Lemonade, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Figures are in U.S. dollars; financial statement amounts are in millions unless noted. Lemonade is a digital insurer operating through wholly owned insurance subsidiaries.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $50.0 | $28.2 | +77% |
| Net earned premium | $31.2 | $16.3 | +91% |
| Loss and loss adjustment expense, net | $28.1 | $13.0 | +116% |
| Net loss | $(67.9) | $(55.6) | Loss widened 22% |
| Adjusted EBITDA (non-GAAP) | $(50.3) | $(40.4) | Loss widened |
| Gross profit margin | 23% | 35% | Down 12 percentage points |
| Adjusted gross profit margin (non-GAAP) | 35% | 45% | Down 10 percentage points |
| Gross / net loss ratios | 86% / 90% | 74% / 80% | Both increased |
For the six months ended June 30, revenue was $94.3 million, up 82%; net loss was $142.7 million versus $104.6 million; and adjusted EBITDA loss was $107.7 million versus $81.7 million. Gross written premium increased 43% to $236.7 million. At quarter-end, Lemonade reported 1,579,936 customers, in-force premium of $457.6 million, premium per customer of $290, and annual dollar retention of 83%.
At June 30, cash and cash equivalents were $199.6 million and investments were $760.0 million. Total assets were $1,460.9 million, total liabilities $611.8 million, and stockholders’ equity $849.1 million. The balance sheet does not separately report a debt balance. Operating cash flow was negative $79.7 million for the first half, compared with negative $56.5 million a year earlier; investing cash flow was positive $13.0 million and financing cash flow positive $1.0 million. Cash, cash equivalents and restricted cash declined $71.0 million to $199.6 million.
Material changes and drivers
- Revenue growth reflected higher premium volume, increased premium per customer, more retained premium under changed reinsurance arrangements, higher ceding commission income, and growth in third-party placements and installment fees.
- Q2 net loss increased as claims costs rose with premium growth, higher net retention under reinsurance arrangements, and inflation. Prior-period reserve development was favorable by $1.2 million for the first half.
- Operating expenses also grew: first-half sales and marketing rose 21%, technology development 64%, and general and administrative expense 69% year over year. Management attributed increases to staffing, growth and expansion, product development, advertising, and public-company and regulatory requirements.
- Fixed-maturity investments had $24.3 million of gross unrealized losses at June 30, versus $5.5 million at December 31, 2021; the company attributed these mainly to interest rates rather than issuer credit risk. The unrealized losses contributed to accumulated other comprehensive loss.
Outlook, risks and unusual items
- Management stated existing cash and cash equivalents were expected to cover working capital and capital expenditure needs for at least the next 12 months. It also cited $959.6 million of cash and investments available to address potential operating cash needs, including catastrophe losses. Lemonade has a history of operating losses and negative operating cash flow.
- Effective July 1, 2022, Lemonade reduced proportional reinsurance from 70% to 55% of premium and added U.S. catastrophe protection for losses exceeding $80 million. The company remains liable to policyholders if reinsurers fail to pay; availability, cost, limits, and counterparty performance are risks.
- Management expects sales and marketing, technology development, and general and administrative expenses to increase in absolute dollars in future periods. The filing provides no quantified revenue, earnings, or profitability guidance.
- On July 28, 2022, after quarter-end, Lemonade completed its all-stock acquisition of Metromile for approximately $146.0 million at closing. Purchase-price accounting and pro forma financial information were still being determined; a significant portion of consideration was expected to be allocated to technology-related intangible assets.
- Risks highlighted include inflation and claims-reserve uncertainty, severe weather and catastrophe exposure, reliance on reinsurance, regulatory and capital requirements, customer retention and acquisition costs, competition, and technology, data security and privacy risks. A class action alleging improper business practices was described as probable and reasonably estimable, with an accrual recorded; the amount was not disclosed in the supplied filing text. Lemonade said it did not believe pending legal proceedings were likely to have a material adverse effect.
Important facts for investors to verify
- Whether premium and customer growth can translate into improved loss ratios, margins, and lower operating losses.
- How the July 2022 reinsurance changes affect retained risk, revenue, claims volatility, and capital requirements.
- Cash burn and liquidity after the Metromile acquisition, and the completed acquisition’s effects on results, integration costs, and dilution.
- Further development in claims inflation, loss reserves, catastrophe exposure, and the class action accrual.
- Investment portfolio fair-value changes and the capacity of regulated insurance subsidiaries to distribute funds to the parent.