Lemonade, Inc.

Good day and welcome to the Lemonade Inc. Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Yael Wisner-Levy. Please go ahead.

Good morning, and welcome to Lemonade's third quarter 2021 earnings call. My name is Yael Wisner-Levy, and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Shriver, co-CEO and co-founder, Shai Winninger, co-CEO and co-founder, and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's third quarter 2021 financial results is available on our investor relations website, investor.leveney.com. Before we begin, I would like to remind you that management 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 Reform 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 their 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'd like to begin with very exciting news about our car and product strategy. Lemonade Car was launched last week, and today, as part of our continued investment in this line, we announced our acquisition of the tech-enabled car insurance company, Metromile. We believe the deal will be a significant value unlock to our shareholders and our customers, and we expect this transaction to pay dividends in three important currencies. Firstly, by collapsing time. We're acquiring billions of miles of highly textured driving data, advanced telematics technologies, and deep pricing and underwriting knowledge. Metro Mile has implemented seasoned proprietary machine learning models that are informed by real-world feedback and iteration at scale. It would, candidly, take us years to gather this level of insight. The deal also delivers over $100 million of seasoned in-force premium, 49 state licenses, and a team steeped in every aspect of digital car insurance, all things that can accelerate the growth trajectory of our own car insurance business. Secondly, the deal allows us to flatten risk curves. Not only does the transaction accelerate our growth trajectory and knowledge base, but importantly, it allows us to vault over the riskiest parts of our car ambitions, namely growing Lemonade Car before our data models season. Lastly, this transaction delivers increased efficiencies. Post-transaction close, our strategy is to build a business that preserves a single culture, single tech stack, single brand, unified team, and a single product experience. We believe this strategy yields considerable revenue and cost synergies that will enhance Lemonade's financial profile. Just days ago, we launched Lemonade Car. This was a Herculean effort by our team. The result is a car insurance product built from scratch by the largest team we've assigned to a single project ever. We're incredibly proud of how it worked out and believe it's only going to get better from here. injecting all the metromile mojo into lemonade car will lead to a product offering that stands alone in the market together we'll have all the people and tools in place to deliver the market's most seamless and customer-centric car insurance product that is also its most affordable precise and fair that at any rate is the plan concurrent with these significant developments in our car product and strategy the rest of our book has happily sustained its growth trajectory With healthy unit economics and robust customer demand, the overarching theme of 2021 sustained through Q3. We leaned in and sequentially ramped up our investment in growth. We saw robust premium growth in Q3 with IFP increasing by 84% year on year. In fact, in Q3, we drove a record $50 million net change in IFP. This marks the third consecutive record quarter and was a direct result of leaning in, a sequential increase in advertising investment for the period. Across our book of business, we are seeing trends that enhance our customer lifetime value, most notably the increasing prevalence of bundling and the formation of healthy loss ratio trends in our newer business lines, and this gives us confidence to accelerate our investment pace. Additionally, Q3 is typically the quarter where we see tailwinds driven largely by seasonality and renters' moving behavior. We capitalize on this effectively, delivering a record volume of gross new renters' business for the period. While renters' growth remains healthy, consistent with our sustained strategy of diversifying our book, we actually drove faster year-on-year growth rates in each of our non-renters' lines of business. As a result, the business mix evolution we highlighted in detail last quarter has sustained, with non-renters' share of our overall book of business ticking up to 47% from 44% last quarter. And with that, let me hand over to Shai for more updates.

Thank you, Daniel. On the topic of growth in our advertising budget allocation strategy across the product portfolio, our growth investment dollars will continue to follow the areas of our business that demonstrate the most healthy unit economics. On last quarter's call, we touched on the formation of favorable trends in our European loss ratios. As a result, in the near term, we expect to reallocate marketing dollars from our live business to Europe. While our Europe and life businesses each have relatively small scopes today, we continue to believe that they will achieve meaningful scale in the long term. Beyond our customer acquisition strategy, we're observing positive trends in the growth contribution from our existing customer base. Bundling behavior is growing substantially across the book, with bundles now representing 8% of total IFP compared to 0% prior to launch of Pet in Q3 2020. This quarter, we recognized a record volume of cross-sales at about $5 million and saw more than 4x increase in the number of customers with policies in multiple lines relative to last year. And while the average premium per customer in Q3 21 was $254, our bundled customers show close to 3x that number, shifting gears to underwriting profitability across our product portfolio. Our Q321 gross loss ratio was 77%, up from 72% a year ago. I wanted to provide some color to address this trend. The increase in our loss ratio masks an important underlying trend. Our less mature lines of business are demonstrating meaningfully improved profitability. These gains are driven by a comprehensive strategy and rigorous focus across the organization to improve loss ratio and customer lifetime value. The improvements we're seeing put us on a clear path to our ultimate destination. In the long term, we expect the loss ratios of all Lemonade product lines to be under 75%. And with that, let me hand over to Tim for a bit more detail around our financial results. Tim?

Great. Thanks, Shaim. I'll give a bit more color on our Q3 results, as well as expectations for the fourth 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 84% in Q3 as compared to the prior year to $346.7 million. We believe 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 26% versus the prior year to $254. 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. Roughly 80% of the growth in premium per customer in Q3 was driven by product mix shift, including cross-sales, while the remaining 20% was from increased coverage levels and pricing. Gross earned premium in Q3 increased 86% as compared to the prior year to $79.6 million, roughly in line with the increase in in-force premium. Our gross loss ratio was 77% for Q3 21, five points higher than 72% in Q3 2020. And this was primarily driven by the impact of our rapidly growing new business lines, but was partially offset by considerable and notable 52-point year-over-year improvement in the loss ratio of our homeowner's book. As Shai noted, it's important to understand the impact of mixed shift on the overall loss ratio to get a better feel for the underlying improvements in loss ratio on a product level. Put more simply, Each of our products is showing loss ratio improvements, though the overall loss ratio showed a slight increase due to the shift in mix. Operating expenses, excluding loss and loss adjustment expense, increased 98% in Q3 as compared to the prior year. And this is primarily driven by a 90% increase in sales and marketing spend as a result of leaning into advertising investment. We also continue 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. Global headcount grew 111% versus the prior year to 969 with a greater growth rate in customer facing departments and product development teams. Net loss was $66.4 million in Q3 as compared to the $30.9 million we reported in the third quarter of 2020. while our adjusted EBITDA loss was $51.3 million in Q3, as compared to $27.6 million in the third quarter of 2020. Our total cash, cash equivalents, and investments ended the quarter at roughly $1.1 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 $95 million since year-end 2020. And with these goals and metrics in mind, I'll outline our specific financial expectations for the fourth quarter and an updated full year of 2021. For the fourth quarter, we expect in-force premium at December 31 of between $380 and $384 million, gross earned premium of $88 to $89 million, revenue between $39 and $40 million, and an adjusted EBITDA loss of between $52 and $50 million. We also expect stock-based compensation expense of approximately $19 million and capital expenditures of approximately $3 million. And this guidance would imply for the full year, in-force premium at December 31 at between $280 and $284 million, gross earned premium between $291 and $292 million, full year revenue between $126 and $127 million, and an adjusted EBITDA loss between $185 and $183 million. For the full year, it would imply stock-based compensation expense of approximately $50 million and capital expenditures of approximately $11 million. Now, notably, we've increased our investment pace and thus reduced the low end of our full-year EBITDA guidance range by about $13 million. There are two drivers here, primarily. One, conservatism related to marketing efficiency, and two, accelerated spend in support of the launch of Lemonade Car. In order to allow our teams sufficient time to learn and ramp up prior to servicing customers, we've staffed up and continue to staff up all of our customer-facing teams prior to launch. In prior iterations of our forecast, these costs were slated for 2022 closer to the onboarding of car customers, and we've pulled forward a portion of that planned spend into 2021.

And with that, I would like to turn the call back over to Daniel. Daniel? And I'll turn to some of these right now.

The first question comes from Jacob, and Jacob asks, will Lemonade adopt the paper mile business model that Metromile is using and which it is failing at? So, Jacob. I don't want to disclose here specifics about future iterations of the Lemonade Car product. We tend not to pre-announce exact features or timelines. But I do want to give some context and color and talk about some of the underlying elements of your question. I think the important thing, which I'll return to in a few minutes time as well, is to distinguish between pricing based on proxies and pricing based on precision. One of the fundamental drivers of how Lemonade thinks about car insurance and how Metromile thinks about car insurance is to increasingly underweight proxies such as credit score and gender, marital status, job history, all things that incumbents rely on exclusively or nearly exclusively in pricing and underwriting. and to use instead continuous data streams which give precise information about how much is driven, how well those miles are being driven, and to use those and overweight those at the expense of proxies. As I say, Lemonade Car has been architected that way based on telematics and on a continuous data feed. The MetroMile acquisition for us really jumps that capability, leaps that capability forward in very significant ways. And what it gives is really world-beating understanding of expected losses per mile driven. So what Metromile has spent the better part of a decade doing and has garnered billions of miles of driving data in support of is getting pinpoint data on every mile driven and the risks associated with all the elements of the driving.

And that then allows you, as I to be able to predict losses per mile driven at a level of granularity and precision that proxies can never, ever get to. Once you have that understanding and you understand the true expected costs per mile driven, how you package that up to consumers is an important question, but a secondary one.

You can package that in different ways. You can package it as Netromile themselves have done on a paper mile basis. basis you can package it as lemonade card does today where you get a flat rate per month but that can change based on your driving patterns so we will experiment and bring to market different capabilities over time we are customer centric we'll use what customers want as our guiding principle in how we package but as i say the fundamental distinction to draw is between precision pricing and proxy based pricing And we're very much going to lean in on the precision side of the house. Let me take another question from Ecopod. And the question is, are you in talks with automakers to form a partnership? Tesla data with Lemonade's delightful customer experience equals the best of both worlds. Thanks for that question. And as I just said to Jacob in a slightly different context, I don't want to reveal what is or isn't in the works at the moment. I will draw your attention to the fact that Metromile themselves have in the past made announcements about various corporations with OEMs. But again, I'd like to address the fundamentals of your question. Undoubtedly, the trend worldwide is towards connected cars. and metromile have been implementing an obd device a device that plugs into the car into the engine's computer and adds to it augments it with gps and accelerometer and the gcm gsm chip allowing it to really become a connected car so all of the metromile customers are effectively driving connected cars already today Our own app that launched last week for Lemonade Car does something similar, but it's really a connected driver rather than a connected car using the smartphone rather than the onboard device. We take an approach that is largely agnostic to the data source. Whether the data is coming from the OEM, through the case with Lemonade Car, we'll be able to integrate all the different data sources. So we're not committed to any one. What we are committed to

is using that data or those data to generate ever more precise expected losses per mile driven.

And we will, with the acquisition of Metromile, be able to do that in a way that just a couple of days ago was impossible to us.

It gives us multiple sources.

and multiple years of churning that data and really understanding it deeply. Now, I'd like to lay out one other dimension onto this now, again, coming back to this distinction between proxies and precision pricing. The basic capabilities that are at a fundamental level available to everybody are becoming more and more available through connected cars. OBD devices have existed for a while. Smartphone tracking capabilities are also technologies that have been developed and deployed in the past And yet we don't see them adopted in a meaningful way by the car insurance industry. And I think that the fundamental obstacle here, the thing that's slowing down adoption, is really a classic innovative dilemma. At the most recent Berkshire Hathaway annual general meeting, the leadership of Berkshire, the owners of GEICO, said the following. They said that GEICO clearly missed the bus when it came to telematics. And I do ask myself, why would it be that a company as venerable and as sophisticated as Geico would entirely miss the bus in the world of its own leadership? Why is it that of the 210 million car insurance policies in effect in the United States, 95 or over 95 billion are not using telematics? And why is it that the 4% or so that do use telematics are really using a neutered version of it? They only allow it to run for about two weeks before discontinuing it, and whatever signals they pick up during that time are meaningfully underweighted. They do not rely on them as heavily as companies like Lemonade or Metromile do, and they do not pass on the anticipated savings to the customers at anything like a rate commensurate with the expected loss. And I think the answer to that why question is that ignorance is bliss. If I were running a legacy company with tens of billions of dollars invested in proxy-based pricing, I might well do the same thing. I think it's a rational thing to do because what happens when you move from proxy-based pricing to precision-based pricing, you discover that large groups that you were treating as monolithic are actually made up of very different risks. about two-thirds of drivers drive less than average. And if you were to know that, if you could differentiate your customers, you'd probably have to lower rates for about two-thirds of your book by as much as 30% or 40%. And that would be a devastating hit to a legacy business. And what you'll also discover, of course, is that the other third are being subsidized.

And having lost that subsidy, you would now have to raise rates. You'd have to hype them. them for about a third of every book, which would lead to tremendous churn.

So all in all, adopting these technologies is not good news in the short term for people in the business of protecting a legacy business. But that is also the opportunity of Lemonade and Lemonade Car are now enjoying a tremendous boost through the acquisition of Metromile to lean in on the technology-based fundamentals of precision pricing and pass on those savings in a way to continue to hold on to Lemonade stock when the company is not expected to turn positive cash flow for many years to come. Joanne, we really do appreciate that question. Also appreciate your faith in being a shareholder to date. And I want to concede and say at the outset, we're not of the view that lemonade as a stock is necessarily right for every investor. In fact, Shai and I have always placed a big premium on being aligned with our shareholders, being very transparent about how we intend to run the business and seeking shareholders who see value in that particular way of prioritizing. To that end, we wrote a founder's letter, made it into our S1. It's also available on the homepage of our investor website, investor.lemonade.com. And I would encourage you to read it. I'm just going to quote a couple of sections briefly.

...will be called to lemonade, while those who do not will seek their fortunes elsewhere. So just acknowledging that the way we're running the business is right for some investors, but not for all.

And the ones for whom it is right, I think, are the ones who are really looking at the long term rather than the near term. And I'll read one more paragraph. We write, industries like insurance are reinvented once every few centuries. Optimizing for profitability is important, but can wait. We aim to grow fast and capture as much market share, mind share, and as large a geographical footprint as possible. If we were to reverse that, we would have a finely honed business that but would risk losing the market. That does not mean our bottom line does not guide or constrain us. It absolutely should and does. We do not launch products, open territories, or sell policies we believe will be a long-term drain rather than a long-term gain, but the key phrase is long-term. And coming back, Jiran, to just give you a little bit more context. So since we wrote those words, it was 16 months ago that we had our IPO. And in the intervening 16 months, our e-force premium has grown by over 160%. Our gross profit has grown by over 180%. We have moved from being a monoline business doing only homeowner's insurance to one that also does pet insurance, life insurance, car insurance, and as of our recent announcement, has acquired Netromile. So the bottom line is we think of the industry that we're in, insurance, as the largest disruptible industry on the planet, and we believe that that is a huge prize that's worth fighting for and that there will be disproportionate rewards for whoever attains pole position or first position as we go through the next few years. So while we could be profitable today, all our products, all our campaigns, all our geographies have positive LTD to CACC, that would be at the expense of great fortunes down the road. And we believe that these are the years for growing customers, growing products, growing markets, growing top line, and that really translates into sizable investments that put us cash flow negative. So coming full circle back to your question, why should you hold the stock despite negative cash flow? The answer is, well, it depends obviously on you, but if you believe in our thesis – If you believe, as we do, that there is unlimited opportunity, or almost, and there is a limited window of opportunity, and if you believe that the moves we're making, the investments we're making, have a good chance of the outside's return, then that would provide an answer to the fundamental question of why hold on to lemonade. I hope that's of some help. With that, let me hand the call back to the operator so we can take some questions from our friends on the street. Thank you.

We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. And the first question comes from Michael Phillips with Morgan Stanley. Please go ahead.

Hey, good morning, guys, and congrats on all the news from last night. Good stuff. I guess the first question would be on your comments in the letter about leaning into the quarter. And, you know, we know that seasonality, and you talk about that a lot in the third quarter, means certain things for wanting to maybe ramp up marketing spend. But X that impact or X that phenomenon, I guess, what else led you to see that this was a time to lean in besides the normal seasonality? Hey, Mike, thanks. So I would think of kind of an overarching theme to kind of scan back over the five or six quarters since we've been public. There's a trend that stands out. A greater level of confidence has led us to great plans. And in a couple of instances, we saw the opposite. Early days, months of the pandemic, we saw the opposite, a great lack of confidence, and we dialed back and were quite cautious.

That was a very brief period. For the most part, these quarters have been the former, increasing confidence, better ability to get products in the hands of customers, more assurance in our competitive position.

And when we see that, it gives us more confidence to accelerate and advance. And that usually comes and exhibits itself in a P&L dynamic where we spend a little bit more. The bottom line shows that impact in the short term. But the LTV to CAC remains strong. The market position remains strong. And the pending combination with Metromile gave us that. that confidence, and then some in what is arguably our most important product launch, certainly our largest addressable market. And so you see that reflected both in the Q4 numbers, and I think you should also feel it in our posture as we head into next year. Tim, maybe I should be a little more specific to the question. I guess... You leaned in also, and that makes a lot of sense, but you leaned in also at a time where you admitted as well as the industry that there's higher customer acquisition costs, higher marketing spend costs as well. So I guess I kind of want to marry those two things. It was a tougher time, and how you view those increased marketing spend dollars that are maybe here to stay for a while, or how long you see this last? Well, so I would think of it maybe less as a tougher time, but perhaps a little bit more expensive time to acquire customers. So there is a case to be made where if customer acquisition cost increases, that feels bad in the short term. But if the lifetime value potential is strong and increasing, that's an impact that impacts everybody in the market. And so it's not just more challenging for us and more expensive for us. It's a market-wide phenomenon. And so we choose to kind of lean into that, knowing what the return is on those investments. And we're a little bit conservative in the forward periods. So we've seen this now for a long enough period of time that we don't have enough data to say this is a persistent thing that's going to last for years. But we're a little cautious about the coming quarter. And so you see that reflected in the numbers. In terms of seasonality, I think the first part of your question, that's still there, but it's a nominal impact. It's softening somewhat because of our much more diverse product base. We still do see that. in Q3, but that's been less of a factor. And it's really our choice to spend more, acquire more customers, as well to accelerate some of the hiring plans to support the expanding car launch. Okay, that makes sense. You guys are pretty exact with your wording, so I might be slicing hairs too finely here, but if I look at the current letter and your long-term target loss ratio is less than 75%, I think prior you had said something a little different to that. Again, I might be just slicing hairs, so I want to make sure I'm not. Prior comments there were in the low 70s, 70 to 75, and today it was less than 75. So is there a change there that's maybe something to be read from that that's making you maybe I think that should be a little bit higher than what it was before, or, again, am I just reading too much into that? No real change there. I would think of it as a, you know, our long-term target remains unchanged. As you may recall, we have a business model structure where we take a 25% flat fee and the remaining 75% goes for reinsurance and customer claims and loss adjustment expense and all of those things. So I would think of that as unchanged. Our long-term target is still there. And I think in the short term, I think it's very important to note that while the loss ratio did tick up a little bit in aggregate, each of the product lines has shown some nice improvement. And it's really a mixed shift that is accelerating. It is a little bit ahead of where we thought it might be a year ago in a good way. Less than half of our business today is made up of our renters' books. And that's decreasing, which means the other parts are increasing, and that really reflects the market. Homeowners is a very large market, life bigger than that, and car, something like three times the homeowners market. And so you're seeing our book of business and the loss ratio shift to look more like the market each quarter. Okay, thanks. Last one for me, and I'll just do one on Metromile. Let's save all that for later, I guess. One is, you know, obviously lots of comments in the letter and comments today on preciseness of the data and what that's going to mean for your pricing and customer acquisition and everything else in your margins. I guess, can you comment on how confident you are today with With the pricing technological advances of Metro Mile, given where their underwriting margins have been, loss and loss adjustment expense ratios have been, does that make you confident with their current pricing algorithms and data they're collecting or any concerns there at all that things that might need to be tweaked or fixed at all?

Hey, Mike. Our confidence is very high. This is really what we spent the last while diligencing. So there's no question that there's been an uptick in severity across the auto insurance space. This has affected Metromile. It's affected everybody else. Progressive and others have spoken about it at some length. And I think the industry as a whole will be taking rate to reflect the increase in the costs of repairing cars in the last few months. So there's definitely been a near-term impact that has affected them. But we look right through that. What we're looking through is really nothing to do with the near-term loss ratio of Metromile, and it's really about the fundamental capabilities and strategic strengths. And there we believe that there is a pronounced advantage that is readily visible. So there's a couple of things that we mentioned in the letter. For one, the very notion that customers report saving something like 47% when switching to Metromile. And at the same time, the loss ratio is within 10 points of progressive direct business, suggesting that even if they took a rate increase, there would still be sizable savings for consumers even as the loss ratio hits its long-term targets. So we see a structural advantage in the capabilities that they have built, and we're unmoved by the near-term changes that they plan to make anyway in order to bring the loss ratio in line with the long-term targets.

Okay, guys, thanks very much for your questions.

Appreciate it. Thank you.

The next question comes from Tracy Ben-Gigi with Barclays. Please go ahead.

Thank you. Good morning. Just a follow-up on this past discussion just on growth outpacing marketplace conditions. That doesn't always turn out well. I think Metromile has 49 state licenses, but it operates in eight states now with plans to enter five more next year. Does that cadence change in your view?

I think – Lemonade in general has been characterized by more emphasis on growth. Certainly if you look at our rollout of our prior products and compare them to Metromile, we do lean in more aggressively in that regard. So I do anticipate that with or without Metromile, we would have been looking for a rapid deployment across the United States, and we've seen Metromile as an accelerant for that.

Okay. Got it. I also believe that Metromile has commuted their reinsurance program. Is the idea that you would have buy-in on the new program that's starting in January?

So, you know, during this period between sign and close, as you know, we're separate independent companies sort of managing our own businesses, but looking ahead to a all of the approvals coming together and the companies coming together. You're correct that they've chosen to go without reinsurance at the moment, but I think like Lemonade, they're thoughtfully assessing the market would be my guess and my understanding to see what kind of terms are out there and what's available. We made the choice actually last summer and the year prior to go with terms that we found very attractive, although we could have gone without reinsurance.

And so I would think that Metromall has those options and they'll make those choices.

Once the companies come together, we'll more than likely continue to enjoy the reinsurance structure we have in place. So we have lots of flexibility with that. And we do get a nice – or we expect to get a nice capital surplus benefit from the combination of the companies, something in the order of 30 percent perhaps or more. The exact number we'll have to determine. But generally, when you bring companies together in this way, they can have a benefit from a surplus view as well. So there's two or three areas in this from a perspective of reinsurance, capital surplus, and other regulatory benefits that look – that make this a great combination for us.

Maybe just to follow up there, because you mentioned surplus. Typically what we see is that an auto insurance rider could run at a higher premiums to surplus. Does that change your equation at all in your view?

A little premature for us to get too specific about what those benefits will be. But, yes, we're well aware of some of the benefits and the incremental cost benefits.

Got it. Thank you.

The next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Thanks, too. Just first on Metromile, I mean, you kind of alluded maybe that Metromile wasn't charging enough, but besides bundling, which you can clearly bring to the table, maybe if you want to talk about how you would run Metromile differently as part of Lemonade. And then just second, as you expand to Europe, just Are there broader financial implications we should think about, or not expand, but kind of spend more on your expansion in Europe? Are there implications we should think about in the model next year? Thanks.

Jason, hi. Good to talk to you. I don't think, I don't want to nitpick your words, but I don't think the right way to think about this is how we would run Metro Mile differently. We don't intend to run Metromile distinctly at all. We intend to run a single company with a single product. It will be over time, once the combination is complete, it will be a successor to Lemonade Car that was launched last week. So this isn't about changing or fixing or transforming Metromile. It's about strengthening Lemonade Car and leapfrogging us to the vanguard of car insurance. And we alluded to this in the post that I shared yesterday as well, the idea that were Metromile to have access to 1.4 million customers and a home insurance product that they could bundle with and pet insurance they could bundle with, That would be hugely valuable to them as it is. But as I say, our focus is really on how can we inject all of those capabilities into Lemonade Car, and hopefully we've given you a good sense of why we think that that is a game changer and why that is a really important long-term value unlock for our customers and for our shareholders. In terms of your question on the EU, when we give guidance next year, we'll perhaps be able to provide some more color. But, you know, I don't think you need to be making any dramatic changes right now. We're just giving you kind of a broad strokes indication that the EU is performing well. And while it's been a small part of our business, we do anticipate in the future it growing perhaps at a faster rate than the rest of our business.

Thank you.

The next question comes from Andrew Kliegerman with Credit Suisse. Please go ahead.

Hey, thank you very much. This morning, I was wondering a little more on the sales and marketing. It was up a little over 90% in the quarter, and you mentioned leaning in as these marketing costs in the industry have gone up. Could you give us a little color on what you're seeing? Like I've heard advertising on social media is up more than 50%. Could you give a little color on those types of metrics and what you're seeing out there in terms of sales and marketing costs?

Sure, I'll take that one. I think the theme that you're highlighting we have seen, certainly upward pressure, whether it's social media or advertising, cost of search terms or other key channels that we rely on. I think the metric you know to 50% is quite dramatic. Our experience has been a fair bit less. I would think of it as something in the order of 20% or 25%-ish or so, so maybe half of perhaps what you're seeing in other companies or across the industry. And important to note that we've been able to offset some of that, not all of that, but some of that through just continued improvement in performance. And so while this is not something we would wish upon ourselves from a competitive standpoint, our track record is quite strong in this area. These impacts affect us, they affect all competitors. And so long as we continue to execute as we have in the past, we've been able to mitigate this somewhat successfully. And then as a reminder, just kind of keep our eye on the lifetime value. The reason the costs of insurance are high is because there's a tremendous potential lifetime value, particularly when you see churn and retention stables as we do, as you see our capabilities in bundling expand as we are seeing. Today we can boast we have our first customers with free policies. A couple years ago, that was one policy. So these are all themes and trends which tell us, even if customer acquisition costs increase somewhat in the short term, that it's something we're confident we can compete effectively and weather in the long term.

Well, that was very helpful. And then with respect to Metro Miles, I was kind of running through their financials last night and just thinking about their operating losses and the fact that it was over $100 million in operating losses, net operating losses in the first half of the year. And if you kind of extrapolate that out, then you're run rating at over $200 million a year. And I'm wondering, you know, and I get that, you know, you want to grow and there's tremendous opportunity in that. How long...

would you expect to see those type losses um in india so um i would point you back to a couple of the comments that daniel just made and the best way to think about that so again you know during this period of time where independent companies operating independently um but the the goal is one company one consolidated brand one consolidated customer experience um and that's the lemonade car product. And so the synergies that we see between the two companies are significant. We have a fairly ambitious growth plan. A big part of that is hiring people that do all the amazing things from a product and a customer standpoint that help us build our company. And so folks that we would plan to hire will as likely or not find those folks at metromile with tremendous experience and background in a market that we're just entering. And that's really the leapfrogging capability. And so I would not think of it as taking two companies and putting them together and adding the P&Ls and finding synergies, which is what is a reasonable approach in many acquisitions. This is much more about us seeing the real core value in what MetroMile has learned and developed over time the data they've created, the third-generation technology that they've come to, which is something we would just be starting out with in our product launch. Those are the real values, and so we'll work aggressively to integrate and bring the companies together once we get to the point of close. So the cash burn, you know, you've seen how we manage our businesses. historically from a cash and capital perspective, and we'll continue to use that approach and ethos once we bring the companies together. Okay, thank you.

The next question comes from Mike Ceremski with Wolf Research. Please go ahead.

Hey, thanks. Good morning. Maybe switching gears a little bit to lost expense inflation in the existing book, maybe you can give us some color on what you're seeing. I think, as you guys know, some of your competitors, although you guys have more renters, have been talking about kind of high single or double-digit rates of inflation. of inflation in in our homeowners portfolios or or auto portfolios maybe you can give us some color what you're seeing in your book um and in particular on the renter side as well and whether you'll be tracing pricing uh accordingly so we've not uh disclosed any specific plans um

In terms of price increases or significant changes, though we're always evaluating prices and certainly on a state-by-state basis, we've made appropriate filings and made adjustments where we feel it makes sense. There's certainly some impact of the price creep that you mentioned. I wouldn't note it as dramatic, but it is something that we've seen to some extent. But it's really been overpowered by the overall improvement in the loss ratio overall. So when you aggregate the losses and the loss adjustment expense, again, we're seeing nice improvement. It's also a benefit that comes with scale. As growing at the pace we're growing, we're able to mitigate some of these price changes impacts and cost impacts through scale um we're still relatively early in that cycle at our current ifp run rate but i think with the launch into car and the pending comp uh combination with metro mile that we'll see some more benefit there in terms of faster scale and and ability to mitigate some of those price increases okay uh as a follow-up um

on the reinsurance, and I know you have a multi-year program. Some of the reinsurers are talking about hopefully raising rates, high single to low doubles as well. Should we be contemplating higher reinsurance costs when we think into the future as well, and are there offsets that you can kind of, levers you can take to potentially offset if there are pricing increases?

We've spoken before about reinsurance. Tim mentioned this in passing earlier as well, which is that we see reinsurance as an option, not as a necessity. And we take the kind of reinsurance and the quantum of reinsurance that makes sense from a financial perspective. If prices were to rise significantly and we've been given no indication of that, then it's entirely possible that we would lower the amount of reinsurance that we take. We have been gradually stepping it down anyway. You may note that last July we went from 75% to 70% coverage as our book grows, as it diversifies across products and across geographies. We see that that's a natural and correct thing for us to do. But really for us, more than anything else, reinsurance is about capital optimization. The cost of capital through reinsurance is lower than elsewhere, so we've been relying on it heavily. If the cost benefits change, structures will change to accommodate that as well. That said, this is the kind of ebbs and flows that you're talking about, come and go with some frequency. We're not up for a major reinsurance renegotiation for quite a while. So I would anticipate absolutely no change in the near term, maybe slight changes in the medium term. And as to the long term, let's take the pulse of industry 18 months hence. and we'll have greater clarity on what we do.

That's helpful. Lastly, a follow-up is, can you offer us any kind of color or views on whether your views on pet insurance has changed and kind of an update on how that's going as it becomes a bigger portion of your book in the future? One of the pet insurance stocks has done very well, and it seems like they're setting a lot of demand for pet insurance. Maybe you can kind of give us an update on your views on that line of business. Thanks.

Happy to. We are... We are very happy with our launch of Pet Insurance. The product has been incredibly well received. It has outperformed our expectations. Customer delight levels are really very, very high. It has formed, in short order, a sizable portion of our business. On any given day, oftentimes 20% to 30% of our sales will come from Pet Insurance. It has provided both an additional on-ramp to Lemonade, so customers that we otherwise might not have gotten at all something in the order of two-thirds of our pet insurance customers are ones who have joined us through this additional on-ramp. So that has been a tremendously valuable task. But it has also provided our first proof of cross-sale. So something like a third of our pet policies are to existing customers. And as we've commented in the past, when a renter adds a pet policy, you see the premiums jump by 300% or 400%. So this has really been incredibly helpful. It has been transformative of our LTV. It has added, as I say, additional on-ramps, and it's been performing very well. Broadly speaking, pets have also been a boom or enjoyed a boom during the COVID period, and that's reflected itself in the pet insurance space as well. So for all those reasons, I'd say that all the lights are green.

Thank you.

The next question comes from Josh Shanker with Bank of America. Please go ahead.

Yeah, thank you for taking my question. So I was curious, I looked at the premium in force for homeowners with stable at 30% of the portfolio in this quarter and in the quarter ago. Uh, it looks like pricing is up about 20%. That's pricing and expansion of coverage. I assume that's happening in homeowners more than the other line. Uh, so what is, to what extent is that, um, is homeowners as on a policy base, perhaps growing less flow than the rest of the book or less quickly than the book overall.

So, uh, a couple of things, um, gosh, so, um, One of the notes we made in the letter and in the script was the majority of the price impact this quarter is mix, something on the order of 80% of the premium per customer is a shift in mix, and that's all the policy types. So homeowners, and Pat is driving, that's not a car yet, obviously, just out. And that's an increase over time. So there was a time when that was about 50-50. because the mix shift was nominal. And so I would say that our ability to sell more of the high price policies, whether it's directly, whether it's bundling for existing customers, all of those are kind of moving in the right direction. And I would not say that homeowners caused a disproportionate impact. We saw it from across the book.

Well, can we dig into that 20% number a little bit more? I mean, I would think if price goes up by 20%, that's a fairly large raise. I mean, you said price and people buying more coverage, although, I mean, in my experience, people don't buy that much more coverage on a new policy. But 20% feels a little bit like being brought in at a teaser rate. And then immediately after, you get a fairly sizable rate increase that might be destructive to persistence.

No. Let me be clear. There was no 20% increase in any pricing or any premium per customer increase. It was driven by pricing or increased coverage. And that's across the book of business, relatively.

require more coverage, get more coverage, pay a higher premium for that coverage. Price is a very minimal impact. The vast majority is mixed.

And bundling or CEDRA is increasing and also driving the overall average policy from you. You're including that.

If they only had renters initially and they bought... No. It's an apples-to-apples comparison. So in the 20% where it's driven by mix, in the 80%, which is driven by mix, that would capture the pet example that you just gave. So, I mean, I don't mean to belabor the point, but when you say that

of the 20% is that people bought a more expensive policy for the same type of policy, but bought more coverage than they did a year ago?

Just let me try and phrase it differently. We've seen premium per customer increase. So the premium per customer is up 26% to $254. And we're saying that the overwhelming majority of that has nothing to do with price. That just has to do with people buying more coverage, more products, bundling products. So at first approximation, all of that is to do with things other than price.

Ah, so that's an easy question. You're saying 80% of it is due to mix, and 20% of it, not a 20% increase, but 20% is due to pricing and coverage, while 80% is due to mix.

That's right. So overwhelmingly, this has nothing to do with prices. We have not increased our prices in any meaningful way, certainly not by 20%. So you could round that down and just focus on the fact that this is to do with people buying more policies, more expensive policies. That's the real driver of this.

All right. I'll leave the question to somebody else. Thank you for the clarification.

Again, if you'd like to ask a question, press star then 1 to join the queue. The next question comes from Christopher Martin with KBW. Please go ahead.

Hey, guys. Congrats, and thanks for having me here today. I have two questions kind of totally unrelated.

The first one goes back to, Dan, if you were just talking about precision versus proxy pricing and how Metromile has been at that for a long way and they have all the data there for them. Can you go into a little bit then on, if you can, how they seem to have a little bit struggled to actually get that statutory net loss ratio kind of even anywhere close to the industry average? And it kind of has stayed elevated even in, like, during COVID with the loss in the LE kind of pretty elevated to keep it still over that 100% range.

Hi, Christopher. You mentioned two questions. I assume there's another one to come.

That's fine.

No, the loss ratio has been much lower. If memory serves, I reported something like a 70% last quarter, excluding LAE, but it's been in that kind of ballpark in the LAEs and the teams. So you're talking about a loss historically in the last couple of quarters, a loss ratio all in something in the 80s.

So I'm not familiar with a triple-digit loss ratio for their company.

They did enjoy a dip during COVID, but their dip was less pronounced than it was for others, and I think that's important. It's actually really telling because whereas other folks don't monitor how much you drive, so they just charge a flat average rate, and then people suddenly stay home and they find themselves overpaying for insurance, Metro miles rates intrinsically went down automatically by virtue of the fact that people drive less and pay less. So actually, they were able to weather the COVID transformations, I think, with greater simplicity and smoothness than others did. But I mentioned this earlier, that the loss ratio, they're targeted to lower it by another bunch of points, 10, 15 points perhaps. But they do enjoy this tremendous cushion from which to take that. So we've seen that there's some statistics. I mentioned one earlier. I'll mention another one now. If you look at the people getting quotes at Metromile, not just the ones who selected Metromile and converted and bought it, but just getting quotes, 55% of the people quoting on Metromile will have savings of 20% or more. And for almost half, for 45%, the savings are 30%. Throw all those stats out to give you a sense that if they, alongside everybody else in the industry, raised rates some in order to compensate day-to-day, that would be a welcome near-term fix, which would do no violence at all to the fundamental strategic advantages that they enjoy.

Absolutely. That makes a lot of sense. And the numbers I was referring to from the yellow books, of looking at, on the stat level, the net is, yeah, in the hundreds, and the loss in LA, if you don't mind. So that's where I was getting that from. Okay, thanks. Yep, yep, and... The European based on... So that's kind of performing relative to each other. How much should we think about that from the life business? I think you mentioned in your letter that that's still sitting about less than 1% of the total premium in force.

Is that what we should kind of expect moving forward as you're kind of shifting resources and allocation of focus into different levels?

It actually is 2%, if I'm not wrong. And it kind of doubles from where it was a quarter before, so small numbers, but went from 1% to 2%. And we're still learning this industry. So it has been growing and growing nicely, doubling, as in outpacing the rest of the book.

But we are finding other places where we could invest in incremental dollar and see a higher time. But at the moment, we're just finding...

more attractive places to deploy our incremental data, and that's what we intend to do.

So while I do expect our life business to continue to grow, I don't think we're going to be showering it with disproportionate love in the coming quarters.

I will also say that it is a product that does very well as a cross-sell. So even though the customer acquisition cost for life policies can be

daunting at times, and a lot of insurers that said bread and butter have had a rough time of it.

For us, that's not the case. We're able to offer it as an upsell to all of our customer base with no incremental spend, and I expect to see an increasing amount of our life policies being sold that way. It's already a sizable portion. Okay, great. Thanks. Thank you.

As we have no further questions, this concludes our question and answer session, which also concludes our call. Thank you for attending today's presentation. You may now disconnect.