Lemonade, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 9, 2021. Amounts are in U.S. dollars unless stated otherwise.
Business context
Lemonade is a digital insurer offering homeowners, renters, pet and life insurance, among other products. It uses reinsurance to manage underwriting risk and describes its model as retaining a fixed fee, with eligible excess funds donated through its customer-directed Giveback program. The company is a public benefit corporation.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $35.7 million | $17.8 million | $87.4 million | $73.9 million |
| Net loss | $66.4 million | $30.9 million | $171.0 million | $88.4 million |
| Adjusted EBITDA (non-GAAP) | $(51.3) million | $(27.6) million | $(133.0) million | $(68.2) million |
| Gross profit margin | 33% | 41% | 27% | 23% |
| Adjusted gross profit margin (non-GAAP) | 43% | 52% | 38% | 29% |
| Gross / net loss ratio | 77% / 81% | 72% / 65% | 88% / 91% | 71% / 70% |
- Q3 revenue rose 101%; net loss widened 115%. For the first nine months, revenue rose 18% while net loss widened 93%.
- Gross written premium was $116.8 million in Q3, up 64%, and $282.1 million for the first nine months, up 81%. End-of-period customers increased to 1.36 million from 941,313; in-force premium rose to $346.7 million from $188.9 million. Annual dollar retention improved to 82% from 76%.
- Q3 net earned premium more than doubled to $21.5 million, but nine-month net earned premium fell 21% to $51.6 million. Management attributed the year-to-date decline mainly to higher ceded premium under proportional reinsurance arrangements; ceding commission income increased to $31.9 million from $7.4 million.
- Sales and marketing, technology development and general and administrative expenses rose year over year in both periods, reflecting customer acquisition, hiring, product development and public-company costs. Nine-month sales and marketing expense reached $104.4 million, versus $57.5 million.
- Q3 basic and diluted net loss per share was $1.08, versus $0.57; nine-month loss per share was $2.80, versus $3.41.
Balance sheet, cash flow and capital
- At September 30, 2021, cash, cash equivalents and restricted cash were $319.6 million; investments were $805.1 million; total assets were $1.522 billion; and total liabilities were $473.7 million. Stockholders’ equity was $1.048 billion.
- The balance sheet and filing discussion do not show a borrowings or debt balance; liabilities primarily comprise insurance, reinsurance and operating-related obligations.
- For the first nine months, operating cash use was $94.7 million, investing cash use was $807.1 million (largely investment purchases), and financing cash inflow was $649.0 million, mainly from the follow-on offering and option exercises. Cash and restricted cash decreased $251.8 million.
- The January–February 2021 follow-on offering generated $640.3 million of net proceeds. Management stated that available cash and cash equivalents were expected to meet working capital and capital expenditure needs for at least 12 months. The company reported $1.125 billion in cash and investment securities available, while noting regulatory limits on distributions from insurance subsidiaries.
Changes, outlook and risks
- Reinsurance: Following renewals effective around June 30, the company reduced proportional reinsurance from 75% to 70% of premium and added U.S. catastrophe protection for losses exceeding $60 million. Reinsurance recoverables and ceded-premium balances are material; the company remains responsible to policyholders even where risk is reinsured.
- Catastrophe losses: Winter Storm Uri contributed $6.9 million of net incurred losses for the first nine months. Uri and other catastrophe losses added 22 percentage points to the nine-month gross loss ratio, which was 88%. Management noted that loss reserves involve substantial estimation uncertainty.
- Outlook: No specific revenue, earnings or profitability guidance is provided. Management expected continued investment in marketing, technology and administrative capacity, and said sales and marketing costs could rise in absolute dollars in the near term. It expected cash resources to cover needs for at least 12 months.
- Subsequent event: On November 8, 2021, Lemonade agreed to acquire Metromile in an all-stock transaction implying a $500 million fully diluted equity value, or over $200 million net of cash. Closing was expected in Q2 2022, subject to customary conditions including Metromile stockholder approval.
- Other risks: The filing highlights continued losses, customer acquisition and retention, underwriting and reserve accuracy, catastrophe exposure, reinsurance availability and counterparty risk, regulatory capital requirements, competition, data security and privacy, and political or military instability affecting Israeli operations. Management reported no material COVID-19 impact on results to date, but said the pandemic’s ultimate effects remained uncertain.
Important facts for investors to verify
- Whether customer, in-force premium and retention growth can translate into improving underwriting economics and lower losses.
- How Uri and other catastrophe claims develop, and whether recorded loss reserves and reinsurance recoverables prove adequate.
- The impact of the 70% proportional reinsurance structure and new catastrophe cover on future earned premiums, margins and capital needs.
- Cash burn, the sustainability of liquidity under regulatory restrictions, and the company’s path toward profitability.
- Metromile acquisition terms, approvals, closing timing and expected financing or integration effects.