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spk06: Good day and welcome to the Lemonade Inc. first quarter 2021 earnings conference call. All participants will be in listening mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one or a touch down phone. To retry your question, please press star then two. Please note, today's event is being recorded. I would now like to turn the conference over to Yael Wisner-Levy, Vice President of Communications. Please go ahead.
spk05: Good morning and welcome to Lemonade's first quarter 2021 earnings call. My name is Yael Wisner-Levy and I am the VP of Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and co-founder, Shai Winninger, President, COO and co-founder, and Tim Bixby, Lemonade's Chief Financial Officer. A letter to shareholders covering the company's first quarter 2021 financial results is available on our investor relations website, investor.lemonade.com. Before we begin, I would like to remind you that management's remarks 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 Form 10-K filed with the SEC on March 8, 2021, and our other 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, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of these 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 operating metrics, including 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, who will begin with a few opening remarks. Daniel?
spk10: Good morning. I'm happy to be able to report on another quote of strong advances along our key performance indicators. As compared to the first quarter of 2020, our top line, which is enforced premium, grew 89% to $252 million, representing an accelerated rate of growth compared to the prior quarter. Premium per customer also increased at an accelerated rate, 25% year-on-year, as recent product launches continued to bolster our economics. Tim will elaborate on all our numbers shortly. During the last call, I spoke, perhaps cryptically, about a new product launch we are highly focused on internally, and we've since unveiled that this mystery product is Lemonade Car. Perhaps that wasn't a huge surprise, but I do still get asked, why car insurance? Well, when asked why he robs banks, the notorious bank robber Willie Sutton answered, because that's where the money is. And I can say much the same thing about car insurance. The car insurance market is about $300 billion in the U.S. alone, and that's about 70 times larger than the renter's insurance market and 80 times larger than the pet insurance market. It's also three times larger than all of the homeowners' market. And given that Google Trends shows that searches for lemonade car insurance and lemonade auto insurance outnumber searches for lemonade home insurance, we believe we have a fighting chance of taking a sizable bite out of this enormous pie. Now, setting aside the massive new market that Lemonade Car opens up, it will also hopefully be a huge unlock of value for existing businesses. For one, we believe that our homeowners insurance customers today already spend about a billion dollars on car insurance, but they've been unable to spend it at Lemonade, and our forthcoming launch will solve for that. For another, we've been selling homeowners insurance effectively with one hand tied behind our back, since we can't bundle homeowners and car insurance in the way our competitors do. So Lemonade Car not only opens up a huge new market, but I do expect it to be a boost for existing homeowners' business as well. The next question I get asked is something like this. With such forbidding incumbents like Geico and Progressive, who have truly achieved mastery over the direct-to-consumer auto insurance space, how can Lemonade conceivably compete? Well, Those companies are indeed formidable and they've been doing their thing since 1936 and 1937 respectively. Now they each have tens of billions of dollars of enforced premium and they spend billions of dollars a year on advertising and have done so for many, many years. That all adds up to real heft and we have tremendous respect for these competitors, as well we should. But strengths and weaknesses are two sides of the same coin and all that legacy and bulk comes at the expense of nimbleness. That may be a problem for them since the car industry is going through a once in a century dislocation, and that may favor the legacy free. As a rule, when innovations are continuous or incremental, the benefits of these innovations accrue to incumbents. But when they are discontinuous or disruptive, they typically accrue to the benefit of disruptors or newcomers. And I think that the transformations in the mobility space are very much of the latter kind. Cars are moving from being mechanical platforms to being digital platforms, morphing from being dumb appliances into smart robots, and from being isolated devices to being nodes on a network. Tesla is clearly showing the way, but while the majority of cars will take some years to be as fully connected as a Tesla, their drivers already are. The smartphone every driver brings to their excursion has exquisitely sensitive sensors, allowing us to derive gravitational magnetic location and directional measurements that we can map onto driving metrics like how much a person drives, how aggressively, and whether on accident-prone roads or on relatively safe ones. Finally, and unlike data from connected cars, Smartphone-based sensors also allow us to detect distracted driving, a highly predictive risk factor, and to track drivers across different cars they drive, rather than homing in just on a single car, regardless of the driver who is driving it. The upshot is that the data streams from cars and from their drivers allow us to graduate from pricing based on make and model, as has been done for generations, to pricing based on usage and behaviors. This could be transformative for the car insurance industry. I like to think of the kind of precision underwriting that technology is enabling as being akin to the revolution unleashed by the invention of the microscope. Before microscopes existed, everybody thought that a drop of blood was just a monolithic blob, whereas after we had microscopes, we could see red blood cells and white blood cells and the fact that they are very unevenly distributed and of different sizes and perform different behaviors. I think the same could be true with these connected streams. Instead of pricing a large group of people as though they are monolithic, connected devices and connected drivers allow us to do precision underwriting. This could really be a game changer. It's not that these technologies are unavailable to companies like Geico. It's that they might threaten their sizable book of business and undermine the competitive advantage, the old way of doing things that they built up over these many years. That may be why Geico resisted telematics for a very long time and only reluctantly dipped their toe in the water not that long ago. Warren Buffett addressed this in the recent Berkshire Hathaway Annual General Meeting and he said the following, Geico clearly missed the bus and were late in terms of appreciating the value of telematics. He added the following, hopefully they will see the light of day before not too long. So why do many incumbents adopt these technologies halfheartedly, and often when they do adopt them, they will underweight their signals in their rates. I think it's because these new technologies, this ability to break up groups that they have been treating so far as monolithic and pricing them to their average, these new technologies will reveal that about half of those groups are actually overpaying. They are better risks than average. The adoption of these technologies will lead to lowering their rates, which will mean losing premiums, and they will also reveal that the other half of these groups are underpaying, that there are worse risks than the average, and that will require raising their rates, which in turn will mean losing customers and, again, losing premium. So you can see why the Always Connected Car, the Always Connected Driver, amounts to a reset of how car insurance can be structured, underwritten, and priced. This is advantageous to players without a legacy business to protect and who design their business from the get-go for these emerging realities. In a minute, I'll hand over to Shai. But just before I do, I'd like to switch gears and address the Texas Freeze, also known as Winter Storm Yuri. This was the fierce winter storm that hit Texas and neighboring states in February and impacted millions, causing power outages, icy roads, frozen pipes, and sadly, a great deal of suffering. We received about an entire year's worth of claims in the first few days, providing an extreme stress test for both our operations and financials. The results, we believe, should be very reassuring to our team, our customers, and our investors. I'll start with the operations stress test. At the onset of Yuri, our claims experience team activated our catastrophe, or CAT, operational process. Our people and technology rose to their occasion, and a majority of claims were fully resolved within one week of the storm's onset. As always, we put our customers first and are proud to have delivered best-in-class, delightful experience to them in their serious time of need. Net promoter scores for our claims interactions associated with the crisis were nearly 70, in line with our typical non-CAT experience, and at a level that I believe is without parallel in our industry. Turning to the financial stress test, all those claims from URI and CAT in general in the quarter added about 50 percentage points to our gross loss ratio. Yet our EBITDA guidance for the year remains materially in line with analysts' consensus prior to the storm. The explanation is pretty simple. We have extensive reinsurance programs in place for just such eventualities, and they worked very much as promised. All told, the Texas freeze was by far the most severe catastrophe Lemonade has had to deal with, and it shows in the sudden spike of our gross loss ratio. But that's pretty much the only major place in which it shows. You might have expected that a year's worth of claims packed into a single week would also crash our systems or overwhelm our teams or lead to a degradation in customer satisfaction or at least lead us to restate our EBITDA guidance. It has not. That is a strong testament to the financial and operational underpinnings of Lemonade and to the resilience of our tech, people, and partnerships. And with that, let me hand over to Shai for some more updates. Shai, over to you. And it shows in the sudden spike in our gross loss ratio. But that is pretty much the only place it shows. You might have expected that a year's worth of claims packed into a week would also crash our systems or overwhelm our teams or lead at the minimum to a degradation in customer satisfaction and probably make us restate our EBITDA guidance. It did none of those things. That is a strong testament to the financial and operational underpinnings of Lemonade and to the resilience of our tech people and partnerships. And with that, let me hand over to Shai for some more updates. Shai, over to you.
spk02: Thank you, Daniel. Let me start with Lemonade Life. Last time we spoke, I mentioned that unlike previous products, our term life insurance business will be launching gradually. We spent the first complete quarter post-launch ironing out the kinks by testing and improving the product to ensure it delivers on the lemonade promise and provides a fantastic experience for our customers. We feel that we've made significant progress in this front and have moved to focus on growing the term life business. On other fronts, we're happy with the rate in which our non-renters products are growing. with homeowners, pet, and life representing roughly half of our new business in the last quarter, up from roughly a third a year ago. This diversification is strategically important to us. Our systems have become increasingly sophisticated at optimizing budget allocation for each product to ensure maximum ROI. Seasonal and local fluctuations in demand are typical. And so when we see a decline in profitability or volume for product A, we divert dollars to product B to sustain efficient growth. We're separately seeing attractive cross-selling trends across our business. This is one of the reasons we're excited to share a new metric with you today, annual dollar retention, or ADR. Our ADR has improved considerably in recent quarters, up to 81% in Q1 2021 from 70% a year ago. Existing Lemonade customers who are purchasing additional products are a major driver of this improvement, contributing 7 percentage points in the current period. And as we look ahead to our car launch, we see potential for a meaningful acceleration in ADR as well. Lastly, I definitely shared Daniel's excitement about Lemonade Car and wanted to share a sneak peek into how we are currently thinking about the product. You can expect everything you already love about Lemonade now for your car. A delightful conversation without chatbot Maya will help you get the customized, hassle-free policy minutes. It will be a beautifully designed experience that is easy and fast. Claims will be paid quickly and will continue to support charities on behalf of our customers. We'll also have attractive pricing for environment-friendly cars and EVs. This is in line with our company core values as a B Corp and public benefit corporation. We have a commitment to the public good, and so our products will, of course, encompass that as well. And with that, let me hand over to Tim for a bit more detail around our financial results and outlook. Tim? Great. Thanks, Shad.
spk03: I'll give a bit more color on our Q1 results, as well as expectations for the second quarter and the full year of 2021. And then we'll take your questions. We had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer. In-force premium grew 89% in Q1 as compared to Q1 in the prior year to $251.7 million. We believe that this metric captures the full scope of our top line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Premium per customer increased 25% versus the prior year to $229. This increase was driven by a combination of increased value of policies over time, as well as mixed shift toward higher value homeowner and pet policies. And again, as in prior quarters, roughly two-thirds of the growth in premium per customer in Q1 was driven by this product mixed shift, including cross-sales, and the remaining one-third from increased coverage levels and pricing. Gross earned premium in Q1 increased 84% as compared to the prior year to $56.2 million, in line with the increase in in-force premium. Our gross loss ratio was 121% for Q1. This includes 50 percentage points associated with the Texas freeze and other caps. In Q1 2020, our 72% gross loss ratio included two percentage points of this cat impact. And if we exclude the CAT impact from both of these periods, our Q1 2021 loss ratio was right in line with the prior year. Operating expenses, excluding loss and loss adjustment expense, increased to 25% in Q1 as compared to the prior year, with sales and marketing expense up 52%, well less than the pace of our premium growth. The prior year G&A expense line, as a reminder, did have a one-time non-cash expense of $12.2 million related to the creation of the Lemonade Foundation. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches, and thus saw increases in each of the other expense lines. Our global headcount grew just over 100% versus the prior year to 661%. with a greater growth rate in customer-facing departments and product development teams. Our net loss was $49 million in Q1, as compared to the $36.5 million we reported in the first quarter of 2020, with a notably larger customer and in-force premium base, while adjusted EBITDA loss was $41.3 million in Q1, as compared to $22.4 million in the first quarter of 2020. Our total cash, cash equivalents, and investments ended the quarter at roughly $1.2 billion, reflecting primarily the net proceeds from our January follow-on offering of approximately $640 million, partially offset by the use of cash for operations of $40.3 million since year-end 2021. With these goals and metrics in mind, I'll outline our specific financial expectations for the second quarter and an updated full year of 2021. For the second quarter, we expect in-force premium at June 30 between $283 and $288 million, gross earned premium between $63.5 million and $65 million, revenue between $26 and $27 million, adjusted EBITDA loss of between $43 million and $40 million, stock-based compensation expense of approximately $13 million, and capital expenditures of approximately $3 million. And for the full year of 2021, we expect in-force premium at December 31 of between $376 and $382 million. gross earned premium between $279 and $283 million, revenue between $117 and $120 million, and adjusted EBITDA loss between $173 and $163 million, stock-based compensation expense of approximately $50 million, and capital expenditures of approximately $11 million. As a reminder, please note that GAAP accounting rules are such that seeded premiums are excluded from GAAP revenue. As a result of the change in our reinsurance structure effective last July 1st to a significant proportional reinsurance structure, our year-over-year revenue and gross margin comparisons are not directly comparable in this period. Accordingly, we publish in-force premium and gross earned premium as metrics that we believe are useful to analysts and investors because both capture the overall growth trajectory of the business before this impact of reinsurance. And with that, I'd like to turn the call back over to Daniel, who will address some questions from our shareholders. Daniel?
spk10: Thanks, Tim. As we did last quarter, we invited our shareholders, regardless of the size of their holding, to post questions or to upvote questions. So we can be sure to address the issues that are deemed most pressing by our community. And looking at the most upvoted questions this quarter, we see a few central themes. One was captured by Kayun about cars and specifically tie-ins with OEMs and particularly manufacturers of autonomous cars. Another from Neil is about growth and how we're planning to outpace our competitors. Our third most upvoted question was from Sanjay with an addendum from Arias about how AI is advancing and whether we'd consider offering it as a service to others. Finally, I'd like to address a question from Dean about blockchain and decentralized insurance and whether that poses a long-term threat to Lemonade. So let me address these in turn. So regarding partnerships with car OEMs, I can definitely say that we see the power of that, and I expect it's a trend that we will see more of as OEMs like Tesla and others dip their toe into the world of insurance. Cars, as I said in my opening comments, are morphing into connected platforms, and that has tremendous implications for risk selection, risk pricing, and risk mitigations. At the same time, I think that much of the benefit of the connected car to insurers is already available today through connected drivers. The mobile phone not only does a great job of tracking risk factors, it itself is a risk factor, and a risk factor that cannot be tracked in any other way. Reportedly, one out of every four car accidents in the United States is caused by texting and driving. By some estimates, driving while distracted by a mobile phone is six times more likely to cause an accident than even driving while drunk. While we're looking forward to leveraging all the tech that's embedded into next generation cars, and perhaps to partnering with OEMs in the fullness of time, we don't think we need to wait for these connected cars, which remain a tiny fraction of the cars on the road, to become prevalent in order to drag car insurance into the digital age. Already today, every car, even that 1973 hand-me-down from grandma, is in effect equipped with a slew of precision sensors capable of generating predictive insights and streaming them in real time to an appropriately trained AI. All that technology is packed into the driver's pocket, and we plan to leverage that power from day one without waiting for connected cars to become mainstream. And to Neil's question about growth, as Tim just recapped, we're actually seeing not only strong growth but accelerated growth. given how young our company is and how extraordinarily large our market is, just made that much larger by entering into the client-sharing space, it's my expectation that we will see many more years of very rapid growth, something which our competitors really don't these days. And so long as our unit economics continue to be healthy and strong, we'll continue to lean into growth investments. That's what happened in Q1, and the yield is, as I say, accelerating growth in Inforce Premium and in Net Customer Ads. Also, as we continue to launch new products, we've been reporting accelerated growth in our premium per customer too. And here too, I think that we have many years of significant growth ahead of us. I hope that addresses your question. Sanjay asked about our AI. Given the nature of our closed-loop feedback system, our AI continually gets stronger with each customer interaction. And as we expand our product offering and broaden the scope of our relationships with our customers, our data becomes richer, and these train our AI engine to increasingly complex problem solving and improving capabilities. Now, there are no concrete plans for an AI day, to your question, but let me share some of the specific examples that may help illustrate the far-reaching impacts of AI technology on our business. One is something that we call watchtower or the eye in the sky. We use machine learning to analyze signals coming from orbiting satellites in space to detect catastrophic events around the globe in real time. This technology allows us to enter into our CAT response protocols faster than probably any other insurance company and to deliver best-in-class customer experience, but it also allows us to reduce the prevalence of bad risk in our book by blocking campaigns and sometimes customers and customer acquisition impacted regions much, much quicker. Another example that comes to mind is something that we call the sixth sense. For each customer or prospective customer, we're able to collect data that allows us to produce something like a digital footprint or fingerprint, stuff like device ID and IP address and face detection and all different other things that I won't elaborate on. So when a customer whose claim has been denied or is suspected as fraudulent We'll create a new account and submit a new video task or otherwise make claims that are dishonest. We are pretty good at instantaneously detecting those and shutting them down, something that incumbents using email or call centers would really not be able to do at all. You just can't connect the dots in the more traditional ways of working. And the upshot of that is that we can catch fraud networks. that previously, to the best of our knowledge, simply went undetected and those claims would have been paid. We also use satellite imagery and computer vision to extract information about properties we insure, whether it's roof types or whether there's a swimming pool or other important signals, and we do that during the onboarding of our customers, and this allows us to deliver what I still believe to be the fastest and most delightful and most straightforward onboarding experience while increasing the precision of our pricing and underwriting. And we see this in other parts of our business as well. So our customer support and claims management engines are very substantially driven by machine learning. We're able to use technology to automate a significant portion of our customer interactions And more recently, with certain subgroupings of interactions, for example, in pet insurance, which we launched just a few months ago, the pet preventative claims, we developed technology that effectively removes the need for humans entirely. And not only does that enable us to pay out a meaningful percentage of our claims instantly at a lower cost, it also delivers a great customer experience. Excuse me. And it does that while allowing us really across the board to achieve very high levels of operational efficiency and scalability. And we have, depending on the incumbent, we've achieved a ratio of about five times, perhaps more than that, the number of customers served by every Lemonade employee relative to what the industry knows. So five, sometimes ten times greater levels of efficiency in terms of at least headcount. And that is pretty impactful. So for example, just last month, we gave back to our customer support team something like 3,200 hours because our AI technology solved and executed on a growing share of incoming customer requests than it had previously. All different things where a customer wants to change their address or recent documents or asking about their payment history or adding a spouse to their policy, all different things like that. So we really do see this impacting our business across the board. And with some of the top-notch talent in the world in the field of machine learning and AI at Lemonade, the development of these tools is now part of our DNA, really has been from the get-go. And tools like this clearly don't just impact one area of our business. Rather, the impact is very broad and touches every aspect of Lemonade, from customer onboarding to claims management, really to the fundamentals of our business model. And data and machine learning and automation, because it's built into the fabric of our company, that's why, to Arias' question, we don't see ourselves renting it out or licensing it to others. Our company is vertically integrated, and the AI is deeply integrated. And this isn't some external bolt-on that we could license out or that we would want to license out. It's the very essence of our company, and we expect it to remain that way. Finally, I want to address Dean's question about blockchain and whether it poses a threat to Lemonade. Let me say that both Shai and I and others on our team take a keen interest in blockchain. We actually are both moderately invested in crypto with events towards DApps and particularly DeFi, decentralized finance. These are powerful technologies and paradigms, and I do think there are some applications for these technologies in certain areas of insurance. For example, Nexus Neutral is doing some very interesting work on ensuring smart contracts. And so I do think decentralized finance and blockchains like Ethereum present opportunities for companies like Lemonade to build new products that ensure new realities and new classes of assets. But I don't for the moment see how they can provide an alternative or become a threat to the kind of products Lemonade offers today. Homeowners, life, pets, car insurance, these cannot be profoundly bettered by crypto. And here's why. Decentralized finance, DeFi as it's known, its power comes from the trustless nature of the blockchain. And when determining whether a major global event has occurred, oracles, as they are known, provide a decent way to pump real world events into smart contracts in a trustless way. If I want to place a bet on a blockchain prediction market on the outcome of an election, for example, there are platforms and protocols that will allow a smart contract to know if the event occurred. And it does that in a trustless way, and then it can settle the bet accordingly. The same would apply to insuring against certain highly visible outcomes, say whether some big concert took place on a given day or whether a landmark building was standing on a given day. But if the question at hand is whether my laptop was stolen at my local coffee shop, there really is no API for that information, and asking the community to state coin and vote would be terribly inefficient, and I think probably produce very unfair outcomes anyway. Personal lines insurance is fundamentally about trust, and that's why Lemonade will work so hard to build a trusting and trustworthy company. built into the fabric of our company, into the business model, into the game theory and behavioral economics upon which Lemonade is predicated. So trustless personal lines insurance, at least using the current state of the art of blockchain, would not be an improvement on what we've already built. So while the world of DeFi opens up new opportunities, new products, new markets, I don't see yet how it can be leveraged to do a better job at what Lemonade does today. I will say, though, that if future developments change that assessment, you can be sure that we will be at the cutting edge of developing and deploying them. With that, let me turn the call back over to the operator so we can now take some questions from our friends on the street. Thank you.
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Today's first question comes from Matt Carlotti with JMP. Please go ahead.
spk08: Hey, thanks. Good morning. Daniel, I wanted to ask the first question on auto. You've talked quite a bit in the past about the flywheel at Lemonade and kind of how your computers get smarter with time and the more iterations they get to go through. And elsewhere in auto, particularly telematics, we've seen other companies kind of go through that process, and it takes three, four years. to kind of hit their stride and get their things zeroed in. Can you help us square those two and how, you know, for Lemonade, kind of you'll hit the ground running with your auto product? You know, will you do the telematics in-house, or might we expect to see you take advantage of an outsourced company like CMT or TrueMotion that is far down that path already?
spk10: Hey, Matt. Good morning. Thanks for that. so the number of factors that i think will interplay here and we're not getting too much information about exactly what we're doing in car until we're ready to launch but i'll try and give you enough to give you a sense of how we're thinking about these things so the first is that um as insurance companies have discovered long ago signals from driving and drivers and and other aspects of the car insurance product um are very powerful, but it is also great to get signals from outside. In other words, good customers in homeowners products tend to be good customers in car insurance as well. Responsible human beings tend to express their responsible nature across different things, you know, when at home and when out of home as well. So with a million customers that we'll be targeting who are on our books and have car insurance, we'll at least have a a fair bit of data before we even promote and decide to whom to promote our new products. That's one thing that I'd say. And the second is that some aspects of relating of telematics is a matter of public record. So we don't have to start entirely from the standstill. The way the insurance space works in the United States is that we can take a look at how different behaviors, different telematics signals have been rated by competitors. And much as we do with all of our products, when we start with and we don't have our own data, we do tend to use the best available data out there as a starting point, and then we refine it over time. So rather than just guessing, we're actually in a pretty strong position to get the best practices that are out there today as a starting point and then build on them. Frankly, whether the signals are collected through one technology or another, and you mentioned a couple of vendors, is a secondary question. In other words, there's two things. Which technology is collecting the sensory data and kind of sending it home? And then secondly, how are those rated as an insurance rating factor? And as I say, regardless of how the technology is developed, the rating factors that are being applied by competitors today is a matter of public record and will serve as our starting point.
spk08: That's very helpful. Thank you. And then one other, if I could, just on URI and the Texas, the MPS score of 70 on the claims, which is pretty impressive. You know, really the question is, what do you plan to do with that? Like, that's a real asset. Should we expect to see some sort of, you know, marketing campaign in Texas or elsewhere based upon that? You know, have you seen any just kind of word of mouth, you know, new customer trends, you know, following the storm?
spk10: We have had and we continuously have satisfied customers spreading word of mouth. They tend to tweet about their experiences. If you look at the Lemonade Twitter handle, you'll see quite a lot of people talking about their good experience. And we do see referrals from customers on a pretty regular basis. It's not just about URI. It is about the continuous day in and day out obsession with high levels of customer satisfaction throughout the lifecycle. So I don't know that there will be a URI-specific event. I'm not sure how tasteful that would be. But the idea that treating customers well and delighting them and getting to high NPS does yield long-term value to the company is a formula that we're very committed to.
spk08: Fair enough. Thank you very much for the answers.
spk06: Thank you. And our next question today comes from Michael Solz with Morgan Stanley. Please go ahead.
spk03: Thanks. Good morning, everybody, and congrats on the news with the audit. I'm looking forward to seeing how it develops. One question there, too, for me on the audit side, I guess, can you talk about I guess maybe you mentioned how no impact in guidance for the year on premiums and force, since you're not even rolling it out yet. But I guess you're doing stuff there. So maybe talk on impact on both sides of the underwriting margin, both on the expense side. I assume you're hiring people and maybe doing some filings and things like that. So I'd imagine there's going to be maybe a little bit of pressure on the expense side. And then maybe a little bit longer term once you are live. um, thoughts on, um, on the loss ratio side. And even if you are good and been around for a while, you know, new business does have a bit of a higher loss ratio. So any pressure you might expect there on the loss ratio side on that. Um, so those two sides, please. Yeah. Hey, Mike, Tim. So, uh, a couple of thoughts there as we have with prior launches, uh, we have taken into account, um, probably the vast majority of the expected expenses and are quite conservative on the top line impact. And we've taken that approach also with CAR. CAR is a little more amplified. It's a bigger product. There's a larger team focused on it. In fact, the largest team in the company from a development perspective is focused on CAR, as we noted earlier. And it's a longer lead time. So, you know, we expect to launch it, but it's not in the next couple of months. So for this full year, I would expect we've got the vast majority of our expenses. We anticipate some of these unknowns, and we have done that in the past. And as we get closer to a more concrete launch date, then obviously we'll update how we see the top line developing from the car launch. But this is consistent with how we've been the prior launches with Life, with Pet, and our shift to homeowners. From a loss ratio perspective, we kind of face this already today. So, you know, we've talked about what we think of as a new business penalty, which is when you launch new products, you enter new markets, you bring in a new type of customer. Things are a little bit tougher, but that's in the model today. So Daniel noted that something like half of our business at this point coming in is something other than renters. So new things are a significant part of the book today, homeowners, pet, life now starting up. So this is something we've dealt with previously. We do realize that car is a different animal. It's a bigger market. There's more challenges. But, again, I think I'd point you back to our initial comments that some of these uncertainties, some of these – disruptions we think can favor the more agile company and this is something we've i think performed quite well with in you know three consecutive product launches just over the past year or so so we're we're gearing up and we're excited for the launch when it comes okay does that mean obviously you don't have any policies yet and you're having rolled it out so or launched it so um And so no impact on the guidance for enforced premium. Does that mean the guidance for the year on EBITDA contemplates any incremental expenses from the loan? It contemplates all the expenses we expect to hit this year. Yeah. And so, yeah, yeah. Yes. Okay. No, cool. Thanks. And then a simple question. You mentioned a couple times in a letter, I just want to maybe a little more details on EBITDA. new entry points for customers and kind of new channels that you're seeing or using. Can you talk a little bit more about that? Yeah, I think it's a theme, right? So it's not a sudden new change that we're seeing. But part of the reason we're able to increase our marketing efficiency, in fact, this quarter, I think we brought in something like 40% more dollars for every dollar invested. And that's after quite significant improvement last year. So we're continuing to see improvement in marketing efficiency, which at the scale right now is a great thing to see continuing. In terms of the channels, we're always looking and testing new channels. The real indicator, I think, is the proportion of the customers that come through the largest channels. and that has declined which is which is good news we're less dependent on the largest channels consistently over time a couple years ago something like uh 90 of our businesses coming to the largest channels that has improved now to 80 last year and something like 70 now so you know large channels by definition there's a bit of an 80 20 rule but we're continuing to see diversification we're testing new channels um you know again you're not i wouldn't hold your breath for ads but We are active in, you know, all the places where we think our customers are spending time, and whether that's online, whether that's social media, whether that's Google, Facebook, YouTube, and sort of the usual suspects, but also complemented by newer channels that we're testing. And I would expect that concentration to continue to diversify over the coming couple of years. Okay. Thank you, Tim. Appreciate it, guys.
spk06: And our next question today comes from Jason Helmstein with Oppenheimer. Please go ahead.
spk00: Thanks. First, just want to say our thoughts are with the team in Israel with everything that's going on. Two questions. One, you know, Tim, you just acknowledged in the last question, you know, you are leaning more into marketing. You know, just Is there a way to kind of quantify, like, you're leaning more into marketing, but you're also seeing higher lifetime value, and how you would compare that versus a year ago at the IPO? Or do you want us to kind of use that retention metric that you're announcing as a product? So just some more color on, again, how those marketing investments are actually, you know, how that connects to higher LTV. And then is, secondly... Is there a way to think about what the adjusted gross profit would have been without the 50 points of CAD impact? Just the actual dollar adjustment, you know, did you have to take any of that on your gross profit line? Thanks.
spk03: Sure. So I'll start off with a marketing comment or question. So, you know, leaning in is really two things. It's spending more dollars and in absolute terms, but also seeking continued efficiency gains. Now, the counter force to that is we're doing new things. So we're launching new products. Pet continues to grow really nicely. Life is very new and nascent. And so while we're always focused on acquiring profitable customers, we'll be a little bit more aggressive on developing our newer products and our more mature products. Renters, for example, I would think of as the most mature products. The returns continue to be very strong. And so while we'll not, you know, proactively go after unprofitable business, those are the two balances. And then maybe think of, you know, historically there's been a ratio of our advertising spend, which is our direct growth spend as a percent of total sales and marketing. That's the number we've disclosed. Uh, it's in the queue that ratio has been, you know, kind of 70 to 75%. That's continued, uh, in that range. And that tells you as the absolute dollars increase, we're able to maintain that, that ratio. Um, and so by leading and that's, that's really what we're looking at from a gross profit standpoint, um, you know, rough order of magnitude. And this is part of the reason we're able to, I think, um, have a good result with the Texas freeze. Part of it is the benefit of timing, right? So we had a little bit of a preview on our last quarterly call because we didn't have all the information, but we had a good amount of information to help guide us. The overall losses were in the roughly, you know, mid $20 million range. The impact on us because of our proportional reinsurance is roughly 25% of that. So I would think of that, and it is a bit embedded in the gross profit number, but I would think of, you know, 25% of that total number is the rough impact. You know, absent that, you would have seen, you know, a nice year-on-year growth in gross profit as we've seen in prior quarters. Thank you.
spk06: And our next question today comes from Ross Sandberg of Barclays. Please go ahead.
spk01: hey uh daniel one technical question and then one for tim uh daniel so how might i get the ios 14.5 update with idfa impact the company's ability to collect data from the phone i know it's been part of the strategy in the past and how important is phone data versus the information that customers provide you in the onboarding flow and then tim thanks for the new metrics around retention I think Shai said that seven points of the recent 11-point increase was from bundling products. So is that mostly the story, or is there something else that's driving up that retention rate? And I think the definition is a little different than what was in the S-1. Could you just bridge the difference between the recent disclosed retention and the S-1 retention? Thanks a lot.
spk10: So, hey, Ross, good to talk to you. Thanks for your questions. The Apple changes don't materially affect us, as best we can tell. For one, we tend to be web-heavy in terms of our onboarding, so a lot of our transactions happen on websites. But we don't do anything other than when customers are logged in. And indeed, it's a good time to reiterate, we don't sell the data, we don't use the data, we don't advertise, we don't do anything with the data other than use the data just for the purposes of the app itself. So we're in pretty safe waters, and we don't see anything meaningfully changing in how we operate or our ability to collect or use data changing really at all as a result of 14.5.
spk03: And, Ross, in terms of the retention metrics, so just as a refresh, since a year ago, since the S1 we've talked about, our customer retention, unit retention, the number of customers that we keep over time, that has continued to be stable. Obviously, much larger absolute numbers, much larger market, much greater penetration into the U.S., and that retention has continued to be stable. We do, and remember, these growth rates, 80% plus annual growth rates, the bulk of our business are first-year customers. And so sustaining and maintaining and seeing some improvement in those retention rates is a There's a real positive that we see. The new metric annual dollar retention is, okay, in those cohorts that you're retaining, what are they spending? And they're consistently spending more over time. A couple things are happening. One is we now have multiple products to sell them. So, yes, cross-selling is a key component. So today we've got customers who can have two policies and, in fact, three policies with the addition of life and hopefully we'll or add to that with CAR before too long. We're also seeing increased coverage amounts, though. So people get a little more knowledgeable. We have outreach programs. They become a little wealthier. All that can drive a greater level of coverage and greater average premium. So it's really a combination of those. So the S-1 metric is very specific to a 12-month period. This dollar retention algorithm captures all the different ways that we can generate more value from customers as we retain them.
spk06: Thank you. And our next question today comes from Ralph Shacker with William Blair. Please go ahead.
spk07: Good morning. Thanks for taking the question. Two, if I could. First, kind of go back to the first question. Just curious, how much of the auto policy pricing will be initially based on third-party data sources, and maybe more importantly, maybe speak to your ability and opportunity to leverage your own connected auto and driver data over time, and how you think that's going to be sort of an advantage or a significant advantage potentially compared to incumbents. And then second, you know, your cleanse process historically has been known to be very sort of hassle-free, frictionless. I'm just curious with auto, will it be a similar experience or process, you know, that will require a simple picture or video to be submitted to the bot? Just curious how that sort of submission process looks versus your current products. Thank you.
spk10: Sure, Harold. So Shai hinted at some of this in his earlier comments. I'll take your second question first, which is that, A lot of the experiences that our customers have come to associate with Lemonade will absolutely be carrying over into the car product. So, again, without being too specific about how that will work, the idea of getting a hassle-free experience, instant claims, a great deal of automation and seamlessness is something that we're very committed to and I think everybody who's been waiting for this product will have felt that the wait was worth it. This is going to be a really exciting and I think compelling product which will be differentiated in terms of the experience quite significantly from what's out there today. So I think that will be pretty exciting. And yes, the kinds of things that you're asking me about are the kinds of things that you can expect to find seamlessly integrated into the product. In terms of the data sets, It's worth distinguishing between data sets and rating rules. So you, Ralph, today don't have the data that a Geico or Progressive or State Farm has, but nevertheless you can go in and see how they price based on the rates and forms that they have filed with regulators on a state-by-state basis. So the lookup table that says, make and model is weighted this much and driving experience is weighted this much and credit score if it's used is rated this much, et cetera. All these factors are available. Even if you don't have that data to hand, you can know how the data is deployed. And my earlier comment was really saying that the cold start problem of, wow, we've got a great stream of data coming in because from day one we will have very rich data coming from our customers, but you haven't had the cycles yet to know how to map those data onto risk factors and therefore onto rates. That problem gets solved by using the existing rates that have been approved by regulators for others. And you can see how different risk factors have been rated. And that provides a very strong starting point. What we've done with other products, and I expect we will do with car as well, is start there and then have our feedback loop make us smarter. And hopefully, we achieve parity pretty quickly. And then we end up with an advantage play. But that is how we start and how we solve for the problem. It's not so much a lack of data or using anybody else's data. It's about using rating factors and weights that regulators have approved and mapping them onto data that we ourselves will generate. I think I'm simplifying, but I think in broad strokes, that gives you a sense of how we approach this.
spk07: I agree. That's helpful. Thanks, Daniel.
spk06: And our next question today, a question from Tracy with Barclays. Please go ahead.
spk04: Thank you. Good morning. You mentioned that as you grow in auto, that would also have a growth impact in homeowners. And I'm just wondering if you could provide some context to us and how we should think about a normal catload in the future as homeowners would become a more meaningful part of your business today.
spk03: Uh, so I would, I would think of a couple of things. I think there's maybe two questions there. I think there's just, uh, perhaps, uh, optimistically pent up demand, perhaps in our customer base for those customers who may prefer to have multiple policies or a bundling, uh, benefits, whether it's for a discount or costs or, or ease of use or, or whatever. we've found that more policy types brings us better results, higher value per customer, greater retention, greater customer satisfaction. We don't see cars any different. In fact, a car can be more of a driver for many, many customers. From a cat perspective, our transition to a less concentrated book of business in the renter's product and more in homeowner's can have an increased impact on the cat node, but greater diversification across the country, which has been significant. We started out in three or four states. We're now in close to 50 states, depending on the product. So we're starting to see the opposite effect, where we're more diversified across the country. So our largest states used to be a larger proportion of the business. Now that's declining. So there's kind of opposing forces, I think, that will move the loss ratio impact around. It is traditional that car providers tend to have a somewhat higher loss ratio. That's a fact that's not lost on us, and it's something we'll think about as we get closer to things like discounts and pricing, but I think it's a little premature for us to say much about that.
spk04: Okay. Looking forward to hearing more about that in the future. I don't have any further questions. Thank you.
spk06: And our next question comes from Arvind Ramnani with Piper Sandler.
spk09: Please go ahead. Hi. Congrats on a good quarter. I also wanted to ask about auto insurance. Given that this auto market is very large, how are you thinking about the cadence of marketing and signing up customers? Are you initially going to offer this just to your existing customers, and then you'll open it up to new customers. I'm just trying to get an understanding of your go-to-market approach.
spk03: Yeah, it's a little early. You know, we're not quite to the point where we're ready to give you specifics about the launch. We'll do that as we get closer. But I would look to our recent launches of other products as a guide. We've found there would be a pretty significant pent-up demand for all of our all of our products in fact you'll see uh as many searches for limited car insurance as you might for products that we actually currently sell so that's a good indication we've opened up the funnel to collect email addresses and interest from potential customers as of a few weeks ago with the announcement so that's another way that we kind of get a good feel for the market acceptance our existing customer base is absolutely uh the most interesting place to start a million plus customers 1.1 million customers And what we found with the PET launch, and we're beginning to see sort of the green shoots and the life launches, there are folks for whom the lemonade product is a decision point. When we launched PET, there were dozens of different ways and vendors where you could get PET insurance that we had scores and scores of customers on the first day buying PET insurance from us. And so that tells you that there's something about the lemonade brand, the lemonade experience, that's distinct. And so I would hope that we'll see that same dynamic for car, something like half of our new life customers and our new pet customers, existing customers, but the other half were people who are new to Lemonade. So those, I think, are good guideposts, and we'll share more before too long as we get smarter about our specific launch.
spk09: Great. I may have missed this, but two really quick ones. Just from a regulatory perspective, how many states will you start with?
spk03: We've not announced that specifically, but, again, I would point to our other launches. We'd like to have a broad launch, but we're also – speed to market is important, so it will be a balance of those two. We'll be launching in a good proportion of our customer base And, again, as we get closer, some of the regulatory hurdles can be a little unpredictable in terms of timing. We do know the outcome, but we don't always know the exact timing. And so, again, that's part of what the real focus is this year is both internally on the product and the customer experience, but also the external regulatory environment. We're parallel passing on all of those efforts.
spk09: Great. And I know you clarified – kind of margin impact from investments you have to make in the auto product but does guidance revenue guidance include auto or is it just auto as you provided auto just on the margin impact so we're not given specific dollar figures but I can guide you in a couple ways so
spk03: If you look at our employee base, 661 employees, about half of those are customer-facing, and about 25% are product and engineering. And so where you see today most of the focus and the effort for a new product launch is in the product and technology area. And so while we're continuing to hire, and those numbers will grow over the course of the year, a significant proportion is hiring. already reflected in that number and is definitely reflected in the guidance for the rest of the year. The customer-facing investment comes closer to launch. And so, again, we've layered into the guidance all the expenses we expect to incur this year based on our current launch plans and essentially no top-line impact. So it's a pretty conservative approach. It is the largest investment. team within the tech group focused on CAR. Everything's layered into the guidance. Thank you.
spk06: And our next question today comes from Josh Shanker with Bank of America. Go ahead.
spk11: Yeah, thank you for taking my question. Is there any detail you can give us on gross premium enforced or policy mixed by type And if there's any changes in your average premium by type from information given in prior S1s,
spk03: I can give a little bit of color on that. So one of the things we noted is that our new business coming in is heading towards roughly 50% renters. Previously, that was significantly higher, and that's been declining. Not declining, but the home and life has been growing at a pretty healthy clip, and so now that mix is closer to uh 50 50 um the overall book of business is not 50 50 that's the new business coming in so the overall book of business is heading that direction um pet in aggregate is still running around uh 10 of of the book and homeowners uh still in 30 range so think of it as probably you know roughly 40 of the overall is is new products life just getting started
spk11: And that's on a premium basis, not a policy basis. Premium basis, not a policy basis.
spk03: Yes, that is correct. On a policy basis, still roughly the shift has continued. Roughly 90% of our customers on a customer account basis are renters and the balance homeowner and pet policies.
spk11: And no material change is an average price per policy over the past few months or six months, I should say.
spk03: No dramatic changes continued, you know, continued past trends and really the mixed shift driving the bulk of the increase in premium per customer. But there's always, you know, roughly a third of that premium per customer changes has continued to be driven by greater coverage more so than price increases.
spk11: And then on pets, to what extent are you expanding the TAM? And to what extent are you having pet insurance customers be switchers from another carrier's policy?
spk03: I don't have the switch percentage at hand, and I'm not sure we've disclosed that yet. We can maybe follow up on that if it's something we've shared. It's definitely a combination. of folks who are first-time buyers of pet insurance, as well as some switchers. It's a much less penetrated market. So in the U.S., it seems to be a greater probability that somebody who's not had pet insurance before. But that's all I have at hand right now.
spk11: Great answers. Thank you.
spk03: Thank you.
spk06: And ladies and gentlemen, this concludes today's question and answer session and today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.
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