Did Lemonade Hit An Inflection Point?
Did Lemonade Hit An Inflection Point?
Taking a Look at Earnings Results for Lemonade (LMND).
Let's jump into the Q4 2023 earnings results for Lemonade (LMND), but before we do, I've got an exciting update. I've transitioned to exclusively logging my weekly activity and tracking my portfolio in real-time on Savvy Trader. This means I'll no longer be updating my buying and selling actions through Substack.
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Lemonade’s Great Quarter
LMND announced their Q4 2023 earnings results this past week. 2023 was marked by industry-wide challenges, from severe weather impacts to inflation pressures. As surprised as I am for LMND weathering this (pun intended), the company’s agile operations and strategic growth adjustments have set a course for a promising future:
Performance Highlights:
Demand Surges: Surpassed projections across the board with a 2.7% beat on In Force Premium (IFP), 3.4% on Gross Earned Premium (GEP), and revenue exceeding estimates by 3.6% and guidance by 7%, thanks to net interest income boosts and a slight dip in ceded premium rates.
Profitability Leaps: EBITDA outperformed estimates by 28% and guidance by 33%, driven by a 5% YoY decrease in non-GAAP operating expenses. Notably, headcount was reduced by 8%, and the GAAP EPS beat by $0.19.
Solid Foundation: The balance sheet remains pretty strong with $945M in cash, no debt, and a minimal 1.2% increase in share count YoY.
Forward-Looking Statements: Although annual revenue guidance slightly missed expectations by 2.6%, the company's EBITDA and IFP forecasts were positive, highlighting a strategic slowdown in growth to focus on profitable ventures and regulatory pricing improvements.
Conscious Growth: Shifting gears, LMND is doubling down on its investment in profitable growth, planning to increase growth spend significantly in 2024.
AI Efficiencies: Leveraging GenAI, LMND aims to further automate customer interactions, enhancing efficiency and reducing costs.
European Expansion: The company is witnessing rapid growth in Europe, a testament to its adaptable business model and the region's regulatory environment favoring its expansion.
Product and Financial Strategy:
Innovative Insurance Models: Lemonade continues to refine its LTV underwriting models, leveraging data to enhance risk assessment and customer segmentation.
Expanding Offerings: The company is broadening its product range, including a strategic focus on car insurance, expected to constitute a significant portion of new premiums in the coming years.
Gross Loss Ratios (GLR:
LMND has made excellent progress in managing its Gross Loss Ratio (GLR), which dipped below 80% for the first time in two years, signaling a positive trend. This achievement is significant, though the company anticipates the path to sustained improvement won't necessarily be straightforward (like I’ve mentioned many times in my past articles). Fluctuations are expected, with potential quarters of elevated loss ratios, especially as LMND's portfolio remains relatively small and more susceptible to severe weather impacts compared to its larger counterparts (which bears don’t understand…?). A specific highlight from this quarter shows that catastrophic events (CAT) had a reduced impact on GLR, dragging it down by only 500 basis points (bps) compared to a 1,000 bps impact YoY, with an overall 600 bps decrease in GLR YoY when excluding this effect. Additionally, loss ratios across individual products have seen reductions ranging from 900 to 1,800 bps YoY, indicating broad-based improvements.
To further refine its approach to loss ratio management, the company plans to introduce a trailing 12-month (TTM) GLR reporting mechanism (seen below). This industry-standard practice aims to mitigate the volatility often observed in quarterly loss ratio figures, providing a more stabilized view over time. The TTM GLR for 2023 stood at 85%, an improvement from 90% in 2022. However, it's essential to note that this figure still surpasses industry averages, largely due to the challenges associated with launching new products and the rapid acquisition of new customers. Such dynamics typically result in higher initial loss ratios, a factor more pronounced in LMND's case due to its strategy of aggressively expanding its product lineup and customer base, contrasting with the more stable portfolios of established insurers.
Europe & Car Insurance:
LMND's journey in Europe has transitioned from a slow start to a significant acceleration in momentum. They have seen an impressive 100% YoY growth in premiums, with a substantial increase in gross profit. A remarkable shift is evident in the customer base, where 30% of new customers this quarter hailed from Europe, compared to just 3% 18 months prior. This success can be attributed to the more lenient regulatory environment in Europe compared to the USA, allowing LMND to adjust premiums more dynamically. This regulatory flexibility reduces LMND's exposure to the risks associated with catastrophic events and inflation, which can adversely affect loss rates and margins.
While the company has had to moderate its growth ambitions in the USA due to regulatory constraints, its European operations have not faced such limitations. The company has taken the opportunity to highlight the achievements of its European team and emphasize the positive outlook for the near future. As part of its expansion strategy, LMND is set to introduce home insurance in the UK and France, marking it as the second product line to be launched in Europe.
Turning to LMND's car insurance segment, it’s poised for significant growth, with expectations set for new premiums to account for about 15% in 2024, and to then double to 30% in 2025. This growth is anticipated as a result of diminishing regulatory obstacles, coupled with strong demand for the product. In jurisdictions where regulatory conditions allow for accurate pricing, LMND has seen a remarkable YoY increase in premiums. The expansion of the car insurance offering is expected not only to enhance the variety of plans available to new users but also to improve engagement with existing customers, evidenced by higher cross-sell rates of 35% in these areas, compared to 25% in others. This strategic push into car insurance, leveraging favorable regulatory conditions, is set to significantly bolster both the marketing effectiveness and the overall profitability of LMND's portfolio.
My Take
This past quarter was pretty good, clearly heading in the right direction and surpassing my personal expectations for the company's management outlook. Many investors, bullish on LMND before the earnings report, might have harbored unrealistic expectations for the stock's immediate performance. This sentiment was often fueled by individuals claiming a long-term investment strategy, yet behaving more like short-term traders at heart. However, any long-term investor with a comprehensive understanding of LMND's trajectory will recognize that significant appreciation of this investment is still some years away.
In a recent article, I discussed the merit of investing in unprofitable companies that possess a clear, concise plan towards profitability—a criterion Lemonade meets by aligning its actions with its promises, thereby validating its potential as an investment. It's common to see prominent voices on social platforms criticize LMND for its lack of profitability, yet this critique rings hollow when considering their past investments in companies like Palantir, Uber, Netflix, Amazon, and Apple before those were profitable. My intention is not to equate LMND directly with these giants in terms of growth potential or capital appreciation but to highlight the parallel in their early stages. The key differentiator for an unprofitable company worthy of investment attention lies in its clear path to profitability and tangible progress towards this goal, criteria that LMND comfortably satisfies. Opting to wait on the sidelines until a company becomes profitable is a common strategy, and ideal for most. However, it's worth noting that in doing so, one often enters the market at a significant premium. This approach has proven successful for me in the past, and it's a path I'm choosing to take again with a company I truly believe in. This method, while cautious, aligns with my investment philosophy and has guided me towards opportunities that not only resonate with my belief in the company's future but also position me for potentially rewarding returns.
I believe LMND has the potential to become a massive success, possibly growing into a company valued over $25 billion, provided it continues its current trajectory of execution. For investors who grasp the fundamental aspects of the business and its objectives, now represents an opportune moment for accumulation. I plan to increase my stake in LMND this week, maintaining it as a high conviction growth stock in my portfolio, contingent on the management's ongoing successful execution.
I also want to extend a special shoutout to the LMND community across various social platforms for their enthusiasm and detailed research. It's quite common for investors to present research with a certain bias, yet many within the LMND community have maintained an admirable level of objectivity and unbiased perspectives.