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Technology development expense decreased $3.7 million, or 5%, to $64.0 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Employee-related expense, including stock-based compensation, net of capitalized costs for the development of internal-use software, decreased $2.3 million, or 4%, as compared to the nine months ended September 30, 2023. Hosting and development costs also decreased by $0.7 million, or 10%, as compared to the nine months ended September 30, 2023.
General and Administrative
General and administrative expense decreased $9.3 million, or 9%, to $91.0 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. During the third quarter of 2023, we recognized an asset impairment on the right-of-use asset related to the San Francisco office in the amount of $3.7 million and an accrual for a potential liability claim of $3.0 million related to Metromile. Employee-related expense, including stock-based compensation, decreased by $2.4 million, or 6%, as compared to the nine months ended September 30, 2023. Insurance expense decreased $2.1 million, or 48% compared to the nine months ended September 30, 2023. Bad debt expense increased $1.9 million, or 32% compared to the nine months ended September 30, 2023.
Income Tax Expense
Income tax expense increased $1.8 million, or 42%, to $6.1 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due to change in transfer pricing methodology and uncertain tax position.
Net Loss
Net loss decreased $22.3 million, or 11%, to $172.2 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 due to the factors described above.
The following table provides a reconciliation of total revenue and gross profit margin to adjusted gross profit and the related adjusted gross profit margin, respectively, for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
($ in millions)
Total revenue
$
136.6
$
114.5
$
377.7
$
314.3
Adjustments:
Loss and loss adjustment expense, net
$
(77.9)
$
(75.9)
$
(214.3)
$
(215.4)
Other insurance expense
(19.8)
(15.1)
(55.9)
(43.7)
Depreciation and amortization
(1.4)
(1.6)
(4.5)
(4.7)
Gross profit
$
37.5
$
21.9
$
103.0
$
50.5
Gross profit margin (% of total revenue)
27
%
19
%
27
%
16
%
Adjustments:
Net investment income
$
(8.9)
$
(7.0)
$
(24.6)
$
(17.6)
Interest income and other income
(2.7)
(0.7)
(7.2)
(2.2)
Employee-related expense
5.5
4.6
16.0
13.1
Professional fees and other
5.8
4.5
17.0
13.6
Depreciation and amortization
1.4
1.6
4.5
4.7
Adjusted gross profit
$
38.6
$
24.9
$
108.7
$
62.1
Adjusted gross profit margin (% of total revenue)
28
%
22
%
29
%
20
%
Ratio of Adjusted Gross Profit to Gross Earned Premium
We define the Ratio of Adjusted Gross Profit to Gross Earned Premium as the 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 U.S. 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.
40
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:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
($ in millions)
Numerator: Adjusted gross profit
$
38.6
$
24.9
$
108.7
$
62.1
Denominator: Gross earned premium
$
213.1
$
173.2
$
600.9
$
491.3
Ratio of Adjusted Gross Profit to Gross Earned Premium
18
%
14
%
18
%
13
%
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding income tax expense, depreciation and amortization, stock-based compensation, interest expense, interest income and others, net investment income, net realized gains and losses on sale of investments, change in fair value of warrants liability, amortization of fair value adjustment on insurance contract intangible liability relating to the Metromile Acquisition, and other non-cash adjustments 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 U.S. GAAP, and other companies may define adjusted EBITDA differently.
41
The following table provides a reconciliation of adjusted EBITDA to net loss for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
($ in millions)
Net loss
$
(67.7)
$
(61.5)
$
(172.2)
$
(194.5)
Adjustments:
Income tax expense
1.9
1.9
6.1
4.3
Depreciation and amortization
5.1
5.0
15.3
15.2
Stock-based compensation (1)
16.9
15.4
47.2
45.6
Interest expense
1.7
—
3.4
—
Interest income and others
(1.8)
(0.5)
(4.9)
(2.0)
Net investment income
(8.9)
(7.0)
(24.6)
(17.6)
Change in fair value of warrants liability
—
—
—
(0.3)
Amortization of fair value adjustment on insurance contract intangible liability relating to the Metromile acquisition
(0.1)
(0.2)
(0.3)
(1.1)
Other adjustments (2) (3)
3.9
6.7
4.1
6.7
Adjusted EBITDA
$
(49.0)
$
(40.2)
$
(125.9)
$
(143.7)
(1) Includes compensation expense related to warrant shares of $2.0 million and $4.5 million for the three and nine months ended September 30, 2024, respectively, and $0.9 million and $1.5 million for the three and nine months ended September 30, 2023.
(2) Includes impairment charge of $3.7 million related to the San Francisco office sublease (refer to Note 15 of the unaudited condensed consolidated financial statements) and $3.0 million accrual for a potential liability claim, both related to Metromile, for the three and nine months ended September 30, 2023.
(3) Includes $3.9 million extra-contractual car claim liability related to pre-acquisition Metromile, and impairment charge of $0.3 million related to a portion of the New York office sublease (refer to Note 15 of the unaudited condensed consolidated financial statements), net of gain on termination of lease for the three and nine months ended September 30, 2024.
42
Liquidity and Capital Resources
As of September 30, 2024, we had $329.8 million in cash and cash equivalents, and $640.8 million in investments. 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 and third party financing. 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. In June 2023, we entered into an Agreement with GC, where up to $150 million of financing will be provided for our sales and marketing growth efforts through December 31, 2024. The Agreement was amended and restated in January 2024, pursuant to which an additional financing of $140 million will be provided for our sales and marketing growth efforts through December 31, 2025, and was further amended and restated in April 2024 and June 2024 to clarify certain provisions and all material terms and conditions remain unchanged. As of September 30, 2024, we had $67.4 million of outstanding borrowings under the Amended and Restated Agreement with GC. We believe our existing cash and cash equivalents as of September 30, 2024 will be sufficient to meet our working capital, liquidity and capital expenditure needs for at least the next 12 months. This belief is subject, to a certain extent, on general economic, financial, competitive, regulatory and other factors that are beyond our control.
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 September 30, 2024, cash and investments held by these companies was $556.6 million of which $241.2 million is held as regulatory surplus.
Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As of September 30, 2024, the total adjusted capital of our U.S. insurance subsidiaries was in excess of its respective prescribed risk-based capital requirements.
The following table summarizes our cash flow data for the periods presented:
Nine Months Ended September 30,
2024
2023
($ in millions)
Net cash used in operating activities
$
(25.2)
$
(103.0)
Net cash provided by investing activities
$
38.1
$
48.1
Net cash provided by financing activities
$
52.7
$
8.2
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Operating Activities
Cash used in operating activities was $25.2 million for the nine months ended September 30, 2024, a decrease of $77.8 million from $103.0 million for the nine months ended September 30, 2023. This reflected the $22.3 million decrease in our net loss, primarily offset by changes in our operating assets and liabilities. The decrease in cash used in operating activities from the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 was primarily due to claim payments, settlements with our reinsurance partners, and growth and expansion spend of the Company, offset by collection of premiums and recoveries from reinsurance partners.
Investing Activities
Cash provided by investing activities was $38.1 million for the nine months ended September 30, 2024, primarily due to proceeds from sales and maturities of U.S. government obligations, corporate debt securities, asset-backed securities, short term investments offset by purchases of U.S. government obligations, corporate debt securities, asset-backed securities, short term investments. We also purchased property and equipment during the period.
Cash provided by investing activities was $48.1 million for the nine months ended September 30, 2023, primarily due to proceeds from sales and maturities of U.S. government obligations, corporate debt securities, short term investments offset by purchases of U.S. government obligations, corporate debt securities, short term investments. We also purchased property and equipment during the period.
Financing Activities
Cash provided by financing activities was $52.7 million for the nine months ended September 30, 2024, primarily due to borrowings under the financing agreement offset by principal payments. We also had proceeds from stock option exercises during the period.
Cash provided by financing activities was $8.2 million for the nine months ended September 30, 2023, primarily due to proceeds from stock option exercises.
We do not have any current plans for material capital expenditures other than current operating requirements. There have been no material changes as of September 30, 2024 to our contractual obligations from those described in our Annual Report on Form 10-K. To the extent our future operating cash flows are insufficient to cover our net losses from catastrophic events, we had $970.6 million in cash, cash equivalents and investments available at September 30, 2024. We may also seek to raise additional capital through third-party borrowings, sales of our equity, issuance of debt securities or entrance into new reinsurance arrangements. There can be no assurance that we will be able to raise additional capital on favorable terms or at all.
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Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. 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, intangible assets, goodwill impairment analysis, 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 and the notes to the unaudited interim condensed consolidated financial statements appearing elsewhere in this Quarterly Report. During the nine months ended September 30, 2024, there were no material changes to our critical accounting policies from those discussed in our Annual Report on Form 10-K.
Recently Issued and Adopted Accounting Pronouncements
See “Note 4 — Summary of Significant Accounting Policies” in the notes to the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for a discussion of new accounting pronouncements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk, and the primary components of market risk affecting the Company are interest rate risk and credit risk on investments in fixed maturities. The Company does not have equity price risk or exposure to commodity risk. There were no invested assets denominated in foreign currencies.
Overview
The Company’s investment portfolio is primarily fixed income securities issued by the U.S. government and government agencies and corporate issuers with relatively short durations. The investment portfolio is managed in accordance with the investment policies and guidelines approved by the board of directors. The Company’s investment policy and objectives provide a balance between current yield, conservation of capital, and liquidity requirements of the Company’s operations setting guidelines that provide for a well-diversified investment portfolio that is compliant with insurance regulations applicable in the states in which we operate. The policy, which may change from time to time, and is approved by the board of directors and reviewed on a regular basis in order to ensure that the policy evolves in response to changes in the financial markets.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of interest bearing assets and liabilities. Our fixed maturities portfolio is exposed to interest rate risk. Changes in interest rates have a direct impact on the market valuation of these securities. As market interest rates increase, market value of fixed maturities decrease, and vice versa. Certain of our securities are held in an unrealized loss position, and we do not intend to sell and believe we will not be required to sell any of these securities held in an unrealized loss position before its anticipated recovery. A common measure of the interest sensitivity of fixed maturities is modified duration, a calculation that utilizes maturity, coupon rate, yield and call terms to calculate an average age to receive the present value of all the cash flows generated by such assets, including reinvestment of interest. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. We manage this interest rate risk by investing in securities with relatively short durations. In addition, if a 10% change in interest rates were to have immediately occurred on September 30, 2024, this change would not have a material effect on the fair value of our investments as of that date.
Credit Risk
We are also exposed to credit risk on our investment portfolio and reinsurance recoverable. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. The majority of our investment portfolio is invested in high credit quality, investment grade fixed maturity securities. As of September 30, 2024, none of our fixed maturity portfolio was unrated or rated below investment grade. To reduce credit exposure to reinsurance recoverable balances, the Company obtains letters of credit from certain reinsurers that are not authorized as reinsurers under U.S. state insurance regulations. In addition, under the terms of its reinsurance contracts, the Company may retain funds due to reinsurers as security for those recoverable balances. The Company also has reinsurance recoverable balances from reinsurers with all but one having an A.M. Best rating of A (Excellent) or better.
Inflation Risk
Inflationary factors such as increases in overhead costs may adversely affect our operating results. In addition, inflation could lead to higher interest rates which may impact the market value of our investment portfolio. The current short duration of the Company's fixed maturity portfolio minimizes the negative effects of higher interest rates.
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Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our principal executive officer and principal financial officer concluded that, as of September 30, 2024, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
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. See Note 15 to the accompanying unaudited condensed consolidated financial statements for more information
Item 1A. Risk Factors.
The Company's business, results of operations, and financial condition are subject to various risks described in the Company's Annual Report on Form 10-K. There have been no material changes to the risk factors identified in the Company's Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(a) On October 28, 2024, Mwashuma Nyatta tendered his resignation as a director of Lemonade, Inc. (the “Company”), effective October 31, 2024. Mr. Nyatta serves as a Class I director, member of the Audit Committee and member of the Compensation Committee. Mr. Nyatta’s resignation was not the result of any disagreement with the Company on any matter related to the Company’s operations, policies or practices.
On October 28, 2024, the Board, upon the recommendation of its Nominating and Corporate Governance Committee, appointed Maria Angelidis-Smith to the Board effective October 31, 2024. Ms. Angelidis-Smith will serve as a Class I director for a term expiring at the Company’s annual meeting of stockholders to be held in 2027, until her successor is duly elected and qualified or her earlier death, disqualification, resignation or removal. She was also appointed to serve on the Audit Committee and the Compensation Committee, in each case to replace Mr. Nyatta, effective October 31, 2024.
Ms. Angelidis-Smith is eligible to participate in the Company’s Non-Employee Director Compensation Policy, which provides for: (i) an annual cash retainer of $30,000 for serving on the Board, earned on a quarterly basis; (ii) an annual cash retainer of $5,000 for serving as a member of the Compensation Committee and an annual cash retainer of $7,500 for serving as a member of the Audit Committee, each earned on a quarterly basis; (iii) an initial equity-based award of restricted stock units (the “Initial Award”) in an amount equal to $175,000 that vests in equal annual installments over three years following the grant date, subject to Ms. Angelidis-Smith’s continued service on the Board through each such vesting date; and (iv) following each annual meeting of the Company’s stockholders, an annual equity-based award of restricted stock units in an amount of $150,000 that vests on the first anniversary of the date of grant, subject to Ms. Angelidis-Smith’s continued service on the Board through such vesting date.
Ms. Angelidis-Smith has entered into the Company’s standard indemnification agreement for directors and officers.
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There is no arrangement or understanding pursuant to which Ms. Angelidis-Smith was appointed to the Board. There are no family relationships between Ms. Angelidis-Smith and any director or executive officer of the Company as defined in Item 401(d) of Regulation S-K, and Ms. Angelidis-Smith has no direct or indirect material interest in any transaction or proposed transaction required to be disclosed pursuant to Item 404(a) of Regulation S-K.
(b) None.
(c) On August 30, 2024, John Peters, our Chief Insurance Officer, adopted a Rule 10b5-1 trading arrangement that is intended to satisfy the affirmative defense of Rule 10b5-1(c) for the sale of up to 117,955 shares of the Company’s common stock until August 29, 2025. Except for the foregoing, during the three months ended September 30, 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
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