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spk07: Hello everyone and a warm welcome to the Lemonade Inc Q2 2022 earnings call. My name is Melissa and I'll be your operator. If you would like to ask a question following the presentation today, you can press star followed by one on your telephone keypads. I now have the pleasure of handing over to our host today, Yael Wisner-Levy, to begin. Yael, over to you.
spk01: Good morning and welcome to Lemonade's second quarter 2022 earnings call. My name is Yael Wissner-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 second quarter 2022 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 factor section of Reform 10-K filed with the SEC on March 1, 2022, and their 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?
spk05: Good morning, and thanks for joining us to review our Q2 results and our outlook for the second half of 2022. We'll touch on a few important themes this morning, Some of these are laid out in more detail and with accompanying graphs in our shareholder letter. So if you haven't read it this quarter, I do encourage you to. Let me start by saying that our second quarter was strong, with both bottom and top lines beating our expectations. Inforce Premium, or IFP, was $458 million, and our adjusted EBITDA came in at negative $50 million. Overall, we feel that our business is beginning to hit its stride, with improving loss ratios, increasing cross-sells and up-sells, and a seasoning book. All three lead us to believe we will see peak losses this quarter, with losses declining in Q4, and even as we continue to grow, an expectation of shrinking losses year on year thereafter as we progress on our path to profitability. Let me expand briefly on each of the three drivers I mentioned, loss ratios, cross-sells, and seasoning. Beginning with loss ratio, at 86% in Q2, our loss ratio is still showing the strains of inflation, though a favorable trend line has emerged as we've shed 10 percentage points of loss ratio over the past two quarters. In our shareholder letter, for the first time, we provide an overview of our machine learning models and the projected lifetime loss ratios these generate. These are hugely powerful tools for managing our business and may be unique in our industry. Our letter expands on why it is these leading indicators rather than the garden variety loss ratios that we use in our day-to-day management at Lemonade. The upshot is that our leading indicators strongly suggest that the business we are writing today will prove profitable, even if lagging indicators take a few years to fully reflect this. Indeed, an analysis of our new cohorts gives us confidence to reiterate our expectation that our business will operate on a multi-year average loss ratio below 75%. As we explain in the letter, in a deep sense, it already is. Notwithstanding this positive trend, we do expect some bumps along the way. For one, we expect the acquisition of Metromile, about which Shai will expand shortly, to add something like three to five percentage points to our loss ratios for the next few quarters. For another, every now and then a cat event will put an unforeseen dent in our loss ratios. And thirdly, while inflation persists, regulatory approval cycles can create a lag between us identifying the need for a price change and our ability to implement it. We're being very proactive in managing this risk, but thinking with regulatory cycles in an inflationary environment is an imperfect science, and short-term mismatches of risk and rate are liable to occur. If they do, these too will present as a bump in our loss ratios. To state the obvious, expecting occasional reversals is entirely consistent with our expectation that on a multi-year average, our loss ratios will be sub-75%. And as a reminder, we have a robust reinsurance program that shields our EBITDA from the worst effects of short-term spikes in loss ratios. Shifting to cross-sells and upsells. In Q2, almost one quarter of our sales were cross-sells or upsells. That's an all-time record for us, and it's part of a steady up-and-to-the-right progression that we've been tracking for some quarters. In the few markets where Lemonade Car has launched, the numbers are better yet, and about a third of our business in those states is from cross-sells and upsells, sales that typically have zero marketing costs associated with them. In this sense, too, the acquisition of Metro Mile and our continued rollout of Lemonade Car bode well. While accounting for a quarter or even a third of new sales, only about 4% of our approximately 1.7 million customers have more than one Lemonade product today. I say this to highlight that while we're making solid strides, we've barely begun to unlock the potential of growing with our customers. This has long been a core plank in our strategy, and it's gratifying to see the impact it's having in recent quarters, let alone to extrapolate to where this can go over time. The third trend I wanted to highlight is that we are fast approaching the tipping point where the return on our earlier investments outstrips the costs of new investments. It's not just that more and more of our sales are zero-cost cross-sells or upsells. It's also that more and more of our book consists of seasoned products and customers. We have said all along that while the cost of launching new products, new markets and acquiring new customers are heavily front loaded, these will prove profitable in the fullness of time. That's what's happening. The passage of time is steadily moving more and more of these undertakings from the investment column to the return on investment column. Here to its early days, and that's good news. To underline the point, consider that almost three quarters of our premiums in Q2 were from customers who have been with us less than two years, and none of our pet or car customers have been with us that long. So while our book is more seasoned than it was, it remains unseasoned by comparison to what it will be, and indeed in comparison to what our competitors enjoy today. The passage of time, in other words, is on our side here too. The upshot is that even as we continue to launch new products in new territories to new customers, we have turned a corner. We expect our losses to peak this quarter, Q3, and to continue to shrink thereafter, charting a clear path to profitability. And that path to profitability brings me to my final update. Being public with a highly liquid stock means that capital is readily available to us, but the costs of capital have jumped considerably. and with about a billion dollars in the tank, we see no need to be dependent on further capital raises. So we've changed gears with the aim of reaching profitability without having to top up. This means we've decelerated our spending on growth and hiring. As Tim will detail in our guidance, this will result in a more rapid improvement in our EBITDA, a slower rate of growth, and, we believe, no need for further fundraising. To be clear, we will continue to execute on our strategy just at a moderated clip. We're changing pace, we're not changing course. And even as our losses shrink, we will continue to grow, though not at our full potential. We think that's the right trade-off while costs of capital are elevated, though it's a trade-off we will revisit as the costs of capital wax and wane. To wrap up my comments, I'd say that our business is doing what it was designed to do. Our past investments in new products, customers, and markets are bearing fruit. We believe we are nearing the point of peak losses and on a path to profitability, and we've moderated our pace so that we can reach the end of that path without being forced raises of capital. And on that note, let me hand over to Shai for some updates on our acquisition of Metromile. Shai, over to you.
spk12: Thanks, Daniel. We closed the Metromile acquisition just under two weeks ago and are feeling very good about how the deal shaped up. Let me start with some numbers. We issued less than $145 million worth of stock for this acquisition and in return received over $155 million in cash and equivalents. nearly 100,000 new customers, over $110 million of IFP, a 49-state licensed insurance entity, and telematics driving data from about half a billion road trips. The number of states where we are live with a car insurance product jumped from 3 to 10, and this segment leapt from 1% of our IFP to about 20% overnight. Daniel touched on the cross-sell implications of a wider footprint for our car product, and this deal is certain to pay dividends in how fast we can grow with our customers. But probably the most exciting part of the transaction is the data, the data science models, and the car experience teams that are now part of Lemonade. 10 years ago, Metromile pioneered the use of continuous driving data feeds to predict losses per mile driven. It is this decade-long head start now powered by the Lemonade experience and technology that makes this combination so promising. Metromile's car mount and sensors have been driven across billions of miles, generating unique and proprietary datasets. These were cross-referenced with hundreds of thousands of claims, closing the loop and enabling driving behaviors to be scored for risk with great granularity. Auto insurance is an extremely competitive market with a steep learning curve that can prove to be unpredictable and costly. The most vulnerable time in the life of an insurance product is during its early years, before data accumulates. Incorporating Metromile's decade-long data and knowledge means reducing that risk and spending less cash along the way. In addition to skipping some of the painful learnings of the car business, the deal also delivers some meaningful synergies. Having a single tech stack, a single brand, a unified team, and a unified product line is far cheaper than funding competing brands, competing teams, competing systems, and siloed products. For all these reasons, we have high expectations from this deal and from the lemonade car more broadly. But it's important to know that we're not planning to rush it. And for those of you who are looking for hints on how CAR is doing based on number of policies sold, Please know that we deliberately throttle the growth of CAW and plan to take the next several quarters to ensure we grow with a healthy loss ratio and acquisition economics. And with that, let me turn it over to Tim. Tim? Great. Thanks, Shai.
spk02: I'll give a bit more color on our Q2 results as well as expectations for the third quarter and the full year, 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 54% in Q2 as compared to the prior year to $458 million. We believe that this metric is useful to understand 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 18% versus the prior year to $290. This increase was driven by a combination of increased value of policies over time, as well as a continuing mix shift toward higher value homeowner, car, and pet policies. As in the prior quarter, roughly 80% of the growth in premium per customer in Q2 was driven by this product mix shift, including cross sales, and the remaining 20% from increased coverage levels and pricing. Gross earned premium in Q2 increased 60% as compared to the prior year to $107 million, roughly in line with the increase in in-force premium. Revenue in Q2 increased 77% from the prior year to $50 million. The growth in revenue is driven by both increase in gross earned premium as well as a modest reduction in the proportion of premiums ceded to reinsurers, which was 70% in the quarter as compared to 75% in the prior year. Also of note, our quota share reinsurance structure changed as of July 1st, 2022, as it did a year ago at this time, such that we began to cede 55% of our premium to reinsurers for the treaty year that ends June 30th, 2023. For the year just ended at June 30, 2022, we were ceding 70%, as noted. And our guidance does reflect this change. Our gross loss ratio was 86 percent for Q2 as compared to 96 percent in Q4 2021 and 90 percent in Q1 2022. Operating expenses excluding loss and loss adjustment expense increased 28 percent to $87 million in Q2 as compared to the prior year. And this is primarily driven by increased personnel expense, stock-based compensation expense, and legal and professional fees, partially offset by the impact of increased sales and marketing efficiency. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and to support geographic product expansion and thus saw increases in each of the other expense lines as compared to the prior year. Global headcount grew 52% versus the prior year to 1,135 with a greater growth rate in product development and underwriting teams. Notably, Our headcount is essentially flat versus six months ago, up less than 2% as we continue to see efficiency gains in personnel expense. Our net loss was $67.9 million in Q2, or $1.10 per share, as compared to the $55.6 million we reported in the second quarter of 2021. While adjusted EBITDA loss was $50.3 million in Q2, as compared to $40.4 million in the second quarter of 2021. Our total cash, cash equivalents and investments ended the quarter at approximately $1 billion, reflecting primarily a use of cash for operations of $80 million since year end 2021. And with these goals and metrics in mind, I'll outline our specific financial expectations for the third quarter and an updated view of the full year of 2022. For the third quarter of 2022, we expect in-force premium at September 30 of between $595 and $600 million, gross earned premium between $127 and $129 million, revenue between $63 and $65 million, and an adjusted EBITDA loss of between $74 and $69 million. We also expect stock-based compensation of expense of approximately $16 million, Capital expenditures, approximately $3 million. And we also note that we expect our share count, which will be weighted for additional shares issued in connection with the Metromile acquisition, to total approximately 67 million shares at the end of the third quarter. For the full year of 2022, we expect in-force premium at December 31 of between $610 and $615 million. Gross earned premium between $476 $480 million, revenue between $236 and $239 million, adjusted EBITDA loss between $245 and $240 million, and we expect stock-based compensation expense of approximately $60 million, capital expenditures of approximately $10 million, and a share count weighted again for the additional shares issued in connection with the Metromile acquisition, totaling approximately 70 million shares for the fourth quarter. And as Daniel noted, we do continue to expect that Q3 will be our quarter of peak EBITDA losses. And with that, I would like to turn the call over to Shai.
spk12: Shai? Thanks, Tim. We'll now turn to the top-voted shareholders' questions submitted through the SAI platform. And we'll start with Paperbag, who's asking how we expect Lemonade Car to be rolled out in terms of availability and customer count, specifically calling out Texas, California, and New York. And some others, including Matthew S., also asking about Lemonade Car and the impact of Metromile on the mix. So I covered much of this in my earlier comments, and our letter touched on it too, so I hope you feel you've received answers, but let me add this. We plan to proceed expanding our car business with both excitement and humility. Excitement because the opportunity appears endless, People love the product and we can't wait to see it used across the nation. But there's also humility because we appreciate the complexity involved in getting a car insurance product growing fast while achieving profitability. Going back to our comments in the shareholders letter, we use machine learning LTV models to decide where we spend every marginal marketing dollar. Our models take many parameters into consideration, including the cost of acquisition, the churn, loss ratio, and even potential cross-hits. Right now, our latest model, LTV6, is pointing our growth teams towards more profitable targets, such as our pet product. This brings me to another point, which is competitiveness. Beyond having a superior experience, the key to creating a competitive car product and growing it fast is price. Now, it's important not to confuse having the best pricing with having the lowest prices. These two are not the same. And to be able to compete on price while achieving profitability, you need to be able to separate the good drivers from the risky ones better than the competition does. And that's where telematics comes in. The idea of using telematics for insurance has been around for a long time. But for traditional insurers, incorporating telematics is easier said than done. Two decades after Progressive introduced telematics, their usage of that technology massively lagged their own. In fact, it has been estimated that less than 4% of Americans with car insurance have telematics. And even those 4% almost always turn it off after two weeks. Because two-thirds of drivers drive less than average, Most drivers who use telematics could see 30% to 40% savings if they were properly passed on to them. That's great news to us, but not really for incumbents with tens of billions of auto insurance dollars on their books. For them, wholesale adoption of telematics and truly matching rates to risk would likely lead to huge losses of revenue as they'll require massive rate cuts for most of their books. It also means they'll likely need to do a major rate hike for the remaining third of the book, which can lead to massive churn. Unlike the 4% telematics adoption in the market, we are seeing a number closer to 90%. And the option of that is that our wholesale adoption of telematics allows us to graduate from pricing, which is mostly based on car make and model, as others have done for generations, to a pricing that's based on actual driving behavior. Having said all that, we're still looking to be very intentional about how we grow this business. And with car now being 20% of our book and over $100 million in IFP, we need to improve its loss ratios before we seek to grow it aggressively. Oh, and to the question about availability of car in Texas, California, and New York, as the MetroMile deal closed, we're now live in California. We're actively working on Texas and New York and expect to be live in both states, among others, within one year. The next series of questions were around our cash flow. More specifically, Darren asked if our risk of failure is substantially lower today than it was at the time of our IPO, just a bit over two years ago. Jacob J. asked whether we will need to raise capital again. So Daniel's introductory comments in our shareholders letter detail how we're thinking about the cost of capital and how we believe that we're putting ourselves on a course to be cash flow positive without additional rates. I trust that this answers most of the questions on this topic. But in a more direct answer to Darren, our business has de-risked significantly since the IPO. What we described as our expectations and aspirations at the time has by and large turned into reality. For example, at the time of our IPO, we were a monoline business with a plan to launch additional products and turn into a multiline carrier. In the two years since, we've launched not one, nor two, but three products, Pet, Life, and Car, making us the only multiline insurtech in the U.S. At the time of our IPO, we told shareholders that a big part of our strategy was actually growing with our customers and meeting their insurance needs as they go through predictable lifecycle events. Two years later, our cross-sells and upsells account for about a quarter of our sales and growing. At the time of our IPO, we had under $300 million in the bank. Today, we have approximately $1 billion. So by all measures, pretty much, Lemonade is significantly de-risked. At the same time, we don't for a second believe that we have delivered on our potential and believe that we have decades of growth potential ahead of us. De-risking is nice, but it isn't our destination. Becoming one of the largest, most advanced, and definitely most loved insurance brand in the world is. Lastly, we have some questions around our stock price. Jacob J. asked if lemonade shares are fairly valued at the value of $20 And if we see a buyback plan at these levels as being a good capital allocation. To be honest, with all that's going on with the world and the markets right now, our share price doesn't really preoccupy us. Our job is to manage the company and not the stock, which is a good thing because share prices are overwhelmingly driven by factors beyond our control, such as monetary policy and investor sentiment. As for buybacks, those are excellent for companies with access capital rather than access opportunities. That's not us. Our capital is there for growing our business, and that's where it will go. And with that, let me hand the call over to the operator so we can take some questions from our friends on the street.
spk07: Thank you. If you would like to ask a question, we invite you to press star, followed by one on your telephone keypad. If you change your mind and wish to withdraw your question, you can press star followed by two. And when preparing to ask your question, please ensure that you are unmuted locally. Our first question today comes from Michael Phillips of Morgan Stanley. Michael, over to you.
spk03: Thanks. Good morning, everybody. First question, kind of a high-level question. If we go back not too far from kind of the formation of Lemonades, Your target customer was those that the incumbents didn't either want to touch or couldn't because of their cost efficiencies. These were customers that were, you know, you described as first-time. A lot of them were first-time insurance buyers. And your idea was to please and delight them over time, I think using some of your words, so that as they matured, they would stay with you and, you know, get a car, get a house, get a pet. and stay with lemonade. And that led to a certain marketing strategy, I think, on your part of target customers. So the question is, you know, now you're not just a monoline company and have done a great strides and kind of extended wings. But to what extent does this different kind of company lead to a different marketing strategy, and a different customer base that's no longer looking for just that one policy, but the multi policies that you offer?
spk05: Michael, good morning. Thanks for the question and appreciate your memory of the things that we said all those years ago and gratifying. At a fundamental level, the strategy is unchanged. So we do still see the majority, even overwhelming majority of our customers arriving not from a competing brand where we've enticed them to switch and save as the whole industry does, but rather picking the fruit off the tree, getting customers coming in for the very first policy. So that core element of our strategy remains very powerful and does account for the majority of our book. Indeed, as best we can tell for the majority of our new sales as well. But a couple of things have changed. So one is that we now have multiple entry points. So back in the day, really renters was the only on-ramp that we had so if you weren't looking to enter the insurance world through renters we probably weren't able to um attract you today maybe before you're renting you have a car or maybe before both you have a a pet you know or you need a life policy you've just had your first child so we are finding that the new products that we are offering are not merely cross-sell opportunities. They are also incremental on-ramps. And depending on the product, we do still see that the majority of those customers, as best we can tell, the data on this is not cut and shut, but as best we can tell, are still third-time buyers of insurance more often than not. The second thing that's changed, of course, is that an increasing portion of our policies are now not to new onboarded customers, but to the existing install base. So if we're somewhere in the ballpark of 1.7 million customers now post the Metromile deal, we do now have a huge value unlock in selling to them. So an increasing portion of our sales aren't new sales at all to existing customers, but that's very much in accordance with the strategy as you correctly summarized it.
spk09: It's just a more mature application of that strategy.
spk10: Okay, thank you, Daniel, for that. That's helpful.
spk03: The second question I have, I'm going to preface by saying it's my lack of understanding of your machine learning and your AI, clearly much different than yours. But help me here, when you talk a lot of discussion on predicting lifetime loss ratios, and in fact, for each customer that you onboard, you can do that. And so I want to be able to understand how, you know, if I had to pick between two companies where company A had a mature, been around for a long time, mature, stable customers, and didn't have a lot of changing of its mix versus a company that did have those things. I think I'd feel more confident that they could say those things. And so help me understand how, you know, for a company that 73% of the premium comes from customers that's been with us less than two years, how do you have confidence that you can predict these lifetime loss ratios with such a changing mix of business? That's just something I want to try to understand. Thank you.
spk05: Sure. And, you know, paradoxically, the company like ours, where, as you say, you'd have the least history is the place where you need it the most, a business that is unchanging, where this quarter looks very much like the same quarter the year before or 10 years before. Lagging indicators really do a decent job because nothing changes. So the result may come in lagging, but it's the present looks very much like the past and therefore lagging indicators are up to the task. It is because I put it to you that we are fast evolving, that we need leading indicators rather than lagging indicators. So that is really the value of this is that for us managing the business, if we have to wait many months, let alone many quarters to get a read on the impact of changes that we're taking now in the product, in the flow, in a rate changes, um in our marketing campaigns if every time we make a change and we noted in the letter we've done 12 000 software changes in the last year if every time we did change we had to wait such a long time to know whether it was thankful or not our ability to correct course and to move fast would be just you know overwhelmingly hampered which is why internally we do use these leading indicators in more direct answer to your question We now have enough confidence in the fidelity and the predictive power of these machine learning models to rely on them. It doesn't mean that they are flawless. I'm sure they are not. And we definitely see with every generational build out of these machine learning, we see the flaws in the prior model and we gain confidence. But we do now believe that they have not statistical significance, but sufficient precision for them to be far better guides for how we should take corrective actions than the alternative. The ability to move at the speed that we have and to iterate quickly based on leading indicators, even if they are imperfect, results in a closer to perfect outcome than if we waited on the lagging indicators.
spk09: It's probably worth adding a comment.
spk02: Yeah, I just thought I would add a comment, if I may, around just an aspect of our unit economics that I think it's helpful to keep in mind in this conversation. It's common that companies think about their current lifetime value, their theoretical future lifetime value, and how that can be optimized. And there's moving parts in those calculations, but there's one thing that's relatively unique in insurance, number one, versus other sectors, and at lemonade especially. And it's our price points. And so if you think about our average customer premium or premium per policy, it still starts with a two. And it's about to start with a three with the addition of Metromile. And so in an industry where if we take one theoretical customer of ours who has all of our policies, and we have a few of those, that's a $3,000 premium per year customer versus our average is around 300 or a 10x increase. And that 10x ratio, while it's difficult to get that for every customer, you can certainly get that for hopefully a good number of customers over time. That 10x ratio really changes the dynamic of all of this valuation and consideration of what LTV is and what LTV can be over time. if you take that three thousand dollar customer and and age them a little bit make them a little wealthier and maybe they get another car and a bigger house that three thousand number can be ten thousand in terms of the annual premium per year and so this is a this is a across the technology world this is not a common thing where you're able to get 30 times uh what what your starting customer gets it's possible but it's quite rare and it's more common in insurance And Lemonade really is, if you look at, kind of dig through all the metrics that we share, that's the one I think that maybe gets missed the most often is we're just getting started, you know, a $300 number and where that can go over the coming years.
spk04: So it really changes that LTV value dynamic for us. Yeah.
spk03: Thanks, Tim. That makes a lot of sense. Thank you. Last question. to your comments of not spending or little to no spend of marketing dollars in the near term on the metromodal new customer system, and get your point of, you know, you talked about a number of points you're going to add in the near term to your loss ratio, but to not spend in the near term marketing dollars for new customers there, can you help to sell any kind of comments that does that mean something in terms of confidence of kind of a customer base, the data, or the tech that you acquired there?
spk05: No, not at all. Not at all. The integration is real work. We have a pretty good sense of what's involved. It's well underway. But today, any dollar that we spend on Metromile is not spent on the lemonade brand for one. So suddenly we'd be investing in another brand. Our goal is to have a single brand. Shai spoke about the efficiencies of having a single brand. We haven't moved on to our tech. We are going to have a single brand. tech stack. We're determined to do that, which means we have to port everything over. We're always going to have a unified single tech stack. And the policies that we sell would be still on the old technology, et cetera, et cetera. So just as you go through each of the elements, we haven't got all our filings done where we can do bundling across the Metromile product and Lemonade product. So in each area, there's work to be done. And when that is done, we'll be very happy to spend against this. but we just think it would be suboptimal to spend those dollars today.
spk09: We're gonna wait until the integration is complete.
spk04: Okay, makes sense. Thank you very much for your answers. Thanks, Michael.
spk07: Thank you for your question. Our next question today comes from Thomas McJoynt of KBW. Thomas, over to you.
spk06: Hey, good morning, guys. Thanks for taking my questions here. Are there any updated statistics on the graduation phenomenon from renters to homeowners that you could share? I understand the timelines there can be long and somewhat lumpy from quarter to quarter, but what are the concrete signs of that graduation playing out as expected? And just to confirm, is the incremental customer acquisition cost truly zero for those graduates?
spk05: Hi, Thomas. The graduation has continued unabated. So we've seen a steady up and to the right. If I'm not misremembering, every single quarter since, certainly since prior to our IPO, we've seen the percentage of our homeowners book that has come in through graduation has increased. The latest numbers that I saw, this may be very approximately wrong, but it's almost precise, is that 20% today of our h06 which is the condo um failed 20 of that book are people who graduated they started with us as renters and um they graduated and for homeowners which is the kind of next leg in in people's graduation it's north of 10 so it is pretty significant um and continues to grow in a steady grip the incremental cost is not truly zero, but not far off. Sometimes they'll have a question that they'll want to ask or they'll need a bit of customer support or things like that. But in terms of the marketing spend, which is where the real spend tends to be, the overwhelming majority of these cross-sells and upsells happen without any CAC expenditure at all, without any marketing spend, perhaps some customer support.
spk09: But I think it would not be far off if you rounded that down to zero.
spk06: Thanks. That makes sense. And then just one other area of questions. You mentioned having processed about twice as many claims in the last 12 months as the prior four years combined. What gives you confidence that your fraud detection and appropriate claims handling there has kept pace with a substantial increase in claims volumes? And especially as you think about perhaps tightening the belt on the expense side going forward?
spk05: Yeah, that's a great question. And perhaps during our investor day, we can expand on that because there's been a tremendous amount of work done in this regard. So let me not take too much time now to delve into the depths of the technology there. And in general, when we talk about our fraud detection, we're always a little bit cagey just because we don't want to tip our hands to potential fraudsters on exactly what it is that we're doing. As I'm sure you can understand, having said all of that, actually the volumes tend to play to our favor rather than to our detriment. The systems train on volume. So, you know, if it was humans that were doing all the fraud detection, then maybe they'd be overwhelmed by volume. But since increasingly we're getting systems that are smarter and smarter and pattern recognition driven identification of frauds and using new technology, the volume tends to be wind in our back rather than a force that we have to fight against.
spk10: Makes sense. Thank you.
spk07: Thanks. Thank you for your question. Our next question today comes from Jason Helfstein of Oppenheimer. Jason, the floor is yours.
spk00: Thank you. Just want to ask a bit more about CAR. So just as you think about kind of getting the kind of unit economics up, how much of this is, you know, you think you can leverage the kind of the underwriting that Metromile had already figured out. And then as just opposed to leveraging the marketing versus needing to build your own intelligence around underwriting for Metromile. So just, I guess, how fast do you think you can kind of scale that relative to scaling that we've seen in your other historical businesses? Thank you.
spk05: Thanks. Jason, the, The data that Metromile has accrued, as Shai elaborated on earlier, is really stupendous. So no, we think that that is ready to go. Their data is able to assess risk and claims per mile driven at a level of granularity that is really quite extraordinary. the change frankly in in terms of um applying all that data tends or the the long pole in the tent if you like tends to be on the regulatory front so extracting insights and wisdom and um appropriate pricing from the data is something that we're pretty adept at and metromile brings a lot of strengths in terms of both their personnel their experience and their their data But then it can stand in line for some months, regulators pending approvals. So that's really where we find that we hit speed bumps. Those are overcome in the fullness of time, but that is challenging. Now it's compounded, that delay is compounded by particularly stark inflationary pressures within the car space. So a lot of the supply chain issues have hit car vendors and car repair shops etc disproportionately if nationwide we're seeing inflation in the eight nine percent area within the car space it's been more like 20 or 30 percent in some areas so a lot of the loss ratios that all car insurance companies have been facing are really to do with that how do you get regulators to approve the hikes that you know you need within the timeframes that inflation dictates. And that's really where the rubber hits the road, no pun intended.
spk10: Thank you for your question.
spk07: Our next question today comes from Andrew Kligerman, Credit Suisse. Andrew, your line is now open.
spk13: Thanks very much. Just curious, just statistically, what percent of your non-car business is in California and what percent of Metro Miles car business is in California?
spk05: Andrew, hi. So Lemonade's car product was never live in California. The only business we have in California in car is Metromile, and the overwhelming majority of their business is in California. They're live in a few states, I think seven or eight states, but California is their largest state by far.
spk13: And the non-car business in California, is that a big proportion? For lemonade?
spk05: Yes, yes. California represents roughly what you would expect just on a prorated basis, population size. Maybe it's used slightly disproportionately, but not out of whack.
spk13: Okay. One thing I was really curious about, you had mentioned in the shareholder letter the six-generation lifetime value machine learning model. You indicated that the fifth generation model had a disposition toward California and the sixth generation model indicated that some of that business wouldn't be profitable. And as I thought about it, there's been over the last few years a lot of concern in California, whether it's the regulators not giving adequate rate at times, whether it's the weather conditions. It's been a very tough market. So the question is, what did the new generation lifetime learning pick up that the fifth generation didn't? What was it that that fifth generation wasn't seeing?
spk05: Yeah, thank you, Andrew. The fifth generation...
spk07: Apologies, we lost connection. We're just going to dial him back in.
spk10: Thanks so much. Bear with us one moment and resume shortly, thanks. Operator? Operator, can you hear me?
spk07: Hello? Okay, Daniel is connected into the call again.
spk13: Hi, operator, can you hear me? Apologies there.
spk04: Yeah, we can hear you. Who's this?
spk13: This is Daniel. Who's speaking?
spk04: Danny, we had someone asking a question.
spk02: I just want to clarify. Was there a question on the call before we resume?
spk13: Yes. So this is Andrew, and the question was around what changed in the – you heard the question?
spk05: Absolutely. Yeah, Andrew, I apologize. I dropped off the line and just had to dial back in. But I did hear your question, and I was mid-answer when I suddenly dropped the line. I apologize. The LTV5 model absolutely identified the trends that you asked about, which is that California had a lot of places that were not profitable business to write. We were already cognizant of that and quite cautious within California, within the homeowner's business for exactly those reasons. So I don't mean to imply in the letter, didn't mean to imply that we just discovered that California is a tricky place to do business. That's not the case. What we do with every generation of the LTV is we get an ever more granular perception. So if prior we had said, okay, here's a pocket that looks like it could be profitable business in California at LTV five, it was at a certain level of specificity. LTV six allows you that extra level of magnification because one second, this looks like this is monolithic and all good. Let me subdivide that for you and show you that actually our pockets here that are good, but you also have pockets here that are bad, which is why this metaphor of the telescope or the, or the microscope helps that you can get to see stuff at a, ever increasing level of granularity. And that's what we did. So suddenly it was revealing to us that within the mix of profitable pockets within California, it was really made up of better and worse. You know, there's white blood cells and red blood cells. It's not just one monolithic blob of blood. And that's what we see as a microscope helps us to see with greater specificity. So it was a slew of different data that fed into the model. As we referenced there, it's close to a million parameters that are being used in the neural nets and hundreds of millions of parameters on which it's trained. It's hard for me to pick out one, but I think that perhaps the most influential was a greater granularity around cat modeling. One of the things that we said is that LTV6 has a far greater degree of specificity around predicting cat, and cat in California, particularly fire, is something that can lead to a great deal of losses. So if I had to guess what was driving the model's greater level of precision, I would put it down to that.
spk13: Got it. Thanks. And maybe we could even get into more on that in the investor day, but that was very helpful. Thank you.
spk05: Thank you, Andrew.
spk07: Thank you for your question. We'll be taking our next question today from the line of Katie Sackis of Autonomous Research. Katie, over to you.
spk08: Hi, thank you. Good morning. My first question, I wanted to touch on the full year enforced premium guidance that you guys shared because it implies a pretty significant slowdown in IFP added across both Legacy Lemonade and Metro Mile versus the second half of last year. So could you walk us through what you're contemplating for auto IFP over the back half of the year? What's driving the slowdown?
spk02: Sure. So that really represents our adjusted approach to We're deploying capital, and so we talked a little bit about the main drivers of that. One is certainly the pace of our growth spend to acquire new customers. This is the most significant one and a direct driver of IFP growth. It's not the only driver. As we noted, we're now getting a high 20% range of new sales from CrossFits. We expect that will continue its climb, but the majority do continue to come from growth spend. And we're also seeing a moderated pace of hiring, and that's also enabling us to drive a better bottom line, even while we continue to grow. In terms of IFP, we don't expect to spend much at all to drive additional IFP at Metromile, but we do expect that to continue to be a strong part of the business. If we look at the first half of the year, the legacy Metromile, IFP is was well above $100 million, well above $110 million. So that will have an inherent churn rate over the course of the second half of the year, but we think that will remain very strong. We'll deliver the vast majority of the CAR IFA. We'll continue to spend in support of all of our products, including CAR. CAR, essentially... one or so percent of the business, something like nearing 20% of the business in Q3 and Q4, once we pulled together the numbers with Metromile. In terms of the growth rate comparing to the prior year, it's very much driven by the growth spend. And so if you compare the, you can't see the dollars spent in the second half of the year yet, but it is implied in the guidance. And I think you'll see a marketing efficiency that's in line with the past several quarters. So the growth capital, the growth spend we do deploy in Q3 and Q4, we think will be as efficient or more so than it has been over the last several quarters. But we'll simply be deploying fewer dollars. So as Daniel said, a solidly double-digit growth rate for a very long time. The growth rate implied in the second half of the year, even just for now, is a pretty strong rate.
spk04: And that's something that we'll look at our overall capital base, if we're able to raise capital, we can certainly adjust that pace of growth. But balancing act, we're playing now. And we think we'll see a great result in Q3 and Q4.
spk08: Got it. Thanks. Do you care to give us any anticipation of when you expect to turn growth back on?
spk02: Well, we're not turning it off. We're just moderating the pace. So I would not think of it as eliminating growth spend by any means. We'll be a considerable amount, but just not, we won't see the increase that we saw in the second half of the last couple of years because of this. So we will continue to spend and we'll continue to sort of track the growth and track our path to profitability. And balance those two. If we see efficiency increase, we have tended to spend more because returns are good. And as Daniel mentioned, our opportunities to spend are vast. And we're going to work carefully to make sure the capital we have forces us to raise capital. But we do look forward to being able to increase that spend rate as soon as we see the data that supports it.
spk08: All right, fair enough. If I could just sneak one more in, I was wondering if you could help us understand the path forward for your reinsurance programs. I believe the letter indicated a gradual reduction down from the 55% session that you've reached today. But if I remember correctly, last year, we also discussed a gradual reduction down from the 70% level at the June 2021 renewals. So how much risk are you looking to retain over the next couple of years? And should we expect another 10 to 15 point reduction in your session rate next year? And then additionally, do you anticipate any material changes to the way the Metromile business is being reinsured when it's rolled into the lemonade structure next summer?
spk02: So it's probably a little premature to think more than a year out on reinsurance, although obviously internally we do think about it. The drive for our reduction over the past two years has been both strategic and structural. Strategic meaning we've been comfortable taking additional risk. As the book grows and as our loss ratios become a little more predictable and as the mix shifts become a little more visible to us, if we looked at our reinsurance structure from three years ago, you could see the tranches that were one-year contracts and the major tranche that was a three-year agreement. So the reduction from 75 to 55 is really driven by us not renewing the one-year contract We didn't renew one of them a year ago. That took us from 75 to 70. We didn't renew a couple of the other one-year deals this year, this past July. That took us from 70 to 55, and that'll begin in Q3 and forward. So next year, I think we have the opportunity to think more broadly. We've said in the past, and I think it remains true, that from a risk perspective, we can have no reinsurance. and still be comfortable with the capital we have at hand and the needs of the business with a billion dollars that we would be comfortable. And in fact, in many quarters, we've been off because there have been cases where we've been giving up potential profit. And I think if you combine that with the cohort loss ratio view that Daniel mentioned, where we can see that we're really business over time with a more attractive loss ratio, that becomes even more interesting. I think as we get closer to Q1 and Q2 next year, it'll become a little more clear what the reinsurance market looks like and what our appetite might be.
spk04: I think maybe Daniel will jump in. I think it's premature to say we're going to methodically go down any percentage point, but I would say the opportunity is an option to certainly consider, and it'll be really a look at what the terms are that are available to us and we'll know more about that in the coming quarters.
spk05: All I have to say is that for us, reinsurance tends not predominantly to be about risk management. Obviously, risk concentration is part of it, and taking out some of the surprises that just, you know, force majeure, weather patterns, stuff like that can introduce into the economics That is definitely one of the benefits of the insurance, but perhaps even even larger driver for us in recent years has been just capital efficiency. So regulatory capital, how much capital we need to set aside and the cost of capital that tend to be very different for us and for the insurance companies. And we quite aside from the risk concentration issue, which is not, will never entirely disappear, but it is solving itself or resolving itself. And as much as we're becoming multi-line multi-geography, and much larger that introduces a fundamental greater modicum of stability into the book kind of just by virtue of that. But the issue that that doesn't solve is, as I said, the capital efficiency. And now it's a question of balancing margin stacking, because re-insurers clearly wants to make a profit and that profit is earned by solving a problem fast, but it does involve margin stacking versus cost of capital. So it tends to be much more about financial optimization than it does about risk alone.
spk10: Thank you for your question.
spk07: That was our final question today. So at this time, I'd like to hand back to the management team for any closing remarks.
spk02: Great. Thanks so much. We have no additional remarks. Great to catch up today and we look forward to seeing you next quarter. Thanks so much.
spk07: Thank you. This concludes the call today. You may now disconnect your line.
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