Lemonade, Inc.

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.

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?

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.