Lemonade Down 60% – Time to Buy?
Iinsurance technology company Lemonade (NYSE: LMND) has been a terrible performance in recent months, with stocks down more than 60% from their 2021 high. Fool live Video clip, recorded May 20Fool.com contributor Matt Frankel, CFP, explains to colleague Brian Withers why he’s still thrilled to own the title.
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Matt Frankel: It’s an insurance company that really targets the millennials, the younger generation who don’t want to face the traditional way of buying insurance. There are few industries in the world that I can name that have as many consumer issues as insurance. I don’t know, Brian, if you’ve ever purchased life insurance, it’s not a fun process.
Brian Withers: Yes I have.
Frankel: When I did, they had to send a nurse to my house to draw blood, they had to call my doctor. I needed a note explaining one of my medications. It was a really heavy process. Forget the online aspect of it. I applied for it online, but it was still all this behind-the-scenes nonsense I had to do. Note that shopping aside, it is a terrible process. Lemonade aims to take the entire insurance process and get it done in seconds, not days or weeks.
Their core product is tenant insurance, this is really where they have racked up over a million customers, as I’ll talk about in a second. They also offer home insurance for people who have gone from renting to owning, and they also offer pet insurance. They have recently started offering life insurance and are about to enter the auto insurance market.
Let’s take a step back for a second. Lemonade peaked at around $ 180 a share earlier this year. It is now trading at $ 77. It’s a pretty big drop. I think of all the stocks in my portfolio, Lemonade was hit the hardest. Let’s see why. Lemonade started to drop long before its last earnings report was released earlier this month, but it was certainly the catalyst for the latest drop.
At first glance, some of the numbers look pretty solid, especially when it comes to the company’s long-term growth. The in-force premium, which is the volume of total premiums under the brand, increased 89% year over year to $ 252 million. Average customers pay the company 25% more than a year ago. It could mean an upgrade in coverage, it could mean adding some other form of coverage, like tenant insurance, a customer adding pet insurance, or something to that effect. The average customer pays 25% more year over year. That’s a pretty impressive increase in income.
The number of customers is now around 1.1 million people. Lemonade hit the million mark in four years. It took decades for the big insurance companies, State Farm, for example, to reach this level. That’s truly impressive. They really did it by: first, by improving the insurance game, but two by focusing on a less expensive form of insurance that young people need, which is not very expensive, which could be purchased. in seconds, not even minutes. , complaints are handled very quickly.
They have really done a great job of developing that customer base. To make it even better, Lemonade upped its revenue forecast for the full year from what it was. Why did the stock drop? It fell because the company lost a lot more money than people realized. I mentioned that their main markets are homeowners and renters insurance. Those big winter storms in Texas that we experienced last year, they’re just terrible. They destroyed the power grid, things like that. I remember reading that Texas was hours away from a total current collapse at one point.
By the way, an insurance company’s loss ratio is the percentage of the premiums it takes that it pays to cover claims. In the fourth quarter, it was 73%, which is pretty normal. For every $ 100 they received, $ 73 was spent to pay claims. In the first quarter, because of those terrible storms and all the losses suffered by landlords and tenants, the loss rate was 121%. This means that for every $ 100 of bonus lemonade, they paid $ 121 to cover claims. That’s a pretty big loss and it doesn’t include business expenses like paying their employees or things like that. This is exactly what they pay for the claims.
The company did a good job of trying to pass it through a stress test. This is corporate America, they have to make it as good as possible. We have now seen what our company can handle. We did not collapse. We say we did better than the Texas power grid, that’s for sure. But even so, it scared off a lot of investors who lowered the stock a bit. Long story short, here we are at around 60% off Highs, my worst performing title. The most exciting lemonade growth market that I’m watching over the next few quarters is auto insurance.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.