On paper, insurance technology firm Lemonade (NYSE:LMND) helped make insurance coverage relevant to the millennial and Generation Z crowds, delivering an intuitive format and rapid-fire service through its artificial-intelligence-driven platform. Though the convenience factor was dialed up to “11,” it turns out the inner workings of Lemonade were not that sophisticated, resulting in sharp losses for LMND stock.
Following the end of the April 7 session, shares of the insurance tech app found themselves down nearly 4%. The red ink contributed to a 39% year-to-date loss, making Lemonade one of the more disappointing debuts among relatively recent initial public offerings. As if to add insult to injury, LMND stock in the pre-market session was down over 2%.
Despite the turmoil, Lemonade is optimistic that it can right the ship. According to S&P Global Market Intelligence, Lemonade and its peers “in recent months have hired senior executives away from traditional insurance companies as they seek to move past losses that have plagued their bottom lines. While insurtechs have mostly focused on customer experience and distribution, they are finding out that insurers need to have sophisticated balance sheet management and solid underwriting practices, analysts said.”
Like playing the guitar, the insurance business is relatively easy to pick up but incredibly difficult to master. To be sure, the business model is straightforward: charge more money than you pay out in claims and expenses. However, the mechanics of this process, according to Kaenan Hertz, managing partner at Insurtech Advisors LLC, are very nuanced.
To put it bluntly, “Many insurtechs did not have the expertise or the institutional history to understand these nuances and ended up performing poorly in terms of profitability.” Still, recognizing that you have a problem is the first step in addressing it.
With hiring the right people to fixing the financial granularity at Lemonade, eventually, the insurance firm can build toward a much more viable business. For instance, according to a Ypulse.com survey, 76% of millennials are pet parents. That’s going to bode well for LMND stock, as will a strong market for residential rentals, which sees young people eschewing high ownership costs in a ridiculous bull market for financial flexibility.
Nevertheless, LMND stock could be choppy over the next several months as it works through its teething pains. At the same time, patient investors could view this as a venture worth considering.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.