Lemonade, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report; the supplied filing text does not provide a clear standalone Q4 income statement or cash flow.
Business context
Lemonade is a digital property and casualty insurer and insurance agency, operating in the U.S. and Europe. Its offerings included renters, homeowners and pet insurance; it announced plans to add life insurance. Its model combines technology-driven distribution and claims handling with reinsurance and customer-directed charitable “Giveback” donations.
Financial and operating results
| Metric | FY2020 | FY2019 |
|---|---|---|
| Total revenue | $94.4 million | $67.3 million |
| Gross written premium | $214.4 million | $115.8 million |
| Gross earned premium | $158.7 million | $75.5 million |
| Net earned premium | $77.3 million | $63.8 million |
| Gross profit | $24.8 million | $11.7 million |
| Gross profit margin | 26% | 17% |
| Adjusted gross profit (non-GAAP) | $31.2 million | $13.1 million |
| Net loss | $(122.3) million | $(108.5) million |
| Adjusted EBITDA (non-GAAP) | $(97.9) million | $(106.4) million |
| Gross loss ratio | 71% | 79% |
| Net loss ratio | 71% | 72% |
- Revenue grew 40% year over year, while gross written premium increased 85%. Net earned premium grew more slowly, in part because the company ceded substantially more premium under its new reinsurance arrangements.
- Sales and marketing expense declined 9% to $80.4 million; technology development expense rose 98% to $19.4 million; general and administrative expense rose 115% to $46.3 million.
- At year-end, Lemonade reported 1,000,802 customers, up from 643,118, and $213.0 million of in-force premium, up from $113.8 million. Premium per customer increased to $213 from $177.
- Cash, cash equivalents and restricted cash totaled $571.4 million; investments were $6.6 million. Total assets were $828.7 million and total liabilities were $287.7 million. The balance sheet does not list interest-bearing debt; no debt balance is separately reported in the supplied text.
- Cash used in operating activities was $91.7 million, compared with $78.1 million in 2019. Investing activities provided $50.1 million, and financing activities provided $341.1 million, primarily from the IPO.
- Gross unpaid losses and loss adjustment expenses were $46.3 million, of which $10.0 million was net of reinsurance. The U.S. insurance subsidiary’s statutory capital and surplus was $61.4 million; its risk-based capital ratio was 561%.
Material changes and unusual items
- Effective July 1, 2020, Lemonade began ceding 75% of written premium under proportional reinsurance contracts, in addition to non-proportional coverage for the remaining business. Ceded written premium rose to $171.7 million from $11.2 million; ceded earned premium was 51.3% of gross earned premium, versus 15.5% in 2019.
- The new reinsurance structure contributed $15.3 million of ceding commission income in 2020 and changed the relationship between gross premium growth and reported net premium and revenue.
- Net investment income fell 56% to $1.5 million, which management attributed primarily to lower interest rates.
- General and administrative expense included a $12.2 million non-cash charge for contributing 500,000 shares to the Lemonade Foundation. Adjusted EBITDA excludes this contribution.
- The July 2020 IPO generated approximately $335.6 million in net proceeds. After year-end, the company’s January 2021 follow-on offering and subsequent underwriters’ option generated a further $639.8 million in net proceeds to the company.
Outlook, management commentary and risks
- Management said the company expects continued investment in marketing, product and technology development, hiring, geographic expansion and public-company compliance. It warned that net losses may increase in the near term and gave no specific numerical earnings or revenue guidance in the supplied text.
- Management reported that 2020 in-force premium was approximately 87% higher than a year earlier and that each marketing dollar generated 88% more in-force premium than in 2019. These are company-reported operating measures, not GAAP revenue or a forecast.
- Management said COVID-19 had not materially affected FY2020 results, but the pandemic’s duration and future effects remained uncertain. The company highlighted catastrophe exposure, climate-related risks and the concentration of 58% of 2020 gross written premium in California, Texas and New York.
- Key risks include the history of losses and uncertain path to profitability; retaining customers and converting renters to higher-premium products; competition and rising customer-acquisition costs; underwriting and reserve-estimation uncertainty; availability, pricing and collectability of reinsurance; insurance capital and regulatory requirements; and legal or regulatory limits on AI, data use, privacy and automated customer communications.
- Most proportional reinsurance coverage was scheduled to expire June 30, 2023, while the remainder and the non-proportional contracts were scheduled to expire June 30, 2021. Renewal terms could affect capacity, risk and profitability.
- The filing reported no pending legal proceeding believed likely to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements; it did not audit or opine on internal control effectiveness.
Important facts for investors to verify
- Whether customer and in-force-premium growth translates into durable GAAP revenue, improved unit economics and eventual profitability.
- How reinsurance renewals, costs, counterparty strength and recoveries affect future margins, capital needs and ability to write business.
- Whether reported loss-ratio improvements persist as the book grows, and whether loss reserves prove adequate as claims develop.
- How concentrated geographic exposure, catastrophes and regulatory restrictions affect underwriting results and required statutory capital.
- Whether customer-acquisition efficiency, retention and cross-selling into homeowners, pet and future products meet management’s expectations.
- How the 2021 follow-on proceeds are deployed, and whether ongoing cash use remains consistent with management’s stated liquidity outlook.