Lemonade, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022. Figures are unaudited and in U.S. dollars. Lemonade is a digital insurer and public benefit corporation. Results include Metromile only from its July 28, 2022 acquisition; Metromile contributed $15.1 million of revenue and $20.7 million of net loss through quarter-end, limiting comparability with 2021.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $74.0 million | $35.7 million | $168.3 million | $87.4 million |
| Net loss | $91.4 million | $66.4 million | $234.1 million | $171.0 million |
| Adjusted EBITDA (non-GAAP) | $(65.7) million | $(51.3) million | $(173.4) million | $(133.0) million |
| Gross profit / margin | $8.1 million / 11% | $11.7 million / 33% | $29.6 million / 18% | $23.4 million / 27% |
| Adjusted gross profit / margin (non-GAAP) | $13.2 million / 18% | $15.2 million / 43% | $47.0 million / 28% | $33.0 million / 38% |
| Gross earned premium | $136.4 million | $79.6 million | $339.2 million | $202.7 million |
| Gross / net loss ratio | 94% / 105% | 77% / 81% | 90% / 97% | 88% / 91% |
- Q3 revenue rose 107% and nine-month revenue rose 93% year over year. Net earned premium increased 135% in Q3 and 112% for the nine-month period.
- Gross written premium grew 49% in Q3 to $174.0 million and 46% for nine months to $410.7 million. At September 30, customers totaled 1.78 million, in-force premium was $609.2 million, premium per customer was $343, and annual dollar retention was 84%.
- Loss and loss adjustment expense, net, increased 205% in Q3 and 125% year to date. Management cited premium growth, a greater share of retained losses after the reinsurance change, and inflation in claims costs. Hurricane Ian added $2.2 million of net incurred losses in the nine-month period; prior-year reserve development was favorable by $1.1 million.
- Q3 operating expenses totaled $163.1 million, up 63%. Sales and marketing fell 15% to $35.8 million, while technology development rose 50% to $21.4 million and general and administrative expense rose 107% to $40.5 million. G&A included $7.4 million of Metromile transaction and integration costs. Nine-month transaction and integration costs were $8.4 million.
Liquidity, investments and capital
- At September 30, cash, cash equivalents and restricted cash were $225.0 million, versus $270.6 million at year-end 2021. Investments totaled $835.9 million, including $693.1 million of fixed maturities and $142.8 million of short-term investments. Cash and investments together were $1,060.9 million.
- Operating cash outflow was $134.4 million for the first nine months, compared with $94.7 million in 2021. Investing activities provided $93.6 million, including acquisition-related cash and investment maturities and sales; financing activities provided $3.3 million. Cash declined $45.6 million over the period.
- The balance sheet reports no borrowings or debt line item. Total liabilities were $806.1 million and stockholders’ equity was $906.8 million. Unpaid losses and loss adjustment expense were $220.6 million; unearned premium was $294.1 million.
- Management stated existing cash and cash equivalents should cover working capital and capital expenditure needs for at least 12 months. Insurance subsidiaries’ dividends are regulatorily restricted; U.S. insurance subsidiaries’ capital exceeded prescribed risk-based capital requirements.
- Rising interest rates contributed to $29.1 million of unrealized losses on fixed maturities at quarter-end, versus $5.5 million at December 31, 2021, and accumulated other comprehensive loss increased to $35.3 million. The company attributed the investment losses primarily to interest rates, not issuer credit risk, and said it did not expect to need to sell the securities before recovery.
Material changes, outlook and risks
- Metromile acquisition: Completed July 28 in an all-stock transaction. Lemonade issued 6.9 million shares; preliminary purchase accounting recorded $10.9 million of goodwill and $35.5 million of identifiable intangible assets. The purchase-price allocation remained subject to finalization. The transaction expanded the company’s auto insurance offering and geographic footprint.
- Reinsurance: Effective July 1, Lemonade reduced proportional reinsurance from 75% to 55% of premium and added U.S. catastrophe protection for losses exceeding $80 million. Management said the change increased retained premium and exposure to losses. Metromile’s separate quota-share agreement cedes 30% of premiums and losses through June 30, 2023.
- Outlook: No numerical revenue, earnings, or other formal guidance is provided in the supplied filing text. Management expects sales and marketing and technology development expenses to grow in absolute dollars, and expects additional G&A spending to support expansion and compliance. Management also stated it believed operating cash flows would satisfy liquidity needs for at least 12 months, while noting possible need for additional capital if cash flows prove insufficient.
- Principal risks: Continued losses and cash use; catastrophe exposure and uncertainty in loss reserves; inflation and claims volatility; dependence on reinsurers and their capacity; insurance capital and regulatory requirements; and regulatory, privacy, fairness, and discrimination concerns relating to AI, external data, and telematics. California restrictions on behavioral driving data may constrain auto underwriting. Management reported no material COVID-19 impact on results for the periods presented.
- Other notable items: A class action concerning business practices was settled in October 2022; the company had accrued a liability, but the filing does not state the settlement amount. Metromile shareholder complaints were voluntarily dismissed, with plaintiffs reserving rights to seek fees. On October 14, Lemonade issued Chewy Insurance Services a warrant for up to 3,352,025 shares at $0.01 per share, vesting over five years subject to performance requirements.
- Disclosure controls were assessed as effective at the reasonable-assurance level. Metromile’s internal controls were excluded from the company’s year-end 2022 assessment under the stated SEC transition allowance.
Most important facts for investors to verify
- Whether customer growth and retention translate into improved underwriting economics, given Q3 net loss ratio of 105% and lower gross and adjusted gross margins.
- How much of revenue and loss growth reflects underlying Lemonade performance versus Metromile’s post-acquisition contribution, and whether integration produces expected benefits.
- Whether the lower proportional reinsurance share improves economics without creating excessive retained catastrophe or reserve risk; review reinsurance recoverables and counterparty exposure.
- The company’s cash runway and potential capital needs, considering $134.4 million of operating cash use in nine months and continuing net losses.
- Final Metromile purchase accounting, the accrued class-action settlement amount, and the potential dilution and performance conditions associated with the Chewy warrant.