Lemonade, Inc. (LMND) Earnings Call Transcript & Summary

Okay. Thank you, everybody, for joining us. Good morning or afternoon or evening depending on where you are in the world today. Thanks for joining this session of the Life After COVID session here with Morgan Stanley. I'm Mike Phillips, the property and casualty insurance analyst at Morgan Stanley, looking forward to a nice session here today with Lemonade's CEO, Daniel Schreiber. Before we get started, I do have one housekeeping item to go through, so let me read that, and then we'll get right into it. Please do note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please do see the Morgan Stanley research website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. Okay. With that out of the way, thank you. Let's move on. We have the honor and privilege this morning, this evening to speaking with Daniel Schreiber, the Co-Founder, CEO and Chairman of the Board of Lemonade. Daniel, thank you so much for joining us, I guess, this evening from where you are. I really appreciate your time and being here with us.

Wonderful to be with you. Thanks for including me on the docket.

Yes, you bet. So we have 0.5 hour. The theme, as you've seen, is kind of life after COVID. So we'll talk about as much as we can this 0.5 hour of a whole slew of things just from kind of what Lemonade is, we'll start with that, probably go into some of the details of what COVID has meant for you and has some changes there. And then kind of wrap it up as we get into the thoughts of what it means for you and maybe the industry longer term of changes that have come about from COVID and what that might bring. Why don't we start with just a kind of a quick overview, if we could, from you and let people hear from you who is Lemonade and what you're all about, a quick kind of high level of your strategy, what you're doing different to the market that's not already here? And maybe even where you see Lemonade in 10, 15, 20 years down the road.

So Lemonade is founded on the predicate, on the thesis that insurance may be one of the most disruptable, perhaps even the most disruptable industry on the planet. It is so big, has, relative to other industries, experienced remarkably little change even as the world has been transformed beyond recognition. And it's still not a loved sector. There's not a lot of brand loyalty and not a lot of love lost between the consumers and their insurance company. So my Co-Founder, Shai Wininger, and I tried to go back to first principles and think through, how would we build an insurance company that we would like to interact with. And what we came out with is a new kind of insurance carrier. Lemonade is actually the carrier. We are the licensed entity here. We're not an agent for another insurance company. We're the full stack. We are regulated by the New York Department of Financial Services, perhaps one of the most exacting regulators in the world, and we also own an insurance company in Europe, regulated in Holland there. So we're a new kind of insurance company today offering renters insurance, homeowners insurance, pet insurance. We just announced yesterday that we will soon launch term life insurance in the next couple of months as well. And we built the company from scratch and we own the entire stack, not only of the regulated entities, but of the technology because we wanted to build it on a different kind of substrate, on a different digital substrate, so replacing brokers with bots, offering a promise of 0 paperwork and instant everything. At the same time, we also tried to build or rebuild not only the fiber of the company, but also its moral fiber. And we reimagined the business model, we formed Lemonade as a public benefit corporation. It's a certified B-Corp. That doesn't mean that we're not about profit maximization. But it does broaden the aperture of what things we take into consideration when deciding on our policies. So in traditional insurance companies, profitability really depends on the weather. So the top line of insurance companies is highly dependable, but in the homeowners space, bottom line will fluctuate wildly depending on wildfires and hurricanes and everything else. And it often creates a zero-sum game between the insurance company and the consumer. Certainly, that's the way consumers perceive it, which is, if you deny my claim, you're enriching yourself at my expense, and we wanted to try and change that. So we come to the consumers with the notion of a 25% flat fee. For every dollar you pay me, I'm going to retain 25 cents on the dollar. And the rest I'm going to use to pay your claims. You say, oh, but what if there's not enough money? And the answer is reinsurance. We buy reinsurance. And if there's a bad year, they have the bad year rather than us. And they say, well, what about if there's a good year? Are you going to pocket that extra money? And the answer is no. That goes to charitable bodies. Why don't you tell us which charity you care about? And we think that changes everything. Suddenly, we have no incentive or far less incentive to deny your claim. And then our incentives flip. We want to pay them as quickly as we can in order to get the high NPS, the high loyalty, the word-of-mouth referral and to keep our costs down. And you might think twice before embellishing your claim if you know that in so doing, you wouldn't be sticking it to the man, the nameless, faceless behemoth with whom you have a conflicted relationship, but rather, you would be hurting a charitable cause that you care about. So we think it solves the alignment of interest. It produces much more predictable results. And because of the way we've structured our reinsurance, it allows us to operate in a capital-light fashion, not words that you usually associate with insurance. And the upshot is an insurance company that looks a lot like a tech company. It's got a contemporary business model. It operates in a very efficient manner in terms of its expenses, cost of acquisition, cost to serve. You get insured in 90 seconds. We pay claims in as little as 3 seconds. And you give back leftover monies to causes you care about, which creates alignment with consumers' brand loyalty, et cetera. And maybe just, well, I'll pause there. Sorry, that was a bit of a soliloquy.

No, that's good.

I can keep going.

I know you could and that you definitely could. Let me touch on one thing that you mentioned there. It's a big part of your thesis, obviously, is the digital, the direct-to-consumer, kind of weeding out the middleman that is pretty dominant in certainly commercial lines and in homeowners as well, the agent and paying the commission there. I guess, in personal lines, the direct-to-consumer model has done quite well in personal auto, right? GEICO, Progressive are killing it in personal auto and direct-to-consumer is clearly winning there. We haven't seen as much penetration in the industry forever in homeowners, which is where you're knocking on the door. So can you maybe speak to what's been the hurdle in homeowners to keep direct-to-consumer model from succeeding. And whatever that hurdle is, if you can kind of talk about what that hurdle might be and how you think you can kind of knock that down?

I'm not entirely sure why it hadn't been done before. It's kind of one of those things. There's the old joke about the economist walking down the street and they don't pick up the $50 bill that they find because it wouldn't have been rational for anybody to have left a $50 bill, so it clearly isn't there. And it's that kind of thing where you say, why hasn't anybody done this before? It's not that difficult. I do think, in fairness, homeowners is more complex. Cars only have so many variables. There's a finite number of models of cars. There's 2 or 3 variables that you care about of the car, how many miles you drive and stuff like that. So it's much more susceptible to kind of simple lookup tables. But if I'm insuring your home, I'm really insuring much more than your home. I'm insuring your personal liability. I'm insuring your personal property. And you might have a wine collection or some personal art or some jewelry that was handed down. And every home is different. Every street address is different. Vulnerabilities in every home is unique. So I just think the permutations in homeowners insurance are far more complex. And perhaps, for that reason, they grew up in a kind of personalized, being sold through brokers rather than being handled by algorithms that couldn't do it in the past.

I don't disagree. I think that's what I hear, and it's a more complex business that maybe needs the hand-holding that personal auto doesn't need. So hence, the hurdle, but that's clearly something that you guys will deal with and have to break down as you go through time.

Well, that's where the technology jump makes a big difference, right? So AI can now do stuff that it couldn't do 5 years ago, certainly couldn't do 10 years ago. If you have a castle on the Wall, Lemonade is still not for you. But for the 80% of the, well, the middle, the bulge bracket there, we don't have such unique things that require that kind of thing. AI does just fine. If you can shop at Amazon, you can buy at Lemonade.

Yes. Sure. Okay. That's helpful. So this conference is really all about the life after COVID. I guess before we get to the after part of COVID, let's talk about life during COVID for a second, especially now from the industry level down to your level. Your first quarter as a public company, 2Q, not too long ago, you kind of went into the quarter a little bit apprehensively thinking about what could happen because of concerns of lockdown and furloughs and things like that and how that could affect your business. And then in your first letter, none of those things really materialized. The click-through rates, the retention rates all held steady, which was really nice to see, but different than what thoughts were going into it. I guess consumers clearly are being affected personally by COVID. But as it relates to your business model, it didn't seem like that was the case in the second quarter. So maybe can you talk about why it wasn't as bad as initially thought?

Yes. It was a pleasant surprise. And certainly, it could have played out differently. These are such uncertain times. So we did take a defensive posture at the beginning, a bit of a wait-and-see. But when we waited and saw, we saw that everything was just fine and all lights were green. In fact, I suspect that people who are buying insurance during lockdown would prefer not to do it with an agent. We're seeing digital-first businesses thrive during this time. I mentioned Amazon earlier, but they come to mind in this context as well. And we are not buying less. We're just buying differently. And I think that insurance is going through a similar change. So it's hard for us to isolate. So much has been changing in our business. We're growing at 100% year-on-year and it could be that we would have grown 110% if it wasn't for COVID. It's hard to isolate the variables. But really what we're seeing is, as best we can tell, it's pretty much a straight line. And that's unusual, I think. COVID seems to do 1 of 2 things to businesses. It either punishes them or it promotes them. And you see companies, Zoom, the day that Pfizer announces the vaccine, their shares plummet because we all know that they do well because of COVID. And then you've got the cruise liners that when Pfizer announced, they suddenly jumped because people think they're doing badly because of COVID. And Lemonade had neither of those dynamics. We seem to be doing what we're doing despite COVID. The trajectories that we saw before the pandemic seem to be continuing broadly unchanged during and hopefully after.

That makes sense. And this is kind of a related question from 2Q to 3Q. 3Q is normally your better quarter. It still was. The results came out this week, still was a good quarter. Seasonally, it's one of your better quarters in terms of growth because of moving, I guess, because of moving trends and people move before school year and things like that, that you benefit from. But again, in 2Q, you were worried about 3Q, and it didn't materialize. And so anything particular about 3Q that changed or was it just kind of, it just didn't happen and the moves happened. And the results are really quite strong, certainly on the top line. So anything different there than what you initially had thought that caused it to be quite a good quarter?

No. And again, a pleasant surprise, they're all right. With school years not starting, the whole migratory patterns of the average American could have changed pretty dramatically. They didn't or at least, I shouldn't say that. I don't know if they did or didn't. We didn't see it in our numbers. So it could be that the changes happened, but they were offset because people were trending -- maybe fewer people were buying, but they were buying it at Lemonade disproportionately. I don't know. But for whatever the reason was, we did see the same seasonality that we saw last year. So in 2019, about 45% of year-to-date at this point came during Q3, and that played out almost to the decimal point again this year. So we're not seeing those differences which we had braced for.

Okay. And you touched upon this, but I wonder if one of the things that's going on, either you really win because of COVID, Zoom, the example you gave or cruise lines, not. In the winner bucket so far has been, the personal auto companies have done quite well because nobody's driving and they're driving a lot less. And that their margins have gotten better, but also the top line for the direct-to-consumer auto players have gotten better, more policy in-force growth for the direct-to-consumer players. And I wonder if that's, and again, this could be part of your story here, too, given you're a direct-to-consumer. We're home, locked down, maybe boredom has set in. But on personal auto, we're inundated with commercials from the Progressives and Travelers of the world that I can only watch so much Netflix and so why don't I see that commercial. I'll get on my phone and go check out that price comparison in personal auto. And if that's the case, it could be maybe a short-term thing, but this could also be our life after COVID, it could be a longer-term thing. But how much of that do you think played into part of your third quarter results is that we're all just home and your consumers are home on their app, they're checking out their app and kind of got a little bored and nothing else to do, so I'll do the price comparison. It certainly helped your results. That could be part of it.

It could be. I don't have a kind of counterfactual here that I can prove. But I don't think it is. That's not my most kind of likely thesis for what's going on. And I say that because the kind of improvements that we saw in Q3 were kind of straight-line improvements to what we saw in Q2 and what we saw in Q1 before the pandemic. So had we seen some major change in trend? But since the trend lines have been pretty straight, we're seeing our brand awareness continue to grow. People are becoming more and more familiar. We're doing a good job. NPS suggests that we're doing a great job in delighting consumers. J.D. Power and Associates just ranked Lemonade #1 in the United States in terms of customer satisfaction. And those things have halo effects, right? So customers have a good experience, they tell their mates. And then the purchase cycles improve. The brand becomes more known. And we've seen that in our numbers, our costs, our marketing efficiencies. We get twice as much in-force premium for every dollar we spend now than we did a year ago. But it wasn't that there's suddenly a hockey stick or elbow in the curve when COVID hit. It's been a straight line, continuous improvement. So I do think that those have come into play. You see the same thing with our loss ratio, which for 3 years has been steadily declining. It could be that in Q2, everybody's at home so nobody is being burglarized kind of dynamic at play, hard to tease that apart. And then we are seeing great cross-sell dynamics. So we just launched pet insurance and we're seeing consumers who have pets and just couldn't buy a policy from us before because we weren't offering it, now we're able to offer it. And that's been a boon. So I think it's much more of those kind of organic elements than it is external forces around COVID, as best I can tell.

Yes. Okay. That makes sense. So transitioning to the life during COVID that we just did to maybe life after COVID. And this is just a higher level theoretical question for the industry. But curious on your thoughts is, has COVID created, do you think, any kind of just structural change to how consumers think about how they purchase insurance that maybe will be long-lasting?

My theory is absolutely. And that it has, so many people have said this, that it has collapsed time. I've got an amazing woman as a grandmother. She's 97 years old, and she Zooms and Skypes with everybody. And now she was pretty digitally savvy beforehand. But every one of us have these stories of people who would not be using digital tools were it not for COVID. And suddenly, they're doing their shopping online and their communications online. They're keeping up with their friends online and doing their gambling online. Whatever it is that they did beforehand, they're finding online versions of that. So I think we've accelerated the adoption of digital technologies, and I see no reason why anybody would go back, yes, socializing, yes. But buying stuff when it's a transactional thing, why would you go to Main Street and sit in front of a broker once you've discovered that you can do it in 90 seconds on your smartphone? I just don't see what the benefits would be. There may be the unknown, but once you've overcome that because of COVID, I see nobody reversing. I think the arc of history was going that way anyway. We've bent the arc. We've bent the curve.