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

Hello, everyone. Thank you for joining us, and welcome to the Lemonade Second Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to the Lemonade team. Please go ahead.

Good morning, and welcome to Lemonade's Second Quarter 2026 Earnings Call. Joining us on our call today is Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bixby, Chief Financial Officer; and Nick Stead, SVP Finance. A letter to shareholders covering the company's second quarter 2026 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our most recent Form 10-K filed with the SEC and our more recent filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including number of customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex CAT, trailing 12-month loss ratio and net loss ratio and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business. With that, I'll turn the call over to Daniel for some opening remarks.

Good morning. I'm happy to report on another excellent quarter, marked by accelerating growth, strong underwriting performance and continued progress towards profitability. In-force premium reached $1.43 billion, growing about 32.5% year-over-year and extending our streak of accelerating growth to 11 consecutive quarters. Revenue grew even faster, increasing 79% to $294 million, and gross profit increased 76% year-over-year to a record $113 million. As a result, adjusted EBITDA loss improved 54% to $19 million, and we remain on track to deliver our first positive adjusted EBITDA quarter in Q4 this year, followed by positive adjusted EBITDA full year 2027. Against that backdrop, we remain confident in our outlook and are reiterating our guidance across IFP and EBITDA while raising our guidance for both gross earned premium and revenue. During the quarter, we also completed our annual reinsurance renewal as well as the extension of our synthetic agents program with important upgrades to each. As it relates to reinsurance, the renewed program modestly increases the share of premiums that we retain while meaningfully strengthening catastrophe protection, including named storm coverage that was largely absent under the expiring structure. The agreement related to our synthetic agent extension provides $0.25 billion in growth financing at roughly 9.8% cost and applies to growth spend in '27 and '28. This amounts to more than 6 percentage points improvement in our cost of capital, materially lowering expected interest expense on a go-forward basis. With the financing of our growth investment improving, let me turn to that spend and its efficiency. Over the past several years, we've substantially increased our growth investments while holding the LTV to CAC ratio stable at roughly 3x, no mean feat. Some of you have noted that this growth spend outpaced the corresponding growth in in-force premium. The concern that I understand it is that this gap signals declining efficiency that each incremental growth dollar is buying less premium than once it did. It doesn't, and I'd like to walk you through why. With our direct-to-consumer distribution and predictive LTV models allocating that spend, we ratchet spending up and down and shifted from one product to geography to another in real time in pursuit of those sterling 3x returns. In 2023, as inflationary pressures shrank the opportunities for profitable spend, those controls naturally reduced our growth investments to about $55 million. We implemented rate changes to counter inflation. And as those came online, we added about $15 million of incremental growth spend each year. Now a similar dollar addition to a growing base produces a lower growth rate. So, spend growth decelerates by construction. On the premium side, the dynamic pushes the other way. Growth spend is a flow. It's expensed and reset each year. The premium it buys is a stock. Cohorts stay on the books, layered on top of every cohort before them. So, while spend growth decelerates, the premium of those dollars created keeps compounding, boosted further by our accelerating cross-sell. The bottom line is this, the observation is accurate, but it doesn't point to any underlying degradation in our efficiency. It's a mathematical artifact of our spending slowdown in response to inflation and our subsequent catch-up spending. Beginning in 2027 and beyond, we expect IFP growth to outpace spend growth, a key driver of operating leverage and profitability. And before I hand over, [indiscernible] this morning's other announcement. At year-end, after more than 9 years as our CFO, Tim Bixby will pass that baton on to Nick Stead, our Senior Vice President of Finance, and Tim will step up to Lemonade's Board of Directors. This transition was years in the making, instigated and paced by Tim himself. And today, almost all of our financial functions already report to Nick. So expect this handover to look like everything else Tim has engineered here, the capital raises, the IPO, 6 years or beat and raise, which is to say planned, disciplined and seamless. Congratulations to both Nick and Tim. With that, I'll hand over to Shai, who will cover a couple of key insights across the business. Over to you, Shai.

Thanks, Daniel. First, I wanted to update on our LAE ratio, that is the cost of handling claims. This is a key metric when looking at insurance carrier efficiency with an industry average of around 9%. In the second quarter, we delivered our best ever LAE ratio result of 5%. This improvement is a continuation of a multiyear trend made by the growing use of our Lemonade OS technology, which drives AI across the claims operation. It is notable that the gains have been broad-based with record low LAE ratios in the quarter across each of our product lines. Beyond boosting our profitability and pricing power, the LAE ratio is a way to compare our efficiency versus other insurers. And what these numbers show today is that our competitors spend almost twice as much as we do on handling claims, and we're not done here by any means. Next, I wanted to touch on our expansion efforts. In the past 100 days, we launched 14 additional state product combinations, which included both a meaningful push towards nationwide availability for renters product as well as the launch of our autonomous car product in Colorado and Indiana. That's made possible by continued investment in our proprietary technology platform, which reduces the effort required to launch new products and enter new markets. We believe that nationwide availability in renters will unlock a much broader partnership opportunity with potential partners for whom that is a key requirement. On the road map, we expect to see more geographical expansion, most notably with regards to our car product. We have several state launches expected in the near term. And before the end of 2027, I believe our car product will be available to the majority of drivers in the United States. And with that, I hand it off to Tim, who will cover our financial performance in a bit more detail. Tim?

Thanks, Shai. Let's start with Q2 results, which were excellent. In-force premium grew more than 32% year-on-year to $1.43 billion, driven by customer growth of 23% and premium per customer growth of 8%. We added about 166,000 new customers in Q2, more than 12% greater than the roughly 148,000 in the prior year quarter. Within our reported gross loss ratio of 60%, our favorable prior period development of 7% was driven primarily by our homeowners, multi-peril and car products. Total CAT impact in the quarter was 3%, excluding CAT prior period development. And on a net basis, we saw 5 points of favorable prior period development, of which 2 points were related to CAT. Prior year development, which we report on a net basis, was $12 million favorable in Q2 and $16 million favorable year-to-date. Gross profit increased 76% to $113 million, while adjusted gross profit increased 74% to $114 million for a gross margin and an adjusted gross margin of 38% and 39%, respectively. These metrics use revenue as their denominator. Our adjusted gross profit as compared to gross earned premium was 34% in Q2, up 8 points from 26% in the prior year. Revenue grew 79% to $294 million, while our adjusted EBITDA loss improved to a loss of just $19 million. Notably, revenue grew nearly 50 percentage points faster than IFP due to dynamics related to our sustained trend of increased premium retention at reinsurance renewals in recent years. Importantly, adjusted free cash flow was positive for the fifth consecutive quarter at $19 million and has been positive 8 of the last 9 quarters, while operating cash flow was negative $3 million, following a common seasonal pattern. We ended the quarter with roughly $1.2 billion in cash and investments, of which about $330 million is required to be held as regulatory surplus. Annual dollar retention, or ADR, remained stable sequentially at 85%, continuing to reflect the impact of our prior clean the book actions within our homeowners product line. And as a reminder, ADR is measured relative to prior year's IFP. So, while those portfolio actions are now largely behind us, they will continue to impact the reported ADR metric for the next couple of quarters before rolling out of the comparison period. Operating expenses, excluding loss and loss adjustment expense, increased by $53 million or 41% to $182 million in Q2 as compared to the prior year. And now I'll hand it off to Nick, who will walk us down the P&L and break down those expense lines a bit. Nick?

Thanks, Tim. Let's do that. Other insurance expense increased year-over-year by $5 million or 25% in Q2 as compared to a 32% growth rate of gross earned premium. This includes certain expenses that are variable in nature, and so typically grows at rates not materially different to that of the top line. Total sales and marketing expense increased by $18 million or 30%, primarily due to increased growth spend as compared to the prior year. In Q2, growth spend was $64 million, up 30% or $15 million as compared to the prior year. Importantly, as we continued to ramp growth spend, marketing efficiency levels remained stable and strong in the second quarter with an LTV to CAC ratio above 3x, in line with prior year. Technology development expense was up by $8 million or 34% year-on-year to $30 million. The growth was driven in roughly equal parts by the SBC impact of recent equity awards to our executives, which were not reflected in the prior year quarter, growth in personnel-related expense and higher software costs supporting our expanding AI capabilities. G&A expense increased 85% as compared to the prior year to $48 million. The year-on-year increase in G&A was driven primarily by a onetime tax refund benefit in the prior year period, the SBC impact of recent multiyear executive equity awards in the current period and growth in interest expense. Excluding those items, the year-over-year growth rate of G&A expense was 2%. Headcount increased slightly by 65 or about 5% year-over-year to 1,339 in Q2. The increase is attributable to net hiring in our product and engineering teams, and we expect that most of the year's net hiring activity is behind us. Net loss was $43 million in Q2 or $0.56 per share as compared to a net loss of $44 million or $0.60 per share in the prior year. Excluding the onetime benefit related to the tax refund I had mentioned from the prior year, the current period net loss result represents a 22% year-over-year improvement. Adjusted EBITDA loss was $19 million in Q2, dramatically improved as compared to a $41 million result in the prior year. Our detailed guidance for Q3 and the updated full year of 2026 is included in our shareholder letter and represents 33% Q3 and full year ISP growth, roughly 9% Q3 revenue growth and 65% full year revenue growth and unchanged a positive full quarter of adjusted EBITDA in the fourth quarter. Based on our third quarter and full year guidance, implied fourth quarter adjusted EBITDA is approximately $8 million. With that, I would like to pass it over to Shai to answer some questions from our retail investors.

Thanks, Nick. We now turn to our shareholders' questions. We received a question about our IFP growth rate acceleration streak, when it might end and what factors could extend it. 11 consecutive quarters of IFP growth rate acceleration is a remarkable run by any measure, but especially for us as it's roughly 1/4 of our life as a company. What is most notable about that streak though, is that it has never been at the expense of profitability. LTV to CAC ratios remain healthy and strong at roughly 3x and adjusted EBITDA breakeven is precisely on track as compared to prior expectations. Our third quarter and full year guide contemplates the next point of IFP growth up to 33%, but we haven't given precise expectations for 2027 just yet. We have many growth drivers, but perhaps it's helpful to think through the lens of LTV to CAC. When unit economics improve, we are able to invest more aggressively in growth. We see opportunities on both sides of the equation. We seek to increase LTV through sustained momentum in cross-sells, which can drive gains in retention. And we seek to improve CAC efficiency through more granular AI-driven pricing, which can provide a tailwind to conversion rates. We continue to focus on these key drivers that we believe can drive sustainable profitable growth. We received a question around our new car insurance business, specifically the share of customers acquired via marketing versus cross-selling. We continue to deliver excellent growth in our car business, 60% year-over-year in the second quarter. We're seeing strength across both of these channels. In the quarter, we saw both the highest ever period of new business to car and the highest ever period of car sales to existing Lemonade customers. In recent periods, car sales typically represent between 40% to 50% of new to Lemonade car sales. We also received an interesting question around our adapting to new AI models as they come out. One of our core advantages is that we're model agnostic. We're not tied to any one frontier model provider. We continuously benchmark the latest models against one another to identify the best combination of capability and cost for each specific use case. When a new model is released, our teams typically begin evaluating it immediately, where we see performance advantage, moving from evaluation to implementation can happen in a matter of hours. The benefit isn't usually 1 dramatic step change. It's the cumulative effect of incremental improvements. To name a few, those improvements increase automation rates, they reduce human intervention, improve customer experience and lower cost to serve. I believe our system's ability to run multiple models at the same time while constantly evaluating them in real life is an advantage that helps drive the improvements in efficiency and operating leverage you've seen over the past several years. With that, I'll pass it over to the moderator, and we will take some questions from the Street.

[Operator Instructions] Your first question comes from the line of Jason Helfstein from Oppenheimer.

I'll have kind of 2 separate questions. So first is, what's the team most excited about right now? Obviously, a number of things going on, product, geo, et cetera? So what are you most excited about? And then just second, as we're all trying to think about how the model spools forward and thinking about potential operating leverage in 2027, 2028 without giving specific guidance, I guess, do we think that gross margins and contribution margins can kind of continue to maintain the current path as you expand product and geo coverage? Just any kind of way, obviously, as we're all trying to think about what that bogey is for 2028 to support valuation.

Jason, good to hear from you. These are exciting times. So there's a lot to be excited about. If I had to pick one, I think I would say car, where we're just seeing kind of all the pistons going, all the quips around car kind of right themselves. But we really are seeing a lot of acceleration, a lot of improvement. There are a lot of changes and implementations and launches being planned and worked on, and we'll elaborate on those during our Investor Day, but there's a lot of reason for ongoing optimism in the sense that in this huge market where we are really just absolutely tiny and have so much headroom, we have advantages that we can sustain and can compound. And vaguely related to that, I'd add a second one, which is a little bit more vague, but there is a strong sense in the team, and I think it's reflected in our results quarter after quarter now, which is that the wins at our back. The machine is doing what it's meant to be doing. These 10 years of hard work at building the technology that we've built is throwing off results, throwing off growth, throwing off gross profit, compounding on a regular basis, all the data infrastructures, the AI infrastructure, some of which Shai mentioned a couple of minutes ago, the brand work that we've built, the team that we've built that this machine is really functioning very, very well, and it's just a pleasure to -- from my vantage point to sit back to some extent and watch it compound and keep doing what it's doing, 11 quarters in a row of acceleration, and we think there's a lot more where that came from going forward. I'll touch on the gross margin question briefly and then see if Tim or Nick wants to add more. But my comment is less by way of a direct answer and more by way of kind of challenging the premise or kind of a little knit, which is to say we are not -- I am not -- we are not focused on gross margin per se. The metric that we focus on, and we do encourage our investors to focus on as well is gross profit because there will be times where we can increase our profitability through shrinking gross margins and times when we cannot. And we're just talking about car, and I've spoken about this repeatedly on prior calls, which is that you see some incredible elasticity of demand in core products like car and our ability to actually shrink gross margins over time. That is to say, to price more aggressively than our competitors because we have a structural advantage that manifests in an entirely different cost structure. (Have a look at what we just announced in terms of LAE, spending something in the ballpark of half as much of our customers' premiums in order to give a better experience in claims.) But that kind of structural advantage allows us to produce a pricing advantage that will allow us to continue to grow and take market share. It will not manifest necessarily as an advantaged play in gross margin, but it will manifest in growing gross profit, which is the more important of the 2 metrics, if you follow my line of thinking. And with that, let me just see if Tim or Nick want to come in as well.

Yes. Daniel has it exactly right. And I think from a -- if you kind of translate that to a modeling perspective, the growth drivers for gross profit are clearly the top line growth, the gross loss ratio, and that is really advantaged by the loss adjustment expense improvement that you've seen, and we had a nice deep dive in the materials today, and we've updated you from time to time on that, and that's something we expect to continue. In addition to that, the top line growth accelerating also puts upward pressure on that gross profit. So while we would not expect to see such dramatic loss ratio impact as we've seen historically, something like 30 points of gross loss ratio improvement over time as expected and as planned, but a result of lots of hard work over time, you'll now see the gross loss ratio move around as much more of an output than an input. But the gross profit, I would expect to grow materially in line with top line growth and even mix shift doesn't hurt us, mix shift tends to help us, again, with the loss ratio or the loss adjustment expense looking nice, not only in aggregate, but also if you isolate by product, we see that same dynamic. So even as mix shifts, we'll still see that nice benefit. So, I think we've given you enough breadcrumbs today, we'll continue to do so to kind of model out that gross profit. We'll certainly update in the next quarter and at Investor Day and give a little more detail, but all the trends are quite good there.

And sorry, I'm told that -- I misspoke, Jason. I hope I was understood, nonetheless. But just looking at our LAE, we are at 5% industry is at around 9%. And I was saying that they spend about twice as much of their customers' premiums than we do of our customers' premiums on the bureaucracy of handling claims. And that we tend to believe is probably indicative of a broader trend beyond claims as well. But if I misspoke, I hope I've clarified that.

Your next question comes from the line of Tommy McJoynt from KBW.

Do you envision the inputs of getting to 30-plus percent in-force premium growth shifting a bit where customer count growth decelerates in the low 20s and premium per customer growth accelerates from the current mid- high single digits? Are those inputs likely to change?

Thanks, Tommy. I would expect no material change in the near term as to those relative growth rates. I think customer growth will continue to be the primary driver of IFP growth, but I also would expect the year-over-year growth rates of premium per customer to gradually and modestly increase as has been the recent trend.