What Investors Should Expect from Lemonade's Upcoming Earnings

Taking a Look at Lemonade (LMND).

Cautiously Optimistic, Not Blind Optimism

This week, Lemonade (LMND) announced their Q4 2023 earnings release set for February 28th, giving investors a little over two weeks to brace for outcomes that could vary widely—from sparking a significant short squeeze with exceptional results to revealing another spike in inconsistent losses. As we approach this earnings announcement, the ideal stance is one of cautious optimism, steering clear of unchecked optimism. This measured approach is especially prudent considering LMND's smaller scale compared to industry giants like State Farm or Progressive. Despite these competitors reporting lower loss ratios, it's not reasonable to automatically expect LMND to mirror their performance in terms of losses, given the company's size and market position.

Q3 2023 Shareholder Letter.

This was extracted directly from LMND's latest shareholder letter. My intention wasn't to cast a bearish outlook but rather to temper the enthusiasm among bullish investors, ensuring they don't set their expectations for unforeseen outcomes. Like everyone else, I'm eager to see their loss ratios continue on a downward trend. However, maintaining such an expectation as we approach LMND's earnings isn't reasonable (prove me wrong Lemonade!).

More GEP, Less Opex

To grasp the evolution and trajectory of their Operating Expense (Opex) efficiency, it's crucial to acknowledge three pivotal aspects. First, technology contributes to a significant and largely fixed overhead, which initially poses a disadvantage for smaller operations but becomes a substantial advantage as scaled (Enter Lemonade). Secondly, their commitment to automation directly correlates with enhanced expense efficiency, particularly as operations expand. This strategy has borne fruit over the last couple years, evidenced by their Gross Earned Premium (GEP) surging by 118%, while Opex saw a modest increase of only 19% in comparison.

Q3 2023 Shareholder Letter.

This progression highlights a critical point often overlooked by skeptics. Critics frequently question LMND’s focus on growth over immediate profitability, presenting it as a binary choice. However, such a viewpoint overlooks the inherent nature of starting from the ground up in the insurance industry. According to managements strategy and business model (dabbled with a little common sense), achieving profitability is contingent on reaching a certain scale, making growth not just beneficial but essential for eventual profitability. Lemonade's management has consistently emphasized the intention to invest in growth and technological advancements. Consequently, while it may be unrealistic to anticipate a *significant* YoY improvement in Adjusted EBITDA given the non-linear path to profitability and the upfront nature of their investments, we should still expect to see YoY enhancements in Adjusted EBITDA. Moreover, these improvements are likely to accelerate over time, aligning with their strategic investments in growth and technology.

The New Bear Argument

Throughout my time following LMND, I've encountered a wide range of bear arguments—while some hold merit, awaiting their resolution over time, others lack substance, easily refutable with minimal research effort. Unfortunately, it seems a thorough investigation is often less appealing to many bears nowadays. I typically refrain from engaging in debates over bullish or bearish perspectives on social platforms, preferring to address these discussions in my weekly writings. It’s just a waste of time and energy. A recent bearish take, which I've tackled in my pinned article, focuses on LMND's pricing strategy, suggesting it mirrors that of traditional insurers in certain aspects. However, this observation overlooks LMND's broader ambition. The company's primary objective is not to simply offer lower prices than its competitors but to redefine the insurance experience, aiming to eliminate the traditional inconveniences that plague the industry.

It's crucial to understand that if LMND's pricing ever appears similar to that of traditional insurers, it's likely a reflection of a higher risk profile associated with the policyholder, aligning with industry standards for risk assessment. Generally, LMND offers more competitive rates compared to its peers, except for individuals deemed high risk or those living in areas prone to catastrophic (CAT) events. Importantly, even those in high-risk categories or regions benefit from LMND's streamlined claims process, which eliminates the usual hassles encountered with traditional insurers. This advantage significantly enhances customer experience, making it puzzling why such a scenario would be considered a negative point against the company (???). Essentially, LMND's model offers value beyond mere pricing, focusing on efficiency and user satisfaction, which questions the validity of its inclusion in bearish arguments. This goal really enhances LMND's innovative approach, emphasizing customer satisfaction and efficiency over competing on price alone, essentially making the entire insurance process “frictionless”.