Lemonade warns that increased spending will hurt its near-term profit

Lemonade Inc., a tech-powered insurance provider, said Tuesday it would spend more on growth this year, a move it said would hurt profits in the months ahead following a year of “extraordinary challenges” in the insurance industry.

In a letter to shareholders, management said Lemonade

planned to “roughly double” its growth budget this year from the $55 million it spent in 2023.

“As the universe of products and geographies where we are rate-adequate expands, we intend to grow in lockstep. Ours, after all, is a business that grows in profitability as it grows in scale — and so grow we must,” the company said.

“The associated spend, and the resultant growth, should boost our bottom line a couple of years hence, but it will weigh on our bottom line in the coming quarters,” it added. “Threading that needle — doubling growth spend while shrinking adjusted Ebitda losses — will be our central challenge in 2024.”

The company — which offers rent, homeowner, life and pet insurance backed by AI-driven forecasting — reported a fourth-quarter per-share loss of 61 cents per share, narrower than FactSet forecasts for 80 cents a share. Revenue was $115.5 million, above estimates for $111.7 million.

Shares fell 15% after hours.

The company issued the results and forecast following a year of higher interest rates. Lemonade also noted damage to homes from storms in the first half of the year, rising costs of home repairs and its own efforts to lower its exposure to that segment.

“2023 was a year of extraordinary challenges in the insurance world: the hardest reinsurance market in decades, some of the worst winter storms on record, and combined ratios above 100 throughout the industry,” the company said. “Several of the largest insurers in the U.S. pulled out of some of its largest states — an unprecedented sign of distress.”

However, it noted that its losses had peaked in 2022, and said its adjusted Ebitda — or earnings before interest, taxes, depreciation and amortization — had improved even as the business expanded.

“Turning to 2024, there’s reason to be hopeful that many of the industry’s headwinds of ’22-’23 may turn into tailwinds in ’24-’25: inflation seems to be receding, new rate approvals are adding up and earning in, and if the costs of capital come down, we may yet see a moderation in reinsurance costs too,” the company said.

“Even if all these wishes come true, however, within the four walls of
Lemonade we will have our work cut out for us,” it said.

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