Lemonade, Inc.

Hello and welcome to the Lemonade Q2 2023 earnings call. My name is Alex. I'll be coordinating the call today. If you'd like to ask a question at the end of the presentation, you can press star followed by one on your telephone keypad. If you'd like to remove your question, you may press star followed by two. I'll now hand it over to your host, Gail Wisner-Levy from Lemonade. Please go ahead.

Good morning and welcome to Lemonade's second quarter 2023 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, our Chief Financial Officer. A letter to shareholders covering the company's second quarter 2023 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 3, 2023, our Form 10-Q filed with the SEC on May 5, 2023, and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess their operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio, XCAT, 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 thank you for joining us to discuss Lemonade's Q2 results and our updated outlook for the year. The second quarter bested our expectations on both top and bottom lines, despite the outsized weather events, which dampened results across the entire industry. Tim will provide all the details shortly, though. The headline is that our in-force premium grew 50% year-on-year, while our operating expense grew only 9%, and our net loss decreased. Premium is growing more than five times faster than expenses, highlights the scalability of our business. As we continue to grow, we expect this dynamic to drive our progress towards profitability. The importance of achieving scale was the driving force behind a major piece of news in Q2, the launch of our synthetic agents program with a longtime investor, General Catalyst. We believe this program is something of a game changer, and I've written about it at length on our blog, and we cover its mechanics in the back of the shareholder letter published yesterday. I do encourage you to study this program, as it is not quite like anything we've seen before, and we believe its impact on our business will be material in 2024 and beyond. Let me explain it briefly. To date, our direct-to-consumer business model has served us extremely well, and we've no plans to change it. But it does have one downside. Customer acquisition costs, known by the acronym CAC, are born up front, and it takes us about 24 months to recoup that initial outlay. To be clear, our expenditure on CAC is money well spent, because over their lifetime with us, our customers typically repay their CAC three times over, even accounting for the time value of money. But because it takes time to recoup the initial outlay, rapid growth is typically cash flow negative. If we spend $100 million on CAC in year one, for example, and $200 million in year two, and $300 million in year three, we could expect that $600 million of CAC investment to yield about $2 billion in gross profit over time, which is a very compelling ROI. But before we saw that return, our bank account would see a dramatic dip in its balance, not a sustainable approach at higher growth rates. Without this synthetic agents program, long-term profitability comes at the expense of near-term cash reserves. This trade-off limits our pace of growth, particularly while the cost of capital is elevated. Slowing growth preserves cash, which is good, but it also caps the amount of gross profit we can generate, slowing our path to profitability and lowering our terminal value. Now, insurance companies that sell through independent agents don't have this issue. The agent finances the CAC, and the insurance company can grow without depleting cash reserves. But while we do partner with agents to some extent, we prefer not to let this become our primary distribution model. For one, the agent-mediated business replaces the magical lemonade experience with the agent's own interface, commoditizing our brand and watering down the data we collect. For another, the agent siphons off as much as half of the gross profit of the customer over the life of the customer, greatly reducing the lifetime value or LTV. So while agents do solve the cash flow gap, their costs in terms of gross profit, brand, data, and customer relationship are significant, which is where synthetic agents come in. Synthetic agents were designed to provide the cash flow benefits of independent agents without what we perceive to be their biggest downsides. How? Synthetic agents finance our cap, or up to 80% of it to be precise, and they get the equivalent of a 16% commission from those cohorts they helped finance. They have no other recourse whatsoever, just a right to a portion of the premiums that wouldn't have existed if it wasn't for their funding. That is broadly similar to independent agents. But unlike independent agents, payments to synthetic agents aren't for the lifetime of the customer. Far from it. They stop after two to three years, and Lemonade owns 100% of the LTV thereafter. That's a huge difference. Secondly, synthetic agents are just financial partners and therefore they don't intermediate the relationship between us and our customers. A model remains direct to consumer and we own the customer relationship, the customer experience and the customer data. Another huge difference. The upshot is that our synthetic agents program enables rapid growth without foregoing the customer relationship, without foregoing much LTV, without depleting our cash reserves, and without selling equity to finance our growth. Synthetic agents thus pave the way to a larger business and more profits sooner and with more cash in the bank, and hopefully you see why we believe this program is something of a game-changer. Same with the theme of making the most of our capital. In addition to announcing our synthetic agents program, this quarter also saw the renewal of our reinsurance program, notwithstanding one of the hardest reinsurance markets in these many, many years. The re-upped program is for the same 55% seed as we had previously to the same top tier reinsurers yielding similar capital efficiency. There are some changes to the renewed program, particularly around the treatment of cat events, Named hurricanes are excluded, for example, and there's a $5 million per event cap. Yet, these are risks we can comfortably bear in our newly formed captive structures while maintaining our target capital efficiency. Taken together, the impact of our reinsurance program and synthetic agents program is significant. In their elemental state, the capital burdens of insurance, both regulatory capital and working capital, would weigh us down, slowing growth, idling cash, and delaying profitability. That's why our Q2 agreements are so material. Our reinsurance partners relieve our regulatory capital burden through our quota share program, and General Catalyst relieves our working capital burden through our synthetic agents program. At least from a capital perspective, therefore, the agreements that came into effect July 1 mean that we're all set to grow and to go the distance, which brings us to the next hurdle we need to clear before picking up our growth rates, most notably rate approvals and loss ratio more broadly. In my remarks last quarter, I said, and I quote, we expect our current trajectory to broadly continue, albeit with occasional hiccups, when outsized CATs introduce a brief reversal. I stand by those comments. Q2 indeed saw a reversal due to outsized CAT events, but the underlying trend line continues to be in line with our expectations. Our rate filings have gained steam, and approvals are also coming in faster now. Significantly, California approved a 30% rate increase for our homeowners product and 23% for our pet business. It will take some time for these rates to earn in, and we still need to take more rates, but we have reason to believe things are moving as they ought to. Importantly, in parallel to our rate approvals picking up, inflation has been slowing down. This is really significant to us, and so long as these trends continue, as I said last quarter, we'll continue to expect the downward trajectory of our gross loss ratio to broadly continue, albeit with occasional hiccups when the outsized cats introduce a brief reversal. And with that, let me hand over the call to Tim, who can provide more details on our Q2 results and a view into the second half of 2023. Tim?