Lemonade: Leveraging AI to Underwrite a Path to Profitability

April 16, 2025 at 07:36 AM EDT

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Amid the tariff-induced market volatility, some stocks in the finance sector are directly untouchable by tariffs. Artificial intelligence (AI) powered digital insurance fintech Lemonade Inc. (NYSE: LMND) stands out as one of them with its disruptive model, solid growth metrics and technological edge. The company leverages sophisticated AI models and machine learning (ML) algorithms to analyze oceans of data to assess risk and underwrite individual insurance policies in under 90 seconds, automate claims processing within three minutes, detect fraud and handle customer service.

Lemonade competes with digital insurance provider Root Inc. (NASDAQ: ROOT) and traditional insurance company Hamilton Insurance Group Inc. (NYSE: HG).

Lemonade shares are trading down approximately 25% year-to-date (YTD). The company is not yet profitable but has a path to profitability that was sidetracked by a major outlier event, causing shares to fall to attractive levels under $30 per share.

Lemonade Had a Solid Fourth Quarter to Close Out a Turnaround Year

The company reported a Q4 2024 earnings per share loss (EPS) of 42 cents, which was an 18-cent improvement of consensus estimates for a loss of 60 cents. Revenues surged 28.8% year-over-year (YoY) to $148.8 million, crushing estimates for $144.98 million.

Lemonade also completed its second extension and expansion of its financing relationship with its Synthetic Agents partner, General Catalyst, who will provide an incremental $200 million to fund growth investment through December 2026.

Key Metrics are Trending in the Right Direction

When it comes to insurance companies, there are a handful of key metrics to pay attention to. Lemonade’s key performance indicators (KPIs) are improving:

· In-force premium (IFP) rose 26% YoY to $944 million, while premium per customer grew 5% YoY to $388, and total customers rose 20% YoY to 2.43 million. IFP represents the total premiums collected on current policies that are active. IFP grew for the fifth straight quarter in a row.

· Its gross loss ratio (GLR) was 63%, its best result ever. The GLR represents how much of the premiums are being used to pay out claims. A GLR under 100% is good, and the lower it falls below 100%, is better. Lemonade’s GLR has been downtrending from 92% in Q3 2022 to 73% in Q4 2024.

· Adjusted free cash flow (FCF) grew to $27 million, and gross profit rose 90% to $64 million in Q4.

· Adjusted earnings-before-interest-taxes-depreciation and amortization (EBITDA) loss improved 18% YoY to $24 million.

In summary, Lemonade’s revenue, annualized premiums, customer base, customer premiums, gross profit (doubled YoY) and free cash flow grew while GLR and losses shrank. That’s the good news, but the bad news was the guidance.

Lemonade Issues Downside Guidance

The company issued Q1 2025 revenue guidance of $143 to $145 million, with a midpoint of $144 million versus $151.78 million consensus analyst estimates. Lemonade expects full-year 2025 revenues of $655 to $657 million, with a midpoint of $656 million, which is higher than the $663.58 million consensus estimates.

This drop in Q1 revenue guidance can be considered an outlier, which could have been much worse. Lemonade expects IFP growth of 28% and above 30% by 2026. It also expects 2025 to be its second consecutive year of positive FCF.

The Los Angeles Wildfires: An Outlier Event

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In January 2025, Los Angeles experienced one of California's worst wildfires in history. In addition to the more than 25 deaths,estroyed over 16,000 structures, torching over 50,000 acres of land, and causing the wildfires d over $160 billion in property damage.

The wildfires also impacted Lemonade’s forward guidance for Q1 2025. Lemonade estimates its liabilities of around $45 million in gross losses, which is relatively nothing (0.027%) compared to the total estimated property damage.

Lemonade President Shai Wininger stated how the company managed to crush expectations on the damage estimates from analysts, “Indeed, some of the market share base loss assumption calculations done by some investors and analysts yielded the loss estimates for Lemonade well north of $200 million.

That's about five times higher than our actual experience on a gross loss basis. These events are expected to lead to approximately $20 million EBITDA impact overall.” Backing out the wildfires, its EBITDA guidance reflects a 25% YoY improvement.

The Path to Profitability Remains on Track: Q4 2026 and Q4 2027

Lemonade’s Q4 2024 adjusted EBITDA loss was $24 million, which was a 33% improvement from $36 million in the year-ago period. Its Q4 net loss was $30 million, which was a 28.6% improvement from $42 million in Q4 2023. Shrinking losses and rising IFPs are the nuts and bolts of their path to profitability.

The company anticipated positive EBITDA by the end of 2026. Lemonade CFO Tim Bixby said, “ In this past year, 2024, we are still on track as we have been for two-plus years to be EBITDA positive exiting… 2026, so that is unchanged.

And then GAAP profitability, while we haven't given an exact date because that's a little harder to project, there's a lot of non-operating components, as you know, that come into net loss, we expect it to follow within roughly a year thereafter and that is also unchanged.”

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