Lemonade, Inc. — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Lemonade is a technology-led insurance company operating through wholly owned U.S. and European subsidiaries. It reported one operating segment.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $23.5 million | $26.2 million |
| Net earned premium | $13.8 million | $25.3 million |
| Gross written premium | $75.8 million | $38.1 million |
| Net loss | $49.0 million | $36.5 million |
| Net loss per share, basic and diluted | $(0.81) | $(3.16) |
| Net cash used in operations | $40.3 million | $19.4 million |
- Profitability and loss experience: Gross profit was $1.9 million, with an 8% gross profit margin, versus $4.6 million and 18%. Adjusted gross profit, a non-GAAP measure, was $5.0 million versus $5.4 million; adjusted gross profit margin was 21% in both periods. Adjusted EBITDA loss was $41.3 million versus $22.4 million.
- Loss ratios: Gross loss ratio was 121% versus 72%; net loss ratio was 120% versus 72%. Management said Winter Storm Uri and other catastrophe losses increased the Q1 2021 gross loss ratio by 50 percentage points. Uri accounted for an estimated $6.5 million of net incurred losses.
- Growth indicators: Customers rose to 1,096,618 from 729,325; in-force premium (IFP) was $251.7 million versus $133.3 million; premium per customer was $229 versus $183; annual dollar retention was 81% versus 70%. GWP nearly doubled year over year.
- Cash, assets, and liabilities: At March 31, cash, cash equivalents and restricted cash totaled $1,174.7 million, including $1,174.4 million in cash and cash equivalents. Total assets were $1,477.5 million and total liabilities $333.8 million. The filing lists no debt balance.
- Capital and liquidity: The January–February follow-on offering generated $640.3 million of net proceeds to Lemonade; financing cash flow was $646.4 million, including stock-option exercises. Management said available cash was sufficient for at least the next 12 months. Cash and short-term investments held by regulated insurance and holding-company subsidiaries totaled $141.4 million and may be subject to dividend restrictions.
Material changes and management commentary
- Revenue declined 10% despite GWP growth. Lemonade attributed lower net earned premium primarily to its July 2020 proportional reinsurance arrangement: it ceded 75% of premiums, while recognizing $9.0 million of ceding commission income. Ceded written premium rose to $55.6 million from $4.3 million.
- Net loss increased 34% to $49.0 million. Sales and marketing rose 52% to $29.1 million and technology development rose 103% to $7.1 million, reflecting investment in acquisition, staffing, products, and technology. General and administrative expense fell 23% to $14.1 million, but the prior-year period included a $12.2 million noncash contribution to the Lemonade Foundation; excluding that item, G&A increased, as discussed by management.
- Management said each marketing dollar generated 37% more IFP than in the prior-year quarter and described customer growth, geographic expansion, and new product offerings as growth drivers. It expects continued investment in sales and marketing, technology, and administrative capacity; no specific earnings or revenue guidance was provided.
- The majority of proportional reinsurance contracts run through June 30, 2023; the remainder and the non-proportional contracts expire June 30, 2021. Management cautioned that renewal terms or availability could affect the business model and growth capacity.
Risks, contingencies, and unusual items
- Key exposures include catastrophe severity and reserve estimation, reinsurer performance and contract renewal, insurance regulation and capital requirements, customer retention and acquisition costs, competition, and risks involving AI, data privacy, cybersecurity, and model accuracy. The filing says there were no material changes to the risk factors in the 2020 Form 10-K.
- Management said COVID-19 had not materially affected Q1 2021 results but that its duration and future impact remained uncertain. The company’s results may also fluctuate with seasonal customer activity and weather-related claims.
- Management did not believe any pending routine litigation was likely to have a material adverse effect; the filing reported no material legal proceedings. Lease commitments totaled $18.1 million. No off-balance-sheet arrangements were reported.
- Disclosure controls and procedures were assessed as effective at a reasonable-assurance level as of March 31, 2021; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- How much of the elevated Q1 gross and net loss ratios reflects Uri and other catastrophe losses, and how reserve estimates develop in later periods.
- Whether proportional and non-proportional reinsurance contracts renew on acceptable terms, and how the 75% cession affects reported revenue, margins, and retained risk.
- Whether rapid growth in customers and IFP converts into durable retention, improved unit economics, and a path to profitability as acquisition and operating expenses rise.
- How much of reported liquidity is freely available at the parent level versus held in regulated subsidiaries, and how operating cash use evolves after the offering proceeds.
- The assumptions underlying non-GAAP adjusted gross profit and adjusted EBITDA, which are not substitutes for GAAP results.