years, from 89% in Q2 2019 to 67% today.
The bear case for Lemonade:
While there is a considerable opportunity for Lemonade, it is a relatively high-risk investment, and this task of disrupting the insurance industry is a confessed David versus Goliath scenario. The company acknowledges this and the fact that there will be some challenging times ahead.
Large insurance companies such as Berkshire Hathaway and Allstate present stiff competition. These companies may choose to integrate A.I or introduce a mobile app to compete with Lemonade if this model continues to gain traction. However, Lemonade’s overall user experience may combat this despite the deep pockets of larger players.
Lemonade’s loss ratio also increased 121% compared to 72% in Q1 2021. The insurance firm posted a loss per share of $0.81 on revenue of $23.5 million. Investors were mostly disappointed with Lemonade’s gross profit decreasing 59% to $1.9 million, which was due to the Texas freeze.
The concentration of the majority of Lemonade’s client base is also a risk factor with over two-thirds of gross written premiums coming from three states according to its S-1 filing. A natural disaster in one of these states, as seen in Texas this year, could prove to be extremely costly for Lemonade.
So, should I buy Lemonade stock?
This company is in the early stages and therefore carries with it more significant risk. It is a socially conscious company on a mission to disrupt and change the perception of the insurance industry. There is a lot to like about Lemonade, and it could prove to be a big winner in the coming years.
When did Lemonade go public?
Lemonade went public on July 2nd, 2020.
When was Lemonade founded?
It was founded in 2015.
Who is the CEO of Lemonde?
Daniel Schreiber is the co-founder and CEO.
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