Lemonade, Inc.

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.

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?

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.