LEMONADE, INC. 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q (the "Quarterly Report") and Annual Report on Form 10-K for the year endingDecember 31, 2021 (the "Annual Report on Form 10-K"). The discussion and analysis below includes forward-looking statements that are subject to risks, uncertainties and other factors described in the "Risk Factors" section of our Annual Report that could cause actual results to differ materially from such forward-looking statements. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. In this Quarterly Report, unless we indicate otherwise or the context requires, "Lemonade, Inc. ," "Lemonade," "the company," "our company," "the registrant," "we," "our," "ours" and "us" refer toLemonade, Inc. and its consolidated subsidiaries, includingLemonade Insurance Company andLemonade Insurance Agency, LLC .
Our Business
Lemonade is rebuilding insurance from the ground up on a digital substrate and an innovative business model. By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, we believe we are making insurance more delightful, more affordable, more precise, and more socially impactful. To that end, we have built a vertically-integrated company with wholly-owned insurance carriers inthe United States andEurope , and the full technology stack to power them. A brief chat with our bot, AI Maya, is all it takes to get covered with renters, homeowners, pet, car or life insurance, and we expect to offer a similar experience for other insurance products over time. Claims are filed by chatting with another bot, AI Jim, who pays claims in as little as three seconds. This breezy experience belies the extraordinary technology that enables it: a state-of-the-art platform that spans marketing to underwriting, customer care to claims processing, finance to regulation. Our architecture melds artificial intelligence with the human kind, and learns from the prodigious data it generates to become ever better at delighting customers and quantifying risk. In addition to digitizing insurance end-to-end, we also reimagined the underlying business model to minimize volatility while maximizing trust and social impact. In a departure from the traditional insurance model, where profits can literally depend on the weather, we typically retain a fixed fee, currently 25% of premiums, and our gross margin is expected to change little in good years and in bad. At Lemonade, excess claims are generally offloaded to reinsurers, while excess premiums are usually donated to nonprofits selected by our customers as part of our annual "Giveback". These two ballasts, reinsurance and Giveback, reduce volatility, while creating an aligned, trustful, and values-rich relationship with our customers. Lemonade's cocktail of delightful experience, aligned values, and great prices enjoys broad appeal, while over indexing on younger and first time buyers of insurance. As these customers progress through predictable lifecycle events, their insurance needs typically grow to encompass more and higher-value products: renters regularly acquire more property and frequently upgrade to successively larger homes; home buying often coincides with a growing household and a corresponding need for life or pet insurance, and so forth. These progressions can trigger orders-of-magnitude increases in insurance premiums. The result is a business with highly-recurring and naturally-growing revenue streams; a level of automation that we believe delights consumers while collapsing costs; and an architecture that generates and employs data to price and underwrite risk with ever-greater precision to the benefit of our company, our customers and their chosen nonprofits.
Acquisition of Metromile
OnNovember 8, 2021 , Lemonade entered into a definitive agreement ("Metromile Agreement") to acquire Metromile, Inc. ("Metromile"). Pursuant to the terms of the Metromile Agreement, the Company will acquire 100% of the equity of Metromile, through an all stock transaction that implies a fully diluted equity value of$500.0 million , or over$200.0 million net of cash (based upon the conversion ratio of 19 shares of Metromile for 1 share of Lemonade). The transaction is expected to close in the second quarter of 2022 subject to customary closing conditions and approvals. 22 -------------------------------------------------------------------------------- Metromile is a leading digital insurance platform inthe United States . With data science at its foundation, Metromile offers real-time, personalized auto insurance policies by the mile instead of the industry's reliance on approximations that have historically made prices unfair. Metromile's digitally native offering is built around the modern driver's needs, featuring automated claims and complementary smart driving features. In addition, through Metromile Enterprise, Metromile licenses its technology platform to insurance companies around the world. Metromile's cloud-based software as a service enables carriers to operate with greater efficiency, automate claims to expedite resolution, reduce losses associated with fraud, and unlock the productivity of employees.
Key Factors and Trends Affecting our Operating Results
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
Seasonality
Seasonal patterns can impact both our rate of customer acquisition and the incurrence of claims and losses.
Based on historical experience, existing and potential customers move more frequently in the third quarter, compared to the rest of the calendar year. As a result, we may see greater demand for new or expanded insurance coverage, and increased online engagement resulting in proportionately more growth during the third quarter. We expect that as we grow our customers, expand geographically and launch new products, the impact of seasonal variability on our rate of growth may decrease. Additionally, seasonal weather patterns impact the level and amount of claims we receive. These patterns include hurricanes, wildfires, and coastal storms in the fall, cold weather patterns and changing home heating needs in the winter, and tornados and hailstorms in the spring and summer. The mix of geographic exposure and products within our customer base impacts our exposure to these weather patterns.
COVID-19 Impact
The COVID-19 pandemic has severely impacted businesses worldwide, including many in the insurance sector. Insurers of travel, events or business interruption may be directly and adversely affected by claims from COVID-19 or the lock-down it engendered. Other insurers, in lines of business that are not directly impacted by COVID-19, may nevertheless be dependent on office-based brokers, in-person inspections, or teams that are poorly equipped to work from home - all of which can translate into value erosion. Finally, the broader financial crisis may hurt insurers in other ways, too. With interest rates at near all-time lows, many insurers may see their return on capital drop; while those selling premium or discretionary products may see an increase in churn and a decrease in demand.
Against this backdrop it is noteworthy that our business has continued to grow, and the key drivers of our business have continued their positive progress, despite the pandemic.
•Lemonade writes insurance in lines that have so far been largely unaffected by COVID-19, or indeed, historically, by recession.
•Our systems are entirely cloud based and accessible to our teams from any browser anywhere in the world. customers' phone calls are routed to our team's laptops, and answered and logged from wherever they happen to be. Internal communication has been via Slack and Zoom since our founding. The upshot is that while we all enjoy each other's company, our teams are able to access systems, support customers and collaborate with each other from anywhere, much as they did before the pandemic.
•Our customers' experience with Lemonade is likewise largely unaffected by the turmoil, as AI Maya and AI Jim chat with customers, wherever they may be, without triggering concerns about social distancing.
This resilience is reflected in our results in which as ofMarch 31, 2022 , our in force premium, or IFP, was about 66% higher than it was onMarch 31, 2021 . For information regarding how we calculate IFP, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -Key Operating and Financial Metrics - In Force Premium." 23 -------------------------------------------------------------------------------- While the global economy began to reopen in the first quarter of 2021 and continues to show positive economic growth in theU.S. as the vaccination roll-out has reduced the spread and severity of COVID-19 and variants of the virus, there remains to be an uncertainty about the duration and ultimate impact of COVID-19 and variants of the virus, including the length of time needed to vaccinate a significant segment of the global population and effectiveness of the vaccines with respect to the new variants of the virus. Management continues to monitor and cannot definitively determine the ultimate financial impact of COVID-19 and variants of the virus, and the related economic conditions at this time. With respect to our investment portfolio which showed a diversified mix of securities beginning in the third quarter of 2021, and given the conservative nature of our portfolio and investment in high-quality securities, we do not expect a material adverse impact in the value of our investment portfolio, or long-term negative impact on our financial condition, results of operations or cash flows as it relates to COVID-19 and variants of the virus. See "Risk Factors - Risks Relating to our Industry - Severe weather events and other catastrophes, including the effects of climate change and global pandemics, are inherently unpredictable and may have a material adverse effect on our financial results and financial condition." in our Annual Report on Form 10-K. Reinsurance We obtain reinsurance to help manage our exposure to property and casualty insurance risks. Although our reinsurance counterparties are liable to us according to the terms of the reinsurance policies, we remain primarily liable to our policyholders as the direct insurers on all risks reinsured, see "Risk Factors - Risks Relating to Our Business" and "Risks relating to our Industry" in our Annual Report on Form 10-K. As a result, reinsurance does not eliminate the obligation of our insurance subsidiaries to pay all claims, and we are subject to the risk that one or more of our reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts, each of which could have a material effect on our results of operations and financial condition. Furthermore, reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business. ThroughJune 30, 2021 , we had proportional reinsurance covering 75% of our business. Under the proportional reinsurance contracts, which cover all of our products and geographies, we transferred, or "ceded," 75% of our premium to our reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers paid us a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all our claims. This arrangement mirrors our fixed fee, and hence shields our gross profit margin, from the volatility of claims, while boosting our capital efficiency dramatically. We opted to manage the remaining 25% of our business with alternative forms of reinsurance. A portion of Lemonade's proportional reinsurance program expired onJune 30, 2021 . We renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements. As the business continued to grow and diversify, and with stability in our insurance results, we decreased the overall share of proportional reinsurance from 75% of premium to 70%. In addition, we purchased a new reinsurance program to protect us against natural catastrophe risk in theU.S. that exceed$60 million in losses. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts. 24 --------------------------------------------------------------------------------
Components of our Results of Operations
Revenue
Gross Written Premium
Gross written premium is the amount received, or to be received, for insurance policies written by us during a specific period of time without reduction for premiums ceded to reinsurance. The volume of our gross written premium in any given period is generally influenced by new business submissions, binding of new business submissions into policies, renewals of existing policies, and average size and premium rate of bound policies.
Ceded Written Premium
Ceded written premium is the amount of gross written premium ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. Ceded written premium is earned over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded written premium is impacted by the level of our gross written premium and any decision we make to increase or decrease in reinsurance limits, retention levels and co-participation. Our ceded written premium can also be impacted significantly in certain periods due to changes in reinsurance agreements. In periods where we start or stop ceding a large volume of our premium, ceded written premium may increase or decrease significantly compared to prior periods and these fluctuations may not be indicative of future trends.
Gross Earned Premium
Gross earned premium represents the earned portion of our gross written premium. Our insurance policies generally have a term of one year and premium is earned pro rata over the term of the policy.
Ceded Earned Premium
Ceded earned premium is the amount of gross earned premium ceded to reinsurers.
Net Earned Premium
Net earned premium represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Premium is earned pro rata over the term of the policy, which is generally one year. Ceding Commission Income Ceding commission income is commission we receive based on the premium ceded to third-party reinsurers to reimburse us for acquisition and underwriting expenses. We earn commissions on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro-rata basis over the terms of the policies reinsured. The portion of ceding commission income which represents reimbursement of successful acquisition costs related to the underlying policies is recorded as an offset to other insurance expense.
Net Investment Income
Net investment income represents interest earned from fixed maturity securities,
short term securities and other investments, and the gains or losses from the
sale of investments, net of investment fees paid to the Company's investment
manager. Our cash and invested assets are primarily comprised of fixed-maturity
securities, and may also include cash and cash equivalents, equity securities
and short-term investments. The principal factors that influence net investment
income are the size of our investment portfolio and the yield on that portfolio.
As measured by amortized cost (which excludes changes in fair value, such as
changes in interest rates), the size of our investment portfolio is mainly a
function of our invested equity capital along with premium we receive from our
customers less payments on customer claims. Over time, we expect that net
investment income will represent a more meaningful component of our results of
operations.
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--------------------------------------------------------------------------------Commission and Other Income
Commission income consists of commissions earned for policies placed with third-party insurance companies where we have no exposure to the insured risk. Such commission is recognized on the effective date of the associated policy. Other income consists of fees collected from policyholders relating to installment premiums. These fees are recognized at the time each policy installment is billed.
Expense
Loss and Loss Adjustment Expense, Net
Loss and loss adjustment expense ("LAE"), net represent the costs incurred for
losses net of amounts ceded to reinsurers. We enter into reinsurance contracts
to limit our exposure to potential losses as well as to provide additional
capacity for growth. These expenses are a function of the size and term of the
insurance policies we write and the loss experience associated with the
underlying risks. Loss and LAE are based on an actuarial analysis of the
estimated losses, including losses incurred during the period and changes in
estimates from prior periods. Loss and LAE may be paid out over a period of
years. Certain policies we write are subject to catastrophe losses. Catastrophe
losses are losses resulting from events involving claims and policyholders,
including earthquakes, hurricanes, floods, storms, terrorist acts or other
aggregating events that are designated by internationally recognized
organizations, such as Property Claims Services, that track and report on
insured losses resulting from catastrophic events.
Other Insurance Expense
Other insurance expense consists primarily of amortization of commissions costs and premium taxes incurred on the successful acquisition of business written on a direct basis, and credit card processing fees not charged to our customers. Other insurance expense also includes employee compensation, including stock-based compensation and benefits, of our underwriting teams as well as allocated occupancy costs and related overhead based on headcount. Other insurance expense is offset by the portion of ceding commission income which represents reimbursement of successful acquisition costs related to the underlying policies.
Sales and Marketing
Sales and marketing includes third-party marketing, advertising, branding, public relations and sales expenses. Sales and marketing also includes associated employee compensation, including stock-based compensation and benefits, as well as allocated occupancy costs and related overhead based on headcount. Sales and marketing costs are expensed as incurred.
We plan to continue to invest in sales and marketing to attract and acquire new customers and increase our brand awareness. We expect that sales and marketing costs will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue in the near-term. We expect that, in the long-term, our sales and marketing costs will decrease as a percentage of revenue as we continue to drive customer acquisition efficiencies and as the proportion of renewals to our total business increases.
Technology development consists of employee compensation, including stock-based
compensation and benefits, and expenses related to vendors engaged in product
management, design, development and testing of our websites and products.
Technology development also includes allocated occupancy costs and related
overhead based on headcount. We expense technology development costs as
incurred, except for costs that are capitalized related to internal-use software
development projects and subsequently depreciated over the expected useful life
of the developed software.
We expect product technology development costs, a portion of which will be
capitalized, to continue to grow in the foreseeable future as we identify
opportunities to invest in the development of new products and internal tools
and enhancement of our existing products and technologies that we believe will
drive the long-term profitability of the business.
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--------------------------------------------------------------------------------General and Administrative
General and administrative includes employee compensation, including stock-based compensation and benefits for executive, finance, accounting, legal, business operations, and other administrative personnel. In addition, general and administrative includes outside professional services, non-income based taxes, insurance, charitable donations, and allocated occupancy costs and related overhead based on headcount. Depreciation and amortization expense is recorded as a component of general and administrative. We expect to incur incremental general and administrative costs to support our global operational growth and enhancements to support our reporting and planning functions. We have incurred and expect to continue to incur significant additional general and administrative expense as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of the NYSE, additional corporate, director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. We also expect to increase the size of our general and administrative function to support our increased compliance requirements and the growth of our business. As a result, we expect that our general and administrative expense will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue.
Income Tax Expense
Our provision for income taxes consists primarily of foreign income taxes related to income generated by our subsidiaries organized under the laws ofthe Netherlands andIsrael . As we expand the scale of our international business activities, any changes in theU.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future. We have a valuation allowance for ourU.S. deferred tax assets, including federal and state net operating losses. We expect to maintain this valuation allowance until it becomes more likely than not, that the benefit of our federal and state deferred tax assets will be realized through expected future taxable income inthe United States . 27 --------------------------------------------------------------------------------
Key Operating and Financial Metrics
We regularly review a number of metrics, including the following key operating
and financial metrics, to evaluate our business, measure our performance,
identify trends in our business, prepare financial projections and make
strategic decisions. We believe these non-GAAP and operational measures are
useful in evaluating our performance, in addition to our financial results
prepared in accordance with GAAP. See "-Non-GAAP Financial Measures" for
additional information on non-GAAP financial measures. and a reconciliation to
the most comparable GAAP measures.
The following table sets forth these metrics as of and for the periods
presented:
Three Months Ended March 31,
2022 2021
($ in millions, except
Premium per customer)
Customers (end of period) 1,504,197 1,096,618
In force premium (end of period) $ 419.0 $ 251.7
Premium per customer (end of period) $ 279 $ 229
Annual dollar retention (end of period) 82 % 81 %
Total revenue $ 44.3 $ 23.5
Gross earned premium $ 96.0 $ 56.2
Gross profit $ 10.2 $ 1.9
Adjusted gross profit $ 16.3 $ 5.0
Net loss $ (74.8) $ (49.0)
Adjusted EBITDA $ (57.4) $ (41.3)
Gross profit margin 23 % 8 %
Adjusted gross profit margin 37 % 21 %
Ratio of Adjusted Gross Profit to Gross Earned Premium 17 % 9 %
Gross loss ratio 90 % 121 %
Net loss ratio 89 % 120 %
Customers
We define customers as the number of current policyholders underwritten by us or
placed by us with third-party insurance partners (who pay us recurring
commissions) as of the period end date. A customer that has more than one policy
counts as a single customer for the purposes of this metric. We view customers
as an important metric to assess our financial performance because customer
growth drives our revenue, expands brand awareness, deepens our market
penetration, creates additional upsell and cross-sell opportunities and
generates additional data to continue to improve the functioning of our
platform.
In Force Premium
We define in force premium ("IFP"), as the aggregate annualized premium for customers as of the period end date. At each period end date, we calculate IFP as the sum of:
i)In force written premium - the annualized premium of in force policies underwritten by us; and
ii)In force placed premium - the annualized premium of in force policies placed
with third party insurance companies for which we earn a recurring commission
payment. In force placed premium currently reflects approximately 2% of IFP.
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The annualized value of premiums is a legal and contractual determination made
by assessing the contractual terms with our customers. The annualized value of
contracts is not determined by reference to historical revenues, deferred
revenues or any other GAAP financial measure over any period. IFP is not a
forecast of future revenues nor is it a reliable indicator of revenue expected
to be earned in any given period. We believe that our calculation of IFP is
useful to analysts and investors because it captures the impact of growth in
customers and premium per customer at the end of each reported period, without
adjusting for known or projected policy updates, cancellations, rescissions and
non-renewals. We use IFP because we believe it gives our management useful
insight into the total reach of our platform by showing all in force policies
underwritten and placed by us. Other companies, including companies in our
industry, may calculate IFP differently or not at all, which reduces the
usefulness of IFP as a tool for comparison.
Premium per customer
We define premium per customer as the average annualized premium customers pay for products underwritten by us or placed by us with third-party insurance partners. We calculate premium per customer by dividing IFP by customers. We view premium per customer as an important metric to assess our financial performance because premium per customer reflects the average amount of money our customers spend on our products, which helps drive strategic initiatives.
Annual Dollar Retention
We define Annual Dollar Retention ("ADR"), as the percentage of IFP retained
over a twelve month period, inclusive of changes in policy value, changes in
number of policies, changes in policy type, and churn. To calculate ADR we first
aggregate the IFP from all active customers at the beginning of the period and
then aggregate the IFP from those same customers at the end of the period. ADR
is then equal to the ratio of ending IFP to beginning IFP. We believe that our
calculation of ADR is useful to analysts and investors because it captures our
ability to retain customers and sell additional products and coverage to them
over time. We view ADR as an important metric to measure our ability to provide
a delightful end-to-end customer experience, satisfy our customers' evolving
insurance needs and maintain our customers' trust in our products. Our customers
become more valuable to us every year they continue to subscribe to our
products. Other companies, including companies in our industry, may calculate
ADR differently or not at all, which reduces the usefulness of ADR as a tool for
comparison.
Gross Earned Premium
Gross earned premium is the earned portion of our gross written premium.
We use this operating metric as we believe it gives our management and other users of our financial information useful insight into the gross economic benefit generated by our business operations and allows us to evaluate our underwriting performance without regard to changes in our underlying reinsurance structure. See "- Components of Our Results of Operations - Revenue - Gross Earned Premium." Unlike net earned premium, gross earned premium excludes the impact of premiums ceded to reinsurers, and therefore should not be used as a substitute for net earned premium, total revenue, or any other measure presented in accordance with GAAP. Gross Profit Gross profit is calculated in accordance with GAAP as total revenue less loss and loss adjustment expense, net, other insurance expense, and depreciation and amortization (allocated to cost of revenue).
Adjusted Gross Profit
We define adjusted gross profit, a non-GAAP financial measure, as:
•Gross profit, excluding net investment income, plus
•Employee-related costs, plus
•Professional fees and other, plus
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--------------------------------------------------------------------------------•Depreciation and amortization (allocated to cost of revenue).
•See "- Non-GAAP Financial Measures" for a reconciliation of total revenue to adjusted gross profit.
Adjusted EBITDA We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding the impact of interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income and other transactions that we consider to be unique in nature. See "- Non-GAAP Financial Measures" for a reconciliation of net loss to adjusted EBITDA in accordance with GAAP.
Gross Profit Margin
We define gross profit margin, expressed as a percentage, as the ratio of gross profit to total revenue.
Adjusted Gross Profit Margin We define adjusted gross profit margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to total revenue. See "- Non-GAAP Financial Measures."
Ratio of Adjusted Gross Profit to Gross Earned Premium
We define Ratio of Adjusted Gross Profit to Gross Earned Premium, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to gross earned premium. Our Ratio of Adjusted Gross Profit to Gross Earned Premium provides management with useful insight into our operating performance. See "- Non-GAAP Financial Measures."
Gross Loss Ratio
We define gross loss ratio, expressed as a percentage, as the ratio of losses and loss adjustment expense to gross earned premium.
Net Loss Ratio
We define net loss ratio, expressed as a percentage, as the ratio of losses and loss adjustment expense, less amounts ceded to reinsurers, to net earned premium.
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--------------------------------------------------------------------------------Results of Operations
Comparison of the Three Months Ended
Three Months Ended March 31,
2022 2021 Change % Change
($ in millions)
Revenue
Net earned premium $ 27.4 $ 13.8 $ 13.6 99 %
Ceding commission income 14.0 9.0 5.0 56 %
Net investment income 0.9 0.2 0.7 350 %
Commission and other income 2.0 0.5 1.5 300 %
Total revenue 44.3 23.5 20.8 89 %
Expense
Loss and loss adjustment expense, net 24.4 16.5 7.9 48 %
Other insurance expense 9.1 4.8 4.3 90 %
Sales and marketing 38.3 29.1 9.2 32 %
Technology development 16.9 7.1 9.8 138 %
General and administrative 28.2 14.1 14.1 100 %
Total expense 116.9 71.6 45.3 63 %
Loss before income taxes (72.6) (48.1) (24.5) 51 %
Income tax expense 2.2 0.9 1.3 144 %
Net loss $ (74.8) $ (49.0) $ (25.8) 53 %
Net Earned Premium
Net earned premium increased $13.6 million , or 99%, to $27.4 million for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 , primarily due to the earning of increased gross written premium and
increased retention of ceded written premium under our Proportional Reinsurance
Contracts as discussed above under "Reinsurance".
Three Months Ended March 31,
2022 2021 Change % Change
($ in millions)
Gross written premium $ 110.6 $ 75.8 $ 34.8 46 %
Ceded written premium (75.6) (55.6) (20.0) 36 %
Net written premium $ 35.0 $ 20.2 $ 14.8 73 %
Gross written premium increased $34.8 million , or 46%, to $110.6 million for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . The increase was primarily due to a 37% increase in net added customers
year over year driven by the success of our digital advertising campaigns. We
also continued to expand our geographic footprint and product offerings. We also
saw a 22% increase in premium per customer year over year primarily due to the
continued shift in the mix of underlying products toward higher value policies.
Ceded written premium increased $20.0 million , or 36%, to $75.6 million for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 , primarily due to the impact of the change in reinsurance arrangements. The
Company renewed the majority of the reinsurance contracts that expired on June
30, 2021 at terms that are very similar to the prior agreements, and decreased
the overall share of proportional reinsurance from 75% of premium to 70%. The
Company also purchased a new reinsurance program to protect against natural
catastrophe risk in the U.S that exceeds $60 million in losses. Other
non-proportional reinsurance contracts were renewed in 2021 with terms similar
to the expired contracts.
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Net written premium increased $14.8 million , or 73%, to $35.0 million for the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . The increase was primarily due to the $34.8 million , or 46%, increase in
gross written premium offset by the increase in ceded written premium for the
three months ended March 31, 2022 , as compared to the three months ended March
31, 2021 .
The table below shows the amount of premium we earned on a gross and net basis.
Ceded earned premium as a percentage of gross earned premium decreased to 71%
for the three months ended March 31, 2022 , as compared to 75% for the three
months ended March 31, 2021 primarily due to the new Proportional Reinsurance
Contracts.
Three Months Ended March 31,
2022 2021 Change % Change
($ in millions)
Gross earned premium $ 96.0 $ 56.2 $ 39.8 71 %
Ceded earned premium (68.6) (42.4) (26.2) 62 %
Net earned premium $ 27.4 $ 13.8 $ 13.6 99 %
Ceding Commission Income
Ceding commission income increased $5.0 million , or 56%, to $14.0 million for
the three months ended March 31, 2022 consistent with increase in earned premium
ceded related to the proportional reinsurance agreements with third-party
reinsurers during the period.
Net Investment Income
Net investment income amounted to$0.9 million for the three months endedMarch 31, 2022 and$0.2 million for the three months endedMarch 31, 2021 . We mainly invest in cash, money market funds,U.S. Treasury bills, corporate debt securities, notes and other obligations issued or guaranteed by theU.S. Government . Net investment income for the period was primarily driven by interest rates on investment balances, and offset by investment expenses of$0.1 million . Commission and Other Income
Commission and other income increased
Loss and Loss Adjustment Expense, Net
Loss and LAE, net increased$7.9 million , or 48%, to$24.4 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to increased claims in line with growth in premium including the impact of inflation, partially offset by favorable prior period development. Other Insurance Expense Other insurance expense increased$4.3 million , or 90%, to$9.1 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . The increase was primarily due to employee-related expense, including stock-based compensation, which increased by$2.2 million , or 129%, as compared to the three months endedMarch 31, 2021 , driven by an increase in underwriting staff to support our continued growth. Professional fees and other increased$1.2 million , or 92%, primarily in support of growth and expansion initiatives for new products. Credit card processing fees increased$0.5 million , or 36%, as a result of the increase in customers and associated premium. Amortization of deferred acquisition costs, net of ceding commissions increased$0.4 million , or 100%. 32 --------------------------------------------------------------------------------
Sales and Marketing
Sales and marketing expense increased$9.2 million , or 32%, to$38.3 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Expense related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by$5.0 million , or 23%, for the three months endedMarch 31, 2022 as compared to the three months endedMarch 31, 2021 , as a result of greater spending on search advertising and other customer acquisition channels in response to new product offerings. Employee-related expense, including stock-based compensation, increased by$3.1 million , or 49%, as compared to the prior year period, driven by an increase in sales and marketing headcount to support our continued growth and expansion.
Technology development expense increased$9.8 million , or 138%, to$16.9 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Employee-related expense, including stock-based compensation, and net of capitalized costs for the development of internal-use software, increased$8.9 million , or 148%, as compared to the three months endedMarch 31, 2021 , driven by an increase in payroll expense for product, engineering, design and quality assurance personnel to support our continued growth and product development initiatives, including automation, improvement in machine learning and geographic expansion. Technology tools and software expense increased by$0.7 million , or 100%. General and Administrative General and administrative expense increased$14.1 million , or 100%, to$28.2 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . Employee-related expense, including stock-based compensation, increased by$4.6 million , or 62%, as we increased finance, legal, business operations and administrative personnel. Legal, accounting and other professional fees increased$4.5 million , or 300%, to support the compliance requirements necessary to operate as a growing global, multi-product line of business and regulated companies. Bad debt expense increased by$1.1 million , or 122%, software costs increased$0.9 million , or 225% and depreciation expense increased$0.6 million or 67%.
Income Tax Expense
Income tax expense increased
Net Loss
Net loss increased$25.8 million , or 53%, to$74.8 million for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 due to the factors described above. 33 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, adjusted gross profit and adjusted gross profit margin, ratio of adjusted gross profit to gross earned premium, and adjusted EBITDA should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies. Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical operating performance of our business operations; (iii) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (iv) review and assess the operating performance of our management team; (v) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (vi) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
Adjusted Gross Profit and Adjusted Gross Profit Margin
We define adjusted gross profit, a non-GAAP financial measure, as gross profit excluding net investment income plus fixed cost and overhead associated with our underwriting operations including employee-related expense and professional fees and other, and depreciation and amortization allocated to cost of revenue. After these adjustments, the resulting calculation is inclusive of only those variable costs of revenue incurred on the successful acquisition of business and without the volatility of investment income. We use adjusted gross profit as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from underwriting operations from period to period.
We define adjusted gross profit margin, a non-GAAP financial measure, expressed as a percentage, as the ratio of adjusted gross profit to total revenue.
The following table provides a reconciliation of total revenue to adjusted gross
profit and the related adjusted gross profit margin for the periods presented:
Three Months Ended March 31,
2022 2021
($ in millions)
Total revenue $ 44.3 $ 23.5
Adjustments:
Loss and loss adjustment expense, net $ (24.4) $ (16.5)
Other insurance expense (9.1) (4.8)
Depreciation and amortization (0.6) (0.3)
Gross profit $ 10.2 $ 1.9
Gross profit margin (% of total revenue) 23 % 8 %
Adjustments:
Net investment income $ (0.9) $ (0.2)
Employee-related expense 3.9 1.7
Professional fees and other 2.5 1.3
Depreciation and amortization 0.6 0.3
Adjusted gross profit $ 16.3 $ 5.0
Adjusted gross profit margin (% of total revenue) 37 % 21 %
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--------------------------------------------------------------------------------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 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. 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 March 31,
2022 2021
($ in millions)
Numerator: Adjusted gross profit $ 16.3 $ 5.0
Denominator: Gross earned premium $ 96.0 $ 56.2
Ratio of Adjusted Gross Profit to Gross Earned Premium 17 % 9 %
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Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding
interest expense, income tax expense, depreciation, amortization, stock-based
compensation, net investment income, 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 GAAP,
and other companies may define adjusted EBITDA differently.
The following table provides a reconciliation of adjusted EBITDA to net loss for
the periods presented:
Three Months Ended March 31,
2022 2021
($ in millions)
Net loss $ (74.8) $ (49.0)
Adjustments:
Income tax expense $ 2.2 $ 0.9
Depreciation and amortization 1.5 0.9
Stock-based compensation 14.1 6.1
Transaction costs 0.5 -
Net investment income (0.9) (0.2)
Adjusted EBITDA $ (57.4) $ (41.3)
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Liquidity and Capital Resources
As ofMarch 31, 2022 , we had$234.8 million in cash and cash equivalents and$777.9 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. OnJanuary 14, 2021 , we issued and sold 3,300,000 shares of common stock, and generated net proceeds to us of$525.7 million after deducting underwriting discounts and other offering costs. OnFebruary 1, 2021 , the underwriters exercised their option to purchase additional shares, which resulted in the issuance and sale of an additional 718,647 shares of common stock by us, and generated additional net proceeds of$114.6 million . Excluding capital raises, 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. We believe our existing cash and cash equivalents as ofMarch 31, 2022 will be sufficient to meet our working capital and capital expenditures needs over at least the next 12 months.
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. OurU.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 ofMarch 31, 2022 , cash and short-term investments held by these companies was$185.8 million . Insurance companies inthe United States are also required by state law to maintain a minimum level of policyholder's surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer's assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As ofMarch 31, 2022 , the total adjusted capital of ourU.S. insurance subsidiary was in excess of its respective prescribed risk-based capital requirements. The following table summarizes our cash flow data for the periods presented: Three Months Ended March 31, 2022 2021 ($ in millions) Net cash used in operating activities$ (39.5) $ (40.3) Net cash provided by (used in) by investing activities $ 4.1$ (2.0) Net cash provided by financing activities $ 0.6$ 646.4 Operating Activities Cash used in operating activities was$39.5 million for the three months endedMarch 31, 2022 , a decrease of$0.8 million from$40.3 million for the three months endedMarch 31, 2021 . This reflected the$25.8 million increase in our net loss, primarily offset by increases in unearned premium, funds held, and unpaid loss and loss adjustment expense that exceeded the increases in prepaid reinsurance premium, premiums receivable and amounts expected to be recovered from our reinsurance partners. The decrease in cash used in operating activities from the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 was primarily due to claim payments, settlements with our reinsurance partners, and increased spend related to growth and expansion. 37 -------------------------------------------------------------------------------- Cash used in operating activities was$40.3 million for three months endedMarch 31, 2021 . This resulted from our net loss of$49.0 million , partially offset by non-cash charges and net cash provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of non-cash stock-based compensation. Net cash provided by changes in operating assets and liabilities primarily consisted of increases in unearned premiums, unpaid loss and loss adjustment expense and accrued and other liabilities partially offset by increases in premiums receivables and amounts expected to be recovered from our reinsurance partners. Investing Activities Cash provided by investing activities was$4.1 million for the three months endedMarch 31, 2022 primarily due to proceeds from sales and maturities and offset by purchases ofU.S. government obligations, corporate debt securities, short term investments, and property and equipment purchased during the period.
Cash used in investing activities was
Financing Activities
Cash provided by financing activities was
Cash provided by financing activities was$646.4 million for the three months endedMarch 31, 2021 primarily due to proceeds received from our Follow-on Offering (as defined in Note 10 to the unaudited interim condensed financial statements included elsewhere in this Quarterly Report) and proceeds from stock option exercises. We do not have any current plans for material capital expenditures other than current operating requirements. We believe that we will generate sufficient cash flows from operations to satisfy our liquidity requirements for at least the next 12 months and for the foreseeable future. There have been no material changes 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$1,012.9 million in cash and investments available atMarch 31, 2022 . We also have the ability to access additional capital through pursuing third-party borrowings, sales of our equity, issuance of debt securities or entrance into new reinsurance arrangements. 38 --------------------------------------------------------------------------------
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP inthe United States . The preparation of the consolidated financial statements in conformity with accounting principles generally accepted inthe 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, stock-based compensation prior to the Company's initial public offering ("IPO"), 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 three months endedMarch 31, 2022 , 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 interim condensed consolidated financial statements included elsewhere
in this Quarterly Report for a discussion of accounting pronouncements recently
adopted and their impact to our consolidated financial statements.
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