Lemonade, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022. Lemonade is a digital insurer offering renters, homeowners, pet, auto and life insurance. Results include Metromile from its July 2022 acquisition, which affects comparability with the prior-year quarter.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $95.2 million | $44.3 million |
| Net earned premium | $68.2 million | $27.4 million |
| Gross written premium | $164.0 million | $110.6 million |
| Net loss | $(65.8) million | $(74.8) million |
| Adjusted EBITDA (non-GAAP) | $(50.8) million | $(57.4) million |
| Gross profit / margin | $16.5 million / 17% | $10.2 million / 23% |
| Adjusted gross profit / margin (non-GAAP) | $20.6 million / 22% | $16.3 million / 37% |
| Net cash used in operating activities | $(46.4) million | $(39.5) million |
- Net loss ratio was 93%, versus 89%; gross loss ratio was 87%, versus 90%.
- At March 31, cash and cash equivalents were $250.1 million, restricted cash was $4.7 million, and investments totaled $737.9 million. Total assets were $1.64 billion and total liabilities were $819.4 million. The filing reports no clear debt balance.
- Cash, cash equivalents and restricted cash declined to $254.8 million from $286.5 million at year-end 2022. The company said existing cash and cash equivalents should cover working capital, liquidity and capital expenditure needs for at least 12 months.
- Insurance subsidiaries’ cash and investments totaled $357.8 million, including $148 million held as regulatory surplus. U.S. insurance subsidiaries’ capital exceeded prescribed risk-based capital requirements.
Material changes and management commentary
- Revenue increased 115%, led by a 149% increase in net earned premium. Gross written premium grew 48%, which management attributed to customer growth, higher premium per customer, expanded products and geography, and assumed Texas auto premiums.
- Customers grew 23% to 1.86 million; in-force premium increased to $653.3 million from $419.0 million; premium per customer rose to $352 from $279; and annual dollar retention improved to 87% from 82%.
- Proportional reinsurance share fell to 55% effective July 2022, from 70% previously. Ceded earned premium declined to about 56% of gross earned premium from about 71%, supporting higher net earned premium but leaving Lemonade with a larger retained share of risk. U.S. catastrophe reinsurance covers losses above $80 million.
- Loss and loss adjustment expense rose 161% to $63.6 million, reflecting business growth, increased retained losses and inflation-driven claims costs. Prior-year reserves developed unfavorably by $5.7 million, compared with favorable development of $0.4 million in Q1 2022.
- Q1 2023 net incurred catastrophe losses included $9.6 million from winter storm Elliott, $0.9 million from southeastern tornadoes and $0.3 million from Hurricane Ian.
- Sales and marketing expense fell 26% to $28.2 million, while technology development expense rose 29% to $21.8 million and general and administrative expense rose 16% to $32.7 million. Stock-based compensation was $15.4 million.
- Metromile contributed $19.8 million of revenue and $5.1 million of net loss in Q1 2023. Management cited continued investment in product development, automation and geographic expansion.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects technology development and some general and administrative costs to continue growing; it expects sales and marketing costs to decline as a share of revenue over the long term as acquisition efficiency and renewals improve.
- Management identifies claim-reserve uncertainty, inflation, severe weather, reinsurance availability and counterparty performance, regulatory capital requirements, customer retention and acquisition costs, competition, and the ability to price and underwrite risk accurately as key risks. The company remains liable to policyholders for ceded claims if reinsurers fail to pay.
- Fixed-maturity investments had $17.9 million of gross unrealized losses at quarter-end, which the company attributed primarily to interest rates rather than issuer credit risk. It said it did not intend, and was not more likely than not required, to sell the securities before recovery. A 10% interest-rate change was not expected to materially affect investment fair value.
- The company reported $9.0 million of unrecognized tax benefits and said these could increase within the next 12 months. Metromile shareholder lawsuits had been voluntarily dismissed, with plaintiffs reserving rights to seek fees; the company said it would monitor developments. No pending legal proceeding was believed likely to have a material adverse effect.
- SoftBank had sole investment and voting power over approximately 17.3% of the company’s common stock as of March 31, 2023, creating concentrated voting control. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether premium growth translates into improved underwriting economics, given the lower gross and adjusted gross profit margins and higher net loss ratio.
- Whether reserve estimates and catastrophe-loss assessments remain adequate, particularly after unfavorable prior-year development and inflation-related claim-cost increases.
- How the reduced proportional reinsurance share affects retained risk, future margins and capital needs, and whether reinsurers remain able to meet obligations.
- Cash burn, regulatory restrictions on subsidiary funds, and the stated expectation that available cash will cover at least 12 months of needs.
- Metromile integration and contribution to results, and the effects of stock-based compensation and SoftBank’s voting position.