Lemonade Inc. is halting its direct business in California after failing to secure regulatory approval for the rate hikes it had sought.

CEO Daniel Schreiber said during an investor day presentation on Nov. 15 that the insurer has "absolute clarity" on what it needs in terms of rate increases, but that the California Department of Insurance is "unwilling" to approve the increases.

"There's no disparity between what is needed and what we know," Schreiber said. "There's a disparity between what we know and what we're able to implement, and we respond to that by throttling back on growth."

The combination of wildfires and a regulatory environment that "doesn't allow you to raise rates as fast as you would like" have made it a challenge to work in that market, Chief Business Officer Maya Prosor said.

"We discontinued our direct business in California ... because we're not in the business of selling unprofitable business," Prosor said. "We'll turn that back on once our rates get approved and we can rate our customers appropriately."

Prosor said 30% of Lemonade's new homeowners business was in California at the beginning of 2022 and as other carriers were leaving the Golden State, they were able to attract more business. However, those customers were "mispriced," and the carrier was able to reduce that percentage to 6% by shifting marketing dollars as well as changing "some of our product flows and requesting more data from customers," Prosor added.

Reinsurance on the radar

Lemonade is also changing its reinsurance strategy, using it as "a tool for surplus optimization, rather than as risk management," Schreiber said. The company is stable and diversified enough, both geographically and across product lines, and it has a handle on what it needs to do in managing loss ratios, he said.

"We are less interested in paying, margin stacking our business if you like, in order to shift risk," Schreiber said. "We're much more interested in doing that as a way of optimizing capital."

In terms of the reinsurance market itself, Schreiber said it is going through "unusually tumultuous times" and is hardening. But he said Lemonade has "pretty deep and meaningful relationships" with its reinsurance partners, including its largest reinsurer, Hannover Re (Bermuda) Ltd.

"I know that they have a deep understanding of our business," Schreiber said. "They understand deeply and we anticipate that the partners who have been with us will want to continue to be with us."