Lemonade, Inc. ($LMND)

All right. Good morning, everybody. We're happy to have Dan Schreiber, the CEO of Lemonade with us here today. And Dan, thank you for taking the time. It's an exciting time to talk about the business. So if we can get us started the broader market is seeing a softening trend in personal lines and then the industry is seeing notably a slower growth. But your business mix is obviously fairly different from other larger carriers.

And in fact, this would be your tenth consecutive quarter of accelerating growth, right? So if we think about the business going forward, can you help us think about how you can win in an increasingly challenging market environment?

Good to be with everyone. We've got some formidable competitors at the best of times, right? So we're up against some companies that have been doing this for decades, if not centuries, and have the advantages of scale that we lag. And so we always approach the challenge in the spirit of your question, which is how can we win against all of this impressive and seasoned business. And our answer to that is a pretty simple formula which is we don't play the same game that everybody else plays. We are a tech-first company and that allows us to do things in our own lane. And our basic hypothesis is that technology can yield cost advantage cost advantage yields price advantage, price advantage yields strong growth. So yes, you see that now across our P&L. I'll give you a couple of indicators of that, but that is really how we to continue to win, which is to say, in the last 3, 3.5 years or so, we have seen our business almost triple. Our revenue almost tripled. We've added close to 1.5 million customers. Our gross profit has done much better. We're more than 10x the gross profit. And yet, our head count is smaller today than it was 3 or so years ago. So you're seeing the kind that drives efficiency like nothing else. And there are a lot of metrics within insurance, we might come back to LAE and others that give you an insight into just how efficiently Lemonade is operating. And that when you pass some of those cost advantages on to the customer, you win in good cycles and you win in bad cycles. In some ways, you win even more in tough cycles when people become more price-sensitive and the competition becomes fire. So your advantage is more pronounced as the old were and buffered about when the tide goes out, you see who's got a swim soon.

No, that's very helpful. Speaking of price sensitivity, right? Personal auto is probably the hallmark of that perhaps now going back to your prior Investor Day, you laid out a very ambitious goal of 10x the business going forward. And a big part of that is the car business, the personal auto business. This is playing well so far. And if we think about the near-term aspiration for the auto business, can you maybe help us think about what aspect of that business is where you think the opportunity lay for you? Or what are the aspects you kind of have to be a little bit more careful about so far?

Sure. So if I said earlier in broad strokes about our business that the anchor of our strategy is our structural advantage in technology and that yields the downstream benefits that I described, you see a perfect illustration of that in our auto business in our car business. The rest of the industry prices people based on things that make people squam in their chair the credit score, gender, marital status, education level. These are the state-of-the-art of the incumbency for how to decide what kind of driver you are. And at Lemonade, we use signals. We use telematics. We actually have through your phone, usually, we've got incredibly sensitive not only GPS, but accelerometer and a bunch of other sensors driving in your car monitoring how you're driving and well over 90% of our customers have that enabled all of the time to have a continuous stream of data we collected over 1 trillion data points already. And something we can parse through all of the proxies that are used. And the name of the gaming and insurance is always about deaveraging taking groups that look monolithic to your competitors, and you see the nuances within them. So take young drivers as a for instance, young drivers on average are bad drivers but averages a curse word in insurance. You want to deaverage at every opportunity. So young drivers go to insurance companies that get a high rate, they come to lemonade and it will depend on how they drive. So a lot of young drivers who don't have a credit score to speak of yet and don't have a driving history to speak of yet. And I'm not of the right age group of the Robinsons to the progressive kind of target audience. they are disadvantaged profoundly by the traditional methods of underwriting and Lemonade is able to give them prices that are unmatched by the others who my example was on young drivers. But zooming out across the age groups, 2/3 of drivers are better risks than average. Two, they drive fewer miles, they drive better, but traditional methods can't capture who is average and who is better than average. We're able to give 30% savings to those 2/3 and then you ask people, eliminate better price or not, it will depend on which third you fall into. There'll be some people who holler. These guys get me such a high rate. I'm sticking with GEICO and good ribbons, that's absolutely the system is working as designed. And then others will find that we're giving them 20%, 30% discounts. Remember that GEICO built a $50 billion business on the promise of saying 15%. This is such a price-elastic business, such a price-sensitive business that small cost advantage passed on as price advantage can deliver very rapid growth. Our car business today is our new sales are growing at over 100% year-on-year. So we are seeing that take off in that business.

And certainly in an exciting subject to talk about on our next Investor Day later this year.

So thanks for the plug, Yes, November Exactly.

So maybe staying on that CAR topic a little bit, right? On the Investor Day, at the time, telematics was a competitive advantage you talked about in the auto business. More recently, the conversation feels like it's shifting more towards the autonomous side of things. And you started a Tesla Autonomous insurance products, and then that's been expanding into various states. Can you tell us maybe about well, first of all, the thoughts behind the product in terms of how to guardrail the risks, right? And then but also maybe just the need of being a first mover there and then where we're going from the autonomous products for this whole vehicle business going forward?

For the benefit of those who aren't familiar, we launched a product that says, if you use Tesla FSD in the 3 states where it's available now and the list keeps growing per mile for those miles that you let FSG drive, we will reduce your premiums by half. That's a pretty dramatic saving I was talking about 15%. This will reduce the cost per mile driven by half. . And that's really a data-driven conclusion. FSD is a better driver than me. It's a safer driver than you or me. The data backs that up and we're able to do some things that the rest of the industry can't do. We can price per mile. -- those kind of proxies that I spoke about earlier, I have no idea how many miles you drive they're looking at your credit score. That's a very crude measure million people will give you the correct average answer, but it doesn't give you the kind of precision. We are down at the item of being able to price per driver per mile once you build something at that level of precision and granularity, you can always amalgamate it into all different kinds of products. And 1 of them is the FSD product we just launched. So I think it is an expression of a profound structural advantage in our ability to go to micro pricing or per mile per driver and our ability to see who the driver is through the machinery and not through the legal form that was the contract that was signed at the time they bought the policy. So this isn't just about named driver. This is about AI, seeing AI. We see you. We see that FSB has taken over we see how it drives. We know which version of FSD you have and whether you updated the firmware and where the user is 1 of the newer testers with a better, faster machinery because the sensors improved over time or not. And to get to that kind of granularity and if you can do that, I think that just gives you a great test case or an example of just how profoundly different the whole flow downstream from the policy is a laminated versus everyone else. So yes, I don't know if I'd say that we had to be first. We are the only ones who are able to do this. It was almost inevitable that we would be first. So we have the full stack that allows us to offer this. It's in line with our brand. It's aligned with our and technological capabilities. So it was natural that will be for us and today it's the only.

Do you feel that competitors will be fast followers? Or do you think there's maybe going to take a while for them to even get there? Just curious your thoughts.

My best guess is that you will see some I don't have any insight. This is a full year speculative my best guess is that they will scramble to get something that sounds similar Okay. So they might start getting discount for cars with FSD. But I think getting to the kind of granularity that I described is beyond our systems and will take a very long time. .

So basically, from fee per month to fee per mile is really not the easiest thing to do.

No, the billing systems aren't supported. They don't have the telematics, the haven't integrated their APIs with the OEMs, I think they've got a journey ahead would be my best guess.

Okay. I really appreciate that so maybe on the autonomous, right? How big do you think this opportunity is for you and for the industry? I think from our perspective, even for some very aggressive assumptions, right, 3 or better autonomous cost would be around, call it, 15% of the total cars by 2035. How should we think about the size of the opportunity for Lemonade at this point? I think that's probably right.

For a long time, the dominant mode of transportation is not going to be autonomous driving. It is clearly going to be the fastest-growing segment. So you're going from 0% to 15% of a $350 billion insurance market, that's great for Lemonade. Because we're small in general, there's a broader point here, if you're the CEO of a $5 billion, $6 billion, $7 billion, $8 billion insurance company, you are massively invested in the status quo. You actually don't want telematics, forget FSD. Telematics is not good for your business. because these x-ray glasses that allow you to see that 2/3 of your customers are overpaying is something you'd rather not know. What are you going to do? Reduce prices for 20 of your customers? Is that going to do a lot of good for your tenure as CEO of whatever company it is. No, that's going to be quite damaging to it. And then you have to raise prices for 1/3 of your customers and have them shut out. None of this is good for somebody who has to protect a traditional business. We have the advantage of being very small. Car is our most recent product. Earlier products launched and have done very well. renters have grown to a dominant position in the market. Pet launched only 4 years ago and was going to $0.5 billion and growing very, very fast. Now the #1 research pastinsurance in the United States car is behind all of those because it's our most recent product. But that same trajectory should allow us to do something very significant in the market that is 20, 30x bigger than the pet or renters market. So I think we'll be able to do this for a very long time. And for us, because we're so small, coming back to your question, growth rapid growth can happen in places that may look small if you're running progressive today. But for us, we'll yield that 10x and 10x again very dramatically. So if we are dominant in niches, young drivers for the reasons I said, autonomous driving for the reason I said, and we have other business beyond that can allow us to continue to grow we mentioned 10 quarters of accelerating growth. Car accelerating faster still, I think we've got a lot of headway ahead of us there. So even if, let's say, you do the 10x, there's still quite a bit of opportunity for you just simply because the areas you are in is where you really can compete much better than everybody else, essentially when we tenor business, we will be barely noticeable. State Farm will still loom over us almost 10 to 1. So we could 10x again before we become truly 1 of the larger players on the field. This is such a huge sector, 11% of GDP, it's got so much headroom. And that is true just in the United States. We're not just in the United States. We are in Germany and Holland and France and the U.K., and we're growing very rapidly in Europe. We're seeing triple digits growth in Europe as well. So the footprint, the TAM that's available to us means that from our modest beginnings in place today, we consider the market opportunities to be endless infinite as far as our planning matters or the next few years matter.

And very global as well.

It is global.

So actually, that would be a great segue into the other parts of the business, right? So when we go back to 10x the business part. The other aspect of that would be fairly robust growth through, let's call home pet renters European business there as well. So can you maybe help us think about the trajectories in various businesses there. Obviously, rent source originally was a very big business for you. is important. So just curious how you think about the various aspects of all the business.

Yes, definitely. So rental was our original product. It's been overtaken by pet. So we're seeing this layering effect as we add more products. One of the things that's worth mentioning as well is that it's not just new products. It's the interrelation between them. I'll come back to that in a second in terms of cross-sell and that. But so Pat is very fast growing, 50%, 60% annual growth. The market itself is growing, but we're growing faster than the market. So that's a great a really great product. And it keeps giving. We think there's a lot of legs to run and run and run in terms of pet insurance just across, as I say, $0.5 billion there. So that's a fabulous plan of the business. But ultimately, it's a smaller TAM. It's not like home, it's not like car, which is where between them, we've got about $0.5 trillion in the United States alone pet and rentals are still somewhere around the $10 billion mark plus/minus in orders of magnitude, no doubt. But that's growing very fast. Europe, again, a relatively recent addition we launched significantly after we launched in the United States. It's doing better age adjusted than America was for us. So growing faster, better profitability. It's got a lot of dynamics. We learned a lot of lessons from our initial launches here. And we're seeing those markets do well. And even within Europe, we're seeing a progress. We launched a sequenced to many Hallin France, the U.K. and how well we're doing in each market tracks the same thing. Germany not a great, Holland better, France, Better still U.K. is on fire. So we're just seeing very rapid progression as we learn and as our systems get smarter and smarter and smarter. So Europe, we're seeing triple-digit growth in Europe now several years in a row as well. renters, the dollars are growing, but as the denominator grows, for reasons that I touched on in terms of the TAM within the percentage growth rates and its ability to swing the entirety of the business becomes harder and harder. So we're seeing growth out in the teens. We expect it to continue. But rental is really important. The majority of our customers are still rents just not the majority of our dollars and it's so important because it's a feeder for the cross-sell of so many products. So I don't we should come back to that separately. But it's a strategic role. We've got over 2 million renters and that's hugely powerful for us as we think about other expansion and crossing.

So maybe yes, let's maybe focus on that a little bit, right? renters, you use that as sort of almost as a hook, so speak or are the other areas of the business. But if we were to think about just future of the renters business, from your perspective, is it just a key for cross-selling going forward? Or is there a way to say you still have a lot of more room to kind of organically grow that business and then compounding the cross-selling going forward.

It's definitely the last. It's growing very fast among first-time buyers of insurance and this is strategically important, people stepping onto the conveyor belt of life, buying their first policy. There isn't good data, but as best I can tell, Lemonade is the #1 brand. you stop a 20-year-old in your office and say to them, what intrinsdo you have. The chance of the manto lemonade is higher than any other brand out there. I put it to you that nothing is more predictable future market than market share among the first-time buyers of insurance. It's also very highly differentiated from how the rest of the sector works. You watch television for 5 minutes, and you'll see 3 different and all saying I switched and I saved. All of insurance is about moving from 1 basket to another, we're picking the fruit from the tree. We're out there getting first-time buyers of entrance onboarding them to eliminate and then growing with them. So I think renters will continue to grow. We will cement and grow our position among first-time buyers of insurance so it's a growth engine. It is a highly profitable product. It is a product where our tech advantage that formula that I said tech it gives you a cost advantage, it gives you a price advantage growth advantage. Is that its port because the premiums are so small, so much of what you're paying is for overhead the risks are so modest. And if you're super efficient, that's where you'll see it the most because there's least denominator to compete with there. So we continue to be massively advantaged there. We pay our claims in a matter of seconds. Our cost to settle claims is marginal, really drops to the module cost drops almost because most of our claims get paid without any human intervention at all. All of our policies are sold that way. It takes you 90 seconds to buy an insurance policy from Lemonade from the comfort of your pajamas at any time of down night anywhere in the world. to get a Starbucks at Starbucks ticks about twice as long. So you do see that a lot of these dynamics that I'm talking about are manifested most partly and renters and then yes, it creates a huge stream of customers to whom you can sell. It's kind of catiless in that sense because they were acquired for very low category paid for itself very quickly.and then you have an installed base to which you can upsell to the products.

And then those renters eventually evolves into homeowner insurance customers. And then maybe just between the renters and the home business, right? Like obviously, homeowner is a more competitive business than renters just given the environment. How do you want maybe maintain an underwriting discipline so that you can compete against the other bigger homeowner insurance companies. But also on the claims point you're pointing out, when you can settle claims very fast, guardrail against fraud and things of that nature?

So can you maybe help us with the process itself? So I'll start with the guardrails. The way we deploy AI, this has been true for a while, it becomes more and more true with every passing day, but is in places where AI outperforms humans. So your question has a premise nestled in it that we need guardrails or human nature I reject the premise what we're seeing, about 90% of the time that we get a customer complaint is about something that a human did not what an AI did. We only allow AI to step into places where it outperforms humans and not only in terms of the rig of its decision-making but it's empathy. We deal with deeply human situations, oftentimes is the worst day of your life. We had to deal with people many thousands of people in the LA fires. We our most beloved pet who is a household member has just been diagnosed with an awful disease. Your household bugged your neighbor is seeing you for something that anything might bankrupt to you. These are really tough situations that we're handling. And there was an assumption that, oh, you need a human in the loop to exude empathy to handle it. It's just not true. It's just not true. LLMs can understand these nuances and responded empathy that outperforms humans. And if I'm paying you claim in 3 seconds, you don't bemoan the fact that you didn't have 3 months of a relationship with a claims adjuster, you're pretty happy cost drop and your satisfaction goes through the roof. So of course, we have guardrails. Of course, we rigorously test all these things we sandbox, every technology before we let it loose but our experience is that once it passes those internal guard rails, it actually outperforms humans at a fraction of the cost.

So it's really about thoughtful deployment of AI on top of that with a very quick claim settlement you essentially have very high customer satisfaction that helps you maintain and cross-sell. No, that's it's actually quite interesting because just like in auto where your advantage younger customers and then they eventually become renters and eventually become homeowners. Is it quite an interesting flywheel you have here.

Right and quite distinct from the way the incumbency thinks about these things.

Yes. For sure. Yes. So maybe on that cross-selling point, right, you when we think about from renter pets to home and cars, how do you think about bundling because it's obviously another competitive point that a lot of your competitors, the bigger competitors will use bundling to their advantage, right but also at the same time, there's quite a bit of synergy in the business products. You just described so is there a way to think about bundling? Or how do you think about that process going forward and versus competition as well

First of all, you're absolutely right. This is an area of focus. I'll give you some numbers, but about 1/3 of our policies are sold to existing customers. So if we just sold a pet or rental policy or home policy, the times 1 and 3, that it's catalyst and going to an existing customer. So we're already seeing quite a lot of that. In Kai's been higher, it's been about half of our policies are being sold to existing customers. That's a stunning competitive advantage because Progressive guide these incredible companies, they're all car fast. They bear the full CAC, and it's an expensive acquisition cost the most expensive Google ad words are around coinsurance. So you're spending a lot of money upfront if we can get half of our customers catalyst. That's a structural advantage, and we pass those savings on to our customer and that feeds the machine that I spoke about earlier. And yet, even though it's about 1/3 already, if you look at our total IFP, almost 20% of our IFP is bundled IFP premiums, sorry. So it's getting there. And yet, we're behind. We're behind and the incumbents are better placed to do bundling, particularly of home and car. Car insurance fast is still unavailable to most Americans. We're approaching 50%, but we're still in our rollout and it doesn't path map where we have homeowners available, which is also being rolled out. So I think a lot of headroom for us to grow as we do more and more of our rollout as we get better overlap of all of our products availability. There are some states where all of our products are available, and we see that impact, but most states we're not there yet. So I think a lot of places as to grow.

So essentially, in that flywheel because you're car is really not the starting point, your LTV to cash should be notably higher. And then as bundling expanded, that should be a very healthy LTV to cat going forward.

Absolutely.

Okay. Perfect. Really appreciate that. So maybe that actually segued nicely into how we think about financial targets, right? Obviously, I presume you're going to talk about it at the 2026 Investor Day. But on the prior Investor Day, you laid out a road map to profitability, right? You're looking at net income positive exiting 2027. So based on where we are today, I think the way for the math to work, I think it's fair to say that we'll have to look for notable expense management, right, from a G&A, sales and marketing and such. Can you maybe help us think about that path currently going into income profitable 2027. How should we think about just that process from here on to, call it, the next 1.5 years?

Yes. So if you look at our financials, to date and the projections that we gave at our last Investor Day in '24, the Investor Day before that in '22 generally look at all the guidance. We've given guidance over 20x it is with notable precision. We've yet to miss guidance we're well ahead of what we told investors in 2022. We're also ahead of what we told investors only 18 months ago. So I do think that our ability to predict our business is surprising in how young and fast-growing our business is. So there is something almost echanical. We've built a machine that is cranking and it's cranking in ways that are reasonably predictable maybe 1 of the most keen ways of looking at that is if you look at our EBITDA margin, you'll see really just not quite straight but almost straight line up into the right which intersects at 0 in Q4 of this year, which is why we've guided already 4 years ago that in Q4 this year will be EBITDA positive. And you see all of the bread crumbs along the way. It just happens to intersect there and then it continues on. And if you draw that line forward about a year later, I don't know exactly, but about a year later, you'll find that we cross over the elements that [indiscernible] is missing, which is stock-based compensation and interest payments, and then you get to net profitability. But I don't want to present it as an inevitability, but it is fairly predictable, fairly mechanical. We've already hit and we're actually a year ahead of when we said we were at capla-positive. There's our third year being cash flow positive, somewhat unusually insurance is cash flow positive before EBITDA positive. But I feel reasonably confident as much as 1 can be in giving you a set of circumstances that the predictions or guidance that we gave, including getting to net profit sometime around late '27, maybe early '28, but roughly a year after EBITDA positive is on course, right?

And I think part of that, I kind of want to emphasize you've been consistently outperforming your guidance as well. So right, like it's been a very strong trajectory so far. One thing, I think, like you touched on earlier is really about the AI capabilities. And obviously, you're a technology-first company. And then but as we think about the evolution of AI going forward, do you see competitors kind of catching up? What are the areas where you think you have the best long-term potential where maybe competitors probably just can't catch up.

We founded everybody every session that everybody will hear today, AI will be sprinkled all over the place.

It wouldn't be a financial conference without it.

Yes which wasn't true just a few years ago. But yes, you've been following us long enough to know that we've been talking about this 10 years ago as well, noting that we discovered in November of '23. So this was the founding thesis of lemonade. And the reason is because even before LLM, Inturn is an extraordinary sector because it's 1 of the only truly moral products. There is nothing physical that's being manufactured. It's a statistics, is probability area that is being monetized. It's the ability to ingest data and use it to make predictions about future that lies at the very core of what insurance is about. That is what you're monetizing. The ability to look at past patterns and predict future patterns as a result of that. And up until the modern era insurance companies were the best in the world at that. They were the best batisticians. They had the best data set. But in the last 20 years, clearly, it's Google, at Silicon basis high tech companies that were engineered with modern big data infrastructures and machine learning capabilities. Lemonade was engineered that way an engineering based company founded by 2 tech founders and we are really bringing Silicon Valley into insurance that is a structural advantage that is today manifest, I think, in every line in our P&L, we touch on some of the ways in which it's manifesting. How do we believe then that instead of that, we could just transform existing Bohemia, that would have been a much more profitable thing to do. you take $100 million of business instead of starting from scratch and eating out your growth, and you just transform $100 billion of business using technology that will produce much better return on investment, we didn't believe it's possible the structural difficulties the innovative dilemma that Bigil and Beadles traditional insurance companies is well studied, well understood and very real leans 1 of the largest insurance companies in the world spend about $3 billion on IT. The industry as a whole spends absolutely staggering amount since our founding, I think the industry has spent something close to $1 trillion on we've spent less than $0.5 billion, and yet our technology is far superior to what those trillions dollars have generated over that intervening time. So I don't expect a turnaround anytime soon. In fact, what's happening now, the acceleration that we're seeing with AI means that the frontier is moving so fast. But if you're not riding that wave, if you're not at the frontier no matter what press releases you issue and what efforts you spin up you're getting further from the Frontier rather than closing the gap. And I think there's no question that today and for the foreseeable future, the incumbents will be moving faster than the frontier is moving. So actually, the frontier is moving away from them rather than closing the gap that's my best assessment based on what we're seeing so far.

That's pretty interesting. So we'll see what happens, right? Maybe we're close to time. If anybody have any questions? If not, I can keep going. I do have 1 last one. So obviously, a big part of the personal lines business is distribution, right? And then 1 thing we talk about all the time is technology and evolution of AI. Do you foresee an environment where in the future, maybe personal line distribution will be significantly changed by AI to a point where maybe that the distribution side of it is perhaps much less relevant where carriers will just directly go to customers or what have you. Just curious if you have any thoughts on the distribution side and how that could evolve because of AI.

It's quite possible we are seeing very early innings of people buying through agents. And when you say in choice, you have to explain what come agency me. I don't mean the traditional broker. I'm talking about AI agents lemonade talk about agents and agents. So we're seeing early innings of that. And you can imagine a machine-to-machine purchase in that situation. We're fine with that. The cost advantage that we spoke about earlier means that already today, if you ask all about your different insurance needs, Lemonade will be featured in a way that is dispoportant to our size. Some markets like in the U.K., which are price comparison-driven we're already seeing a much more algo trading style environment where the human contact is far less important and the machine to machine is driving a lot of it. And we are doing very well. I mentioned earlier the U.K., 1 of our fastest-growing market. So I think we're well prepared for that eventuality. I don't know how fast we move into that future. People have been able to buy and transom website for a long time and yet a lot of them still go to the High Street agent. So we'll see how fast human behavior adapts but the capability is surely are there.

Just given your AI native architecture it will be there regardless of whether or not the industry is there.

That's safe to bed.

Perfect. Really appreciate your time. We're at time. So thank you. Thank you. Thanks. Really appreciate it.

Thank you.