Lemonade, Inc. (NYSE: LMND) has released its second quarter 2023 financial results on August 2, 2023.
In their Shareholder Letter, Insurance tech firm Lemonade notes that 2023’s second quarter “delivered better than expected top and bottom lines, as well as reinsurance and growth financing programs which herald a step function improvement in their capital efficiency, enabling both faster growth and deeper cash reserves.”
As noted in the letter to Lemonade’s share holders:
- Top line: At $687 million, in-force premium (IFP) grew by 50% year
over year. - Reinsurance: Our 55% quota share program was reupped and
oversubscribed, with ceding commissions expected to be roughly
equivalent to those under the outgoing agreements. - ‘Synthetic Agents’: We secured customer acquisition cost (CAC)
financing, designed to close the cash-flow gap and unlock cash-friendly
scaling. - Rates: California recently approved a 30% increase in our homeowners
rates, and a 23% increase for Lemonade Pet. Across the board we are
taking more rate, and seeing an acceleration in our rate approvals. We
expect this will register on our loss ratio as new rates ‘earn in’ over the
coming quarters. - Bottom line: At $53 million, Adjusted EBITDA loss came in better than
expected, notwithstanding heightened CAT losses. Net loss for the
quarter was $67 million.
Lemonade’s reinsurance agreement was successfully renewed despite difficult market conditions – one reinsurance market report called it “one of the hardest reinsurance markets in living memory” (The Great Realignment, Howden).
With ceding commissions that are expected “to be roughly inline with our previous deal, at the same cede level, and with the same partners, the new reinsurance program is a vote of confidence from some of the world’s most substantial and respected reinsurers.”
In effect from July 1, 2023 for the standard 12-month term, “the renewed 55% quota share allows Lemonade to continue to operate in a capital-light manner.”
This capital efficiency is “supplemented by two new structures: a new riskbearing entity, Lemonade Re, domiciled in the Cayman Islands, where we plan to hold some of the retained risk, and a captive cell at a Bermuda transformer, where we plan to retain most of our windstorm exposure. ”
‘Capital light’ was also “one of the goals of our newly launched Synthetic Agents program.”
The ratio of their customer lifetime “value to CAC (LTV/CAC) is compelling, yet our direct-to-consumer (DTC) distribution strategy front-loads our costs, making fast growth capital intensive: we must finance 100% of the CAC upfront, and it typically takes ~24 months to realize payback on that spend.”
As noted in the announcement:
“Given today’s elevated cost of capital, these dynamics led us to pull back on growth. By advancing up to 80% of our growth spend each month, our Synthetic Agents (aka, General Catalyst’s Customer Value Fund) will effectively close the ‘cash flow gap’ associated with DTC distribution. This is expected to enable us to nearly double the IRR on our CAC spend, from ~50% to ~90%.”
As covered recently, Lemonade, the digital insurance company powered by AI and social impact, announced it has partnered with General Catalyst (GC), a venture firm and an early investor in Lemonade, in order “to create Synthetic Agents, a novel financial structure that unlocks growth without depleting cash.”
Lemonade claims that it “enjoys strong unit economics – investments in customer acquisition (CAC) are typically repaid three times over – but the initial CAC payback can take a couple of years.”
This ‘cash flow gap’ means “that many opportunities for profitable growth are passed on, pending payback from prior acquisitions.”