Lemonade, Inc.

Hello and welcome to the Lemonade fourth quarter 2022 earnings call. My name is Harry and I'll be your operator today. If you'd like to ask a question during the Q&A, please press star one on your telephone keypad. I'd now like to hand over to Yael Wisner-Levy to begin. Yael, please go ahead now.

Good morning and welcome to Lemonade's fourth quarter 2022 earnings call. My name is Yael Wisner-Levy and I'm 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 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 factors section of our Form 10-K, filed with the SEC on March 1, 2022, our Form 10-Q, filed with the SEC on November 9, 2022, and our other filings with the SEC. Any forward-looking statements made on this file represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess their operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key operating metrics, including in-force premium, premium per customer, gross loss ratio, and net loss ratio, and 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 for some opening remarks. Daniel?

Good morning, and thanks for joining us to review Lemonade's results for Q4 and for the full year of 2022, as well as our outlook for 2023. 2022 posed challenges to businesses and industries worldwide in the form of soaring inflation geopolitical unrest, rising interest rates, and tumbling markets. Happily, Lemonade had a good year notwithstanding the global tumult. It's not that we were unaffected by these convulsions by any means, but we're grateful to have been able to respond in ways that blunted their force. When inflation put upward pressure on our loss ratio, we counted by upping our rate of filings eightfold. While we've not seen off the threat of inflation, we can tentatively say that it is in retreat. As the cost of capital rose dramatically, we moderated our spending so that our sizable reserves should now last the distance. As our results this quarter indicate, we believe that peak losses are now behind us and that we're progressing per our plan along our path to profitability. In parallel to fending off threats from without, we've made progress from within, launching new products, new markets, acquiring and integrating Metromile, and growing our business by two-thirds year on year. All told, with a hat tip to Churchill's precept to never let a good crisis go to waste, we ended 2022 materially stronger, better, and bigger than we entered it. Zooming in on our fourth quarter, we're happy to report strong results with both top and bottom lines coming in better than expected. Q4 was also an interesting case study of some of the challenges and surprises insurance companies face, in particular seasonality and extreme weather. On seasonality, the last quarter of the year is usually characterized by fewer renters and homeowners moving, more holidays, higher cost of acquisition, and hence slower sales. This year, probably driven by spending pullback by companies across industries, our marketing efficiencies were actually stronger than we'd anticipated, helping both our top and bottom lines, a pleasant surprise. And then there was an unpleasant surprise when winter storm Elliot inflicted misery on millions of Americans over the Christmas holiday. Such a storm so late in the year is also atypical, and the fact that our loss ratio continued its decline notwithstanding, Elliot, is suggestive of a strong underlying downward trend. In fact, we saw continued loss ratio improvements across our business very much in line with the predictions we shared in our November Investor Day. Which brings us to the year ahead, and I'll hand over to Shai to provide some color commentary on 2023. Shai? Thanks, Daniel.

In 2023, we'll focus our efforts on three key levers of our business. Growing with our customers, further improving our loss ratio, and continuing our growth. You'll read more about each in our shareholders letter, but I'd like to add some more color. Starting with ADR, our annual dollar retention, which is a helpful indicator for our growing with our customers strategy. Today, we reported that our ADR climbed four percentage points to 86%, an all-time high. Though in Illinois, where all our products, including Lemonade Car, have been available for a full year, ADR now stands at 95%, hopefully a sign of things to come. Having said that, ADR loss ratio and growth are all entwined in obvious as well as non-obvious ways. For example, We have broad efforts to continue to drive down our loss ratio to our target range, and in some cases, this includes parting ways with customers whom we cannot adequately price. Pockets of mispriced customers can always arise, but the inflationary environment of recent quarters have increased their size and prevalence. Our machine learning models have become fairly proficient at identifying these mismatches, and so we're slowing growth in these areas. Within the limitations imposed by regulation, In the more badly mispriced areas, we won't make do with slowing or stopping growth. We'll actually put growth into reverse. We'll do that by non-renewing unprofitable business. Non-renewals will put downward pressure on all three of our core metrics, ADR, loss ratio, and growth. Downward pressure on loss ratio is the point and is welcome. Downward pressure on ADR may appear to be unwelcome, though when the business we're parting ways with is a drain on our profits, this is actually welcome too. Gross profit retention, if you like, will still be going up, which brings us to the downward pressure on growth. The time lag between filing new rates and these being approved, implemented, and earned in can be considerable. Fortunately, we have reasonably good visibility into those dynamics and can target our growth accordingly. But as long as sections of the market remain mispriced, opportunities for profitable growth will remain somewhat constrained, and our pace of growth will track to the pace of new and profitable rates coming online, which is a good segue to Tim, who can provide more details on our guidance for 2023, as well as on our Q4 results. Tim?

Great. 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, and then we'll take your questions. We had a strong quarter of growth driven by addition of new customers, a portion of them related to the Metro Mile acquisition, as well as a continued increase in premium per customer. In-force premium, or IFP, grew 64% in Q4 as compared to the prior year to 625 million dollars. Absent the impact of the Metromile acquisition, organic annual growth was approximately 38%. We believe that IFP 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. Our customer count increased by 27% to 1.8 million as compared to the prior year. And premium per customer increased 30% versus the prior year to $346. This increase was driven primarily by the Metromile acquisition impact, and to a lesser extent, a combination of increased value of policies over time, as well as a continuing mix shift toward higher value homeowner car and pet policies. Annual dollar retention, or ADR, increased by four percentage points to 86%, a new high. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases, and churn. Gross earned premium in Q4 increased 69 percent as compared to the prior year to $151.3 million, roughly in line with the increase in enforced premium. Revenue in Q4 increased 116 percent from the prior year to $88.4 million. The growth in revenue was driven by the increase in gross earned premium as well as a reduction in the proportion of premiums ceded to reinsurers to 58 percent in the quarter. as compared to 72% in the prior year. Our gross loss ratio was 89% for Q4 as compared to 96% in Q4 2021 and 94% in Q3 of 2022. The impact of CAT in both Q3 and Q4 was notable, with Hurricane Ian impacting Q3 and Winter Storm Elliot impacting the end of Q4. Absent the impact of all CATs in Q3 and Q4, the underlying non-CAT loss ratio showed solid improvement of roughly nine percentage points from Q3 to Q4. Operating expenses excluding loss and loss adjustment expense increased 12 percent to $95 million in Q4 as compared to the prior year. This increase was primarily driven by increased personnel expense, stock-based compensation expense, and legal and professional fees in large part due to the Metromile acquisition partially offset by lower sales and marketing expense. Other insurance expense grew 68% in Q4 versus the prior year, roughly in line with the growth of earned premium. Sales and marketing expense actually declined by $10 million, primarily due to lower growth acquisition spending to acquire new customers. Offset by certain one-time software expense rationalization costs that we expect will reduce future recurring expenses. Technology development expense increased 43%, primarily due to increased personnel and hosting expenses to support customer and product growth, while G&A expense increased 35% as compared to the prior year, but notably decreased by $9 million as compared to the prior quarter. We also continued to add new Lemonade team members in all areas of the company, though at a much more modest pace than we've seen for several quarters, in support of customer and premium growth and geographic expansions. Global headcount grew 22 percent versus the prior year to 1,367, primarily due to the impact of the closing of the Metromile acquisition in July. Absent the impact of the Metromile acquisition, year-on-year headcount would have remained roughly flat. Net loss was $63.7 million in Q4, or a loss of 93 cents per share, as compared to the $70.3 million net loss we reported in the fourth quarter of 2021. or $1.14 per share, while our adjusted EBITDA loss was $51.7 million in Q4, nearly identical to the $51.2 million net EBITDA loss in the fourth quarter of 2021. Our total cash, cash equivalents, and investments ended the quarter at approximately $1 billion, reflecting a use of cash for operations and capital expenditures of about $163 million since year end 2021. offset entirely by an increase of about $165 million acquired in conjunction with the Metromile acquisition. With these goals and metrics in mind, I'll outline our specific financial expectations for the first quarter and full year 2023. In the first quarter, we expect in-force premium at March 31 of between $635 and $637 million. gross earned premium of between $148 and $150 billion, revenue between $87 and $89 million, and adjusted EBITDA loss of between $65 and $63 million, stock-based compensation expense of approximately $15 million, capital expenditures of approximately $2 million, and our share count weighted for additional shares issued in connection with the Metromile acquisition, totaling approximately 70 million shares. For the full year 2023, we expect to enforce premium at December 31 of between $695 and $700 million, gross earned premium of between $632 and $636 million, revenue between $375 and $379 million, and adjusted EBITDA loss between $245 and $240 million, stock-based compensation expense of approximately $60 million, capital expenditures of approximately $8 million, and a share count for the full year totaling approximately 72 million shares. And with that, I would like to hand things over to Shah. Shah?

Thanks, Tim. We'll now turn to the top-voted shareholders' questions submitted through the SAVE platform. The first question is coming from Darren. who is asking about our thoughts on the increase in Glassdoor negative reviews in relation to our customer support team. Well, Darren, we take all of our employee feedback very seriously and have put in place tools and procedures to make sure everyone is able to speak up and help us become better. From day one, we've instilled a culture of openness, directness, and hunger for feedback. In fact, being direct is one of our core values. Our managers are all trained to embrace failure as much as they celebrate success and ask their teams to provide them with direct feedback on what's working, what's not, and how they're doing as managers. Several years ago, we implemented an anonymous employee feedback system and since then collect extensive feedback from employees constantly and act on it when needed. Within our existing team and through the anonymous system, which we think is the most reliable, we haven't seen any decrease in satisfaction in the last six months. In fact, during that time, we've seen an increase in engagement and ENPS across our teams as well as by our customer service organization. While we appreciate sites such as Glassdoor and recognize their place in the job market, They fail to serve as a reliable operating data source for us, and we prefer to be guided by the more dependable, nuanced, and benchmarked data sets that our tools provide. On the next question, Paperbag wanted to know what are the ways we're reducing costs and overhead, and how do we plan to reduce costs further and become as efficient as possible? Hey, Paperbag. Thanks for the question. Efficiency is something we've been seriously monitoring since we started. In fact, I wrote several posts about our vision of the autonomous organization and how we're using technology to lead the market in our efficiency. We're big believers in automation, and this has been in the company's DNA and plans from the very beginning. For example, our operating expenses in Q4 versus Q3 decreased by about 13%. And for sales and marketing alone, this decrease was 24%. Efficiency is something we're laser focused on, and I hope these examples help show that. More generally, I'm happy to say that much of the costlier tech infrastructure building is behind us. And due to that, we slowed our headcount growth significantly. Here are a couple of data points to help demonstrate this. The first is that our IFP per employee increased by 35% during 2022. Second is that our expenses, as a percent of our gross earned premium, improved by 32 percentage points during the same period. It's worth underlining that this progress was notwithstanding our acquisition of Metromile, which added considerably to our expense load in the short term. And while we're still in the process of integrating Metromile's core systems, in the fourth quarter, we discontinued dozens of high-cost services which we no longer require as a combined entity. It's also worth noting that our expense ratio today is built for scale, and we should be able to continue to grow very significantly without a matching increase in costs. This is important. because getting to our target expense ratio will require a combination of expense control, the numerator, and growing our business, the denominator. The superpower of technology and automation, as you know, is most pronounced at scale, and that will be true of Lemonade's efficiency too. The third question is coming from Anand, and he's asking, when is Lemonade planning to offer Metro Mile Auto to all states? Thanks, Anand. I assume that by Metro Mile Auto, you mean pay-per-mile car insurance. In terms of our rollout plans, beyond reiterating our long-term aspirations to offer all products to all customers, I'm afraid we don't pre-announce specific rollouts. All I will say is that we're impatient to get these great products into the hands of as many of our customers as possible and as soon as practicable. In the next question, we were asked How confident are we that our loss ratio will improve, that customer churn will reduce, and that we can cut operating expenses significantly, and why? On all points, loss ratio, retention, and reducing expense load, we do see encouraging trend lines and reason for continued optimism. This quarter's results reinforce this with loss ratio declining, dollar retention climbing, and greater efficiencies than ever before. And I shared some stats on this in my answer to paperback. In short, though, our confidence in continued progress comes from our technology and how fast it's learning and impacting our KPIs. As our systems become more sophisticated and training data sets become more expansive, we become better at pricing and selecting risks, which translates into healthier loss ratios. We become better at automating processes like customer support and claims, which translates into healthier expense ratios, and we get better at delighting and cross-selling to our customers, and that translates into growing customer and dollar retention. That's the short answer. To get a full answer with examples, statistics, trend lines, and projections, I'd encourage you to watch the presentation from our November Investor Day, where we provided detailed explanations for what we're seeing. And with that, let me hand the call over to the operator so we can take some more questions from our friends on the street.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. Our first question today is from the line of Jason Helfstein of Oppenheimer. Jason, your line will be open now if you'd like to proceed.

Thanks. Two questions. The first kind of big picture and the second more specific. So it appears that AI technology is going to be, in time, easily licensed from Microsoft, Google, probably Amazon, to whatever companies want to use it, and probably more cost-efficient and easier than would have been available. How do you think that impacts Lemonade specifically, as well as your competition broadly? So that's a big-picture question. And then just second, Kim, Can you talk about how the loss ratio in the quarter was impacted by business mix to the extent we were comparing it to last year's loss ratio? Thanks.

Hey, Jason. So I'll take the first bit and then hand it back over to Tim. We're deeply gratified to see the real explosion of kind of third wave AI that's captured a lot of imagination. It was curious for me, we opened, as you may recall, on November Investor Day, with examples of generative AI and what it can do and it was really a week or two later that chat GPT came out and it exploded into the into kind of common knowledge and people have been talking about little else for the last few months in the AI world so no doubt these technologies are becoming incredibly powerful and far more pervasive and available so I accept the premise of the question but in a way that is important to understand, I think, and we try to touch on it in the November presentations as well. If you haven't built your company, if you haven't architected in such a way that the AIs have access to deep and textured and precise information, It's really hard to see how it's going to glean the kind of insights that we've built our business upon. So data sets that have been built up over generations that are disparate, that are not entwined, are going to be very, very difficult for AI to really mine in a highly efficient way. And broker-based distribution systems and human interfaces of all kinds are going to make it harder again for them to get high-precision training data sets. So we do feel like we have architected our business from the ground up and from day one have spoken about Lemonade as being built for AI. It's very au fait to say that today, but we've been saying that consistently since the day we were founded, which is why we believe that we'll be able to leverage these capabilities as they mature in a way that, frankly, is unmatched by any of the incumbents. Tim, let me hand over to you to tackle the second part of Jason's question.

Sure. Sort of shift gears to the loss ratio and the cat impact and some of the seasonality I think you're getting at, Jason. So in the fourth quarter, we did see cat impact as we have also in the third quarter, which tends to be the highest impact, but two pretty significant storms. And so one of the things we highlighted in the letter that we put out and materials we put out is that Absent all the CAT activity, we saw significant underlying improvement in the loss ratio sequentially, something on the order of nine points of improvement. So while the seasonality is something that is unpredictable but consistent, meaning Q3 tends to be higher but you don't always know what the impact is, absent all of that impact, about a nine-point improvement. And then A similar result as compared to the prior year in the fourth quarter. So if you strip out, again, all of the CAT impact, we would have seen something on the order of a seven-point improvement. So really, with or without, just about any comparison showed the continuing underlying improvement in the loss ratio in Q4. Thank you.

Great. Our next question is from the line of Josh Shanker of Bank of America Merrill Lynch. Josh, please go ahead now.

Sorry about that. Yeah. Hello. My question is more longer term. If we think out five years into the future, what is an appropriate loss ratio for the mix of business that Lemonade has? And what's the appropriate loss ratio for the incumbent carriers at the same time?

So I would think we're better able to answer from our own perspective as compared to the industry. So I'll start with that. So from Lemonade's perspective, a loss ratio that's well under 75%, if not under 70%, is the long-term plan and the long-term goal. We've seen that already in a subset of our business. If we isolate renter's insurance, for example, we shared a little more granular detail in our investor day, and so we can see where we've already achieved that with the more mature products. There will certainly be volatility quarter to quarter, and there's a seasonality impact, but that continues to be the long-term goal, and I think we've started to see and will continue to see the impact of a pretty dramatic increase in rate filings, which we expect will continue to move us fairly rapidly toward that goal, not just over five years, but over the coming quarters. In terms of the industry, I'm a little more reticent to say what's appropriate for the other players. I think we're pretty focused on our path to profitability and our loss ratio. And I think with the rate filings we have in place and coming online, We expect that we'll see good results in the coming quarters on that.

And one thing that I guess I'll just follow up. You said that you're already seeing those sort of numbers in the renters area. Should we expect long term that renters have a much better loss ratio than the rest of the product? That's the case for the industry. But should we expect that Lemonade actually thinks that renters should have approximately the same margins as the rest of the business? or will it be like the rest of the industry where renters are materially better loss ratio business than everything else?

So maybe two ways to think about that. So one, yes, the underlying profitability is there, and we've shown it, and we're experiencing it now. But on the other hand, one of the levers or options that we have is to deliver some of that value back to our customers in the terms of pricing. And so that's something we've done historically where we don't automatically take every bit of benefit to increase our own profitability. Our renter's product is quite attractively priced. We don't compete solely on price with that product, but because of our cost structure and because of our go-to-market strategy, it continues to be pretty attractively priced. But I would say that we have that optionality to do that. And that's one of the levers as our product mix changes that enables us to generate a little more visibility. So for example, this coming year, we'll probably lean a little more into growing the renter's book than we have in the past, not dramatically, but modestly, because that's a little more profitable while we wait for some of the rate impacts to come online and some of the other products. So it continues to be one of our healthy levers that we can pull from time to time as we grow the business.

And maybe just to add another sentence on that. One of the ways to think about this is optimizing for gross profit dollars. As you take up pricing, loss ratio, of course, being a ratio is one that you can manage to. So you could raise prices that would increase your loss ratio, but would also increase your cost of acquisition and dampen retention and market share. Conversely, you can lower prices. You'll have a lower loss ratio, but you'll be able to grow and retain customers faster. we'll be looking to really optimize for gross profit dollars, which is the multiple of the two. So as we, with each of the products, including with the renters, that will be the kind of logic of where we end up in terms of loss ratio.

Well, thank you for the answers. Very complete. Appreciate it.

Thank you. Our next question of the day is from the line of Andrew Kilgerman of Credit Suisse. Andrew, please go ahead now.

Hi, good morning. Kind of curious in the write-up, you talked about some pressures on the pet services products as well as the home and car repairs in terms of lost cost and inflation. Given I just don't see a lot of companies with these pet services, could you give a little color on what loss ratios you're seeing in the pet services area and just some color on the inflationary environment for that product? Sure. So a couple of thoughts on inflation in general and then patent specifically. So generally, this is something we've talked about for a few quarters. All of the other players have as well. We've seen impact from inflation across the entire book. It's more pronounced in home and to a somewhat lesser extent, patent car and then lesser still in renters, but still across the whole book. In terms of the loss ratio impact, it's a little hard to parse out, but based on the way we've come at it, we've seen car with the most dramatic loss ratio impact, and part of that is the nature of the acquired business through Metromile, but something like on the order of 10 or 11 points of impact on car, home and pet more in line with each other, five or six points, and then renters maybe one or two points of loss ratio impact. Now, because of seasonality and other impacts, you can't completely isolate inflation. But generally, that's how we think about it. In the pet market specifically, labor costs, vet labor costs is a significant part of what's being covered. And so that has faced upward pressure, as have a number of other types of costs. So in terms of the specifics, we did share a bit more detail in our Investor Day presentation in terms of loss ratios. So you can see, I would point you to those materials where you've seen a continued improvement quarter over quarter, and actually our fourth quarter loss ratio experience was a bit better in terms of each of the sub-product loss ratios than we shared at Investor Day. So good positive trends there. And then from a macro standpoint, we see our ability, based on our filing pace, to keep up or even better to match where we think inflation is heading over the coming year. And we're hopeful that some of that has been built into our guidance. And we've, as always, set our guidance in a way that we believe we can achieve it. And if some of those filings come on as planned, we might even have a more favorable impact. That's very helpful. And then with respect to, I was reading through the letter, the shareholder letter, and you talked about AIGym. And could you give an example of how AIGym would handle a claim? What might be a typical claim for AIGym?

Hi, Andrew. Let me take a run at that. So AIGym begins pretty much all claim processes at Lemonade, something in the order of 98% of our claims begin with a conversation with AI Jim. So almost regardless of the nature of the incident, your first port of call at Lemonade will be the app, and in the app you'll be very quickly talking to this AI. Now, there are claims that AI Jim can handle from start to finish. In fact, it's not far from half of our claims. It's 40-something percent of our claims where AI Jim will ask you a host of questions. So you're in the coffee shop and your laptop went missing, and he'll ask you to upload a video just explaining in kind of normal language what exactly happened. If you have a receipt, he might ask you for that. He might ask you for a police report if you have that. He'll ask you for whatever is necessary. In almost half the cases of claims, 40-something, I think it may be around 45%, I forget the precise number, there'll be no need for any human intervention at all. In the remaining cases, he will do the triage and ask for the information, but something in the claim will be such that he's not authorized to close out the case. And in that case, he will direct it to a claims professional, and AIGEM has access to all our claims professionals, AI Gym knows what the area of expertise is. AI Gym knows what their workload is. And he will send them a link where they can open up directly a dashboard with all of the claim laid bare in front of them, the video, the receipts, et cetera, et cetera, and any concerns that AI Gym flags. So if there's any things that stopped AI Gym from paying the claim, that will also be laid bare in front of the claims professional, and they will take it from there. So even in those 55% odd claims, that are handled partially by humans, a lot of the heavy lifting is already done by AIGEM. So he really is the stalwart of our claims infrastructure.

Super. Thanks a lot. Thank you. As a final reminder, if you would like to ask a question today, please press star 1 on your telephone keypad now. Our next question is coming from the line of Tommy McGoyne of KBW. Tommy, please go ahead.

Hey, good morning, guys. Thanks for taking my questions. The first one, can we drill down a little bit on the operating expenses? So both sales and marketing and G&A saw some solid declines sequentially. How should we think about the trajectory of those two expense lines going forward? And I guess along that same lines, when you think about the marketing spend, how much of that is a function of just waiting for rate adequacy?

Yeah, so a couple of comments, and welcome to the analyst group. Great to have a new contributor on board. I know one of the things that you've been highlighting and that we want to make sure that we're highlighting as well around the expenses is how they break down, and I'll cover that. But just also important, I think, to highlight what we've been saying for quite some time is we've expected that Q3 last year would be our peak loss quarter. And I think if you break down our expenses now and going forward in our expectations, that's something that continues to be the case. Q4 came in quite nicely. It was one of those quarters where things that are expected came in as expected and things that were a little uncertain came in to the good. And so Q4, we ended up doing a little bit better, as you saw, than our own expectations and certainly compared to the market's expectations. So that peak loss expectation continues to be the case. You noted, I think, in one of your notes that its peak loss is a quarterly thing or an annual thing, and I think it's probably worth clarifying for all our investors that our annual losses we also expect to continue to decline. Now, 2022 was a little bit of an anomaly year where Metromile Impact, which is an acquisition that closed, as you know, in July – really bumped up our expense run rate. In fact, if you annualize that from the beginning of the year, our EBITDA would have looked more like a 270 or 280 loss for the year, and we came in in the 220s. So even from an annual perspective, our aspiration and goal is that we'll see last year's peak losses. Our guidance reflects some conservatism in that, but that continues to be the case. In terms of your specific questions, On the expense lines, Q4 is a really good proxy for the breakdown of the expense lines. And you'll see if you compare Q4 to the prior three quarters, a little bit of a break in terms of both the absolute amount as well as the breakdown. And the biggest shift is really in the sales and marketing line where we've chosen to tamper our growth rate somewhat, our top line guidance in terms of IFP puts out something in the 11% to 12% growth range. And so that's probably the biggest shift. If you roll out the quarters, I think the breakdown will look a lot like the fourth quarter in terms of ratio. So other insurance expense, sales and marketing, tech development, G&A, the four key lines, that ratio I think will continue to be fairly similar to what you'll see today or you saw yesterday in the Q4 breakdown. And then the last piece that's probably worth hitting is within the sales and marketing line, that advertising or growth acquisition spend has for quite some time has been the key component, the primary component, usually running at a level of about 70% of that total sales and marketing line, fairly consistently over time. That has come down again as we've tampered down the growth rate somewhat. And so that rate you'll see in Q4 actuals when we file our 10K looks more like 55% of the sales and marketing line. And I would think of that also as a reasonable ratio to use going forward. So a little bit of moderation Q4 and then those patterns continuing throughout 2023.

That's great detail. Thanks. And then just my second question, what was sort of the impact of the hard reinsurance market on your 2023 expectations? um and is is there any way to quantify either the rate online or change in chief seating commissions um and then just remind us how much uh you guys are dependent on one one renewals versus mid-year renewals just kind of an overview on the reinsurance would be great hi tommy i'm daniel here so um our main

Reinsurance agreements come up for renewal mid-year. We're coming off of a three-year quota share agreement. It was actually tiered. Some elements of it were annual recurring. Some of it were three years. And those will come up for renewal mid-year, so end of June. We are in regular contact with all of our reinsurance partners, and I think your characterization is spot on. This is a hard reinsurance market. Prices in general of reinsurance have become tighter. Our need for reinsurance has declined as our business has grown and diversified. When we signed those agreements three years ago, we were a monoline business really in one country. We've now got five lines, four that we're underwriting, and we've been across four countries. So that kind of diversification helps a great deal. So we are looking at a series of options in front of us given the cost of reinsurance. But to be honest, the way this industry operates, it's very hard to do this too far in advance. The reinsurance industry rather tends to operate on a 60 or 30 day to renewal window. If you're lucky, you can do stuff 90 days out, but we're really too early in the year to know exactly what that would look like. Hopefully by this time next quarter, we'll have greater clarity.

Understood, thank you. And then maybe just one note on the specific impact on the seeding percentage. If you think about the primary reinsurance structure, which is the quota share, that seeding proportion has shifted over the past two years. So a year ago, the seed rate was 70%. At the July, last July renewal, that moved to 55%. And so how that works running through the financial model is it doesn't happen, it's a gradual impact. So you'll see the seed rate shift in terms of flowing through the P&L from that 70% level last July down towards the 55% level next July. It's not a straight line. It's not a straight linear transition, but it's relatively linear, and that's just a continued shift. And then beyond July, again, because as Daniel explained, we've continued to model in the guidance no material change until we get a better view and clarity on where we think the renewal will appear.

Great. Thanks for reminding us those numbers, Tim. Cool.

Thank you. And we have no further questions registered at this time, so we will conclude the Lemonade fourth quarter 2022 earnings call. Thank you all for joining. You may now disconnect to your lines.