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

I'm really thrilled to have Lemonade here with us. Tim Bixby is their CFO. Tim, thank you. Welcome.

Good morning.

Maybe start at the top, just Lemonade has kind of one of the early insurtechs and really set out to fundamentally rethink insurance. And as the company has scaled, as you kind of sit back and reflect, what aspects of the original vision have proven the most durable and where in kind of the -- as you've gone along and you had to maybe adapt the most?

Sure. Yes. Good morning, everybody. I think one of the most striking things about Lemonade, and there's a few striking things about Lemonade is the consistency of the original vision. So from the original whiteboard or napkin concept in 2015, where our 2 founders, Daniel Schreiber and Shai Wininger got together and started the kickoff to today, really, the change has been almost nominal in terms of the original vision, strategy, go-to-market approach, AI first from day 1. Our first policy was sold by AI Maya. Our first claim was managed by AI Jim. And this was in 2016. Lemonade was founded the year that OpenAI was founded. So a lot of water under the bridge since then, but we were built really for this day. And this day, meaning '21, '22, '23 up to what we're seeing day by day now from an AI perspective. But fundamentally unchanged and what the core premise of that is insurance can be done fundamentally differently from a user perspective, from a consumer experience perspective, if enabled by the latest and greatest technology, whether that's the LLM from last week or machine learning from 2015 and everything in between.

Perfect. And I mean, you obviously mentioned AI there a few times and going back 10 years ago, I know you guys were -- before it was really an everyday word. So you've been kind of preparing for the AI world and some of the rapid advances we're seeing more recently for a long time. What's your view or anything more you can add to the headlines around insurance via GPT has kind of been the last few weeks or SaaSpocalypse, kind of a lot of the theaters in the market.

Yes. this cycle is similar to the ones I've seen before and then, of course, different and fundamentally different in a couple of ways. But a lot of similarities to cycles we've seen historically where the fancy new thing comes and it gets very exciting and then it will be immediate disruption. And I think the selling insurance via LLM or GPT or cloud or what have you is interesting. But the experience is poor. And whether that experience will be poor a week from now or a month from now or a year from now, we don't know, but we don't need to know. Lemonade has had the highest standards of customer experience at heart in our DNA from day 1. And using an LLM to sell insurance will be no different. If and when we get there, we'll be at the front of the line. We talk to these folks all day every day, but the consumer experience will drive it.

Yes. Great. You guys made a pretty exciting announcement recently related to Tesla and auto insurance product for FSD. Maybe can you talk about that a little bit? And then more broadly, kind of what is at top of mind for Lemonade as you think about kind of the autonomous vehicle wave that's coming?

Sure, sure. I think the most notable thing from my view about the Tesla announcement that was not sort of the flashy part. It's nice to have a big announcement with a big partner and a company like Tesla that has lots of folks who love it and then lots of other folks as well. And so that's always good from a PR perspective and I kind of plant the flag perspective. But from my view, under the covers, I think what I would take away from it, if I were kind of looking at the company from the outside is the pace and the speed and the agility with which we're able to do these things. And so whether autonomous and assisted and supervised and there's some different flavors of driving that are coming to fruition here, whether the acceleration and the pace of adoption is faster or slower in between, it doesn't matter. It doesn't matter for us because we'll constantly be at the forefront. There's probably a tipping point before too long where this is kind of a rule of thumb where if once 10% of the miles are fully autonomous or supervised, that creates sort of a dynamic where there's likely to be seismic market shifts. Today, we're at 0.1% and then fully autonomous is [indiscernible]. And so it's going to -- we're going to have a little bit of time to think that through. Lemonade was a pioneer in paper mile, which feels low tech now, but we've been in that for many years where a customer who drives less and is therefore a much fundamentally lower risk. There's not -- they're not no risk, but a lower risk. We have a pricing model that's been adaptable to that paper mile model for years. And so autonomous is one more -- it's a major step change beyond the paper mile approach, but that's one of the reasons we were able to put something together with the Tesla folks, with our product team in just a matter of months. Our employees are friends, some of our employees have worked at Tesla. And so these things are just natural when you're AI first and data first, and there'll be many more to come.

Cool. Great. Maybe if we shift to your -- as we think Lemonade going forward, the recent shareholder letter talked a little bit about some investment areas where I think the way you guys termed it was like medium-term ROI. Can you expand a little bit there, kind of what you're thinking about, what we might expect to see?

Sure. I think another striking thing about Lemonade perhaps is the visibility and the predictability of the model. So even though in an era with an insurance that has been really one of the most tumultuous the last 6 or 8 years in history, even in that era, Lemonade's key metrics have been sort of up and to the right in an almost surprisingly linear fashion, while the outside world and the macro world have been quite a bit more volatile. We set out a target to prove that we can do several things at the same time, dramatically improve our underwriting, go from a relatively immature insurance company to a mature insurance company, show loss ratios that consistently improve quarter over quarter-over-quarter with a new customer base and significant growth and doing all of that without moving the sort of the goal line of EBITDA positive. So we planted that flag. I think it was as much as almost 4 years ago at this point, and it hasn't moved. And part of that is by our own choice, but part of it is the visibility and the predictability of our model and our ability to grow at a pace of our own choosing. Importantly, the market is not our limitation. We could grow faster. The insurance market, the addressable market is enormous by every -- almost every measure. But we spend money to acquire each new customer typically. Sometimes it's a cross-sell, but we spend that money upfront and it burdens the P&L, and we want to be able to show that we would hit that breakeven point. Despite that, under the covers, we're continuing to invest. And so to your specific question, there are things that we can see in -- under the covers, in the numbers, in the analytics that are tougher to see externally where we can invest in areas where we know they'll have positive ROI in the medium term, but perhaps not in year and some of that is built into the guidance. Nevertheless, we're going to grow at a faster rate than last year. We expect loss ratios in line or better than industry best. Our loss adjustment expense, a key measure of the efficiency of the underlying machine is something like 6% in Q4. Industry norms are 9%, ours used to be 15%. So we can do more than 2 or 3 things at once.

Yes. Can you maybe expand on that a little bit because maybe people don't know Lemonade as well, like it's been pretty impressive kind of your -- how your expenses have gone, how your headcount has gone versus your premium over the past few years. Maybe talk a little bit about that and how you've really used technology to scale the business.

Yes. I think that's -- I've been with Lemonade 9 -- almost 9 years now. And I think one of the most pleasantly surprising things that I started to see in the numbers several years ago is when this dynamic broke, right? And the traditional dynamic in insurance is you're going to add a certain amount of business or add a certain number of customers and you're going to add a good slug of costs and maybe there's some efficiency gains. And what we started to see in the numbers about 3 years ago was headcount increases falling to 0, netting to roughly 0 and our top line accelerating, our ability to continue to grow the business. And so after a few quarters of convincing ourselves that the change has come, that's really the underlying benefit of our approach and our single system. We have a single -- one data stack, one technical system that supports and drives the entire business. And the reason that dynamic started to occur, a big part of it is we were able to take big chunks of cost out of the system, not just become more efficient, but just eliminate entire cost. So for example, in our pet insurance business, which is a really interesting -- has some really interesting unique dynamics. One is frequency. So the frequency in a normal line might be 2% or 3% or 5% of your customers have a claim in a given year. With pet, it's something like 100% or 120%. There's just a constant flow, which we actually like. It enables the flywheel to move faster. It builds our data advantage and it expands our data advantage faster. And so something like 50% or 60% of our claims in pet, we were able to take to 0, close them, pay them in real time, money in the bank account within a few seconds. And so it's not just getting more efficient. It's literally pulling pieces of cost out of the P&L. And so that's -- it's part of what drives that LAE improvement. And when you're able to get to these sort of efficiency gains that are visible and sustainable and we're so subscale. We're $1 billion plus insurance company at $10 billion or $100 billion, then you're starting to get to some real scale and those are the folks we compete with. But when you start to see this at our scale, that's what really tells you the model is really working well.

Yes. Yes. You touched on it there, just kind of the more data and the feedback loops. And if I kind of tie a couple of things together, like on one side, with kind of what's going on with AI and so forth, there are a lot more AI tools available to competitors today kind of easily attainable than -- I mean, you guys had to build it from scratch 10 years ago. So when you kind of take that on one side and say, like does that hurt your kind of competitive advantage or the moat that you've built around the business. But on the flip side, like how important is all those new product lines you've added, the new geographies you've added and that -- really just that data and that feedback loop like how do you think about those 2 things?

Yes. It's -- the common question is, can you build Lemonade overnight over a weekend now, and it took us years to put together. And I think the underlying advantage is not for Lemonade sort of a silver bullet. It's kind of the culmination or the combination of all these different pieces. And so if you just took an extreme example, let's say, you took the Lemonade's front end and you gave it to a large incumbent for free. AI feels free even though you have to pay for it. But let's say you could code that thing up and hand it off to one of our competitors. The question is what do you do with that capability? It's not getting the capabilities, what do you do with the capability. The real value of the Lemonade system is built under the hood on our proprietary data. We all share publicly available data, and that's been true for a very long time. And so if AI enables some of those sort of external facing pieces to be easier to build or easier to code, then that may very well be. But our fundamental advantage, we think, is actually expanding, not shrinking because of the pace of the sort of acceleration here. If we're all accelerating at a similar speed, whoever started first, this is -- you heard Daniel published this in the last couple of days. If you started earlier and you're all accelerating at the same speed, your advantage is going to widen, is not going to narrow. It's kind of like it's a little bit of the -- it's a different version of the innovator's dilemma where for decades, to be an amazing insurance company, you had to be a bit of a Sumo wrestler, right? You had to be really big and really smart and have a lot of reserves, and that was how that system was built over decades and decades. And we're playing in a different game. And so we're not trying to Sumo wrestle the Sumo wrestler. We're doing the biathlon and we have a rifle and some skis and -- and next week, the sport is going to change again and whoever is most agile, and that's really where our advantage lies, not mastering today's model release, but knowing that we're going to be best fitted to master 3 releases from now in 6 or 12 or 18 months.

Yes. That makes sense. Along those lines of constantly expanding, growing, I think a lot of people think of Lemonade as a U.S. company, but Europe is kind of stealthily getting on the map and growing and you have a number of countries there products. Can you just spend a couple of minutes talking about kind of the strategy there and kind of maybe how the regulatory environment there is welcomes that...

Yes. So one of the -- again, going back to day 1, one of the strategic pillars of Lemonade was we can go where the market is. We don't bring in 1,000 agents, and we don't build big buildings and put our name on them. And so it became clear to us that we could launch Texas, for example, with no employees in Texas or we could launch Michigan with no employees in Michigan. And so we kind of planted the flag in Europe, and we said we're going to do this because we can. If you had asked me in my prior life before Lemonade, I probably would have strongly recommended against it for all the normal reasons, risk and capital and all those things. And that was really the reason we did it because we could. And for a while, for a few years, it was under the covers. And now it's really -- Europe has come into its own. It's got some really interesting dynamics from a pricing perspective. There's no pricing regulation, price comparison websites drive a lot of the business. At first, we didn't like that because we didn't have an advantage. The direct-to-consumer model was really our fundamental advantage. We had to learn it. We had to become part of it. We failed a bit, and then we started to succeed quite a bit. And so Europe someday can be -- it should be half the business, right? The relative market size is 50-50. We're following the game plan from the U.S. We've gone from 1 product to 2 products. We think car insurance will be great in Europe. We don't have it yet. We think pet insurance likewise will be great to add. More than half our business in Europe is from the U.K., which is our newest territory. More than half the business is from home insurance versus renters insurance. That's the newer product. So it's -- again, we're seeing this pattern that we saw in maybe 2016, 2017, 2018 in the U.S., and we have a nimble team. And it's actually -- it's interesting when you think about the sort of LLM question, can GPT sell insurance. In some ways, Europe was a bit of a test case, right? We had to figure out price comparison engines a little distant from our customer experience. We figured out we had to mail it. Now obviously, AI and the LLMs are going to be a step change beyond those websites. But maybe that was a bit of a dry run that prepped us.

Good point. Okay. Great. I mean CFO is here, so let's put a financial hat on. Can you talk a little bit about the virtual agents and the kind of the growth financing arrangement that you put in place? It is pretty unique, but it seems to be working very well. You've renewed it, so on, like it's, I think, a big -- something people might gloss over, but is pretty unique.

Yes. It's -- so we have a synthetic agents program we call it. We really -- we developed it. When I say we developed it, we have partners who are thinking along the same line. General Catalyst is our partner in this. Others in the market do it. It's a bit rare outside of tech and software, and it's a little more common in private companies than public companies. And we found it to be a bit of a sleeper to put it mildly, which is -- it's one of the few financing mechanisms I've ever seen or experience that does everything you want it to do and none of the bad things that you don't want it to do. And with all due respect to all the bankers and lenders in the world, there's always a trade-off, cost and covenants and all that stuff. And there's so much flexibility built into this program, and it gives us downside flexibility, but it also enables us to make decisions going forward. So we can grow at the pace of our choosing. We've been able to replicate the benefit of agents where we're competing against big incumbents with large installed agent bases. Now those can be a liability and can be cumbersome to manage and train and pay. But the nice thing about them is you can -- it stretches out your customer acquisition cost over a very long period of time, essentially the lifetime of the customer. So we were able to do that, replicate that. There's a cost, right? So the partner makes a healthy return, but it's debt like. It's got all the advantages of debt where we're able to get the balance sheet benefit, lessen the cash flow burden, but also maintain our flexibility. There's no covenants. There's no limitations. There's no decisions we make that we can't -- couldn't make otherwise because of the debt -- a traditional debt structure. So it's just been ideal for our business and the kind of customer cohorts that we acquire, and it's just -- it was a good -- it's been a great fit.

Great. Before we open it up for questions in the last few minutes, maybe I'll ask you this kind of one forward-looking kind of look -- as you look out 5 to 10 years, I guess, look out 10, Lemonade is kind of 10 years old now. So let's look out 10 years, like what -- how do you, one, see where Lemonade is; but two, just the broader insurance landscape, at least in your personal lines sort of universe, particularly with AI coming of age and those sorts of things.

So I think in broad strokes, we have what we need. We don't have to -- there's another continent or 2 out there that we're not in, and that's always an opportunity. There's other products that we could launch, but we don't need to, but we likely will over time. But we have the core capabilities. We have the core products. We'll go -- we're in 50 states with a couple of products, but we're not in 50 states with all products. We'll continue that geographic expansion. I think from a 5- or 10-year view, we have always believed that there's room in the insurance world for a single -- at least a single digital leader, the Spotify of insurance, the Uber of insurance, the Netflix of insurance. And that doesn't mean that sort of indicates a winner take most dynamic, which I don't think is how insurance plays out. But there's no one in the market that's ahead of us. 4 years ago, I would say that same sentence kind of waiting for the shoe to drop and the companies to flood in, and we've still not seen that. Our real direct competition is really ourselves, right, to maintain our standards, to adapt to these new technologies, to accelerate growth, to do all the things we've been able to do. So I think in the same way that people love and use Spotify and would panic if you took it away from them, I think Lemonade will occupy a place like that in financial services and insurance 5 or 10 years from now.

Great. We got a couple of minutes left if there's any questions in the room.

[indiscernible].

Yes. So I think maybe you're getting at the long-term view of employment and compensation and some of those economic issues that are starting pretty starting to come pretty fast. I'll just assume that might be where you're going. So we are highly cognizant of the benefits of AI to businesses and cost structures and all those things. And we are even more cognizant of the broader pressures that we expect or might expect developing on consumers. In the short term, consumers -- we're providing a service and a product that's of utmost importance to a consumer, whether they're wealthy or not wealthy or employed or unemployed or it's a critical need. And so while recession-proof might be an exaggeration, there's a bit of truth to that. People will pull down their discretionary spending, but they want to make sure their bike is covered and their pet is covered in their home, their most important asset is covered. And so I think that, that will be a short-term and a medium-term dynamic. But in the long term, we have to have customers, and they have to have -- be healthy customers that have -- that own valuable things. And so it's in all of our incentives as leaders of businesses to think about these things. And so I don't -- I have no more magic vision than the next guy. I do -- the leader of Lemonade, Daniel Schreiber, has actually done quite a bit of thinking along these lines and outside of work is kind of a key thought leader in how these economic structures play out. And so it is a top of mind thing for us. And it's top of mind for me and probably you, anyone has kids and grandkids, and it's critically important. But from a Lemonade's perspective, we'll be at the front of the line, but we do have a greater responsibility, I think.

Great. We are at time. So thank you, Tim.

Thank you. Thanks.

Thank you. Appreciate it.