Lemonade, Inc.

Good morning and welcome to the Lemonade, Inc. fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only 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 a question. To ask a question, you may press star then one on your telephone keypad. 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, Vice President of Communications at Lemonade. Please go ahead. Good morning, and welcome to Lemonade's fourth quarter and full year 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 Schreiber, 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 fourth quarter and full year 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 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 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, and thanks for joining us this morning to review our Q4 results, wrap up 2021, and share our plans for the year ahead. 2021 was a very productive year for us, and we ended it materially larger, more diversified, and strategically stronger than ever. The year kicked off with a substantial capital raise that set our business up for years of sustained growth, and, indeed, we ended Q4 with 100% revenue growth and with over $1 billion in cash. Simultaneously, we diversified our book by scaling our younger and higher premium products, while using our expanded portfolio to increase bundling and upselling across the book. These resulted in our largest ever annual jump in premium per customer. We also began and completed the development of Lemonade Car, a monumental undertaking, as well as signing a deal to acquire Metromile, and with it the data, talent, and technology needed to propel Lemonade Car forward. What a difference 12 months can make. And now to 2022. This year will shift much of our firepower to the next phase of our growth. Our longstanding two pronged strategy has been to win with technology and to grow with our customers. That is to build a digital native company on the premise that an insurance company built on a technological foundation will be able to service customers and quantify risk with a degree of precision and at a level of automation unavailable to incumbents. And secondly, to engage customers when they're young, delight them with a cocktail of a value, values, and fabulous experience, and then grow with them by offering them all the upgrades and coverages that they will naturally grow into as they go through predictable lifecycle events. These two pillars, winning with technology and growing with customers, have guided us since our inception, and our experience to date has only served to strengthen our conviction that in choosing these pillars, we chose well. As we enter 2022, we find ourselves in an enviable position. Having launched pet, life, and car in the past 18 months, we believe we have achieved a critical mass in both our technology and our product portfolio. Of course, we have ambitious plans for new products and new technologies for years to come. But for the first time, both pillars are now sufficiently complete to be built upon. This enables us to shift resources from making technology and products to harnessing our technology and products in new ways. That means leveraging our technology to lower our expense ratio through automation and our loss ratio through machine learning, while growing our CAC to LTV ratio through cross-selling and bundling. None of this is entirely new. We've been investing in graduation and automation and precision for years, but we're on the cusp of a changing degree that we expect will amount to a change in kind. When we were a monoline business, cross-selling and bundling, perhaps the biggest LTV unlocks, were not really available to us, and our technology investments were largely consumed by building products. The balance will now shift, and we expect that over the coming quarters and years, this shift will take our business to new levels of efficiency, growth, and profitability. One upshot is that we project that 2022 will be our year of peak losses, with our EBITDA improving in each subsequent year. All good strategies require focused investments in order to achieve true differentiation from the competition. And we believe that five years post-launch, our investments have yielded structural differences between us and the rest of the industry, and that these set us up very well for the next five years. Take our fellow insurtechs on the one hand. At first approximation, every other insurtech company is a single product business, offering either car or home or life or pet or renter's insurance whereas Lemonade uniquely offers all five on a unified platform. While specialization has its advantages, a monoline strategy increases concentration risk, caps LTV, precludes bundling, forcing customers to engage competitors, and generally it means that growth comes almost exclusively from adding customers rather than from growing with them. In a highly competitive market, these strike us as strategic challenges. Incumbents, on the other hand, have complete insurance product suites but lack the technological foundations needed to massively automate and to move from proxy-based pricing to precision pricing. While the wheels of insurance move slowly, we believe our tech offers Lemonade a strategic advantage that will manifest evermore with every turn of the flywheel. We expect this to express itself in loss ratio and expense ratio trend lines already in the second half of this year. and for this advantage to compound in the years that follow. Of course, we wish both our fellow InsurTechs and more established competitors well. There's enough room for everyone. But for the reasons I outlined, we are increasingly concerned in our multi-product, technology-first strategy. And with that, let me hand over to Shai for some updates on our newest offering, Lemonade Car. Shai.

Thank you, Daniel. In the short time Lemonade Car was available to our customers in the fourth quarter, It brought in three kinds of sales lemonade package during the same period following its launch in Illinois. We're also seeing encouraging bundling dynamics with a majority of lemonade car customers bundling with at least one other lemonade policy. I'm also happy to report that customers are loving lemonade car and we're tracking outstanding NPS for the product across our customer experience and claims. We believe the Taminade car is the most delightful, seamless, fair, and precise offering on the market. As a reminder, we use Telematics to model driving behavior and reward safe drivers with better rates. We also monitor the CO2 emitted by our customers' cars based on their year, model, and driving behavior, and plant trees to help absorb that CO2 over time. Turning to our acquisition of Netromod. We're working closely with regulators toward closing the transaction and still expect to do so in the second quarter. In the subsequent quarters, we'll focus on integrating Metromile's teams, systems, and processes, and also develop and launch a pay-per-mile car product and lemonade infrastructure that is compelling both for new and existing customers. As we've shared previously, we're confident this deal will collapse time, flatten risk, and increase efficiencies for lemonade car. Shifting gears, I'd like to share some thoughts on our loss ratio. Our Q4 21 loss ratio was 96%, up from 77% in the third quarter of 21. A meaningful driver of this increase was a handful of older large losses for which in retrospect we under-reserved. We have a strong record of cautious reserving, but reserving is an imprecise science. and so adverse developments do happen every now and then. Notably, there was no spike in our accident quarter loss ratio during the same period, suggesting no underlying deterioration in the book. Nevertheless, we've seen a few quarters with elevated loss ratios. The underlying cause is the welcome and intentional shift in our business mix, with U.S.-based ventures comprising less than half of the book today compared to about two-thirds a year ago. The lines of business that have captured that share, home and pet, demonstrate higher loss ratios than our more mature stable renters book. We have projects across all of our newer product lines to address underwriting profitability, and these are yielding steady improvements in loss ratios for both pet and home. These improvements have been outpaced by these products' growth, meaning that our aggregate loss ratio has climbed even as our product-specific loss ratios improved. In time, the one should catch up with the other, and we expect loss ratios of all Lemonade products to be below 75% in due course. In the short term, though, our newer products will likely be above this target, even as they trend downwards. This is a natural and temporary cost of scanning new businesses. And with that, over to you, Tim.

Great. Thanks, Shai. Thanks, Shai. I'll give a bit more color on our Q4 results as well as expectations for the first quarter and the full year 2022. 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 78% in Q4 as compared to the prior year to $380 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 $266. This increase was driven by a combination of increased value of policies over time as well as a continuing mixed shift toward higher value homeowner and pet policies. And as in the prior quarter, about 80% of the growth in premium per customer in Q4 was driven by this mixed shift, including cross sales, and the remaining 20% from increased coverage levels and pricing. Gross earned premium in Q4 increased 79% as compared to the prior year to $89 million, roughly in line with the increase in forced premium. Revenue in Q4 increased 100% from the prior year to $41 million, we're now comparing to a prior year that has a similar quota share approach, so the growth rate is more in line with the overall growth of the business. Our gross loss ratio was 96% for Q4, 23 points higher than 73% in Q4 a year ago. And as Shai noted, this is primarily driven by prior period adverse development. Operating expenses, excluding loss and loss adjustment expense, increased 89% in Q4 as compared to the prior year, This is primarily driven by increased advertising spend in support of growth, increased personnel expense related to our recent car launch, and expenses related to the Metromile acquisition. 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. Global headcount grew about 97% versus the prior year, 1119 with a greater growth rate as in past quarters in customer facing departments and product development teams our net loss was 70 million dollars in q4 as compared to the 34 million dollars we reported in the fourth quarter of 2020 while our adjusted ebitda loss was 51 million dollars in q4 as compared to 30 million dollars in the fourth 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 $145 million since year-end 2020. And with these goals and metrics in mind, I'll outline our specific financial expectations for the first quarter and for the full year 2022. For the first quarter of 2022, we expect in-force premium at March 31 of $405 to $410 million, gross earned premium of $92 to $94 million, revenue between $41 and $43 million, and an adjusted EBITDA loss of between $70 and $65 million. We also expect stock-based compensation of expense of approximately $20 million and capital expenditures of approximately $2 million. And for the full year of 2022, please note that we expect the Metro Mile transaction will close during Q2 and that our total annual IFP will grow approximately 70% during 2022. The guidance that follows, however, excludes the expected impact of the closing of the Metro Mile acquisition. In-force premium at December 31 of between $530 and $540 million. gross earned premium between $423 and $427 million, revenue between $202 and $205 million, and an adjusted EBITDA loss between $290 and $275 million. We also expect a stock-based compensation expense of approximately $80 million and capital expenditures of approximately $10 million. And as Daniel noted, we currently expect that 2022 will be our peak year of EBITDA losses. And with that, I'd like to turn the call back over to Daniel. Daniel?

Thanks, Tim. As is our practice, we will now turn to questions most upvoted by our shareholders through the same platform. And the first one comes from Darren. And Darren asked about insiders buying stock while the stock is low and whether or not we have any plans for company buybacks of shares. Well, Darren, the market overall has clearly been very volatile these last few months, and growth tech companies across all sectors have seen their shares hit very hard. So lemonade's declines in that sense are fairly typical. Clearly, all of this has much more to do with macroeconomic trends like inflation and rate hikes and geopolitical concerns like what's happening in Russia and the Ukraine. than with the performance of these growth stocks per se or of lemonade in particular. We didn't know that this particular constellation was coming, but we knew that sooner or later something like this would. And we addressed this prospectively in our founder letter, which we published in the IPO prospectus. And I'd like to read the germane section from that because I think it applies here as well. There we wrote, Chai and I wrote, that we see our job as value creation, not share price maximization. We are not interested in our share price on a day-to-day, week-to-week, or month-to-month basis. On these timescales, share prices fluctuate for a myriad of reasons, some correlated with long-term value creation, others uncorrelated, yet others inversely correlated. Success will reflect itself in our share price in the fullness of time, but short-term price flutters are noise, and we will not credit them as signals. So that's what we wrote then. We stand by that still today. And the bottom line is that, as we've said from day one, Lemonade is all about a long-term play, long-term value creation. And we will continue to work very hard to build Lemonade into a very large, very profitable, much-loved company and one that will reward all our shareholders in the fullness of time. That certainly is what we're working towards and believe in. I won't speak about individuals buying or selling plans or patterns, but in terms of a company buyback, we have no current plans. to initiate any kind of stock buyback. We have many excellent investment opportunities for our cash. We believe there's tremendous opportunities to grow our customer base and optimize in ways that I've outlined. And stock buybacks tend to be more for companies that have excess cash and less investment opportunities of their own. So I hope that addresses that question. The second question comes from the paper bag, and it is about how Lemonade can sustain rapid growth with a high cash burn and for how many years and when profitability will come. Again, a great question. Let me put our cash situation in perspective. Over the past six years since we founded the company, we've raised about $1.5 billion, all told, of which 1.1 remain in the bank. And, in fact, acquisition of Metro Mile brings with it not only great licenses and IFP and talented people and technology, but a fair amount of cash as well. So our cash position is going to receive something of a little boost in the coming months. So all told, we believe we remain in a strong cash position, and we certainly have access to more cash where we can need it. And for reasons that I outlined earlier, we think our phase of heavy investment in foundational products and foundational technologies is drawing to a close. We have built the largest TAM products and we have launched them. And we have created the technological infrastructure that we need for our next phase of growth. And that's why we're probably six to nine months away from our peak losses. And we expect to see our losses decline with every successive year and our EBITDA margin to be on a steady path of improvement in the years to come. And that will chart a clear and steady path to profitability. The next question comes from Thaddeus, together with a paper bag again, actually, and that is, when do we expect the Metro Mile deal to close, and how quickly will lemonade car be available in 49 states? Well, we're working closely with regulators, as we said, to close the transaction. We do expect it to close next quarter, in Q2, that is, although it's never guaranteed, and we are... awaiting final approvals. I'm not sure when we'll hit 49 states. By the way, I'm not sure why the question is about 49 states. We tend to think of the U.S. as having 50 states plus Washington, D.C., so we tend to think of it as 51 jurisdictions. But be that as it may, we do expect that we're about a year away from being able to offer lemonade cards to the majority of lemonade customers, and we'll continue to expand rapidly after that as well. And as the formula of the question raised by Paperbag anticipates, we absolutely will monitor our performance in terms of CAC to LTV as we chart the rollout. So that will provide an important roadmap guardrails, if you like, for our nationwide performance of Lemonade Car in Illinois. And we've got a major year. But as I say, we remain pretty bullish on our ability to roll out reasonably quickly over the course of the next 12, 18 months or so. Final question is again from Darren. Darren asked if there's a move that our technology advantage exists since in practice in terms of bottom line, we are still seeing OPEX that has been growing. That's a great question, Darren, and certainly the gap accounting metrics and disclosures that we make do make it hard to teach the investment because, in general, the costs of these investments hit our financials immediately, whereas the benefits materialize over time, and it makes it hard to see the one for the other. Internally, we do track very closely the impact of every testing and we've got a series of other dashboards that allow us to track these things. So we do have a high degree of confidence that our tech will deliver transformative impact and in many ways is already doing so. In terms of what's public, I can reiterate some of the things that were disclosed in the past. For example, you saw Renters' business for the first few years of the company's life, renters was the overwhelmingly dominant part of our business. We did have some homeowners, but overnight, we saw that loss ratio trajectory drop from us reporting 69% at the time of our IPO. So you saw drops in loss ratio, the likes of which traditional insurance companies do. have not delivered in the past. So that is a standout case of seeing just us use the data feedback loops to very, very rapidly bring down loss ratio. About two-thirds of our customers have really no interaction with customer support. It's entirely self-served, and that is, I believe, pretty revolutionary and outstanding and, you know, attaches a zero-cost solution. to serve to those customers. We've spoken about AIGym in different forums. I believe we disclosed a couple of years ago that our AIGym bot handled the first notice of loss for about 96% of claims and handled them start to finish in about a third of claims. So you do see about a third of our claims handled without any human intervention and almost all our claims handled with some

bot efficiency.

And we've also disclosed that in terms of ongoing customer support, what we call CXAI, about a third of all customer inquiries are handled this way, again, without human intervention, and that's been true even as we roll out new products. The CXAI has been able to adapt to the new needs of our customers in a pretty remarkable way. So all told, our customer-facing technologies, whether it's AI Maya or AI Gym or CXAI, they do tend to deliver a superior experience. We have MPS that is, I believe, without equal in the insurance space. And we do that with a marginal cost that oftentimes is literally zero. So those are all, I think, indicative of the kind. And more broadly, for the reasons that I outlined and that I think will become clearer in the quarters and years, largely behind us or soon will be. So that our peak losses is going to be, we expect, in the coming quarters. And that, as I intimated in my earlier comments, I do. you expect to be able to display trend lines for both expense ratios and loss ratios that begin to evidence the force and the power of what we've been building and for those to manifest towards the end of this year. And from this year onwards, I think it will reflect itself also in steadily improving EBITDA margins, charting a steady and fairly clear path to profitability. Hopefully that answers your question, and with that, With that, we will turn to address some of the questions from our friends on Wall Street.

So operator, please open the mic for our first question.

Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. And our first question will come from Michael Phillips of Morgan Stanley. Please go ahead.

Okay, thank you. Good morning, everybody. First question, Daniel, as you think about kind of a long-term vision for how you look at the limited car.

We're not planning to do anything that would be called a traditional car insurance at all.

Traditional car insurance uses a diverse group of people and to charge them as if they were uniform. Our products, whether they're paper mile or not, are telematic. during a trial period or pre-purchase, but are based on continuous monitoring of where you drive, how much you drive, how you drive, and using that to be able to deliver to you a precise rate that really matches risk and rate in a way that traditional insurance policies that already use telematics tend to have it turned off after a couple of weeks. And even during that time, insurers tend to underweight that signal because it would cannibalize the rest of their business. So I think in all cases, what we're offering is something that is pretty highly differentiated from existing incumbent-based policies, is using precision metrics rather than broad proxies, and therefore will have Very little opportunity for adverse selection and a great deal of opportunity for the opposite of that. As people who are cautious drivers or who drive less, we're able to get a rate that's reflective of that and will be unattractive to people who drive a tremendous amount or drive poorly because we will identify that in charge accordingly. The difference between paper mile version of that and non-paper mile is really more to do with the comfort and convenience of how the customer wants to be billed. whether they prefer their rates to match their driving on a monthly basis and retroactive, which is what paper mile tends to be, or whether they'd rather be charged something that is commensurate with their usage but is predictable up front and they know what they're going to be charged. It's really much more to do with that aspect of the user experience. The underlying precision technology will be uniform across our product offerings and highly differentiated from what's out there today.

Okay, yeah, thank you, Daniel. I apologize. I should have been more specific, and you kind of got to it in the last part of your answer. I understand you're going to be different in terms of traditional. I should have said paper mile versus non-picker mile, I guess, because I feel like your customer base is more – conducive to using paper mile type, which auto insurance than other insurance companies might have. I'm not sure if that's something you would agree with or not, but I was kind of getting at how much paper mile versus non-paper mile. I should have said it that way.

Do you see your auto book? I know you're going to be more telematics and constantly using that, but I was kind of getting at a different spot there. Does that make sense?

Yeah, of course it makes sense. Sorry I was answering a question you didn't ask. Okay. I think the answer, honestly, is that this is a customer choice, and it will be driven by our customers. So we want to offer them both models in as many places as we can, as quickly as we can, all working on more creative amalgams and ways to bridge the two user experiences, which we'll roll out and disclose kind of in the fullness of time. But as in all things in our products, we are really looking for the customer to have the best possible

experience and then to opt into something that makes sense for them.

So I don't know what that would look like. And at least at first approximation, we're indifferent. We will make sure that we match rate and risk in either model. Okay.

That's helpful. Thank you. Thanks for the clarification. Second question would be on your pressure that you've talked about on the loss ratio, which makes sense. Your pet, your home, higher traditional loss ratios in general, but they're also growing, so some pressure there. But let's take that same analogy to how you think about what that might look like. I guess as a side comment, it's no surprise that there are some companies that have new rollout products that want to grow quickly and have significant pressure on the loss ratios. So let's take that to you guys. And as we look at the first couple of years of lemonade car, are we talking about a point or I'm not looking for fully specific numbers, but is it a point or two pressure or is it more like that 75-ish goes into the 85, the 90s? When we look back a year or two from today and how much pressure does lemonade car produce on the loss ratio?

That's a fair question, and I don't think that we can tie it down with that level of precision. Our car product has been in market for such a short period of time, and the data that we have hasn't even gone through a single renewal cycle, and we do know that illustrations change very dramatically in the first few months, and we just haven't been there. So we are data-driven, and the data just isn't all in for us to be able to say anything with precision. We will be having the book that Metromile has. We've got a better grasp of what they're doing. They've been doing this for 10 years and for many billions of miles. So we have a better sense of their loss ratios, which in recent quarters has been somewhere in the 70s. With LAE, it's made it into the low 90s, trending, I think, in a good direction. So we will see that the – well, I should add one other perspective, which is that the entire industry in the car from progressive on down have been seeing a lot of pressure due to inflation. So these are unusual times and, for us, unpredictable times just because it's early in the game. But I think that over time – This is a place where we expect frankly to shine and to be able to outperform incumbents. just because of the answer that I gave to the question you ever asked, which is about precision pricing and the ability to monitor and to adapt prices with much greater speed and precision. So I do think that we'll be in a very strong place to get to a good loss ratio for car, remembering that the pressures on a new launch are not merely the ones that you spoke about, which is growth oftentimes inversely correlates with loss ratio, But that first year policies are always higher. Even companies like Progressive have been doing this for decades and are perceived as being the industry leaders. They don't break out their first year policies, but if they did, you'd see much higher rates there as well. So you just have to take all of that into account.

Okay. Thank you. Yeah. And that's why I kind of said, is it a point or two or is it more like 10 or 20 points? Um, so I don't know if it's not the other, um, last question, quick question. Sorry. Um, uh, how do you classify, uh, large losses for you guys? So can you give any details of kind of what those were? Um, you say large losses that, uh, contribute to the adverse development. Yeah. So the, the, there was a bit more adverse development in the quarter, which is not, unexpected generally, but it's not something we see very often. I think looking back over eight or ten quarters, there might have been one other quarter with that kind of development. We've also had quite a few quarters with the favorable development. In this particular quarter, the adverse development was a majority was driven within the home area and within home larger losses. And I would think of that we don't have a sort of a hard number that we disclose, but I would think of you know, an entire loss of a home that could be a million dollars sort of a claim, you know, that would certainly be squarely in that large loss category. And given our rate of gross earn premium, you know, one or two large losses of that nature can clearly move the loss ratio pretty significantly. So that was the primary cause in the quarter. So it sounds like it's a couple almost entire losses of houses, what do you say? A few of those. Yeah, that was the most significant driver. Other lesser impacts, but that was the majority of the impact in the quarter. Okay. Thanks. I'll give that for now. But thank you guys for your help. Thank you.

Our next question comes from Jason Helfstein of Oppenheimer. Please go ahead.

Hey. Good morning, everybody. And actually, that last bit was helpful for our model. So as we're thinking about 22 and kind of bridging to your EBITDA guidance, you know, how should we think about, like, the impact from loss ratio versus marketing efficiency? So I think we've seen sales and marketing improve as a percent of gross earn premiums. both this year, last year, or whatever, 2020 and 21. So just maybe just help us understand a little bit about that. And then, you know, when we think about pay per mile, I think if you've looked at, you know, the legacy operators and go on your mind, They generally don't operate in bigger states. I don't think it's available in New York or hasn't been available in California. How do you think about that, and what do you think is the impediment to you being able to offer kind of pay-per-mile more broadly than it's offered today? Thanks.

So I'll take the first one first, the question on marketing improvements. So you are correct. We have seen historically quite significant marketing efficiency improvements in on the order of doubling of efficiency over the past two to three years. Those have really ceased during 2021, and I think we saw what many customer or companies that are reliant in some way on online acquisition have seen prices actually increase. And so while our marketing efficiency is not currently showing those dramatic gains we saw in the earlier years when we were really optimizing and building that capability, things are not deteriorating much. The second half of last year, we saw some increases in overall pricing similar to other companies in this market. Our modeling going forward and our guidance expects that the current rates of efficiency will continue. We're not modeling in tremendous gains and improvements. Our marching orders internally to our growth team is we expect to see continuous gains and improvements, but we're not modeling that into the guidance until we start to see any of those impacts in the real data.

One thing that I

Yeah, I'll come to that one. But let me just add one tail comment to Tim's comment, which is in terms of the marketing efficiencies for new customer acquisition, Tim addressed that and spoke both historically and forward-looking. The other area that we referenced in our letter as well is that we do expect to see a great deal more cross-selling and up-selling from existing customers. So we now have close to 1.5 million customers

So the opportunity to cross out LTV is extraordinary. And we do see big jumps there. We reported the largest jump in premiums.

We beat that record again and again because of that behavior.

So focused on acquiring new customers in terms of acquiring new premiums,

we have a growing pool of people to whom we can sell more products without the associated CACs. So we will see the CAC gel TV continuously improve as best we can model and expect. In terms of the telematics question, I think I take issue with your premise, or at least with elements of it. So Metromile's largest state is California. And California is absolutely fine with tracking mileage and charging accordingly. They have restrictions on behavior tracking and charging, but you do see that there are ways to implement telematics that are just fine with the state of California. And as I say, indeed, a large portion of the Metromile business is California-based. And New York in recent months has actually also changed its posture on telematics and is becoming much more open to that. So I think that the trend line is very much in that direction. Larger states, like you said, like New York, like California, are going in the right direction in that regard, largely because it's perceived as increasing fairness and charging people a rate that's commensurate with their driving rather than using

credit score or gender or other or profession or marital status, all things that are traditionally used in the insurance world, which I think regulators correctly understand are less fair than the telematics approach. Thank you.

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

Yeah, hi there. Just doing some quick math. The loss ratio went up by about 19% from 2021, and you spent most of the federal development on $90 million of premium. That's about $17 million of losses. And the second part of my question is, of course, you tout your AI claims management skills.

As the best in class, how do you lose a whole home in the quarter and not put up something for it?

So a couple answers to a couple of your questions there.

So this adverse development and the remainder caused by makeshift.

So as we've seen in past quarters, as renters as a proportion of the book declines. It's now less than 50%. That is continuing to have an impact as it has in prior quarters and pushing the loss ratio up. So absent any adverse development, the loss ratio would have been up versus the prior year and the prior quarter. In terms of the large losses, my answer was intended to give an example of the kinds of claims that can drive large loss impact. And so specifically we can have a reserve put up on a large loss that turns out to be insufficient, and then we have to correct that. In the same way, we can see the opposite happen. This is pretty standard, but it has the prior quarters.

Yeah, I'll just add, Josh, in Q3 we saw some major CAT events and what Jen

generally just happens there is that oftentimes reporting comes in later, so oftentimes the claims aren't being recorded. This isn't the kind of claim that the AI handles anyway. This is handled by humans, by professionals, and oftentimes we tend, as Tim already intimated, we tend to be conservative. We've had many, many more quarters of positive development than adverse development. But when you have a relatively small book, a few homes can swing things one way or another, particularly in cap season, and that's what happened to us this time.

And so I'm not wrong saying that half the increase in the loss ratio was due to attritional increases because your business mix has gone up. So maybe the new loss ratio for lemonade not going much around as close to the low to mid 80s.

I think that would only be true if we weren't seeing and planning for improvements in the overall last ratio for the newer products. So as we saw consistently with renters over a number of years, uh, an improvement in the loss ratio from a couple of hundred percent to well below our current overall loss ratio, we'll expect to see for our newer products. Home is relatively, it's not new in terms of time, but it's new in terms of its magnitude. and PET certainly, which is now a fairly significant part of our book, heading towards 20%, those have higher loss ratios currently, but we don't expect those loss ratios, those current loss ratios have been fully optimized. And over time, we expect the net overall of the book to be around that 75% or so level. Thank you for the answers.

Darren Kinnar of Jefferies. Please go ahead.

Thank you. Good morning. First question on clearly still differentiated and very strong growth there. I think it's nearly half of the growth rate we've seen achieved over the last couple of years. And that's even as you're seeing traction and increases in premiums per customer. So can you maybe elaborate a little bit on why we would see some slowdown there? Is it more from the customer's side? more from the premium per customer side and why that is.

Hi, Aaron. Let me make a start, and Tim, feel free to butt in if there's anything you want to add.

The way we think about on the day that we announced it, and I think in all our communications since concluding this morning, we've spoken about risk and collapse time, but not as a new bolt-on business.

We've never thought about it as a standalone business or something that is additive in terms of its business, its replacement. And it's true in terms of our expenses, largely. So a lot of the investments that we would be making, like feature build-out and talent hire and marketing spend, we won't do some of those things because we will do them through the vehicle of MetroMile once we acquire it, or we will effectively hire. hire the Metromile people and acquire the Metromile technology, etc. So in our operational plans, we don't think of Metromile as being a bolt-on or an addition, but being organic and being part of our car launch plans. I say that because that gives you our perspective on the year, which is that we're going to see a 70% year growth based on the guidance that we're providing, and this year was a 78% year growth. So it's very much in line with the kind of growth that we saw in 21. We'll see a similar rate of growth in 22, albeit with substituting some of the things that we would have built in-house and some of the investments that we would have made on our own with investments that we are acquiring and markets and products that we're acquiring through Metromile. But we do intend to keep up the pace of growth, and I think 2022 will be very similar in terms of its top line and other metrics of growth to 21.

Only thing I would add is that in terms of our addressable market and our view of long-term growth, we've never been more bullish. I think with renters, I think it's fair to say that our market share, particularly in new renters to the market, has gone from zero to fairly significant over the past few years. But when you layer on home, pet, car, and life and beyond, those are extremely large markets, many multiples of the size of the renter's market. We're just sort of scratching the surface on those. And so our growth rate is something we're quite focused on, but balanced growth, optimized growth, integrating Metro Mile, getting CAR moving out, those are almost as equally important as what the overall growth rate is. And the TAM is something that we think is important to keep our eye on.

Understood. And then my second question is, Regarding your comments on 2022 being a peak loss year with improving trends, I think, in the second half of 2022, I just want to be clear. Does that statement hold true with Mile, or is it really for the existing book of business that you have?

I think it largely holds true with Metro Mile, with a couple of exceptions. So, obviously, with the integration of two companies, there will be a step change that is – will create a different curve to the year in terms of spending growth and expenses than we would see without that. But absent that sort of step change, I would expect to see a consistent pattern with what we've seen in prior years. And that is true, I think, for peak losses as well. So with Metromile, There will be some bit of cost and investment that comes with it, but as importantly, a significant amount of in-force premium. They reported just shy of $115 million as of the last quarter, and we expect a substantial proportion of that to come across, as well as some cash. And so despite that step change, there's lots of... There's benefits that come with it. The other note, I think, is if you look at our pattern of investment over the course of prior years, you'll see a fairly consistent pattern with Q3 as the most substantial investment quarter. and the most substantial growth quarter with a little modest, more modest impact in Q2 and Q4. While we're not guiding to the specific quarters of this year, I would expect that pattern to persist. It's somewhat mitigated because more of our book of business is less seasonal and more so as we move into car. The seasonal impact tends to be driven more by renters and homeowners, but it's a a good view of what you might expect to see you'd find by looking back at the prior year pattern of investment over the course of the quarters.

Got it. That's super helpful. And then maybe one last very quick numbers question. Can you offer the distribution of in-force premiums by product as you've done in the past?

That's not in the disclosed materials, and I think our prior numbers sort of reiterate renters just shy of 50% and homeowners making up the difference. Cars, you know, are clearly nascent at this point. And then Metromile will move that needle considerably at $100 million plus. Thank you very much.

Our next question will come from Andrew Klingman of Credit Suisse. Please go ahead.

Hey, thanks for taking the question this morning.

I just want to get a better understanding on sales and marketing. It looked like sequentially you went from 42 million in sales and marketing expense to 37, while revenue went up from 36 to 41. So it was a good move. Could you give a little color around that decline?

Yeah, so there's a couple things happening there. So it's a typical seasonal impact. So, again, because of the scope of the home and renter's book, we do see – uh significant growth but less so in the fourth quarter than in the third quarter and that's a pattern i think that will will persist as home and renters is a majority of the book um we did see a leveling of cost increases so in terms of how many dollars we deployed to grow the customer base we keep a close eye on the ratio of lifetime value to the acquisition cost a new premium coming in relative to the acquisition cost and so we we do limit uh our spend such that if it goes way beyond what we think is economical to providing long-term value, we'll not spend too much money beyond that line. But we did see consistent kind of marketing gains. We're seeing a greater – number of dollars of premium coming in per customer. And so even though the number of customers added was very much in line with the pattern of the prior period, we added more customers in the quarter, in the fourth quarter of the prior year, and added significantly more dollars per customer. So it's a combination of those three things that's driving it.

Got it. And maybe just in general – the customer acquisition cost for new business. What were you seeing sequentially in the fourth quarter and maybe the beginning of this year in terms of customer acquisition cost, ad spending?

Fairly consistent. So, we did see some increases, excuse me, over the course of Q2, Q3, heading into Q4. fairly persistent at those levels, so not a dramatic change. We are reallocating to some extent because we're seeing good progress in the growth of the PET product, so that has a somewhat different dynamic. And we're also taking into account which channels are more and less effective, and there's a constant reallocation that's happening. But overall, I think we saw sort of a consistent view. We've always spoken – for a number of quarters of a ratio between two and three in terms of the lifetime value that we drive. That's not a hard limit, but in some ways that's kind of managed by us in terms of how much capital we're willing to deploy on growth. And over time, as Daniel mentioned, I think it's important to note that there's a real or certainly a growing potential there with our ability to cross-sell and bundle where the cost of that incremental IFP is significantly lower, in some cases zero. So that's where we'll start to see what I think is a declining reliance on direct customer acquisition and an improving balance between growing existing customers and bringing in new customers.

Very helpful. And lastly, I just wanted a little bit more clarity around the prior year development. So did I understand it right in that, you know, the homeowners claims, because they were larger, you mentioned a million dollars, Tim, that's why there was just sort of a timing issue with that? Just maybe a little color on why these prior year developments came about where you should tell. type of business?

Yeah, so I should clarify, not necessarily prior year, but prior period development. And so, yeah, and so it's the nature of, you know, both our book of business and the insurance generally, where a small number of large claims can have much greater volatility. So you don't see the risk of this as being nearly a significant redress because you've got a large number of relatively small claims, and so the puts and takes tend to even themselves out. You can still see either adverse or favorable development, but there's a greater probability just sort of law of large numbers that that's mitigated somewhat. With home, and particularly with the relatively smaller proportion still of our book of business being home, just a small number of claims can have a significant impact on the overall loss ratio. So it's sort of a quantity versus impact issue. Makes sense. Thanks so much.

Our next question comes from Katie Sackes of Autonomous Research. Please go ahead.

Good morning. This is Katie Sackis on for Ryan Tunis. I've got a question on share-based comp and how broadly it will be used next year. Is the guided $80 million for executive compensation only or is it intended to be used to recruit talent?

Our stock-based compensation includes all equity issued at the company, both historically, which is the most significant part of it, as well as for new hires, not just executives. Every Lemonade employee across the business at every level of responsibility has equity, and we have a pretty significant refresh program that we have in place to continue to have retention impact on those employees across the entire company. We will be and plan to be competitive with the market. It is part of compensation for employees, and so that's something we have factored in. There is an impact that is just a reality of having a historically volatile stock price, and I think you'll see this across other companies that had a higher price a year or two ago we live with those expenses until all of that equity is vested it's not just the new grants that impact that number and so that we expect would normalize over time got it thank you so much this concludes our question and answer session

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