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

Good afternoon, everybody. Thanks for joining the session. I'm Mike Phillips, Morgan Stanley's Property and Casualty insurance analyst. I'm joined here this morning by Tim Bixby, Lemonade's CFO. Before we get started, the obligatory statements to be read for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales representative. Okay. Thanks for that.

Let's get right into it. Tim, thanks for joining us this morning. I think we have about 30 minutes to kind of go through some questions. So I appreciate your time.

Great. Good to see you.

You, too. Thanks. I guess why don't we just start off a minute or 2 to put on the spot of your concise nets here to maybe kind of drilling for those that aren't too familiar with your story. Who Lemonade is, what makes you different and unique in the P&C space, then we'll kind of get into it from there.

Sure. Happy to give a quick overview. So I'm Tim Bixby, I'm the Financial Officer with Lemonade. And we're one of several insure tech folks going after the insurance business, but we're doing a few unique things. We're a full stack insurance provider, number one, which means we're actually writing policies on our own paper, taking the risk on our balance sheet, as opposed to being an agent for another typically incumbent insurance company so that's unique. The second thing that's a little bit different for us is we've entered the market with a vision to provide all types of consumer insurance, but we've been going step-by-step entering with renters insurance, then homeowners, recently added pet insurance, then life insurance, and we've been asked recently that we'll be adding car insurance coverage in the coming months. So we're stepping our way through the longer-term vision, which is all consumer types of coverage we will provide, and we're just consistently expanding that portfolio over the past couple of years. We're also expanding geographically. So we're in most of the United States. And we've also launched in Europe, and we're in 3 countries in Europe with more on the horizon. We're providing rent and liability coverage in the Netherlands, in Germany and in France. And that's also a little bit unique to be a player in both the North American market and U.S. market as well as in the European market. And that's really a benefit of the lean cost structure and physical infrastructure that we have, which is not much is required for us to enter a new market.

Okay. Good. Great start. I guess let's start with kind of the end of the latest news in auto. You expanded your product offerings and now you just announced recently the auto insurance offering. So maybe just kind of talk about kind of what you're doing there. Any expectations that we can get on timing of first policies and kind of what you're doing behind the scenes as you start to roll out there?

Sure. So we're pretty excited about car insurance, primarily because our customers are. Most of our existing customers of whom there are more than 1.1 million or so at this point have cars. Something like 70-ish percent, 2/3 of our customers have at least 1 car. They typically have coverage that's different than saying pet insurance or renters insurance, where it is somewhat more common to not be insured. Auto is obviously a very different animal. We have our largest team to date from a product and design perspective, building the car product. And we've kind of let the world know that it's under way and it's in our cost structure, but we haven't yet picked a launch date, but we're working feverishly during the course of this year, both from a product standpoint and from a regulatory standpoint to get something launched in customers' hands as soon as we can.

So just to make sure we got this correct on auto. When you go into a new product like you did for term life and insurance pet you can do it in different ways, either as a broker or as an underwriter, I guess, is the 2 basic ways. Here, I think you're -- you just confirmed you're doing this as an underwriter taking the underwriting risk and building pricing yourself.

That's right. And our preference -- our bias is really to build it ourselves with some distinct advantages from a product and design viewpoint. At this point, we've, I think, built up a very sort of an established track record of being able to bring new products to market, have both existing customers buy those new products as well as new customers, new entrants to the market. When we launched pet insurance, for example, last summer, a year ago, we found that about half our customers -- or half our new pet customers were existing customers, but half were other customers who've never had pet insurance before. Most of our new folks buying new coverage from us are not replacing something. They're new entrants to the market. And so I think we're very encouraged from a -- when we look ahead to car, that we'll see some of those dynamics. Now with car, obviously, you'll see more switching because of the nature of car insurance. But one of the advantages we think we have is being able to manage the entire customer experience. And so to write the policies on our own paper, we have our own regulated insurance company, our own insurance agency that's part of our legal entity structure. we're able to control the entire process from start to finish, the claims process, the customer support, interaction, all of those touch points that really create a strong customer experience. Now you're right, we do have the choice. So when we launched life insurance, We made a different choice. And that was now really for the first time where, in that case, with life insurance, working with a partner who writes the policy, and we're just the agent. And so we're able to provide that upfront experience that people have come to know and expect through Lemonade. But because of the nature of claims and insurance -- life insurance, the customer themselves is typically not there when the insurance claim is made, it's a different dynamic. We can get the vast majority of those customer interactions and we can get that benefit even though we're not providing the policy coverage and managing the claims experience. So we can choose from either of those.

It's -- I think it's no secret that last year was a great year for personal auto. Nobody drove and now we're kind of getting back to that. So in a sense -- and a little bit of a question, a little bit of a function of timing here, but in a sense, the auto industry is -- we're probably going to see a tougher year this year than prior years, certainly than last year. Pricing seems to be flat and margins could be under pressure given driving is back. So does that influence at all the makeup of your timing as you think about that backdrop. It's a little bit more of a tougher year this year and maybe next year not. But how do you think about that backdrop as you sort of think about getting into auto?

Yes, those are fair points. And it's true. There are a number of dynamics that are changing in the auto sector. Some are accelerating. Some are new, some are pandemic driven. But from kind of all accounts, that's exactly true. Our view is that these more rapid disruptions or these dislocations or these innovations, depending on how you term them help companies that look like us. Those companies that are more agile, have less legacy pressure that are able to move more quickly that are product and consumer experience focused. We think we will have an advantage over companies that are less so that have a greater legacy that have more rigid systems that may not be as agile or adaptable. And in many cases, we kind of feel like more history for older systems can become liabilities rather than assets. And so we look to this market as a real -- a challenge certainly, but that a challenge where we, in many ways, feel we have a pole position to be -- to move quickly, to be adaptable, to be agile, to react quickly to links we learn. And there's lots to be learned. There's strong players in this market who've done amazing things with technology, with direct-to-consumer engagement and sign-up and rating of policies and we get that. But we're able to -- our view is we'll be able to combine that with some of the new technologies being developed, telematics, greater, deeper data about customer behavior, how they drive and where they drive and their true actual risk, and we think the combination of those is really energizing for us, and we're looking forward to getting in the market, learning what we can learn and adapting quickly.

I think over the -- at least the year you've been public, you've given investors, I think, some sense of confidence in your ability to underwrite the homeowners and renters market, our loss ratios are low 70s at sometimes at worst. So you've done a good job there of pricing that product on par with some of the best in the business and homeowners and renters. How do you give investors that are thinking about auto the same confidence that you can do the same kind of results as we go into the next couple of years in auto?

I think the Lemonade of 2021 and 2022 is very different than 2016 and 2017. While we're still a younger market entrant, we have, I think, really transformed the business from a single product business to a multiline business from a company with not so many customers and not much data to a company with lots of customers, growing very rapidly. The data that we capture and collect for each customer is significant. And so we feel -- and we felt this when we were just providing the renters and homeowners coverage. We felt that we had very quickly gone from a data disadvantage to a data advantage. And I think entering the car market, I think some of those capabilities can be even more so. There's a lot more touch point to the customer. There is more complexity in the way that claims are managed and handled. There's more likely to be a third party involved, there's repair shops. There's networks, there's a lot of moving parts. But again, more data and more interactions. And in fact, more claims, while no one likes more claims from a financial perspective, more activity tends to improve our advantages or help us leverage our advantages, which is more data is good, gives us a much more granular view of what's actually happening. Two drivers who in a more traditional world of writing a car policy might look very much alike. They might have the same car, the same -- live in the same neighborhood, drive the same number of miles, but for Lemonade, when we're collecting 1,700 data points for each customer, and we may know something about that customer as a homeowner. And perhaps as a pet owner or as a life insurance customer, we're going to know a lot more about that customer. And those 2 customers will look -- likely look very different to us than they might in a more traditional model where you're collecting make and model and year of car.

And maybe last one on auto for now is any impacts we should expect to your reinsurance programs or structures that you have in place? They're well aware obviously of your decision to go into these new markets. So any impacts there on the reinsurance?

I expect no material change. They are aware of our plans for quite some time. No special sort of adjustments or changes are required. We are at the point where we're renewing a subset of our reinsurance structure, but that's unrelated to car. That's just to the July transition date, but the vast majority of our reinsurance structure that's in place today where we're seeing about 75% of our premiums and losses, the bulk of that is a 3-year structure and will remain unchanged for a couple more years.

Why don't we switch to the side back to homeowners and metrics. Maybe how does the makeup of your homeowners book today look compared to a year ago when you first kind of came out of the gates. In other words, you talked about graduation rates. So your homeowners books involve renters that graduate. So how much of the homeowners book is a graduation today versus before? How much of it is kind of new business in the door homeowners? Does that kind of make up today versus a year ago?

Yes. So I would describe it as things that were working well, are continuing, and more so. So our graduate rates have been strong and are getting somewhat stronger. There are more ways for a customer to become a homeowner customer, they can start as a renter, they can start as a pet policy holder. They can start as a life insurance holder as their first product in all those paths in order to become a homeowner. So we're creating more ways, more probability that a customer becomes a homeowner, which is a significant step up. It can be hundreds of percent increase in the premium that a customer is paying. We're continuing to become more geographically distributed. So when we launched the business, we were very concentrated in just a handful of states. That continues to be true. But if you look at the trend line, it's been a steady march toward a book of business that's starting to look consistently more like America in the U.S. and more like the respective countries in Europe. It will still be concentrated for a while. In first quarter, in Texas, 22% of our business was in Texas. So there's no denying that one of our challenges is that we are somewhat concentrated, but the financial results and experience that our customers had during that Q1 catastrophe was quite positive. Absent the claims themselves, our ability to react quickly, our ability to mitigate losses with our reinsurance structure and then the continuing shift in our homeowners book of business towards a more diverse customer base, all those trends are moving in the right direction. The last thing I might highlight is we started sharing a bit more detail around our annual dollar retention metric. And one of the real drivers there is that homeowners are typically more stable. They change vendors less often. They are a little more predictable in terms of their retention, their dollar value is certainly higher. And so as our book of business shifts towards homeowners as a percentage of new business, shifts towards homeowners, all that has had a positive impact on the P&L.

You touched on this in your last question -- last question about taxes in the first quarter. But as you grow more in homeowners, I think there's more of an inherent cat risk owners versus renters. So how do you think about that risk for you as the homeowners becomes more of a portion of your business versus renters. And maybe, again, it's partially, as you said, diversification, but how do you think about that risk?

Yes. I think that's right. But I would think of it more as risks inherent in insurance. So if we had entered the homeowners market and we're selling one product and that was homeowners, that was it, then that dynamic would be much more of a challenge to be dealt with because we are a multiline product and because we've entered in the smallest markets and it worked -- are working on right to the largest markets, we have a lot of moves, meaning if we want to be more cautious in homeowners, which on occasion we do, whether it's in a certain geography, there's certainly a seasonal impact of a higher probability of risk in certain areas. We can still grow significantly because we have other products that we can leverage. Pet is growing quite nicely. Life insurance just getting started. We'll launch auto. These are -- if you think of it is kind of like an upside down pyramid, we start at the smallest on, renters, and now are working on our way up. Homeowners is a $100 billion market. Life insurance is a $200 billion market in the U.S. Auto is a $300 billion market in the U.S. We're kind of working our way up this upside down pyramid, and so we're much less exposed to some of those things that we might be because we have those moves. We have that ability to optimize across geographies, across products and now across -- with Europe, across continents.

I guess get to, in fact, staying with homeowners, just how you view impediments to growth there given your channel of direct-to-consumer. And I think of pretty successful stories in auto, obviously, for direct-to-consumer thanks to going on progressive. But the direct-to-consumer play hasn't been quite successful long term in homeowners. So maybe that's part of the backdrop of the question of how do you think about what are the biggest impediments for you guys for growing new business, not graduation but new business in homeowners?

Yes. I think the way we think about the markets kind of informs that, which is, we don't think about the homeowners market, and how do we kind of take over the homeowners market. And by the way, no one takes over entities market because they're so big, like the biggest players have a couple of percentage points of share. But we think of it from a customer perspective. And so we are not the right provider for every homeowner. We are the right provider for many homeowners. And because we're relatively small and because we now have multiple lines, we're able to grow in a thoughtful way, but really leverage the ideal customer for us, and it's the customer experience, not the product that drives it. So there's an ideal Lemonade customer in homeowners. It may not be the customer who was very happy with USAA because they either have a military background, a long history in USAA, has built a great community. We don't have to win that, necessarily win that customer, although we do win against the USAA on occasion. The Chubb customer, who maybe has an $8 million home on one of the coasts, not an ideal customer. In fact, we won't write that policy today. But again, those are sort of subsets of the market, the vast majority of the market, and it's not just young people, millennials are 40 years old plus. We've got customers who are 50, 60, 70, 80 years old who are digitally savvy. So this subset of the market is a really big subset. We don't have to go after 100% of it, but the portion that we can go after who really want the flexibility of being able to pick this up and change their homeowners policy while they're waiting in line at Starbucks for coffee, that's a lot of folks. It's not 100% folks, but that's a lot of folks. And so we feel these markets are so big and that's really encouraging for us.

Last quarter, you gave us some thoughts on nice metrics to think about for the quarter coming out second quarter and then for the full year of some of your key metrics. So any thoughts there on, on how that's coming along for, I guess, for the year on those key metrics you gave us? And maybe any kind of one-offs we should think about that might really deter that from happening, biggest risk there?

Yes, I think we obviously don't really update anything mid-quarter. But I think the lessons we took from the first quarter, I think, helped maybe inform how we think about for the rest of the year, which is in a quarter where we had probably one of the most significant catastrophes generally in Texas and even more significant apply to Lemonade, which is we are over-indexing in Texas and California and a couple of other states. The result was kind of, everything was pretty much okay. And so that's a really, I think, impressive and helpful test case because I think as an investor kind of thinking out, whether it's guidance or numbers or other ways to think about risk, that's really the -- I feel that's the primary insurance risk, right? As these things happen, were going to happen to any and every insurance company, can happen in any market, how do they uniquely affect a Lemonade versus another company that might be either in different markets or more established or have a bigger balance sheet or whatever. And so it's kind of nice to have a big test behind us that we can point to and say this is not us getting the theoretical example, but this is a real-world example of something that happened. It was unpredictable, nobody modeled it, and we fared quite well. Underlying that, as we look back to the last 1.5 years, we just see a very consistent trend. Part of the reason I think we've been able to give guidance over the past 3 or 4 quarters and achieve and exceed those numbers is because of the kind of inherent visibility into the growth drivers. It's a very simple business from a visibility standpoint. It's how many customers do we have, how many can we add and how much do they pay us? Those 2 metrics multiply it together. That's really -- that's the top line of the business and everything really flows from there. That, coupled with the loss ratio, again, if you look at the last 3 years of our loss ratio trajectory, you can see a pretty nice steady, consistent trend, and now we're down in this range of high 60s, low 70s, absent a significant catastrophe like we saw in the first quarter. And so while I can't predict future quarters yet more so than I already have, I'm really pleased with what we've been able to do in the past 3 quarters since going public. I think we've done a really nice job of doing what we set out to do and communicating in a way that's ambitious, but not get ahead of our SKUs.

You talked about the visibility there, and that's really important to folks like us and investors. How -- do you give thought to helping us break out the homeowners piece separately from renters? Or how do we -- could you talk about the new business and percentage homeowners versus non-homeowners, I believe, right? But how about customer count? Is there any way for us to get deeper into the renters versus homeowners versus pet versus whatever product like customer count?

Yes. So we get that question a lot. More information is better and more helpful for modeling, we get that. And where we can, we've shared more information in where we choose to. So the customer count is a tricky one. So to put, this way, when we launched the business, we were selling a lot of renters policies. Some of those renters policies cost $60. Now the average was higher, the average now is much higher even for renters. But it's because of the scope of our pricing, $60 to $6,000, we have customers paying us more than $6,000 a year for homeowner's policy. That's a really broad range of pricing. And so it's pretty easy to get caught up in the weeds of customer count and say, this number going up is good. This number going down is bad, and that's really the reason we don't give all that granularity. We do give a total customer count. We'll probably share more over time in terms of the product breakdown, but we do focus more on dollars than on the number of customers. Dollar retention is more and that's why we started sharing that number. So we'd like to share more, and we will share more, but no promises today. I will have to wait for the next earnings call, and we'll hopefully fill in some of the blanks.

Okay. You obviously, given your technology bent, you realign a lot of AI for -- even for claims handling. Can you talk about how you think about maybe either reactions you get from customers or just the customer perception of -- with Lemonade I get AI, and I got to really call a customer rep too much. I don't need to. But if I do, that's how Lemonade is different. Do you get feedback on what that's like from a customer perspective? Certainly, you went through a lot of that with Texas last quarter, and that kind of tests your systems. But any thoughts on customer perception there of how you're different with claims handling versus other parts of the business?

Yes. From a customer standpoint, we really don't get too much that focuses in that way. Is something AI? Or is it automation? Is it technology? Or is it a person. We find that customers are focused on their feelings. And their feelings are based on, am I getting the service I need? Is it happening as fast as I would like. And whether that's through automation or through one of our great team members or some combination, our ability to match the need with what we provide is critical. And so a customer who gets a claim denied because in some cases, it's not a payable claim. So for example, the customer might file a claim for an amount of money that's below their deductible. And they just don't remember the deductible for whatever reason. That's not a claim that's going to be paid out. It's not a current claim. If we're able to deny that claim and explain why in clear language, in real time through automation, that's a great customer experience. It's not great because the customer doesn't get the dollars. They don't -- no customer likes that, but getting a quick response through automation that satisfies the customers' immediate need, that's a great customer experience. That's a high Net Promoter Score experience. On the other hand, if it's a complicated issue, if someone is having a terrible day at the vet with their pet, in many cases, they really need a human who's empathetic and we'll talk to them and be supportive of them and get them information quickly, but it's a very different interaction. And so what we hear from customers, I love your AI or I don't like your -- had a bad claims experience is all about did I have a good general experience versus my expectations. And so we -- our focus is on automation, on AI, where it can make things better for that immediate claim or maybe for the future of the business. And on a human team, where that's the best answer, and it's many times a combination of all of those.

Maybe one more kind of back -- maybe one more on the new product offering kind of theme. How do you think about which way to go? What discussions do you guys have internally about let's go into pet this way, let's go into auto this way, let's go into term life this way, your broker versus here. What discussions, what are the pros and cons and what kind of discussions you guys have internally about how to approach a new product?

Yes. It's -- one of the nice things about being a younger company is there's a lot of open playing field. And this was -- in some ways, it was a harder choice before because there were so many options to choose from, car was a little easier because it was the biggest and the one we hadn't gotten to yet. And so that one was a little more straightforward. But it's really just a combination of we've got so many folks now who are real experts in the customer experience from a product design standpoint. So when we launched, we had a lot of those folks, but they weren't experts in the insurance customer experience. They might have been experts in the -- at Spotify or Google or Facebook or a start-up about on the consumer experience because that's where we hired these folks. But now we've got folks who really, really understand what has worked well in renters. What has really not worked well in homeowners? What is really resonating with pet. And so we've got this team of folks who we can now go to and say, here's the choices in front of us, here's the pros and cons, here's maybe the cost impact. We have a little bigger checkbook today than we did a year ago. And so we're able to maybe overinvest or lean in, in areas where we might not have been able to or might not have been as confident in doing that a year or 2 ago. And so the result of that, I think just you can kind of see in car, it's the biggest team we've ever put in place. It's the biggest market we've entered, it's likely we'll build, write the policies ourselves, although nothing's in stone on that front, but that's usually our preference. And so the choices are, they're not easy ones, but the pathway is pretty established at this point. I think the toughest one is probably the first. I think that pet choice was probably the trickiest one because there were so many alternatives and we just felt we could bring something to market relatively quickly. That was unique. And that's still a mantra of the business. Like we don't want to bring a product that's kind of in where it's almost as good as 3 things that are already out there or it looks just like -- name that incumbent. We've never done that, and we hope to never do that. We want to bring something that's unique, followed our kind of customer mindset, the customer experience mindset and have it be kind of a wow customer experience. So far, we've been able to pull that off.

We probably have time for maybe 2 more, Tim. You had great headways in the past year with your LTV to CAC ratio, I know that's kind of ticked up, and a lot of that has been the average premium per policy for customer that's grown, but your cost per customer really has into the same rate. But how does that -- how do we think about that ratio, which is a pretty important ratio for all of us. If we think about that changing in the near term also again with auto.

Yes. So I think we're kind of in the sweet spot now for that. There's a couple of things that are said about LTV to CAC in the market. Some of them are not complementary. Like everyone's got their way of doing it. There's a thousand different ways. It's an easy one to kind of hedge, or fudge, or whatever. And so -- we don't want to put too much weight on it, but we've, I think, taken a very conservative approach. We were pretty transparent. A couple of years ago, we said we're paying $1 to get $1 of premium. It's not so great. But we're entering markets, we're learning. We see it's improving. We think it's improving. And over time, it did. It went from paying $1 to get $1, to paying a $1 to get $2, now somewhere between $2 and $3. Lifetime value to CAC is right in that -- is in a similar range, which is pretty common in insurance. I think if it goes too high, that suggests that you're giving something up in terms of the growth, right? There are businesses that have an LTV to CAC of 5. That's not always a healthy sign because it can indicate that either you're not able to acquire more customers, you hit your limit or the market size has some limitations or there's other challenges. So higher is not always better. I think 2 to 3 is great. I think we can hedge it above 3 at some point, but too much higher than that, I don't really see that happening in the short term, again, because of this growth dynamic. If we're able to spend a little bit more, maybe weather a slightly more challenging marketing efficiency, but get that incremental customer and have the ability to upsell them to our other products that we think has great value to us.

Okay. Last one because we had about a minute left, so kind of high leveraging our question. But what's Lemonade 5 years from today look like, how you're different? You're growing all these different -- you say you're going to be everything to everybody on the consumer side, and I'm not sure what's left. So what do you look like 5 years from today that you don't look like today?

I think one thing about Lemonade that has been striking to me, especially as a newcomer to insurance is how -- how in line we are performing today with how we thought we might be 3 or 4 years ago. Now we're not in line in terms of where we are because I think we're getting there faster than we might have expected, which is kind of a pleasant surprise. We've been -- by the time we launch car, I think we'll have launched 4 new products in less than 2 years, which is, I think, pretty impressive and ahead of where I thought we might be. But from a portfolio standpoint, it's essentially unchanged. Now we've got a slide in our various investor decks in their prospectus showing the young woman climbing the hill, just going from age 25 to age 50. And I think with the launch of car, we're going to be bringing all the major coverage types to our customers. And with million-plus customers, these are big markets. There's 100 million households or 150 million households in the U.S. There's -- double that in Europe, where we're already beginning to see growth. There's additional products. So there's umbrella insurance. I think that's interesting. There's travel insurance and other coverage types. So there'll be more of these gaps to fill in. We won't be lacking for things to add. But I think you'll see us heading into next year and the year after with a full portfolio. And hopefully, car will be in there if all goes according to plan, and that will be more than enough to keep us busy for the 5-year horizon, I think you laid out.

Perfect. Well, thank you very much for your time. Tim, appreciate it, and we've got to end it there, but hope you have a good rest of the day. Thanks so much for your time.

Very good. Thank you.

Okay, guys. Thank you.