Item 1. Financial Statements.
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
June 30,
|
|
December 31,
|
|
|
2021
|
|
2020
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
Investments
|
|
|
|
|
Fixed maturities available-for-sale, at fair value (amortized cost: $71.3 million and
$6.4 million as of June 30, 2021 and December 31, 2020)
|
$
|
71.2
|
|
|
$
|
6.6
|
|
|
|
|
|
|
|
Total investments
|
71.2
|
|
|
6.6
|
|
|
Cash, cash equivalents and restricted cash
|
1,092.7
|
|
|
571.4
|
|
|
Premium receivable, net of allowance for doubtful accounts of $0.7 million and
$0.5 million as of June 30, 2021 and December 31, 2020
|
108.1
|
|
|
86.1
|
|
|
Reinsurance recoverable
|
64.7
|
|
|
49.0
|
|
|
Prepaid reinsurance premium
|
120.3
|
|
|
91.3
|
|
|
Deferred acquisition costs
|
4.9
|
|
|
3.5
|
|
|
Property and equipment, net
|
8.8
|
|
|
5.7
|
|
|
Intangible assets
|
0.6
|
|
|
0.6
|
|
|
Other assets
|
16.0
|
|
|
14.5
|
|
|
Total assets
|
$
|
1,487.3
|
|
|
$
|
828.7
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity
|
|
|
|
|
Unpaid loss and loss adjustment expense
|
$
|
64.7
|
|
|
$
|
46.3
|
|
|
Unearned premium
|
166.0
|
|
|
123.8
|
|
|
Trade payables
|
1.3
|
|
|
1.4
|
|
|
Funds held for reinsurance treaties
|
77.6
|
|
|
62.1
|
|
|
Deferred ceding commission
|
30.1
|
|
|
22.4
|
|
|
Ceded premium payable
|
18.0
|
|
|
13.0
|
|
|
Other liabilities and accrued expenses
|
28.0
|
|
|
18.7
|
|
|
Total liabilities
|
385.7
|
|
|
287.7
|
|
|
Commitments and contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
Common stock, $0.00001 par value, 200,000,000 shares authorized; 61,532,127 and 56,774,294 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
|
—
|
|
|
—
|
|
|
Additional paid-in capital
|
1,525.9
|
|
|
859.8
|
|
|
Accumulated deficit
|
(425.2)
|
|
|
(320.6)
|
|
|
Accumulated other comprehensive income
|
0.9
|
|
|
1.8
|
|
|
Total stockholders' equity
|
1,101.6
|
|
|
541.0
|
|
|
Total liabilities and stockholders' equity
|
$
|
1,487.3
|
|
|
$
|
828.7
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ in millions, except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
Net earned premium
|
|
$
|
16.3
|
|
|
$
|
29.2
|
|
|
$
|
30.1
|
|
|
$
|
54.5
|
|
|
Ceding commission income
|
|
10.6
|
|
|
0.4
|
|
|
19.6
|
|
|
0.4
|
|
|
Net investment income
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
1.1
|
|
|
Commission and other income
|
|
1.1
|
|
|
0.1
|
|
|
1.6
|
|
|
0.1
|
|
|
Total revenue
|
|
28.2
|
|
|
29.9
|
|
|
51.7
|
|
|
56.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net
|
|
13.0
|
|
|
20.5
|
|
|
29.5
|
|
|
38.7
|
|
|
Other insurance expense
|
|
5.2
|
|
|
4.0
|
|
|
10.0
|
|
|
7.3
|
|
|
Sales and marketing
|
|
33.1
|
|
|
16.1
|
|
|
62.2
|
|
|
35.3
|
|
|
Technology development
|
|
14.0
|
|
|
4.2
|
|
|
21.1
|
|
|
7.7
|
|
|
General and administrative
|
|
15.8
|
|
|
5.8
|
|
|
29.9
|
|
|
24.0
|
|
|
Total expense
|
|
81.1
|
|
|
50.6
|
|
|
152.7
|
|
|
113.0
|
|
|
Loss before income taxes
|
|
(52.9)
|
|
|
(20.7)
|
|
|
(101.0)
|
|
|
(56.9)
|
|
|
Income tax expense
|
|
2.7
|
|
|
0.3
|
|
|
3.6
|
|
|
0.6
|
|
|
Net loss
|
|
$
|
(55.6)
|
|
|
$
|
(21.0)
|
|
|
$
|
(104.6)
|
|
|
$
|
(57.5)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
Unrealized (loss) gain on investments
|
|
(0.2)
|
|
|
0.2
|
|
|
(0.1)
|
|
|
0.2
|
|
|
Foreign currency translation adjustment
|
|
0.3
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
Comprehensive loss
|
|
$
|
(55.5)
|
|
|
$
|
(20.8)
|
|
|
$
|
(103.7)
|
|
|
$
|
(57.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Net loss per share attributable to common stockholders
—basic and diluted
|
|
$
|
(0.90)
|
|
|
$
|
(1.77)
|
|
|
$
|
(1.72)
|
|
|
$
|
(4.89)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
and diluted
|
|
61,444,958
|
|
11,891,979
|
|
60,643,764
|
|
|
11,750,198
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
($ in millions, except share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Preferred Stock
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Accumulated Deficit
|
|
Accumulated Other Comprehensive Income
|
|
Total Stockholders' Equity (Deficit)
|
|
|
|
Shares
|
|
Amount
|
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
|
56,774,294
|
|
|
$
|
—
|
|
|
$
|
859.8
|
|
|
$
|
(320.6)
|
|
|
$
|
1.8
|
|
|
541.0
|
|
|
Issuance of common stock upon closing of
Follow-on Offering, net of underwriting
discounts and commissions and offering
costs of $22.8 million
|
|
—
|
|
|
—
|
|
|
|
4,018,647
|
|
|
—
|
|
|
640.3
|
|
|
—
|
|
|
—
|
|
|
640.3
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
|
577,162
|
|
|
—
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
|
—
|
|
|
—
|
|
|
6.1
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(49.0)
|
|
|
—
|
|
|
(49.0)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.8)
|
|
|
(0.8)
|
|
|
Balance as of March 31, 2021
|
|
—
|
|
|
$
|
—
|
|
|
|
61,370,103
|
|
|
$
|
—
|
|
|
$
|
1,512.3
|
|
|
$
|
(369.6)
|
|
|
$
|
1.0
|
|
|
$
|
1,143.7
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
|
162,024
|
|
|
—
|
|
|
1.7
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
11.9
|
|
|
—
|
|
|
—
|
|
|
11.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(55.6)
|
|
|
—
|
|
|
(55.6)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1)
|
|
|
(0.1)
|
|
|
Balance as of June 30, 2021
|
|
—
|
|
|
$
|
—
|
|
|
|
61,532,127
|
|
|
$
|
—
|
|
|
$
|
1,525.9
|
|
|
$
|
(425.2)
|
|
|
$
|
0.9
|
|
|
$
|
1,101.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
31,557,107
|
|
|
$
|
480.2
|
|
|
|
11,271,228
|
|
|
$
|
—
|
|
|
$
|
15.7
|
|
|
$
|
(198.3)
|
|
|
$
|
0.1
|
|
|
$
|
(182.5)
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
|
54,374
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
2.2
|
|
|
Contribution to the Lemonade Foundation
|
|
—
|
|
|
—
|
|
|
|
500,000
|
|
|
—
|
|
|
12.2
|
|
|
—
|
|
|
—
|
|
|
12.2
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36.5)
|
|
|
—
|
|
|
(36.5)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Balance as of March 31, 2020
|
|
31,557,107
|
|
|
$
|
480.2
|
|
|
|
11,825,602
|
|
|
$
|
—
|
|
|
$
|
30.1
|
|
|
$
|
(234.8)
|
|
|
$
|
0.1
|
|
|
$
|
(204.6)
|
|
|
Exercise of stock options
|
|
—
|
|
|
—
|
|
|
|
30,562
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
Stock-based compensation
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
2.4
|
|
|
Release of shares upon repayment
|
|
—
|
|
|
—
|
|
|
|
513,537
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
1.3
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.0)
|
|
|
—
|
|
|
(21.0)
|
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
Balance as of June 30, 2020
|
|
31,557,107
|
|
|
$
|
480.2
|
|
|
|
12,369,701
|
|
|
$
|
—
|
|
|
$
|
33.9
|
|
|
$
|
(255.8)
|
|
|
$
|
0.3
|
|
|
$
|
(221.6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net loss
|
|
$
|
(104.6)
|
|
|
$
|
(57.5)
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
Depreciation
|
|
1.7
|
|
|
0.7
|
|
|
Stock-based compensation
|
|
18.0
|
|
|
4.6
|
|
|
Amortization of discount on bonds
|
|
—
|
|
|
(0.3)
|
|
|
Provision for bad debts
|
|
2.3
|
|
|
0.9
|
|
|
|
|
|
|
|
|
Common shares contribution to the Lemonade Foundation
|
|
—
|
|
|
12.2
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
Premium receivable
|
|
(24.4)
|
|
|
(11.6)
|
|
|
Reinsurance recoverable
|
|
(15.7)
|
|
|
(5.9)
|
|
|
Prepaid reinsurance premium
|
|
(29.0)
|
|
|
1.0
|
|
|
Deferred acquisition costs
|
|
(1.4)
|
|
|
(0.7)
|
|
|
Other assets
|
|
(1.5)
|
|
|
(3.5)
|
|
|
Unpaid loss and loss adjustment expense
|
|
18.4
|
|
|
7.1
|
|
|
Unearned premium
|
|
42.2
|
|
|
18.9
|
|
|
Trade payables
|
|
(0.1)
|
|
|
0.1
|
|
|
Funds held for reinsurance treaties
|
|
15.5
|
|
|
—
|
|
|
Deferred ceding commissions
|
|
7.7
|
|
|
—
|
|
|
Ceded premium payable
|
|
5.0
|
|
|
1.6
|
|
|
Other liabilities and accrued expenses
|
|
9.4
|
|
|
(2.9)
|
|
|
Net cash used in operating activities
|
|
(56.5)
|
|
|
(35.3)
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Proceeds from short-term investments sold or matured
|
|
—
|
|
|
40.0
|
|
|
Proceeds from bonds sold or matured
|
|
—
|
|
|
2.2
|
|
|
Cost of short-term investments acquired
|
|
—
|
|
|
(14.9)
|
|
|
Cost of bonds acquired
|
|
(64.6)
|
|
|
(2.9)
|
|
|
Purchases of property and equipment
|
|
(4.7)
|
|
|
(1.9)
|
|
|
Net cash (used in) provided by investing activities
|
|
(69.3)
|
|
|
22.5
|
|
|
Cash flows from financing activities:
|
|
|
|
|
Proceeds from Follow-on Offering, net of underwriting discounts and commissions
and offering costs
|
|
640.3
|
|
|
—
|
|
|
Proceeds from release of shares upon repayment
|
|
—
|
|
|
1.3
|
|
|
|
|
|
|
|
|
Proceeds from stock exercises
|
|
7.8
|
|
|
0.1
|
|
|
Net cash provided by financing activities
|
|
648.1
|
|
|
1.4
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
|
(1.0)
|
|
|
(0.1)
|
|
|
Net increase in cash, cash equivalents and restricted cash
|
|
521.3
|
|
|
(11.5)
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
571.4
|
|
|
270.3
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
1,092.7
|
|
|
$
|
258.8
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
1.1
|
|
|
$
|
0.8
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
8
LEMONADE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Nature of the Business
Lemonade, Inc. is a public benefit corporation organized under Delaware law on June 17, 2015. It provides certain personnel, facilities and services to each of its subsidiaries (together with Lemonade, Inc., the “Company”), all of which are 100% owned, directly or indirectly, by Lemonade, Inc. For the list of the Company's US and EU subsidiaries, see Note 1 - Nature of the Business, of the audited consolidated financial statements and related notes thereto for the year ended December 31, 2020 as contained in the Company's Annual Report on Form 10-K for the year ending December 31, 2020 (the "Annual Report on Form 10-K") for more complete descriptions and discussions.
2.Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated upon consolidation. All foreign currency amounts in the condensed consolidated statement of operations and comprehensive loss have been translated using an average rate for the reporting period. All foreign currency balances in the balance sheet have been translated using the spot rate at the end of the reporting period. All figures expressed, except share amounts, are in U.S. dollars in millions.
Risk and Uncertainties
The global pandemic resulting from the disease known as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, has caused national and global economic and financial market disruptions and may adversely impact our business. Although the Company did not see a material impact on its results of operations for the three and six months ended June 30, 2021 due to the COVID-19 pandemic, the Company cannot predict the duration or magnitude of the pandemic or the full impact that it may have on the Company’s financial condition and results of operations, business operations, and workforce.
Unaudited interim financial information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of its financial position and its results of operations, changes in stockholders’ equity (deficit) and cash flows. The condensed consolidated balance sheet at December 31, 2020, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2020 contained in the Company’s Annual Report on Form 10-K.
3.Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates estimates, including those related to contingent assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities at the dates of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, reinsurance recoverables on unpaid losses, valuation allowance on deferred tax assets and valuation on stock-based compensation prior to the Company's IPO.
4.Summary of Significant Accounting Policies
Cash, cash equivalents and restricted cash
The following represents the Company’s cash, cash equivalents and restricted cash as of June 30, 2021 and December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2021
|
|
2020
|
|
Cash and cash equivalents
|
|
$
|
1,092.4
|
|
|
$
|
570.8
|
|
|
Restricted cash
|
|
0.3
|
|
|
0.6
|
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
1,092.7
|
|
|
$
|
571.4
|
|
Cash and cash equivalents consist primarily of bank deposits and money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company’s restricted cash relates to security deposits for office leases in Israel. The carrying value of restricted cash approximates fair value.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to the carrying value of stockholders' equity (deficit) as a reduction of additional paid-in capital generated as a result of such offering. In connection with the Initial Public Offering, the Company incurred total offering costs of $32.4 million, of which $28.9 million was recorded as a reduction to gross proceeds, and $3.5 million was recognized as a component of general and administrative expense in 2019. On January 14, 2021, the Company completed a Follow-on Offering of common stock, as defined and discussed in detail in Note 9, which generated net proceeds of $525.7 million, after deducting underwriting discounts and offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, and generated additional net proceeds to us of $114.6 million. Deferred offering costs from the Follow-on Offering amounted to $0.4 million.
Recent accounting pronouncements
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, simplifies the various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends the existing guidance to improve consistent application. The adoption of ASU 2019-12 beginning January 1, 2021 did not have a material impact on our condensed consolidated financial statement and related disclosures.
In February 2016, the FASB issued Leases (Topic 842) (“ASU 2016-02”), whereby a lessee will be required to recognize for all leases at the commencement date a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. A modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements must be applied. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. ASU 2016-02 is effective for the Company’s annual periods beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. The adoption of the new standard is expected to result in the recognition of additional lease liabilities and right-of-use assets as of January 1, 2022. The Company is evaluating the potential impact of this pronouncement.
In June 2016, the FASB issued Financial Instruments — Credit Losses, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 will change the way entities recognize impairment of financial assets by requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, premium receivables, and reinsurance recoverable. The valuation allowance is a measurement of expected losses that is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This methodology is referred to as the current expected credit loss model. ASU 2016-13 requires a valuation allowance to be calculated on these financial assets, as well as available for sale securities, and that they be presented on the financial statements net of the valuation allowance. ASU 2016-13 is effective for the Company’s annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-13 on its financial condition and results of operations, with a primary focus on its reinsurance recoverable.
Reclassification
Certain accounts in the prior period financial statements were reclassified to conform with the current period presentation.
5.Investments
Unrealized gains and losses
The following tables present cost or amortized cost and fair values of investments as of June 30, 2021 and December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost or Amortized Cost
|
|
Gross
Unrealized
|
|
Fair
Value
|
|
|
|
|
Gains
|
|
Losses
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
71.3
|
|
|
$
|
0.1
|
|
|
$
|
(0.2)
|
|
|
$
|
71.2
|
|
|
Total
|
|
$
|
71.3
|
|
|
$
|
0.1
|
|
|
$
|
(0.2)
|
|
|
$
|
71.2
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
6.4
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
Total
|
|
$
|
6.4
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
Gross unrealized losses amounted to $0.2 million as of June 30, 2021. Gross unrealized losses were less than $0.1 million as of December 31, 2020. Gross unrealized gains and losses were recorded as a component of accumulated other comprehensive income.
Contractual maturities of bonds
The following table presents the cost or amortized cost and estimated fair value of bonds as of June 30, 2021 by contractual maturity ($ in millions). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
Cost or
Amortized
Cost
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
1.1
|
|
|
$
|
1.1
|
|
|
Due after one year through five years
|
|
70.2
|
|
|
70.1
|
|
|
Due after five years through ten years
|
|
—
|
|
|
—
|
|
|
Due after ten years
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
71.3
|
|
|
$
|
71.2
|
|
Net investment income
An analysis of net investment income follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Interest on cash and cash equivalents
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
$
|
0.8
|
|
|
Bonds
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
Short-term investments
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.3
|
|
|
Total net investment income
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
1.1
|
|
Investment gains and losses
The Company did not have any pre-tax net realized capital gains or losses for the three and six months ended June 30, 2021 and 2020.
Aging of gross unrealized losses
The following table presents the gross unrealized losses and related fair values for the Company’s available-for-sale bond securities, grouped by duration of time in a continuous unrealized loss position as of June 30, 2021 and December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Gross Unrealized Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
There were no investments in gross unrealized loss position for twelve months or more as of June 30, 2021. Gross unrealized losses for U.S. Government Bonds was less than $0.1 million for twelve months or more as of December 31, 2020.
The gross unrealized investment losses as of June 30, 2021 and December 31, 2020, were deemed to be temporary, based on, among other things:
•the duration of time and the relative magnitude to which fair values of these investments have been below their amortized cost was not indicative of an other than temporary impairment loss;
•the absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the investment; and
•the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
The Company may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology the Company uses to assess other-than-temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral, and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.
As of June 30, 2021 and December 31, 2020, none of the debt securities were held in unrealized loss position for 12 months or more.
6. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured as of June 30, 2021 and December 31, 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
—
|
|
|
$
|
71.2
|
|
|
$
|
—
|
|
|
$
|
71.2
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
71.2
|
|
|
$
|
—
|
|
|
$
|
71.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
U.S. Government obligations
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
6.6
|
|
|
$
|
—
|
|
|
$
|
6.6
|
|
There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 2021 and December 31, 2020, respectively.
7. Unpaid Loss and Loss Adjustment Expense
The following table presents the activity in the liability for unpaid loss and loss adjustment expense ("LAE") for the six months ended June 30, 2021 and 2020 ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
Unpaid loss and LAE at beginning of period
|
|
$
|
46.3
|
|
|
$
|
28.2
|
|
|
Less: Reinsurance recoverable at beginning of period (1)
|
|
36.3
|
|
|
18.5
|
|
|
Net unpaid loss and LAE at beginning of period
|
|
10.0
|
|
|
9.7
|
|
|
Add: Incurred loss and LAE, net of reinsurance, related to:
|
|
|
|
|
|
Current year
|
|
29.9
|
|
|
33.5
|
|
|
Prior years
|
|
(0.4)
|
|
|
5.2
|
|
|
Total incurred
|
|
29.5
|
|
|
38.7
|
|
|
Deduct: Paid loss and LAE, net of reinsurance, related to:
|
|
|
|
|
|
Current year
|
|
19.0
|
|
|
24.4
|
|
|
Prior years
|
|
5.5
|
|
|
13.2
|
|
|
Total paid
|
|
24.5
|
|
|
37.6
|
|
|
Unpaid loss and LAE, net of reinsurance recoverable, at end of period
|
|
15.0
|
|
|
10.8
|
|
|
Reinsurance recoverable at end of period (1)
|
|
49.7
|
|
|
24.5
|
|
|
Unpaid loss and LAE, gross of reinsurance recoverable, at end of period
|
|
$
|
64.7
|
|
|
$
|
35.3
|
|
(1) Reinsurance recoverable in this table includes only ceded unpaid loss and LAE
Unpaid loss and LAE includes anticipated salvage and subrogation recoverable.
Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders' equity. Additional variability exists due to accident year allocations of ceded amounts in accordance with reinsurance agreements, which is not expected to result in any changes to the ultimate liability. The Company had unfavorable development on net loss and LAE reserves of $0.4 million for the six months ended June 30, 2021, and favorable development on net loss and LAE reserves of $5.2 million for the six months ended June 30, 2020. No additional premiums or returned premiums have been accrued as a result of prior year effects.
For the six months ended June 30, 2021, current accident year incurred loss and LAE included $6.2 million of net incurred loss and LAE from the severe winter storm that affected our customers in the states of Texas and Oklahoma. The net incurred loss and LAE from Winter Storm Uri as of June 30, 2021 represents the Company's best estimates based upon information currently available.
Through June 30, 2021, the Company has proportional reinsurance contracts which cover all of the Company's products and geographies, and transfer, or “cede,” 75% of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers pay a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all claims. The Company opted to manage the remaining 25% of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts"). The majority of the Proportional Reinsurance Contracts run for a three-year term, expiring June 30, 2023, while the remainder has a one-year term, expiring June 30, 2021. The Company's Non-Proportional Reinsurance Contracts are likewise effective as of July 1, 2020, and have a one-year term.
A portion of the Company’s proportional reinsurance program expired on June 30, 2021. The Company renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements. As the business continues to grow and diversify, and with stability in our insurance results, the Company decreased the overall share of proportional reinsurance from 75% of premium to 70%. In addition, the Company purchased a new reinsurance program to protect against natural catastrophe risk in the U.S. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts.
8.Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses as of June 30, 2021 and December 31, 2020 consist of the following ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2021
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued advertising costs
|
|
$
|
10.3
|
|
|
$
|
6.8
|
|
|
Employee compensation payable
|
|
3.8
|
|
|
3.7
|
|
|
Premium taxes payable
|
|
3.0
|
|
|
3.2
|
|
|
Income tax payable
|
|
2.6
|
|
|
0.3
|
|
|
Advance premium
|
|
2.5
|
|
|
—
|
|
|
Accrued professional fees
|
|
2.4
|
|
|
2.6
|
|
|
VAT payable
|
|
0.2
|
|
|
0.2
|
|
|
Other payables
|
|
3.2
|
|
|
1.9
|
|
|
Total other liabilities and accrued expenses
|
|
$
|
28.0
|
|
|
$
|
18.7
|
|
9. Stockholders’ Equity
Common stock
The Company completed its IPO on July 2, 2020, in which the Company issued and sold 12,650,000 shares of its common stock at a public offering price of $29 per share, including 1,650,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the IPO were approximately $335.6 million.
In connection with the IPO, the Company's outstanding convertible preferred stock converted into 31,557,107 shares of common stock. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the preferred stock to common stock and additional paid in capital.
Upon closing of the IPO, the Company filed an amended and restated certificate of incorporation on July 7, 2020 with the Secretary of State of the State of Delaware to authorize the issuance of up to 200,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.
On January 14, 2021, the Company completed a Follow-on Offering of common stock (the "Follow-on Offering"), which resulted in the issuance and sale of 3,300,000 shares of common stock of the Company, and 1,524,314 shares of common stock by certain selling shareholders, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and commissions and other offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock of the Company, and generated additional net proceeds of $114.6 million to us after deducting underwriting discounts.
As of both June 30, 2021 and December 31, 2020, the Company was authorized to issue 200,000,000 shares of par value $0.00001 per share common stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock is subject to and qualified by the rights, powers and preferences of the holders of the preferred stock.
On February 18, 2020, the Company made a contribution of 500,000 newly issued shares of common stock to a related party, the Lemonade Foundation (see Note 13). In connection with the Follow-on Offering noted above, Lemonade Foundation sold 100,000 of the contributed shares of the Company.
Undesignated Preferred Stock
As of both June 30, 2021 and December 31, 2020, the Company's certificate of incorporation, as amended and restated, authorized the Company to issue up to 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share. As of both June 30, 2021 and December 31, 2020, there were no shares of undesignated preferred stock issued or outstanding.
10. Stock-based Compensation
Share option plans
2020 Incentive Compensation Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Incentive Compensation Plan (the “2020 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The 2020 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards.
The number of shares initially reserved for issuance under the 2020 Plan is 5,503,678 shares, inclusive of available shares previously reserved for issuance under the 2015 Incentive Share Option Plan, as amended and restated on September 4, 2019 (the “2015 Plan”). In addition, the number of shares reserved for issuance under the 2020 Plan is subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. Annually, on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, the reserve will be increased by an amount equal to the lesser of (A) 5% of the shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the Company’s board of directors, provided that no more than 3,650,000 shares may be issued upon the exercise of incentive stock options. On January 1, 2021, the 2020 Plan was increased by 2,838,412 shares, equal to 5% of the aggregate number of outstanding common stock as of December 31, 2020. As of June 30, 2021, there were 5,890,700 shares of common stock available for future grants.
2020 Employee Stock Purchase Plan
On July 2, 2020, the Company's board of directors adopted and the Company's stockholders approved the 2020 Employee Stock Purchase Plan (the "2020 ESPP"), which became effective immediately prior to the effectiveness of the registration statement for the Company's IPO on July 2, 2020. The total shares of common stock initially reserved for issuance under the 2020 ESPP is limited to 1,000,000 shares. In addition, the number of shares available for issuance under the 2020 ESPP will be annually increased on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (A) 1,000,000 shares, (B) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares as is determined by the board of directors. The board of directors or a committee of the board of directors will administer and will have authority to interpret the terms of the 2020 ESPP and determine eligibility of participants. On January 1, 2021, the 2020 ESPP was increased by 567,682 shares, equal to 1% of the aggregate number of outstanding common stock as of December 31, 2020. As of June 30, 2021, there were no shares of common stock issued under the 2020 ESPP.
2015 Incentive Share Option Plan
In July 2015, the Company adopted the 2015 Plan. The 2015 Plan has been amended and restated from time to time to increase the number of shares reserved for grant and to enable the grant of options to employees of the Company’s subsidiaries. Under the 2015 Plan, options to purchase common stock of the Company may be granted to employees, officers, directors and consultants of the Company. Each option granted can be exercised for one share of common stock of the Company. Options granted to employees generally vest over a period of no more than four years. The options expire ten years from the date of grant.
Pursuant to the 2015 Plan, the Company had reserved 7,312,590 shares of common stock for issuance. Effective immediately upon the approval of the 2020 plan, the remaining shares of common stock available for future grant under the 2015 Plan were transferred to the 2020 Plan. As of June 30, 2021, there were no shares of common stock available for future grant under the 2015 Plan. Subsequent to the approval of the 2020 Plan, no additional grants will be made under the 2015 Plan and any outstanding awards under the 2015 Plan will continue with their original terms.
Options granted to employees and non-employees
The fair value of each option granted for the six months ended June 30, 2021 and 2020 is estimated on the date of grant using the Black-Scholes model based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
Weighted average expected term (years)
|
|
6.3
|
|
6.1
|
|
Risk-free interest rate
|
|
1.3%
|
|
1.0%
|
|
Volatility
|
|
49%
|
|
40%
|
|
Expected dividend yield
|
|
0%
|
|
0%
|
Expected volatility is based on companies at a comparable stage, as well as companies in the same or a similar industry. The expected term of options granted is based on the simplified method, which uses the midpoint between the vesting date and the contractual term in accordance with ASC 718, “Compensation — Stock Compensation”. The risk-free interest rate is based on observed interest rates appropriate for the term of the Company’s stock options. The dividend yield assumption is based on the Company’s historical and expected future dividend payouts and may be subject to substantial change in the future.
The following tables summarize activity of stock options and restricted stock units ("RSUs") ($ in millions, except for number of options and weighted average amounts):
Stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic Value
|
|
Outstanding as of December 31, 2020
|
|
4,944,711
|
|
$
|
20.50
|
|
|
8.30
|
|
$
|
506.58
|
|
|
Granted
|
|
2,052,325
|
|
102.81
|
|
|
|
|
|
|
Exercised
|
|
(739,186)
|
|
10.56
|
|
|
|
|
|
|
Cancelled
|
|
(223,241)
|
|
39.21
|
|
|
|
|
|
|
Outstanding as of June 30, 2021
|
|
6,034,609
|
|
$
|
48.65
|
|
|
8.51
|
|
$
|
382.66
|
|
|
Options exercisable as of June 30, 2021
|
|
1,720,686
|
|
$
|
13.51
|
|
|
7.20
|
|
$
|
165.22
|
|
|
Options unvested as of June 30, 2021
|
|
4,313,923
|
|
$
|
62.65
|
|
|
9.03
|
|
$
|
217.44
|
|
Restricted Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
Grant Date
Fair Value
|
|
Outstanding as of December 31, 2020
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
|
57,004
|
|
|
151.58
|
|
|
Vested
|
|
—
|
|
|
—
|
|
|
Cancelled
|
|
(1,875)
|
|
|
159.02
|
|
|
Outstanding as of June 30, 2021
|
|
55,129
|
|
|
$
|
151.33
|
|
.
Stock-based compensation expense
Stock-based compensation expense from stock options and RSUs granted included and classified in the condensed consolidated statements of operations for the six months ended June 30, 2021 and 2020 is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Loss and loss adjustment expense, net
|
|
$
|
0.5
|
|
|
$
|
0.1
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
Other insurance expense
|
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
0.4
|
|
|
Sales and marketing
|
|
1.3
|
|
|
0.6
|
|
|
2.4
|
|
|
1.3
|
|
|
Technology development
|
|
6.8
|
|
|
0.7
|
|
|
7.5
|
|
|
1.3
|
|
|
General and administrative
|
|
3.1
|
|
|
0.8
|
|
|
7.0
|
|
|
1.5
|
|
|
Total stock-based compensation expense
|
|
$
|
11.9
|
|
|
$
|
2.4
|
|
|
$
|
18.0
|
|
|
$
|
4.6
|
|
Stock-based compensation expense classified by award type as included in the condensed consolidated statements of operations is as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Stock options
|
|
$
|
10.5
|
|
|
$
|
2.4
|
|
|
$
|
16.0
|
|
|
$
|
4.6
|
|
|
RSUs
|
|
1.4
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
Total stock-based compensation expense
|
|
$
|
11.9
|
|
|
$
|
2.4
|
|
|
$
|
18.0
|
|
|
$
|
4.6
|
|
The total unrecognized expense granted to employees and non-employees outstanding at June 30, 2021 was $108.2 million for the stock options and $6.4 million for the RSUs, with a remaining weighted-average vesting period of 1.5 years for the stock options and 1.5 years for the RSUs.
11. Income Taxes
Effective tax rates
The consolidated effective tax rate for the six months ended June 30, 2021 and 2020 was (3.6)% and (1.0)%, respectively. The change in effective tax rate over the two periods was predominantly reflective of the change in profit before tax of its wholly-owned subsidiaries in Israel and the Netherlands. The Company believes that as of June 30, 2021, it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable.
There were no material liabilities for interest and penalties accrued as of June 30, 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief in measures in response to the economic conditions due to the COVID-19 pandemic. As of June 30, 2021, the Company has determined that neither the CARES Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on the Company's effective tax rate.
12. Net Loss per Share
Net loss per share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders ($ in millions)
|
|
$
|
(55.6)
|
|
|
$
|
(21.0)
|
|
|
$
|
(104.6)
|
|
|
$
|
(57.5)
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding — basic and diluted
|
|
61,444,958
|
|
11,891,979
|
|
60,643,764
|
|
11,750,198
|
|
Net loss per share attributable to common stockholders — basic and diluted
|
|
$
|
(0.90)
|
|
|
$
|
(1.77)
|
|
|
$
|
(1.72)
|
|
|
$
|
(4.89)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s potentially dilutive securities, which include stock options, unvested RSUs and preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded unvested RSUs and outstanding options to purchase common stock of 6,089,738 and 4,578,520 for the six months ended June 30, 2021 and 2020, respectively, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect.
13. Related Party Transactions
The Company uses the services of a travel agency owned by a relative of one of the Company’s key stockholders. The Company incurred less than $0.1 million of travel related expenses during the three and six months ended June 30, 2021, and less than $0.1 million of travel related expenses was incurred during the three and six months ended June 30, 2020.
The Company has historically leased office spaces in the United States and The Netherlands from an affiliate. Rental expense amounted to less than $0.1 million was incurred for the three and six months ended June 30, 2021, and less than $0.1 million for the three and six months ended June 30, 2020. There were no outstanding amounts due to or from related parties as of June 30, 2021 and December 31, 2020.
The Company’s Chief Executive Officer and the Company’s President and Chief Operating Officer, both of whom are also members of the Company’s board of directors, are the two sole members of the board of directors of the Lemonade Foundation. Effective July 2021, the Company's President and Chief Operating Officer became the Company's Co-Chief Executive Officer. The Company contributed 500,000 shares of common stock with a fair market value of $24.36 per share (see Note 9). The Company recorded $12.2 million of non-cash expense within general and administrative expense in connection with this contribution for the year ended December 31, 2020. In connection with the Follow-on Offering as discussed in Note 9, Lemonade Foundation sold 100,000 shares of the contributed shares of the Company. As of June 30, 2021, there were no outstanding amounts due to or from the Lemonade Foundation.
14. Commitments and Contingent Liabilities
Litigation
The Company is occasionally a party to routine claims or litigation incidental to its business. The Company does not believe that it is a party to any pending legal proceeding that is likely to have a material adverse effect on its business, financial condition or results of operations.
Lease commitments
The Company and its subsidiaries lease their facilities under various operating lease agreements. The Company’s headquarters in New York is under a lease that expires in November 2022. The Company’s Israel based operations occupy offices with lease expiration dates that extend through July 2026. On March 18, 2019, the Company entered into a lease agreement to lease office space in Scottsdale, Arizona that expires in November 2024.
Aggregate minimum rental commitments under non-cancelable leases at June 30, 2021 are as follows ($ in millions):
|
|
|
|
|
|
|
|
|
|
|
2021 (remaining six months)
|
|
$
|
2.6
|
|
|
2022
|
|
4.9
|
|
|
2023
|
|
2.8
|
|
|
2024
|
|
2.8
|
|
|
2025 and thereafter
|
|
4.1
|
|
|
|
|
$
|
17.2
|
|
Expenses for lease of facilities for the three and six months ended June 30, 2021 were $1.1 million and $2.1 million, respectively, and for the three and six months ended June 30, 2020 were $1.0 million and $1.9 million, respectively, and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Charges and guarantees
The Company provided guarantees with respect to office leases in an aggregate amount of $0.3 million as of June 30, 2021 and $0.6 million as of December 31, 2020.
15. Geographical Breakdown of Gross Written Premium
The Company has a single reportable segment and offers insurance coverage under the homeowners multi-peril and inland marine lines of business. Gross written premium by jurisdiction are as follows ($ in millions):
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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2021
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2020
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Jurisdiction
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Amount
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% of GWP
|
|
Amount
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% of GWP
|
|
Amount
|
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% of GWP
|
|
Amount
|
|
% of GWP
|
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California
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|
$
|
22.2
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|
|
24.8
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%
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|
$
|
9.9
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|
|
21.2
|
%
|
|
$
|
41.4
|
|
|
25.0
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%
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|
$
|
19.3
|
|
|
22.8
|
%
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Texas
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18.7
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|
|
20.9
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%
|
|
11.8
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|
|
25.3
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%
|
|
33.7
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|
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20.4
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%
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20.6
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24.3
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%
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New York
|
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10.9
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12.2
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%
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5.3
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|
|
11.3
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%
|
|
20.9
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|
|
12.6
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%
|
|
10.2
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|
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12.0
|
%
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Georgia
|
|
4.3
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|
|
4.8
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%
|
|
2.8
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|
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6.0
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%
|
|
8.0
|
|
|
4.8
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%
|
|
4.9
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|
|
5.8
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%
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|
Illinois
|
|
4.1
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|
|
4.6
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%
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|
2.6
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|
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5.6
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%
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7.1
|
|
|
4.3
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%
|
|
4.2
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|
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5.0
|
%
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|
|
|
New Jersey
|
|
3.7
|
|
|
4.1
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%
|
|
1.6
|
|
|
3.4
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%
|
|
6.8
|
|
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4.1
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%
|
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3.1
|
|
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3.7
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%
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|
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Pennsylvania
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2.3
|
|
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2.6
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%
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|
1.1
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|
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2.4
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%
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4.1
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2.5
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%
|
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1.8
|
|
|
2.1
|
%
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|
Michigan
|
|
1.9
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|
|
2.1
|
%
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|
1.4
|
|
|
3.0
|
%
|
|
3.5
|
|
|
2.1
|
%
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|
2.4
|
|
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2.8
|
%
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|
|
|
Colorado
|
|
2.0
|
|
|
2.2
|
%
|
|
0.8
|
|
|
1.7
|
%
|
|
3.4
|
|
|
2.1
|
%
|
|
1.5
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Maryland
|
|
1.8
|
|
|
2.0
|
%
|
|
0.9
|
|
|
1.9
|
%
|
|
3.4
|
|
|
2.1
|
%
|
|
1.7
|
|
|
2.0
|
%
|
|
|
|
All other
|
|
17.6
|
|
|
19.7
|
%
|
|
8.5
|
|
|
18.2
|
%
|
|
33.0
|
|
|
20.0
|
%
|
|
15.1
|
|
|
17.7
|
%
|
|
|
|
|
|
$
|
89.5
|
|
|
100.0
|
%
|
|
$
|
46.7
|
|
|
100.0
|
%
|
|
$
|
165.3
|
|
|
100.0
|
%
|
|
$
|
84.8
|
|
|
100.0
|
%
|
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q and Annual Report on Form 10-K for the year ending December 31, 2020 (the "Annual Report on Form 10-K"). The discussion and analysis below includes forward-looking statements that are subject to risks, uncertainties and other factors described in the "Risk Factors" section of our Annual Report that could cause actual results to differ materially from such forward-looking statements. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.
In this Quarterly Report on Form 10-Q, unless we indicate otherwise or the context requires, "Lemonade, Inc.," "Lemonade," "the company," "our company," "the registrant," "we," "our," "ours" and "us" refer to Lemonade, Inc. and its consolidated subsidiaries, including Lemonade Insurance Company and Lemonade Insurance Agency, LLC.
Our Business
Lemonade is rebuilding insurance from the ground up on a digital substrate and an innovative business model. By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, we believe we are making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, we have built a vertically-integrated company with wholly-owned insurance carriers in the United States and Europe, and the full technology stack to power them.
A two minute chat with our bot, AI Maya, is all it takes to get covered with renters or homeowners insurance, pet or life insurance, and we expect to offer a similar experience for other insurance products over time. Claims are filed by chatting to another bot, AI Jim, who pays claims in as little as three seconds. This breezy experience belies the extraordinary technology that enables it: a state-of-the-art platform that spans marketing to underwriting, customer care to claims processing, finance to regulation. Our architecture melds artificial intelligence with the human kind, and learns from the prodigious data it generates to become ever better at delighting customers and quantifying risk.
In addition to digitizing insurance end-to-end, we also reimagined the underlying business model to minimize volatility while maximizing trust and social impact. In a departure from the traditional insurance model, where profits can literally depend on the weather, we typically retain a fixed fee, currently 25% of premiums, and our gross margins are expected to change little in good years and in bad. At Lemonade, excess claims are generally offloaded to reinsurers, while excess premiums are usually donated to nonprofits selected by our customers as part of our annual “Giveback”. These two ballasts, reinsurance and Giveback, reduce volatility, while creating an aligned, trustful, and values-rich relationship with our customers.
Lemonade’s cocktail of delightful experience, aligned values, and great prices enjoys broad appeal, while over indexing on younger and first time buyers of insurance. As these customers progress through predictable lifecycle events, their insurance needs normally grow to encompass more and higher-value products: renters regularly acquire more property and frequently upgrade to successively larger homes; home buying often coincides with a growing household and a corresponding need for life or pet insurance, and so forth. These progressions can trigger orders-of-magnitude increases in insurance premiums.
The result is a business with highly-recurring and naturally-growing revenue streams; a level of automation that we believe delights consumers while collapsing costs; and an architecture that generates and employs data to price and underwrite risk with ever-greater precision to the benefit of our company, our customers and their chosen nonprofits.
This powerful trifecta, delightful experience, aligned values, and great prices, has delivered rapid growth alongside steadily improving results. During the six months ended June 30, 2021, our gross written premium, or GWP, of $165.3 million nearly doubled from the $84.8 million of GWP we wrote during the six months ended June 30, 2020. Despite our shift to Proportional Reinsurance Contracts in July 2020 where we cede 75% of our premiums to our reinsurers, our total revenue was $51.7 million for the six months ended June 30, 2021 in comparison to $56.1 million for the six months ended June 30, 2020. Net loss was $104.6 million for the six months ended June 30, 2021 as compared to $57.5 million for the six months ended June 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Components of Our Results of Operations — Revenue — Gross Written Premium.”
For the six months ended June 30, 2021, our gross loss ratio of 96% was significantly impacted by the severe winter storm that affected our customers in the states of Texas and Oklahoma during the period ("Winter Storm Uri"). The impact of this winter storm, along with other catastrophe losses, on our gross loss ratio for the six months ended June 30, 2021 was 27%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Operating and Financial Metrics and Results of Operations."
Initial Public Offering and Follow-on Offering
On July 7, 2020, we completed our initial public offering of common stock, or IPO, which resulted in the issuance and sale of 12,650,000 shares of common stock at the IPO price of $29.00, including the exercise of the underwriters’ option to purchase additional shares, and generated net proceeds of $335.6 million after deducting underwriting discounts and other offering costs.
On January 14, 2021, we completed a Follow-on Offering of common stock (the "Follow-on Offering"), which resulted in the issuance and sale of 3,300,000 shares of common stock by us and 1,524,314 shares of common stock by certain selling shareholders, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and other offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock by us, and generated additional net proceeds of $114.6 million to us after deducting underwriting discounts.
Factors and Trends Affecting our Operating Results
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
Seasonality
Seasonal patterns can impact both our rate of customer acquisition and the incurrence of claims and losses.
Based on historical experience, existing and potential customers move more frequently in the third quarter, compared to the rest of the calendar year. As a result, we may see greater demand for new or expanded insurance coverage, and increased online engagement resulting in proportionately more growth during the third quarter. We expect that as we grow our customers, expand geographically and launch new products, the impact of seasonal variability on our rate of growth may decrease.
Additionally, seasonal weather patterns impact the level and amount of claims we receive. These patterns include hurricanes, wildfires, and coastal storms in the fall, cold weather patterns and changing home heating needs in the winter, and tornados and hailstorms in the spring and summer. The mix of geographic exposure and products within our customer base impacts our exposure to these weather patterns.
COVID-19 Impact
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China and was subsequently recognized as a pandemic by the World Health Organization. The global pandemic has severely impacted businesses worldwide, including many in the insurance sector. Insurers of travel, events or business interruption may be directly and adversely affected by claims from COVID-19 or the lock-down it engendered. Other insurers, in lines of business that are not directly impacted by COVID-19, may nevertheless be dependent on office-based brokers, in-person inspections, or teams that are poorly equipped to work from home — all of which can translate into value erosion. Finally, the broader financial crisis may hurt insurers in other ways, too. With interest rates at all-time lows, many insurers may see their return on capital drop; while those selling premium or discretionary products may see an increase in churn and a decrease in demand.
Against this backdrop it is noteworthy that our business has continued to grow, and the key drivers of our business have continued their positive progress, despite the pandemic.
•Lemonade writes insurance in lines that have so far been largely unaffected by COVID-19, or indeed, historically, by recession.
•Our systems are entirely cloud based and accessible to our teams from any browser anywhere in the world. customers’ phone calls are routed to our team’s laptops, and answered and logged from wherever they happen to be. Internal communication has been via Slack and Zoom since our founding. The upshot is that while we all enjoy each other’s company, our teams are able to access systems, support customers and collaborate with each other from anywhere, much as they did before the pandemic.
•Our customers’ experience with Lemonade is likewise largely unaffected by the turmoil, as AI Maya and AI Jim chat with customers, wherever they may be, without triggering concerns about social distancing.
This resilience is reflected in our results. As of June 30, 2021, our in force premium, or IFP, was about 91% higher than it was on June 30, 2020. For information regarding how we calculate IFP, see "Management's Discussion and Analysis of Financial Condition and Results of Operations — Key Operating and Financial Metrics — In Force Premium."
While the global economy began to reopen in the first quarter of 2021, there remains to be an uncertainty about the duration and ultimate impact of COVID-19, including the length of time needed to vaccinate a significant segment of the global population and effectiveness of the vaccines with respect to the new variants of the virus. Therefore, the financial impact of COVID-19 on our business could change and cannot be accurately predicted at this time.
See “Risk Factors — Risks Relating to our Industry — Severe weather events and other catastrophes, including the effects of climate change and global pandemics, are inherently unpredictable and may have a material adverse effect on our financial results and financial condition.” in the Annual Report on Form 10-K.
Reinsurance
We obtain reinsurance to help manage our exposure to property and casualty insurance risks. Although our reinsurance counterparties are liable to us according to the terms of the reinsurance policies, we remain primarily liable to our policyholders as the direct insurers on all risks reinsured, see "Risk Factors - Risks Relating to Our Business" and "Risks relating to our Industry" in our Annual Report on Form 10-K.
As a result, reinsurance does not eliminate the obligation of our insurance subsidiary to pay all claims, and we are subject to the risk that one or more of our reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts, each of which could have a material effect on our results of operations and financial condition. Furthermore, reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business.
Through June 30, 2021, we have proportional reinsurance covering 75% of our business. Under the proportional reinsurance contracts, which cover all of our products and geographies, we transfer, or “cede,” 75% of our premium to our reinsurers (“Proportional Reinsurance Contracts”). In exchange, these reinsurers pay us a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all our claims. This arrangement mirrors our fixed fee, and hence shields our gross profit margin, from the volatility of claims, while boosting our capital efficiency dramatically. We have opted to manage the remaining 25% of our business with alternative forms of reinsurance. We have achieved this through the non-proportional reinsurance contracts (“Non-Proportional Reinsurance Contracts”). The majority of the Proportional Reinsurance Contracts run for a three-year term, expiring June 30, 2023, while the remainder has a one-year term, expiring June 30, 2021. Our Non-Proportional Reinsurance Contracts are likewise effective as of July 1, 2020, and have a one-year term.
A portion of Lemonade’s proportional reinsurance program expired on June 30, 2021. We renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements. As the business continues to grow and diversify, and with stability in our insurance results, we decreased the overall share of proportional reinsurance from 75% of premium to 70%. In addition, we purchased a new reinsurance program to protect us against natural catastrophe risk in the U.S. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts.
Components of our Results of Operations
Revenue
Gross Written Premium
Gross written premium is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance. The volume of our gross written premium in any given period is generally influenced by new business submissions, binding of new business submissions into policies, renewals of existing policies, and average size and premium rate of bound policies.
Ceded Written Premium
Ceded written premium is the amount of gross written premium ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. Ceded written premium is earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded written premium is impacted by the level of our gross written premium and any decision we make to increase or decrease in reinsurance limits, retention levels and co-participation. Our ceded written premium can also be impacted significantly in certain periods due to changes in reinsurance agreements. In periods where we start or stop ceding a large volume of our premium, ceded written premium may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends.
Gross Earned Premium
Gross earned premium represents the earned portion of our gross written premium. Our insurance policies generally have a term of one year and premium is earned pro rata over the term of the policy.
Ceded Earned Premium
Ceded earned premium is the amount of gross earned premium ceded to reinsurers.
Net Earned Premium
Net earned premium represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Premium is earned pro rata over the term of the policy, which is generally one year.
Ceding Commission Income
Ceding commission income is commission we receive based on the premium ceded to third-party reinsurers to reimburse us for acquisition and underwriting expenses. We earn commissions on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro-rata basis over the terms of the policies reinsured. The portion of ceding commission income which represents reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to other insurance expense.
Net Investment Income
Net investment income represents interest earned from fixed maturity securities, short term securities and other investments, and the gains or losses from the sale of investments. Our cash and invested assets are primarily comprised of fixed-maturity securities, and may also include cash and cash equivalents, equity securities and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premium we receive from our customers less payments on customer claims. Over time, we expect that net investment income will represent a more meaningful component of our results of operations.
Commission and Other Income
Commission income consists of commissions earned for policies placed with third-party insurance companies where we have no exposure to the insured risk. Such commission is recognized on the effective date of the associated policy. Other income consists of fees collected from policyholders relating to installment premiums. These fees are recognized at the time each policy installment is billed.
Expense
Loss and Loss Adjustment Expense, Net
Loss and loss adjustment expense ("LAE"), net represent the costs incurred for losses net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks. Loss and LAE are based on an actuarial analysis of the estimated losses, including losses incurred during the period and changes in estimates from prior periods. Loss and LAE may be paid out over a period of years. Certain policies we write are subject to catastrophe losses. Catastrophe losses are losses resulting from events involving claims and policyholders, including earthquakes, hurricanes, floods, storms, terrorist acts or other aggregating events that are designated by internationally recognized organizations, such as Property Claims Services, that track and report on insured losses resulting from catastrophic events.
Other Insurance Expense
Other insurance expense consists primarily of amortization of commissions costs and premium taxes incurred on the successful acquisition of business written on a direct basis, and credit card processing fees not charged to our customers. Other insurance expense also includes employee compensation, including stock-based compensation and benefits, of our underwriting teams as well as allocated occupancy costs and related overhead based on headcount. Other insurance expense is offset by the portion of ceding commission income which represents reimbursement of successful acquisition costs related to the underlying policies.
Sales and Marketing
Sales and marketing includes third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing also includes associated employee compensation, including stock-based compensation and benefits, as well as allocated occupancy costs and related overhead based on headcount. Sales and marketing costs are expensed as incurred.
We plan to continue to invest in sales and marketing to attract and acquire new customers and increase our brand awareness. We expect that sales and marketing costs will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue in the near-term. We expect that, in the long-term, our sales and marketing costs will decrease as a percentage of revenue as we continue to drive customer acquisition efficiencies and as the proportion of renewals to our total business increases.
Technology Development
Technology development consists of employee compensation, including stock-based compensation and benefits, and expenses related to vendors engaged in product management, design, development and testing of our websites and products. Technology development also includes allocated occupancy costs and related overhead based on headcount. We expense technology development costs as incurred, except for costs that are capitalized related to internal-use software development projects and subsequently depreciated over the expected useful life of the developed software.
We expect product technology development costs, a portion of which will be capitalized, to continue to grow in the foreseeable future as we identify opportunities to invest in the development of new products and internal tools and enhancement of our existing products and technologies that we believe will drive the long-term profitability of the business.
General and Administrative
General and administrative includes employee compensation, including stock-based compensation and benefits for executive, finance, accounting, legal, business operations, and other administrative personnel. In addition, general and administrative includes outside professional services, non-income based taxes, insurance, charitable donations, and allocated occupancy costs and related overhead based on headcount. Depreciation and amortization expense is recorded as a component of general and administrative.
We expect to incur incremental general and administrative costs to support our global operational growth and enhancements to support our reporting and planning functions.
We have incurred and expect to continue to incur significant additional general and administrative expense as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the listing standards of the NYSE, additional corporate, director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. We also expect to increase the size of our general and administrative function to support our increased compliance requirements and the growth of our business. As a result, we expect that our general and administrative expense will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
Income Tax Expense
Our provision for income taxes consists primarily of foreign income taxes related to income generated by our subsidiaries organized under the laws of the Netherlands and Israel. As we expand the scale of our international business activities, any changes in the U.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future.
We have a valuation allowance for our U.S. deferred tax assets, including federal and state net operating losses. We expect to maintain this valuation allowance until it becomes more likely than not that the benefit of our federal and state deferred tax assets will be realized through expected future taxable income in the United States.
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. We believe these non-GAAP and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP. See “—Non-GAAP Financial Measures” for additional information on non-GAAP financial measures. and a reconciliation to the most comparable GAAP measures.
The following table sets forth these metrics as of and for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
|
($ in millions, except Premium per customer)
|
|
($ in millions, except Premium per customer)
|
|
Customers (end of period)
|
1,206,172
|
|
|
814,160
|
|
|
1,206,172
|
|
|
814,160
|
|
|
In force premium (end of period)
|
$
|
296.8
|
|
|
$
|
155.1
|
|
|
$
|
296.8
|
|
|
$
|
155.1
|
|
|
Premium per customer (end of period)
|
$
|
246
|
|
|
$
|
190
|
|
|
$
|
246
|
|
|
$
|
190
|
|
|
Annual dollar retention (end of period)
|
82
|
%
|
|
73
|
%
|
|
82
|
%
|
|
73
|
%
|
|
Total revenue
|
$
|
28.2
|
|
|
$
|
29.9
|
|
|
$
|
51.7
|
|
|
$
|
56.1
|
|
|
Gross earned premium
|
$
|
66.9
|
|
|
$
|
35.3
|
|
|
$
|
123.1
|
|
|
$
|
65.8
|
|
|
Gross profit
|
$
|
9.8
|
|
|
$
|
5.4
|
|
|
$
|
11.7
|
|
|
$
|
10.0
|
|
|
Adjusted gross profit
|
$
|
12.8
|
|
|
$
|
7.0
|
|
|
$
|
17.8
|
|
|
$
|
12.4
|
|
|
Net loss
|
$
|
(55.6)
|
|
|
$
|
(21.0)
|
|
|
$
|
(104.6)
|
|
|
$
|
(57.5)
|
|
|
Adjusted EBITDA
|
$
|
(40.4)
|
|
|
$
|
(18.2)
|
|
|
$
|
(81.7)
|
|
|
$
|
(40.6)
|
|
|
Gross profit margin
|
35
|
%
|
|
18
|
%
|
|
23
|
%
|
|
18
|
%
|
|
Adjusted gross profit margin
|
45
|
%
|
|
23
|
%
|
|
34
|
%
|
|
22
|
%
|
Ratio of Adjusted Gross Profit to Gross Earned
Premium
|
19
|
%
|
|
20
|
%
|
|
14
|
%
|
|
19
|
%
|
|
Gross loss ratio
|
74
|
%
|
|
67
|
%
|
|
96
|
%
|
|
70
|
%
|
|
Net loss ratio
|
80
|
%
|
|
70
|
%
|
|
98
|
%
|
|
71
|
%
|
Customers
We define customers as the number of current policyholders underwritten by us or placed by us with third-party insurance partners (who pay us recurring commissions) as of the period end date. A customer that has more than one policy counts as a single customer for the purposes of this metric. We view customers as an important metric to assess our financial performance because customer growth drives our revenue, expands brand awareness, deepens our market penetration, creates additional upsell and cross-sell opportunities and generates additional data to continue to improve the functioning of our platform.
In Force Premium
We define in force premium ("IFP"), as the aggregate annualized premium for customers as of the period end date. At each period end date, we calculate IFP as the sum of:
i)In force written premium — the annualized premium of in force policies underwritten by us; and
ii)In force placed premium — the annualized premium of in force policies placed with third party insurance companies for which we earn a recurring commission payment. In force placed premium currently reflects approximately 1% of IFP.
The annualized value of premiums is a legal and contractual determination made by assessing the contractual terms with our customers. The annualized value of contracts is not determined by reference to historical revenues, deferred revenues or any other GAAP financial measure over any period. IFP is not a forecast of future revenues nor is it a reliable indicator of revenue expected to be earned in any given period. We believe that our calculation of IFP is useful to analysts and investors because it captures the impact of growth in customers and premium per customer at the end of each reported period, without adjusting for known or projected policy updates, cancellations, rescissions and non-renewals. We use IFP because we believe it gives our management useful insight into the total reach of our platform by showing all in force policies underwritten and placed by us. Other companies, including companies in our industry, may calculate IFP differently or not at all, which reduces the usefulness of IFP as a tool for comparison.
Premium per customer
We define premium per customer as the average annualized premium customers pay for products underwritten by us or placed by us with third-party insurance partners. We calculate premium per customer by dividing IFP by customers. We view premium per customer as an important metric to assess our financial performance because premium per customer reflects the average amount of money our customers spend on our products, which helps drive strategic initiatives.
Annual Dollar Retention
We define Annual Dollar Retention ("ADR"), as the percentage of IFP retained over a twelve month period, inclusive of changes in policy value, changes in number of policies, changes in policy type, and churn. To calculate ADR we first aggregate the IFP from all active customers at the beginning of the period and then aggregate the IFP from those same customers at the end of the period. ADR is then equal to the ratio of ending IFP to beginning IFP. We believe that our calculation of ADR is useful to analysts and investors because it captures our ability to retain customers and sell additional products and coverage to them over time. We view ADR as an important metric to measure our ability to provide a delightful end-to-end customer experience, satisfy our customers’ evolving insurance needs and maintain our customers’ trust in our products. Our customers become more valuable to us every year they continue to subscribe to our products. Other companies, including companies in our industry, may calculate ADR differently or not at all, which reduces the usefulness of ADR as a tool for comparison.
Gross Earned Premium
Gross earned premium is the earned portion of our gross written premium.
We use this operating metric as we believe it gives our management and other users of our financial information useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure. See “— Components of Our Results of Operations — Revenue — Gross Earned Premium.”
Unlike net earned premium, gross earned premium excludes the impact of premiums ceded to reinsurers, and therefore should not be used as a substitute for net earned premium, total revenue, or any other measure presented in accordance with GAAP.
Gross Profit
Gross profit is calculated in accordance with GAAP as total revenue less loss and loss adjustment expense, net, other insurance expense, and depreciation and amortization (allocated to cost of revenue).
Adjusted Gross Profit
We define adjusted gross profit, a non-GAAP financial measure, as:
•Gross profit, excluding net investment income, plus
•Employee-related costs, plus
•Professional fees and other, plus
•Depreciation and amortization (allocated to cost of revenue).
•See “— Non-GAAP Financial Measures” for a reconciliation of total revenue to adjusted gross profit.
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding the impact of interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income and other transactions that we consider to be unique in nature. See “— Non-GAAP Financial Measures” for a reconciliation of net loss to adjusted EBITDA in accordance with GAAP.
Gross Profit Margin
We define gross profit margin, expressed as a percentage, as the ratio of gross profit to total revenue.
Adjusted Gross Profit Margin
We define adjusted gross profit margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to total revenue. See “— Non-GAAP Financial Measures.”
Ratio of Adjusted Gross Profit to Gross Earned Premium
We define Ratio of Adjusted Gross Profit to Gross Earned Premium, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to gross earned premium. Our Ratio of Adjusted Gross Profit to Gross Earned Premium provides management with useful insight into our operating performance. See “— Non-GAAP Financial Measures.”
Gross Loss Ratio
We define gross loss ratio, expressed as a percentage, as the ratio of losses and loss adjustment expense to gross earned premium.
Net Loss Ratio
We define net loss ratio, expressed as a percentage, as the ratio of losses and loss adjustment expense, less amounts ceded to reinsurers, to net earned premium.
Results of Operations
Comparison of the Three Months Ended June 30, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Net earned premium
|
$
|
16.3
|
|
|
$
|
29.2
|
|
|
$
|
(12.9)
|
|
|
(44)
|
%
|
|
Ceding commission income
|
10.6
|
|
|
0.4
|
|
|
10.2
|
|
|
2,550
|
%
|
|
Net investment income
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
—
|
%
|
|
Commission and other income
|
1.1
|
|
|
0.1
|
|
|
1.0
|
|
|
1,000
|
%
|
|
Total revenue
|
28.2
|
|
|
29.9
|
|
|
(1.7)
|
|
|
(6)
|
%
|
|
Expense
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net
|
13.0
|
|
|
20.5
|
|
|
(7.5)
|
|
|
(37)
|
%
|
|
Other insurance expense
|
5.2
|
|
|
4.0
|
|
|
1.2
|
|
|
30
|
%
|
|
Sales and marketing
|
33.1
|
|
|
16.1
|
|
|
17.0
|
|
|
106
|
%
|
|
Technology development
|
14.0
|
|
|
4.2
|
|
|
9.8
|
|
|
233
|
%
|
|
General and administrative
|
15.8
|
|
|
5.8
|
|
|
10.0
|
|
|
172
|
%
|
|
Total expense
|
81.1
|
|
|
50.6
|
|
|
30.5
|
|
|
60
|
%
|
|
Loss before income taxes
|
(52.9)
|
|
|
(20.7)
|
|
|
(32.2)
|
|
|
156
|
%
|
|
Income tax expense
|
2.7
|
|
|
0.3
|
|
|
2.4
|
|
|
800
|
%
|
|
Net loss
|
$
|
(55.6)
|
|
|
$
|
(21.0)
|
|
|
$
|
(34.6)
|
|
|
165
|
%
|
Net Earned Premium
Net earned premium decreased $12.9 million, or 44%, to $16.3 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily due to the earning of increased gross written premium mostly offset by the earning of increased ceded written premium under our Proportional Reinsurance Contracts as discussed above under "Reinsurance".
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Gross written premium
|
$
|
89.5
|
|
|
$
|
46.7
|
|
|
$
|
42.8
|
|
|
92
|
%
|
|
Ceded written premium
|
(66.5)
|
|
|
(6.0)
|
|
|
(60.5)
|
|
|
1,008
|
%
|
|
Net written premium
|
$
|
23.0
|
|
|
$
|
40.7
|
|
|
$
|
(17.7)
|
|
|
(43)
|
%
|
Gross written premium increased $42.8 million, or 92%, to $89.5 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was primarily due to a 48% increase in net added customers year over year driven by the success of our digital advertising campaigns. We also continued to expand our geographic footprint and product offerings. Since June 30, 2020, we began writing policies in 9 additional U.S. states, launched a pet health insurance product in the U.S., and expanded internationally into the Netherlands and France. We also saw a 29% increase in premiums per customer year over year primarily due to the continued shift in the mix of underlying products toward higher value policies.
Ceded written premium increased $60.5 million, or 1,008%, to $66.5 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, primarily due to the impact of the change in reinsurance arrangement. On July 1, 2020, we entered into Proportional Reinsurance Contracts where we cede 75% of our written premiums to our reinsurers that cover all of our products and geographies, and premium was ceded both on new policies written or renewed, as well as a portion of the unearned premium reserve.
Net written premium decreased $17.7 million, or 43%, to $23.0 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The decrease was primarily due to the $60.5 million, or 1,008%, increase in ceded written premium offset by the increase in gross written premium for the three months ended June 30, 2021, as compared to the three months ended June 30, 2020.
The table below shows the amount of premium we earned on a gross and net basis. Ceded earned premium as a percentage of gross earned premium increased to 76% for the three months ended June 30, 2021, as compared to 17% for the three months ended June 30, 2020 primarily due to the new Proportional Reinsurance Contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Gross earned premium
|
$
|
66.9
|
|
|
$
|
35.3
|
|
|
$
|
31.6
|
|
|
90
|
%
|
|
Ceded earned premium
|
(50.6)
|
|
|
(6.1)
|
|
|
(44.5)
|
|
|
730
|
%
|
|
Net earned premium
|
$
|
16.3
|
|
|
$
|
29.2
|
|
|
$
|
(12.9)
|
|
|
(44)
|
%
|
Ceding Commission Income
Ceding commission income of $10.6 million was recognized for the three months ended June 30, 2021 based on earned premium ceded related to the quota-share reinsurance agreements with third-party reinsurers during the period.
Net Investment Income
Net investment income amounted to $0.2 million for the three months ended June 30, 2021 and three months ended June 30, 2020. We mainly invest in cash, money market funds, U.S. Treasury bills, notes and other obligations issued or guaranteed by the U.S. Government, and net investment income for the period is primarily driven by interest rates on investment balances.
Commission and Other Income
Commission and other income of $1.1 million was recognized for the six months ended June 30, 2021 based on premium placed with third-party insurance companies during the period and installment fees billed.
Loss and Loss Adjustment Expense, Net
Loss and LAE, net decreased $7.5 million, or 37%, to $13.0 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The decrease was primarily driven by the change in reinsurance structure in which approximately 75% of loss and LAE is ceded to reinsurers.
Other Insurance Expense
Other insurance expense increased $1.2 million, or 30%, to $5.2 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. The increase was primarily due to employee-related expense, including stock-based compensation, which increased by $0.7 million, or 70%, as compared to the three months ended June 30, 2020, driven by an increase in underwriting staff to support our continued growth. Credit card processing fees increased $0.6 million, or 60%, as a result of the increase in customers and associated premium. Professional fees and other increased $0.6 million, or 86%, primarily in support of growth and expansion initiatives for new products. These increases were offset by a $0.6 million, or 50%, decrease in amortization of deferred acquisitions costs, net of ceding commissions.
Sales and Marketing
Sales and marketing expense increased $17.0 million, or 106%, to $33.1 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Expense related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $13.8 million, or 124%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, as a result of greater spending on search advertising and other customer acquisition channels in response to new product offerings. Employee-related expense, including stock-based compensation, increased by $2.7 million, or 75%, as compared to the prior year period, driven by an increase in sales and marketing headcount to support our continued growth and expansion into new products and markets.
Technology Development
Technology development expense increased $9.8 million, or 233%, to $14.0 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Employee-related expense, including stock-based compensation, and net of capitalized costs for the development of internal-use software, increased $9.3 million, or 258%, as compared to the three months ended June 30, 2020, driven by an increase in payroll expense for product, engineering, design and quality assurance personnel to support our continued growth and product development initiatives, including automation, improvement in machine learning and geographic expansion. Technology tools and software expense increased by $0.5 million, or 125%.
General and Administrative
General and administrative expense increased $10.0 million, or 172%, to $15.8 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020. Employee-related expense, including stock-based compensation, increased by $4.2 million, or 150%, as we increased finance, legal, business operations and administrative personnel. Insurance obtained for operating as a public company increased by $2.2 million, or 1,100%. Bad debt expense increased by $0.9 million, or 180%, and depreciation expense increased $0.5 million or 167%. Legal, accounting and other professional fees increased $0.5 million, or 45%, to support the compliance requirements necessary to operate as a public company. Software costs increased $0.5 million, or 250%.
Income Tax Expense
Income tax expense increased $2.4 million, or 800%, to $2.7 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to increased tax liability related to income generated by our subsidiaries organized under the laws of the Netherlands and Israel.
Net Loss
Net loss increased $34.6 million, or 165%, to $55.6 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 due to the factors described above.
Comparison of the Six Months Ended June 30, 2021 and 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Net earned premium
|
$
|
30.1
|
|
|
$
|
54.5
|
|
|
$
|
(24.4)
|
|
|
(45)
|
%
|
|
Ceding commission income
|
19.6
|
|
|
0.4
|
|
|
19.2
|
|
|
4,800
|
%
|
|
Net investment income
|
0.4
|
|
|
1.1
|
|
|
(0.7)
|
|
|
(64)
|
%
|
|
Commission and other income
|
1.6
|
|
|
0.1
|
|
|
1.5
|
|
|
1,500
|
%
|
|
Total revenue
|
51.7
|
|
|
56.1
|
|
|
(4.4)
|
|
|
(8)
|
%
|
|
Expense
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense, net
|
29.5
|
|
|
38.7
|
|
|
(9.2)
|
|
|
(24)
|
%
|
|
Other insurance expense
|
10.0
|
|
|
7.3
|
|
|
2.7
|
|
|
37
|
%
|
|
Sales and marketing
|
62.2
|
|
|
35.3
|
|
|
26.9
|
|
|
76
|
%
|
|
Technology development
|
21.1
|
|
|
7.7
|
|
|
13.4
|
|
|
174
|
%
|
|
General and administrative
|
29.9
|
|
|
24.0
|
|
|
5.9
|
|
|
25
|
%
|
|
Total expense
|
152.7
|
|
|
113.0
|
|
|
39.7
|
|
|
35
|
%
|
|
Loss before income taxes
|
(101.0)
|
|
|
(56.9)
|
|
|
(44.1)
|
|
|
78
|
%
|
|
Income tax expense
|
3.6
|
|
|
0.6
|
|
|
3.0
|
|
|
500
|
%
|
|
Net loss
|
$
|
(104.6)
|
|
|
$
|
(57.5)
|
|
|
$
|
(47.1)
|
|
|
82
|
%
|
Net Earned Premium
Net earned premium decreased $24.4 million, or 45%, to $30.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily due to the earning of increased gross written premium, partially offset by the earning of increased ceded written premium under our Proportional Reinsurance Contracts as discussed in detail above under "Reinsurance".
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Gross written premium
|
$
|
165.3
|
|
|
$
|
84.8
|
|
|
$
|
80.5
|
|
|
95
|
%
|
|
Ceded written premium
|
(122.1)
|
|
|
(10.3)
|
|
|
(111.8)
|
|
|
1,085
|
%
|
|
Net written premium
|
$
|
43.2
|
|
|
$
|
74.5
|
|
|
$
|
(31.3)
|
|
|
(42)
|
%
|
Gross written premium increased $80.5 million, or 95%, to $165.3 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to a 48% increase in net added customers year over year driven by the success of our digital advertising campaigns. We also continued to expand our geographic footprint and product offerings. Since June 30, 2020, we began writing policies in 9 additional U.S. states, launched a pet health insurance product in the U.S., and expanded internationally into the Netherlands and France. We also saw a 29% increase in premiums per customer year over year due to the continued shift in the mix of underlying products toward higher value policies.
Ceded written premium increased $111.8 million, or 1,085%, to $122.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. On July 1, 2020, we entered into Proportional Reinsurance Contracts where we cede 75% of our premiums to our reinsurers and covers all of our products and geographies. Under the new agreements, premium was ceded both on new policies written or renewed on and after July 1, 2020, as well as a portion of the unearned premium reserve.
Net written premium decreased $31.3 million, or 42%, to $43.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease was primarily due to the $111.8 million, or 1,085%, increase in ceded written premiums offset by the increase in gross written premium for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020.
The table below shows the amount of premium we earned on a gross and net basis. Ceded earned premium as a percentage of gross earned premium increased to 76% for the six months ended June 30, 2021, as compared to 17% for the six months ended June 30, 2020 primarily due to the new Proportional Reinsurance Contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
Change
|
|
% Change
|
|
|
($ in millions)
|
|
|
|
Gross earned premium
|
$
|
123.1
|
|
|
$
|
65.8
|
|
|
$
|
57.3
|
|
|
87
|
%
|
|
Ceded earned premium
|
(93.0)
|
|
|
(11.3)
|
|
|
$
|
(81.7)
|
|
|
723
|
%
|
|
Net earned premium
|
$
|
30.1
|
|
|
$
|
54.5
|
|
|
$
|
(24.4)
|
|
|
(45)
|
%
|
Ceding Commission Income
Ceding commission income of $19.6 million was recognized for the six months ended June 30, 2021 based on earned premium ceded related to the quota-share reinsurance agreements to third-party reinsurers during the period.
Net Investment Income
Net investment income decreased $0.7 million, or 64%, to $0.4 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. This decrease was primarily driven by lower interest rates on investment balances due to federal fund rate cuts since the prior year period. We mainly invest in cash, money market funds, U.S. Treasury bills, notes and other obligations issued or guaranteed by the U.S. Government.
Commission and Other Income
Commission and other income of $1.6 million was recognized for the six months ended June 30, 2021 based on premium placed with third-party insurance companies during the period and installment fees billed.
Loss and Loss Adjustment Expense, Net
Loss and LAE, net decreased $9.2 million, or 24%, to $29.5 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease was primarily driven by the change in reinsurance structure in which approximately 75% of loss and LAE is ceded to reinsurers. The decrease was partially offset by net incurred losses of $6.2 million relating to Winter Storm Uri that affected our customers in the states of Texas and Oklahoma.
Other Insurance Expense
Other insurance expense increased $2.7 million, or 37%, to $10.0 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The increase was primarily due to a $1.1 million, or 58%, increase in credit card processing fees as a result of the increase in customers and associated premiums. Employee-related expense, including stock-based compensation, increased by $1.6 million, or 89%, as compared to the six months ended months ended June 30, 2020, driven by an increase in underwriting staff to support our continued growth. Professional fees and other increased $1.1 million, or 73%, primarily in support of growth and expansion initiatives. These increases were offset by $1.0 million, or 50%, decrease in amortization of deferred acquisition costs, net of ceded commissions.
Sales and Marketing
Sales and marketing expense increased $26.9 million, or 76%, to $62.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Expense related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $20.5 million, or 80%, for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020, as a result of greater spending on search advertising and other customer acquisition channels in response to new product offerings. Employee-related expense, including stock-based compensation, increased by $5.8 million, or 85%, as compared to the prior year period, driven by an increase in sales and marketing headcount to support our continued growth and expansion into new products and markets.
Technology Development
Technology development expense increased $13.4 million, or 174%, to $21.1 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Employee-related expense, including stock-based compensation, net of capitalized costs for the development of internal-use software, increased $12.6 million, or 200%, as compared to the six months ended June 30, 2020, driven by an increase in payroll expense for product, engineering, design and quality assurance personnel to support our continued growth and product development initiatives, including automation, improvement in machine learning and geographic expansion. Technology tools and software expense increased by $0.9 million, or 129%.
General and Administrative
General and administrative expense increased $5.9 million, or 25%, to $29.9 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. After taking into account the impact of the $12.2 million non-cash expense recognized during the six months ended June 30, 2020 in connection with the contribution to the Lemonade Foundation of 500,000 shares of common stock with a fair market value of $24.36 per share, general and administrative expense increased $18.1 million, or 75%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. Employee-related expense, including stock-based compensation, increased by $8.8 million, or 157%, as we increased finance, legal, business operations and administrative personnel. Insurance obtained for operating as a public company increased by $4.5 million, or 1,500%. Bad debt expense increased by $1.4 million, or 156%, and depreciation expense increased by $1.1 million, or 183%. Software costs increased by $0.7 million,or 175%.
Income Tax Expense
Income tax expense increased $3.0 million, or 500%, to $3.6 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to increased tax liability related to income generated by our subsidiaries organized under the laws of the Netherlands and Israel.
Net Loss
Net loss increased $47.1 million, or 82%, to $104.6 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 due to the factors described above.
Non-GAAP Financial Measures
The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, adjusted gross profit and adjusted gross profit margin, Ratio of Adjusted Gross Profit to Gross Earned Premium, and adjusted EBITDA should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical operating performance of our business operations; (iii) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of our management team; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
Adjusted Gross Profit and Adjusted Gross Profit Margin
We define adjusted gross profit, a non-GAAP financial measure, as gross profit excluding net investment income plus fixed cost and overhead associated with our underwriting operations including employee-related expense and professional fees and other, and depreciation and amortization allocated to cost of revenue. After these adjustments, the resulting calculation is inclusive of only those variable costs of revenue incurred on the successful acquisition of business and without the volatility of investment income. We use adjusted gross profit as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from underwriting operations from period to period.
We define adjusted gross profit margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to total revenue.
The following table provides a reconciliation of total revenue to adjusted gross profit and the related adjusted gross profit margin for the periods presented:
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|
|
|
|
|
|
Three Months Ended June 30,
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Six Months Ended June 30,
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2021
|
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2020
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2021
|
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2020
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|
|
($ in millions)
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|
Total revenue
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$
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28.2
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|
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$
|
29.9
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|
|
$
|
51.7
|
|
|
$
|
56.1
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|
|
Adjustments:
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|
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Loss and loss adjustment expense, net
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$
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(13.0)
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$
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(20.5)
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$
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(29.5)
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$
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(38.7)
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Other insurance expense
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(5.2)
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|
|
(4.0)
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|
|
(10.0)
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|
|
(7.3)
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Depreciation and amortization
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(0.2)
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|
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—
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|
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(0.5)
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|
|
(0.1)
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Gross profit
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$
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9.8
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$
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5.4
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$
|
11.7
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$
|
10.0
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Gross profit margin (% of total revenue)
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35
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%
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|
18
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%
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23
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%
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|
18
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%
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Adjustments:
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Net investment income
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$
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(0.2)
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$
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(0.2)
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$
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(0.4)
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$
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(1.1)
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Employee-related expense
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1.7
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|
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0.9
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|
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3.4
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|
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1.8
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Professional fees and other
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1.3
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|
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0.9
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|
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2.6
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|
|
1.6
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Depreciation and amortization
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0.2
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|
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—
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|
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0.5
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|
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0.1
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|
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Adjusted gross profit
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$
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12.8
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|
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$
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7.0
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|
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$
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17.8
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|
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$
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12.4
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Adjusted gross profit margin (% of total revenue)
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45
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%
|
|
23
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%
|
|
34
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%
|
|
22
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%
|
Ratio of Adjusted Gross Profit to Gross Earned Premium
The Ratio of Adjusted Gross Profit to Gross Earned Premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other. We rely on this measure, which supplements our gross profit ratio as calculated in accordance with GAAP, because it provides management with insight into our underlying profitability trends over time.
We use gross earned premium as the denominator in calculating this ratio, which excludes the impact of premiums ceded to reinsurers, because we believe that it reflects the business volume and the gross economic benefit generated by our underlying underwriting operations, which in turn are the key drivers of our future profit opportunities. We exclude the impact of ceded premiums from the denominator because ceded premiums can change rapidly and significantly based on the type and mix of reinsurance structures we use and, therefore, add volatility that is not indicative of our underlying profitability. For example, a shift to a proportional reinsurance arrangement would result in an increase in ceded premium, with offsetting benefits to gross profit from ceded losses and ceding commissions earned, resulting in a nominal overall economic impact. This shift would result in a steep decline in total revenue with a corresponding spike in gross margin, whereas we expect that the Ratio of Adjusted Gross Profit to Gross Earned Premium would remain relatively unchanged. We expect our reinsurance structure to evolve along with our costs and capital requirements, and we believe that our reinsurance structure at a given time does not reflect the performance of our underlying underwriting operations, which we expect to be the key driver of our costs of reinsurance over time.
On the other hand, the numerator, which is adjusted gross profit, includes the net impact of all reinsurance, including ceded premiums and the benefits of ceded losses and ceding commissions earned. Because our reinsurance structure is a key component of our risk management and a key driver of our profitability or loss in a given period, we believe this is meaningful.
Therefore, by providing this Ratio of Adjusted Gross Profit to Gross Earned Premium for a given period, we are able to assess the relationship between business volume and profitability, while eliminating the volatility from the cost of our then-current reinsurance structure, which is driven primarily by the performance of our insurance underwriting platform rather than our business volume.
The following table sets forth our calculation of the Ratio of Adjusted Gross Profit to Gross Earned Premium for the periods presented:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2021
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2020
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2021
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2020
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($ in millions)
|
|
Numerator: Adjusted gross profit
|
$
|
12.8
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|
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$
|
7.0
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|
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$
|
17.8
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|
|
$
|
12.4
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|
|
Denominator: Gross earned premium
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$
|
66.9
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|
|
$
|
35.3
|
|
|
$
|
123.1
|
|
|
$
|
65.8
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|
|
Ratio of Adjusted Gross Profit to Gross Earned Premium
|
19
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%
|
|
20
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%
|
|
14
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%
|
|
19
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%
|
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income, and other transactions that we would consider to be unique in nature. We exclude these items from adjusted EBITDA because we do not consider them to be directly attributable to our underlying operating performance. We use adjusted EBITDA as an internal performance measure in the management of our operations because we believe it gives our management and other customers of our financial information useful insight into our results of operations and our underlying business performance. Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define adjusted EBITDA differently.
The following table provides a reconciliation of adjusted EBITDA to net loss for the periods presented:
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Three Months Ended June 30,
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Six Months Ended June 30,
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|
|
2021
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2020
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2021
|
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2020
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|
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($ in millions)
|
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Net loss
|
$
|
(55.6)
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|
|
$
|
(21.0)
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|
|
$
|
(104.6)
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|
|
$
|
(57.5)
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|
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Adjustments:
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|
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|
Income tax expense
|
$
|
2.7
|
|
|
$
|
0.3
|
|
|
$
|
3.6
|
|
|
$
|
0.6
|
|
|
Depreciation and amortization
|
0.8
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|
|
0.4
|
|
|
1.7
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|
|
0.7
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|
|
Stock-based compensation
|
11.9
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|
|
2.4
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|
|
18.0
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|
|
4.6
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|
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Contribution to the Lemonade Foundation
|
—
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|
|
—
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|
|
—
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|
|
12.2
|
|
|
Interest income
|
—
|
|
|
(0.1)
|
|
|
—
|
|
|
(0.1)
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|
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Net investment income
|
(0.2)
|
|
|
(0.2)
|
|
|
(0.4)
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|
|
(1.1)
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|
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Adjusted EBITDA
|
$
|
(40.4)
|
|
|
$
|
(18.2)
|
|
|
$
|
(81.7)
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|
|
$
|
(40.6)
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Liquidity and Capital Resources
As of June 30, 2021, we had $1,092.4 million in cash and cash equivalents. From the date we commenced operations, we have generated negative cash flows from operations, and we have financed our operations primarily through private and public sales of equity securities. On January 14, 2021, we issued and sold 3,300,000 shares of common stock, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and other offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock by us, and generated additional net proceeds of $114.6 million. Excluding capital raises, our principal sources of funds are insurance premiums, investment income, reinsurance recoveries and proceeds from the maturity and sale of invested assets. These funds are primarily used to pay claims, operating expenses and taxes. We believe our existing cash and cash equivalents as of June 30, 2021 will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months.
Our cash flows used in operations may differ substantially from our net loss due to non-cash charges or due to changes in balance sheet accounts.
The timing of our cash flows from operating activities can also vary among periods due to the timing of payments made or received. Some of our payments and receipts, including loss settlements and subsequent reinsurance receipts, can be significant. Therefore, their timing can influence cash flows from operating activities in any given period. The potential for a large claim under an insurance or reinsurance contract means that our insurance subsidiaries may need to make substantial payments within relatively short periods of time, which would have a negative impact on our operating cash flows.
We are a holding company that transacts a majority of our business through operating subsidiaries. Consequently, our ability to pay dividends to stockholders, meet debt payment obligations and pay taxes and operating expenses is largely dependent on dividends or other distributions from our subsidiaries and affiliates, whose ability to pay us is highly regulated.
Our U.S. and Dutch insurance company subsidiaries, and our Dutch insurance holding company, are restricted by statute as to the amount of dividends that they may pay without the prior approval of their respective competent regulatory authorities. As of June 30, 2021, cash and short-term investments held by these companies was $168.7 million.
Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As of June 30, 2021, the total adjusted capital of our U.S. insurance subsidiary was in excess of its respective prescribed risk-based capital requirements.
The following table summarizes our cash flow data for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
|
($ in millions)
|
|
Net cash used in operating activities
|
$
|
(56.5)
|
|
|
$
|
(35.3)
|
|
|
Net cash (used in) provided by investing activities
|
$
|
(69.3)
|
|
|
$
|
22.5
|
|
|
Net cash provided by financing activities
|
$
|
648.1
|
|
|
$
|
1.4
|
|
Operating Activities
Cash used in operating activities was $56.5 million for the six months ended June 30, 2021, an increase of $21.2 million from $35.3 million for the six months ended June 30, 2020. This reflected the $47.1 million increase in our net loss, primarily offset by increases in unearned premium, unpaid loss and loss adjustment expense and funds held under reinsurance treaties, that exceeded the increases in premiums receivable, prepaid reinsurance premium and amounts expected to be recovered from our reinsurance partners. The increase in cash used in operating activities from six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to claim payments and settlements with our reinsurance partners.
Cash used in operating activities was $35.3 million for six months ended June 30, 2020. This resulted from our net loss of $57.5 million, partially offset by non-cash charges and net cash provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of non-cash stock-based compensation. Net cash provided by changes in operating assets and liabilities primarily consisted of increases in unearned premiums, unpaid loss and loss adjustment expense and accrued and other liabilities partially offset by increases in premiums receivables and amounts expected to be recovered from our reinsurance partners.
Investing Activities
Cash used in investing activities was $69.3 million for the six months ended June 30, 2021 primarily due to purchases of U.S. government obligations and purchases in property and equipment during the period.
Cash provided by investing activities was $22.5 million for the six months ended June 30, 2020 primarily due to proceeds from the sale or maturity of fixed income securities, offset by purchases of short-term investments and U.S. government obligations and purchases of property and equipment.
Financing Activities
Cash provided by financing activities was $648.1 million for the six months ended June 30, 2021 primarily due to proceeds received from our Follow-on Offering as discussed above and proceeds from stock exercises.
Cash provided by financing activities was $1.4 million for the six months ended June 30, 2020 primarily due to proceeds received from the exercise of stock awards.
We do not have any current plans for material capital expenditures other than current operating requirements. We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least the next 12 months. To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $1,163.9 million in cash and investment securities available at June 30, 2021, including $640.3 million in net proceeds from our Follow-on Offering. We also have the ability to access additional capital through pursuing third-party borrowings, sales of our equity, issuance of debt securities or entrance into new reinsurance arrangements.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations from those described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP in the United States. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to unpaid loss and loss adjustment expense, reinsurance assets, stock-based compensation prior to the Company's IPO, income tax assets and liabilities, including recoverability of our net deferred tax asset, income tax provisions and certain non-income tax accruals. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Our critical accounting policies are described under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2020 and the notes to the unaudited interim condensed financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the six months ended June 30, 2021, there were no material changes to our critical accounting policies from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.
Recently Issued and Adopted Accounting Pronouncements
See “Note 4 — Summary of Significant Accounting Policies” in the Notes to Unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our financial statements.
Election Under the Jumpstart Our Business Startups Act of 2012
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.