1. Demand
**In the 3rd quarter of 2020, Lemonade conducted an accounting change to cede 75% of its premiums to reinsurers (while retaining a 25% commission). This prevented the company from recognizing these ceded premiums as revenues, thus making year over year revenue comparisons apples and oranges. We will lap the change after next quarter when revenue growth will again become relevant.
These results beat the high point of the company’s guide across the board, including:
- A 3.1% high point in force premium (IFP) beat
- A 3% high point gross earned premium (GEP) beat
- A 4.4% high point revenue beat
The company plans to gradually reduce the portion of premiums ceded to reinsurers over time as its book grows and matures. It did so this quarter by cutting its ceded premium rate from 75% to 70%. Lemonade has the flexibility to reduce it down to 55% throughout the course of its current 3 year contract.
This marks the 3rd straight quarter of accelerating IFP growth. Lemonade also posted its 4th straight quarter of accelerating premium per customer growth pointing to insurance products outside of renters continuing to proliferate for the organization. The 29% increase in premium per customer is its largest quarterly jump in the metric to date.
2. Profitability
The company guided to ($43)-($40) million in adjusted EBITDA. It posted in-line results of ($40.4) million.
The gross loss ratio increase was powered by new products making up a larger portion of new business. These products have a higher loss ratio at launch with that ratio falling over time.
Gross profit margin benefited from the ceded premium accounting change highlighted above.
Adjusted EBITDA and Net Income margins suffered from the ceded premium accounting change highlighted above.
3. Guide Updates
4. Shareholder Letter
a. The Product Mix
Renters represented 50% of the company’s new premiums during the quarter. This was down from 75% in the year over year period and stable sequentially. This change has been fostered by up-selling renters and the cross-selling of pet and life.
Last year, renters policies made up 75% of Lemonade’s total business. That number fell to 56% this quarter as higher premium channels continued to rapidly grow.
