a © Provided by The Motley Fool Growth Investors, Have You Read Lemonades Founders Letter Yet?

Computing technology has grown up a lot in the past two decades, and its evolution has spawned a variety of new tech empires -- entire ecosystems dedicated to hardware and software like Microsoft, Apple, and Alphabets Google.

These advances have made it easier for new businesses to tap into that same transformational power to change traditional industries. Lemonade (NYSE: LMND) aims to be one of those applied technology companies, and it has its sights set on the massive insurance space. The companies co-founders said as much in a letter to investors when the company went public a year ago.

Theres a lot to be gained if Lemonade is successful at disrupting this old industry, but the company itself admits theres no road map for success and it will be a very bumpy long-term journey. At the same time, growth investors of all kinds will benefit from reading the co-founders insights into the opportunity ahead of them.

The first of a new breed of insurance stock?

Technology has changed much of the business landscape in the last couple of decades. Business distribution models like direct-to-consumer and software-as-a-service, cloud-based statistical tools, a digital-first (or sometimes digital-only) user experience, new marketing channels on the web, and more have all reshaped what it takes to run a successful business. These secular growth trends are showing no signs of letting up.

a © Getty Images Someone holding a smartphone and a cup of coffee.

As Lemonade co-founders Daniel Schreiber and Shai Wininger explained in their co-founders letter, these myriad changes are the reason they founded a new insurance company from scratch, rather than start a tech service company to try to shepherd incumbents through these momentous changes. As Schreiber and Wininger point out, winds of change have caused upheaval in the global economy in the past, and theres no reason to believe the technological revolution and the new tech giants theyve created in the process wont do the same again.  

But heres the thing: Lemonade itself admits there is no road map for disrupting the massive and deep-rooted insurance industry status quo. Heres a key line from the co-founders letter that every investor should read before buying (or buying more of) this stock.

Lemonade is not everyones cup of tea, which is why we wanted to outline our approach, in the hope that investors who share our thinking will be drawn to Lemonade, while those who do not will seek their fortunes elsewhere. 

Thats a key point to keep in mind. If trailblazing and experimentation, a very volatile stock price, and an ultra-long time horizon in which you can be patient (or outright ignore) the month-to-month, quarter-to-quarter, and year-to-year fluctuations in Lemonades business doesnt feel right to you, walk away. There are more sure bets out there on already established growth stories putting new technology to good use, both in fintech and elsewhere. 

Keep a pulse on these metrics

If Lemonades ambitious plans jibe with you, youre not alone. After all, the global insurance industry is worth trillions of dollars every year, and practices are still rooted in the 20th century. A successful disruptor (Lemonade, or someone else) could have a great deal to gain. 

As for Lemonade specifically, its off to a good start and is building up a young base of customers from which to launch new products -- like its foray into auto insurance later in 2021. Losses are steep right now, but that isnt unusual for a company intentionally using up capital off of its balance sheet to maximize growth. After all, businesses are valued primarily on their future ability to generate cash, not the cash they have on hand right now. With that said, here are some key metrics to keep an eye on at this stage of Lemonades life cycle:  

  • In-force premium (IFP), or the value of payments to be collected from insured customers on policies that have not been cancelled or expired. Lemonades second-quarter IFP was up 91% year over year to $297 million. 
  • Total customers and premium per customer. Lemonades total customer count was up 48% to just over 1.2 million in Q2, and premium per customer was up 29% to $246 on an annualized basis.
  • Adjusted EBITDA, or earnings (profit) before interest, tax, depreciation, and amortization. EBITDA backs out non-cash expenses to evaluate how much liquidity it is using or generating each quarter. This metric is used to assess a companys progress toward eventual profitability. Adjusted EBITDA loss was $40.4 million in Q2.
  • Total cash, equivalents, and investments (less restricted cash the company holds in reserve for payment of claims). Losses will gradually whittle down this amount over time. Lemonade had $995 million at the end of June 2021, just over six years worth of reserves if annualizing Q2 adjusted EBITDA loss.

This is not an exhaustive list of financial metrics from which to judge Lemonades success at building a new breed of insurance business, but an investor need not get too hung up by the finer details. As already discussed from the co-founders letter, this is an experiment of sorts. Occasionally checking in on the high-level progress is good enough for now. If that strategy makes you uncomfortable, Lemonade isnt the stock for you. And even if you do buy, remember to keep that initial bet small and allow it to grow over time if Lemonade proves it can disrupt at least some of the status quo in the insurance world.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fools board of directors. Nicholas Rossolillo and his clients own shares of Alphabet (C shares), Apple, and Lemonade, Inc. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Lemonade, Inc., and Microsoft. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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