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HomeValue InvestingInsurtech Massacre part 3 – Lemonade & Churn, churn, churn !!

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

Long time readers know that I have a soft spot for insurance companies. Some weeks ago, I started looking into Insurtech companies and then I looked into Lemonade’s 2021 earnings. Since my first post, Lemonade has lost another 1/3 of its value and is now significantly below its IPO price.

What I like about Lemonade is that they indeed created a “fresh” insurance brand, however the numbers were clearly challenging. My main takeaways from last time were as following:

  • Growth is slowing
  • marketing cost is increasing (per new dollar premium)
  • The business is not really scaling

Already a week ago, Lemonade issued its Q1 earnings. This time, I have compiled a few line items that I find interesting on a quarterly basis in order to analyze things more deeply:

  Q2 2022 est Q1 2022 Q4 2021 Q3 2001 Q2 2021 Q1 2021 Q4 2020
In Force premium 447,5 419 380 347 297 252 213
Gross earned premium 104 96 89 80 66,9 56 50
Revenue 47 44 41 35,7 28,2 20,8 20,5
Gross profit   10 7,8 11,7 9,8 1,9 7,5
Total expenses   117 109 99 81,1 71,6 53,9
loss ratio   90% 96% 77% 74% 121% 71%
Expense ratio   122% 122% 124% 121% 128% 108%
Combined Ratio   212% 218% 201% 195% 249% 179%
Net loss   -74,8 -70,3 -67,3 -55,6 -49 -33,9
Churn annual   -18% -18% -18% -18% -19%  
Customers   1504 1427 1363 1206 1096 1000
Stock based comp 15 14,1 13,4 12,7 11,9 6,1 3,3
Sales & marketing   38,3 37,2 42,2 33,1 29,1  
Tech&Dev   16,9 16,4 14 14 7,1  
G&A   28,1 23,1 19,6 15,8 14,1  

Lemonade reports a couple of revenue numbers, among others “in force premium”, Gross earned premium and actual “Revenue”. For me, the most relevant number is Gross earned premium because this drives everything. In force premium is nice to know but subject to churn and actual revenue is impacted by reinsurance.

  1. Slowing growth

With these numbers above, we can calculate quarterly growth numbers and it is very easy to see: Growth is slowing, even in Q1 2022:

  Q2 2022 est Q1 2022 Q4 2021 Q3 2001 Q2 2021 Q1 2021
QoQ growth IFP


10,26% 9,51% 16,84% 17,86% 18,31%
QoQ growth Gross earned 8,33% 7,87% 11,25% 19,58% 19,46% 12,00%
QoQ growth revenue 6,82% 7,32% 14,85% 26,60% 35,58% 1,46%

Not sure if Lemonade guided conservatively for Q2 in order to create a “beat”, but it is clear that revenue growth is actually slowing quite significantly.

2. Marketing efficiency: Churn baby, churn !!!

The other worrying trend has also continued: Lemonade needs to increase its spend on marketing even with slower growth rates, which means that the incremental premium generated for every marketing dollar goes down as we can see in this table:

  Q2 2022 est Q1 2022 Q4 2021 Q3 2001 Q2 2021 Q1 2021
Marketing efficiency            
Additional inforce premium:   39 33 50 45 39

Churn from previous period

  17,1 15,6 13,4 12,0 10,1
Gross new business  


48,6 63,4 57,0 49,1
Sales & Marketing exp   38,3 37,2 42,2 33,1 29,1

Cost/Gross Increase in Inforce

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

From the first table we know that 18% of the premium is “churning” every year, so the average life time of a customer is ~5 years. So in this table I calculate what amount of “gross new business” Lemonade had to write each quarter in order to achieve the net increase in “in force premium”.

Then I divide the marketing expenses through the new business volume. We can see that Q1 2022 looks a little bit better, with 68 cents to be spend in order to get 1 Dollar new gross business, but this is still a lot higher than early last year.

The biggest issue is however the last line: Due to it’s high churn, Lemonade needs to spend between 11-13% of GPE only to replace churn. In my opinion this is really an issue. Insurance is all about acquiring (and retaining) customers as cheaply and efficiently as possible. The most successful insurers are basically “acquisition and retention machines”. 

Protector from Norway for instance, pays relatively little to acquire customers and retains them on average for 10 years. this leads to a total expense ratio of 10-11% which is less than Lemonade spends only to compensate churn.

3. Other costs

Here I have compiled a few cost items that i found interesting and compared the to Gross premium earned:

  Q2 2022 est Q1 2022 Q4 2021 Q3 2001 Q2 2021 Q1 2021

Stock based comp in % of GPE

  14,69% 15,06% 15,88% 17,79% 10,89%

Sales & marketing in % of GPE

  39,90% 41,80% 52,75% 49,48% 51,96%
Tech & Dev in % of GPE   17,60% 18,43% 17,50% 20,93% 12,68%
G&A in % of GPE   29,27% 25,96% 24,50% 23,62% 25,18%

Sales & marketing cost as % of GPE go own but we should not forget that growth is also slowing. The most worrying development is clearly that general costs as % of GPE increase steadily. Normally, one should see some scaling own here but it seem that at Lemonade, costs are out of control. Maybe it has to do with product launches etc. but just to remember: Normal insurers have TOTAL cost ratios of ~25-30% and really good direct insurers between 10-15%.

Lemonade manages to blow out that amount only with stock based compensation.

The most worrying issue is however the ever increasing amount of general costs. one explanation could be that with every new product, complexity increases, they have to hire new experts etc.

Another explanation is that Lemonade, as other Softbank funded start-ups just don’t know how to save costs. Softbank pushed all their start-ups to grow at any cost and many of these companies have problems to adapt to a “lower growth, cost saving” approach.

Let’s do a simple calculation here: the annual run rate for expenses in Q1 was 117 USD or 468 mn USD annually.

If Lemonade wants to achieve a 20% cost ratio and assuming that they could hold cost constant, the would need to write (468/0.2)= 2,34 bn USD in annual premium.

At the moment they are at 0,42 bn with a projected growth rate of ~7% per quarter. this translates into around 25 quarters or more than 6 years to grow into a reasonable expense ratio, assuming costs remain at Q1 2022 level which is of course not realistic. Yes, Lemonade still has a pile of capital to burn through, but if they continue like this, they won’t reach profitability before the capital is gone.

4. Fun with graphics

This is a chart from Lemonade’s shareholder letter that Lemonade “fans” often use as proof that everything is great and Lemonade is growing nicely:

Indeed, the development of the “in force” premium is a nice and steady, upward sloping line. However, for a true growth company, this should not be a steady line !!! A steady line means that you indeed add roughly the same amount of new premium each quarter, but your percentage growth goes down each quarter.

For a company that is valued as a growth company, you want to see an exponentially growing line, not a linear one.


As much as I personally like Lemonade and it’s fresh brand, it is relatively easy to see that Lemonade has both, a growth and a cost problem.

Churn is too high and sales & marketing costs are too high to be sustainable and on top of that general costs grow faster than the underlying business. In my opinion, they would need to dramatically slash costs at some point in time or they will not make it.

Maybe the upcoming Metromile acquisition could be a catalyst for this, but for the time being, lemonade for me is far from investable, even at current valuations.

Finally, to honor the title of the post, a link to the famous song “Churn, churn, Churn” (or so):





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