đROOT & LMND 3Q25: The best capital is no capital?đ¤ˇââď¸
Or so it seems.
TLDR Summary
As of this writing, Root stock is down about 10% since their earnings while Lemonade is up more than 30%.
Rootâs consolidation can be explained by operating challenges. Challenges that shouldnât be surprising to anyone who has read Fallacy Alarm over the past year. Their results were solid, but they are paying a price for the weakened macro and industry environment in the form of a higher loss ratio and a higher operating expense ratio. Itâs natural for the stock to lose some speculative flows.
I actually like that this is happening because it should provide for opportunity to buy the dip. In the long run, I have no doubt that this company will be successful in building a business that will be much bigger than it is today. The intrinsic value of the company keeps compounding at a rate of 30% annually.
Lemonade on the other hand keeps incinerating equity capital at a rate of 20% annually. As usual, they overburdened their shareholder letter with an absurd amount of meaningless KPIs to hide the fact that they are not making any meaningful progress to reaching industry-typical profitability, or at least breakeven.
Equity capital is the most important input factor for an insurance carrier. And while Lemonadeâs is crumbling away, the companyâs share price keeps going vertical. As a result, the company is now trading at an incredible P/B multiple of 11x, now BY FAR the most ambitiously valued insurance company in North America. To justify this valuation, they would have to demonstrate unprecedented levels of profitability. The current and historical operating performance offers zero credible signal in that direction.
One of the most famous âElonismsâ is: âThe best part is no part.â It seems that todayâs insurance investor generation acts based on the motto âThe best capital is no capital.â Because that is where Lemonade is headed and the stock market is loving it. This disturbs me greatly. There seems to be an enormous amount of dumb money engaged in this space. This will harm forward returns for everyone involved. I wonât add to my Root position before I have evidence that this money has left.
Setting the stage for this quarter
In my 2Q25 earnings review, I highlighted that Rootâs policy pricing and policy acquisition engine was continuing to work flawlessly which suggested that the company was on track to become a much bigger company in 5-10 years.
However, I cautioned that the insurance industry cycle was turning sour which taints the near-term prospects. I was happy though with how Management navigated this environment. They dialed down growth to protect their profitability.
In contrast, Lemonade kept marching full-steam into this industry slowdown without any credible path to reaching an appropriate return. The strength in its share price made me nervous as a concerning cross-read for Root.
Letâs look into the 3Q25 performance of both companies and then contextualize this more broadly.