🔎ROOT & LMND 4Q25: Buckle up.
The insurance technology sector has tough times ahead. Speculative flows will have to leave the space. The cyclical consolidation of the insurance industry seems to be the right catalyst for that.
TLDR Summary
With 22% YoY revenue growth and a continued positive bottom line, 4Q25 was a step in the right direction for Root. The company continues to protect its earnings against weak industry trends. As a result, the company’s topline growth continues to come down. That’s not a problem for the investment case in the long-term, but it may continue to weigh on sentiment in the near-term. I doubt that these earnings can reignite investor euphoria anytime soon. I wished I could say otherwise.
Lemonade still incinerates capital and is in a much weaker position to deal with the challenges of the industry. Its management still gaslights investors with irrelevant KPIs. Originally they wanted to turn profitable in 2026. Now, they are guiding the full year to a loss of more than $100m which is easily more than 15% of the equity book value they have left.
Root stock has reacted positively to their earnings release. Lemonade stock has dropped sharply. It’s down 50% from its absurd pre-earnings valuation. My base case is that this drop will continue to eventually force a capitulation of investors who should have never invested in the first place. Root will likely end up as collateral damage in this process. It will likely go through its own capitulation process.
Setting the stage for this quarter
In my 3Q25 earnings review, I highlighted that Root stock continued to post a solid operating performance, considering the weakened industry environment which was a headwind for their loss ratio and their operating expense ratio. I further highlighted that Lemonade continued to incinerate equity capital at a rate of about 20% annually while overburdening their investor communication with meaningless KPIs.
I felt disturbed by the fact that Root stock was falling in this environment while Lemonade stock was pumping. I felt that the dumb money in the insurance technology space made the sector toxic.
