Why Lemonade Still Has the Potential to Be a Monster Stock

Despite turbulence, Lemonade (NYSE: LMND) has opportunity ahead with its expansion into different insurance lines. In this clip from “IPO & SPAC Show” on Motley Fool Live, recorded on April 11, Motley Fool contributor Jason Hall discusses the pros and cons of Lemonade’s financials over prior quarters and assesses the potential growth areas ahead for the insurance disruptor.

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Jason Hall: The challenge, guys, is that it’s had some challenges, I guess is the best way to put it. First of all, the good stuff. This is from its fourth-quarter, its most recent reported results. In force premium. Current active premiums up 78% and you see where that is from where it was in the fourth quarter at the end of 2019. This is a business that has grown substantially. Premiums per customer continue to go up as it expands and adds more different insurance lines. This started out as pet insurance and renter’s insurance. It’s recently added homeowners and life. More recently than that, Lemonade Car is a new product that only really was operating in one state during the fourth quarter. It’s a brand-new business. Customers up 43%. The amount of premium per customer is up and you get this in force premium right here, which is great. Then, you start looking at the economics of their insurance and it’s not great. The company’s goal is to really be closer to like 65% to 70% on that gross loss ratio. It was 96% in the fourth quarter. That is very, very high particularly in a period that there weren’t any major natural disasters in areas that it insures. It’s going to happen every once in a while. It’s the insurance business. Management’s reasoning behind it is more concerning to me because what they essentially said is that it was larger than expected losses from prior periods which tells me that those mid 70s numbers that we were getting in prior quarters were too low. I’m not concerned about this one quarter here. I’m concerned about prior quarters that were reported, maybe not being as low as they were. Now, thinking about Lemonade’s forward. That’s where we are today, but where are we going? This is a big thing that’s happening right here is its acquisition of Metromile (NASDAQ: MILE). What is this going to do? This is going to get the company into 48 states that it’s not in right now. Metromile is licensed in 49 states. It’s going to introduce a tremendous opportunity to move into other states. But there’s more to it as well. This is a company that’s been using AI and using big data in the auto industry for an auto insurance business for a decade. It’s really jump-starting Lemonade auto in a very meaningful way. It’s going to fit very well with the business. I’ll tell you right now what I’m thinking about Lemonade is they have a lot going on. Added a lot of new lines as they’ve told us that they were going to do. I’m giving management the benefit of the doubt that what’s happened in the past few quarters all got baked into this one quarter’s result is going to be an aberration. It’s brought in some really good people, some tenured insurance executives from other companies that are really good insurers. They have somebody that came over from USAA that I think is going to bring a lot of value to their business. Acquiring Metromile is going to give them a lot of operational excellence in auto. I think that’s really going to add value. I’m in a wait-and-see moment, but I’ve given management a little bit of the benefit of the doubt. Investors aren’t bought into the story. You look at the value of the company as much as its book value has gone up substantially from the IPO, the book value, that cash burn and that failure so far to generate good underwriting. I want to show that real quick here. Even though the book value has gone up, the failure to do a good underwriting has the industry very leery about this as a business going forward. But I’m giving them the benefit of the doubt. Very disruptive. If they can do what they’re trying to do, I think this could still be just an incredible monster stock.

Jason Hall owns Lemonade, Inc. and Metromile, Inc. The Motley Fool owns and recommends Lemonade, Inc. The Motley Fool has a disclosure policy.

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