Lemonade, Inc. (NYSE: LMND) has released its first quarter 2023 financial results.
The Q1 2023 financial results were shared by Lemonade in the Letter to Shareholders and can be accessed via the company’s investor relations section.
As covered, Lemonade reportedly “offers renters, homeowners, car, pet, and life insurance.”
Powered by artificial intelligence and social impact, Lemonade’s full stack insurance carriers in the US and the EU “replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything.”
A Certified B-Corp, Lemonade explains that it “gives unused premiums to nonprofits selected by its community, during its annual Giveback.”
Lemonade is currently “available in the United States, Germany, the Netherlands, France, and the UK, and continues to expand globally.”
As noted in the letter to the firm’s shareholders, the first quarter of 2023 “was strong, clocking solid performance across their key metrics.”
Notwithstanding persistent inflation and heightened frequency of severe weather events, the primary dials with which they monitor their business all moved in the “right” direction:
- Growing Top Line – In Force Premium (“IFP”) topped $653 million, a 56% – or $234 million – increase YoY.
- Declining Loss Ratio – Gross loss ratio was 87%, down from 89% in Q4 and 94% in Q3 22.
- Strong unit economics – Annual Dollar Retention (“ADR”) hit a new all-time-high of 87%, up 5 percentage points YoY, while Premium Per Customer jumped 26%.
- Improving Bottom Line – At ($51) million, Adjusted EBITDA saw an 11% improvement YoY, while Net Loss, at ($66) million, registered a 12% improvement.
Three bits of commentary:
- Their loss ratio continued its downward journey despite the unseasonably high number of catastrophic weather events (“CAT”) in Q1. Indeed, an ex-CAT picture shows that their underlying loss ratio is improving faster than their headline loss ratio suggests. While they have line of sight to their target loss ratios, they believe this destination is still several quarters away. As outlined previously, they will continue to constrain their growth until their loss ratio is within that range.
- Despite their reiterated intention to proactively slow growth until more of their price changes are approved, as their Q1 results and Q2 guidance demonstrate, they haven’t mastered this maneuver quite yet. While they aim to slow down further as the year progresses, they are modestly raising their IFP guidance for the year, from $695m-$700m to $700m-$705m.
- The quarter’s sizable and concurrent improvements in both top and bottom lines evidence considerable progress along their path to profitability. Accordingly, they are now projecting a significant improvement to Adjusted EBITDA, and are raising our annual guidance from ($245m-$240m) to ($205m-$200m).
Lemonade also mentioned that it is “in vogue to talk-up AI in earnings calls, though for Lemonade the power of AI and chatbots isn’t a recent revelation – it’s the foundation upon which their company was founded.”
Lemonade launched “in the fall of 2016, and three months later they claimed a new world record when ‘AI-Jim’ paid a theft claim in 3 seconds.” At the time, they spotlighted how AI “works at the speed of light, 24/7, but costs only a few pennies in electricity bills” enabling both “the best service” and “the best price tag.”
Today, close to half their claims are settled this way.
In 2017 they wrote “The Rise Of The Autonomous Organization”, outlining how organizations like ours will use AI to unchain revenue growth from headcount growth, “with AI taking over ever more repetitive and time consuming tasks.”
At the same time they also published “AI Eats Insurance: Exactly why Artificial Intelligence will transform insurance, and exactly how,” outlining their vision “for how AI not only provides superior service at a lower cost, but how it will ultimately transform the core of insurance: quantifying and selecting risk.”
As noted in the update:
“In the intervening years we’ve made huge strides in realizing this vision, and
during our November 2022 Investor Day, we shared how our LTV6 model –
approximately a million-parameter AI able to predict churn, claims and cross
sells for every prospect – is already offering unprecedented levels of insight
and precision. We’ve since upgraded LTV7, with LTV8 expected later this
quarter. While insurance has a built in time-lag (AI’s findings are
reconstituted as regulatory filings, which are then reviewed, approved, and
begin to earn in) – the impact of these technologies is increasingly evident in
our results.”
The broad, recent excitement around AI is on point.
Their competitors presumably share in this excitement, “but unless they built their company for this moment, we expect its impact will be somewhat muted.”
Broker-based distribution, “siloed systems, disparate databases, and a motley collection of off-the-shelf applications – all these are kryptonite for AI.”
As mentioned in the announcement:
“In contrast, Lemonade was built for this moment. Eight years ago, at our founding, we made a bet on chat interfaces, AI and bots. We posited that if we built our company atop these technologies, as they advance, our structural advantage would grow in tandem. We architected our company accordingly: our pricing is the product of machine learning, our knowledge base is stored in vector databases, our tech stack is API based, ours is an engineering culture, and we sell almost all of our policies and assimilate almost all of our claims, using chat and AI. Generative AI, in short, is not a course change for us – it’s an accelerant along the very course we set at our inception.”
For now, the firm wants “to highlight their assessment that in the coming 18 months we expect to see meaningful savings in our cost structure.”
They have “identified over 100 business processes that generative AI can automate and improve, and prototyped dozens of them already.”
To be sure, generative AIs still “have issues and so they will be thoughtful as to where and how we integrate them into our production environment.”
They will always “prioritize ensuring their use of AI adheres to high compliance and fairness standards.”
As explained in the letter:
“Nevertheless, the first of our generative-AI-based automations will make their way into production within weeks, and we expect the benefits of these, as well as subsequent rollouts, to be somewhat impactful on our financials late this year (already reflected in our updated Adjusted EBITDA guidance), and more significantly impactful in 2024 and beyond.”