Insurance companies are financial intermediaries that offer direct insurance or reinsurance services, taking on risks in return for the payment of premiums. The difference between premiums and claims is the revenue of insurers. In addition, insurance companies invest their assets in low-risk securities such as U.S. bonds, which makes them sensitive to FED’s interest rate.
According to Research and Markets, the global insurance industry is expected to reach $6,390.73 billion by 2025, growing at a CAGR of 6% between 2021 and 2025. The increasing risk awareness, rising demand for protection, and rate hardening in non-life insurance commercial lines should drive the industry’s growth during the forecast period.
Founded in 2015, Lemonade offers different insurance options for clients in the US and Europe. Lemonade insurance products cover stolen or damaged property, personal liability, and it has a variety of other insurance policies. Based in Columbus, Ohio, Root provides auto, homeowners, and renters insurance products through its mobile application and website.
Year-to-Date (YTD), LMND stock has fallen about 50%, while shares of ROOT dropped 47.5% over the same period.
On February 8th, Lemonade announced that it had expanded its pet insurance option to Massachusetts. The company said that it is the 37th state where it provides the coverage. Earlier in February, Metromile stockholders approved a previously proposed all-stock merger with Lemonade. The deal should be completed during the second quarter of 2022. Consequently, this acquisition is estimated to bring long-term benefits for Lemonade.
On January 26th, Root announced the completion of a new $300 million loan facility with BlackRock. The 5-year term loan will have an interest rate that equals SOFR + 9%. Management believes that this loan will strengthen Root’s liquidity position and extend its debt maturity.
Recent Quarterly Performance & Analysts’ Estimates
On February 23rd, Lemonade issued its earnings results for the fourth quarter of 2021, causing its shares to fall over 20% on an EPS miss and a weak outlook. In Q4, Lemonade’s revenue increased 100% year-over-year to $41 million, topping the Wall Street revenue consensus by $1.6 million. Strong revenue growth was driven by an increase of gross earned premium and increases in net investment income & commission income. However, the company reported GAAP EPS of ($1.14), missing analysts estimates by $0.01.
It is also important to note that its In Force Premium (IFP), which calculates as the aggregate annualized premium for customers as of the period end date, was up 78% year-over-year to $380 million. The number of customers stood 43% higher year-over-year at 1,427,481. Finally, the premium per customer came in at $266 in Q4, representing a 25% year-over-year increase.
A ($1.28) consensus EPS estimate for the first fiscal quarter, ending March 31st, 2021, indicates a 58.02% year-over-year decrease. However, analysts expect Lemonade’s revenue to increase 86.98% year-over-year to $43.94 million in the current quarter.
Root’s total revenue for its fiscal fourth quarter, ended December 31st, 2021, grew 83.1% year-over-year to $93.2 million. The revenue growth was mainly related to a 92.5% YoY increase in net earned premium to $84.9 million, driven by a decrease in cession rate and growth in gross earned premium compared to a year-ago quarter. Also, Root topped the Wall Street consensus revenue projections by $31.34 million. The company reported a GAAP EPS of ($0.44), missing Wall Street estimates by $0.06.
For the first quarter, analysts expect ROOT’s EPS to stand at ($0.42), down 4.57% on a year-over-year basis. Besides, analysts forecast that its current-quarter revenue should be $76.78 million, showing a moderate YoY growth of 11.92%.
Comparing Options Market Sentiment
Looking at the March 18th, 2022, option chain for both LMND and ROOT, we can define options market sentiment by analyzing the calls/puts ratio. In LMND’s case, the open calls/open puts ratio at the $23.00 strike price comes in at 0.57x, implying a bearish options market sentiment. When it comes to ROOT, the open calls/open puts ratio at the $2.50 strike price is 10.13x, showing a heavy bullish market sentiment.
While Lemonade and Root should benefit from the insurance market’s growth in the long term, I believe Root appears to be a better investment at current levels based on its higher-than-anticipated financials, favorable growth prospects, and superior options market sentiment.
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LMND shares were trading at $20.94 per share on Thursday morning, down $1.36 (-6.10%). Year-to-date, LMND has declined -50.27%, versus a -8.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...
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