Lemonade Answering the Biggest Questions

Here's our initial take on Lemonade's (NYSE: LMND) fourth-quarter results.

Key Metrics

Lemonade Is Delivering Profitable Growth

For much of its existence as a public company, Lemonade has steadily delivered solid growth in new customers and policies and increased its per-customer premiums (meaning customers are paying up for multiple policies and more expensive home and auto). However, it has struggled to actually be a good insurance underwriter, regularly reporting gross loss ratios -- a measure of what's left from premiums after claims have been paid -- well above the long-term goal of 75%.

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Well, it just continued to give us an answer to the "can they fix this" question, reporting a gross loss ratio of 63% in the fourth quarter, marking a continued improvement in this critical metric and even better than the 73% loss ratio it reported in Q3. It also reported a 26% increase in in-force premium to $944 million, a 5% increase in premium per customer, and a 20% increase in its customer count.

Carrying that improved underwriting across the operating statement, Lemonade continues to build on its momentum toward sustainable growth. It generated $13.8 million in operating cash flow, $10.6 million of which it converted to free cash. The company also says it earned $26.5 million in "adjusted" free cash flow, but there's a big grain of salt investors should take with that: It adds net borrowings under financing agreement to operating cash flow after subtracting capital expenditures. And last we checked, borrowings are many things, but free isn't one of them.

Nonetheless, it would seem that a newfound discipline and better pricing (whether it's changes to its artificial intelligence (AI)-powered models or human intervention) for insurance policies are making all the difference on the bottom line.

Lemonade continues to spend aggressively to market and grow and is accelerating that spending: Sales and marketing expense increased 95% in the fourth quarter compared to 63% higher for the full year. For context, full-year expenses increased about $70 million, with sales and marketing expense increases making up $64 million of that.

With the company now generating positive cash from its business, accelerating its marketing spending to continue growing is now sustainable.

Immediate Market Reaction

Lemonade shares were down about 12% in after-hours trading, compounding a tough market day that saw shares fall almost 8% in regular trading. The company doesn't hold its earnings call the afternoon of earnings but rather the following morning, so we won't get some of the insights that can affect the after-hours moves of a reporting company's stock.

In this case, there's a good chance that Lemonade's full-year 2025 guidance is playing a role here. Management says it expects to end 2025 with in-force premium of $1.26 billion at the midpoint of guidance, which works out to 28% growth for the full year, a deceleration from 2024. With expectations that it will increase growth spending 40% this year, it's possible that investors were looking for a more aggressive growth expectation.

What to Watch

Even with today's sell-off and what will likely be another down day tomorrow, Lemonade's business results have continued to improve. This marks its sixth consecutive quarter of declining loss ratios, and management says it will be cash-flow positive for the full year this year, building on a strong cash-positive second half of 2024. The company also said it anticipates about $20 million in "unfavorable impact" due to the California wildfires and will offer more on that when it reports Q1.

Helpful Resources

• Earnings results and shareholder letter [link downloads a PDF]
• Investor relations page

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Jason Hall has positions in Lemonade and has the following options: short January 2027 $15 puts on Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.