Lemonade, Inc. — Q1 2022 Form 10-Q
Business context and period: Quarterly results for the three months ended March 31, 2022, compared with Q1 2021. Lemonade operates a digitally focused insurance business and reports one segment. It was pursuing an all-stock acquisition of Metromile, expected to close in Q2 2022 subject to customary conditions and approvals.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $44.3 million | $23.5 million |
| Net earned premium | $27.4 million | $13.8 million |
| Gross written premium | $110.6 million | $75.8 million |
| Gross profit / margin | $10.2 million / 23% | $1.9 million / 8% |
| Adjusted gross profit / margin | $16.3 million / 37% | $5.0 million / 21% |
| Net loss | $(74.8) million | $(49.0) million |
| Adjusted EBITDA | $(57.4) million | $(41.3) million |
| Operating cash flow | $(39.5) million | $(40.3) million |
- Revenue increased 89% year over year; net loss widened 53%. Expenses rose 63% to $116.9 million, including sales and marketing of $38.3 million, technology development of $16.9 million, and general and administrative expense of $28.2 million.
- Gross and net loss ratios improved to 90% and 89%, respectively, from 121% and 120%. Loss and loss adjustment expense, net, nevertheless increased 48% to $24.4 million, reflecting business growth and inflation, partly offset by favorable prior-year reserve development of $0.4 million.
- Cash, cash equivalents and restricted cash were $235.0 million at quarter-end; investments were $777.9 million. The company reported $1,012.9 million in cash and investments available to support potential losses. Operating cash use was $39.5 million; investing activities provided $4.1 million and financing activities provided $0.6 million.
- Total assets were $1,495.4 million and total liabilities were $582.7 million. The filing does not identify borrowings or provide a clear debt balance. Stockholders’ equity was $912.7 million. Accumulated other comprehensive loss increased to $18.8 million, principally reflecting unrealized investment losses.
- Unpaid loss and loss adjustment expense liabilities were $107.6 million, including $79.4 million of related reinsurance recoverables. The filing notes that reserve estimates are uncertain and may change materially.
Material changes and operating trends
- Customers increased to 1.50 million from 1.10 million, and in-force premium rose 66% to $419.0 million. Premium per customer increased 22% to $279; annual dollar retention was 82%, compared with 81%.
- Gross written premium rose 46%, reflecting customer growth and a shift toward higher-value policies. Ceded earned premium was 71% of gross earned premium, down from 75%; the company had reduced proportional reinsurance from 75% to 70% and added U.S. catastrophe protection for losses exceeding $60 million.
- Stock-based compensation increased to $14.1 million from $6.1 million. The company’s reported adjusted gross profit and adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.
Outlook, risks and unusual items
- Management said existing cash and cash equivalents were expected to cover working capital and capital expenditure needs for at least 12 months. It also cited potential access to borrowing, equity issuance, debt securities, or additional reinsurance. The company has a history of operating losses and negative operating cash flows.
- Management expects sales and marketing, technology development, and general and administrative expenses to increase in absolute dollars as it invests in growth, products, technology, and compliance. No specific quarterly or annual earnings guidance is provided in the filing.
- Key risks include claims and catastrophe volatility, inflation, reserve estimation, reinsurance availability and counterparty performance, insurance regulation and capital requirements, customer retention and acquisition costs, competition, and execution of growth initiatives. The company also cites technology, data privacy, cybersecurity, and AI-related risks.
- The company accrued a liability for class-action litigation alleging improper business practices, stating the loss was probable and reasonably estimable; the filing text does not provide a clear accrual amount. Management said it did not believe any pending legal proceeding was likely to have a material adverse effect.
- Management attributed unrealized fixed-maturity losses primarily to the interest-rate environment, not issuer credit risk, and recorded no related credit-loss allowance. It said a 10% immediate interest-rate change would not have a material effect on investment fair value.
- After quarter-end, director Joel Cutler resigned effective May 9, 2022; the board rebalanced director classes on May 10. Management reported disclosure controls were effective as of March 31, 2022 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer and in-force-premium growth converts into improved GAAP profitability and cash generation, given the larger net loss and rising operating expenses.
- How claims inflation, catastrophe experience, reserve development, and reinsurance terms affect future loss ratios and the company’s retained risk.
- Whether the reported liquidity is accessible where needed, considering regulatory restrictions on insurance-subsidiary distributions and the timing of claims and reinsurance recoveries.
- The status, closing terms, and integration effects of the Metromile acquisition, including its impact on capital, operating costs, and auto-insurance growth.
- The amount and potential development of the accrued class-action liability, which is not quantified in the filing text.