Lemonade published their Q3 shareholder letter during after-hours on the 10^th of November. The reported numbers were outstanding and managed to exceed my high expectations. The third-quarter revenue of 2020 was $17.8M, representing a decline of 6.3% YoY. So why am I so excited, even with lower sales than last year?

The decline in revenue is not caused by a decrease in the underlying business but by accounting rules. Before, LMND reported ceded premium as revenue. Simply put, LMND forwards some of its customers to reinsurers. Until Q3 of 2020, the premiums generated through reinsurers were counted as revenue. Beginning with this earnings report, only the commission that LMND gets from their reinsurers is counted as revenue. Accordingly, leading to a spike in gross margin (21% in Q3 2019 to 41% in Q3 2020) and a decrease in revenues.

Figure 1: Revenue and Gross margin

Source: Lemonade

However, these accounting changes were already communicated in the last quarter, so it was not surprising to informed investors. If anything, LMND solidly beat estimates. Management guided to $14.5M for this quarter. Hence, LMND also beat its own revenue guidance by roughly 23%.

A metric that better reflects the underlying business of LMND is in force premium (IFP). It is calculated by multiplying the number of customers by the average premium generated per customer. The respective guidance for Q3 was at midpoint $172.5M. The reported IFP is $188.9M (99% YoY), thus, beating guidance by 9.5%. This beat was only possible due to surprises in the two underlying factors, customer base, which grew QoQ by 16% to 941K, and the respective premium per customer of $201.

This growth rate is possible due to costumers combining pet insurance and homeowners or renters insurance. LMND is generating higher interest in their products without investing further in marketing for this customer group. Leading us to the big news of this quarter, LMND will start to offer life insurance during the next 90 days. This leads to a strengthening of the effect described above and enables LMND to continue to grow rapidly. However, this is just a test product for now. As we advance, it will be interesting to see if LMND will scale this business so fast as the pet insurance.

Last but not least, LMND also increased its guidance for IFP from $192.5M to 202.5M.

In the following some tidbits of the conference call and other exciting results:

• Adjusted EBITDA loss of $27.6M vs. mid-point guidance of $32.5M.
• Entering the French market in 2020
• Prioritization of the American market over the European market due to customer acquisition costs