Insurtech Massacre phase 3 – Lemonade & Churn, churn, churn !!

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Long time readers know that I’ve a comfortable spot for insurance coverage firms. Some weeks in the past, I started looking into Insurtech companies and then I looked into Lemonade’s 2021 earnings, Since my first publish, Lemonade has misplaced every other 1/3 of its price and is now considerably beneath its IPO worth.

What I love about Lemonade is they certainly created a “fresh” insurance coverage emblem, then again the numbers had been obviously difficult. My primary takeaways from ultimate time had been as following:

  • Growth is slowing
  • advertising and marketing value is expanding (in line with new greenback top class)
  • The industry isn’t truly scaling

Already per week in the past, Lemonade issued its Q1 earnings, This time, I’ve compiled a couple of line pieces that I to find attention-grabbing on a quarterly foundation with the intention to analyze issues extra deeply:

Q2 2022 est Q1 2022 This fall 2021 Q3 2001 Q2 2021 Q1 2021 This fall 2020
In Force top class 447,5 419 380 347 297 252 213
Gross earned top class 104 96 89 80 66,9 56 50
Revenue 47 44 41 35,7 28,2 20,8 20,5
Gross benefit 10 7,8 11.7 9,8 1,9 7,5
Total bills 117 109 99 81.1 71,6 53.9
loss ratio 90% 96% 77% 74% 121% 71%
Expense ratio 122% 122% 124% 121% 128% 108%
Combined Ratio 212% 218% 201% 195% 249% 179%
web loss -74,8 -70,3 -67,3 -55,6 -49 -33,9
Churn annual -18% -18% -18% -18% -19%
Customers 1504 1427 1363 1206 1096 1000
Stock based totally comp 15 14,1 13.4 12,7 11.9 6,1 3,3
Sales & Marketing 38,3 37.2 42.2 33,1 29,1
Tech&Dev 16.9 16,4 14 14 7,1
G&A 28,1 23.1 19,6 15,8 14,1

Lemonade reviews a few earnings numbers, amongst others “in force premium”, gross earned top class and precise “Revenue”. For me, probably the most related quantity is Gross earned top class as a result of this drives the entirety, In power top class is sweet to understand however topic to churn and precise earnings is impacted through reinsurance.

  1. Slowing enlargement

With those numbers above, we will be able to calculate quarterly enlargement numbers and it is vitally simple to peer: Growth is slowing, even in Q1 2022:

Q2 2022 est Q1 2022 This fall 2021 Q3 2001 Q2 2021 Q1 2021
QoQ enlargement IFP


10,26% 9,51% 16,84% 17,86% 18,31%
Gross earned QoQ enlargement 8,33% 7,87% 11,25% 19,58% 19,46% 12.00%
QoQ enlargement earnings 6,82% 7,32% 14,85% 26,60% 35,58% 1,46%

Not certain if Lemonade guided conservatively for Q2 with the intention to create a “beat”, however it’s transparent that earnings enlargement is in reality slowing down rather considerably.

2. Marketing potency: Churn child, churn !!!

The different being concerned pattern has additionally persisted: Lemonade wishes to extend its spend on advertising and marketing even with slower enlargement charges, this means that that the incremental top class generated for each advertising and marketing greenback is going down as we will be able to see on this desk:

Q2 2022 est Q1 2022 This fall 2021 Q3 2001 Q2 2021 Q1 2021
Marketing potency
Additional inforce top class: 39 33 50 45 39

Churn from earlier duration

17,1 15,6 13.4 12.0 10,1
Gross new industry


48,6 63,4 57.0 49,1
Sales & Marketing exp 38,3 37.2 42.2 33,1 29,1

Cost/Gross Increase in Inforce

0,68 0,77 0,67 0,58 0,59
Marketing value for compensating churn 11,67 11,95 8,90 6,95 5,99
Churn value in % of GPE 12,16% 13,43% 11,13% 10,40% 10,70%

From the primary desk we all know that 18% of the top class is “churning” yearly, so the typical lifestyles time of a buyer is ~5 years. So on this desk I calculate what quantity of “gross new business” Lemonade needed to write every quarter with the intention to reach the web build up in “in force premium”.

Then I divide the promoting bills via the brand new industry quantity. We can see that Q1 2022 appears a bit of bit higher, with 68 cents to be spend with the intention to get 1 Dollar new gross industry, however that is nonetheless so much upper than early ultimate 12 months.

The largest factor is then again the ultimate line: Due to it is prime churn, Lemonade must spend between 11-13% of GPE simplest to interchange churn. In my opinion that is truly a topic. Insurance is all about obtaining (and holding) consumers as cost effectively and successfully as imaginable. The maximum a success insurers are mainly “acquisition and retention machines”.

Protector from Norway for example, can pay somewhat little to procure consumers and keeps them on moderate for 10 years. this results in a complete expense ratio of 10-11% which is not up to Lemonade spends simplest to compensate churn.

3. Other prices

Here I’ve compiled a couple of value pieces that i discovered attention-grabbing and in comparison to the Gross top class earned:

Q2 2022 est Q1 2022 This fall 2021 Q3 2001 Q2 2021 Q1 2021

Stock based totally comp in % of GPE

14,69% 15,06% 15,88% 17,79% 10,89%

Sales & advertising and marketing in % of GPE

39,90% 41,80% 52,75% 49,48% 51,96%
Tech & Dev in % of GPE 17.60% 18,43% 17,50% 20,93% 12,68%
G&A in % of GPE 29,27% 25,96% 24.50% 23,62% 25,18%

Sales & advertising and marketing value as % of GPE move personal however we will have to no longer omit that enlargement could also be slowing. The maximum being concerned building is obviously that common prices as % of GPE build up continuously, Normally, one will have to see some scaling personal right here however it appear that at Lemonade, prices are out of keep an eye on. Maybe it has to do with product launches and many others. however simply to keep in mind: Normal insurers have TOTAL value ratios of ~25-30% and truly excellent direct insurers between 10-15%.

Lemonade manages to blow out that quantity simplest with inventory based totally repayment.

The maximum being concerned factor is then again the ever expanding quantity of common prices. one rationalization may well be that with each new product, complexity will increase, they’ve to rent new mavens and many others.

Another rationalization is that Lemonade, as different Softbank funded start-ups simply do not know the way to save lots of prices. Softbank driven all their start-ups to develop at any value and lots of of those firms have issues to conform to a “lower growth, cost saving” means.

Let’s do a easy calculation right here: the yearly run price for bills in Q1 was once 117 USD or 468 mn USD every year.

If Lemonade needs to reach a 20% value ratio and assuming that they might grasp value consistent, the would wish to write (468/0.2)= 2,34 bn USD in annual top class.

At the instant they’re at 0,42 bn with a projected enlargement price of ~7% in line with quarter. This interprets into round 25 quarters or greater than 6 years to develop into an inexpensive expense ratio, assuming prices stay at Q1 2022 stage which is in fact no longer life like. Yes, Lemonade nonetheless has a pile of capital to burn via, but when they proceed like this, they would possibly not succeed in profitability sooner than the capital is long gone.

4. Fun with graphics

This is a chart from Lemonade’s shareholder letter that Lemonade “fans” continuously use as evidence that the entirety is excellent and Lemonade is rising properly:

Lemo growth

Indeed, the improvement of the “in force” top class is a pleasing and stable, upward sloping line. However, For a real enlargement corporate, this will have to no longer be a gentle line !!! A gradual line signifies that you certainly upload kind of the same quantity of latest top class every quarter, however your share enlargement is going down every quarter.

For an organization this is valued as a enlargement corporate, you need to peer an exponentially rising line, no longer a linear one.


As a lot as I for my part like Lemonade and it is recent emblem, it’s somewhat simple to peer that Lemonade has each, a enlargement and a price downside.

Churn is simply too prime and gross sales & advertising and marketing prices are too prime to be sustainable and on most sensible of that common prices develop sooner than the underlying industry. In my opinion, they’d wish to dramatically slash prices someday in time or they are going to no longer make it.

Maybe the impending Metromile acquisition generally is a catalyst for this, however in the intervening time, lemonade for me is some distance from investable, even at present valuations.

Finally, to honor the name of the publish, a hyperlink to the well-known track “Churn, churn, Churn” (or so):

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