Lemonade offers renters, home, auto, pet & life insurance in the USA and parts of Europe. The company’s tech-native foundation eliminates legacy fixed expenses to lower cost of service. It builds on this edge by obsessively iterating on its underwriting algorithms to ensure accurate underwriting.

For a full review of its recent Investor Day, click here.

Total OpEx rose 38% Y/Y in Q4 due to growth spend rising from $13M to $36M Y/Y. R&D rose by just 3% Y/Y, while G&A rose by 16% Y/Y via more interest expenses from its synthetic agent agreement. Headcount fell by 2% Y/Y.

Lemonade offers renters, home, auto, pet & life insurance in the USA and parts of Europe. The company’s tech-native foundation eliminates legacy fixed expenses to lower cost of service. It builds on this edge by obsessively iterating on its underwriting algorithms to ensure accurate underwriting.

For a full review of its recent Investor Day, click here.

Total OpEx rose 38% Y/Y in Q4 due to growth spend rising from $13M to $36M Y/Y. R&D rose by just 3% Y/Y, while G&A rose by 16% Y/Y via more interest expenses from its synthetic agent agreement. Headcount fell by 2% Y/Y.

Annual revenue guidance missed by 1%. Lemonade leadership frequently talks about its track record of beating guidance. I think this was sandbagged to set themselves up for an easy year of beats and raises. On EBITDA, annual guidance missed by 13% or $13 million. This includes an expected LA wildfire impact of $45 million in gross losses and $20 million in EBITDA losses. The sizable difference is thanks to its reinsurance agreements. Lemonade expects 28% Y/Y IFP growth for 2025 and thinks that will accelerate to 30%+ by 2026. Finally, it sees $165 million in growth spend vs. $122 million in 2024.

Lemonade proactively pulling back on risky home policies in California throughout 2023 and 2024 served them extremely well. Smart move. Losses would have been closer to $225 million ($100M for EBITDA) without this change. Many market pundits were expecting losses to be that large, but perhaps they weren’t paying attention to how aggressively Lemonade had already been shedding catastrophic event risk. Lemonade also stood out in terms of customer service during the chaos. Its combination of AI, aerial image technology and support staff facilitated hundreds of claims settled instantly and a 91 net promoter score (NPS) from customers affected. A 91 NPS is unheard of for any insurer… and that’s especially notable considering these were customers dealing with devastating loss. That generally makes people a tad grumpy.

“Our cautious underwriting, diversification & strong reinsurance programs all positioned us well for moments like these. ..We were able to achieve this outcome due to our conservative homeowners underwriting strategy and the gradual removal of higher risk homeowners policies from our book.”

Co-CEO Shai Wininger

Despite LA Wildfire losses, Lemonade reiterated its path to positive EBITDA by the end of 2026 and GAAP net income a year later. It reached positive EBITDA ex-growth this quarter and generated free cash flow (FCF) in 2024 — a full year ahead of schedule. That has a lot to do with its synthetic agent agreement, which funds growth spend and means that cost isn’t a cash drain. Still absolutely worth noting.

The Puppet Master:

Time for my quarterly admiration of Lemonade and the control it has over its financials. Throughout 2022 and 2023, the firm greatly pulled back on growth spend, as macro soured and inflation roared. As a reminder, claims freely float with inflation, but premium increases must be approved by slow regulators. Delays in approvals led to large chunks of Lemonade’s addressable market becoming un-compelling to pursue. Furthermore, it had that aforementioned cohort of home policies originated by its older underwriting models that it no longer viewed as desirable. These had to be cut, which slowed down growth even more. Instead of pursuing maximum demand, Lemonade read the room, set its path to profitability and hunkered down for somewhat tough times.

In the middle of 2023, it then signed its “synthetic agent” agreement, which essentially funds 80% of its growth spend (16% cost of capital) while this cash is being repaid. New insurance plans generally burn cash at the beginning, which meant rapid Lemonade expansion was a risk to its cash pile. It needed to scale revenue, but do so in a way that preserved its strong balance sheet. This did that. It serves as a necessary bridge.

Synthetic agents emboldened growth spend appetite, while loss ratio improvements from underwriting upgrades and needed regulatory approvals helped too. All of this unlocked significant portions of the country to re-pursue. The result in 2024 was more than doubling its growth spend and delivering a full year of accelerating IFP growth.

While this acceleration is based on more marketing aggression, that’s the only cost bucket quickly growing for Lemonade; EBITDA margins continue to rapidly improve. Its extremely asset-light business model means operating expenses ex-growth spend have remained flat for two years while the top-line continued to proliferate. OpEx ex-growth in 2024 fell Y/Y in real terms. It doesn’t have agents all over the country taking perpetual commissions or manual processes for onboarding and claims. It’s all automated and lightning fast, which is why its loss adjustment expense (LAE) (cost to handle claims) already rivals incumbents at smaller scale. LAE will keep falling over time to create a compelling input cost edge.

“Technology & development is where you see really terrific leverage. Productivity is growing dramatically… The amount of product and content that's coming out of what's really roughly a fixed team in terms of size and cost continues to increase every day, every week, every month… our current tech team has the ability to support a business that's twice as big or five times as big without significant dollar or cost increases.”

CFO Tim Bixby

Maintaining a 3x lifetime value to customer acquisition cost (LTV/CAC) ratio despite a 100%+ boost in growth spend also helped preserve margin improvements. This durability also shows how long the runway is for spending productive dollars.

Lemonade is confident that it’s fully in command of its growth and margins at this point. It could easily grow at 35%-40% this year at the expense of profits, but thinks this is the best balance for 2025. If more compelling spending opportunities surface at compelling LTV/CAC, it will likely spend more. Lemonade turns 10 years old in April. Companies this young and this far away from profitability are not supposed to be in tight control of their P&L. Lemonade is, which is why it has either reiterated or moved up its path to profitability for the last three years. Promises made… promises kept.

Macro & Inflation Risk:

Lemonade has worked very hard to automate filings for premium hike approvals from regulators. It sees its systems compared to a year or two ago as “night and day.” Candidly, it did get caught with its pants down when inflation was raging, but it has done the work needed to ensure that doesn’t happen again. Inflation will always be a headwind for insurers, but the relatively higher degree of intensity for Lemonade vs. others should diminish.

Car Insurance:

Lemonade continues to perfect its car underwriting algorithms and go-to-market; it’s gearing up for segment acceleration over the coming years. As we worked through in the investor day review, its claim of telematics (sensors to track your driving) superiority is actually legitimate. Nobody matches its depth or length of data collecting and nobody else realizes the risk pricing advantage this approach delivers. That’s not yet showing up in strong loss ratios, as there’s still more work to do and a few more regulatory premium hike approvals to flow in… but it’s quickly getting there.

“With unparalleled telematics technology and adoption, we are at the cutting edge of precision car insurance. The essence of our growth strategy is that our best-in-class first party data will enable us to offer unbeatable prices for the customers we want.”

Co-CEO Shai Wininger

For now, the product is in just 8 states. 2025 will be a transition year where Lemonade moves from testing and learning, to carefully rolling this out for more customers in more parts of the country. Growth for this segment should modestly accelerate this year as a result, but 2026 is when it really plans to accelerate the go-to-market and turn this into a growth driver.

Lemonade is in the process of running experiments in some test markets, where early indications point to outperforming conversion rates and strong loss ratios. Everything that needs to be going well here is. I get that some want them to go faster, but this slow approach is the correct one. Just like SoFi and Robinhood must be careful in expanding their credit card businesses to ensure origination models are effective and unit economics can be strong, Lemonade must too. Losses can mount in a hurry if underwriting isn’t ready for primetime. The firm is fully confident in car growing to 40% of the total business over time… but leadership will not pursue that growth until it’s certain that it won’t jeopardize the profits and balance sheet of the company. They’re in this for the long haul. Once it’s ready to unleash car, the 700,000-person waitlist offers a highly compelling avenue to pursue growth — without hefty customer acquisition cost (CAC).

“Our car loss ratio has come down significantly over the past year. It's not quite at our target, but it's getting awfully close. And so now over the course of 2025, we'll continue to see that shift from a somewhat declining rate of customer count and stable premiums to a growing customer count as loss ratio continues to improve.”

CFO Tim Bixby

On self-driving, it’s “keeping a close eye on this” and is generally excited about the opportunity. As it explained, “market dislocations create tremendous opportunities for disruptors” while incumbents tend to be stubborn, resist change and move more slowly. A quickly evolving market is good for the company in the space that moves? The quickest.

Pet Insurance:

Pet IFP continues to be a success story for Lemonade. Premiums rose 57% Y/Y to $283M while a 26% multi-year sector CAGR offers significant room to run. Interestingly, it cited direct channels as the reason for this momentum and didn’t mention how the Chewy partnership is going. That would only be an issue if this segment wasn’t performing so well. The 69% GLR is already at its target thanks to the constantly improving LTV and pricing models to more effectively characterize each individual applicant. That has allowed GLR to fall from 98% to 69% in just 3 years.

The high-frequency nature of pet claims doesn’t just mean faster model training thanks to more data, but allows Lemonade to flex its input expense advantages vs. the field. It costs Lemonade just $19 to handle a claim vs. $23 in 2023; that continues to fall year after year. This is a testament to Lemonade’s business model. Once the foundational investments are made to support a product, fixed cost leverage quickly kicks in. While Lemonade is still a young company and over a year away from EBITDA, it’s business model features like this that make me confident in it being a future profitable compounder. Again… costs excluding growth have been flat for two years and the degree of growth spend increases will slow in 2026 and beyond. More leverage is coming.

Final Notes:

As already announced, the synthetic agent agreement with General Catalyst was extended through 2026. Lemonade has $83 million drawn from this program (basically debt). It has repaid the funds from the first 3 cohorts in full.

I continue to be very impressed and pleased with this team and company. They are in firm control of their financial future and demonstrate that reality every single quarter. Everything that needs to be going well is going great. Growth keeps accelerating… margins keep improving… and its proactive move to limit catastrophic event risk was admirable. This company is growing up before our eyes.

With that said, two things are true here. First, I think Lemonade can turn into a very large and special company in the future. Secondly, there’s a lot more to prove before it can get there. While I am quite optimistic about this firm, I am forcing myself to not let it grow into an anchor holding at the moment. This (and considerable multiple expansion as it crossed $50/share) is why I trimmed 41% of the position amid the recent run-up and haven’t yet resumed adding. It is the youngest company I own and the only holding that isn’t currently generating EBITDA. I don’t generally hold firms like this, but I do consider Lemonade to be a special exception. I feel comfortable holding what is admittedly more speculative than anything else in the portfolio. 

Not adding or trimming. Great quarter… again.