Lemonade(LMND) - 2024 Q3 - Quarterly Report

Filing Information Form 10-Q Details Lemonade, Inc. filed its Quarterly Report on Form 10-Q for September 30, 2024, as a large accelerated filer on the NYSE - Filing Type: Quarterly Report on Form 10-Q for the period ended September 30, 2024[1] - Registrant: Lemonade, Inc., a Delaware corporation[1] Securities Registered | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | |:-----------------------------------|:------------------|:------------------------------------------| | Common Stock, $0.00001 par value | LMND | New York Stock Exchange | | Warrants to Purchase Common Stock | LMND.WS | New York Stock Exchange American | - Filer Status: Large accelerated filer[3] - Common Stock Outstanding (as of Oct 30, 2024): 71,404,540 shares[3] Table of Contents Cautionary Note Regarding Forward-Looking Statements Forward-Looking Statements Disclosure This section details forward-looking statements and key risks that could cause actual results to differ materially from projections - Forward-looking statements are covered by safe harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934[5] - Key risks include a history of losses, dependence on customer retention and expansion, brand reputation, accurate and timely claim payments, reinsurance availability and counterparty risk, limited operating history, effective growth management, proper functioning of proprietary AI algorithms, intense industry competition, and maintaining risk-based capital levels[6][7][8][9][10][11] - Additional risks include the efficacy of the business model, potential limitations on AI algorithm development by regulators, impact of new legislation on customer communication, cyclical nature of the insurance business, reliance on data collection, need for additional capital, security incidents, regulatory examinations, accurate underwriting, complex product development cycles, expansion costs, extensive industry regulations, enterprise risk reporting, severe weather events, climate change, ESG matters, and the evolving conflict in Israel[12][13][14][15][16][17][18][19][20][21][22][23][24][25] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents Lemonade, Inc.'s unaudited condensed consolidated financial statements, covering balance sheets, operations, equity, cash flows, and related notes Condensed Consolidated Balance Sheets The condensed consolidated balance sheets present the company's financial position as of September 30, 2024, detailing changes in assets, liabilities, and equity Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | Sep 30, 2024 (Unaudited) | Dec 31, 2023 | |:-----------------------|:-------------------------|:-------------| | Total Assets | $1,823.0 | $1,633.3 | | Total Liabilities | $1,230.0 | $924.4 | | Total Stockholders' Equity | $593.0 | $708.9 | - Cash, cash equivalents and restricted cash increased to $337.8 million as of September 30, 2024, from $271.5 million as of December 31, 2023[29] - Unpaid loss and loss adjustment expense increased to $294.2 million as of September 30, 2024, from $262.3 million as of December 31, 2023[29] Condensed Consolidated Statements of Operations and Comprehensive Loss For the three and nine months ended September 30, 2024, total revenue increased, while net loss showed mixed trends, influenced by expenses and premium growth Key Financials (Three Months Ended Sep 30, in millions) | Metric | 2024 | 2023 | Change ($) | Change (%) | |:-------------------|:-------|:-------|:-----------|:-----------| | Total Revenue | $136.6 | $114.5 | $22.1 | 19% | | Total Expense | $202.4 | $174.1 | $28.3 | 16% | | Net Loss | $(67.7)| $(61.5)| $(6.2) | 10% | | Net Loss per Share | $(0.95)| $(0.88)| $(0.07) | 8% | Key Financials (Nine Months Ended Sep 30, in millions) | Metric | 2024 | 2023 | Change ($) | Change (%) | |:-------------------|:--------|:--------|:-----------|:-----------|\ | Total Revenue | $377.7 | $314.3 | $63.4 | 20% | | Total Expense | $543.8 | $504.5 | $39.3 | 8% | | Net Loss | $(172.2)| $(194.5)| $22.3 | (11%) | | Net Loss per Share | $(2.44) | $(2.80) | $0.36 | (13%) | - Sales and marketing expense significantly increased by 111% for the three months and 53% for the nine months ended September 30, 2024, compared to the prior year[31] Condensed Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity decreased for the nine months ended September 30, 2024, primarily due to net losses, partially offset by stock-based compensation Stockholders' Equity Changes (in millions) | Metric | Dec 31, 2023 | Sep 30, 2024 |\ |:-------------------------------------|:-------------|:-------------|\ | Total Stockholders' Equity (Beginning)| $708.9 | $708.9 |\ | Net Loss | - | $(172.2) |\ | Stock-based Compensation | - | $47.2 |\ | Other Comprehensive Income (Loss) | - | $8.5 |\ | Total Stockholders' Equity (Ending) | $708.9 | $593.0 | - Common shares outstanding increased from 70,163,703 at December 31, 2023, to 71,378,678 at September 30, 2024, due to exercise of stock options, distribution of restricted stock units, and exercise of warrant shares[33] Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly decreased for the nine months ended September 30, 2024, while financing activities increased substantially Cash Flow Summary (Nine Months Ended Sep 30, in millions) | Activity | 2024 | 2023 | Change ($) | |:-------------------------------|:--------|:--------|:-----------| | Net cash used in operating | $(25.2) | $(103.0)| $77.8 | | Net cash provided by investing | $38.1 | $48.1 | $(10.0) | | Net cash provided by financing | $52.7 | $8.2 | $44.5 | | Cash, cash equivalents and restricted cash at end of period | $337.8 | $238.1 | $99.7 | - The significant decrease in cash used in operating activities was primarily due to a reduced net loss and favorable changes in operating assets and liabilities, including claim payments and settlements with reinsurance partners[36][224] - Financing activities were boosted by $70.5 million in proceeds from borrowings under a financing agreement with GC Customer Value Arranger, LLC[36][227] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations for the financial statements, covering business, accounting policies, estimates, and specific financial line items Note 1. Nature of the Business Lemonade, Inc. is a public benefit corporation providing services to its wholly-owned US and EU subsidiaries - Lemonade, Inc. is a public benefit corporation organized under Delaware law since June 17, 2015[38] - The company provides services to its 100% owned, direct or indirect, subsidiaries in the US and EU[38] Note 2. Basis of Presentation Financial statements are prepared under U.S. GAAP, consolidating subsidiaries, with ongoing evaluation of the Israel conflict's impact - Financial statements are prepared in accordance with U.S. GAAP and include wholly-owned subsidiaries and a variable interest entity[39] - The evolving conflict in Israel and the surrounding region has increased global economic and political uncertainty, with the company continuing to evaluate its impact on operations[40] Note 3. Use of Estimates Financial statement preparation involves significant estimates and assumptions, particularly for loss reserves and deferred tax assets - Significant estimates include reserves for loss and loss adjustment expense, reinsurance recoverable on unpaid losses, and valuation allowance on deferred tax assets[42] Note 4. Summary of Significant Accounting Policies This note details accounting policies for cash and discusses recently issued accounting pronouncements under evaluation Cash, Cash Equivalents and Restricted Cash (in millions) | Category | Sep 30, 2024 | Dec 31, 2023 | |:-------------------------------------------|:-------------|:-------------| | Cash and cash equivalents | $329.8 | $264.5 | | Restricted cash | $8.0 | $7.0 | | Total cash, cash equivalents and restricted cash | $337.8 | $271.5 | - Restricted cash primarily relates to insurance policy premiums held for transmittal to underwriting carriers or settlement of claims, and security deposits for office leases[43] - The company is evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures), effective for fiscal years beginning after December 15, 2023, and December 15, 2024, respectively[44][45] Note 5. Investments The investment portfolio, primarily fixed maturities, saw decreased unrealized losses and increased net investment income as of September 30, 2024 Fixed Maturities (in millions) | Category | Sep 30, 2024 (Fair Value) | Dec 31, 2023 (Fair Value) | |:------------------------------|:--------------------------|:--------------------------| | Corporate debt securities | $503.5 | $449.9 | | U.S. Government obligations | $87.8 | $175.9 | | Asset-backed securities | $18.4 | $1.6 | | Total Fixed Maturities | $609.7 | $627.4 | Gross Unrealized Losses on Fixed Maturities (in millions) | Period | Gross Unrealized Losses |\ |:---------------|:------------------------|\ | Sep 30, 2024 | $1.3 |\ | Dec 31, 2023 | $6.3 | Net Investment Income (in millions) | Period | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | |:-------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------|\ | Net Investment Income | $8.9 | $7.0 | $24.6 | $17.6 | - Restricted investments, held in a trust account for reinsurance obligations, totaled $80.2 million as of September 30, 2024[56] Note 6. Fair Value Measurements Financial assets and liabilities are measured at fair value using a hierarchy, with most investments classified as Level 2 - All fixed maturities and short-term investments are classified as Level 2 for fair value measurement, estimated using quoted prices from third-party valuation service providers[57][58][59] - Public warrant liability is classified as Level 1 due to observable market quotes, while private warrant liability is Level 2, derived from public warrant prices[61] - The change in fair value of the Public and Private warrant liability was less than $0.1 million for both September 30, 2024 and December 31, 2023[61] Note 7. Unpaid Loss and Loss Adjustment Expense Unpaid loss and LAE increased, with favorable reserve development offset by a Metromile claim, and reinsurance used to manage catastrophic risks Unpaid Loss and LAE Activity (Nine Months Ended Sep 30, in millions) | Metric | 2024 | 2023 | |:---------------------------------------------|:-------|:-------| | Unpaid loss and LAE at beginning of period | $262.3 | $256.2 | | Net unpaid loss and LAE at end of period | $154.2 | $142.0 | | Reinsurance recoverable at end of period | $140.0 | $113.1 | | Unpaid loss and LAE, gross of reinsurance, at end of period | $294.2 | $255.1 | - Favorable development on net loss and LAE reserves was $6.3 million for the nine months ended September 30, 2024, primarily from homeowners multi-peril and pet lines, partially offset by a Metromile car claim liability[65] - Current accident year incurred loss and LAE for 2024 included $5.0 million from hurricane Helene and $4.0 million from hurricane Beryl[66] - The company maintains proportional reinsurance contracts (approximately 55% of premium ceded) and non-proportional excess of loss contracts to manage risk, with the main program renewed through June 30, 2025, and an increased non-hurricane catastrophe limit of $10 million per occurrence[68][69][71] Note 8. Borrowings under Financing Agreement Lemonade secured up to $140 million in financing for sales and marketing growth, with $67.4 million outstanding as of September 30, 2024 - Amended and Restated Customer Investment Agreement with GC provides up to an additional $140 million for sales and marketing growth through December 31, 2025[75] - Outstanding borrowings under the financing agreement were $67.4 million as of September 30, 2024[76] Interest Expense on Borrowings (in millions) | Period | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2024 | |:-------------------------------------|:----------------------------|:----------------------------| | Interest Expense | $1.8 | $3.4 | Note 9. Other Liabilities and Accrued Expenses Other liabilities and accrued expenses increased to $123.5 million as of September 30, 2024, driven by ceding commission and advertising costs Other Liabilities and Accrued Expenses (in millions) | Category | Sep 30, 2024 | Dec 31, 2023 | |:------------------------------|:-------------|:-------------| | Ceding commission payable | $23.5 | $13.9 | | Lease liabilities | $21.4 | $28.2 | | Uncertain tax position | $17.9 | $13.3 | | Accrued advertising costs | $15.8 | $6.2 | | Employee compensation | $7.5 | $8.4 | | Payable to carriers | $4.9 | $2.0 | | Total | $123.5 | $99.5 | Note 10. Stockholders' Equity The company has 200 million authorized common shares, with 71.4 million outstanding, and warrants for 3.35 million shares issued to Chewy - Authorized common stock: 200,000,000 shares; outstanding: 71,378,678 shares as of September 30, 2024[79] - Authorized undesignated preferred stock: 10,000,000 shares; none issued or outstanding[81] - Warrants for 3,352,025 common shares were issued to Chewy Insurance Services, LLC, vesting in installments over five years[82] Note 11. Stock-based Compensation Stock-based compensation expense increased for the three and nine months ended September 30, 2024, with 5 million shares available for future grants - The 2020 Incentive Compensation Plan share pool increased by 3,508,185 shares on January 1, 2024, with 5,005,622 shares available for future grants as of September 30, 2024[84] Stock-based Compensation Expense (in millions) | Period | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | |:-------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------|\ | Total Stock-based Compensation Expense | $16.9 | $15.4 | $47.2 | $45.6 | - Unrecognized compensation expense for stock options was $43.7 million (1.0 years weighted-average vesting) and for RSUs was $71.3 million (1.4 years weighted-average vesting) as of September 30, 2024[94] - Compensation expense related to warrant shares increased significantly to $2.0 million (3 months) and $4.5 million (9 months) in 2024, with $61.3 million in unrecognized expense remaining[95] Note 12. Income Taxes The effective tax rate was (3.7)% for the nine months ended September 30, 2024, with increased unrecognized tax benefits from transfer pricing Income Tax Expense (in millions) | Period | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | |:-------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------|\ | Income Tax Expense | $1.9 | $1.9 | $6.1 | $4.3 | - Consolidated effective tax rate for the nine months ended September 30, 2024, was (3.7)%, compared to (2.3)% in 2023[96] - Unrecognized tax benefits increased to $17.1 million as of September 30, 2024, from $10.9 million in 2023, primarily due to transfer pricing methodology[97] Note 13. Net Loss per Share Basic and diluted net loss per share was $(0.95) for three months and $(2.44) for nine months ended September 30, 2024 Net Loss per Share (Basic and Diluted) | Period | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | |:-------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------|\ | Net Loss per Share | $(0.95) | $(0.88) | $(2.44) | $(2.80) | - Weighted average common shares outstanding for basic and diluted EPS were 71,138,070 (3 months) and 70,716,140 (9 months) for 2024[98] - Approximately 15.1 million potential common shares were excluded from diluted EPS calculation as of September 30, 2024, due to their anti-dilutive effect[99] Note 14. Related Party Transactions The Lemonade Foundation, a related party, owned 400,000 common shares as of September 30, 2024 - Lemonade Foundation, a related party, owned 400,000 common shares as of September 30, 2024, from an initial contribution of 500,000 shares in 2020[100] Note 15. Commitments and Contingencies The company accrued a liability for a Metromile-related claim and recorded impairment charges for office subleases - A liability has been recorded for a probable Metromile-related claim[102] - Guarantees for office leases amounted to $2.7 million as of September 30, 2024[103] - An impairment charge of $0.3 million was recorded for a New York office sublease in Q3 2024, following a $3.7 million charge for a San Francisco office sublease in Q3 2023[104][105] Note 16. Geographical Breakdown of Gross Written Premium Gross written premium increased by 26% and 25% for the three and nine months ended September 30, 2024, with California as the largest market Gross Written Premium by Jurisdiction (in millions) | Jurisdiction | 3 Months Ended Sep 30, 2024 (Amount) | 3 Months Ended Sep 30, 2024 (% of GWP) | 9 Months Ended Sep 30, 2024 (Amount) | 9 Months Ended Sep 30, 2024 (% of GWP) | |:-------------|:-------------------------------------|:---------------------------------------|:-------------------------------------|:---------------------------------------| | California | $60.8 | 22.6% | $171.4 | 24.5% | | Texas | $38.2 | 14.2% | $104.1 | 14.9% | | New York | $28.6 | 10.6% | $72.4 | 10.3% | | Total | $268.9 | 100.0% | $700.7 | 100.0% | - Gross written premium increased by 26% for the three months and 25% for the nine months ended September 30, 2024, compared to the prior year[108] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Lemonade's financial condition and operations, covering business model, key factors, revenue, expenses, metrics, and liquidity Our Business Lemonade is a vertically-integrated insurer using AI and a digital-first approach to offer various insurance products, managing risk with reinsurance and a 'Giveback' program - Lemonade is a vertically-integrated company with wholly-owned insurance carriers in the US and Europe, utilizing AI and a full technology stack[111] - Offers renters, homeowners, pet, car, and life insurance through AI bots (AI Maya for coverage, AI Jim for claims), aiming for a delightful, affordable, and precise experience[112] - Business model minimizes volatility through reinsurance and maximizes trust and social impact via an annual 'Giveback' program to nonprofits[113] Customer Investment Agreement Lemonade secured up to $140 million in financing for sales and marketing growth, with $67.4 million outstanding as of September 30, 2024 - Amended and Restated Customer Investment Agreement with GC provides up to an additional $140 million for sales and marketing growth through December 31, 2025[115] - Outstanding borrowings under the agreement totaled $67.4 million as of September 30, 2024[116] Interest Expense on Customer Investment Agreement (in millions) | Period | 3 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2024 | |:-------------------------------------|:----------------------------|:----------------------------| | Interest Expense | $1.8 | $3.4 | Key Factors and Trends Affecting our Operating Results Operating results are influenced by seasonality, macroeconomic conditions, and reinsurance strategies, with geopolitical instability posing an additional risk Seasonality Customer acquisition is higher in Q3 due to mobility, while claims are impacted by seasonal weather patterns like hurricanes and hailstorms - Customer acquisition and growth may be higher in the third quarter due to increased customer mobility[118] - Seasonal weather patterns (hurricanes, wildfires, cold weather, tornados, hailstorms) impact the level and amount of claims received[119] Current Macroeconomic Environment Elevated inflation impacts investment portfolio, pricing, and claim reserves, while the Israel conflict adds geopolitical uncertainty - Inflation is anticipated to impact the investment portfolio, product pricing, and estimation of reserves for unpaid claims[121] - Operations in Israel are subject to adverse effects from political, economic, and military instability in the region[122] Reinsurance Lemonade uses proportional and non-proportional reinsurance to manage property and casualty risks, ceding 55% of premiums, with a renewed catastrophe limit - Reinsurance contracts are used to manage exposure to property and casualty insurance risks and provide capacity for growth[124] - The company remains primarily liable to policyholders for reinsured risks and is exposed to reinsurer default or delayed payments[124] - The proportional reinsurance program covers all products and geographies, ceding approximately 55% of premium, with a renewed non-hurricane catastrophe limit of $10 million per occurrence[126] Components of our Results of Operations This section defines key revenue and expense components, including gross written premium, ceding commission, net investment income, and various operating costs Revenue Revenue is primarily from gross written premium, supplemented by ceding commission, net investment income, and other commission income - Gross written premium includes direct and assumed premium, influenced by new business, renewals, and policy values[133] - Ceding commission income is received from reinsurers to reimburse for acquisition and underwriting expenses[137] - Net investment income is derived from fixed maturity securities, short-term, and other investments, net of fees[138] - Commission and other income includes commissions from third-party policies, installment fees, and net realized gains/losses from investments[139] Expense Expenses include loss and LAE, other insurance costs, sales and marketing, technology development, and general and administrative expenses - Loss and loss adjustment expense, net, represents costs for losses, net of reinsurance, based on actuarial analysis[140] - Sales and marketing expenses include third-party marketing, advertising, and sales, with plans for continued investment to attract new customers and increase brand awareness[142][143] - Technology development costs include employee compensation and vendor expenses for product management, design, development, and testing[144] - General and administrative expenses cover executive, finance, legal, and administrative personnel, professional services, and public company compliance costs[146][148] Income Tax Expense Income tax expense primarily relates to foreign income taxes, with a valuation allowance maintained for U.S. deferred tax assets - Provision for income taxes primarily consists of foreign income taxes from subsidiaries in the Netherlands and Israel[149] - A valuation allowance is maintained for U.S. deferred tax assets, including federal and state net operating losses and capital losses[150] Key Operating and Financial Metrics Lemonade tracks key operating and financial metrics like customers, IFP, premium per customer, ADR, revenue, net loss, and various profit ratios to evaluate performance Key Operating and Financial Metrics | Metric | 3 Months Ended Sep 30, 2024 | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2024 | 9 Months Ended Sep 30, 2023 | |:---------------------------------------------|:----------------------------|:----------------------------|:----------------------------|:----------------------------|\ | Customers (end of period) | 2,313,113 | 1,984,154 | 2,313,113 | 1,984,154 | | In force premium (end of period) | $889.1 | $719.0 | $889.1 | $719.0 | | Premium per customer (end of period) | $384 | $362 | $384 | $362 | | Annual dollar retention (end of period) | 87% | 85% | 87% | 85% | | Total revenue | $136.6 | $114.5 | $377.7 | $314.3 | | Gross earned premium | $213.1 | $173.2 | $600.9 | $491.3 | | Gross profit | $37.5 | $21.9 | $103.0 | $50.5 | | Adjusted gross profit | $38.6 | $24.9 | $108.7 | $62.1 | | Net loss | $(67.7) | $(61.5) | $(172.2) | $(194.5) | | Adjusted EBITDA | $(49.0) | $(40.2) | $(125.9) | $(143.7) | | Gross profit margin | 27% | 19% | 27% | 16% | | Adjusted gross profit margin | 28% | 22% | 29% | 20% | | Ratio of Adjusted Gross Profit to Gross Earned Premium | 18% | 14% | 18% | 13% | | Gross loss ratio | 73% | 83% | 77% | 88% | | Net loss ratio | 81% | 88% | 80% | 93% | - Customers increased by 17% year-over-year to 2,313,113, driving revenue growth and market penetration[153][154] - In force premium (IFP) grew to $889.1 million, reflecting growth in customers and premium per customer[153][155] - Annual Dollar Retention (ADR) improved to 87%, indicating strong customer retention and ability to upsell/cross-sell[153][158] Results of Operations This section compares financial performance for the three and nine months ended September 30, 2024, highlighting changes in revenue, expenses, and net loss Comparison of the Three Months Ended September 30, 2024 and 2023 For Q3 2024, total revenue increased by 19%, driven by gross written premium and ceding commission, while net loss grew by 10% due to sales and marketing expenses Revenue Comparison (3 Months Ended Sep 30, in millions) | Revenue Category | 2024 | 2023 | Change ($) | Change (%) | |:--------------------------|:-------|:-------|:-----------|:-----------| | Net earned premium | $95.7 | $86.6 | $9.1 | 11% | | Ceding commission income | $24.0 | $16.7 | $7.3 | 44% | | Net investment income | $8.9 | $7.0 | $1.9 | 27% | | Commission and other income | $8.0 | $4.2 | $3.8 | 90% | | Total revenue | $136.6 | $114.5 | $22.1 | 19% | Expense Comparison (3 Months Ended Sep 30, in millions) | Expense Category | 2024 | 2023 | Change ($) | Change (%) | |:----------------------------------|:-------|:-------|:-----------|:-----------| | Loss and loss adjustment expense, net | $77.9 | $75.9 | $2.0 | 3% | | Other insurance expense | $19.8 | $15.1 | $4.7 | 31% | | Sales and marketing | $51.4 | $24.4 | $27.0 | 111% | | Technology development | $21.9 | $21.8 | $0.1 | 0% | | General and administrative | $31.4 | $36.9 | $(5.5) | (15%) | | Total expense | $202.4 | $174.1 | $28.3 | 16% | - Gross written premium increased by 26% to $268.9 million, driven by a 17% increase in net added customers and a 6% increase in premium per customer[168] - Net loss increased by 10% to $67.7 million, influenced by higher sales and marketing spend and increased claim costs, partially offset by reserve releases[176][178][182] Comparison of the Nine Months Ended September 30, 2024 and 2023 For the nine months ended September 30, 2024, total revenue increased by 20%, and net loss decreased by 11%, despite higher sales and marketing expenses Revenue Comparison (9 Months Ended Sep 30, in millions) | Revenue Category | 2024 | 2023 | Change ($) | Change (%) | |:--------------------------|:-------|:-------|:-----------|:-----------| | Net earned premium | $269.4 | $231.3 | $38.1 | 16% | | Ceding commission income | $61.5 | $51.4 | $10.1 | 20% | | Net investment income | $24.6 | $17.6 | $7.0 | 40% | | Commission and other income | $22.2 | $14.0 | $8.2 | 59% | | Total revenue | $377.7 | $314.3 | $63.4 | 20% | Expense Comparison (9 Months Ended Sep 30, in millions) | Expense Category | 2024 | 2023 | Change ($) | Change (%) | |:----------------------------------|:-------|:-------|:-----------|:-----------| | Loss and loss adjustment expense, net | $214.3 | $215.4 | $(1.1) | (1%) | | Other insurance expense | $55.9 | $43.7 | $12.2 | 28% | | Sales and marketing | $118.6 | $77.4 | $41.2 | 53% | | Technology development | $64.0 | $67.7 | $(3.7) | (5%) | | General and administrative | $91.0 | $100.3 | $(9.3) | (9%) | | Total expense | $543.8 | $504.5 | $39.3 | 8% | - Gross written premium increased by 25% to $700.7 million, driven by a 17% increase in net added customers and a 6% increase in premium per customer[185] - Net loss decreased by 11% to $172.2 million, primarily due to improved overall loss ratio, reserve releases, and reduced general and administrative expenses, despite higher sales and marketing spend[192][194][196][198] Non-GAAP Financial Measures This section presents non-GAAP financial measures like Adjusted Gross Profit and Adjusted EBITDA, used by management to evaluate underlying business performance - Non-GAAP measures are used by management to monitor and evaluate performance, facilitate comparisons, assess management, and inform strategic planning[201] - Adjusted Gross Profit excludes net investment income, interest income, and net realized gains/losses, while including fixed costs and overhead, to evaluate variable contribution from underwriting[202] - The Ratio of Adjusted Gross Profit to Gross Earned Premium measures the relationship between business volume and profitability, eliminating volatility from reinsurance structure changes[206][207][208][209] - Adjusted EBITDA excludes income tax expense, depreciation, stock-based compensation, interest, investment income, warrant liability changes, and Metromile acquisition adjustments to reflect underlying operating performance[211] Liquidity and Capital Resources As of September 30, 2024, Lemonade had $329.8 million in cash and $640.8 million in investments, with significantly decreased cash used in operating activities - As of September 30, 2024, cash and cash equivalents were $329.8 million, and investments totaled $640.8 million[216] - The company has financed operations primarily through equity sales and third-party financing, including a $140 million financing agreement with GC for sales and marketing growth[216] Cash Flow Data (Nine Months Ended Sep 30, in millions) | Activity | 2024 | 2023 | |:-------------------------------|:--------|:--------| | Net cash used in operating | $(25.2) | $(103.0)| | Net cash provided by investing | $38.1 | $48.1 | | Net cash provided by financing | $52.7 | $8.2 | - U.S. and Dutch insurance subsidiaries hold $556.6 million in cash and investments, with $241.2 million as regulatory surplus, and meet risk-based capital requirements[220][221] Critical Accounting Policies and Estimates The financial statements rely on significant estimates, with no material changes to critical accounting policies during the nine months ended September 30, 2024 - No material changes to critical accounting policies and estimates during the nine months ended September 30, 2024[231] Recently Issued and Adopted Accounting Pronouncements This section refers to Note 4 for new accounting pronouncements, including ASU 2023-07 and ASU 2023-09, currently under evaluation - Refer to Note 4 for details on recently issued accounting pronouncements pending adoption[232] Item 3. Quantitative and Qualitative Disclosures About Market Risk Lemonade is exposed to interest rate and credit risk on its investment portfolio, managed through short-duration securities and diversification Overview The investment portfolio primarily comprises short-duration fixed income securities, balancing yield, capital conservation, and liquidity - Investment portfolio primarily consists of fixed income securities issued by the U.S. government and corporate issuers with relatively short durations[235] - Investment policy balances current yield, capital conservation, and liquidity, ensuring diversification and compliance with insurance regulations[235] Interest Rate Risk The fixed maturities portfolio is exposed to interest rate risk, managed by short durations, with a 10% rate change having no material effect - Fixed maturities portfolio is exposed to interest rate risk; managed by investing in securities with relatively short durations[236] - A 10% change in interest rates would not materially affect the fair value of investments as of September 30, 2024[236] Credit Risk The company faces credit risk on its investment portfolio and reinsurance, mitigated by high-quality investments and letters of credit - Exposed to credit risk on investment portfolio and reinsurance recoverable[237] - Majority of investment portfolio is in high credit quality, investment grade fixed maturity securities; none unrated or below investment grade as of September 30, 2024[237] - Credit exposure to reinsurance recoverable balances is reduced by obtaining letters of credit from certain reinsurers[237] Inflation Risk Inflationary factors could affect operating results and interest rates, but the short duration of the fixed maturity portfolio minimizes negative effects - Inflationary factors may adversely affect operating results and lead to higher interest rates[238] - The short duration of the fixed maturity portfolio minimizes the negative effects of higher interest rates due to inflation[238] Item 4. Controls and Procedures Disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2024, with no material changes in internal control Limitations on Effectiveness of Controls and Procedures Controls and procedures provide reasonable, not absolute, assurance due to inherent limitations like resource constraints and judgment - Controls and procedures can only provide reasonable assurance, not absolute, due to inherent limitations like resource constraints and judgment[239] Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures were deemed effective at the reasonable assurance level by management as of September 30, 2024 - Disclosure controls and procedures were evaluated and concluded to be effective at the reasonable assurance level as of September 30, 2024[240] Changes in Internal Control over Financial Reporting No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2024 - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2024[241] PART II. OTHER INFORMATION Item 1. Legal Proceedings No pending legal proceeding is expected to have a material adverse effect on the company's business or financial condition - No pending legal proceeding is believed to have a material adverse effect on the company's business, financial condition, or results of operations[243] Item 1A. Risk Factors No material changes to the risk factors identified in the Annual Report on Form 10-K - No material changes to the risk factors identified in the Annual Report on Form 10-K[244] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or purchases by the issuer or affiliated purchaser occurred during the period - No unregistered sales of equity securities or purchases by the issuer or affiliated purchaser[244] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the period - No defaults upon senior securities[245] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[246] Item 5. Other Information Changes to the Board of Directors include a resignation and new appointment, with a Rule 10b5-1 trading arrangement also reported Director Resignation and Appointment Mwashuma Nyatta resigned as director, replaced by Maria Angelidis-Smith, appointed as Class I director to Audit and Compensation Committees - Mwashuma Nyatta resigned as a director, Audit Committee member, and Compensation Committee member, effective October 31, 2024[246] - Maria Angelidis-Smith was appointed as a Class I director and to the Audit and Compensation Committees, effective October 31, 2024[247] - Ms. Angelidis-Smith's compensation includes an annual Board retainer of $30,000, committee retainers ($5,000 for Compensation, $7,500 for Audit), an initial equity award of $175,000 in RSUs, and annual equity awards of $150,000 in RSUs[248] Rule 10b5-1 Trading Arrangement John Peters, Chief Insurance Officer, adopted a Rule 10b5-1 trading arrangement to sell up to 117,955 common shares by August 29, 2025 - John Peters, Chief Insurance Officer, adopted a Rule 10b5-1 trading arrangement on August 30, 2024, to sell up to 117,955 shares of common stock by August 29, 2025[251] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, contracts, and certifications - Exhibits include merger agreements, corporate organizational documents, warrant agreements, and various reinsurance contracts[253] - Certifications from the Chief Executive Officer and Chief Financial Officer are also filed[253] Signatures The report is signed by Daniel Schreiber (CEO) and Tim Bixby (CFO) on behalf of Lemonade, Inc., dated October 31, 2024 - Report signed by Daniel Schreiber (CEO) and Tim Bixby (CFO) on October 31, 2024[255][256]