What is "We"?
The name “Lemonade” refers to a group of commonly-owned companies that provide, distribute and service insurance.
Lemonade, Inc., a public benefit corporation organized under Delaware law, is the parent company in the group. It owns 100% of three subsidiary companies:
- Lemonade Insurance Company, an insurance corporation organized under New York law. This company issues your policy and pays your claims. It is licensed as a stock property/casualty insurance company in New York and will become licensed in other states.
- Lemonade Insurance Agency, LLC, a limited liability company organized under New York law. This company is licensed as an insurance agent in New York and will become licensed in other states. It acts exclusively as the agent for Lemonade Insurance Company (but receives no commission for doing so).
- Lemonade, Ltd, a corporation organized under the laws of Israel. This company provides technology and research and development to the group.
Lemonade, Inc. provides personnel, facilities and services to Lemonade Insurance Company. This includes the services of Lemonade Insurance Agency, LLC and of Lemonade, Ltd. as well as the services of third parties with whom Lemonade, Inc. has contracted. Lemonade, Inc. and Lemonade Insurance Company hold an agreement between them in which Lemonade Insurance Company pays Lemonade, Inc. a fee equal to 20% of Lemonade Insurance Company’s premium revenue.
A Guide to the Giveback
The Giveback is a way for Lemonade Insurance Company to contribute money to causes its policyholders care about. The Giveback is paid only if payment is authorized by Lemonade Insurance Company’s Board of Directors consistent with their duty of care. The amount of the Giveback is based on each peer group’s total premiums and losses, after deduction of certain expenses described below.
Here’s how it works
After you purchase Lemonade insurance, we ask you to tell us which cause you would like us to support with the portion of any Giveback resulting from your policy. Policyholders who select the same cause compose one recognized peer group on the books of Lemonade Insurance Company. We will not recognize peer groups defined by causes promoting hate, violence, discrimination or similar things, and we will only donate to causes organized for any one or more of the purposes set out in Internal Revenue Code Section 50l(c), provided that no part of the Giveback will inure directly to the benefit of any private individual.
We record the total premiums paid by the members of each peer group, deduct 20% to pay Lemonade, Inc, for the expenses of running the insurance business, use some premiums to purchase reinsurance, set aside another ~20% as our very own ‘Lemonade Reinsurance’, (think of it as a our ‘rainy day fund’ together with smaller expenses such as transactional fees, premium taxes and others), and use the remainder to pay claims. Every twelve months beginning each June 20th the total claims paid to the members of each peer group are set against the total premiums remaining to the credit of that peer group after the deductions just mentioned. Provided that the company as a whole passes the financial tests listed below, Lemonade Insurance Company will donate the funds remaining to the cause by which that peer group is defined.
As mentioned above, a big part of what we do with your premiums is to buy reinsurance. So what is reinsurance? It’s the way insurance companies hedge the risks their policyholders pay them to assume. Think of it as insurance for insurance companies. Our reinsurance program protects Lemonade Insurance Company against large individual losses and accumulations of losses (such as would result from a hurricane). Suppose we pay a claim under your policy, and that payment is reinsured. Then the reinsurance company would reimburse Lemonade Insurance Company for all or part of that payment.
Our lawyers want you to know this
Although we would dearly love to guarantee the Giveback, sometimes it would not be in the best interests of our policyholders to do so. When our policyholders pay us premiums today, they are buying a promise from Lemonade Insurance Company to indemnify them in the event they suffer covered losses in the future. While you are paying a fixed price today for your policy, the future cost to Lemonade Insurance Company of its promise to you can only be estimated. Since paying your claims is job #1, the possibility that prices will prove inadequate to cover loss costs requires that insurance companies adhere to strict standards intended to ensure their future ability to pay claims. Furthermore, like all corporate directors, insurance company directors owe a legal duty of care to run the company in a financially prudent manner. As a result, Lemonade Insurance Company’s board of directors has the discretion to pay all of the Giveback, some of it, or none of it.
In other words: the Giveback is not a share of the profits of Lemonade as a whole; the Giveback is not a contractual obligation of Lemonade to you or to any cause; the Giveback is not something for which you may claim a tax deduction.
Yet it is our stated intention to donate Giveback, and our models suggest we will be able to do so most of the time.
Financial tests for the Giveback
Since our business model is based on the Giveback and since we are also committed to you to remain in sound financial condition, Lemonade Insurance Company has committed to its regulator to be constrained by four (specialized and complicated) financial tests:
- Our Risk Based Capital ratio should be above 300%
- Our ratio of Net Premiums Written to Policyholder Surplus should be below 300%
- Our ratio of Net Loss and Loss Adjustment Expense Reserves to Policyholder Surplus should not exceed 300%
- Our ratio of Adjusted Liabilities to Liquid Assets should be below 100%
These tests are intended to ensure that all or part of the Giveback will not be donated, if doing so would likely impair full and timely payment of all valid policyholder claims.