Lemonade in Three Words: Disruptive Insurtech leader

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Background

Lemonade is an insurance company that offers policies for homeowners, renters, cars, pets, and term life

It’s been a wild year for Lemonade, with shares falling 67% in 2022 and then rising back 28% in 2023.

The insurance technology leader closed on its acquisition of usage-based auto insurance company Metromile in late July 2022, paying just $145 million in stock for almost 100,000 new customers, over $110 million of additional in-force premium, more than $155 million of cash and cash equivalents, and a second insurance business with licenses in 49 states — not to mention data from roughly 500 million road trips. It financial results directly following that acquisition were rather skewed.

The good news was that it increased the total number of customers and bolstered the average premium per customer. But it also added 3 to 5 percentage points to Lemonade’s loss ratios, meaning it was more expensive to support those insurance policies. Management told investors that they believed their losses had peaked and should steadily improve going forward, adding that their existing capital on the balance sheet should be more than sufficient to carry Lemonade through to profitability.

In November 2023, Lemonade reported that it had just signed its 2 millionth customer. Its third-quarter results showed an 11 percentage point decrease in its loss ratio — from 95% last year to just 84% today (lending credibility to management’s previous statements). Total in-force premiums were up 19% to $719 million and the premium per customer rose 6% to $362.

Lemonade is still reporting negative EBITDA, but its reported losses are decreasing as it signs more policies. In its recent first quarter 2024 conference call, CEO Daniel Schreiber claimed the company would be cash-flow positive by the end of the year, empowered by how artificial intelligence “continues to deliver on the promise at the very core of Lemonade’s thesis.” In the first quarter of 2024, revenue grew 22% even though operating expenses grew only 2% (and also with a 11% decrease in headcount).

That seems to suggest that the juice was worth the squeeze, and that patient investors could be rewarded for Lemonade’s upcoming growth ambitions.

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May 8, 2025:

Here is my collection of thoughts and insights about Lemonade.

Fundamentals & Profitability

• Lemonade's fundamentals are incredible. It is growing the top line quickly (20%+ in revenue and new customers) and is also now profitable.
• Its retention rate of 86% is average for the insurance industry.
• Its gross loss ratio (expenses paid for claims / premiums collected) of 73% is still very high as compared to peers (<60% is 'good'). But this is improving rapidly as the company is becoming more disciplined in its underwriting. For example, it was 90% two years ago.
• We should expect Lemonade's loss ratio to be higher than the industry average. It is not only heavily automated (i.e. very low costs for human labor/agents), but is also writing lower-premium policies like renters and pet. It has lower overhead as compared to many of its peers.
• The entire insurance industry is based upon disciplined underwriting. The companies who prioritize growth over discipline don't last long and eventually blow up.
• The insurance industry is heavily regulated, especially related to the increase in premium they are allowed to issue. In periods of high inflation (i.e. the past several years), insurance revenues and profitability will often lag the broader economy.

Marketing

• An LTV / CAC ratio of 3x (customer lifetime value divided by customer acquisition cost) is very good for a software company. It is similar to the LTV/CAC of ⁠Veeva Systems in 2019, and the stock went on to double during the following 12 months. The highest I've seen for any publicly-traded growth-stage software company who was already profitable was for CrowdStrike, which was 8x. https://x.com/7Innovator/status/1198998148888309762
• One of the reasons Lemonade's LTV/CAC is so attractive is due to its partnership with General Catalyst. Using "Synthetic Agents" (where the entire customer experience, from clicking on the first ad to setting up a policy, is controlled by Lemonade), Lemonade leans on GC to finance up to 80% of its acquisition costs (digital ads) in exchange for paying them a commission of up to 16% of the final premium. This is a win-win; keeping Lemonade's cash requirements for marketing to a minimum in exchange for a profitable relationship for GC.

California

• The California wildfires this year was a tail-risk event. Lemonade did was it was meant to do -- be there for its insured customers in need -- but it also results in $45 million in gross losses and an unexpected ($20) million hit to Adj. EBITDA in Q1 2025.
• Considering this was a catastrophic event, the magnitude of that financial impact isn't all that bad.
• Lemonade would need to increase its policy pricing to continue to participate profitably in this very-high-risk market. And while it's not entirely exiting, it has purposely begun pulling back 'non-renewing' its homeowners and renters policies in the California market. This might impact top-line growth. But it is a reasonable business decision.

With regard to management, co-founders Daniel Schreiber and Shai Wininger are still actively involved as the company's CEO and President (respectively).

Lemonade is still a very young company; founded only 10 years ago. Most of the past decade has been about outsized growth and obtaining a ton of data. Not just number-crunching to get the right relationship between premiums and claims, but also behavioral data like the telematics into autos. Lemonade set its long-term growth ambitions to write policies for Renters and then Home and then Pet and then Life and then Auto.

I suspect the next decade for Lemonade will be less about growth and more about disciplined underwriting. It now has a loyal base of customers and has learned which markets are the most profitable (and also the most unprofitable).

We should see its revenue growth decline to 10-15%, its retention rates climb to >90%+, and its gross loss ratios decline to <60%. And because of its AI foundation, this transition will be incredibly profitable for shareholders. So then we get to the valuation.

• Lemonade's current stock price is $30.54 and its current market cap is $2.2 billion.
• The stock is currently priced at a Price/Book Value of 3.7x. That's nearly double many traditional insurers; who are also growing much slower and are much less efficient.
• Wall Street's consensus price target of the 8 analysts following Lemonade is $30. Suggesting the shares are currently fairly-valued.
• I have read several takes on X/Twitter and investing blogs that suggest Wall Street is undervaluing Lemonade's growth rates and operational leverage, and that the shares should be priced closer to $150.

LMND's stock is down (16%) YTD in 2025 but is also up +70% during the past twelve months.

Based upon the strong fundamentals and unit economics, the profitable marketing strategy, the operating leverage, and the financial discipline, I am very confident in reaffirming Lemonade as a... Join 7investing to get access to this section

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