Lemonade, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted. Amounts are in U.S. dollars. Lemonade is a digital insurer and public benefit corporation; results include Metromile, acquired in July 2022.
Financial and operating results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $114.5m | $74.0m | $314.3m | $168.3m |
| Net earned premium | $86.6m | $50.6m | $231.3m | $109.2m |
| Net loss | $(61.5)m | $(91.4)m | $(194.5)m | $(234.1)m |
| Adjusted EBITDA (non-GAAP) | $(40.2)m | $(65.7)m | $(143.7)m | $(173.4)m |
| Gross profit / margin | $21.9m / 19% | $8.1m / 11% | $50.5m / 16% | $29.6m / 18% |
| Adjusted gross profit / margin (non-GAAP) | $24.9m / 22% | $13.2m / 18% | $62.1m / 20% | $47.0m / 28% |
| Net loss ratio | 88% | 105% | 93% | 97% |
- Q3 gross written premium was $212.8m, up 22%; customers reached 1,984,154, up from 1,775,824. In-force premium was $719.0m versus $609.2m, and premium per customer was $362 versus $343. Annual dollar retention was 85%, compared with 84%.
- At September 30, cash, cash equivalents and restricted cash were $238.1m; investments were $706.8m; total assets were $1,647.6m; and stockholders’ equity was $726.9m. Total liabilities were $920.7m, including $7.7m borrowed under the financing agreement.
- For the first nine months, operating cash outflow was $103.0m, investing cash inflow was $48.1m, and financing cash inflow was $8.2m. Cash, cash equivalents and restricted cash declined $48.4m to $238.1m. Management also reported $944.9m in cash and investments available, while noting that some assets are held by regulated subsidiaries or otherwise restricted.
Material changes and management commentary
- Revenue rose 55% in Q3 and 87% year to date. Management attributed premium growth to customer additions, higher premium per customer, geographic and product expansion, and assumed Texas auto premium. Net earned premium also benefited from a lower share of earned premium ceded to reinsurers than in the prior-year periods.
- Net loss narrowed 33% in Q3 and 17% year to date. Lower sales and marketing spending and higher investment income helped; higher net claims and other operating costs partly offset those benefits. Sales and marketing expense fell 32% in Q3 and 30% year to date, while technology development expense increased 21% year to date.
- Q3 net loss and LAE expense increased 42% to $75.9m. The nine-month net loss and LAE was $215.4m, including $10.0m related to winter storm Elliott and $3.5m from a Texas hailstorm. Management cited premium growth, increased retained losses following reinsurance changes, and claims-cost inflation. Prior-year reserves developed favorably by $3.6m year to date.
- Management stated existing cash and cash equivalents were expected to meet working-capital, liquidity and capital-expenditure needs for at least 12 months, subject to economic, financial, competitive, regulatory and other factors. No earnings or revenue guidance was provided in the supplied filing text.
Risks, contingencies and unusual items
- A new reinsurance program effective July 1, 2023 covers about 55% of premium proportionally, with exclusions, caps and other limits. Lemonade remains directly liable to policyholders if reinsurers fail to pay; reinsurance availability, pricing and counterparty performance are material risks.
- The General Catalyst Customer Investment Agreement provides for up to $150m over an 18-month commitment period to support growth spending. Advances may cover up to 80% of that spend and are repaid with a 16% rate of return under agreed schedules. Outstanding borrowings were $7.7m at quarter-end. The company cautioned that the arrangement may not function as intended.
- Q3 included a $3.7m impairment charge related to the San Francisco office sublease and a $3.0m accrual for a potential Metromile-related liability claim. The filing says the liability was considered probable and reasonably estimable. Metromile acquisition-related complaints had been voluntarily dismissed, with plaintiffs reserving rights to seek fees.
- The Israel-Hamas conflict creates uncertainty for operations in Israel; the company reported approximately 300 full-time employees there at September 30 and said some staff had been called to military service. Inflation, severe weather, reserve estimation, regulatory capital, reinsurance limits and investment interest-rate risk are also highlighted. The company reported U.S. insurance subsidiary capital above prescribed risk-based capital requirements.
- Fixed-maturity investments had $12.0m of gross unrealized losses at quarter-end, which management attributed primarily to interest rates rather than issuer credit risk. The company said it did not intend, and was not more likely than not required, to sell them before recovery.
Important facts for investors to verify
- Whether premium and customer growth can translate into sustainable improvement in underwriting profitability, including trends in loss ratios, claims inflation and retention.
- The effect of the July 2023 reinsurance terms, catastrophe exclusions and limits on retained losses, ceding commissions and future premium growth.
- The cash-flow economics and repayment obligations of the General Catalyst arrangement, including the 16% return and remaining availability.
- Developments in loss reserves, the Metromile-related claim accrual and other legal or tax contingencies.
- Whether Israel-related disruption, regulatory constraints or catastrophe losses affect operations, capital availability or liquidity; distinguish unrestricted corporate liquidity from funds held in regulated or restricted accounts.