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

All right. We're going to get started. Sorry, we're a few minutes late, folks. For those who I've never met, my name is Ross Sandler. I run the Internet team here at Barclays. Also joined by Tracy Benguigui, who many of you probably know by now, who is our Head Insurance Analyst. And we're also very thrilled to have Tim Bixby, making a debut, if you will, at the Barclay TMT conference. So Tim, welcome. Very excited to have you.

I guess, just to start off, this -- maybe we'll start with the top question. I know you don't focus on the stock price, and it's not something that you or anybody at the company can really control. But from your perspective and based on conversations you've had since the third quarter, we've been on this parabolic move to the upside. Any thoughts on what's driving that? And where that's coming from?

Yes. Well, I'll take your answers as my answer, which is I can't comment or forecast what -- where things are going or why exactly they're doing what they're doing. I would think of it maybe this way, and this is based on the conversations we've had maybe over the last maybe in 6 months since the other day, we had a couple of earnings calls and a couple of cycles here. Is I think given the relative young age of Lemonade and the relative nascency of insurtech generally, there are just some uncertainties in the market around how real were some of these metrics, how solid is the foundation of these companies, not just Lemonade, but just new companies coming to a highly regulated market where there's a lot of big boys and girls with big balance sheets. And I think we're given the benefit of the doubt, but now with a couple of quarters behind us, a lot of the key metrics are coming in pretty much on track or better across the board, certainly for us. And I think as more companies come in, we were pretty happy that we were the first out of the gate in that we were able to establish some of the language and define some of the terms and those things. I think with more folks coming to market, it becomes clearer, easier to differentiate. And we don't -- we're not all created equal. We don't all have the exact same metrics. And so there may be a greater appreciation for some of the things that Lemonade has been able to do that maybe they aren't so easy. If every one of us came with the exact same metrics and the exact same performance, the exact same growth, then I think maybe there could be a tendency to say, well, it's just a timing thing. Everyone is able to do the same thing. It's clearly not everybody is able to do the same thing. We're able to grow at pretty significant rates, bring the loss ratio down at the same time. Launch a couple of new products in a pretty challenging year. Hire hundreds of people during a pandemic. Entered France a couple of days ago. There's a lot to get done in a pretty short period of time. So I think it's execution and more differentiation now that there's more companies in the market with more data, more information.

Awesome. Yes, I want to hit on one of the comments you just made, which is we've talked to a bunch of companies at this point in insurtech between Tracy and myself. And being able to grow at very fast growth rates while bringing loss ratio down to industry kind of levels or even better than industry levels, seems to be a tension that not many companies are able to solve. You guys have done a nice job over the last 5 or 6 quarters at solving exactly that. So how have you done it? And as you start expanding into all these new geos and all these new adjacent products, how do you think about balancing out that relationship between growth rate and maintaining a healthy loss ratio?

Yes. We think about it as definitely 1 of the top couple -- 3 things we think about, which is how do we balance those 2? How do we grow at a pace that we think is taking advantage of the opportunity in front of us, but without putting some of these metrics at risk, building a stronger book of business. One of the things we're able to do is our acquisition capability is a very tight mechanism, meaning we can make small changes or not so small changes very quickly that flow through the system. And that's just -- part of that is just the nature of a digital approach. If we learn something in the data this week, we can think about it next week, and that can be in our product, changing the way we acquire customers, the following week. And that cycle can happen in an hour, it can happen in a day, it can happen in a week. At large incumbent insurers, that cycle, if it happens at all, might take weeks or months or quarters depending on how their customer acquisition process works. It's tough. I'll just give you an example. If we see something in the market, and we want to change the acquisition in real time, we're able to do that within regulation. It would be difficult for Chubb or Allstate to call up their agents and tell them to do something different on Tuesday. That would affect their ability to earn money. So these are just speed cycles that enable us to do things more quickly. And then the second lever, I think, is adding on more product types. So some of these things were tougher when the vast majority of our business was renters policy. We had a lot of renters policies, a handful of homeowners. That was basically it in a few states. Now we have many more levers. We're in most of the states of the U.S. We're in almost 40% of the population of Europe now, very small base, but we're licensed in 3 major countries now. We launched pet. We're on track to launch life. So now we've got multiple levers, multiple geos. And so these quick decision cycles we can make. We have many more levers to pull as we go. And so I think that enables us to say, loss ratio, for example, we're in this -- a comfortable range in the 60s and low 70s where we want to keep it there as best as we can. We don't want to grow so fast that all of a sudden, that looks like it's not as much under our control. But we've got these levers to say let's lean a little towards this geo or lean a little bit towards that product. And that's -- we have much more at our disposal now than we did even a year ago.

Also maybe I'll jump in here. Let's talk about your product launch cadence. You mentioned pet insurance 1 quarter. It seems like on a quarterly rate, you have a mixed quarter life insurance. There did seem to be some pushback why life before auto. I actually get it. I think you could even argue that life should come before pet insurance. There's a massive TAM. There's also a huge need for the digital sales in light of less kitchen table discussions with agents. And also COVID-19 has raised some awareness for mortality. But if I want to use your words on the third quarter call, you mentioned I guess, in graduation rates, you go from me to we. And term life tends to be a we product. So I'm just wondering, I mean, looking at future cadence of product launches, are we not skipping a step in that graduation rate path? Or do you tend to look at the opportunistic play at times? And could it be uneven?

Yes. It's very much the latter. I would describe it the way you described it. So we look at the -- we look at the ultimate destination. And that's a few years away or more where we want to provide all the coverage types for our consumers, and our consumers will be insurance consumers. They won't be just young folks. They won't be just urban folks, though we have a lot of young and urban folks. Over time, they'll be older and wealthier, and they'll live everywhere and have homes and all these different pieces. So we want to have the portfolio that keeps them with us forever. Now how we get there, how we insert the puzzle pieces is really up to us in an opportunistic way. So pet was a logical next step for us for a couple of reasons. One, we felt we could bring something different to the market. There's lots of pet insurance out there. We're not the first game in town, but we felt that we could use sort of much of what we've learned not just in building the insurance risk, loss ratio part of the business, but also the customer interaction, things that we've learned and bring that to pet. We thought about whether we'd run it on our own paper versus through a partner, because our platform enables us to make that decision. And our choice -- our bias tends to be towards building ourselves. We want to be part of the onboarding process. We want to be part of the claims process. And with pet, in particular, the claims process is pretty significant. It's not just illness and accident. It's also ongoing support and vaccination and vet visits and that kind of thing, which is part of it. So there's a lot more activity. We wanted to be part of that, and so we chose to kind of provide the Lemonade experience, chose to build it ourselves. And we also knew -- thought we'd get to market within a reasonable period of time. We can do more than one thing at a time. So obviously, we have begun thinking about life as we were in the process of building and launching pet. Life, we expect to come in the next couple of months. We haven't set a specific date yet. Life is a little bit different. So yes, huge TAM and really important for our customers. But the claims process is much different. So there's not a lengthy customer-focused claims process by definition because it's life insurance. And so for regulatory reasons and for product reasons, we felt we could get to market much faster through a partner yet bring the Lemonade experience. So that front end, that onboarding experience will be wholly Lemonade. The claims experience will be the partners. And that's where we're able to kind of make that trade-off. There's more beyond that, nothing that we've announced formally yet, but that's how we kind of plug these puzzle pieces in place, and then we had to -- are able to make the choice whether we write it ourselves or not.

Tim, I want to jump in on what we're talking product extension. We, and I think the broader investment community spend a lot of time looking at auto of late. You have Root, you've got Metromile both going public and about to go public. What's the path in auto? I mean this -- it's either, on one hand, it's a required insurance product. On the other hand, there's a lot of different ways to differentiate through technology. So what's the current thinking on auto?

Yes. So we've not announced anything formally. So no new news there. It is one where we still think we have the choice, it's early enough in the process to -- we could write something ourselves. We could work through a partner. And that's kind of true of any future policy type we might consider. It's a huge market. It's critical to our customers, something. Like 70% of our customers, even today, outside of New York, are car owners. So it is something we believe is critical for our customers. There's nothing that tells us today that we can't bring something that's unique to the market. That we can't bring the things that we've learned, that we can't kind of leverage the data that's available in the market. There's lots of information about how people drive and ways to capture that information now versus 10 years ago when there was little or nothing in this area. So we think it's important. We think we can bring a unique advantage to it. We'll do it at the right time and at the right cadence. I think you mentioned something about a product a quarter. I think that's probably getting a little aggressive to think of it that way. We might have -- we might be able to launch 2 products in 2 quarters, but I would think of it more long term that life is a bigger, more complicated business. We're working through a partner, so that's enabled us to accelerate that a fair bit. Auto, bigger still from a dollar perspective and a complexity perspective. So we're looking closely at it. We're thinking hard about it, and we'll let people know when we get further down the road.

Maybe I could just piggyback on something you said on the life side. You're saying that it's an easier claims process. But maybe if I could pick your brain on the underwriting side. A lot of life insurers -- and there's a term called simplified underwriting, where they went ahead and they dropped medical exams all together. And even by doing that, it still takes 3 days to quote when buying a policy, which sounds like a long time, but that's actually light years ahead of the weeks that it typically takes under traditional underwriting. So I'm just curious, because you want to provide that same customer experience that is painless, are you and this underwriter on the same page? When it comes to getting to the finishing line, would you think you could do it faster than the rest of the industry? Or do you think you could live with that typical 3-day pattern? And would that tarnish the customer experience?

Yes. So great question, and I'm not in a position to commit to those specific time frames today because we just -- it's more than we disclosed so far about how the exact process will work. And some of that we're still working through. It's -- this is the part of the launch we kind of answer those final questions. But the product, we expect, will not require an exam. So it will be an exam-free process. There are more questions. It's not a -- you can't do a 5- or 6-question underwriting process. So it's more rigorous. But I do think we'll have -- we'll bring a product that is notably fast, efficient and impressive in the market. I'm not going to quote the exact length at this point just because we don't have that information firm enough to share outside the company. But we're aware of what the current standards are, and our goal is always to meet or beat customers' expectations. So we'll -- stay tuned when we get closer to launch.

On all these products that are coming out everywhere, I mean bundling has been a big part of your strategy. And if we look at the broader insurance space, that's a key way to drive unit economics for even the mature companies. So is it as easy as like, you got to have a high NPS. It's all digital first. You've got the young, kind of mobile-native customer base, and then you just kind of hit them with e-mails and notifications. Hey, this new thing is available. You guys love us. Come on over. Or is there something that you're doing, like at the state-by-state, cohort-by-cohort level that's a lot more complicated than that? Any an insight as to how you're driving those bundle rates higher?

So we are seeing the benefits of bundling. And it's as much, I think discount is always attractive to just about everybody getting a better price. But we think it's as much or more about having multiple policies. And once someone has 2 or more coverage types, you tend to see all sort of good things happen regarding retention and word-of-mouth and things like that. They start to think of you as their insurance provider versus a single product provider. In terms of our ability to go after customers, we -- pets -- let's use pet as a case study, because I think it's a good one. We were pleasantly surprised that we were getting quite a few customers for whom pet was their first policy with Lemonade. So they've never used Lemonade before. Pet is an uncommon policy to have in America. The penetration is very low. Yet we were able to sell to both new customers and existing customers, not exactly 50-50, but a really nice balance between the 2. And I think what it's telling us is giving us data around what we already kind of felt or suspected was that Lemonade -- our customers are starting to think of themselves as Lemonade customers and what's coming next from Lemonade. Sort of like a -- people think about Apple, like what's the next product from Apple, and less about do I have a specific need for that product. So we had folks that got pet the first day we launched, first week, the first month. They were our customers, bought pet insurance. There's a dozen products in the market they could have bought the day before, but most of them did not and chose to come to us. So we think that bodes well for subsequent launches. It is not so simple as just e-mailing everybody and telling what you have, and then they buy it. Everybody knows what cars are available to sell in the world, yet car advertising is still a major business that drives people to make decisions. We don't want to bombard people with insurance stuff because there's a breakeven point where even though we're lovable, we don't want people to be thinking about how much they're paying us every day or 6 times a day. And so there's a balance there. And candidly, we're still figuring it out. Pet, we've been in, in 5 months. We've learned a great deal, but it's a steep learning curve. We know a lot more today than we knew just 3 months ago with our pet customers. And life will be a whole nother kettle of fish. And I think in an interesting way, we'll learn a lot more about those customers that we don't know. Just think of the questions you ask someone in terms of underwriting life. We'll be able to combine that with, now we know about their Pet, now we know about their living situation and that gives you a much more holistic view of your customer. We're coming up on a million customers before too long. So when you start to think about that many customers with a much more cohesive view, that you can start to get a feel for the -- sort of the flywheel aspect of the business. And that's what keeps us kind of charged up about bringing the next product.

And in the S-1, you guys had stats on retention. I ask you guys about this every quarter, so not surprising that I'm asking you again. But of the 5 months that you've seen with the combined pet and renters, is there a noticeable change in retention among the folks that are taking both? I mean you would have had some of those 5 monthers dropping out of renters based on just historical patterns. So yes, can you talk to us about what that looks like?

Yes. It's still very early, and I can only speak to Q3 at this point. But there are indications that folks with 2 policies, which we have now for the first time, will stay with us longer. And what that turns to be in metrics and percentages, we'll hopefully get to a point where we can share that information. But there is positive information that 2 policies is definitely a good thing.

Tracy, anything else you want to hit Tim on?

No. You've done a great job asking.

Yes. I'll ask one more. On international, so you're live in 3 countries now in Europe, and you mentioned you've got a significant percentage of coverage from a regulatory standpoint. So what's determining where to go next? And why was high mobile penetration and overall kind of tech-savvy users in other parts of the world like Asia in particular, what are some of the hurdles in terms of getting that on the map?

Yes. So being in 2 continents is a major accomplishment. It's very rare in insurance for players to be in -- even in both, much less be in a dominant position in both. Because of our approach and our structure and our sort of lean cost structure, we're able to make this foray into a second continent with not so much risk. We don't have to have big teams in Germany or in France. We launched France just yesterday -- 2 days ago, sorry. But we have no employees in any of these places. Some place, same in the U.S. And we have no employees in Texas, a big, huge market for us; no employees in California, huge market for us. So I would think of our global strategy as not -- that it's smaller than the U.S., but that it's -- we're early to build out the long-term footprint. So 5 years from now or 10 years from now, and hopefully, we have a -- I expect us to have a much broader footprint, probably over the whole planet, we'll be very happy that we made these early steps into these newer markets. So Europe, for example, gives us sort of a testing ground where now that we have the regulatory piece behind us, we can test pricing in ways we can't in the U.S. and be a little more -- just because the regulatory environment is very different, we can enter markets more quickly than in -- even in the U.S. Entering a new state in the U.S. from a regulatory perspective, can be a little more challenging than Europe. We're learning about different cultures. So language is not a big challenge for us. Normally, companies that expand -- U.S. tend to go to the Anglo countries first and then beyond. We've got French folks on staff. We've got Dutch folks on staff. So we kind of -- all we have to do is nail the product and nail the customer experience -- customer support and claims experience, and we're ready to go with a pretty lean profile. So I'm optimistic about future launches into future European territories. We'll see how France goes. Between France, Germany and Netherlands, it's about 38%, 40% of the EU population. So we can cover a lot of ground in just a handful of countries. No announcements about Asia at this point. It's out there, and we've -- I think we have our hands pretty full with the U.S. and Europe right now.

Awesome. All right. Well, Tim, this is great. This has been a great overview. I want to -- on behalf of Tracy and myself, thank you again for attending. I know you guys are busy, so we really appreciate it. And we'll let you get on to the next meeting.

Very good. All the best. Thanks so much. Cheers, guys.

Thanks a lot.