Lemonade reported its earnings in its shareholder letter on May 11, 2021, and held an earnings call on May 12.
The Basics
1. Lemonade’s earnings per share (EPS) was -$0.81, missing estimates by $0.03, but Lemonade’s revenue of $23.5 million beat estimates by $1.62 million.
2. Lemonade grew in most of its key metrics: in force premium (IFP) grew 89% year-over-year (YoY) to $252 million, premium per customer grew 25% YoY to $229, and total customers grew 50% YoY to 1,096,618.
3. Regarding new customers acquired in Q1 2021, about half of new customers bought non-renters products (homeowners, pet, or life insurance). This is up from about 1/3 of new customers buying non-renters products in Q1 2020. Since renters insurance is Lemonade’s cheapest product, key to Lemonade’s growth is to acquire non-renters insurance customers.
4. Lemonade took a major hit to its gross loss ratio, down 68% YoY to a 121% gross loss ratio. This is due to the Texas Freeze in January 2021 and the large number of claims that were made. Lemonade received about a year’s worth of claims in just a few days. The event resulted in $6.5 million of net losses.
5. Lemonade’s stock dropped about 18% after its earnings report to $60.16 at close on May 12, although the stock has pulled back up to $69.45 at close on May 14.
Lemonade had a mixture of good and bad news, but the market focused on the bad news. Investors are abandoning Lemonade with a bearish outlook. Seeking Alpha analysts have an overall Bearish rating (2 Bullish, 3 Bearish, 2 Very Bearish), while Wall Street analysts have an overall Neutral rating (1 Very Bullish, 2 Bullish, 3 Neutral, and 2 Bearish), with a price target of about $80. Lemonade’s stock is down 61% YTD, from $113.36 on January 4, and down from an all-time high of $183.26 on January 11.
Looking Forward: Lemonade Car Insurance
In its shareholder letter, Lemonade announced its planned move into car insurance, entitled Lemonade Car.
President and COO of Lemonade, Shai Wininger said, “We’re seeing an overwhelming demand for a Lemonade car insurance product from our customers. And so, since last year, a large part of our team has been working on what we believe will become one of the best car insurance products on the market. Lemonade Car will use technology to handle emergencies and pay claims fast, will offer great prices to safe drivers, and will be attractive to drivers of EVs and environment-friendly cars.”
Most intriguing here are two points:
1. Wininger says, “We’re seeing an overwhelming demand for a Lemonade car insurance product from our customers.” An overwhelming demand from existing Lemonade customers is important, since customers who bundle multiple Lemonade insurance products are key to its growth (see shareholder letter, pp. 4-6).
Lemonade already offers renters, condo, home, pet, and life insurance; adding car insurance adds another product that can grow Lemonade’s revenue from its existing customers, as opposed to the more difficult task of acquiring new customers. Thus, we should watch for growth in Lemonade’s premium per customer, which grew 25% YoY in Q1 2021 to $229 per customer.
2. Wininger says, “Lemonade Car will use technology to handle emergencies and pay claims fast.” Lemonade’s use of AI technology for car insurance will be key to building a competitive advantage in the insurance market. During the earnings call, CEO Daniel Schreiber explained some of the technology that Lemonade will use for its car insurance product, specifically data gathering through smartphones for the underwriting process.
If Lemonade’s AI can delight car insurance customers with speed and ease of use, as well as excellent underwriting -- then Lemonade has the key ingredients for disrupting the car insurance market.
Takeaway: Continued Growth Despite Losses from the Texas Freeze
Many critics have been waiting for Lemonade’s first major stress test in order to evaluate how well Lemonade can handle a large amount of claims. According to critics, Lemonade’s heavy usage of reinsurance contracts is unsustainable and risky, especially during times of crisis.
However, the Texas freeze actually had little impact on Lemonade’s growth, despite the negative reaction from investors. Consider the following:
1. Lemonade’s earnings per share (EPS) missed estimates by 3 cents, but Lemonade grew in every other important metric (in-force premium, number of customers, premium per customer), except gross loss ratio. Even Lemonade’s Q1 2021 revenue grew to $23.5 million from $20.5 million in Q4 2020 and topped estimates of $21.9 million in revenue.
2. Despite the losses from claims with the Texas Freeze, Lemonade actually increased their guidance numbers for 2021 in comparison to their guidance from the Q4 2020 shareholder letter:
- In force premium of $376 to $382 million vs. previous guidance of $372 to $378 million.
- Gross earned premium of $279 to $283 million vs. previous guidance of $270 to $275 million.
- Revenue of $117 to $120 million vs. previous guidance of $114 to $117 million.
Lemonade said that this increased guidance is because “we have extensive reinsurance programs in place for just such eventualities, and they worked very much as designed” (Shareholder Letter, p. 8).
3. Just as important as the financial test from the Texas Freeze was the operational test for Lemonade. How did Lemonade treat its customers during their time of crisis? Were Lemonade customers happy with how their claims were handled? Lemonade says that “a majority of claims were fully resolved within a week of the storm’s onset . . . Net Promoter Scores, a generally accepted measure of customer satisfaction, were nearly 70 for [Texas Freeze] claims, in line with our typical non-CAT [non-catastrophe] experience. We believe this is without parallel in our industry” (Shareholder Letter, p. 8).
Conclusion
2021 is proving to be a difficult year for the economy and tech stocks. The current economic/investing environment is characterized by rising inflation, slow job growth, rising interest rates, and a general sentiment against growth stocks.
While losses from the Texas Freeze are crushing investor enthusiasm for Lemonade, the leaders of Lemonade have not been discouraged and are moving forward with a new car insurance product and are confident in the company’s future growth.
