UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| | | | | |
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20212022
or
| | | | | |
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________________ to ___________________
Commission File Number: 001-39367
Lemonade, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| | | | | | | | |
| Delaware | | 32-0469673 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer
Identification No.) |
| | |
5 Crosby Street, 3rd Floor New York, New York | | 10013 |
| (Address of principal executive offices) | | (Zip Code) |
(844) 733-8666
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.00001 par value per share | LMND | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | |
| Large accelerated filer | ox | | Accelerated filer | o |
| Non-accelerated filer | xo | | Smaller reporting company | o |
| | | Emerging growth company | xo |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 10, 2021,8, 2022, the registrant had 61,556,85768,945,568 shares of common stock, $0.00001 par value per share, outstanding.
Table of Contents
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| PART I. | | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| PART II. | | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the "Quarterly Report") contains forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this Quarterly Report, including without limitation statements regarding our future results of operations and financial position, our ability to attract, retain and expand our customer base, our ability to operate under and maintain our business model, our ability to maintain and enhance our brand and reputation, our ability to effectively manage the growth of our business, the effects of seasonal trends on our results of operations, our ability to attain greater value from each customer, our ability to compete effectively in our industry, the future performance of the markets in which we operate, and our ability to maintain reinsurance contracts, and the plans and objectives of management for future operations and capital expenditures are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.
In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential”, or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this Quarterly Report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of important factors that could cause actual results to differ materially from those in the forward-looking statements, including:
•We have a history of losses and we may not achieve or maintain profitability in the future.
•Our success and ability to grow our business depend on retaining and expanding our customer base. If we fail to add new customers or retain current customers, our business, revenue, operating results and financial condition could be harmed.
•The "Lemonade" brand may not become as widely known as incumbents' brands or the brand may become tarnished.
•Denial of claims or our failure to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations, and prospects.
•Our future revenue growth and prospects depend on attaining greater value from each user.
•The novelty of our business model makes its efficacy unpredictable and susceptible to unintended consequences.
•We could be forced to modify or eliminate our Giveback, which could undermine our business model and have a material adverse effect on our results of operations and financial condition.
•Our limited operating history makes it difficult to evaluate our current business performance, implementation of our business model, and our future prospects.
•We may not be able to manage our growth effectively.
•Intense competition in the segments of the insurance industry in which we operate could negatively affect our ability to attain or increase profitability.
•Reinsurance may be unavailable at current levels and prices, which may limit our ability to write new business. Furthermore, reinsurance subjects us to counterparty risk and may not be adequate to protect us against losses, which could have a material effect on our results of operations and financial condition.
•Failure to maintain our risk-based capital at the required levels could adversely affect the ability of our insurance subsidiary to maintain regulatory authority to conduct our business.
•If we are unable to expand our product offerings, our prospects for future growth may be adversely affected.
•Our proprietary artificial intelligence algorithms may not operate properly or as we expect them to, which could cause us to write policies we should not write, price those policies inappropriately or overpay claims that are made by our customers. Moreover, our proprietary artificial intelligence algorithms may lead to unintentional bias and discrimination.
•Regulators may limit our ability to develop or implement our proprietary artificial intelligence algorithms and/or may eliminate or restrict the confidentiality of our proprietary technology, which could have a material adverse effect on our financial condition and results of operations.
•New legislation or legal requirements may affect how we communicate with our customers, which could have a material adverse effect on our business model, financial condition, and results of operations.
•We rely on artificial intelligence and our digital platform to collect data points that we evaluate in pricing and underwriting our insurance policies, managing claims and customer support, and improving business processes, and any legal or regulatory requirements that restrict our ability to collect this data could thus materially and adversely affect our business, financial condition, results of operations and prospects.
•We depend on search engines, social media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to our website and our online app, which may be affected by third-party interference beyond our control and as we grow our customer acquisition costs will continue to rise.
•We may require additional capital to grow our business, which may not be available on terms acceptable to us or at all.
•Security incidents or real or perceived errors, failures or bugs in our systems, website or app could impair our operations, result in loss of personal customer information, damage our reputation and brand, and harm our business and operating results.
•We are periodically subject to examinations by our primary state insurance regulator, which could result in adverse examination findings and necessitate remedial actions. In addition, insurance regulators of other states in which we are licensed to operate may also conduct examinations or other targeted investigations, which may also result in adverse examination findings and necessitate remedial actions.
•We collect, process, store, share, disclose and use customer information and other data, and our actual or perceived failure to protect such information and data, respect customers' privacy or comply with data privacy and security laws and regulations could damage our reputation and brand and harm our business and operating results.
•We may be unable to prevent or address the misappropriation of our data.
•If we are unable to underwrite risks accurately and charge competitive yet profitable rates to our customers, our business, results of operations and financial condition will be adversely affected.
•Our product development cycles are complex and subject to regulatory approval, and we may incur significant expenses before we generate revenues, if any, from new products.
•Our expansion within the United States and any future international expansion strategy will subject us to additional costs and risks and our plans may not be successful.
•Combining the businesses of Lemonade and Metromile may be more difficult, costly or time-consuming than expected and the combined company may fail to realize the anticipated benefits of the mergers, which may adversely affect the combined company’s business results and negatively affect the value of the company’s common stock.
•The combined company may not be able to retain customers, which could have an adverse effect on the combined company’s business and operations. Third parties may terminate or alter existing contracts or relationships with Lemonade or Metromile.
•The combined company may be exposed to increased litigation, which could have an adverse effect on the combined company’s business and operations.
•The insurance business, including the market for renters and homeowners insurance, is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.
•We are subject to extensive insurance industry regulations.
•State insurance regulators impose additional reporting requirements regarding enterprise risk on insurance holding company systems, with which we must comply as an insurance holding company.
•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.
•We expect our results of operations to fluctuate on a quarterly and annual basis. In addition, our operating results and operating metrics are subject to seasonality and volatility, which could result in fluctuations in our quarterly revenues and operating results or in perceptions of our business prospects.
•We rely on data from our customers and third parties for pricing and underwriting our insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of our products and disrupt our business.
•Our results of operations and financial condition may be adversely affected due to limitations in the analytical models used to assess and predict our exposure to catastrophe losses.
•Our actual incurred losses may be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition and results of operations.
•Our insurance subsidiary is subject to minimum capital and surplus requirements, and our failure to meet these requirements could subject us to regulatory action.
•We are subject to assessments and other surcharges from state guaranty funds, and mandatory state insurance facilities, which may reduce our profitability.
•As a public benefit corporation, our focus on a specific public benefit purpose and producing a positive effect for society may negatively impact our financial performance.
•Our directors have a fiduciary duty to consider not only our stockholders' interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our stockholders.
•A joint investment committee consisting of our Co-Founders and ana former executive of SoftBank will have sole voting and dispositive control over the shares owned by the entities affiliated with SoftBank Group Corp. This joint investment committee further concentrates voting power with our Co-Founders, which could limit your ability to influence the outcome of important transactions, including a change in control.
•We conduct certain of our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel and the region.
•The factors described under the sections "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020,2021, and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" int hisin this Quarterly Report on Form 10-Q.Report.
You should read this Quarterly Report and the documents that we reference in this Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions, except share and per share amounts)
| | | | | | | | | | | |
| As of |
| June 30, | | December 31, |
| 2021 | | 2020 |
| (Unaudited) | | |
| Assets | | | |
| Investments | | | |
Fixed maturities available-for-sale, at fair value (amortized cost: $71.3 million and $6.4 million as of June 30, 2021 and December 31, 2020) | $ | 71.2 | | | $ | 6.6 | |
| | | |
| Total investments | 71.2 | | | 6.6 | |
| Cash, cash equivalents and restricted cash | 1,092.7 | | | 571.4 | |
Premium receivable, net of allowance for doubtful accounts of $0.7 million and $0.5 million as of June 30, 2021 and December 31, 2020 | 108.1 | | | 86.1 | |
| Reinsurance recoverable | 64.7 | | | 49.0 | |
| Prepaid reinsurance premium | 120.3 | | | 91.3 | |
| Deferred acquisition costs | 4.9 | | | 3.5 | |
| Property and equipment, net | 8.8 | | | 5.7 | |
| Intangible assets | 0.6 | | | 0.6 | |
| Other assets | 16.0 | | | 14.5 | |
| Total assets | $ | 1,487.3 | | | $ | 828.7 | |
| | | |
| Liabilities and Stockholders' Equity | | | |
| Unpaid loss and loss adjustment expense | $ | 64.7 | | | $ | 46.3 | |
| Unearned premium | 166.0 | | | 123.8 | |
| Trade payables | 1.3 | | | 1.4 | |
| Funds held for reinsurance treaties | 77.6 | | | 62.1 | |
| Deferred ceding commission | 30.1 | | | 22.4 | |
| Ceded premium payable | 18.0 | | | 13.0 | |
| Other liabilities and accrued expenses | 28.0 | | | 18.7 | |
| Total liabilities | 385.7 | | | 287.7 | |
| Commitments and contingencies (Note 14) | 0 | | 0 |
| | | |
| Stockholders' equity: | | | |
| Common stock, $0.00001 par value, 200,000,000 shares authorized; 61,532,127 and 56,774,294 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 0 | | | 0 | |
| Additional paid-in capital | 1,525.9 | | | 859.8 | |
| Accumulated deficit | (425.2) | | | (320.6) | |
| Accumulated other comprehensive income | 0.9 | | | 1.8 | |
| Total stockholders' equity | 1,101.6 | | | 541.0 | |
| Total liabilities and stockholders' equity | $ | 1,487.3 | | | $ | 828.7 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
($ in millions, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Revenue | | | | | | | | |
| Net earned premium | | $ | 16.3 | | | $ | 29.2 | | | $ | 30.1 | | | $ | 54.5 | |
| Ceding commission income | | 10.6 | | | 0.4 | | | 19.6 | | | 0.4 | |
| Net investment income | | 0.2 | | | 0.2 | | | 0.4 | | | 1.1 | |
| Commission and other income | | 1.1 | | | 0.1 | | | 1.6 | | | 0.1 | |
| Total revenue | | 28.2 | | | 29.9 | | | 51.7 | | | 56.1 | |
| | | | | | | | |
| Expense | | | | | | | | |
| Loss and loss adjustment expense, net | | 13.0 | | | 20.5 | | | 29.5 | | | 38.7 | |
| Other insurance expense | | 5.2 | | | 4.0 | | | 10.0 | | | 7.3 | |
| Sales and marketing | | 33.1 | | | 16.1 | | | 62.2 | | | 35.3 | |
| Technology development | | 14.0 | | | 4.2 | | | 21.1 | | | 7.7 | |
| General and administrative | | 15.8 | | | 5.8 | | | 29.9 | | | 24.0 | |
| Total expense | | 81.1 | | | 50.6 | | | 152.7 | | | 113.0 | |
| Loss before income taxes | | (52.9) | | | (20.7) | | | (101.0) | | | (56.9) | |
| Income tax expense | | 2.7 | | | 0.3 | | | 3.6 | | | 0.6 | |
| Net loss | | $ | (55.6) | | | $ | (21.0) | | | $ | (104.6) | | | $ | (57.5) | |
| | | | | | | | |
| Other comprehensive income, net of tax | | | | | | | | |
| Unrealized (loss) gain on investments | | (0.2) | | | 0.2 | | | (0.1) | | | 0.2 | |
| Foreign currency translation adjustment | | 0.3 | | | 0 | | | 1.0 | | | 0 | |
| Comprehensive loss | | $ | (55.5) | | | $ | (20.8) | | | $ | (103.7) | | | $ | (57.3) | |
| | | | | | | | |
| Per share data: | | | | | | | | |
Net loss per share attributable to common stockholders
—basic and diluted | | $ | (0.90) | | | $ | (1.77) | | | $ | (1.72) | | | $ | (4.89) | |
| | | | | | | | |
Weighted average common shares outstanding—basic
and diluted | | 61,444,958 | | 11,891,979 | | 60,643,764 | | | 11,750,198 | |
| | | | | | | | |
| | | | | | | | | | | |
| As of |
| June 30, | | December 31, |
| 2022 | | 2021 |
| (Unaudited) | | |
| Assets | | | |
| Investments | | | |
| Fixed maturities available-for-sale, at fair value (amortized cost: $698.4 million and $696.8 million as of June 30, 2022 and December 31, 2021, respectively) | $ | 674.1 | | | $ | 691.4 | |
| Short-term investments (cost: $85.9 million and $110.4 million as of June 30, 2022 and December 31, 2021, respectively) | 85.9 | | | 110.4 | |
| Total investments | 760.0 | | | 801.8 | |
| Cash and cash equivalents | 199.6 | | | 270.6 | |
| Premium receivable, net of allowance for credit losses of $2.2 million and $1.6 million as of June 30, 2022 and December 31, 2021, respectively | 147.6 | | | 127.0 | |
| Reinsurance recoverable | 110.3 | | | 89.8 | |
| Prepaid reinsurance premium | 168.9 | | | 149.6 | |
| Deferred acquisition costs | 7.4 | | | 6.2 | |
| Property and equipment, net | 13.2 | | | 11.7 | |
| Intangible assets | 0.6 | | | 0.6 | |
| Other assets | 53.3 | | | 53.2 | |
| Total assets | $ | 1,460.9 | | | $ | 1,510.5 | |
| | | |
| Liabilities and Stockholders' Equity | | | |
| Unpaid loss and loss adjustment expense | $ | 122.9 | | | $ | 97.9 | |
| Unearned premium | 241.6 | | | 207.7 | |
| Trade payables | 1.3 | | | 1.0 | |
| Funds held for reinsurance treaties | 119.2 | | | 103.1 | |
| Deferred ceding commission | 42.1 | | | 36.5 | |
| Ceded premium payable | 21.0 | | | 18.7 | |
| Other liabilities and accrued expenses | 63.7 | | | 57.4 | |
| Total liabilities | 611.8 | | | 522.3 | |
| Contingencies (Note 15) | 0 | | 0 |
| | | |
| Stockholders' equity | | | |
| Common stock, $0.00001 par value, 200,000,000 shares authorized; 61,867,577 and 61,660,996 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | — | | | — | |
| Additional paid-in capital | 1,582.5 | | | 1,553.5 | |
| Accumulated deficit | (704.6) | | | (561.9) | |
| Accumulated other comprehensive loss | (28.8) | | | (3.4) | |
| Total stockholders' equity | 849.1 | | | 988.2 | |
| Total liabilities and stockholders' equity | $ | 1,460.9 | | | $ | 1,510.5 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
6
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CONVERTIBLE PREFERRED STOCKOPERATIONS AND STOCKHOLDERS’ EQUITY (DEFICIT)COMPREHENSIVE LOSS
($ in millions, except share and per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Convertible Preferred Stock | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity (Deficit) |
| | Shares | | Amount | | | Shares | | Amount | | | | |
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2020 | | 0 | | | $ | 0 | | | | 56,774,294 | | | $ | 0 | | | $ | 859.8 | | | $ | (320.6) | | | $ | 1.8 | | | 541.0 | |
Issuance of common stock upon closing of Follow-on Offering, net of underwriting discounts and commissions and offering costs of $22.8 million | | — | | | — | | | | 4,018,647 | | | — | | | 640.3 | | | — | | | — | | | 640.3 | |
| Exercise of stock options | | — | | | — | | | | 577,162 | | | — | | | 6.1 | | | — | | | — | | | 6.1 | |
| Stock-based compensation | | — | | | — | | | | — | | | — | | | 6.1 | | | — | | | — | | | 6.1 | |
| Net loss | | — | | | — | | | | — | | | — | | | — | | | (49.0) | | | — | | | (49.0) | |
| Other comprehensive income | | — | | | — | | | | — | | | — | | | — | | | — | | | (0.8) | | | (0.8) | |
| Balance as of March 31, 2021 | | 0 | | | $ | 0 | | | | 61,370,103 | | | $ | 0 | | | $ | 1,512.3 | | | $ | (369.6) | | | $ | 1.0 | | | $ | 1,143.7 | |
| Exercise of stock options | | — | | | — | | | | 162,024 | | | — | | | 1.7 | | | — | | | — | | | 1.7 | |
| Stock-based compensation | | — | | | — | | | | — | | | — | | | 11.9 | | | — | | | — | | | 11.9 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | — | | | — | | | | — | | | — | | | — | | | (55.6) | | | — | | | (55.6) | |
| Other comprehensive income | | — | | | — | | | | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | |
| Balance as of June 30, 2021 | | 0 | | | $ | 0 | | | | 61,532,127 | | | $ | 0 | | | $ | 1,525.9 | | | $ | (425.2) | | | $ | 0.9 | | | $ | 1,101.6 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | | | | | | | | |
| Net earned premium | | $ | 31.2 | | | $ | 16.3 | | | $ | 58.6 | | | $ | 30.1 | |
| Ceding commission income | | 15.5 | | | 10.6 | | | 29.5 | | | 19.6 | |
| Net investment income | | 1.2 | | | 0.2 | | | 2.1 | | | 0.4 | |
| Commission and other income | | 2.1 | | | 1.1 | | | 4.1 | | | 1.6 | |
| Total revenue | | 50.0 | | | 28.2 | | | 94.3 | | | 51.7 | |
| | | | | | | | |
| Expense | | | | | | | | |
| Loss and loss adjustment expense, net | | 28.1 | | | 13.0 | | | 52.5 | | | 29.5 | |
| Other insurance expense | | 9.7 | | | 5.2 | | | 18.8 | | | 10.0 | |
| Sales and marketing | | 37.0 | | | 33.1 | | | 75.3 | | | 62.2 | |
| Technology development | | 17.8 | | | 14.0 | | | 34.7 | | | 21.1 | |
| General and administrative | | 22.4 | | | 15.8 | | | 50.6 | | | 29.9 | |
| Total expense | | 115.0 | | | 81.1 | | | 231.9 | | | 152.7 | |
| Loss before income taxes | | (65.0) | | | (52.9) | | | (137.6) | | | (101.0) | |
| Income tax expense | | 2.9 | | | 2.7 | | | 5.1 | | | 3.6 | |
| Net loss | | $ | (67.9) | | | $ | (55.6) | | | $ | (142.7) | | | $ | (104.6) | |
| | | | | | | | |
| Other comprehensive loss, net of tax | | | | | | | | |
| Unrealized loss on investments in fixed maturities | | (4.5) | | | (0.2) | | | (18.8) | | | (0.1) | |
| Foreign currency translation adjustment | | (5.5) | | | 0.3 | | | (6.6) | | | 1.0 | |
| Comprehensive loss | | $ | (77.9) | | | $ | (55.5) | | | $ | (168.1) | | | $ | (103.7) | |
| | | | | | | | |
| Per share data: | | | | | | | | |
| Net loss per share attributable to common stockholders—basic and diluted | | $ | (1.10) | | | $ | (0.90) | | | $ | (2.31) | | | $ | (1.72) | |
| | | | | | | | |
| Weighted average common shares outstanding—basic and diluted | | 61,816,225 | | | 61,444,958 | | | 61,757,722 | | | 60,643,764 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2019 | | 31,557,107 | | | $ | 480.2 | | | | 11,271,228 | | | $ | 0 | | | $ | 15.7 | | | $ | (198.3) | | | $ | 0.1 | | | $ | (182.5) | |
| Exercise of stock options | | — | | | — | | | | 54,374 | | | — | | | — | | | — | | | — | | | — | |
| Stock-based compensation | | — | | | — | | | | — | | | — | | | 2.2 | | | — | | | — | | | 2.2 | |
| Contribution to the Lemonade Foundation | | — | | | — | | | | 500,000 | | | — | | | 12.2 | | | — | | | — | | | 12.2 | |
| Net loss | | — | | | — | | | | — | | | — | | | — | | | (36.5) | | | — | | | (36.5) | |
| Other comprehensive income | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | |
| Balance as of March 31, 2020 | | 31,557,107 | | | $ | 480.2 | | | | 11,825,602 | | | $ | 0 | | | $ | 30.1 | | | $ | (234.8) | | | $ | 0.1 | | | $ | (204.6) | |
| Exercise of stock options | | — | | | — | | | | 30,562 | | | — | | | 0.1 | | | — | | | — | | | 0.1 | |
| Stock-based compensation | | — | | | — | | | | — | | | — | | | 2.4 | | | — | | | — | | | 2.4 | |
| Release of shares upon repayment | | — | | | — | | | | 513,537 | | | — | | | 1.3 | | | — | | | — | | | 1.3 | |
| Net loss | | — | | | — | | | | — | | | — | | | — | | | (21.0) | | | — | | | (21.0) | |
| Other comprehensive income | | — | | | — | | | | — | | | — | | | — | | | — | | | 0.2 | | | 0.2 | |
| Balance as of June 30, 2020 | | 31,557,107 | | | $ | 480.2 | | | | 12,369,701 | | | $ | 0 | | | $ | 33.9 | | | $ | (255.8) | | | $ | 0.3 | | | $ | (221.6) | |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
7
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
($ in millions, except share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Common Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive (Loss) Income | | Total Stockholders' Equity |
| | | | | | | Shares | | Amount | | | | |
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | | | | | | | 61,660,996 | | | $ | — | | | $ | 1,553.5 | | | $ | (561.9) | | | $ | (3.4) | | | $ | 988.2 | |
| Exercise of stock options and distribution of restricted stock units | | | | | | | 97,743 | | | — | | | 0.6 | | | — | | | — | | | 0.6 | |
| Stock-based compensation | | | | | | | — | | | — | | | 14.1 | | | — | | | — | | | 14.1 | |
| Net loss | | | | | | | — | | | — | | | — | | | (74.8) | | | — | | | (74.8) | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | (15.4) | | | (15.4) | |
| Balance as of March 31, 2022 | | | | | | | 61,758,739 | | | $ | — | | | $ | 1,568.2 | | | $ | (636.7) | | | $ | (18.8) | | | $ | 912.7 | |
| Exercise of stock options | | | | | | | 108,838 | | | — | | | 0.4 | | | — | | | — | | | 0.4 | |
| Stock-based compensation | | | | | | | — | | | — | | | 13.9 | | | — | | | — | | | 13.9 | |
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| Net loss | | | | | | | — | | | — | | | — | | | (67.9) | | | — | | | (67.9) | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | (10.0) | | | (10.0) | |
| Balance as of June 30, 2022 | | | | | | | 61,867,577 | | | $ | — | | | $ | 1,582.5 | | | $ | (704.6) | | | $ | (28.8) | | | $ | 849.1 | |
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| Balance as of December 31, 2020 | | | | | | | 56,774,294 | | | $ | — | | | $ | 859.8 | | | $ | (320.6) | | | $ | 1.8 | | | $ | 541.0 | |
| Issuance of common stock upon closing of Follow-on Offering, net of underwriting discounts and commissions and offering costs of $28.2 million | | | | | | | 4,018,647 | | | — | | | 640.3 | | | — | | | — | | | 640.3 | |
| Exercise of stock options | | | | | | | 577,162 | | | — | | | 6.1 | | | — | | | — | | | 6.1 | |
| Stock-based compensation | | | | | | | — | | | — | | | 6.1 | | | — | | | — | | | 6.1 | |
| Net loss | | | | | | | — | | | — | | | — | | | (49.0) | | | — | | | (49.0) | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | (0.8) | | | (0.8) | |
| Balance as of March 31, 2021 | | | | | | | 61,370,103 | | | $ | — | | | $ | 1,512.3 | | | $ | (369.6) | | | $ | 1.0 | | | $ | 1,143.7 | |
| Exercise of stock options | | | | | | | 162,024 | | | — | | | 1.7 | | | — | | | — | | | 1.7 | |
| Stock-based compensation | | | | | | | — | | | — | | | 11.9 | | | — | | | — | | | 11.9 | |
| Net loss | | | | | | | — | | | — | | | — | | | (55.6) | | | — | | | (55.6) | |
| Other comprehensive loss | | | | | | | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | |
| Balance as of June 30, 2021 | | | | | | | 61,532,127 | | | $ | — | | | $ | 1,525.9 | | | $ | (425.2) | | | $ | 0.9 | | | $ | 1,101.6 | |
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The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
8
LEMONADE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(Unaudited)
| | | | Six Months Ended June 30, | | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| Cash flows from operating activities: | Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | |
| Net loss | Net loss | | $ | (104.6) | | | $ | (57.5) | | Net loss | | $ | (142.7) | | | $ | (104.6) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | Adjustments to reconcile net loss to net cash used in operating activities: | | Adjustments to reconcile net loss to net cash used in operating activities: | |
| Depreciation | Depreciation | | 1.7 | | | 0.7 | | Depreciation | | 3.1 | | | 1.7 | |
| Stock-based compensation | Stock-based compensation | | 18.0 | | | 4.6 | | Stock-based compensation | | 28.0 | | | 18.0 | |
| Amortization of discount on bonds | Amortization of discount on bonds | | 0 | | | (0.3) | | Amortization of discount on bonds | | 4.6 | | | — | |
| Provision for bad debts | | 2.3 | | | 0.9 | | |
| Provision for bad debt | | Provision for bad debt | | 3.6 | | | 2.3 | |
| | Common shares contribution to the Lemonade Foundation | | 0 | | | 12.2 | | |
| | Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Premium receivable | Premium receivable | | (24.4) | | | (11.6) | | Premium receivable | | (24.2) | | | (24.4) | |
| Reinsurance recoverable | Reinsurance recoverable | | (15.7) | | | (5.9) | | Reinsurance recoverable | | (20.6) | | | (15.7) | |
| Prepaid reinsurance premium | Prepaid reinsurance premium | | (29.0) | | | 1.0 | | Prepaid reinsurance premium | | (19.3) | | | (29.0) | |
| Deferred acquisition costs | Deferred acquisition costs | | (1.4) | | | (0.7) | | Deferred acquisition costs | | (1.2) | | | (1.4) | |
| Other assets | Other assets | | (1.5) | | | (3.5) | | Other assets | | (0.3) | | | (1.5) | |
| Unpaid loss and loss adjustment expense | Unpaid loss and loss adjustment expense | | 18.4 | | | 7.1 | | Unpaid loss and loss adjustment expense | | 25.0 | | | 18.4 | |
| Unearned premium | Unearned premium | | 42.2 | | | 18.9 | | Unearned premium | | 33.9 | | | 42.2 | |
| Trade payables | Trade payables | | (0.1) | | | 0.1 | | Trade payables | | 0.3 | | | (0.1) | |
| Funds held for reinsurance treaties | Funds held for reinsurance treaties | | 15.5 | | | 0 | | Funds held for reinsurance treaties | | 16.1 | | | 15.5 | |
| Deferred ceding commissions | Deferred ceding commissions | | 7.7 | | | 0 | | Deferred ceding commissions | | 5.6 | | | 7.7 | |
| Ceded premium payable | Ceded premium payable | | 5.0 | | | 1.6 | | Ceded premium payable | | 2.3 | | | 5.0 | |
| Other liabilities and accrued expenses | Other liabilities and accrued expenses | | 9.4 | | | (2.9) | | Other liabilities and accrued expenses | | 6.1 | | | 9.4 | |
| Net cash used in operating activities | Net cash used in operating activities | | (56.5) | | | (35.3) | | Net cash used in operating activities | | (79.7) | | | (56.5) | |
| Cash flows from investing activities: | Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | |
| Proceeds from short-term investments sold or matured | Proceeds from short-term investments sold or matured | | 0 | | | 40.0 | | Proceeds from short-term investments sold or matured | | 81.5 | | | — | |
| Proceeds from bonds sold or matured | Proceeds from bonds sold or matured | | 0 | | | 2.2 | | Proceeds from bonds sold or matured | | 53.7 | | | — | |
| Cost of short-term investments acquired | Cost of short-term investments acquired | | 0 | | | (14.9) | | Cost of short-term investments acquired | | (57.3) | | | — | |
| Cost of bonds acquired | Cost of bonds acquired | | (64.6) | | | (2.9) | | Cost of bonds acquired | | (60.3) | | | (64.6) | |
| Purchases of property and equipment | Purchases of property and equipment | | (4.7) | | | (1.9) | | Purchases of property and equipment | | (4.6) | | | (4.7) | |
| Net cash (used in) provided by investing activities | | (69.3) | | | 22.5 | | |
| Net cash provided by (used in) investing activities | | Net cash provided by (used in) investing activities | | 13.0 | | | (69.3) | |
| Cash flows from financing activities: | Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | |
Proceeds from Follow-on Offering, net of underwriting discounts and commissions
and offering costs | Proceeds from Follow-on Offering, net of underwriting discounts and commissions
and offering costs | | 640.3 | | | 0 | | Proceeds from Follow-on Offering, net of underwriting discounts and commissions and offering costs | | — | | | 640.3 | |
| Proceeds from release of shares upon repayment | | 0 | | | 1.3 | | |
| | | Proceeds from stock exercises | Proceeds from stock exercises | | 7.8 | | | 0.1 | | Proceeds from stock exercises | | 1.0 | | | 7.8 | |
| Net cash provided by financing activities | Net cash provided by financing activities | | 648.1 | | | 1.4 | | Net cash provided by financing activities | | 1.0 | | | 648.1 | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (1.0) | | | (0.1) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (5.3) | | | (1.0) | |
| Net increase in cash, cash equivalents and restricted cash | | 521.3 | | | (11.5) | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | | Net (decrease) increase in cash, cash equivalents and restricted cash | | (71.0) | | | 521.3 | |
| Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | | 571.4 | | | 270.3 | | Cash, cash equivalents and restricted cash at beginning of period | | 270.6 | | | 571.4 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | | $ | 1,092.7 | | | $ | 258.8 | | Cash, cash equivalents and restricted cash at end of period | | $ | 199.6 | | | $ | 1,092.7 | |
| | Supplemental disclosure of cash flow information: | Supplemental disclosure of cash flow information: | | Supplemental disclosure of cash flow information: | |
| Cash paid for income taxes | Cash paid for income taxes | | $ | 1.1 | | | $ | 0.8 | | Cash paid for income taxes | | $ | 2.7 | | | $ | 1.1 | |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
89
LEMONADE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.Nature of the Business
Lemonade, Inc. is a public benefit corporation organized under Delaware law on June 17, 2015. It provides certain personnel, facilities and services to each of its subsidiaries (together with Lemonade, Inc., the “Company”), all of which are 100% owned, directly or indirectly, by Lemonade, Inc. For the list of the Company's US and EU subsidiaries, see Note 1 - Nature of the Business, of the audited consolidated financial statements and related notes thereto for the year ended December 31, 20202021 as containedincluded in the Company's Annual Report on Form 10-K for the year ending December 31, 20202021 (the "Annual Report on Form 10-K") for more complete descriptions and discussions.
2.Basis of Presentation
The accompanying interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated upon consolidation. All foreign currency amounts in the condensed consolidated statement of operations and comprehensive loss have been translated using an average rate for the reporting period. All foreign currency balances in the balance sheet have been translated using the spot rate at the end of the reporting period. All figures expressed, except share amounts, are in U.S. dollars in millions.
Risk and Uncertainties
The globalCOVID-19 pandemic resulting from the disease known as COVID-19, caused by a novel strain of coronavirus, SARS-CoV-2, has caused national and global economic and financial market disruptions and may adversely impact our business.the Company. Although the Company did not see a material impact on its results of operations for the three and six months ended June 30, 2022 and year ended December 31, 2021 due to the COVID-19 pandemic, the Company cannot predict the duration or magnitude of the pandemic or the full impact that it may have on the Company’s financial condition and results of operations, business operations, and workforce.
Unaudited interim financial information
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of its financial position and its results of operations, changes in stockholders’ equity (deficit) and cash flows. The condensed consolidated balance sheet at December 31, 2020,2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements. The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2020 contained2021 as included in the Company’s Annual Report on Form 10-K.
3.Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. On an ongoing basis, the Company’s management evaluates estimates, including those related to contingent assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expense during the reporting period. Such estimates are based on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities at the dates of the condensed consolidated financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in the Company’s condensed consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, reinsurance recoverables on unpaid losses and valuation allowance on deferred tax assets and valuation on stock-based compensation prior to the Company's IPO.assets.
4.Summary of Significant Accounting Policies
Cash, cash equivalents and restricted cash
The following represents the Company’s cash, cash equivalents and restricted cash as of June 30, 2021 and December 31, 2020 ($ in millions):
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| | 2021 | | 2020 |
| Cash and cash equivalents | | $ | 1,092.4 | | | $ | 570.8 | |
| Restricted cash | | 0.3 | | | 0.6 | |
| Total cash, cash equivalents and restricted cash | | $ | 1,092.7 | | | $ | 571.4 | |
Cash and cash equivalents consist primarily of bank deposits and money market accounts with maturities of three months or less at the date of acquisition and are stated at cost, which approximates fair value. The Company’s restricted cash relates to security deposits for office leases in Israel. The carrying value of restricted cash approximates fair value.
Deferred offering costs
The Company capitalizes certain legal, accounting and other third-party fees that are directly associated with in-process equity financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs are recorded as a reduction to the carrying value of stockholders' equity, (deficit) as a reduction of additional paid-in capital generated as a result of such offering. In connection with the Initial Public Offering, the Company incurred total offering costs of $32.4 million, of which $28.9 million was recorded as a reduction to gross proceeds, and $3.5 million was recognized as a component of general and administrative expense in 2019. On January 14, 2021, the Company completed a Follow-on Offering of common stock, as defined and discussed in detail in Note 9,10, which generated net proceeds of $525.7 million, after deducting underwriting discounts and offering costs. On February 1, 2021, the underwriters exercised their option to purchase additional shares, and generated additional net proceeds to us of $114.6 million. Deferred offering costs from the Follow-on Offering amounted to $0.4 million.
RecentRecently adopted accounting pronouncements
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.Leases
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless, as indicated below, management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.
ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, simplifies the various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifies and amends the existing guidance to improve consistent application. The adoption of ASU 2019-12 beginning January 1, 2021 did not have a material impact on our condensed consolidated financial statement and related disclosures.
In February 2016, the FASB issued Leases (Topic 842) (“("ASU 2016-02”2016-02"), wherebyas subsequently amended, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors), and replaces the existing guidance in ASC 840, Leases. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine the recognition pattern of lease expense over the term of the lease. In addition, a lessee will beis required to recognizerecord (i) a right-of-use asset and a lease liability the balance sheet for all leases at the commencement date awith accounting lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, whichterms of more than 12 months regardless of whether it is an assetoperating or financing lease, and (ii) lease expense for operating leases and amortization and interest expense for financing leases, in statement of operations. Leases with a term of 12 months or less may be accounted for similar to existing guidance for operating leases under ASC 840. In July 2018, the FASB issued ASU 2018-11, Leases ("Topic 842"), which added an optional transition method that representsallows companies to adopt the lessee’s rightstandard as of the beginning of the year of adoption as opposed to use, or control the use of, a specified asset for the lease term. Underearliest comparative period presented.
The Company adopted the new guidance, lessor accounting is largely unchanged. Astandard effective January 1, 2021, using the modified retrospective transition approach for leases existing at, or entered into after,which uses the beginningeffective date as the date of initial application with no adjustment to prior periods presented. There was no adjustment to the earliest comparative period presentedopening balance of retained earnings.
At adoption date, the new standard resulted in the financial statements must be applied.recognition of an operating lease Right-of-Use ("ROU") asset of $16.9 million included under Other Assets, and a corresponding operating lease liabilities of $17.2 million included in Other Liabilities on the consolidated balance sheets. The modified retrospective approach would not require any transition accounting for leases that expired beforedifference of $0.3 million between the earliest comparative period presented. ASU 2016-02 is effective foroperating lease ROU assets and operating lease liabilities represents reclassification of deferred rent liability (the difference between the Company’s annual periods beginning after December 15, 2020,straight-line rent expenses and interim periods within fiscal years beginning after December 15, 2021.paid rent amounts under the leases) to operating lease ROU assets from other liabilities at the adoption date. The adoption of the new standard is expecteddid not have a material impact on the Company’s consolidated statements of operations and comprehensive loss, or consolidated statements of cash flows. The adoption impact relates to resultthe Company’s existing operating leases for office spaces in the recognition of additional lease liabilitiesUS, Netherlands and right-of-use assets as of January 1, 2022. Israel.
The Company is evaluatinghas elected to apply the potential impactpackage of this pronouncement.practical expedients requiring no reassessment of whether any expired or existing contracts are or contain leases, the lease classification of any expired or existing leases, or the capitalization of initial direct costs for any existing leases. Additionally, the Company elected the practical expedients that permit the exclusions of leases considered to be short-term.
Current Expected Credit Losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments —- Credit Losses ("Topic 326"): Measurement of Credit Losses on Financial Instruments (“("ASU 2016-13”2016-13"). ASU 2016-13 will change the way entities recognize impairmentintroduced a current expected credit loss ("CECL") model for measuring expected credit losses for certain types of financial assets byinstruments held at the reporting date requiring immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, including, among others, held-to-maturity debt securities, premium receivables, and reinsurance recoverable. The valuation allowance is a measurement of expected losses that issignificant judgment in application based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts, but is not prescriptive about certain aspects of estimating expected losses. The guidance replaced the current incurred loss model for measuring expected credit losses and provided for additional disclosure requirements. Subsequently, the FASB issued additional ASUs on Topic 326 that affectdid not change the collectabilitycore principle of the reported amount. This methodology is referred to as the current expected credit loss model.guidance in ASU 2016-13, requires a valuation allowance to be calculatedbut provided clarification and implementation guidance on these financial assets, as well as available for sale securities, and that they be presented on the financial statements net of the valuation allowance. ASU 2016-13 is effective for the Company’s annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impactcertain aspects of ASU 2016-13, and have the same effective date and transition requirements as ASU 2016-13. The Company adopted the guidance using a modified retrospective approach as of January 1, 2021 which resulted in no cumulative-effect adjustment to retained earnings.
The updated guidance in ASU 2016-13 also amended the previous other-than-temporary impairment (“OTTI”) model for available-for-sale fixed income securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The Company adopted the guidance related to available-for-sale fixed income securities on its financial conditionJanuary 1, 2021 using a prospective transition approach for available-for-sale fixed income securities that were purchased with credit deterioration or had recognized an OTTI write-down prior to the effective date. The effect of the prospective transition approach was to maintain the same amortized cost basis before and resultsafter the effective date.
5. Acquisition of operations, with a primary focus on its reinsurance recoverable.Business
ReclassificationOn November 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 acquired 100% of the equity of Metromile, through an all-stock transaction based upon the exchange ratio of 0.05263 shares of Lemonade for each outstanding share of Metromile
Certain accountsMetromile is a leading digital insurance platform in the prior period financial statements were reclassifiedUnited 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 conforminsurance 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 current period presentation.productivity of employees.
6. Investments
Unrealized gains and losses
The following tables present cost or amortized cost and fair values of investmentsinvestment in fixed maturities as of June 30, 20212022 and December 31, 20202021 ($ in millions):
| | | Cost or Amortized Cost | | Gross
Unrealized | | Fair
Value | | Cost or Amortized Cost | | Gross
Unrealized | | Fair
Value |
| | Gains | | Losses | | | Gains | | Losses | |
| June 30, 2021 | | | | | | | | | |
| June 30, 2022 | | June 30, 2022 | | | | | | | | |
| Corporate debt securities | | Corporate debt securities | | $ | 597.7 | | | $ | — | | | $ | (20.8) | | | $ | 576.9 | |
| U.S. Government obligations | U.S. Government obligations | | $ | 71.3 | | | $ | 0.1 | | | $ | (0.2) | | | $ | 71.2 | | U.S. Government obligations | | 99.5 | | | — | | | (3.5) | | | 96.0 | |
| Municipal securities | | Municipal securities | | 1.2 | | | — | | | — | | | 1.2 | |
| Total | Total | | $ | 71.3 | | | $ | 0.1 | | | $ | (0.2) | | | $ | 71.2 | | Total | | $ | 698.4 | | | $ | — | | | $ | (24.3) | | | $ | 674.1 | |
| | December 31, 2020 | | |
| December 31, 2021 | | December 31, 2021 | |
| Corporate debt securities | | Corporate debt securities | | $ | 593.4 | | | $ | — | | | $ | (4.7) | | | $ | 588.7 | |
| U.S. Government obligations | U.S. Government obligations | | $ | 6.4 | | | $ | 0.2 | | | $ | 0 | | | $ | 6.6 | | U.S. Government obligations | | 102.2 | | | 0.1 | | | (0.8) | | | 101.5 | |
| Municipal securities | | Municipal securities | | 1.2 | | | — | | | — | | | 1.2 | |
| Total | Total | | $ | 6.4 | | | $ | 0.2 | | | $ | 0 | | | $ | 6.6 | | Total | | $ | 696.8 | | | $ | 0.1 | | | $ | (5.5) | | | $ | 691.4 | |
Gross unrealized losses amounted to $0.2for fixed maturities was $24.3 million as of June 30, 2021. Gross unrealized losses were less than $0.12022 and $5.5 million as of December 31, 2020.2021. Gross unrealized gains and losses were recorded as a component of accumulated other comprehensive income.
Contractual maturities of bonds
The following table presents the cost or amortized cost and estimated fair value of bondsinvestments in fixed maturities as of June 30, 20212022 by contractual maturity ($ in millions). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | June 30, 2021 | | June 30, 2022 |
| | Cost or
Amortized
Cost | | Fair Value | | Cost or
Amortized
Cost | | Fair Value |
| Due in one year or less | Due in one year or less | | $ | 1.1 | | | $ | 1.1 | | Due in one year or less | | $ | 217.3 | | | $ | 213.7 | |
| Due after one year through five years | Due after one year through five years | | 70.2 | | | 70.1 | | Due after one year through five years | | 481.1 | | | 460.4 | |
| Due after five years through ten years | Due after five years through ten years | | 0 | | | 0 | | Due after five years through ten years | | — | | | — | |
| Due after ten years | Due after ten years | | 0 | | | 0 | | Due after ten years | | — | | | — | |
| Total | Total | | $ | 71.3 | | | $ | 71.2 | | Total | | $ | 698.4 | | | $ | 674.1 | |
Net investment income
An analysis of net investment income follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Interest on cash and cash equivalents | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.3 | | | $ | 0.8 | |
| Bonds | | 0.1 | | | 0 | | | 0.1 | | | 0 | |
| Short-term investments | | 0 | | | 0.1 | | | 0 | | | 0.3 | |
| Total net investment income | | $ | 0.2 | | | $ | 0.2 | | | $ | 0.4 | | | $ | 1.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Interest on cash and cash equivalents | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.1 | | | $ | 0.3 | |
| Fixed maturities | | 1.1 | | | 0.1 | | | 2.0 | | | 0.1 | |
| Short-term investments | | 0.1 | | | — | | | 0.2 | | | — | |
| Total | | 1.3 | | | 0.2 | | | 2.3 | | | 0.4 | |
| Investment expense | | 0.1 | | | — | | | 0.2 | | | — | |
| Net investment income | | $ | 1.2 | | | $ | 0.2 | | | $ | 2.1 | | | $ | 0.4 | |
Investment gains and losses
The Company did not have anyhad pre-tax net realized capital losses of $0.4 million for the three months ended June 30, 2022 and six months ended June 30, 2022. There were no pre-tax net realized capital gains or losses for the three and six months ended June 30, 2021 and 2020.
Aging of gross unrealized losses
The following table presents the gross unrealized losses and related fair values for the Company’s available-for-sale bond securities,investment in fixed maturities, grouped by duration of time in a continuous unrealized loss position as of June 30, 20212022 and December 31, 20202021 ($ in millions):
| | | Less than 12 Months | | 12 Months or More | | Total | | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | June 30, 2021 | | | | | | | | | | | | | |
| June 30, 2022 | | June 30, 2022 | | | | | | | | | | | | |
| Corporate debt securities | | Corporate debt securities | | $ | 1.0 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1.0 | | | $ | — | |
| U.S. Government obligations | U.S. Government obligations | | $ | 0 | | | $ | (0.2) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (0.2) | | U.S. Government obligations | | 655.8 | | | (24.3) | | | 0.5 | | | — | | | 656.3 | | | (24.3) | |
| Municipal securities | | Municipal securities | | 1.2 | | | — | | | — | | | — | | | 1.2 | | | — | |
| Total | Total | | $ | 0 | | | $ | (0.2) | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | (0.2) | | Total | | $ | 658.0 | | | $ | (24.3) | | | $ | 0.5 | | | $ | — | | | $ | 658.5 | | | $ | (24.3) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2021 | | | | | | | | | | | | |
| Corporate debt securities | | $ | 581.9 | | | $ | (4.7) | | | $ | — | | | $ | — | | | $ | 581.9 | | | $ | (4.7) | |
| U.S. Government obligations | | 95.0 | | | (0.8) | | | 0.5 | | | — | | | 95.5 | | | (0.8) | |
| Municipal securities | | 1.2 | | | — | | | — | | | — | | | 1.2 | | | — | |
| Total | | $ | 678.1 | | | $ | (5.5) | | | $ | 0.5 | | | $ | — | | | $ | 678.6 | | | $ | (5.5) | |
Gross unrealized losses for investments in fixed maturities for twelve months or more was less than $0.1 million for both June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less than 12 Months | | 12 Months or More | | Total |
| | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2020 | | | | | | | | | | | | |
| U.S. Government obligations | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Total | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
There were 0 investments in gross unrealized loss position for twelve months or more as of June 30, 2021. Gross unrealized losses for U.S. Government Bonds was less than $0.1 million for twelve months or more as of December 31, 2020.
The gross unrealized investment losses as of June 30, 2021 and December 31, 2020, were deemed to be temporary, based on, among other things:
•the duration of time and the relative magnitude to which fair values of these investments have been below their amortized cost was not indicative of an other than temporary impairment loss;
•the absence of compelling evidence that would cause the Company to call into question the financial condition or near-term prospects of the issuer of the investment; and
•the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.
The Company may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology the Company uses to assess other-than-temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral, and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.
As of June 30, 2021 and December 31, 2020, NaN2022, 287 of the debt securities held were held in an unrealized loss position. The Company determined that unrealized losses on fixed maturities were primarily due to the interest rate environment, and not credit risk related to the issuers of these securities. The Company does not intend to sell these investment in fixed maturities, and it is not more likely than not that that the Company will be required to sell these investment in fixed maturities before recovery of the amortized cost basis. No allowance for 12credit losses related to any of these securities was recorded for the three and six months ended June 30, 2022. The Company does not measure an allowance for credit losses on accrued interest receivable and would instead write off accrued interest receivable at the time an issuer defaults or more.is expected to default on payments.
6.7. Fair Value Measurements
The following tables present the Company’s fair value hierarchy for financial assets and liabilities measured as of June 30, 20212022 and December 31, 20202021 ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| U.S. Government obligations | | $ | 0 | | | $ | 71.2 | | | $ | 0 | | | $ | 71.2 | |
| Total | | $ | 0 | | | $ | 71.2 | | | $ | 0 | | | $ | 71.2 | |
| | | December 31, 2020 | | June 30, 2022 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | Assets: | | | | | | | | | Assets: | | | | | | | | |
| Corporate debt securities | | Corporate debt securities | | $ | — | | | $ | 576.9 | | | $ | — | | | $ | 576.9 | |
| U.S. Government obligations | U.S. Government obligations | | $ | 0 | | | $ | 6.6 | | | $ | 0 | | | $ | 6.6 | | U.S. Government obligations | | — | | | 96.0 | | | — | | | 96.0 | |
| Municipal securities | | Municipal securities | | — | | | 1.2 | | | — | | | 1.2 | |
| Fixed maturities | | Fixed maturities | | — | | | 674.1 | | | — | | | 674.1 | |
| Short term investments | | Short term investments | | — | | | 85.9 | | | — | | | 85.9 | |
| Total | Total | | $ | 0 | | | $ | 6.6 | | | $ | 0 | | | $ | 6.6 | | Total | | $ | — | | | $ | 760.0 | | | $ | — | | | $ | 760.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | |
| Corporate debt securities | | $ | — | | | $ | 588.7 | | | $ | — | | | $ | 588.7 | |
| U.S. Government obligations | | — | | | 101.5 | | | — | | | 101.5 | |
| Municipal securities | | — | | | 1.2 | | | — | | | 1.2 | |
| Fixed maturities | | — | | | 691.4 | | | — | | | 691.4 | |
| Short term investments | | — | | | 110.4 | | | — | | | 110.4 | |
| Total | | $ | — | | | $ | 801.8 | | | $ | — | | | $ | 801.8 | |
The fair value of all different classes of Level 2 fixed maturities and short-term investments are estimated by using quoted prices from a third-party valuation service provider to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments.
There were no transfers between Level 1, Level 2, or Level 3 during the three and six months ended June 30, 20212022 and during the year ended December 31, 2020,2021, respectively.
7.8. Unpaid Loss and Loss Adjustment Expense
The following table presents the activity in the liability for unpaid loss and loss adjustment expense ("LAE") for the six months ended June 30, 20212022 and 20202021 ($ in millions):
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| Unpaid loss and LAE at beginning of period | Unpaid loss and LAE at beginning of period | | $ | 46.3 | | | $ | 28.2 | | Unpaid loss and LAE at beginning of period | | $ | 97.9 | | | $ | 46.3 | |
Less: Reinsurance recoverable at beginning of period (1) | Less: Reinsurance recoverable at beginning of period (1) | | 36.3 | | | 18.5 | | Less: Reinsurance recoverable at beginning of period (1) | | 72.7 | | | 36.3 | |
| Net unpaid loss and LAE at beginning of period | Net unpaid loss and LAE at beginning of period | | 10.0 | | | 9.7 | | Net unpaid loss and LAE at beginning of period | | 25.2 | | | 10.0 | |
| Add: Incurred loss and LAE, net of reinsurance, related to: | Add: Incurred loss and LAE, net of reinsurance, related to: | | Add: Incurred loss and LAE, net of reinsurance, related to: | |
| Current year | Current year | | 29.9 | | | 33.5 | | Current year | | 53.7 | | | 29.9 | |
| Prior years | Prior years | | (0.4) | | | 5.2 | | Prior years | | (1.2) | | | (0.4) | |
| Total incurred | Total incurred | | 29.5 | | | 38.7 | | Total incurred | | 52.5 | | | 29.5 | |
| Deduct: Paid loss and LAE, net of reinsurance, related to: | Deduct: Paid loss and LAE, net of reinsurance, related to: | | Deduct: Paid loss and LAE, net of reinsurance, related to: | |
| Current year | Current year | | 19.0 | | | 24.4 | | Current year | | 30.0 | | | 19.0 | |
| Prior years | Prior years | | 5.5 | | | 13.2 | | Prior years | | 14.4 | | | 5.5 | |
| Total paid | Total paid | | 24.5 | | | 37.6 | | Total paid | | 44.4 | | | 24.5 | |
| Unpaid loss and LAE, net of reinsurance recoverable, at end of period | Unpaid loss and LAE, net of reinsurance recoverable, at end of period | | 15.0 | | | 10.8 | | Unpaid loss and LAE, net of reinsurance recoverable, at end of period | | 33.4 | | | 15.0 | |
Reinsurance recoverable at end of period (1) | Reinsurance recoverable at end of period (1) | | 49.7 | | | 24.5 | | Reinsurance recoverable at end of period (1) | | 89.5 | | | 49.7 | |
| Unpaid loss and LAE, gross of reinsurance recoverable, at end of period | Unpaid loss and LAE, gross of reinsurance recoverable, at end of period | | $ | 64.7 | | | $ | 35.3 | | Unpaid loss and LAE, gross of reinsurance recoverable, at end of period | | $ | 122.9 | | | $ | 64.7 | |
(1) Reinsurance recoverable in this table includes only ceded unpaid loss and LAE
Unpaid loss and LAE includes anticipated salvage and subrogation recoverable.
Considerable variability is inherent in the estimate of the reserve for losses and LAE. Although management believes the liability recorded for losses and LAE is adequate, the variability inherent in this estimate could result in changes to the ultimate liability, which may be material to stockholders' equity. Additional variability exists due to accident year allocations of ceded amounts in accordance with reinsurance agreements, which is not expected to result in any changes to the ultimate liability. Other factors that can impact loss reserve development may also include trends in general economic conditions, including the effects of inflation. The Company had unfavorablefavorable development on net loss and LAE reserves of $1.2 million for the six months ended June 30, 2022, and favorable development on net loss and LAE reserves of $0.4 million for the six months ended June 30, 2021, and favorable development on net loss and LAE reserves of $5.2 million for the six months ended June 30, 2020.2021. No additional premiums or returned premiums have been accrued as a result of prior year effects.
For the six months ended June 30, 2021, current accident year incurred loss and LAE included $6.2 million of net incurred loss and LAE from the severe winter storm that affected ourthe Company's customers in the states of Texas and Oklahoma. The net incurred loss and LAE from Winter Storm Uri as of June 30, 2021 represents the Company's best estimates based upon information currently available.
In the ordinary course of business, the Company cedes losses and LAE to other reinsurance companies. These arrangements reduce the net loss potentially arising from large or catastrophic risks. Certain of these arrangements consist of excess of loss and catastrophe contracts, which protect against losses exceeding stipulated amounts. The ceding of risk through reinsurance does not relieve the Company from its obligations to policyholders. The Company remains liable with respect to losses and LAE ceded in the event that any reinsurer does not meet obligations assumed under the reinsurance agreements. The Company does not have any significant unsecured aggregate recoverable for losses, paid and unpaid including Incurred But Not Reported ("IBNR"), loss adjustment expenses, and unearned premium with any individual reinsurer.
Through June 30, 2021, the Company hashad proportional reinsurance contracts which cover all of the Company's products and geographies, and transfer,transferred, or “cede,“ceded,” 75% of the premium to reinsurers ("Proportional Reinsurance Contracts"). In exchange, these reinsurers paypaid a ceding commission of 25% for every dollar ceded, in addition to funding all of the corresponding claims, or 75% of all claims. The Company opted to manage the remaining 25% of the business with alternative forms of reinsurance through non-proportional reinsurance contracts ("Non-Proportional Reinsurance Contracts"). The majority of the Proportional Reinsurance Contracts run for a three-year term, expiring June 30, 2023, while the remainder has a one-year term, expiring June 30, 2021. The Company's Non-Proportional Reinsurance Contracts are likewise effective as of July 1, 2020, and have a one-year term.
A portion of the Company’s proportional reinsurance program expired on June 30, 2021. The Company renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements.2021 and on June 30, 2022. As the business continues to grow and diversify, and with stability in ourthe Company's insurance results, the Company decreased the overall share of proportional reinsurance from 75% of premium to 70%.55% effective July 1, 2022. In addition, the Company purchased a new reinsurance program to protect against natural catastrophe risk in the U.S.U.S that exceed $80 million in losses effective July 1, 2022. Other non-proportional reinsurance contracts were renewed with terms similar to the expiringexpired contracts.
8.
9. Other Liabilities and Accrued Expenses
Other liabilities and accrued expenses as of June 30, 20212022 and December 31, 20202021 consist of the following ($ in millions):
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| | 2021 | | 2020 |
| | | | |
| | | | |
| Accrued advertising costs | | $ | 10.3 | | | $ | 6.8 | |
| Employee compensation payable | | 3.8 | | | 3.7 | |
| Premium taxes payable | | 3.0 | | | 3.2 | |
| Income tax payable | | 2.6 | | | 0.3 | |
| Advance premium | | 2.5 | | | 0 | |
| Accrued professional fees | | 2.4 | | | 2.6 | |
| VAT payable | | 0.2 | | | 0.2 | |
| Other payables | | 3.2 | | | 1.9 | |
| Total other liabilities and accrued expenses | | $ | 28.0 | | | $ | 18.7 | |
| | | | | | | | | | | | | | |
| | June 30, | | December 31, |
| | 2022 | | 2021 |
| | | | |
| | | | |
| Lease liabilities | | $ | 21.9 | | | $ | 22.3 | |
| Accrued advertising costs | | 10.2 | | | 11.2 | |
| Employee compensation | | 8.1 | | | 5.4 | |
| Income taxes payable | | 6.2 | | | 4.7 | |
| Accrued professional fees | | 3.8 | | | 4.6 | |
| Advance premiums | | 3.7 | | | 2.0 | |
| Premium taxes payable | | 3.6 | | | 5.4 | |
| Other payables | | 6.2 | | | 1.8 | |
| Total | | $ | 63.7 | | | $ | 57.4 | |
9.10. Stockholders’ Equity
Common stock
The Company completed its IPO on July 2, 2020, in which the Company issued and sold 12,650,000 shares of its common stock at a public offering price of $29 per share, including 1,650,000 shares sold upon the exercise of the underwriter's option to purchase additional shares. After underwriter discounts and commissions and other offering costs, net proceeds from the IPO were approximately $335.6 million.
In connection with the IPO, the Company's outstanding convertible preferred stock converted into 31,557,107 shares of common stock. Upon conversion of the convertible preferred stock, the Company reclassified the carrying value of the preferred stock to common stock and additional paid in capital.
Upon closing of the IPO,initial public offering ("IPO") in 2020, the Company filed an amended and restated certificate of incorporation on July 7, 2020 with the Secretary of State of the State of Delaware to authorize the issuance of up to 200,000,000 shares of common stock, par value $0.00001 per share, and 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share.
On January 14, 2021, the Company completed a Follow-on Offering of common stock (the "Follow-on Offering"), which resulted in the issuance and sale of 3,300,000 shares of common stock of the Company, and 1,524,314 shares of common stock by certain selling shareholders, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and commissions and other offering costs. On February 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 of the Company, and generated additional net proceeds of $114.6 million to us after deducting underwriting discounts.
As of both June 30, 20212022 and December 31, 2020,2021, the Company was authorized to issue 200,000,000 shares of par value $0.00001 per share common stock. The voting, dividend and liquidation rights of the holders of the Company’s common stock is subject to and qualified by the rights, powers and preferences of the holders of the preferred stock.
On February 18,The Company in 2020 the Company made a contribution of 500,000 newly issued shares of common stock to a related party, the Lemonade Foundation (see Note 13)14). In connection with the Follow-on Offering noted above, Lemonade Foundation sold 100,000 of the contributed shares of the Company.
Undesignated Preferred Stock
As of both June 30, 20212022 and December 31, 2020,2021, the Company's certificate of incorporation, as amended and restated, authorized the Company to issue up to 10,000,000 shares of undesignated preferred stock, par value $0.00001 per share. As of both June 30, 20212022 and December 31, 2020,2021, there were 0no shares of undesignated preferred stock issued or outstanding.
10.11. Stock-based Compensation
Share option plans
2020 Incentive Compensation Plan
On July 2, 2020, the Company’s board of directors adopted and the Company’s stockholders approved the 2020 Incentive Compensation Plan (the “2020 Plan”), which became effective immediately prior to the effectiveness of the registration statement for the Company’s IPO on July 2, 2020. The 2020 Plan provides for the issuance of incentive stock options, non-qualified stock options, stock awards, stock units, stock appreciation rights and other stock-based awards.
The number of shares initially reserved for issuance under the 2020 Plan is 5,503,678 shares, inclusive of available shares previously reserved for issuance under the 2015 Incentive Share Option Plan, as amended and restated on September 4, 2019 (the “2015 Plan”). In addition, the number of shares reserved for issuance under the 2020 Plan is subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. Annually, on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, the reserve will be increased by an amount equal to the lesser of (A) 5% of the shares outstanding (on an as-converted basis) on the last day of the immediately preceding fiscal year and (B) such smaller number of shares as determined by the Company’s board of directors, provided that no more than 3,650,000 shares may be issued upon the exercise of incentive stock options. On January 1, 2021,2022, the 2020 Plan share pool was increased by 2,838,4123,083,050 shares, equal to 5% of the aggregate number of outstanding common stock as of December 31, 2020.2021. As of June 30, 2021,2022, there were 5,890,7004,986,203 shares of common stock available for future grants.
2020 Employee Stock Purchase Plan
On July 2, 2020, the Company's board of directors adopted and the Company's stockholders approved the 2020 Employee Stock Purchase Plan (the "2020 ESPP"), which became effective immediately prior to the effectiveness of the registration statement for the Company's IPO on July 2, 2020. The total shares of common stock initially reserved for issuance under the 2020 ESPP is limited to 1,000,000 shares. In addition, the number of shares available for issuance under the 2020 ESPP will be annually increased on January 1 of each calendar year beginning in 2021 and ending in and including 2030, by an amount equal to the lesser of (A) 1,000,000 shares, (B) 1% of the shares outstanding on the final day of the immediately preceding calendar year and (C) such smaller number of shares as is determined by the board of directors. The board of directors or a committee of the board of directors will administer and will have authority to interpret the terms of the 2020 ESPP and determine eligibility of participants. On January 1, 2021,2022, there was no increase in the 2020 ESPP was increased by 567,682 shares, equal to 1% of the aggregate number of outstanding common stock as of December 31, 2020.share pool. As of June 30, 2021,2022, there were 0no shares of common stock issued under the 2020 ESPP.
2015 Incentive Share Option Plan
In July 2015, the Company adopted the 2015 Plan.Incentive Share Option Plan ("2015 Plan"). The 2015 Plan has been amended and restated from time to time to increase the number of shares reserved for grant and to enable the grant of options to employees of the Company’s subsidiaries. Under the 2015 Plan, options to purchase common stock of the Company may be granted to employees, officers, directors and consultants of the Company. Each option granted can be exercised for one share of common stock of the Company. Options granted to employees generally vest over a period of no more than four years. The options expire ten years from the date of grant.
Pursuant to the 2015 Plan, the Company had reserved 7,312,590 shares of common stock for issuance. Effective immediately upon the approval of the 2020 plan, the remaining shares of common stock available for future grant under the 2015 Plan were transferred to the 2020 Plan. As of June 30, 2021,2022, there were 0no shares of common stock available for future grant under the 2015 Plan. Subsequent to the approval of the 2020 Plan, 0no additional grants will be made under the 2015 Plan and any outstanding awards under the 2015 Plan will continue with their original terms.
Options granted to employees and non-employees
The fair value of each option granted for the six months ended June 30, 20212022 and 20202021 is estimated on the date of grant using the Black-Scholes model based on the following assumptions:
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| Weighted average expected term (years) | Weighted average expected term (years) | | 6.3 | | 6.1 | Weighted average expected term (years) | | 6.1 | | 6.3 |
| Risk-free interest rate | Risk-free interest rate | | 1.3% | | 1.0% | Risk-free interest rate | | 2.6% | | 1.3% |
| Volatility | Volatility | | 49% | | 40% | Volatility | | 47% | | 49% |
| Expected dividend yield | Expected dividend yield | | 0% | | 0% | Expected dividend yield | | 0% | | 0% |
Expected volatility is calculated based on implied volatility from market comparisons of certain publicly traded companies at a comparable stage, as well as companies in the same or a similar industry.and other factors. The expected term of options granted is based on the simplified method, which uses the midpoint between the vesting date and the contractual term in accordance with ASC Topic 718, “Compensation — Stock Compensation”.Compensation.” The risk-free interest rate is based on observed interest rates appropriate for the term of the Company’s stock options. The dividend yield assumption is based on the Company’s historical and expected future dividend payouts and may be subject to substantial change in the future.
The following tables summarize activity of stock options and restricted stock units ("RSUs") ($ in millions, except for number of options and weighted average amounts):
Stock options
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Options | | Weighted-
Average
Exercise
Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2020 | | 4,944,711 | | $ | 20.50 | | | 8.30 | | $ | 506.58 | |
| Granted | | 2,052,325 | | 102.81 | | | | | |
| Exercised | | (739,186) | | 10.56 | | | | | |
| Cancelled | | (223,241) | | 39.21 | | | | | |
| Outstanding as of June 30, 2021 | | 6,034,609 | | $ | 48.65 | | | 8.51 | | $ | 382.66 | |
| Options exercisable as of June 30, 2021 | | 1,720,686 | | $ | 13.51 | | | 7.20 | | $ | 165.22 | |
| Options unvested as of June 30, 2021 | | 4,313,923 | | $ | 62.65 | | | 9.03 | | $ | 217.44 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of
Options | | Weighted-
Average
Exercise
Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Outstanding as of December 31, 2021 | | 6,573,744 | | $ | 46.03 | | | 8.29 | | $ | 85.86 | |
| Granted | | 2,906,961 | | | 27.20 | | | | | |
| Exercised | | (170,362) | | | 6.23 | | | | | |
| Cancelled | | (405,797) | | | 54.38 | | | | | |
| Outstanding as of June 30, 2022 | | 8,904,546 | | $ | 40.26 | | | 8.38 | | $ | 15.73 | |
| Options exercisable as of June 30, 2022 | | 2,725,019 | | $ | 24.36 | | | 6.72 | | $ | 14.32 | |
| Options unvested as of June 30, 2022 | | 6,179,527 | | $ | 47.28 | | | 9.11 | | $ | 1.41 | |
Restricted Stock Units
| | | | | | | | | | | | | | |
| | Number of shares | | Grant Date
Fair Value |
| Outstanding as of December 31, 2021 | | 335,814 | | | $ | 66.94 | |
| Granted | | 577,360 | | | 21.60 | |
| Vested | | (36,219) | | | 70.76 | |
| Cancelled | | (39,666) | | | 46.75 | |
| Outstanding as of June 30, 2022 | | 837,289 | | | $ | 36.47 | |
Restricted Stock Units
| | | | | | | | | | | | | | |
| | Number of shares | | Grant Date
Fair Value |
| Outstanding as of December 31, 2020 | | 0 | | | $ | 0 | |
| Granted | | 57,004 | | | 151.58 | |
| Vested | | 0 | | | 0 | |
| Cancelled | | (1,875) | | | 159.02 | |
| Outstanding as of June 30, 2021 | | 55,129 | | | $ | 151.33 | |
.Stock-based compensation expense
Stock-based compensation expense from stock options and RSUs granted as included and classified in the condensed consolidated statements of operations for the three and six months ended June 30, 20212022 and 20202021 is as follows ($ in millions):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Loss and loss adjustment expense, net | Loss and loss adjustment expense, net | | $ | 0.5 | | | $ | 0.1 | | | $ | 0.7 | | | $ | 0.1 | | Loss and loss adjustment expense, net | | $ | 0.6 | | | $ | 0.5 | | | $ | 1.2 | | | $ | 0.7 | |
| Other insurance expense | Other insurance expense | | 0.2 | | | 0.2 | | | 0.4 | | | 0.4 | | Other insurance expense | | 0.5 | | | 0.2 | | | 0.8 | | | 0.4 | |
| Sales and marketing | Sales and marketing | | 1.3 | | | 0.6 | | | 2.4 | | | 1.3 | | Sales and marketing | | 1.7 | | | 1.3 | | | 3.2 | | | 2.4 | |
| Technology development | Technology development | | 6.8 | | | 0.7 | | | 7.5 | | | 1.3 | | Technology development | | 5.8 | | | 6.8 | | | 11.2 | | | 7.5 | |
| General and administrative | General and administrative | | 3.1 | | | 0.8 | | | 7.0 | | | 1.5 | | General and administrative | | 5.3 | | | 3.1 | | | 11.6 | | | 7.0 | |
| Total stock-based compensation expense | Total stock-based compensation expense | | $ | 11.9 | | | $ | 2.4 | | | $ | 18.0 | | | $ | 4.6 | | Total stock-based compensation expense | | $ | 13.9 | | | $ | 11.9 | | | $ | 28.0 | | | $ | 18.0 | |
Stock-based compensation expense classified by award type as included in the condensed consolidated statements of operations is as follows ($ in millions):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Stock options | Stock options | | $ | 10.5 | | | $ | 2.4 | | | $ | 16.0 | | | $ | 4.6 | | Stock options | | $ | 11.9 | | | $ | 10.5 | | | $ | 24.0 | | | $ | 16.0 | |
| RSUs | RSUs | | 1.4 | | | 0 | | | 2.0 | | | 0 | | RSUs | | 2.0 | | | 1.4 | | | 4.0 | | | 2.0 | |
| Total stock-based compensation expense | Total stock-based compensation expense | | $ | 11.9 | | | $ | 2.4 | | | $ | 18.0 | | | $ | 4.6 | | Total stock-based compensation expense | | $ | 13.9 | | | $ | 11.9 | | | $ | 28.0 | | | $ | 18.0 | |
The total unrecognized expense granted to employees and non-employees outstanding at June 30, 20212022 was $108.2$105.5 million for the stock options and $6.4$27.9 million for the RSUs, with a remaining weighted-average vesting period of 1.5 years for the stock options and 1.51.7 years for the RSUs.
11.12. Income Taxes
Effective tax rates
The consolidated effective tax rate for the six months ended June 30, 2022 and 2021 and 2020 was (3.6)(3.7)% and (1.0)(3.6)%, respectively. The change in effective tax rate over the two periods was predominantly reflective of the change in profit before tax of its wholly-owned subsidiaries in Israel and the Netherlands. The Company believes that as of June 30, 2021,2022, it had no material uncertain tax positions. Interest and penalties related to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable.
There were no material liabilities for interest and penalties accrued as of June 30, 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law in the U.S. to provide certain relief as a result of the COVID-19 pandemic. In addition, governments around the world have enacted or implemented various forms of tax relief in measures in response to the economic conditions due to the COVID-19 pandemic. As of June 30, 2021, the Company has determined that neither the CARES Act nor changes to income tax laws or regulations in other jurisdictions had a significant impact on the Company's effective tax rate.2022.
12.
13. Net Loss per Share
Net loss per share
Basic and diluted net loss per share attributable to common stockholders was calculated as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | Numerator: | | | | | | | | | Numerator: | | | | | | | | |
| Net loss attributable to common stockholders ($ in millions) | Net loss attributable to common stockholders ($ in millions) | | $ | (55.6) | | | $ | (21.0) | | | $ | (104.6) | | | $ | (57.5) | | Net loss attributable to common stockholders ($ in millions) | | $ | (67.9) | | | $ | (55.6) | | | $ | (142.7) | | | $ | (104.6) | |
| Denominator: | Denominator: | | | | | | | | | Denominator: | | | | | | | | |
| Weighted average common shares outstanding — basic and diluted | Weighted average common shares outstanding — basic and diluted | | 61,444,958 | | 11,891,979 | | 60,643,764 | | 11,750,198 | Weighted average common shares outstanding — basic and diluted | | 61,816,225 | | 61,444,958 | | 61,757,722 | | 60,643,764 |
| Net loss per share attributable to common stockholders — basic and diluted | Net loss per share attributable to common stockholders — basic and diluted | | $ | (0.90) | | | $ | (1.77) | | | $ | (1.72) | | | $ | (4.89) | | Net loss per share attributable to common stockholders — basic and diluted | | $ | (1.10) | | | $ | (0.90) | | | $ | (2.31) | | | $ | (1.72) | |
|
The Company’s potentially dilutive securities, which include stock options and unvested RSUs, and preferred stock, have been excluded from the computation of diluted net loss per share as the effect would be anti-dilutive. Therefore, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The Company excluded unvested RSUs andthe following potential common shares, presented based on amounts outstanding options to purchase common stock of 6,089,738 and 4,578,520 for the six months ended June 30, 2021 and 2020, respectively,at each period end, from the computation of diluted net loss per share attributable to common stockholders for the periods indicated because including them would have had an anti-dilutive effect.
| | | | | | | | | | | | | | | | |
| | | | Six Months Ended June 30, |
| | | | | | 2022 | | 2021 |
| Options to purchase common stock | | | | | | 8,904,546 | | | 6,034,609 | |
| Unvested restricted stock | | | | | | 837,289 | | | 55,129 | |
| Total | | | | | | 9,741,835 | | | 6,089,738 | |
13.14. Related Party Transactions
The Company uses the services of a travel agency owned by a relative of one of the Company’s key stockholders. The Company incurred travel expenses in the amount of approximately less than $0.1 million of travel related expenses duringfor the three and six months ended June 30, 2021,2022 and less than $0.1 million of travel related expenses was incurred during the three and six months ended June 30, 2020.2021.
The Company has historically leased office spaces in the United States and The Netherlands from an affiliate. Rental expense amounted to less than $0.1 millionin connection with the leased space was incurred for the three and six months ended June 30, 2021, andapproximately less than $0.1 million for the three and six months ended June 30, 2020.2022 and June 30, 2021. There were no outstanding amounts due tofrom or fromto related parties as of June 30, 20212022 and December 31, 2020.2021.
The Company’s ChiefCo-Chief Executive Officer and the Company’s President and Chief Operating Officer,Officers, both of whom are also members of the Company’s board of directors, are the 2 sole members of the board of directors of the Lemonade Foundation. Effective July 2021, the Company's President and Chief Operating Officer became the Company's Co-Chief Executive Officer. The Company contributed 500,000 shares of common stock with a fair market value of $24.36 per share (see Note 9)10). The Company recorded $12.2 million of non-cash expense within general and administrative expense in connection with this contribution for the year ended December 31, 2020. In connection with the Follow-on Offering as discussed in Note 9,10, Lemonade Foundation sold 100,000 shares of the contributed shares of the Company. As of June 30, 2021,2022, there were no outstanding amounts due to or from the Lemonade Foundation.
14. Commitments and Contingent Liabilities
Litigation15. Contingencies
The Company is occasionally a party to routine claims or litigation incidental to its business. The Company does not believerecords accruals for loss contingencies with these legal matters when it is probable that it isa liability will be incurred, and the amount of the loss can be reasonably estimated. The Company has been made a party to any pending legal proceedingclass action litigation alleging that is likely to have a material adverse effect on itscertain of our business financial condition or results of operations.
Lease commitments
practices were improper. The Company has determined that the liability associated with this matter is probable and its subsidiaries lease their facilities under various operating lease agreements. The Company’s headquarterscan be reasonably estimated and therefore has accrued a liability for this matter in New York is under a lease that expires in November 2022. The Company’s Israel based operations occupy officesaccordance with lease expiration dates that extend through July 2026. On March 18, 2019, the Company entered into a lease agreement to lease office space in Scottsdale, Arizona that expires in November 2024.
Aggregate minimum rental commitments under non-cancelable leases at June 30, 2021 are as follows ($ in millions):
| | | | | | | | |
| 2021 (remaining six months) | | $ | 2.6 | |
| 2022 | | 4.9 | |
| 2023 | | 2.8 | |
| 2024 | | 2.8 | |
| 2025 and thereafter | | 4.1 | |
| | $ | 17.2 | |
Expenses for lease of facilities for the three and six months ended June 30, 2021 were $1.1 million and $2.1 million, respectively, and for the three and six months ended June 30, 2020 were $1.0 million and $1.9 million, respectively, and are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Charges and guarantees
ASC 450, Contingencies. The Company provided guarantees with respectwill continue to office leases in an aggregate amount of $0.3 millionmonitor all legal issues and adjust the accrued liability as of June 30, 2021new information and $0.6 million as of December 31, 2020.
15.16. Geographical Breakdown of Gross Written Premium
The Company has a single reportable segment and offers insurance coverage under the homeowners multi-peril, and inland marine and general liability lines of business. Gross written premium by jurisdiction are as follows ($ in millions):
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | 2021 | | 2020 | | | 2022 | | 2021 | | 2022 | | 2021 | |
| Jurisdiction | Jurisdiction | | Amount | | % of GWP | | Amount | | % of GWP | | Amount | | % of GWP | | Amount | | % of GWP | | Jurisdiction | | Amount | | % of GWP | | Amount | | % of GWP | | Amount | | % of GWP | | Amount | | % of GWP | |
| California | California | | $ | 22.2 | | | 24.8 | % | | $ | 9.9 | | | 21.2 | % | | $ | 41.4 | | | 25.0 | % | | $ | 19.3 | | | 22.8 | % | | California | | $ | 28.3 | | | 22.4 | % | | $ | 22.2 | | | 24.8 | % | | $ | 55.4 | | | 23.4 | % | | $ | 41.4 | | | 25.0 | % | |
| Texas | Texas | | 18.7 | | | 20.9 | % | | 11.8 | | | 25.3 | % | | 33.7 | | | 20.4 | % | | 20.6 | | | 24.3 | % | | Texas | | 24.1 | | | 19.1 | % | | 18.7 | | | 20.9 | % | | 44.3 | | | 18.7 | % | | 33.7 | | | 20.4 | % | |
| New York | New York | | 10.9 | | | 12.2 | % | | 5.3 | | | 11.3 | % | | 20.9 | | | 12.6 | % | | 10.2 | | | 12.0 | % | | New York | | 15.9 | | | 12.6 | % | | 10.9 | | | 12.2 | % | | 30.7 | | | 13.0 | % | | 20.9 | | | 12.6 | % | |
| New Jersey | | New Jersey | | 5.9 | | | 4.7 | % | | 3.7 | | | 4.1 | % | | 11.2 | | | 4.7 | % | | 6.8 | | | 4.1 | % | |
| Illinois | | Illinois | | 6.6 | | | 5.2 | % | | 4.1 | | | 4.6 | % | | 11.0 | | | 4.6 | % | | 7.1 | | | 4.3 | % | |
| Georgia | Georgia | | 4.3 | | | 4.8 | % | | 2.8 | | | 6.0 | % | | 8.0 | | | 4.8 | % | | 4.9 | | | 5.8 | % | | Georgia | | 5.0 | | | 4.0 | % | | 4.3 | | | 4.8 | % | | 9.4 | | | 4.0 | % | | 8.0 | | | 4.8 | % | |
| Illinois | | 4.1 | | | 4.6 | % | | 2.6 | | | 5.6 | % | | 7.1 | | | 4.3 | % | | 4.2 | | | 5.0 | % | | |
| New Jersey | | 3.7 | | | 4.1 | % | | 1.6 | | | 3.4 | % | | 6.8 | | | 4.1 | % | | 3.1 | | | 3.7 | % | | |
| Colorado | | Colorado | | 3.9 | | | 3.1 | % | | 2.0 | | | 2.2 | % | | 6.9 | | | 2.9 | % | | 3.4 | | | 2.1 | % | |
| Pennsylvania | Pennsylvania | | 2.3 | | | 2.6 | % | | 1.1 | | | 2.4 | % | | 4.1 | | | 2.5 | % | | 1.8 | | | 2.1 | % | | Pennsylvania | | 3.2 | | | 2.5 | % | | 2.3 | | | 2.6 | % | | 5.9 | | | 2.5 | % | | 4.1 | | | 2.5 | % | |
| Michigan | | 1.9 | | | 2.1 | % | | 1.4 | | | 3.0 | % | | 3.5 | | | 2.1 | % | | 2.4 | | | 2.8 | % | | |
| Colorado | | 2.0 | | | 2.2 | % | | 0.8 | | | 1.7 | % | | 3.4 | | | 2.1 | % | | 1.5 | | | 1.8 | % | | |
| | Virginia | | Virginia | | 2.7 | | | 2.1 | % | | 1.9 | | | 2.1 | % | | 5.1 | | | 2.2 | % | | 3.4 | | | 2.1 | % | |
| Maryland | Maryland | | 1.8 | | | 2.0 | % | | 0.9 | | | 1.9 | % | | 3.4 | | | 2.1 | % | | 1.7 | | | 2.0 | % | | Maryland | | 2.5 | | | 2.0 | % | | 1.8 | | | 2.0 | % | | 4.7 | | | 2.0 | % | | 3.4 | | | 2.1 | % | |
| All other | All other | | 17.6 | | | 19.7 | % | | 8.5 | | | 18.2 | % | | 33.0 | | | 20.0 | % | | 15.1 | | | 17.7 | % | | All other | | 28.0 | | | 22.3 | % | | 17.6 | | | 19.7 | % | | 52.1 | | | 22.0 | % | | 33.1 | | | 20.0 | % | |
| | $ | 89.5 | | | 100.0 | % | | $ | 46.7 | | | 100.0 | % | | $ | 165.3 | | | 100.0 | % | | $ | 84.8 | | | 100.0 | % | | | $ | 126.1 | | | 100.0 | % | | $ | 89.5 | | | 100.0 | % | | $ | 236.7 | | | 100.0 | % | | $ | 165.3 | | | 100.0 | % | |
|
17. Subsequent Event
On July 28, 2022, the Company completed the acquisition of Metromile, Inc. (“Metromile"), a leading digital insurance platform in the United States that offers real-time, personalized auto insurance policies by the mile. The Company acquired 100% of the equity of Metromile, through an all-stock transaction based upon the exchange ratio of 0.05263 shares of Lemonade for each outstanding share of Metromile, for a total consideration of approximately $146.0 million at close date.
As the transaction recently closed, the Company is in the process of completing the purchase price accounting related to our acquisition of Metromile. We anticipate that a significant portion of the purchase consideration will be allocated to acquired intangible assets, specifically technology. We expect the preliminary purchase price accounting to be completed when all information on facts and circumstances that existed as of the acquisition date become available, but not to exceed 12 months following the acquisition date. In addition, we are still determining the pro forma financial information and the effect on our operating results.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 and Annual Report on Form 10-K for the year ending December 31, 2020 (the "Annual Report on Form 10-K").2021. 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 on Form 10-K 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, on Form 10-Q, unless we indicate otherwise or the context requires, "Lemonade, Inc.," "Lemonade," "the company," "our company," "the registrant," "we," "our," "ours" and "us" refer to Lemonade, Inc. and its consolidated subsidiaries, including Lemonade Insurance Company and Lemonade 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 in the United States and Europe, and the full technology stack to power them.
A two minutebrief chat with our bot, AI Maya, is all it takes to get covered with renters, or homeowners, insurance, pet, car or life insurance, and we expect to offer a similar experience for other insurance products over time. Claims are filed by chatting towith 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 margins aremargin 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”.“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 normallytypically 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.
This powerful trifecta, delightful experience, aligned values, and great prices, has delivered rapid growth alongside steadily improving results. During
Acquisition of Metromile
On July 28, 2022, the six months ended June 30, 2021, our gross written premium, or GWP,Company completed the acquisition of $165.3Metromile, Inc. (“Metromile"), a leading digital insurance platform in the United States that offers real-time, personalized auto insurance policies by the mile. The Company acquired 100% of the equity of Metromile, through an all-stock transaction based upon the exchange ratio of 0.05263 shares of Lemonade for each outstanding share of Metromile, for a total consideration of approximately $146.0 million nearly doubled from the $84.8 million of GWP we wrote during the six months ended June 30, 2020. Despite our shift to Proportional Reinsurance Contracts in July 2020 where we cede 75% of our premiums to our reinsurers, our total revenue was $51.7 million for the six months ended June 30, 2021 in comparison to $56.1 million for the six months ended June 30, 2020. Net loss was $104.6 million for the six months ended June 30, 2021 as compared to $57.5 million for the six months ended June 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Components of Our Results of Operations — Revenue — Gross Written Premium.”
ForMetromile is a leading digital insurance platform in the six months ended June 30, 2021, our gross loss ratio of 96% was significantly impactedUnited States. With data science at its foundation, Metromile offers real-time, personalized auto insurance policies by the severe winter stormmile instead of the industry’s reliance on approximations that affected our customers inhave historically made prices unfair. Metromile’s digitally native offering is built around the statesmodern 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 Texas and Oklahoma during the period ("Winter Storm Uri"). The impact of this winter storm, along with other catastrophe losses, on our gross loss ratio for the six months ended June 30, 2021 was 27%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Key Operating and Financial Metrics and Results of Operations."employees.
Initial Public Offering and Follow-on Offering
On July 7, 2020, we completed our initial public offering of common stock, or IPO, which resulted in the issuance and sale of 12,650,000 shares of common stock at the IPO price of $29.00, including the exercise of the underwriters’ option to purchase additional shares, and generated net proceeds of $335.6 million after deducting underwriting discounts and other offering costs.
On January 14, 2021, we completed a Follow-on Offering of common stock (the "Follow-on Offering"), which resulted in the issuance and sale of 3,300,000 shares of common stock by us and 1,524,314 shares of common stock by certain selling shareholders, and generated net proceeds to us of $525.7 million after deducting underwriting discounts and other offering costs. On February 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 to us after deducting underwriting discounts.
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
In December 2019,The COVID-19 was reported to have surfaced in Wuhan, China and was subsequently recognized as a pandemic by the World Health Organization. The global 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 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’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. Asresults in which as of June 30, 2021,2022, our in force premium or IFP,("IFP"), was about 91%54% higher than it was on June 30, 2020.2021. 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."
While the global economy began to reopen in the first quarter of 2021, and continues to show positive economic growth in the U.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. Therefore,Management continues to monitor and cannot definitively determine the ultimate financial impact of COVID-19 on our business could change and cannot be accurately predictedvariants 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 theour 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 subsidiarysubsidiaries 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.
Through June 30, 2021, we havehad proportional reinsurance covering 75% of our business. Under the proportional reinsurance contracts, which cover all of our products and geographies, we transfer,transferred, or “cede,“ceded,” 75% of our premium to our reinsurers (“("Proportional Reinsurance Contracts”Contracts"). In exchange, these reinsurers paypaid 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 have opted to manage the remaining 25% of our business with alternative forms of reinsurance. We have achieved this through the non-proportional reinsurance contracts (“Non-Proportional Reinsurance Contracts”). The majority of the Proportional Reinsurance Contracts run for a three-year term, expiring June 30, 2023, while the remainder has a one-year term, expiring June 30, 2021. Our Non-Proportional Reinsurance Contracts are likewise effective as of July 1, 2020, and have a one-year term.
A portion of Lemonade’s proportional reinsurance program expired on June 30, 2021. We renewed the majority of the expiring reinsurance contracts at terms that are very similar to the prior agreements.2021 and on June 30, 2022. As the business continuescontinued 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%.55% effective July 1, 2022. In addition, we purchased a new reinsurance program to protect us against natural catastrophe risk in the U.S. that exceeds $80 million in losses effective July 1, 2022. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts.
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.investments, net of investment fees paid to the Company's investment manager. Our cash and invested assets are primarily comprised of fixed-maturityfixed 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.
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
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.
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 the SEC and the listing standards of the NYSE,New York Stock Exchange, 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 of the Netherlands and Israel. As we expand the scale of our international business activities, any changes in the U.S. and foreign taxation of such activities may increase our overall provision for income taxes in the future.
We have a valuation allowance for our U.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 in the United States.
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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | ($ in millions, except Premium per customer) | | ($ in millions, except Premium per customer) | | ($ in millions, except
Premium per customer) | | ($ in millions, except
Premium per customer) |
| Customers (end of period) | Customers (end of period) | 1,206,172 | | | 814,160 | | | 1,206,172 | | | 814,160 | | Customers (end of period) | 1,579,936 | | | 1,206,172 | | | 1,579,936 | | | 1,206,172 | |
| In force premium (end of period) | In force premium (end of period) | $ | 296.8 | | | $ | 155.1 | | | $ | 296.8 | | | $ | 155.1 | | In force premium (end of period) | $ | 457.6 | | | $ | 296.8 | | | $ | 457.6 | | | $ | 296.8 | |
| Premium per customer (end of period) | Premium per customer (end of period) | $ | 246 | | | $ | 190 | | | $ | 246 | | | $ | 190 | | Premium per customer (end of period) | $ | 290 | | | $ | 246 | | | $ | 290 | | | $ | 246 | |
| Annual dollar retention (end of period) | Annual dollar retention (end of period) | 82 | % | | 73 | % | | 82 | % | | 73 | % | Annual dollar retention (end of period) | 83 | % | | 82 | % | | 83 | % | | 82 | % |
| Total revenue | Total revenue | $ | 28.2 | | | $ | 29.9 | | | $ | 51.7 | | | $ | 56.1 | | Total revenue | $ | 50.0 | | | $ | 28.2 | | | $ | 94.3 | | | $ | 51.7 | |
| Gross earned premium | Gross earned premium | $ | 66.9 | | | $ | 35.3 | | | $ | 123.1 | | | $ | 65.8 | | Gross earned premium | $ | 106.8 | | | $ | 66.9 | | | $ | 202.8 | | | $ | 123.1 | |
| Gross profit | Gross profit | $ | 9.8 | | | $ | 5.4 | | | $ | 11.7 | | | $ | 10.0 | | Gross profit | $ | 11.3 | | | $ | 9.8 | | | $ | 21.5 | | | $ | 11.7 | |
| Adjusted gross profit | Adjusted gross profit | $ | 12.8 | | | $ | 7.0 | | | $ | 17.8 | | | $ | 12.4 | | Adjusted gross profit | $ | 17.5 | | | $ | 12.8 | | | $ | 33.8 | | | $ | 17.8 | |
| Net loss | Net loss | $ | (55.6) | | | $ | (21.0) | | | $ | (104.6) | | | $ | (57.5) | | Net loss | $ | (67.9) | | | $ | (55.6) | | | $ | (142.7) | | | $ | (104.6) | |
| Adjusted EBITDA | Adjusted EBITDA | $ | (40.4) | | | $ | (18.2) | | | $ | (81.7) | | | $ | (40.6) | | Adjusted EBITDA | $ | (50.3) | | | $ | (40.4) | | | $ | (107.7) | | | $ | (81.7) | |
| Gross profit margin | Gross profit margin | 35 | % | | 18 | % | | 23 | % | | 18 | % | Gross profit margin | 23 | % | | 35 | % | | 23 | % | | 23 | % |
| Adjusted gross profit margin | Adjusted gross profit margin | 45 | % | | 23 | % | | 34 | % | | 22 | % | Adjusted gross profit margin | 35 | % | | 45 | % | | 36 | % | | 34 | % |
Ratio of Adjusted Gross Profit to Gross Earned
Premium | Ratio of Adjusted Gross Profit to Gross Earned
Premium | 19 | % | | 20 | % | | 14 | % | | 19 | % | Ratio of Adjusted Gross Profit to Gross Earned Premium | 16 | % | | 19 | % | | 17 | % | | 14 | % |
| Gross loss ratio | Gross loss ratio | 74 | % | | 67 | % | | 96 | % | | 70 | % | Gross loss ratio | 86 | % | | 74 | % | | 88 | % | | 96 | % |
| Net loss ratio | Net loss ratio | 80 | % | | 70 | % | | 98 | % | | 71 | % | Net loss ratio | 90 | % | | 80 | % | | 90 | % | | 98 | % |
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 1%2.0% of IFP.
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
•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.
Results of Operations
Comparison of the Three Months Ended June 30, 20212022 and 20202021
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Revenue | Revenue | | Revenue | |
| Net earned premium | Net earned premium | $ | 16.3 | | | $ | 29.2 | | | $ | (12.9) | | | (44) | % | Net earned premium | $ | 31.2 | | | $ | 16.3 | | | $ | 14.9 | | | 91 | % |
| Ceding commission income | Ceding commission income | 10.6 | | | 0.4 | | | 10.2 | | | 2,550 | % | Ceding commission income | 15.5 | | | 10.6 | | | 4.9 | | | 46 | % |
| Net investment income | Net investment income | 0.2 | | | 0.2 | | | — | | | — | % | Net investment income | 1.2 | | | 0.2 | | | 1.0 | | | 500 | % |
| Commission and other income | Commission and other income | 1.1 | | | 0.1 | | | 1.0 | | | 1,000 | % | Commission and other income | 2.1 | | | 1.1 | | | 1.0 | | | 91 | % |
| Total revenue | Total revenue | 28.2 | | | 29.9 | | | (1.7) | | | (6) | % | Total revenue | 50.0 | | | 28.2 | | | 21.8 | | | 77 | % |
| Expense | Expense | | Expense | |
| Loss and loss adjustment expense, net | Loss and loss adjustment expense, net | 13.0 | | | 20.5 | | | (7.5) | | | (37) | % | Loss and loss adjustment expense, net | 28.1 | | | 13.0 | | | 15.1 | | | 116 | % |
| Other insurance expense | Other insurance expense | 5.2 | | | 4.0 | | | 1.2 | | | 30 | % | Other insurance expense | 9.7 | | | 5.2 | | | 4.5 | | | 87 | % |
| Sales and marketing | Sales and marketing | 33.1 | | | 16.1 | | | 17.0 | | | 106 | % | Sales and marketing | 37.0 | | | 33.1 | | | 3.9 | | | 12 | % |
| Technology development | Technology development | 14.0 | | | 4.2 | | | 9.8 | | | 233 | % | Technology development | 17.8 | | | 14.0 | | | 3.8 | | | 27 | % |
| General and administrative | General and administrative | 15.8 | | | 5.8 | | | 10.0 | | | 172 | % | General and administrative | 22.4 | | | 15.8 | | | 6.6 | | | 42 | % |
| Total expense | Total expense | 81.1 | | | 50.6 | | | 30.5 | | | 60 | % | Total expense | 115.0 | | | 81.1 | | | 33.9 | | | 42 | % |
| Loss before income taxes | Loss before income taxes | (52.9) | | | (20.7) | | | (32.2) | | | 156 | % | Loss before income taxes | (65.0) | | | (52.9) | | | (12.1) | | | 23 | % |
| Income tax expense | Income tax expense | 2.7 | | | 0.3 | | | 2.4 | | | 800 | % | Income tax expense | 2.9 | | | 2.7 | | | 0.2 | | | 7 | % |
| Net loss | Net loss | $ | (55.6) | | | $ | (21.0) | | | $ | (34.6) | | | 165 | % | Net loss | $ | (67.9) | | | $ | (55.6) | | | $ | (12.3) | | | 22 | % |
Net Earned Premium
Net earned premium decreased $12.9increased $14.9 million, or 44%91%, to $16.3$31.2 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 20202021, primarily due to the earning of increased gross written premium mostly offset by the earningand increased retention of increased ceded written premium under our Proportional Reinsurance Contracts as discussed above under "Reinsurance"."Reinsurance."
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Gross written premium | Gross written premium | $ | 89.5 | | | $ | 46.7 | | | $ | 42.8 | | | 92 | % | Gross written premium | $ | 126.1 | | | $ | 89.5 | | | $ | 36.6 | | | 41 | % |
| Ceded written premium | Ceded written premium | (66.5) | | | (6.0) | | | (60.5) | | | 1,008 | % | Ceded written premium | (87.9) | | | (66.5) | | | (21.4) | | | 32 | % |
| Net written premium | Net written premium | $ | 23.0 | | | $ | 40.7 | | | $ | (17.7) | | | (43) | % | Net written premium | $ | 38.2 | | | $ | 23.0 | | | $ | 15.2 | | | 66 | % |
Gross written premium increased $42.8$36.6 million, or 92%41%, to $89.5$126.1 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. The increase was primarily due to a 48% 31% increase in net added customers year over year driven by the success of our digital advertising campaigns.campaigns and partnerships. We also continued to expand our geographic footprint and product offerings. Since June 30, 2020, we began writing policies in 9additional U.S. states, launched a pet health insurance product in the U.S., and expanded internationally into the Netherlands and France. We also saw a 29%18% increase in premiumspremium per customer year over year primarily due to an increasing prevalence of multiple policies per customer, growth in the overall average policy value, and continued shift in the mix of underlying products toward higher value policies.
Ceded written premium increased $60.5$21.4 million, or 1,008%32%, to $66.5$87.9 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020,2021, primarily due to the impact of the change in reinsurance arrangement. Onarrangements. 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 effective July 1, 2020, we entered into Proportional Reinsurance Contracts where we cede 75% of our written premiums2021. Other non-proportional reinsurance contracts were renewed in 2021 with terms similar to our reinsurers that cover all of our products and geographies, and premium was ceded both on new policies written or renewed, as well as a portion of the unearned premium reserve.
Net written premium decreased $17.7increased $15.2 million, or 43%66%, to $23.0$38.2 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. The decreaseincrease was primarily due to the $60.5$36.6 million, or 1,008%41%, increase in cededgross written premium offset by the increase in grossceded written premium of $21.4 million, or 32%, for the three months ended June 30, 2021,2022, as compared to the three months ended June 30, 2020.2021.
The table below shows the amount of premium we earned on a gross and net basis. Ceded earned premium as a percentage of gross earned premium increaseddecreased to approximately 71% for the three months ended June 30, 2022, as compared to approximately 76% for the three months ended June 30, 2021 as compared to 17% for the three months ended June 30, 2020 primarily due to the new Proportional Reinsurance Contracts.change in proportional reinsurance. contracts.
| | | Three Months Ended June 30, | | | Three Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Gross earned premium | Gross earned premium | $ | 66.9 | | | $ | 35.3 | | | $ | 31.6 | | | 90 | % | Gross earned premium | $ | 106.8 | | | $ | 66.9 | | | $ | 39.9 | | | 60 | % |
| Ceded earned premium | Ceded earned premium | (50.6) | | | (6.1) | | | (44.5) | | | 730 | % | Ceded earned premium | (75.6) | | | (50.6) | | | (25.0) | | | 49 | % |
| Net earned premium | Net earned premium | $ | 16.3 | | | $ | 29.2 | | | $ | (12.9) | | | (44) | % | Net earned premium | $ | 31.2 | | | $ | 16.3 | | | $ | 14.9 | | | 91 | % |
Ceding Commission Income
Ceding commission income of $10.6increased $4.9 million, was recognizedor 46%, to $15.5 million for the three months ended June 30, 2022 compared to the three months ended June 30, 2021, based onconsistent with the increase in ceded earned premium ceded related to the quota-shareproportional reinsurance agreementscontracts with third-party reinsurers during the period.
Net Investment Income
Net investment income amounted to $1.2 million for the three months ended June 30, 2022 and $0.2 million for the three months ended June 30, 2021 and three months ended June 30, 2020.2021. We mainly invest in cash, money market funds, U.S. Treasury bills, corporate debt securities, notes and other obligations issued or guaranteed by the U.S. Government, and netGovernment. Net investment income for the period iswas primarily driven by interest rates on investment balances.balances, and offset by investment expenses of $0.1 million.
Commission and Other Income
Commission and other income of $1.1increased $1.0 million, was recognizedor 91%, to $2.1 million for the sixthree months ended June 30, 2022 compared to the three months ended June 30, 2021, based on premiumdue to growth in premiums placed with third-party insurance companies during the period and an increase in installment fees billed.
Loss and Loss Adjustment Expense, Net
Loss and LAE, net decreased $7.5increased $15.1 million, or 37%116%, to $13.0$28.1 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. The decreaseincrease was primarily driven by thein line with growth in premium, increase in net retained losses due to change in proportional reinsurance structure in which approximately 75%contract and increased claims costs due to impact of loss and LAE is ceded to reinsurers.inflation. These increases were partially offset by favorable prior period development.
Other Insurance Expense
Other insurance expense increased $1.2$4.5 million, or 30%87%, to $5.2$9.7 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. The increase was primarily due to employee-related expense, including stock-based compensation, which increased by $0.7$2.6 million, or 70%153%, as compared to the three months ended June 30, 2020,2021, driven by an increase in underwriting staff to support our continued growth. Professional fees and other increased $1.0 million, or 77%, primarily in support of growth and expansion initiatives for new products. Credit card processing fees increased $0.6 million, or 60%38%, as a result of the increase in customers and associated premium. Professional fees and other increased $0.6 million, or 86%, primarily in support of growth and expansion initiatives for new products. These increases were offset by a $0.6 million, or 50%, decrease in amortizationAmortization of deferred acquisitionsacquisition costs, net of ceding commissions.commissions increased $0.3 million, or 50%.
Sales and Marketing
Sales and marketing expense increased $17.0$3.9 million, or 106%12%, to $33.1$37.0 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020. Expense related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $13.8 million, or 124%, for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, as a result of greater spending on search advertising and other customer acquisition channels in response to new product offerings.2021. Employee-related expense, including stock-based compensation, increased by $2.7$2.4 million, or 75%38%, as compared to the prior year period, driven by an increase in sales and marketing headcount to support our continued growth and expansion intoexpansion. Expense related to brand and performance advertising also increased by $0.7 million, or 3%, for the three months ended June 30, 2022 as compared to the three months ended June 30, 2021, as a result of greater spending on search advertising and other customer acquisition channels in response to new products and markets.product offerings.
Technology Development
Technology development expense increased $9.8$3.8 million, or 233%27%, to $14.0$17.8 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. Employee-related expense, including stock-based compensation, and net of capitalized costs for the development of internal-use software, increased $9.3$2.4 million, or 258%19%, as compared to the three months ended June 30, 2020,2021, 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 $0.5$0.6 million, or 125%67%.
General and Administrative
General and administrative expense increased $10.0$6.6 million, or 172%42%, to $15.8$22.4 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 2020.2021. Employee-related expense, including stock-based compensation, increased by $4.2$4.4 million, or 150%63%, as we increased finance, legal, business operations and administrative personnel. Insurance obtained for operating as a public company increased by $2.2 million, or 1,100%. Bad debt expense increased by $0.9 million, or 180%, and depreciation expense increased $0.5 million or 167%. Legal, accounting and other professional fees increased $0.5$0.8 million, or 45%50%, to support the compliance requirements necessary to operate as a public company. Softwaregrowing global, multi-product line of business and regulated companies. Depreciation expense increased $0.8 million, or 100%, and software costs increased $0.5$0.6 million, or 250%86%.
Income Tax Expense
Income tax expense increased $2.4$0.2 million, or 800%7%, to $2.7$2.9 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 20202021 due to increased tax liability related to income generated by our subsidiaries organized under the laws of the Netherlands and Israel.
Net Loss
Net loss increased $34.6$12.3 million, or 165%22%, to $55.6$67.9 million for the three months ended June 30, 20212022 compared to the three months ended June 30, 20202021 due to the factors described above.
Comparison of the Six Months Ended June 30, 20212022 and 20202021
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Revenue | Revenue | | Revenue | |
| Net earned premium | Net earned premium | $ | 30.1 | | | $ | 54.5 | | | $ | (24.4) | | | (45) | % | Net earned premium | $ | 58.6 | | | $ | 30.1 | | | $ | 28.5 | | | 95 | % |
| Ceding commission income | Ceding commission income | 19.6 | | | 0.4 | | | 19.2 | | | 4,800 | % | Ceding commission income | 29.5 | | | 19.6 | | | 9.9 | | | 51 | % |
| Net investment income | Net investment income | 0.4 | | | 1.1 | | | (0.7) | | | (64) | % | Net investment income | 2.1 | | | 0.4 | | | 1.7 | | | 425 | % |
| Commission and other income | Commission and other income | 1.6 | | | 0.1 | | | 1.5 | | | 1,500 | % | Commission and other income | 4.1 | | | 1.6 | | | 2.5 | | | 156 | % |
| Total revenue | Total revenue | 51.7 | | | 56.1 | | | (4.4) | | | (8) | % | Total revenue | 94.3 | | | 51.7 | | | 42.6 | | | 82 | % |
| Expense | Expense | | Expense | |
| Loss and loss adjustment expense, net | Loss and loss adjustment expense, net | 29.5 | | | 38.7 | | | (9.2) | | | (24) | % | Loss and loss adjustment expense, net | 52.5 | | | 29.5 | | | 23.0 | | | 78 | % |
| Other insurance expense | Other insurance expense | 10.0 | | | 7.3 | | | 2.7 | | | 37 | % | Other insurance expense | 18.8 | | | 10.0 | | | 8.8 | | | 88 | % |
| Sales and marketing | Sales and marketing | 62.2 | | | 35.3 | | | 26.9 | | | 76 | % | Sales and marketing | 75.3 | | | 62.2 | | | 13.1 | | | 21 | % |
| Technology development | Technology development | 21.1 | | | 7.7 | | | 13.4 | | | 174 | % | Technology development | 34.7 | | | 21.1 | | | 13.6 | | | 64 | % |
| General and administrative | General and administrative | 29.9 | | | 24.0 | | | 5.9 | | | 25 | % | General and administrative | 50.6 | | | 29.9 | | | 20.7 | | | 69 | % |
| Total expense | Total expense | 152.7 | | | 113.0 | | | 39.7 | | | 35 | % | Total expense | 231.9 | | | 152.7 | | | 79.2 | | | 52 | % |
| Loss before income taxes | Loss before income taxes | (101.0) | | | (56.9) | | | (44.1) | | | 78 | % | Loss before income taxes | (137.6) | | | (101.0) | | | (36.6) | | | 36 | % |
| Income tax expense | Income tax expense | 3.6 | | | 0.6 | | | 3.0 | | | 500 | % | Income tax expense | 5.1 | | | 3.6 | | | 1.5 | | | 42 | % |
| Net loss | Net loss | $ | (104.6) | | | $ | (57.5) | | | $ | (47.1) | | | 82 | % | Net loss | $ | (142.7) | | | $ | (104.6) | | | $ | (38.1) | | | 36 | % |
Net Earned Premium
Net earned premium decreased $24.4increased $28.5 million, or 45%95%, to $30.1$58.6 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021 primarily due to the earning of increased gross written premium partially offset by the earningand increased retention of increased ceded written premium under our Proportional Reinsurance Contracts as discussed in detail above under "Reinsurance"."Reinsurance."
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Gross written premium | Gross written premium | $ | 165.3 | | | $ | 84.8 | | | $ | 80.5 | | | 95 | % | Gross written premium | $ | 236.7 | | | $ | 165.3 | | | $ | 71.4 | | | 43 | % |
| Ceded written premium | Ceded written premium | (122.1) | | | (10.3) | | | (111.8) | | | 1,085 | % | Ceded written premium | (163.5) | | | (122.1) | | | (41.4) | | | 34 | % |
| Net written premium | Net written premium | $ | 43.2 | | | $ | 74.5 | | | $ | (31.3) | | | (42) | % | Net written premium | $ | 73.2 | | | $ | 43.2 | | | $ | 30.0 | | | 69 | % |
Gross written premium increased $80.5$71.4 million, or 95%43%, to $165.3$236.7 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. The increase was primarily due to a 48%31% increase in net added customers year over year driven by the success of our digital advertising campaigns.campaigns and partnerships. We also continued to expand our geographic footprint and product offerings. Since June 30, 2020, we began writing policies in 9 additional U.S. states, launched a pet health insurance product in the U.S., and expanded internationally into the Netherlands and France. We also saw a 29%18% increase in premiumspremium per customer year over year primarily due to an increasing prevalence of multiple policies per customer, growth in the overall average policy value, and continued shift in the mix of underlying products toward higher value policies.
Ceded written premium increased $111.8$41.4 million, or 1,085%34%, to $122.1$163.5 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020. On July 1, 2020, we entered into Proportional Reinsurance Contracts where we cede 75% of our premiums to our reinsurers and covers all of our products and geographies. Under the new agreements, premium was ceded both on new policies written or renewed on and after July 1, 2020, as well as a2021. A portion of the unearnedCompany’s proportional reinsurance program expired on June 30, 2021. 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 reserve.to 70%. The Company also purchased a new reinsurance program to protect against natural catastrophe risk in the U.S. that exceeds $60.0 million. Other non-proportional reinsurance contracts were renewed with terms similar to the expiring contracts.
Net written premium decreased $31.3increased $30.0 million, or 42%69%, to $43.2$73.2 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. The decreaseincrease was primarily due to the $111.8$71.4 million, or 1,085%43%, increase in cededgross written premiumspremium offset by the increase in grossceded written premium for the six months ended June 30, 20212022 as compared to the six months ended June 30, 2020.2021.
The table below shows the amount of premium we earned on a gross and net basis. Ceded earned premium as a percentage of gross earned premium increaseddecreased to 71% for the six months ended June 30, 2022, as compared to 76% for the six months ended June 30, 2021 as compared to 17% for the six months ended June 30, 2020 primarily due to the new Proportional Reinsurance Contracts.change in proportional reinsurance contracts.
| | | Six Months Ended June 30, | | | Six Months Ended June 30, | |
| | 2021 | | 2020 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
| | ($ in millions) | | | | ($ in millions) | | |
| Gross earned premium | Gross earned premium | $ | 123.1 | | | $ | 65.8 | | | $ | 57.3 | | | 87 | % | Gross earned premium | $ | 202.8 | | | $ | 123.1 | | | $ | 79.7 | | | 65 | % |
| Ceded earned premium | Ceded earned premium | (93.0) | | | (11.3) | | | $ | (81.7) | | | 723 | % | Ceded earned premium | (144.2) | | | (93.0) | | | (51.2) | | | 55 | % |
| Net earned premium | Net earned premium | $ | 30.1 | | | $ | 54.5 | | | $ | (24.4) | | | (45) | % | Net earned premium | $ | 58.6 | | | $ | 30.1 | | | $ | 28.5 | | | 95 | % |
Ceding Commission Income
Ceding commission income of $19.6increased $9.9 million, was recognizedor 51%, to $29.5 million for the six months ended June 30, 2022 compared to six months ended June 30, 2021, based onconsistent with the increase in ceded earned premium ceded related to the quota-shareproportional reinsurance agreements tocontracts with third-party reinsurers during the period.
Net Investment Income
Net investment income decreased $0.7increased $1.7 million, or 64%425%, to $0.4$2.1 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020. This decrease was primarily driven by lower interest rates on investment balances due to federal fund rate cuts since the prior year period.2021. We mainly invest in cash, money market funds, U.S. Treasury bills, corporate debt securities, notes and other obligations issued or guaranteed by the U.S. Government. Net investment income for the period was primarily driven by interest rates on investment balances, and offset by investment expenses of $0.2 million.
Commission and Other Income
Commission and other income of $1.6increased $2.5 million, was recognizedor 156%, to $4.1 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, baseddue to growth on premium placed with third-party insurance companies during the period and increase in installment fees billed.
Loss and Loss Adjustment Expense, Net
Loss and LAE, net decreased $9.2increased $23 million, or 24%78%, to $29.5$52.5 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. The decreaseincrease was primarily driven by thein line with growth in premium, increase in net retained losses due to change in proportional reinsurance structure in which approximately 75%contract and increased claims costs due to impact of loss and LAE is ceded to reinsurers. The decrease wasinflation. These increases were partially offset by net incurred losses of $6.2 million relating to Winter Storm Uri that affected our customers in the states of Texas and Oklahoma.favorable prior period development.
Other Insurance Expense
Other insurance expense increased $2.7$8.8 million, or 37%88%, to $10.0$18.8 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. The increase was primarily due to a $1.1 million, or 58%, increase in credit card processing fees as a result of the increase in customers and associated premiums. Employee-relatedemployee-related expense, including stock-based compensation, which increased by $1.6$4.7 million, or 89%138%, as compared to the six months ended months ended June 30, 2020,2021, driven by an increase in underwriting staff to support our continued growth. Professional fees and other increased $1.1$2.2 million, or 73%85%, primarily in support of growth and expansion initiatives. These increases were offset by $1.0 million, or 50%, decrease in amortizationAmortization of deferred acquisition costs, net of ceded commissions.ceding commissions increased $0.7 million, or 70%.
Sales and Marketing
Sales and marketing expense increased $26.9$13.1 million, or 76%21%, to $62.2$75.3 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. Expense related to brand and performance advertising, the largest component of our sales and marketing expenses, increased by $20.5$5.8 million, or 80%13%, for the six months ended June 30, 20212022 as compared to the six months ended June 30, 2020,2021, 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 $5.8$5.4 million, or 85%43%, as compared to the prior year period, driven by an increase in sales and marketing headcount to support our continued growth and expansion into new products and markets.
Technology Development
Technology development expense increased $13.4$13.6 million, or 174%64%, to $21.1$34.7 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020.2021. Employee-related expense, including stock-based compensation, net of capitalized costs for the development of internal-use software, increased $12.6$10.7 million, or 200%57%, as compared to the six months ended June 30, 2020,2021, 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 $0.9$1.3 million, or 129%81%.
General and Administrative
General and administrative expense increased $5.9$20.7 million, or 25%69%, to $29.9$50.6 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 2020. After taking into account the impact of the $12.2 million non-cash expense recognized during the six months ended June 30, 2020 in connection with the contribution to the Lemonade Foundation of 500,000 shares of common stock with a fair market value of $24.36 per share, general and administrative expense increased $18.1 million, or 75%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.2021. Employee-related expense, including stock-based compensation, increased by $8.8$9.5 million, or 157%66%, as we increased finance, legal, business operations and administrative personnel. Insurance obtained for operatingLegal, accounting and other professional fees increased $5.0 million, or 161%, to support the compliance requirements necessary to operate as a public companygrowing global, multi-product line of business and regulated companies. Software cost increased by $4.5$1.5 million, or 1,500%. Bad136%, depreciation expense increased $1.4 million, or 82%, and bad debt expense increased by $1.4$1.3 million, or 156%, and depreciation expense increased by $1.1 million, or 183%. Software costs increased by $0.7 million,or 175%57%.
Income Tax Expense
Income tax expense increased $3.0$1.5 million, or 500%42%, to $3.6$5.1 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021 due to increased tax liability related to income generated by our subsidiaries organized under the laws of the Netherlands and Israel.
Net Loss
Net loss increased $47.1$38.1 million, or 82%36%, to $104.6$142.7 million for the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021 due to the factors described above.
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, Ratioratio of Adjusted Gross Profitadjusted gross profit to Gross Earned Premium,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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | ($ in millions) | | ($ in millions) |
| Total revenue | Total revenue | $ | 28.2 | | | $ | 29.9 | | | $ | 51.7 | | | $ | 56.1 | | Total revenue | $ | 50.0 | | | $ | 28.2 | | | $ | 94.3 | | | $ | 51.7 | |
| Adjustments: | Adjustments: | | Adjustments: | |
| Loss and loss adjustment expense, net | Loss and loss adjustment expense, net | $ | (13.0) | | | $ | (20.5) | | | $ | (29.5) | | | $ | (38.7) | | Loss and loss adjustment expense, net | $ | (28.1) | | | $ | (13.0) | | | $ | (52.5) | | | $ | (29.5) | |
| Other insurance expense | Other insurance expense | (5.2) | | | (4.0) | | | (10.0) | | | (7.3) | | Other insurance expense | (9.7) | | | (5.2) | | | (18.8) | | | (10.0) | |
| Depreciation and amortization | Depreciation and amortization | (0.2) | | | — | | | (0.5) | | | (0.1) | | Depreciation and amortization | (0.9) | | | (0.2) | | | (1.5) | | | (0.5) | |
| Gross profit | Gross profit | $ | 9.8 | | | $ | 5.4 | | | $ | 11.7 | | | $ | 10.0 | | Gross profit | $ | 11.3 | | | $ | 9.8 | | | $ | 21.5 | | | $ | 11.7 | |
| Gross profit margin (% of total revenue) | Gross profit margin (% of total revenue) | 35 | % | | 18 | % | | 23 | % | | 18 | % | Gross profit margin (% of total revenue) | 23 | % | | 35 | % | | 23 | % | | 23 | % |
| Adjustments: | Adjustments: | | Adjustments: | |
| Net investment income | Net investment income | $ | (0.2) | | | $ | (0.2) | | | $ | (0.4) | | | $ | (1.1) | | Net investment income | $ | (1.2) | | | $ | (0.2) | | | $ | (2.1) | | | $ | (0.4) | |
| Employee-related expense | Employee-related expense | 1.7 | | | 0.9 | | | 3.4 | | | 1.8 | | Employee-related expense | 4.3 | | | 1.7 | | | 8.2 | | | 3.4 | |
| Professional fees and other | Professional fees and other | 1.3 | | | 0.9 | | | 2.6 | | | 1.6 | | Professional fees and other | 2.2 | | | 1.3 | | | 4.7 | | | 2.6 | |
| Depreciation and amortization | Depreciation and amortization | 0.2 | | | — | | | 0.5 | | | 0.1 | | Depreciation and amortization | 0.9 | | | 0.2 | | | 1.5 | | | 0.5 | |
| Adjusted gross profit | Adjusted gross profit | $ | 12.8 | | | $ | 7.0 | | | $ | 17.8 | | | $ | 12.4 | | Adjusted gross profit | $ | 17.5 | | | $ | 12.8 | | | $ | 33.8 | | | $ | 17.8 | |
| Adjusted gross profit margin (% of total revenue) | Adjusted gross profit margin (% of total revenue) | 45 | % | | 23 | % | | 34 | % | | 22 | % | Adjusted gross profit margin (% of total revenue) | 35 | % | | 45 | % | | 36 | % | | 34 | % |
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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | ($ in millions) | | ($ in millions) |
| Numerator: Adjusted gross profit | Numerator: Adjusted gross profit | $ | 12.8 | | | $ | 7.0 | | | $ | 17.8 | | | $ | 12.4 | | Numerator: Adjusted gross profit | $ | 17.5 | | | $ | 12.8 | | | $ | 33.8 | | | $ | 17.8 | |
| Denominator: Gross earned premium | Denominator: Gross earned premium | $ | 66.9 | | | $ | 35.3 | | | $ | 123.1 | | | $ | 65.8 | | Denominator: Gross earned premium | $ | 106.8 | | | $ | 66.9 | | | $ | 202.8 | | | $ | 123.1 | |
| Ratio of Adjusted Gross Profit to Gross Earned Premium | Ratio of Adjusted Gross Profit to Gross Earned Premium | 19 | % | | 20 | % | | 14 | % | | 19 | % | Ratio of Adjusted Gross Profit to Gross Earned Premium | 16 | % | | 19 | % | | 17 | % | | 14 | % |
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 June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 | | 2022 | | 2021 | | 2022 | | 2021 |
| | ($ in millions) | | ($ in millions) |
| Net loss | Net loss | $ | (55.6) | | | $ | (21.0) | | | $ | (104.6) | | | $ | (57.5) | | Net loss | $ | (67.9) | | | $ | (55.6) | | | $ | (142.7) | | | $ | (104.6) | |
| Adjustments: | Adjustments: | | Adjustments: | |
| Income tax expense | Income tax expense | $ | 2.7 | | | $ | 0.3 | | | $ | 3.6 | | | $ | 0.6 | | Income tax expense | $ | 2.9 | | | $ | 2.7 | | | $ | 5.1 | | | $ | 3.6 | |
| Depreciation and amortization | Depreciation and amortization | 0.8 | | | 0.4 | | | 1.7 | | | 0.7 | | Depreciation and amortization | 1.5 | | | 0.8 | | | 3.0 | | | 1.7 | |
| Stock-based compensation | Stock-based compensation | 11.9 | | | 2.4 | | | 18.0 | | | 4.6 | | Stock-based compensation | 13.9 | | | 11.9 | | | 28.0 | | | 18.0 | |
| Contribution to the Lemonade Foundation | — | | | — | | | — | | | 12.2 | | |
| Interest income | — | | | (0.1) | | | — | | | (0.1) | | |
| Transaction costs | | Transaction costs | 0.5 | | | — | | | 1.0 | | | — | |
| | Net investment income | Net investment income | (0.2) | | | (0.2) | | | (0.4) | | | (1.1) | | Net investment income | (1.2) | | | (0.2) | | | (2.1) | | | (0.4) | |
| Adjusted EBITDA | Adjusted EBITDA | $ | (40.4) | | | $ | (18.2) | | | $ | (81.7) | | | $ | (40.6) | | Adjusted EBITDA | $ | (50.3) | | | $ | (40.4) | | | $ | (107.7) | | | $ | (81.7) | |
Liquidity and Capital Resources
As of June 30, 2021,2022, we had $1,092.4$199.6 million in cash and cash equivalents.equivalents and $760.0 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. On January 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. On February 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 of June 30, 20212022 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.
Our U.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 of June 30, 2021,2022, cash and short-term investments held by these companies was $168.7$194.8 million.
Insurance companies in the United States are also required by state law to maintain a minimum level of policyholder’s surplus. Insurance regulators in the states in which we operate have a risk-based capital standard designed to identify property and casualty insurers that may be inadequately capitalized based on inherent risks of the insurer’s assets and liabilities and its mix of net written premium. Insurers falling below a calculated threshold may be subject to varying degrees of regulatory action. As of June 30, 2021,2022, the total adjusted capital of our U.S. insurance subsidiary was in excess of its respective prescribed risk-based capital requirements.
The following table summarizes our cash flow data for the periods presented:
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2022 | | 2021 |
| | ($ in millions) | | ($ in millions) |
| Net cash used in operating activities | Net cash used in operating activities | $ | (56.5) | | | $ | (35.3) | | Net cash used in operating activities | $ | (79.7) | | | $ | (56.5) | |
| Net cash (used in) provided by investing activities | $ | (69.3) | | | $ | 22.5 | | |
| Net cash provided by (used in) by investing activities | | Net cash provided by (used in) by investing activities | $ | 13.0 | | | $ | (69.3) | |
| Net cash provided by financing activities | Net cash provided by financing activities | $ | 648.1 | | | $ | 1.4 | | Net cash provided by financing activities | $ | 1.0 | | | $ | 648.1 | |
Operating Activities
Cash used in operating activities was $79.7 million for the six months ended June 30, 2022, an increase of $23.2 million from $56.5 million for the six months ended June 30, 2021, an increase of $21.2 million from $35.3 million for the six months ended June 30, 2020.2021. This reflected the $47.1$38.1 million increase in our net loss,, primarily offset by increases in unearned premium, unpaid loss and loss adjustment expense and funds held under reinsurance treaties, that exceeded the increases in premiums receivable prepaid reinsurance premium and amounts expected to be recovered from our reinsurance partners.partners and prepaid reinsurance premium. The increase in cash used in operating activities from the six months ended June 30, 20212022 compared to the six months ended June 30, 20202021 was primarily due to claim payments, and settlements with our reinsurance partners.partners, and increased spend related to growth and expansion.
Cash used in operating activities was $35.3$56.5 million for six months ended June 30, 2020.2021. This resulted from our net loss of $57.5$104.6 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, funds held and accrued and other liabilities partially offset by increases in prepaid reinsurance, premiums receivables and amounts expected to be recovered from our reinsurance partners.
Investing Activities
Cash provided by investing activities was $13.0 million for the six months ended June 30, 2022 primarily due to proceeds from sales and maturities and offset by purchases of U.S. government obligations, corporate debt securities, short term investments, and property and equipment purchased during the period.
Cash used in investing activities was $69.3 million for the six months ended June 30, 2021 primarily due to purchases of U.S. government obligationsfixed maturities and purchases in property and equipment during the period.equipment.
Financing Activities
Cash provided by investingfinancing activities was $22.5$1.0 million for the six months ended June 30, 20202022 primarily due to proceeds from the sale or maturity of fixed income securities, offset by purchases of short-term investments and U.S. government obligations and purchases of property and equipment.
Financing Activitiesstock option exercises.
Cash provided by financing activities was $648.1 million for the six months ended June 30, 2021 primarily due to proceeds received from our Follow-on Offering as discussed above(as defined in Note 10 to the unaudited interim condensed financial statements included elsewhere in this Quarterly Report) and proceeds from stock option exercises.
Cash provided by financing activities was $1.4 million for the six months ended June 30, 2020 primarily due to proceeds received from the exercise of stock awards.
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.months and for the foreseeable future. There have been no material changes as of June 30, 2022 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 $1,163.9$959.6 million in cash and investment securitiesinvestments available at June 30, 2021, including $640.3 million in net proceeds from our Follow-on Offering.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.
Contractual Obligations and Commitments
There have been no material changes to our contractual obligations from those described in our Annual Report on Form 10-K for the year ended December 31, 2020.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined by applicable regulations of the SEC, that are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP in the United States. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the 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 IPO,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 for the year ended December 31, 2020 and the notes to the unaudited interim condensed consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.Report. During the six months ended June 30, 2021,2022, there were no material changes to our critical accounting policies from those discussed in our Annual Report on Form 10-K for the year ended December 31, 2020.10-K.
Recently Issued and Adopted Accounting Pronouncements
See “Note 4 — Summary of Significant Accounting Policies” in the Notesnotes to Unaudited Condensed Consolidated Financial Statementsthe unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of accounting pronouncements recently adopted and recently issued accounting pronouncements not yet adopted and their potential impact to our unaudited condensed consolidated financial statements.
Election Under the Jumpstart Our Business Startups Act of 2012
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, the Company is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
The Company has elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Our consolidated balance sheets include assets and liabilities with estimated fair values that are subject to market risk, and the primary components of market risk affecting the Company are interest rate risk and credit risk on investments in fixed maturities. The Company does not have equity price risk or exposure to commodity risk. There were no invested assets denominated in foreign currencies.
Overview
The Company’s investment portfolio is primarily fixed income securities issued by the U.S. government and government agencies and corporate issuers with relatively short durations. The investment portfolio is managed in accordance with the investment policies and guidelines approved by the board of directors. The Company’s investment policy and objectives provide a balance between current yield, conservation of capital, and liquidity requirements of the Company’s operations setting guidelines that provide for a well-diversified investment portfolio that is compliant with insurance regulations applicable to the states in which we operate. The policy, which may change from time to time, and is approved by the board of directors and reviewed on a regular basis in order to ensure that the policy evolves in response to changes in the financial markets.
Interest Rate Risk
Interest rate risk is the risk that the Company will incur a loss due to adverse changes in interest rates relative to the interest rate characteristics of interest bearing assets and liabilities. As market interest rates decrease, the value of the portfolio increases and vice versa. A common measure of the interest sensitivity of fixed maturity assets is modified duration, a calculation that utilizes maturity, coupon rate, yield and call terms to calculate an average age to receive the present value of all the cash flows generated by such assets, including reinvestment of interest. The longer the duration, the more sensitive the asset is to market interest rate fluctuations. We manage this interest rate risk by investing in securities with relatively short durations. In addition, if a 10% change in interest rates were to have immediately occurred on June 30, 2021,2022, this change would not have a material effect on the fair value of our investments as of that date.
Credit Risk
We are also exposed to credit risk on our investment portfolio.portfolio and reinsurance recoverable. Credit risk results from uncertainty in a counterparty’s ability to meet its obligations. We monitor our investment portfolio to ensure that credit risk does not exceed prudent levels. The majority of our investment portfolio is invested in high credit quality, investment grade fixed maturity securities. As of June 30, 2021,2022, none of our fixed maturity portfolio was unrated or rated below investment grade.
Inflation Risk
Inflationary factors such as increases in overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of operating expenses as a percentage of revenue, if the selling prices of our products do not increase with these increased costs.
Item 4. Controls and Procedures.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our co-principal executive officers and principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report, on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, our co-principal executive officers and principal financial officer concluded that, as of June 30, 2022, our disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2021.2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identifiedas defined in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of13a-15(f) and 15(d)-(f) under the Exchange ActAct) during the quarter ended June 30, 20212022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
We areThe Company is occasionally a party to routine claims or litigation incidental to its business and has been made a party to class action litigation alleging that certain of our business practices were improper. See Note 15 - Contingencies in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report. The Company does not subjectbelieve that it is a party to any pending legal proceeding that is likely to have a material legal proceedings.adverse effect on its business, financial condition or results of operations.
Item 1A. Risk Factors.
The Company's business, results of operations, and financial condition are subject to various risks described in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.10-K. There have been no material changes to the risk factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, except for the risk below related to certain of our operations in Israel.10-K.
We conduct certain of our operations in Israel and therefore our results may be adversely affected by political, economic and military instability in Israel and the region.
We maintain offices in Israel and some of our officers, employees and directors are residents of Israel. Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our Israeli operations. In recent years, Israel has been involved in sporadic armed conflicts with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large portions of Southern Lebanon, and with Iranian-backed military forces in Syria. Some of these hostilities were accompanied by missile strikes from the Gaza Strip against civilian targets in various parts of Israel, including areas in which our officers, employees and directors are located, and negatively affected conditions in Israel. The tension between Israel and Iran and/or these groups may escalate in the future and turn even more violent, which could materially adversely affect conditions in Israel in general and our operations in particular.
Furthermore, many Israeli citizens are obligated to perform several days, and in some cases more, of annual military reserve duty each year until they reach the age of 40 (or older, for reservists who are military officers or who have certain occupations) and, in the event of a military conflict, may be called to active duty. In response to increases in terrorist activity, there have been periods of significant call-ups of military reservists. It is possible that there will be military reserve duty call-ups in the future. Our operations could be disrupted by such call-ups, which may include the call-up of our officers and employees. Such disruption could materially adversely affect our business, prospects, financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Recent Sales of Unregistered Securities; Purchases of Equity Securities by the Issuer or Affiliated Purchaser
None.
Use of Proceeds
On July 1, 2020, the SEC declared effective our registration statement on Form S-1 (File No. 333-239007), as amended, filed in connection with our initial public offering, or Registration Statement.IPO (the "Registration Statement").
The net proceeds of approximately $335.6 million from our initial public offeringIPO have been invested in investment grade, interest-bearing instruments. There has been no material change in the expected use of the net proceeds from our initial public offeringIPO as described in our final prospectus, dated July 1, 2020, filed with the SEC pursuant to Rule 424(b) relating to our Registration Statement.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
As previously disclosed in a Current Report on Form 8-K filed on July 23, 2021, the Company appointed Adina Eckstein as Chief Operating Officer on July 21, 2021. On August 5, 2021, the Company and Ms. Eckstein entered into a severance agreement, pursuant to which Ms. Eckstein’s employment with the Company is at-will. The severance agreement provides that, upon Ms. Eckstein’s termination of employment by the Company without cause, subject to Ms. Eckstein’s execution and non-revocation of a release of claims, Ms. Eckstein will be entitled to receive, in addition to any accrued amounts, (i) her annual base salary for a period of six months, (ii) fifty percent of her target annual bonus for the year in which such termination occurs, (iii) continuation of benefits consisting of six months of company contributions to her pension insurance, six months of company contributions to her education fund, and a company-paid car for six months and (iv) the acceleration of six months of vesting of any outstanding equity awards. If Ms. Eckstein’s employment is terminated in the period starting three months prior to a change in control and ending on the first anniversary of such change in control, Ms. Eckstein will instead be entitled to receive, in addition to any accrued amounts, (i) her annual base salary for a period of twelve months, (ii) one hundred percent of her target annual bonus for the year in which such termination occurs, (iii) continuation of benefits consisting of twelve months of company contributions to her pension insurance, twelve months of company contributions to her education fund, and a company-paid car for six months and (iv) full acceleration of vesting of any outstanding equity awards. On August 5, 2021, the Company and Ms. Eckstein also entered into a standard indemnification agreement for directors and officers.
Item 6. Exhibits.
| Exhibit
Number | Exhibit
Number | | Description | | Incorporated by Reference | | Exhibit
Number | | Description | | Incorporated by Reference | |
| | Form | File No. | Exhibit | Filing Date | | | Form | File No. | Exhibit | Filing Date | |
| | | | Agreement and Plan of Merger, dated as of November 8, 2021, by and among Lemonade, Inc., Metromile, Inc., Citrus Merger Sub A, Inc. a wholly-owned subsidiary of Lemonade, Inc. and Citrus Merger Sub B, LLC, a wholly-owned subsidiary of Lemonade, Inc. | | S-4 | 333-261629 | 2.3 | 12/14/2021 | |
| | | | | 8-K | 001-39367 | 3.1 | 7/10/2020 | | | | | | 8-K | 001-39367 | 3.1 | 7/10/2020 | |
| | | | | 8-K | 001-39367 | 3.2 | 7/10/2020 | | | | | | 8-K | 001-39367 | 3.2 | 7/10/2020 | |
| | | | | S-1/A | 333-239007 | 4.1 | 6/23/2020 | | | | | | S-1/A | 333-239007 | 4.1 | 6/23/2020 | |
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| 101.INS* | 101.INS* | | Inline XBRL Instance Document | | | 101.INS* | | Inline XBRL Instance Document | | |
| 101.SCH* | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | | 101.SCH* | | Inline XBRL Taxonomy Extension Schema Document | | |
| 101.CAL* | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | 101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | |
| 101.DEF* | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | 101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | |
| 101.LAB* | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | 101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase Document | | |
| 101.PRE* | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | 101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | |
| 104* | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | 104* | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | |
____________
* Filed herewith.
** Furnished herewith.
† Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(b)(10)(iv).
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | | | | |
| | Lemonade, Inc. |
| | | |
| Date: | August 11, 20219, 2022 | By: | /s/ Daniel Schreiber |
| | | Daniel Schreiber |
| | | Co-Chief Executive Officer |
| | | |
| | | |
| Date: | August 11, 20219, 2022 | By: | /s/ Shai Wininger |
| | | Shai Wininger |
| | | Co-Chief Executive Officer |
| | | |
| | | |
| Date: | August 11, 20219, 2022 | By: | /s/ Tim Bixby |
| | | Tim Bixby |
| | | Chief Financial Officer |