Lemonade announced earnings and guidance in their Q4 2020 shareholder letter.

Here we offer some key takeaways and analysis:

1. Lemonade beat analyst estimates on earnings per share (EPS) and revenue.

Lemonade beat earnings per share (EPS) estimates by 4 cents. Lemonade had a Q4 loss of $33.9 million, or 60 cents per share; analysts estimated an earnings per share (EPS) loss of 64 cents per share. Lemonade also beat estimates on Q4 revenue by $1.3 million. Lemonade had a Q4 revenue of $20.5 million; analysts forecasted Q4 revenue of $19.2 million for Lemonade.

2. Despite beating analyst estimates, Lemonade’s stock still fell 4.5% in after-hours trading because of an underwhelming forecast for Q1 2021.

Analysts had forecasted revenue of $22.1 million for Q1 2021, but Lemonade offered guidance of between $21.5 and $22.5 million in revenue. 

The forecasted revenue dip for Q1 2021 should probably be explained by claims paid related to the Texas winter storms, which continue to wreak havoc among homeowners in Texas.

A large portion of Lemonade customers are from Texas. In a February 17 blog post, Lemonade was proactive for their Texas customers in explaining what exactly is and is not covered by Lemonade homeowner's insurance, producing a clear FAQ to re-assure their customers.

Lemonade also addressed the Texas winter storms in the shareholder letter (page 12). Lemonade writes: “We prepared our Claims Experience (CLX) teams to rapidly switch to our CAT [catastrophe] operational process, and within days received and processed thousands of claims. In such unprecedented circumstances, we’re proud that our teams and tech rose to the occasion and provided the care, support, and funds quickly and empathetically.”

Here is the full statement:

Statement on the Texas Winter Storms in Lemonade’s Shareholder Letter

3. Lemonade’s two-fold business strategy seems to be working: (a) they are “growing up” with renters who become homeowners and (b) they are growing in “cross sales” (namely, multi-policy holders).

Since their beginning, Lemonade has aimed to reach Millennial renters who will purchase cheap policies ($5 per month), then “grow up” with them as they move into homes and switch to more expensive policies (see pages 2-3 in Lemonade’s SEC filing). Lemonade has also aimed to expand to new types of insurance (pet insurance, life insurance) and to earn “cross sales” when existing customers add these new types of insurance.

On both strategies, Lemonade says they are growing:

  • Lemonade reported a premium per customer of $213, up 20% year-over-year (YoY). Lemonade explains: “This metric is important as it captures two areas of focus: (1) diversifying our mix of new business across a broader suite of products, and (2) expanding coverage within our existing customer base.”
  • Lemonade reported 250% year-over-year (YoY) growth in renters who shifted to more expensive homeowner policies. Lemonade reported that about ⅓ of in-force premium (IFP) was from non-renters in 2020, compared to ¼ in 2019.
  • Lemonade reported that growth in multi-policy holders vs. single policy holders had increased 5x. 
  • Lemonade reported that 50% of its pet insurance in-force premium (IFP) was generated from existing customers adding on pet insurance.
  • While Lemonade has only recently begun offering life insurance, Lemonade reported that about 50% of new life insurance policies are existing customers adding on.

4. Lemonade’s gross loss ratio is probably its most important metric for predicting their growth towards profitability; Lemonade did not decrease its gross loss ratio in Q4 2020.

A company’s gross loss ratio “is insurance claims paid plus adjustment expenses divided by total earned premiums. For example, if a company pays $80 in claims for every $160 in collected premiums, the loss ratio would be 50%” (source: Investopedia). Good underwriting and accurate predicting of customer risk will decrease gross loss ratio. Thus, Lemonade’s gross loss ratio is a major test of the underwriting ability of their artificial intelligence (AI) -- if Lemonade’s AI is improving, their loss ratio will continue to fall.

For Q4 2020, Lemonade reported a gross loss ratio of 73%, which is exactly the same as Q4 2019. However, Lemonade was still able to report a gross loss ratio of 71% for all of 2020, which is still a 10% year-over-year (YoY) decrease from 2019.

Image: Lemonade

While this still sounds like bad news, Lemonade actually explains in the shareholder letter that their situation is not as bad as it sounds. Underwriting tends to be poor with new customers, new products, and new geographies -- but improves over time. And in 2020, Lemonade expanded into new geographies and offered a new product (pet insurance), so they had very little data to do their underwriting. If Lemonade’s gross loss ratio had increased from 2019, that would be cause for concern. However, in their 2020 situation of new products and new geographies, Lemonade’s lack of decreasing gross loss ratio is less concerning. Lemonade claims, “our systems have a track record of turning data handicaps into data advantages fairly fast” -- so we should watch closely for a falling gross loss ratio in 2021.

Article Summary

1. Lemonade beat earnings per share (EPS) and revenue estimates.

2. Q1 2021 revenues will probably decrease because of payouts to customers affected by the Texas winter storms. This has caused Lemonade's stock to drop, although it should not be a long-term concern.

3. Lemonade is executing on their two-fold business strategy: (a) they are seeing growth in renters who transition to homeowners insurance and (b) they are seeing growth in multi-policy holders.

4. Lemonade had no change in gross loss ratio compared to Q4 2019, but this is not concerning when we take into account new products launched and geographic expansion in 2020. Underwriting is always weak at first, but gets better as more data is gathered.