The stock Lemonade (LMND -4.80%) may be my worst stock investment ever. Since becoming a shareholder and joining the legion of fans who were enthusiastic about the potential of this innovative insurance company, the value of the insurance technology company’s stock has decreased by approximately 75%. I’m holding onto this stock for the time being in spite of the market sell-off. Even though I wouldn’t recommend it to every investor at this time, I still have faith in the business and what it can do for the insurance industry. Why I still own this stock is as follows:
The compelling growth story of Lemonade is that the company aims to use an AI-driven rating system to provide low-cost coverage for life, auto, home, renters, and pets. It uses AI and a mobile app to generate quotes, service policies, collect payments, and file claims in its high-tech business model. It touts its superior claim processing speed over the competition.
Given the kind of numbers Lemonade posts, the company’s negative investor sentiment is a little puzzling considering the company’s rapid product growth.
By making the process simple, low-stress, and affordable, management has devised a well-thought-out strategy for attracting younger customers, typically those who are purchasing insurance for the first time (generally renters insurance). As they become car owners, homeowners, and more, these policyholders purchase more products and take out larger policies over time. Between development in clients and development in premium per client, which occurs as they purchase more items and more costly items, Lemonade’s in-force premium, which it considers its top-line development metric, keeps on filling in high twofold digit rates.
I’m intrigued with Lemonade’s administration
Being a pioneer driven organization is viewed as a benefit to financial backers since organizer pioneers are generally enthusiastic and focused on their organization’s prosperity. Daniel Schreiber and Shai Winninger, co-founders and co-CEOs of Lemonade, have made some moves that Wall Street has been wary of, but they think are good for the company. The actions include rapidly launching multiple products, which exacerbated the company’s losses the previous year, and acquiring the auto insurance company Metromile, which further impacted profitability. A valuable quality of the co-founders is their capacity to play the long game and keep their eyes on the ball despite critics.
Before each quarterly conference call, Schreiber and Winninger allow shareholders to ask questions, and they answer the questions with the most votes. Their openness and willingness to engage are things I value.
Despite the fact that the business is still unprofitable, management has restored my faith in its ability to maintain its course and achieve its objectives.
The opportunity looks huge, but the road is long. At this point in its development, management wants to maintain a loss ratio of 75%, which it did most of 2020. However, over the past two years, that completely deviated from the plan, which is the primary factor affecting investor confidence in the model. Regardless of how satisfied customers are, it casts doubt on the company’s viability if it is unable to control the loss ratios.
Over the past few quarters, management has offered a variety of explanations for why it has not consistently improved. These range from one-time catastrophes that shouldn’t happen again to newer products with higher loss ratios, which isn’t entirely unreasonable given the blitz product launches. However, Lemonade may find it more challenging to put its ducks in a row in the not-too-distant future as investors grow weary, particularly given that the macroenvironment continues to be volatile.
On the other hand, management stated that it would concentrate on profitability rather than capital raising in the near future.
When Lemonade reports its fourth-quarter earnings on Wednesday, February 22, we will receive an update on how that is going.
Even though I hold a small stake in Lemonade, I wouldn’t want to lose it at a time when the company may finally be on the right track. For long-term investors, Warren Buffett’s observation that you don’t have to make your money back the same way you lost it is food for thought. Having said that, I prefer not to worry about my positions. After carefully considering my options, I basically relax and let my investments take care of themselves.
I’m really excited about what Lemonade does and continue to have faith in its prospects. Even though it might take some time, I still think it can come back and make shareholder wealth.
