Lemonade (NYSE:LMND) stock has been a bit on a roller coaster ride over the past six months. At the end of last year, shareholders were enjoying the ride up, but since mid-January, the ride down has been swift and a little bumpy. What's next for this insurance tech upstart? On a Fool Live episode recorded on March 3, Fool.com contributor Jason Hall discusses the most recent quarterly results and what investors should be watching, including the one metric that the company absolutely needs to get right.
Jason Hall: Lemonade reported today, closed down pretty sharp. I think their close down was about 15%. Reported after earnings yesterday, they held their call this morning. The short version, if you look at the metrics across the board, generally, [the] company executed well, and this is tougher business to really evaluate because the way revenues come in, the way cashflows come across for insurance companies, and the way that they have to account for different expenses at different times.
Here are four important metrics that are handy to start with, in-force premiums. This is the number of dollars that are in insured products at that time. Ended the quarter up, 87% year over year to $213 million. The average premium per customer increased 20% to $213. What that says is, No. 1, they're growing quickly, but they're also growing their relationship with customers. That's important and that also means they're also selling upmarket some as well if they're increasing that premium per customer. Now, gross earned premiums increased 92%. Then, loss ratio, it fell to 71% versus 79%. Again, this is a young new business. But that loss ratio, the lower it is, the better. That's a positive number because it means their insurance business is getting more profitable.
Now, the thing is the company's revenue did decline a little bit year over year. But a lot of that has to do with the way revenues come in just because somebody has a policy in place. If they're paying per month, then they haven't collected all of the premiums yet. Those are things that can affect the way that its revenues come in.
Probably part of what affected the stock price today was their guidance. They're only projecting about $22 million of revenue at the midpoint, and that's a little bit below where Wall Street analysts were projecting. That has some implications for how the stock is viewed. This is also a stock that had generally done pretty well as we've talked about. There you go.
What are the things I'm thinking about right now? No. 1, continue to focus on those growth metrics, that's really good. Because the things that Lemonade is trying to do to disrupt the insurance industry should continue to drive growth. You think about trying to create those financial incentive alignments between its customers and the business itself. Things like giving a portion of profits to your favorite charity. Keeping people from filing false claims or overestimating the amount of a claim can help them to keep people honest.
The other thing that they're trying to do is, structure their business so that their piece of the pie is fixed, so there's no additional incentive for them to reject claims, just because they don't want to give you the money. Try and recreate those incentives, that's really important.
Then leveraging technology, leveraging AI to try to reduce the friction for all of the transactional aspects of doing insurance. Whether it's asking for a quote, how quickly they can approve you as a customer, filing a claim, approving that claim like literally all of those things that other insurance companies create these processes to create friction that cost hundreds of dollars per claim trying to break those barriers down. That's what the company is trying to do, but it's going to come back to their underwriting quality at the end of the day.
There's going to need to be some balance between the quality of the underwriting to make all of those other aspects continue to work. If they do work, even though the stock is still, if you look at it based on how much the stock costs and what it values the business have today is being wildly overvalued. It's a matter of their ability to disrupt the entire industry in a lot of ways. If they can continue to execute and the underwriting works out, then this is a stock that's going to be worth a hell of a lot more 10 years from now than it is today. That's basically where I think about Lemonade after another quarter.