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Shares of Lemonade (LMND -1.67%) stock lost 31% of their value in December, according to data provided by S&P Global Market Intelligence. There wasn’t any significant news in December, but Lemonade was on the receiving end of the general market slump, which has been particularly affecting unprofitable tech stocks.
Lemonade continues to post impressive growth and gain droves of customers. In the 2022 third quarter, customer count increased 30% over last year to 1.8 million, and gross earned premium, or total policy dollars, increased 71%. Premium per customer increased 35% to $343. That rate was accelerated, and almost doubled, from the second quarter, when it was 18%. It demonstrates that Lemonade’s model of growing its business through upsells and cross-sells is working.
That’s significant for investors, because Lemonade has claimed from the beginning that it would evolve from a humble seller of renters insurance into a real challenger to traditional insurance. The evolution, though, can’t happen in an instant. It involves serious cash outlays and patience.
Investors have been frustrated that losses have been growing. The market didn’t cheer Lemonade’s acquisition of auto insurance platform Metromile over the summer, despite management’s optimism. The current investing climate is not hospitable to expanding losses.
The loss ratio, which measures how much of each policy is used in payouts and indicates how well a company is underwriting its policies, has been climbing as well recently. That’s giving investors pause when considering whether or not Lemonade’s artificial intelligence really has anything better to offer than conventional underwriting practices.
There seems to be a disconnect between Lemonade’s growth and investors’ perception of its viability. At the very least, it’s taking longer than investors were hoping for Lemonade to turn a profit, or at least demonstrate improvement in this area.
Insurance is actually a resilient industry in the face of economic instability. In general, policy holders don’t halt their coverage when times get rough. That gives Lemonade some amount of security inasmuch as it’s a tech and growth stock.
Management expressed that losses would peak in the third quarter and then start to improve. That means when the fourth-quarter results are released, investors should expect some good news. If that’s not the case, Lemonade stock could get hammered. If it is, though, the stock price may begin to rise. Most of the elements of a viable and growing business are already there. However, considering the unknown, moving parts, this remains a stock for the risk-tolerant for the time being.
Jennifer Saibil has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.
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