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

Good afternoon, everyone, and thanks for joining us for a fireside chat with Lemonade. Excited to have the company's CFO, and Tim Bixby joining us. So this is our, I think, sixth year we've done this. And kind of maybe our last year as you're formally transitioning away from CFO at some point over the next year. So yes, so anyway, so 6 time is the charm, as they say, right?

Appreciate it.

And I think we did start this live. At one point, it was like an in-person maybe the first 2 years. So anyway. Okay. So let's like jump right in. So I think everybody knows if you have a question, you can put it in chat. I already see some questions already down below. Otherwise, e-mail me at jason.helfstein@opco.com.

Okay. So let's start with IFP, very strong quarter, up 33%, 11th consecutive quarter accelerating growth, third quarter and full year implies kind of sustained growth. I guess as you think about the business, what could cause IFP to slow? And I guess, like within your control and without your control? And how are we thinking about next year despite you not giving formal guidance yet?

Sure. So for lemonade, growth is a gift, right? More growth is better. That's not always true in insurance. And historically, it's often been the opposite for many insurance companies, growth and profit were at odds, you had to choose one. For us, it's typically the opposite. More growth typically leads to faster learning, more improvements, and you said it yourself, something like 11 quarters sequentially in a row of more rapid growth, accelerating growth, and at the same time, significant profitability improvements, loss ratio improvements during that whole period. From a go-forward basis, we've kind of set 30% plus as our margin orders. And we first indicated that, I think, at our last Investor Day, which is almost 2 years ago at this point. And we've done it and then some. And we've gotten 30% and then grown that a little bit each quarter. I don't know that you can't accelerate every quarter forever. There's a limit to that, I think. And I think to the question of what can get in the way or what can offset that or slow that is it's really of our choosing. As long as we can acquire profitable customers, a lifetime value that's forecast by us and by our models, that's healthy, we can grow at that rate, and we've indicated 30% plus as far as the eye can see. And the good news is, since we made that declaration 2 years ago, we've been able to do it at ever-increasing absolute numbers higher gross spend dollar amount, though the growth rate is slowing somewhat by -- again, by our choosing and maintaining the marketing efficiency and the kind of march toward EBITDA breakeven, we've indicated that's just around the corner. So we feel very comfortable with that 30% plus. Our ambition is more. Our ambition is to increase that a little bit each quarter versus what is more typical, which is a flattening or a decline that they might come, but our ambition is to continue the trend.

Okay. So yes, we're going to go through one of the top line metrics and then because there's some questions in the chat, we will kind of get the margin. So customer growth, most recent quarter was 23%, premium per customer 8%. And I think you expect kind of no material kind of change in that in the near term. I guess talk about the dynamics of premium per customer, what drives that 8% cross-sell versus mix versus pure rate?

Sure. I think premium per customer is a good output. It's not a great input, but it's a good metric to track. There's some noise there, particularly as our Europe business grows quite rapidly. The premium per customer in Europe, even though it's both renters and home is relatively low compared to the U.S. business, a home policy in the U.S. is quite a bit -- quite a bit higher. So you have to be a little cautious in the -- that's just looking at absolute customer numbers. But in terms of premium per customer, I think our current theme will continue. We've seen a roughly 8% year-on-year growth rate. I think you will continue to see that. I should expect that the remainder of this year, probably through next year. Looking out a little further into '28, late '27, '28 and beyond, I think there will be upward pressure on that premium per customer where that growth rate might move up a bit versus down from that 8% run rate. And that I think is -- that is really driven by mix shift. I think when you see our current pet growth rate and car growth rate in the 50s versus the overall growth rate in the 30s, that will start -- you really start to see that play out in the numbers in those out years. And so I would think of that 8% is edging upwards a couple of years from now.

Okay. So kind of segueing to car grew 60% year-over-year in the quarter. 40%, 50% of new car sales from existing customers, so really good cross-sell. I guess -- and this is -- it is not widely available yet. So just -- I guess the goal is to have it in the majority of the U.S. by the end of next year. So I guess just like help us understand like where does this go? Is this like do we assume car accelerates from that 60%? And then just I guess, how does that also a little bit impact margin just because there's different maybe requirements per state as you add more states?

Sure, sure. So more of the same. Generally, we expect car will grow because of the TAM and because of our efforts at quite a bit faster than the overall business. The state rollout is interesting, but it's not indicative, I think, of the trajectory or the growth rate much, meaning more states is good, more populations better. But we're in more than 40% of the U.S. population already, even though the number of states, it's a dozen or so, but more than 40%. By next year, that should be more than 50%. And so while it's 50% is less than 100%, it's moving pretty nicely. The growth rate of our autonomous product in terms of coverage is pretty notable. The premium is negligible. But I would look to the pattern of expanding coverage as a theme for Lemonade. So we'll expand in traditional car states. We're now up to 5 car states already in our -- in the autonomous Tesla partnership product. So our ambition, ultimately, for sure, is 50 states for all products. But our growth trajectory is not hindered in any way by the pace of expansion. And at this point, the driver is really regulatory hurdles. We become quite efficient at the rate filing process. That was not true 3 or 4 years ago, we were kind of new to the game and we had to build that -- build that team, build that skill, build those muscles, and we've done that. One of the places we're seeing the most AI automation benefit is in those filings. A filing has to be done and approved by a human, but a lot of infrastructural work, the logistical work is repetitive once you get to know a state, and so we're getting really good at getting filings in. And then ultimately, we're still subject to the regulator's approval.

Maybe talk about the unit economics of the kind of AB versus non-AB car policy and then kind of the choices you're making around if it is more attractive -- you can -- it is a better margin product. Do you kind of give that back by a lower premium, so...

Yes, there's a couple of dynamics there, again, and I would take this as directional again, because the end is very, very small at this point. It's thousands of customers, not millions of customers. So you've got a couple of dynamics that are different. One is obviously the price is notably different. The risk -- the expected frequency of a claim is notably less and the price is intended to kind of capture that impact, meaning if you're doing it right, you're holding that margin potential intact. You're just paying less claims and you're kind of returning that to the customer in the form of price. The second piece that's probably more interesting is the marketing piece or the customer acquisition cost, because autonomous -- because it's a very specific subset of driving, it's not just Tesla, but having a partner like Tesla, who kind of leads this market, I think, creates an opportunity where the customer acquisition cost can be different. And I got to be -- we got to be careful about what I can and can't say, you're going to pay to acquire customers one way or the other. But I'd be hopeful that the ability to acquire customers is more efficient when you have a very targeted audience, you've got a strong brand awareness and partnership through Tesla and you bring another brand that kind of is closely tied with the way they operate and the way they think in the form of lemonade. I would think you have benefits both on the claims or loss ratio side of the house, but also on the expense ratio where you'd have a CAC advantage as well. So ultimately, we want to preserve the gross profit autonomous or non, and we want to preserve the bottom line profit autonomous or non. Will they be exactly the same? No. But I think because of those 2 dynamics still, the potential, they'll both be quite attractive to us.

So like, again, thinking about kind of broadening the company, I think you did 14 state products, combination launches in 100 days. I think that goes to your point about like getting better at automating the paperwork and the applications with nationwide kind of now being -- I think nature kind of -- should we think of now renters can now be a national or broader product, which then just increases, again, like more efficient customer acquisition, new customers in the funnel, et cetera.

Yes. I think that's true. And I think our preference on the rollout is to do versus say. And so I think looking at the first 6 months gives you an indication of our appetite. We can roll out faster than historically. A lot of the automation and AI enabled work we're doing under the covers under the hood where it's a little tougher to see it. We can tell you about our R&D investments and the ROI we expect from them. This is a great example. Being able to launch a state and a product in a week or a month instead of 6 months is a new capability. We've reached a new level in the first half of this year. Now I wouldn't take the first half of this year, which is a new high and then extrapolate that out, but it gives you a feeling for what's possible. And like everything else with Lemonade, we don't see an end in sight, meaning what we did in the first half of this year, we think it would be better in the second half and better the year after that. And so at some point, this rollout question will be behind us. But we have a little ways to go before we're there.

Okay. So let's talk about LAE hit 5% versus industry average around 9%. I mean, how much further can that go -- and I guess -- I mean, this literally is the AI stage data structural advantage. I mean -- do we see you evolve how you're thinking about kind of pricing versus margin?

It's a great indicator. I think when we were getting to about 7%, we indicated we thought we might be able to cut that in half. Again, we cut it in half from 14% to 7%. We thought aspirationally, maybe we can cut in the half again. And we're already at 4%. That wasn't too long ago, right? There was a few quarters ago and we're already at 5%. And the good news is it's not just 1 product that's fueling this, one type of claim. It's all the products are showing that improvement. Now each product has a different LAE. They're a different -- there's a range of low to high. But they're all showing improvement, which is another -- like another good sign that this is a fundamental advantage. It's not like a one-off because one product is better than the others. So we like that. And there's no sort of a floor in sight. Now there's obviously a floor of -- you can't go to 0 or you can't go below 0, but I think the cutting in half from 7 is a reasonable aspiration. At the time, I didn't say it, one of our founders, I think, treated it, but it was -- it's an ambition that's within reach.

So talk about sort of the synthetic agents program has become more efficient for you. I think you cut the cost of capital by 6 points. Do we -- where does that 6-point savings go to? Does that change your LTV CAC hurdle? Do you just -- do you reinvest that in more growth? Like how do you think about what the 6-point of savings last?

I mean it phases in over time. So it's not an overnight. I mean the renewal starts in January, meaning -- and we've got 2 great partners of General Catalyst has been a fantastic partner for many years in this area. Hannover Re is a unique player in the market that's been with us as a reinsurance partner for 10 years. So these are companies that know us really, really well. And that's why we're able to put together this structure and improve the economics a little bit. It will phase in, though, over time. So January will be the switch over. We'll continue to repay all the cohorts that we've borrowed via general catalyst until they're all repaid, and that will continue over time. There's no sort of balloon repayment or anything. So that plays out over the next couple of years. But in January for new sales, new borrowings, new growth spend that will come from Hannover Re at the lower rate. And so from a P&L perspective, you'll see that the benefit of that lower expense rate phase in over the course of those couple of years. And then ultimately, it will all be at the new rate, but it comes in over time, not overnight. We -- it runs through our G&A cost rather than below the line, this interest expense, and we think that's -- we chose to do that. And we think because it's an operating expense, it's tied to growth and customer operations, it makes sense to put it there versus not. I don't think -- it won't fundamentally change our LTV model because, again, it's an expense, it's not free. So -- but it helps at the margin to give us a little more freedom to lean in or to lean towards growth on cases that are maybe closer to the edge.

Starting about I think you recently deemphasized gross margin as a percent in favor of gross profit dollars, right, arguing the structural cost advantage will show up in pricing. I guess we've seen some nice improvement, like where to -- like as you're looking out -- I don't know if we want to say what long term is, but maybe several years out, where gross margins should be, I guess, given the whole mix of products?

I mean a significant part of the shift in gross margin over time has been -- it's a combination of growth and loss ratio improvement for sure. And loss ratio will now ebb and flow more than it will just decline or improve over time, by definition, when you're in the 60s, I think we had a 59 [indiscernible] loss ratio shouldn't be in the 40s or 50s. That means something unhealthy about the business. So you'll see an ebb and flow in this -- probably in this range of the 60s. So the change or the potential improvement in gross margin will be primarily efficiency driven versus loss ratio driven. Our LAE factors into it. Our LAE is embedded in the loss ratio. And so that -- for some companies, it's not. And so you have to sort of think about that dynamic. And then we've got some other components of gross margin, we distribute products that are not underwritten by us, it's relatively small, but that will grow over time. So I think you'll see gross margin sort of normalized, not too far from where they're headed maybe by the end of this year. I think you'll start to see sort of a more normalized rate. But again, you said the most important part, which is it's all about growing gross profit, maximizing that growth rate versus what the gross margin percentage is, I would think of the gross margin as an output and the gross profit dollars as the goal.

So we didn't [indiscernible] about gross loss ratio. So 60%, there were 7 points of favorable prior period development, 3 points of cat like what's the right target level, I guess, as people are thinking about over length in the next few years or what the loss ratio should be?

I would expect it not too far from the mid-60s. I think we've -- some of these patterns replicated some don't. We've had fairly favorable cat experience that doesn't last forever. So we have to be somewhat thoughtful about that. That's part of the reason we've been cautious about growing our home book of business. We've renewed with our reinsurance partner with greater protection against named storms. That doesn't show up in the P&L. But from a risk perspective, it mitigates some of that risk. So we're being thoughtful about that. There's mix shift components to it. The renters book super healthy pet is edging up a little bit. Car is showing nice trajectory. So I would expect not too much diversions from that sort of mid-50s -- or sorry, mid-60s range for gross loss ratio. And again, to the extent we can -- the gross loss ratio goes up, premiums come down and conversion can improve that can drive a faster growth rate, that would be a good thing.

So on EBITDA, your guidance implies positive EBITDA in the fourth quarter. You said EBITDA should be positive for next year, but not necessarily every quarter. I guess investors because it was 1 or 2 questions in the kind of Q1, like does that mean -- like if it plays out like that, and then we're talking about like positive margins in every quarter for 2028 and kind of off to the races or just more to do that, that could like limit that linearity?