Lemonade, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Lemonade sells insurance through a digital platform and uses reinsurance to manage underwriting risk. Comparisons below are with the corresponding 2020 period.
Key financial and operating metrics
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Total revenue | $28.2 | $29.9 | $51.7 | $56.1 |
| Net earned premium | $16.3 | $29.2 | $30.1 | $54.5 |
| Gross written premium | $89.5 | $46.7 | $165.3 | $84.8 |
| Net loss | ($55.6) | ($21.0) | ($104.6) | ($57.5) |
| Adjusted EBITDA (non-GAAP) | ($40.4) | ($18.2) | ($81.7) | ($40.6) |
| Gross profit / margin | $9.8 / 35% | $5.4 / 18% | $11.7 / 23% | $10.0 / 18% |
| Adjusted gross profit / margin (non-GAAP) | $12.8 / 45% | $7.0 / 23% | $17.8 / 34% | $12.4 / 22% |
| Gross / net loss ratio | 74% / 80% | 67% / 70% | 96% / 98% | 70% / 71% |
Q2 net loss per share was $0.90, versus $1.77 in Q2 2020. The company reported no debt balance in the supplied balance sheet. At June 30, cash, cash equivalents and restricted cash were $1,092.7; investments were $71.2; total assets were $1,487.3; total liabilities were $385.7; and stockholders’ equity was $1,101.6.
For H1, operating cash outflow was $56.5, investing cash outflow was $69.3, and financing cash inflow was $648.1, chiefly from the January/February follow-on offering. Cash, cash equivalents and restricted cash increased by $521.3 during the half-year. Management cited $1,163.9 of cash and investment securities available at quarter-end.
Material changes versus prior periods
- Gross written premium rose 92% in Q2 and 95% in H1; at June 30, customers numbered 1.21 million, in-force premium was $296.8, and annual dollar retention was 82%. The filing reports in-force premium up about 91% year over year.
- Despite premium growth, net earned premium fell 44% in Q2 and 45% in H1. The principal factor was the proportional reinsurance arrangement introduced July 1, 2020: ceded earned premium represented 76% of gross earned premium in both 2021 periods, versus 17% in 2020. Ceding commission income rose to $10.6 in Q2 and $19.6 in H1.
- Net loss widened to $55.6 in Q2 and $104.6 in H1, as total expenses grew 60% in Q2 and 35% in H1. Sales and marketing and technology development were notable growth areas; management attributed spending increases to customer acquisition, staffing, product development and geographic expansion.
- H1 gross loss ratio rose to 96%, including a 27-percentage-point impact from Winter Storm Uri and other catastrophe losses. Uri accounted for $6.2 of net incurred loss and loss adjustment expense. H1 prior-year reserve development was unfavorable by $0.4, compared with favorable development of $5.2 in H1 2020.
- In 2021, the company raised $640.3 net from its follow-on offering, increasing its share count and cash resources. Stock-based compensation was $18.0 in H1, versus $4.6 a year earlier.
Outlook, commentary and risks
Management said existing cash and cash equivalents were sufficient for working capital and capital expenditure needs for at least the next 12 months. It expects continued investment in sales and marketing, technology, product development and administrative capacity; it did not provide numerical revenue or earnings guidance. Management expects seasonality in customer acquisition and claims, and noted that historical results may not indicate future performance.
From July 1, 2021, Lemonade reduced its proportional reinsurance share from 75% to 70%, renewed most expiring contracts on similar terms, and added U.S. natural-catastrophe protection. Reinsurance reduces retained exposure but does not remove the insurer’s obligation to policyholders; counterparty performance, coverage limits, availability and pricing remain risks.
Other key risks include persistent losses and negative operating cash flow; catastrophe events and uncertainty in loss reserves; competition and customer retention/acquisition costs; regulatory and capital requirements; reliance on technology, data and AI; privacy and cybersecurity; and potential disruption to Israel operations from regional political or military conditions. The company said COVID-19 had not materially affected its results through June 30, 2021, but future effects remained uncertain. It reported no material legal proceedings and no material change to previously disclosed risk factors other than the Israel-related risk.
Important facts for investors to verify
- Whether growth in gross written premium, customers and in-force premium translates into higher revenue and improved profitability, given the substantial ceded-premium structure.
- How the July 2021 reduction in proportional reinsurance and new catastrophe cover affect retained risk, margins, capital needs and future results.
- Whether loss reserves and reinsurance recoverables prove adequate, particularly following Winter Storm Uri and other catastrophe claims.
- The sustainability and returns of sharply higher customer acquisition, technology and staffing expenses; review non-GAAP reconciliations alongside GAAP losses.
- Cash burn, insurance-subsidiary capital requirements and restrictions on distributions; management’s 12-month liquidity statement is an expectation, not a guarantee.