Following Lemonade’s June decision to cut the ceded proportion of its quota share reinsurance from about 55% to 20%, CEO and Co-Founder Daniel Schreiber said the arrangement was used more for capital than risk management, adding that the policies protecting against risk concentration remain materially unchanged.
On Lemonade’s Q2 2025 earnings call, CEO and Co-Founder Daniel Schreiber reiterated the point, stressing the decision was entirely the firm’s own.
“The confidence to make such a move directly stems from our multiyear track record of improving loss ratios as key products and geographies have become more mature and predictable,” he observed.
Timothy Bixby, Chief Financial Officer at Lemonade, said, “The transition from 55% to 20% quota share does not happen overnight. Each program is risk attaching, which means it covers policies written between July 2025 and June 2026, such that we expect the transition to unfold over several quarters on our P&L in a roughly linear fashion.
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“By Q3 2026, we expect to be ceding roughly 20% of premium. And in the second half of 2025, we expect to cede roughly 45% due to those transition dynamics.
“Second, a reduction in our quota share program does increase our revenue retention but has no impact on IFP. As a result, we are about to enter a period during which revenue growth rates are expected to outpace IFP growth rates. And finally, all else equal, a smaller quota share increases regulatory capital needs.
“However, with an improved loss ratio and the expanded use of our wholly owned captive, we are able to offset these pressures such that there is no material change in our capital planning.”
Schreiber also stated that quota share for Lemonade was not predominantly about risk management at all, adding, “We can use reinsurance to serve different goals. We have other policies in place that do manage risk concentration.”
“When a catastrophe hits, for example, like the one that hit in Q1 in the California fires, and you saw that our gross loss ratio was much worse than our net loss ratio. That wasn’t the quota share that was helping.
“Quota share, in theory, will produce very similar gross and net loss ratios because you cede X% of premiums and you cede the same X% of claims. At first approximation, the gross and the net should be similar. If anything, because some cat events are excluded from the quota share agreement, you might see slightly worse net than gross loss ratios in quota share.
“In fact, we saw significantly better net loss ratios, and that was because of other policies that we have in place about risk concentration covering losses beyond a certain dollar amount or too many losses in a particular quadrant or something like that.
“So, we have various policies. Those continue. The policies that we have in place that are helping us protect against risk concentration are not being materially changed. Quota share was in place, as I say, not predominantly as a tool of risk management, but much more so as a tool for capital management.
“As the last few quarters came in and we have consistently lowered and stabilised our trailing 12-month loss ratio, I mean 67% this past quarter, trailing 12 months, which I think is the more dependable metric, if you like, less volatile, less given to the vicissitudes of a particular event.
“70% trailing 12-month loss ratio is simply fantastic and perfectly aligned with our long-term goals. And what that has meant is that our insurance entities have moved from being loss-making to profit-making. Rather than consuming capital, they are generating capital. And that is something that changed over the course of the last few quarters, as we indeed became cash flow positive; we reported a $25 million adjusted cash flow this past quarter, a tenfold increase year-on-year.
“It is that more than anything else that’s allowing us to take on less or to utilise less quota share reinsurance. And of course, our quota share partners have been stellar. They’ve been amazing. They’ve been with us from the get-go. They are the biggest and most trusted names in the industry.
“When you engage in quota share reinsurance, you are really margin stacking. You are giving up part of your business. You’re getting the gains that I outlined before, predominantly capital efficiency, but you are sacrificing some of your EBITDA. And you really want to use, or we really want to use as little of that as we need, given our capital requirements.
“That more than anything else is what’s changed. We’ve moved from being businesses that are draining cash to those that are generating cash. Low loss ratios have changed the capital requirements significantly in those entities, and that is what is allowing us to be less dependent on quota share, and we made those adjustments.”
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