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

Yes, we've not done that recently. So this is probably -- this is pretty dated, but it's quite a notable distinction. Our average premium per customer is still starts with a 4. It's less than 5.

Not $4,000. .

It is not $4,000 less than $500. Our -- we do have customers that have all of our products. It's a limited because that only occurs in a few states in the U.S. but it's definitely north of $10,000 per year versus $400. That's obviously pretty dramatic increase. The average in the U.S. has somewhere between $4,000 and $5,000 of premium. I don't know if you've checked your insurance bill, but I imagine it's well into the 4 or maybe 5 digits. And so that's really where we're headed.

I'll take a second to pause and see if there's any questions before we move on. I certainly want to talk about -- this has been a great excellent conversation around the growth side of things. Ultimately, as a financial analyst. We want to see what this translates to on the bottom line. And so I think 2027 is your sort of target year to be the first year of full year positive adjusted EBITDA. What are the stepping stones? What have the stepping stones been to getting to that milestone?

Yes. So things are right on track. We've indicated that Q4 this year, we expect to be our first full quarter of positive and that the subsequent year will be wholly positive. We've not given any quarterly guidance yet at this point. We likely will early in next year. I think this theme of sort of the rule of 40 we like, and again, not that it's a typical insurance metric, we think keeping that balance of growth and profitability and seeing that line improve, and it's not so much the Rule of 40, like 40 is the number. But the idea that we have -- for some time, I think, for us, an almost limitless market. And then if we can support a 30% growth rate and take the profit line from negative to positive and we're on track to do that, and those 2 can kind of work in tandem and we think that's the best has been and will be the best strategy for us. From a profit perspective, it's a little bit of a in this period, it's a little bit of an optics game, right? Because negative 1 and positive 1 are both are kind of 0, but we get that we live in the real world and investors and others who are watching the company, that's a pretty dramatic difference. But I do think we'll continue to lean in on growth. I think we've done a really nice job of sort of showing that we can deliver positive adjusted free cash flow, showing we can deliver free cash flow -- positive free cash flow. EBITDA positive is now just on the horizon. So I think checking these boxes as we go through are the important ones. Being able to talk about LAE as being dramatically better than best-in-class, like that's a really important sort of a margin impact. I'm a little less focused, I would say, on what's the exact bottom line improvement quarter-over-quarter, but more what's the year look like? What's the following year look like, what's the following year look like? Is the 3:1 LTV to CAC ratio holding is the cross-sell number expanding, is the dollar retention number. Like these are all really important metrics that we've developed over time if they're all improving that bottom line will certainly follow. But in some ways, we think of it more as an output than an input.

When you think of the -- like what could sort of take that trajectory off track, I tend to think a lot of it is within your control and even in sort of the insurance risk retention that you have it's short tail lines. It's not -- you don't have much CAC risk. You don't have casualty that could develop adversely. It's really thinking about like marketing dollars and hiring engineering talent, maybe to oversimplify it, but it does feel like a lot of it is in your control, right, in terms of getting to that number.

I think that's absolutely fair. We don't have an advantage in predicting the weather, and we don't pretend to, that can happen. But that tends to be a short-term thing that can affect the quarter. We've seen it a couple of times over longer periods. We've had a couple of years of somewhat calmer weather and less impact. But yes, the big things outside of a spike in claims are really under our control. We've got essentially in broad strokes, about 1,300 employees at the company 2 or 3 years ago, we were -- 4 or 5 years ago, we were 1/3 of the size. We had about 1,300 employees. And so while that -- I'm not saying that number will be static forever, we can grow 2x, 4x, 6x, and there's just no scenario that we can see where that head count has to grow dramatically. It will grow more than 0, but I think that's kind of a box that we can check. And every day that gets a little better with AI improvement. We can do things like launch 10 states in a year, and what used to take us several years to do that. And the team is essentially the same size as it was. So these are the -- you're kind of seeing the benefits of some of these improvements we're able to make.

Am I recalling it correctly that the guidance has been or the expectation or target has been that GAAP profitability will follow 1 year after adjusted EBITDA?

We said roughly a year. And we've said that very specifically. We've not we've not yet said this quarter will be this -- will be positive. And that's a choice we've made. And we have an Investor Day coming up in the fall and we'll kind of take a look at our best view forward view at that time, and we may give a little more expansive view at that point, but I would think of approximately a year later. For us, it's pretty -- the difference is not dramatic. It's stock-based compensation, which is a fairly static number. It's related to employees. We know how many employees we have and interest expense, which is a pretty knowable, predictable number.

You probably haven't been in some of the meetings with a lot of the other companies but topics like ROEs and combined ratios come up a lot. Do you have a sort of a target or a guidepost for investors that traditional insurance investors that want to think about ROE and combined ratio at scale, maybe call it your $10 billion premium number. If that scale, is there an ROE and a combined ratio around there?

There is not, and that's a choice we have made, but I will answer the question. So we see no evidence that says we shouldn't be best-in-class. And best-in-class is really an expense ratio side of the equation, meaning a loss ratio in the 60s were kind of there and whether it ebbs and flows, and it's up and down. And obviously, that can change over time, but I don't think we'll have a -- the product we're selling is paying for customers' claims. So I don't think we'll have an underwriting advantage. But a lot of that we would expect to put back into the price to the customer to enable growth. And so loss ratio, I would expect to be in a range that is comparable to other strong performers. And the way I think about it is that somewhere in the 60s. The expense ratio side of the equation, I think, is where the dramatic, the significant advantage is most likely to play out. Expense ratio averages, and this is our smaller part of the world, P&C and the consumer side of the business. typically around 30%, best-in-class maybe 15%-ish. We see no evidence where we shouldn't be best-in-class or better. And so there will come a day when we'll have -- we'll spend some time talking about combined ratios and those kinds of metrics, that's where I'd expect us to be. But that day is still a bit in the future.

We'll switch over to talk a little bit about maybe the market backdrop, and this has been sort of a subject that's been permeating this conference and frankly, the past months or quarters. just the soft market conditions and especially in personal lines and what that's leading to across the competitive environment and how that translates into rate reductions and heightened competition for acquiring customers. How did those 2 variables impact like your go-to-market strategy now? Have you sensed a need for Lemonade to pull back because marketing dollars can't be spent as efficiently?

Candidly, it doesn't affect us a lot. It does affect us. We don't ignore these things. We're not immune to these things, but it doesn't change what we do and what our plans are to do significantly. And the reason for that is we are such a small part of the market that even when we're growing at 30% plus, even when pet is now our largest book of business, and we're starting to look like an equivalent provider as those who have been doing it for a very long time. These are still very small relative to the total market. Compare that to a GEICO or Progressive or an Allstate or State Farm, all these folks we compete with. When the market changes, they are the market, and so it really has a significant impact on them. Does it affect us at the margin? Yes. Do we grow 1% more, 1% less? Maybe. Is a given state or a given product going to face a little bit more of a headwind, maybe, but the big picture is wholly unchanged. We are launching more states. We are growing 30% plus. All of the AI enablement is full speed ahead 1,000 miles an hour. None of those fundamental sort of strategies are much changed. And 6 months or 12 months from now, these factors will change.

Is the digital marketing costs for lines of business like renters and pet, which are the majority of your mix right now, are those correlated or sensitive to the auto side? Like right now, I think of the GEICOs and the progressive of the world are spending aggressively, mostly focused on auto. Yes, they're expanding into home as well. But -- does that impact the cost of customer acquisition and pet?

I'm not sure I have a great answer to that, to be honest. For us, the channels are fairly distinct, meaning we know quite quickly which product that customer is likely to be a potential buyer of. And there are certain channels that are wholly focused for us, not necessarily for everybody on pet versus rent versus car, and then there's some overlap. And I think we're quite adept at quickly reallocating growth spend based on what we're seeing, what that LTV to CAC ratio is. I don't know that I don't really have good data that says this shift in the car market is affecting pet. So that's what I got. That's fair.

We'll switch over to maybe a fun topic that I'm sure you're excited to talk about on the autonomous vehicle side. Maybe starting off for audience members that aren't familiar with Lemonade products that you guys came out with in February. Do you want to give a sort of an overview of what that was?

Yes. So we put together a partnership or a product in partnership with Tesla over several months last year that is providing traditional car insurance, but for those who are using Tesla fully supervised driving or autonomous driving and what the data shows and what many studies that you may be familiar with show is that the accident rate, the frequency, not necessarily severity, but the frequency is dramatically lower for each mile every mile that's driven under autonomous versus a human driver, something on the order of 50% and our cost is something in the order of 50% lower for those miles driven. There are other risks that are unaffected. The tree falls in the car, that's obviously not -- that risk is unchanged. And so -- this product is in rollout mode. We're in 5 states at this point. It started in 2. We're now in 5 and is very small. There's not many folks who are driving many miles under fully autonomous, but it's growing pretty rapidly. It's not a premium driver for us yet, but I would think of it as an indicator of where Lemonade is headed. We -- when we got the information and sat with Tesla and understood the data, our reaction was, this is amazing, let's go. They did not -- they've not gotten that reaction from other players, at least not yet. There may be others that come over time. But if you go to a large car insurance provider with billions in premium and say, I have a thing where we're going to charge 50% lower rates, it's not very interesting. To us, we're like, let's go. This is amazing, and we're going to learn a ton. We're going to gather data. We're going to roll this out in as many states as we can. And so that's the mode we're in now. And it's I think it's another sort of a proof point of our model, which is we're underwriting drivers and whether they're a human driver or whether they're a software driver, just a driver. And so the data suggests and supports this risk level. And for us, it's just another input. So it feels radically different because the human side of it, obviously, is radically different. -- from a risk perspective, it's same data, same underwriting models, better result and a better price for the customer.

That's a small piece, though, I guess, of Lemonade car when you look at the in premiums and dollars associated with it. Maybe talk a little bit about Lemonade car specifically and sort of what you think differentiates Lemonade car from maybe other traditional auto insurers?

So a couple of notable differences. One, as with everything we try to do, we're very -- as data-driven as possible. In car, that means telematics. It means the more data we can get about your driving behavior, you're driving experience, the better for us in evaluating your risk and a better for you in terms of a more accurate price. It is still very common for car underwriting to be a world of averages. If you have 2 customers that have a similar car and a similar background, maybe a similar credit rating, maybe a similar address, their price is going to be awfully similar, if not the same. Under a Lemonade underwriting approach, using telematics-enabled data, those 2 individuals are going to be priced fundamentally different and not 5% or 10% different, but significantly different pricing because it's based on their actual driving behavior. When do they drive, how many miles do they drive, how aggressively or conservatively do they drive? That's what really drives risk, and that's what drives our underwriting model. That's thing one. Thing two is there are other car insurers who utilize telematics but all telematics is not equal. At Lemonade, almost 100% of our car customers are being tracked almost 100% of their miles. That's not the case at any other provider. So 90% -- 90 something percent times 90-something percent is 90-something percent. Other providers, and we don't have exact numbers, but it may be 10% times 10% and now you're at 1%. So it's a radically different density of data that's being captured. And we think that's only to the benefit of evaluating risk and differentiating amongst drivers and giving a better price. Something like just very rough strokes, something like 2/3 of car customers are overpaying typically, if you had a more granular view of the risk and about 1/3 are underpaying. And the third are so much worse that the reason the math works out. And so every -- the more we can get at that average, we're going to be much more attractive to those folks that are overpriced and perhaps we don't get the ones that are underpriced and we don't necessarily want that business. So those are very distinct differences. There are some restrictions. California has different rules of what you can and can't do. That may change over time. But those are pretty distinct advantages that I think we have.

And is pay per mile still a prominent product or like a piece of the mix of Lemonade car?

It is. It is. Customer preference tends to win out, and that's a more specific type of customer who wants to know that they're paying the lowest price, but is open to more variability -- and the flip side of that coin is there's a benefit to saying, all right, my rate is going to be this every month, but we do provide the paper mile product. But the -- I would layer the telematics as a more important driver than the strict pay per mile. And the paper mile aspect, you can charge a fixed rate, but we still collect that mileage data. So there's different levels of benefit to us, whether they're on the paper mile product or even if they're not in the paper mile.

Pause here again to see if there's any questions here before we finish up on AI. I would maybe say I mean, AI has obviously been an important component of the Lemonade story and how you guys use it across the entire value chain of -- in the ecosystem within Lemonade. What's maybe a use case or something sort of recent that you guys have found a use case for AI that you feel like is differentiated?

The list is pretty long. We don't have a good view into what others are doing because it's -- we tend to talk about it more than the average company because it's a core of who we are and what we do. I think a couple of areas that I might highlight one, and these are things I think you can see outside, we launched more new states in our renters product in the first 6 months of this year than in the prior 3 years. That's a direct effect of the ability to adapt and understand and file in a very specific market. Every state is notably different in terms of the approval requirements, the rates and forms that you're filing and that flows through into product. And the reason we can do that is because things that used to take both an engineer and a product manager working in tandem or a few of each that might have taken a few weeks or a few months can now be done in a few days. And that enables that you can't really shorten the regulator process, but you can really radically shorten the internal process to launch a new state and sometimes that's an entire new product in the most state. But more often, it might be a feature that in an existing state where it's a little less publicly visible, we don't make a big deal about it, but we can launch those in a pretty good time. I think another place you're seeing it is in our ability to grow the business but actually have -- grow the business and improve the customer experience, yet have fewer people providing that whether it's customer service or claims support. And the way you do that is automating the simple stuff and consistently moving that line and then applying your people to the more complex or the more nuanced or the more -- the types of claims that can benefit from more human interaction or customer support. So we've seen that. We've been able to provide dramatically more claim settlements, dramatically more customer inquiries with fewer heads than we were able to 2 or 3 years ago. All of that is really AI enabled. And then the last piece is probably worth mentioning is -- this came up in a couple of meetings today, which is when a new the pace of capabilities is increasing. A new model comes out and that model compared to the 1 a week ago or a month ago or 6 months ago is radically different, far more complex and that the pace of that change is accelerating, not decelerating. This is all kind of stuff we know. Our model, our people, the DNA of our organization embraces that. And so we're able to quickly evaluate new models, determine the security level and get what makes sense into the product and into what actually touches customers in an hour or a day or a week or whatever the right time frame is that is not common in large insurance companies. It is not common yet that someone wholly embraced is something that came out last week versus 6 weeks ago versus months ago in terms of these AI capabilities. So I think that's an advantage that we'll continue to carry.

All right. Well, that takes us out of time. So I want to thank Tim, Lemonade for joining us, and thank you all for coming to the KBW Insurance Conference. Thank you. .

Thanks.