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

All right. Thanks, everybody. I hope everybody got some lunch. Enjoyed the session with Steve. But we're excited now to move on with Lemonade. We have Tim Bixby, CFO of Lemonade. Thanks for coming.

You bet.

So look, I actually want to start with a kind of a different question. You're preparing to move on from being CFO, right? So maybe talk about how leadership is changing, some strategic framing because excited for you and excited to meet who's next.

Sure. Happy to. And while I am moving on, I'm not moving on very far. I've been Lemonade's first CFO. I've been CFO of Lemonade for 9 years and change, 9.5 years. I've been asked to join the Board of Directors, which I've graciously accepted starting January 1. And so at that point, I'll hand the reins of CFO over to Nick Stead, who is our -- currently our SVP of Finance, superstar player internally at Lemonade for many years. So while it's a change of name, I don't expect a tremendous change of philosophy or strategy. But I will -- candidly, I will say it's a bit of an upgrade. Nick has done terrific work, and this has been in the works for quite some time. That said, one of the most notable things about Lemonade is the lack of change in a good way, meaning our approach, our strategy, our philosophy, our go-to-market vision and story is really unchanged today, 2026 versus our founding in 2015. That's awfully rare in any sector, technology, data, AI, financial services, that's a rare thing in a market and a decade that's been tumultuous in maybe a dozen different ways, Lemonade's metrics, Lemonade performance, Lemonade strategy has been awfully stable and consistent and up and to the right during that period.

So look, I don't know how familiar everybody is in the room with the business. So why don't you start by going through some of that evolution over time and where you are today versus where you started?

Sure. Lemonade sells insurance to consumers. That is a thing that's been around for a few centuries, if not longer. The average American insurance company, the average of the top 10, the biggest of the big, the winners is a little over 100 years old. Lemonade is not 100 years old. We're about 10 years old. We formed the company with 2 thoughts in mind, more than 2, but 2 key thoughts in mind. We will leverage and employ and use the current technology that's available. And by current, in 2015, we were kind of thinking more about 2025 and 2026 than 2015, to be honest. But the world of data, machine learning and AI, our founders at the founding of Lemonade knew it was coming. They didn't know when, they didn't know what day. They didn't know what happened in the last 2 weeks when that was going to happen. But they knew it was coming, and they wanted to build a company that would be enabled and ready to leverage sort of a tsunami of technology development in a way that would enable us, Lemonade to deliver a unique thing, which is delightful insurance, a consumer experience, a product, a user experience that's delightful. That was not something and really hasn't been something historically that was important or prevalent in insurance. Not many -- if we polled the audience today and ask how many people love their insurance company, not too many hands would go up. That's not a thing that was really sought after. If you got a group of 100 Lemonade customers in the room, you get a fundamentally different result. And it's not because we're great people, although I think we do have a bunch of great people, it's because we've used technology to deliver amazing things, a policy in 3 or 4 or 5 minutes, not a quote, but a policy, multiple products. We started out as a one product company. We now have 5, car, pet, home, life and rent. Many of our claims, more than half are paid out in real time in seconds. That is unheard of in insurance. I just filed a claim with a very large premium insurance company that is not Lemonade. I think it took 6 months, start to finish. And they're one of the best. And I had a good experience. Half of our claims -- more than half of our claims are paid out in 3 or 4 or 5 seconds using machine learning, AI, data and technology to give a delightful customer experience, create an NPS, a Net Promoter Score that's off the chart, 50, 60, 70, depending on how and when we're measuring it. That's also unheard of in the insurance business. And we can also do the normal things insurance companies need to do. You need to grow. You need to grow profitably. We are on track within a few weeks, we're going to start the fourth quarter. We expect the fourth quarter to be an EBITDA positive quarter for the first time. Now that's an important milestone. More importantly, we first talked about that quarter 4 years ago. We said somewhere around the end of 2026 is this model works. We've got visibility. Everything is on track, end of 2026. And here we are, it's a few weeks away. Q4 is not over yet and ain't over until it's over, but things are really on track. And I think we're -- and maybe I'll throw it back to you, but we are now building a set of customers that are beginning to know us as an insurance company as compared to a product company. When we first started, we -- people knew us as a renters company. And then it was maybe a pet company. And then there's a couple of car customers. And now we have autonomous with Tesla. But over time, all the pieces are coming together, both in the U.S. and in Europe, and customers are now beginning to appreciate us as an insurance company. And so that's the vision. 10 years from now, 20 years from now, we'll be up against as we are today, Allstate and State Farm and Chubb and the best of the best.

Well, congrats. It's tough to be a CFO and forecast 4 years in the future, but congrats on getting there. But can you talk about some of the challenges over time you've had in terms of growth like -- because, for example, I'd love to be a Lemonade auto customer, but I live in New York. So I haven't been able to find you guys.

Sure. So yes, there are a couple of challenges that we face as all insurance companies do. Regulation is a fact of life. Insurance is regulated state by state in the U.S. We appreciate and have great relationships with our regulator partners, but we don't manage their schedule and we don't set their deadlines. They do that. And so we are at the mercy of a process that has that sort of third-party component to it. We don't yet have all products available in all states. That's a handicap. Now we're awfully close. We're close to 50. We have 50 states in our life insurance policy, close to 50 in pet and rent. Home and car will take longer. They're newer, and we're launching those over time. But we still -- that's not an obstacle to our growth. But ultimately, we want to be all products in 50 states. So that's a challenge. On the other side of that challenge is regulators have a difficult job that's getting much more difficult. And again, in the last couple of weeks, it's going to get much more difficult at a faster pace. I think that Lemonade has been relatively successful in building a relationship where we're seen as perhaps more of a partner or an input or a resource for regulators because of our unique experience with AI and our deep understanding of how it works and what it can do and what it can't do and what the risks are. Again, we're -- there's lots of smart people on the planet dealing with these questions, but we've been doing nothing but preparing for this moment for 10 years. And so I think we now can have conversations with regulators that are relatively positive about where things are headed and where -- how risks might evolve and how we might work together in addition to the normal like getting rates and forms approved and getting a license and all of those realities of the business. So.

Maybe talk about some of the challenges competition -- your competition has had in certain geos in the U.S., how insurance is changing a little bit around how you're starting to see problems come up with homeowners finding insurance in tough states like Florida, coastal areas. It seems like insurance companies have pulled back from higher risk coverage. So maybe talk a little bit about how the industry is moving.

A couple of thoughts on the industry, maybe from a consumer perspective and then from a company perspective. From a consumer perspective, you're very right in that certain territories, certain regions, certain risks are getting more difficult to underwrite and more difficult to predict where -- how underwriting will evolve. We have sort of the good fortune of being very small. And so things that impact the industry at large tend to impact us less because we aren't the industry. That's not the case. If you're a $20 billion or a $50 billion or $100 billion insurer, things that impact the industry, by definition, impact you. And so what happens in Florida impacts you. What happens in California impacts you. We've chosen not to underwrite, for example, in Florida for homeowners insurance. Yes, someday, we'll be doing everything everywhere most likely. But we've chosen not to do that. We're cautious about what risks we take and where we take them. From a company perspective, competitively, we candidly don't spend a great deal of time thinking about or worrying about the competition and what they've done and how we're going to react to it. We're not -- we're not ignorant of it, but we don't -- we rarely change course or strategy as a result of what a competitor has done. And there's a couple of reasons for that. One is we believe that the movement, the momentum is toward a world of more data, more technology, more AI enablement, providing a better product, a better customer experience. And we believe that we're among the best at doing that and getting better every day, even though we're not yet at scale. And so one of the things you'll hear Daniel or Shai, our founders say frequently is if today, you said, I'll trade you fairly, I'll give you Progressive's data and system or GEICO's data and system, amazing super profitable, successful companies. The answer would be no. I wouldn't trade our data, our system, our capabilities for any other on the planet, not because today, they're not strong, but because what we see and feel of where the market is going 5, 10, 15, 25 years out is only in one direction. And what we have is one system that's enabled for data and machine learning and AI that gets a little bit better every day. That's unique, I think, to a small set of companies, notably in insurance where typically, historically, once a certain size or scale or scope is achieved, things start to get a little harder. You acquire a new system, you buy another company, you add a new -- it tends to get a little harder, not easier. For Lemonade, we're still at that stage where every incremental thing we do, every added customer, added product, added claim, we get a little bit better because, again, we have one system built from scratch that enables 100% of the process and the customer life cycle of the business. And so it gets a little bit easier each time with each incremental turn, not a little bit harder.

Management's framed 30%-plus growth as a long-term ambition, right, but not as a ceiling. So as the revenue base gets larger, what gives you confidence that Lemonade can continue compounding at that suggested rate?

So 30% is a good number for a few reasons. It's a level of our own choosing. We could grow 20% or we could grow 40%. But what you'd see would be fundamentally different. And we've made some commitments, and we're doing more than one thing at a time. There's capital intensity in insurance. Every insurance company has to provide a certain amount of surplus that they set aside for a rainy day and is subject to regulators' requirements. So that's in addition to everything else that we do, and we have employees and as we spend on growth to acquire customers and all the normal things that would flow through the P&L. But the obstacle to faster growth is not market size or addressable market. That, again, at a point, something between $1 billion and $2 billion run rate of premium currently. We -- at our last Investor Day 1.5 years ago, we kind of provided a line of sight of how we think we might get to $10 billion. Those are still -- they're very large numbers when you start from 0. But in the realm of insurance, they're still relatively small numbers. We can grow faster. I think there's -- at some point, I did some a bit of modeling on this verbally on the last earnings call. At some point, things break down from a capital surplus perspective, meaning if we were to grow 40%, somewhere in the high 40s, then we would need more capital to support that from a surplus perspective. And we could do that. We can raise capital, but it becomes more difficult to grow that fast and to generate it from your own profit. And that's just more of a math issue than a Lemonade issue. But 30%, if you kind of track us for many quarters in a row, I think you saw it go from the mid-20s to the low 30s, a little bit faster each quarter. Last quarter, another 0.5 point. So that can't go on forever, I don't think. But every quarter, we've grown a little bit faster. But we want to balance that with profitability. All the customers we acquire in a given quarter, we expect to be profitable. We don't acquire unprofitable business, but the company is still unprofitable because we expense all that growth spending upfront. That's unlike most insurance companies that have a somewhat different model. We committed to EBITDA breakeven in Q4. We're on track. I expect we are on track to achieve that. If we were to grow at a slower pace today, which we don't -- we've chosen not to do, and I don't recommend, if we were to grow at a slower pace today, we'd be arguably profitable breakeven or better today. So there's that interchange between growth and profitability that we think is important. We've indicated publicly that we expect GAAP breakeven to follow roughly a year after EBITDA breakeven. That is still the case. So we can do 2 or 3 things at once.

Okay. You've talked about expecting IFP growth to begin outpacing growth spend in '27. Can you unpack why that's happening and cohort maturation, cross-selling, brand awareness, all those things are going into that?

Sure. So there's a natural dynamic where acquiring a profitable cohort of customers in a month or a quarter or whatever period you look at, we've seen in the way that we do it and the type of customers we acquire that those cohorts stacking over time. And that's why you see this consistent progress toward -- with consistent bottom line improvement quarter after quarter, even though we're growing at pretty high rates. And so what I think you'll continue to see is that sort of that cohort stacking dynamic over time. I've forgotten the second part of your question, if you'd refresh me.