Lemonade (NYSE: LMND) just announced an exceptional quarter that beat Wall Street’s expectations on every metric, resulting in a jaw-dropping 47% single-day pop last Thursday (November 1, 2023).
To be clear, I’m a Lemonade bull and longtime shareholder who’s celebrating this move — particularly considering that shares of the insurance technology stock had been beaten down nearly 60% from its 52-week high set in July. I also suspect there’s a potential short squeezeat play here, with more than a third of Lemonade’s entire float being sold short as of the midpoint of last month. This strong quarter apparently left many bearish traders fleeing for the exits.
But can Lemonade stock continue rallying after this excitement subsides? If it can continue its steady march toward sustained profitability — and noting the stock has admirably held onto last week’s gains so far — I think so.
Before we get to the really exciting parts of Lemonade’s ongoing growth story, let’s recap its third quarter.
Lemonade’s revenue grew 55% year over year to $114.5 million, helped by higher investment income and a 27% increase in gross earned premium (to $173.2 million). In-force premium (IFP) jumped 18% year over year, to $719 million, while Lemonade’s gross loss ratio improved by 11 percentage points to 83%. Lemonade’s gross loss ratio ex-CAT (or excluding catastrophe events) remained steady at 73%, which — as I noted when I urged investors to buy this dip a few months ago — is comfortably below Lemonade’s target of 75% for the key metric.
Lemonade ended its quarter with 1,984,154 customers, up 12% from the same year-ago period, and predicted it would exceed two million customers some time this month — a milestone it formally announced with a subsequent press release on the morning of Wednesday, November 8. That didn’t take long. Lemonade further revealed that while its customer base has doubled since first reaching the one-million market in late 2020, its premium per customer has also increased by roughly 70% while its operating expenses (as a percentage of gross earned premium) have roughly halved over the same period. Put another way, Lemonade’s superior economies of scale (relative to incumbent insurance giants that weren’t built with a mobile-first focus and AI at their cores) are finally becoming more clear.
Of course, a significant portion of that growth in premium per customer was driven by Lemonade’s July 2022 acquisition of usage-based auto insurance company Metromile, where — up until last quarter, at least — the company had failed to make meaningful headway in terms of its gross loss ratios so far. In large part, this lack of progress was related to the dichotomy between the (slow) pace of rate-hike approvals and higher claims costs spurred by soaring inflation.
But that’s about to change. In their quarterly letter to shareholders, management noted that Lemonade has just received approval for a 51% rate increase for its car insurance product in California, where around half of its car book of business resides. Coupled with recent rate approvals in other states — and assuming Lemonade can responsibly manage any resulting customer churn — the company expects its Car loss ratios should steadily march downward in the coming quarters.
Arguably most exciting, however, was a fresh prediction from Lemonade management in their letter to shareholders — namely, that the company now expects to turn cash-flow positive by late 2025. That’s far sooner than their previous target (outlined in their investor day presentation last year) to reach cash-flow positivity by 2027.
What’s more, management says they should be able to do so “with hundreds of millions in unrestricted cash in the bank.” And a few quarters later (some time in 2026) the company anticipates adjusted EBITDA profitability will follow.
Looking ahead to next year — and with the caveat that they “don’t expect [their] path to profitability to be entirely linear” — Lemonade anticipates its adjusted EBITDA should improve on a year-over-year basis each quarter even as the company continues to invest in growth and technology.
In the end, this quarter was as refreshing an update as any bullish Lemonade investor could have hoped for. And despite the temptation to take some quick profits off the table after last week’s delightfully violent pop, I’m perfectly content to hold my shares as Lemonade’s march toward sustained profitability continues.
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