Lemonade CFO Promotes Do-Good Status, Path to Profitability to New Investors

Lemonade Inc.’s finance chief faces a peculiar challenge: explaining to new investors why a company that is not yet profitable is giving away money to charity.

Source: WSJ | Published on August 31, 2020

Lemonade Insurtech

Customers signing up for one of Lemonade’s products—homeowners, renters or pet insurance—select a charity of their choice. The company then contributes a portion of unclaimed insurance premiums—$1.1 million in the year ended June 30—to those organizations.

Lemonade reported a $21 million net loss during the second quarter, roughly in line with a year earlier, and analysts expect that it will take several years for the company to turn a profit. It listed on the public markets in July.

Prospective shareholders pressed the company for more information on its strategy and its legal status in the lead-up to the company’s listing, said Chief Financial Officer Tim Bixby.

Lemonade is a public-benefit corporation, a type of company with a dual mandate to serve society and maximize profits for investors. The legal status has gained popularity in recent years amid a rise in sustainable investing and growing investor focus on environmental, social and governance factors.

A key part of Mr. Bixby’s role is making sure investors understand the company’s path to profitability. The company is still relatively small compared with other insurance businesses, but has to invest in regulatory compliance and pay claims, Mr. Bixby said. Lemonade’s largest expense, next to insurance losses, is sales and marketing to acquire new customers.

“We’ve tried our best to clearly explain to investors how our unit economics work, so that even though the business is unprofitable, they can understand how a customer is profitable,” Mr. Bixby said.

The company was founded in 2015 and received about $480 million in venture funding prior to its listing. SoftBank Group Corp., Sequoia Capital and Aleph currently own over a third of the company’s shares outstanding, according to data provider FactSet.

Approximately 22% of the company’s shares are trading in the market, according to the company. The firms didn’t respond to a request for comment.

Lemonade said it went public to access new sources of capital. The company confidentially filed its paperwork to the Securities and Exchange Commission last fall, but held off due to market conditions, Mr. Bixby said. After markets stabilized this summer, Lemonade rushed to move forward, he said. The company raised $319 million in its initial public offering, according to PitchBook Data, a data provider.

Mr. Bixby, who became Lemonade CFO in 2017, previously ran the finances of Shutterstock Inc., a stock photo company that went public in 2012, and LivePerson Inc., an online communication company that listed 2000.

Lemonade had 814,160 customers as of June 30, an increase of 84% from a year earlier. About 70% of customers are under 35 years old, according to the company.

Turning a profit will require the company to not only continue adding customers, but also to convince existing customers to stick around, said Ron Josey, an analyst at investment firm JMP Securities LLC. Customer churn is a big risk for Lemonade, he said. Its one-year retention rate, including company-initiated cancellations, was 62% in March, according to a filing with regulators.

Lemonade hasn’t gotten any pushback from investors on its status as a public-benefit corporation, Mr. Bixby said.

That could be because its charitable contributions are relatively small, according to Jason Helfstein, an analyst at investment firm Oppenheimer & Co. Lemonade’s recent $1.1 million donation to charitable causes was nearly double the amount from the prior year. For a sense of scale, the donation was 1% of gross earned premiums and 2% annual revenue in 2019.

The company said its giving program is intended to appeal to young, socially minded customers and discourage them from inflating insurance claims.

Lemonade plans to stick to its current level of donations for now. “Ten years from now, if that number is $100 million or whatever, who knows. But for now, it’s not a big enough number to upset anyone,” Mr. Helfstein said.

Larger businesses, by contrast, gave an average 0.12% of their annual revenue to charities in 2020, according to a survey of 223 companies with at least $2 billion in revenue conducted by Chief Executives for Corporate Purpose, a coalition of executives focused on making a social impact.

Public benefit companies were created during the past decade, and are required to consider how their actions affect society, as opposed to always maximizing profits for investors, said Brett McDonnell, a corporate law professor at the University of Minnesota.

There are no quantifiable, minimum requirements to become a benefit corporation, such as a threshold for donations, Mr. McDonnell said. Companies must regularly report on their activities to shareholders. Investors can sue if they believe a company has violated its fiduciary duty to consider its social mission, he said, adding that those lawsuits would be tough to win because of the way the laws are written.

Thirty-eight U.S. jurisdictions have passed benefit-corporation legislation since 2010, according to B Lab, an organization which tracks and evaluates corporate sustainability efforts.

Most benefit corporations—there are about 10,000 in the U.S.—are privately held, and only three, including Lemonade, are publicly traded, B Lab said.

A key function of the special legal status is to signal to investors that a company is interested in social causes, Mr. McDonnell said.

“This is our way, a way of committing to you: If you give us your money, we’re going to make some money,” he said. “But we’re also going to do good for the world.”