Lemonade, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing was signed August 12, 2020. Lemonade operates a digital insurance platform, primarily offering renters and homeowners coverage, and uses reinsurance to transfer a portion of insured risk.
Financial results and operating metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $29.9 | $13.8 | $56.1 | $24.8 |
| Net earned premium | $29.2 | $13.3 | $54.5 | $23.8 |
| Net loss | $(21.0) | $(23.1) | $(57.5) | $(44.7) |
| Adjusted EBITDA (non-GAAP) | $(18.2) | $(23.0) | $(40.6) | $(44.6) |
| Gross profit / margin | $5.4 / 18% | $1.7 / 12% | $10.0 / 18% | $2.9 / 12% |
| Gross loss ratio | 67% | 82% | 70% | 85% |
| Net loss ratio | 70% | 74% | 71% | 75% |
- Q2 gross written premium was $46.7, up 84%; six-month gross written premium was $84.8, up 90%. In-force premium at June 30 was $155.1, versus $72.1 a year earlier; customers totaled 814,160, versus 442,752.
- Q2 gross profit margin and loss ratios improved year over year. For the six months, revenue grew 126%, while net loss widened 29%; management attributed growth mainly to customer and geographic expansion. The six-month net loss included a $12.2 noncash charge for shares contributed to the Lemonade Foundation.
- Q2 sales and marketing expense fell 15% to $16.1, which management attributed mainly to more efficient advertising spend. Six-month sales and marketing fell 6% to $35.3. Technology development rose 100% in Q2 to $4.2 and 114% for the six months to $7.7.
- Cash used in operations was $35.3 for the six months, compared with $37.7 in 2019. Investing activities provided $22.5; financing activities provided $1.4. Cash, cash equivalents and restricted cash were $258.8 at June 30. Cash and short-term investments totaled $288.7; total investments were $36.6.
- Total liabilities were $141.3, including unpaid losses and LAE of $35.3 and unearned premium of $86.9. The filing does not report borrowings or a debt balance. Convertible preferred stock of $480.2 was classified outside stockholders’ equity; stockholders’ deficit was $221.6.
Material changes, outlook and risks
- Premium growth reflected higher customer counts, expansion into four additional U.S. states and the Netherlands, and a 17% increase in premium per customer. Ceded earned premium rose as a share of gross earned premium, partly reflecting a whole-account quota-share reinsurance agreement effective January 1, 2020.
- The company reported no material COVID-19 impact on net earned premium in the periods presented, but said the pandemic’s duration and financial effects remained uncertain. Management noted that Q3 is typically a stronger moving season, but COVID-19 could reduce real-estate activity. Weather-related seasonality can also affect claims.
- No specific forward financial guidance was provided. Management expected continued investment in marketing, technology, hiring, geographic and product expansion, and public-company compliance, and cautioned that losses may increase in the near term. It stated that June 30 cash and cash equivalents plus IPO proceeds were expected to meet working-capital and capital needs for at least 12 months.
- On July 2, 2020, after quarter-end, Lemonade completed its IPO: 12.65 million shares at $29 per share generated approximately $335.6 million in net proceeds. Preferred stock converted to common stock in connection with the IPO. The IPO proceeds are not included in June 30 cash balances.
- Key risks include continued losses and uncertain path to profitability; adequacy of loss reserves and reinsurance protection; catastrophe and weather exposure; competition and customer retention; insurance regulation and capital requirements; AI underwriting or claims errors and potential bias; data privacy and cybersecurity; and the uncertain economic and operational effects of COVID-19. Management reported no material legal proceedings and no material change in contractual obligations. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether customer, in-force premium and premium-per-customer growth translate into durable renewals, efficient acquisition costs and improving GAAP profitability.
- How loss experience and reserve development evolve, including the assumptions behind reserves and the reported prior-year reserve redundancies.
- The cost, coverage, counterparties and renewal terms of reinsurance, and the effect of ceded premiums on margins and retained risk.
- How the post-IPO cash position, preferred-stock conversion, share issuance and equity compensation affect liquidity and dilution.
- The amount and governance of the Foundation share contribution, and whether similar noncash or related-party items recur.
- Whether COVID-19, seasonal claims, severe weather and regulatory requirements materially affect growth, claims, capital or operations.