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Lemonade Quarterly Results: No Upside Catalysts.Problematic Acquisition

Lemonade (LMND) Earnings results showed slow if any move to profitability. They also announced the purchase of Metromile a relative newcomer in auto insurance f


  • Lemonade’s repored:

  • In force premium $347 mln up 84% year on year.

  • Gross Earned premium rose to $76.9 million up 86% yoy But up only $67 vs. previous quarter

  • The more important measure: net earned premium was $35.7 mln up 101% over the previous year .

  • Revenue was $35.7 vs $17.8 a year ago and $28 mln the previous quarter

  • Adjusted EBITDA loss was $53 million

  • Net loss was $66.4 million in Q3 as compared to the $30.9 million reported in the third quarter of 2020,

  • Adjusted EBITDA loss was $51.3 million in Q3 as compared to $27.6 million in the third quarter of 2020.

Lemonade definitely improved its loss ratio from the horrible results in the previous quarter due to the extreme weather in Texas but it was 77% vs 72% a year ago.

The average premium although 26% higher is still extremely low at $254.

This indicates that they have paid minimal progress breaking into the homeowners market dominated by the “dinosaurs”…the average premium for homeowners pollcies is $1200. Lower premium means higher likelihood of a loss exceeding premium earned. It also means marketing costs are high relative to premium earned Lemonade saw a 26% yoy decrease in marketing efficiency. operating expenses rose 98%

The business mix shows the vast majority is in low premium pet and rental area where large incumbents are not interested in writing business:

% of Business :

Pet 15% up 2%

Renters up to 47% from previous quarter

Homeowners unchanged at 30%

Life 2%

Although Lemonade often cites its international business as a positive it doesnt report any financials related to that business.

Lemonade revised downward the lower end of its' forecasts

  • In force premium at December 31 of $380 - $384 million

  • Gross earned premium of $88 - $89 million

  • Revenue of $39 - $40 million •

  • Adjusted EBITDA loss of ($52) - ($50) million

Looking through the above numbers it seems difficult seeing a path to a company that "disrupts" the industry. The company's model is such that 70% of premium is passed over to reinsurers (for which Lemonade receives commision), with low average premium. It's unclear what unique technology. Lemonade's many "sleepy incumbent competitors" make use of apps and AI and there are many stan along insuretech startup companies from which the incumbents can buy services or simply buy the companies.

Metromile purchase. The major news released by Lemonade just beforeits earning release was its purchase of metromile in an all stock transaction valued at around $500 million.Metromile had an enterprise value of $340 million of which $160 million is in cash.Lemonade was paying a hefty premium

Metromile stock rose 14% on the announcement Lemonade dropped 6.7%. As of the end of September 30. Since that announcement and today's (November 18) trading metromile has dropped just under 15% Lemonade has declined 23%.

The acquisition can be seen as an admission that building a full stack car insurance company on its own. It's unclear where Lemonade currently offers its car insurance: I didnt check every state but the Lemonade site says they offer auto in Californai but when attempting to apply the "bot" said the insurance was not available.

Lemonade says that it will gain the from Metromile's technology and data and experience just speeding the ramp up for their policies. It's unclear what they are buying since Metromile's loss rato reported in the third quarter was 81.6%, its policies in force were flat and its cost of acquisition rose, Interestingly Metromile's average premium per customer was $1197 far in excess of Lemonade.

Lemonade in its' release mentions Metromile is licensed in 48 states...but it is only available in 9. Metromile stock price has dropped close to 16% in the four trading days since the earnings release. The transaction doesnt close until mid 2022. Lemonade says it will have metromile technology incorparated in its product in 18 months.

There are many things unclear in the release. For example metromile uses a device attached to the car (measuring data per vehicle) Lemonade says it does it through data from a phone although it is unclear how this is done since it would have to measure driver behavior per driver. In any case there are several "old school vendors" that already make use of this data through similar devices and its not hard to see that future cars will incorporate such technology or others will develop apps to do the same thing.

Stock Performance: The market has not been kind to Lemonade stock. It has dropped

23% since its' earnings report and is trading over 70% below its all time high (and around the time the founders and other insiders sold significant amounts of stock in a secondary offering). CEO Shreiber in the Lemonade conference call that "Lemonade as a stock is necessarily right for every investor". It doesn't instill confidence that both founders have sold significant amounts of shares. In any case investors even at current levels need to be very optimistic in the long term to hold shares. The average price target among analysts is $66.75.

The CEO letter about the acquisition is here As is usually the case lemonade CEO makes expansive statements about how Lemonade is way ahead of the “stodgy established insurance companies”. But in fact several companies are already using mileage based pricing. In addition Lemonade speaks about Lemonade also moving in the future to telematics which measures how the car is driven sharp stops, high speed etc. again something other companies such as Allstate and Nationwide already have in place.


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