Lemonade, a heavily-backed startup that sells rent to consumers and insurance to homeowners, has filed to go public today. The company (backed by SoftBank, part of the Sequoia empire, General Catalyst and Tusk Venture Partners, among others) releasing its financial results helps shed light on the Buring Insurtech market, which attracted an ocean of capital in recent quarters is.
TipsClear covered a part of the insurtech world earlier this year, asking why insurance marketplaces are raising so much investment, so quickly. Lemonade insurance differs from the markets in which it is a full-service insurance provider.
Actually, as its S-1 note:
By leveraging technology, data, artificial intelligence, contemporary design, and behavioral economics, we believe that we are making insurance more delightful, more affordable, more accurate, and more socially influential. To that end, we have built a vertically-integrated company with wholly owned insurance carriers in the United States and Europe, and a full technology stack to complete them.
Lemon water Pitching is the technology to make insurance a better business And A better consumer product. it’s tempting. Insurance is hardly anyone’s favorite product. If it can suck a little less, that would be great. Undoubtedly if Lemonade can generate physical net income in the process.
Looking at the number, the pitch is slightly forward.
Parsing Lemonade’s IPO filing, the business shows that while it may generate some margin from insurance, it is still miles away from being able to pay for its operations. The filing reminds us of Woomer’s similarly unprofitable offer compared to Zoom’s surprisingly profitable debut.
Lemonade is targeting a $ 100 million IPO according to its filings. This number is impermeable, but directly useful. What the placeholder goal tells us is that the company is more likely to try to raise $ 100 million to $ 300 million in its debut, as its goal is $ 500 million or more.
Therefore, the company, backed by $ 480 million in private capital, wants to expand its fundraising record, not to double it at once. What’s all the money you bought lemonade? Improvement in result, if drastic loss. Let’s parse some charts that the company considered based on their raw results and then chew.
First of all, this trio of bar charts topped the filing:
Gross written premium (GWP) is the total amount of revenue expected by Lemonade for its sold insurance products, particularly discounted commissions and certain other costs. As you are expecting, the numbers are increasing over time, which means that Lemonade was effective in selling more insurance products as it aged.
The second chart shows how much money the company is losing on a net basis compared to the company’s gross written premium result. It’s a faff metric, and that’s not very encouraging; Lemonade’s GWP more than doubled from 2018 to 2019, but the firm’s net loss per dollar of GWP decreased greatly. This means at least stellar operating leverage.
The final chart is more encouraging. In 2017, the company was raising claims more than the premium. By 2019 it was generating margins from its insurance products. The trend line here is also good, with improvement in pace from 2018 to 2019.
And then this one is:
this Looks like good. That said, the improvement in adjusted EBITDA margins remains as negative as anything but pride very Unicorn Period. But the animal is alive with spirits in 2020, so perhaps it will attract some public investors.
Regardless, dig into the numbers. Here is the main income statement:
Some definitions. What is the net premium earned? According to the company this is “the accrued portion of our gross written premium, the less accrued portion that is quoted for third party reinsurance under our reinsurance agreements.” Like pre-sold software revenue, premium revenue is “revenue earned over the term of the policy, which typically occurs.” Cold.
Net investment income is “interest earned from fixed maturity securities, short-term securities and other investments.” Cold.
Number two is the company’s only physical revenue source. And they do a lot of development. From $ 22.5 million in 2018 to $ 67.3 million in 2019, an increase of 199.1%. More recently, the company’s Q1 results increased its revenue from $ 11.0 million in 2019 to $ 26.2 million in 2020, up 138.2%. Slow pace, yes, but from a higher base and more than enough for the company to accelerate growth for a produce-star public market.
Now, let’s talk about losses.
We’ll talk on the margin after a while, because this bit is annoying. What matters is that the cost structure of a lemonade is suffocating compared to its ability to pay for it. Net loss increased from $ 52.9 million in 2018 to $ 108.5 million in 2019. More recently, Q1 2019 net loss of $ 21.6 million in the first quarter of 2020 occurred when the firm incurred a loss of $ 36.5 million.
In fact, Lemonade only appears to lose more money over time. So how is the company making such a huge loss? Here’s a hint:
It’s a mess, but we can get through it. First, see how operating revenue differs from GAAP revenue metrics that we saw earlier? This is because it is a non-GAAP (adjusted) number, meaning “total revenue before adding net investment income and subtracting premiums earned for reinsurance.” Cold.
That curiosity aside, what we Actually The company cares about adjusted gross profit. This metric is defined as “total investment income and lower costs of sales, including amortization of total revenue, net loss and loss adjustment expense, deferred acquisition costs and credit card processing fees,” which means gross profit but Super not really, Is irritable. Given that Lemonade is already adjusting it, it is notable that the company only managed to make $ 5.4 million worth of goods in Q1.
Recall that the company had GAAP revenue of $ 26.2 million over that three-month period. Therefore, if we adjust the firm’s gross profit, the company only winds up with a gross margin of over 20%.
So what? The company is spending a hefty $ 19.2 million in Q1 only – on sales and marketing to generate relatively low-margin revenue. Or more accurately, Lemonade generated enough adjusted gross profit for the same period to cover 28% of its GAAP sales and marketing expenses in Q1 2020. Figure out that one.
Anyway, the company raised $ 300 million from SoftBank Last year, so it has a lot of cash. In fact by the end of Q1 2020, “$ 304.0 million in cash and short-term investment”. Therefore, the company can maintain its Q1 2020 operating cash burn ($ 19.4 million) for a longer period of time. Then why go public?
Because as we wrote this morning (Extra Crunch subscription required), Woomer showed that the IPO market growth is open to shares and SoftBank needs a win. Let’s see what investors think, but this IPO feels like it is time to get out as time is good. Who can get mad at him?