In a recent analyst report by BMO Capital Markets, Lemonade, the innovative insurtech company, has found itself in a precarious financial position, with its profitability prospects looking increasingly distant.
The report highlights several key factors contributing to Lemonade’s challenges, including its significant cash burn rate, rising reinsurance costs, and supply constraints in the reinsurance market.
According to the analysts, the elusive light of profitability at the end of the tunnel appears increasingly distant for Lemonade.
Lemonade, known for its disruptive approach to home, auto, renters, and pet insurance, has been burning through approximately $40 million or more in cash per quarter.
This staggering cash burn rate is concerning, given the estimated unencumbered cash position of $573 million. The report suggests that this ongoing cash drain is unsustainable, making it imperative for Lemonade to address its financial situation promptly.
One of the major hurdles Lemonade faces is the escalating costs of reinsurance, a vital component of its business model.
Recent industry meetings in the reinsurance sector have dashed hopes of a significant decrease in reinsurance costs. Instead, the market outlook indicates mid-single digit increases, further squeezing Lemonade’s profit margins.
To navigate these challenges, the analyst report outlines potential solutions for Lemonade, with an outright sale to a competitor emerging as a clear option. Such a sale could be driven by a competitor’s interest in leveraging Lemonade’s direct-to-consumer franchise.
However, the report cautions that the sale process may be protracted, as the current landscape for auto and home insurance remains highly competitive, especially in states where regulators are reluctant to permit insurers to raise prices in line with double-digit inflationary pressures.
The report suggests a “Renewal Rights” type of sale scenario, estimating that it could result in $11 per share of value for Lemonade shareholders.
This scenario assumes that an acquirer would swiftly downsize Lemonade’s direct-to-consumer spending to restructure the business and minimise near-term losses while preserving Lemonade’s substantial net cash position, which stands at over $500 million.
The report also highlights that Lemonade’s co-CEOs had previously sold more than $100 million combined of their stakes in late 2020 when the company’s stock was trading at a higher valuation.
This history, the report suggests, might make the leadership more amenable to considering a sale as a viable option to address the company’s financial predicament.
Despite these potential outcomes, the report maintains a cautious outlook, assigning a low probability to Lemonade improving its results over time without a significant injection of equity and debt capital.
The report also reiterates an “Underperform” rating for Lemonade, emphasising that its target price remains the lowest among Bloomberg consensus estimates.
