Why Lemonade Stock Skyrocketed This Week

With a single change it recently made in its operations, Lemonade (NYSE: LMND) stands to become significantly more profitable. On this major development, investors piled into the stock this holiday-shortened trading week to lift it to a nearly 24% increase, according to data compiled by S&P Global Market Intelligence.

A refreshed reinsurance regime

On Tuesday, Lemonade announced it has renewed its reinsurance program (reinsurance is insurance for insurers, protecting them against a sudden wave of claims in catastrophic events). That wouldn't be anything earth-shaking, usually, but the company also managed to renegotiate it to effectively retain more of its premiums.

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Lemonade said it managed to lower the quota share cession in the program, i.e., the portion of its premiums paid to the reinsurer for coverage. Under the new regime, this is around 18%; previously it was roughly 20%. At the same time, the insurer will benefit from expanded protection against catastrophic and major weather events.

In the press release touting the adjustment, the company said it advocated for it to "retain more of the economics from its growing business."

The new reinsurance program is expected to be in force for a standard 12-month term. Lemonade did not provide any estimates as to how it would affect company fundamentals.

Fundamental benefits

In a way, that almost doesn't matter.

A refreshed reinsurance agreement that will allow Lemonade to retain more of its premium income can't help but benefit its finances. Also, the fact that its reinsurer was willing to accept a lower quota share cession while simultaneously broadening the arrangement's protections shows that it increasingly views the company as an effective and viable underwriter.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.