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spk04: Good morning everyone and welcome to the Lemonade Flash Quarter 2024 Financial Results. My name is Angela and I'll be coordinating your call today. During the presentation you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind please press star followed by two. I will now hand you over to your host, Yael with the Lemonade VP Communications at Lemonade. Please go ahead.
spk01: Good morning and welcome to Lemonade's first quarter 2024 earnings call. My name is Yael with the Lemonade VP Communications. Joining me today to discuss our results are Daniel Schreiber, CEO and co-founder, Shai Winninger, President and co-founder, and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's first quarter 2024 financial results is available on our investor relations website, .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 Mitigation 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 2023 Form 10-K filed with the SEC on February 28th, 2024, and our other filings with the SEC. Any forward-looking statements 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 growth profit, which we believe may be important to investors to assess our operating performance. Reconciliation 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, enforced premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio x-cat, 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.
spk08: Good morning, and thank you for joining us to discuss Lemonade's Q1 results. I'm happy to report that 2024 got off to a strong start. -on-year, our top line grew 22%, our adjusted EBITDA loss improved fully by a third, and our gross profit more than doubled. The quarterly loss ratio came in at 79%, down eight points from this time last year, while our TTM loss ratio, that is the trailing 12-month loss ratio, came in six points lower than the same time last year. These loss ratio improvements indicate that the growing sophistication and diligence in our rate modelings and filings are bearing fruit. In addition, they reflect that our claims accuracy is strong and getting stronger, and this is helping with favorable prior year development, and indeed that our growing underwriting precision is delivering lower frequency of claims outright. All in all then, a strong quarter, very much keeping us on track, or perhaps better than on track. In fact, we're happy to update that we now project the net cash flow positive by the end of this year. This acceleration in our cash flow profitability is made possible by a couple of factors, the most notable being how technology in general and AI in particular, continue to deliver on the promise at the very core of a lemonade thesis. This quarter, for example, saw a 22% top line growth, but only a 2% increase in operating expense and an 11% decrease in headcount, all of these metrics -on-year. These numbers tell a powerful story. With it in mind, let me hand over to Shai to tell you more about our recent efficiency improvements. Shai, over to you.
spk09: Thanks, Daniel. This quarter, I wanted to highlight a metric we don't often talk about called LAE or loss adjustment expense. LAE represents the cost associated with handling claims, and by extension, operational efficiency. LAE is an essential piece of the loss ratio, and for large insurers who enjoy the benefits of scale, it tends to run around 10%. I'm happy to report that after years of technology driven improvements in our claims automation and operations, with nearly 50% improvement in the last two years alone, we ended Q1 at an impressive .6% LAE ratio. This achievement was made possible by the ongoing advancement of our Blender insurance operating system, which incorporates AI, machine learning, and other cutting edge technologies to help our team become more efficient. Blender uses AI to minimize human involvement at multiple points of the claims journey. It automatically validates and extracts important information from documents. It can itemize invoices, detect pre-existing conditions, and much more. And as we continue to break apart our claims process and automate it piece by piece, our loss adjustment expenses improve and our loss ratio continues to trend down. I believe that building our core technology in-house buys us an ever-growing advantage over the industry, both in efficiency and capabilities, and expect to continue seeing this positive impact flowing into our financial results and plans. And with that, let me hand it over to Tim to cover our financial results and outlook in greater detail. Tim?
spk11: Great. Thanks, Shai. I'll review highlights of our Q1 results and provide our expectations for Q2 and the full year, and then we'll take some questions. As Daniel and Shai noted, it was a great quarter with good progress on all of our key metrics, including growth, gross loss ratio, and our cash outlook. 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 Q1 increased 22% as compared to the prior year to $188 million in line with our IFP. The growth in revenue was driven by the increase in gross earned premium, a slightly higher effective seating commission rate under our quota share reinsurance, primarily related to reserve adjustments, and a near doubling of investment income. Our gross loss ratio was 79% for Q1 as compared to 87% in Q1 2023 and 77% in Q4 2023. The impact of catastrophes or cats in Q1 was roughly 16 percentage points within the gross loss ratio and nearly all driven by convective storm and winter storm activity. Absent this total cat impact, the underlying gross loss ratio was 63% and nine points better than the prior quarter and nearly 10 percentage points better than the prior year. Our prior period development was a roughly 6% favorable impact in the quarter. And worth noting that the cat or catastrophe prior period development impact was about 2% unfavorable while non-cat was about 8% favorable. Given the notable ups and downs of the quarterly gross loss ratio, it's all the more useful to continue to consider our rolling four quarter view of loss ratio, which we include again in our shareholder letter, to get a feel for the longer term trends for loss ratio. Our trailing 12 months or TTM loss ratio was about 83%, and this is six points better year on year. From a product perspective, loss ratios improved across the business as compared to the prior year, with the exception of home, which did not. Gross profit and adjusted gross profit have shown notable improvement over time, driven by continued premium growth coupled with loss ratio and investment income improvements. Q1 gross profit increased by 110% to $35 million versus the prior year, while adjusted gross profit increased by 78% over the same period. Gross profit has grown significantly, more than tripling in two years, while quarterly adjusted gross profit has more than doubled over that same period. Operating expenses, excluding loss and loss adjustment expense, increased just 2% to $98 million in Q1 compared to the prior year. Other insurance expense grew 27% Q1 versus the prior year, a bit more than the growth of earned premium, primarily in support of our increased investment in rate filing capacity. Total sales and marketing expense increased by $2 million or 8%, primarily due to our increased growth spend, which is partially offset by lower personnel related costs driven by efficiency gains. Total growth spend in the quarter was $19.8 million, up about 14% as compared to the prior year. We continue to utilize our Synthetic Agents Growth Funding Program and have financed 80% of our growth spend since the start of the year. As a reminder, you will see 100% of our growth spend flow through the P&L as always, while the impact of the new growth mechanism is visible on the cash flow statement in the balance sheet, and the net financing to date through our Synthetic Agents Program is about $28 million as of the end of Q1. Our technology development expense declined 4% to $21 million, due primarily to personnel cost efficiencies, and our G&A expense declined 9% as compared to the prior year to $30 million, primarily due to lower professional service fees and lower insurance costs. Personnel expense and headcount control continue to be a high priority. Total headcount is down about 11% as compared to the prior year at $1,236, while again our top line IFP grew about 22% the same period. Our net loss was a loss of $47 million in Q1, or a loss of $0.67 per share. This was about 28% better as compared to the $66 million loss, or $0.95 per share loss we reported in the first quarter of 2023. Our adjusted EBITDA loss was a loss of $34 million in Q1, as compared to the $51 million adjusted EBITDA loss in the first quarter of 2023, or about 33% better. Our total cash, cash equivalents, and investments ended the quarter at approximately $927 million, down just 2% since year-end 2023. And with these metrics in mind, I'll outline our specific financial expectations for the second quarter and for the full year 2024. For the second quarter, we expect in-force premium at June 30 between $839 and $841 million, gross earned premium between -$199 million, revenue of between $118 and $120 million, and an adjusted EBITDA loss of between $49 and $47 million. We expect stock-based compensation expense of approximately $15 million in the quarter, capital expenditures of approximately $3 million, and a weighted average share count of approximately 70 million shares. And for the full year of 2024, we expect in-force premium at December 31 between $940 and $944 million, gross earned premium between $818 and $822 million, revenue of between $511 and $515 million, and an adjusted EBITDA loss of between $155 and $151 million. For the full year, we expect stock-based compensation expense of approximately $62 million, capital expenditures of approximately $10 million, and a weighted average share count of approximately 71 million shares. And with that, I'd like to hand things back over to Shai to answer a few questions from our retail investors.
spk09: Thanks, Tim. We'll now turn to our shareholders' questions submitted through the SAFE platform. First, Henry asked for more insight on the rollout of auto nationwide. Hi, Henry. It usually takes a few years to stabilize the performance of a new insurance product after launch. During that period, we test products at lower scale and continuously improve pricing, underwriting, and operating efficiency to get the product to be compatible with our LTV targets. Once that happens, we can increase our marketing efforts and grow faster. By the way, despite the fact that CAR's loss ratio isn't yet where we want it to be, it did improve 18 points in 2023, which was the biggest and fastest loss ratio improvement across all of our business lines that year. So while there's still work to be done, a lot has already happened, and I expect we will begin rolling out CAR more broadly early next year. In the next question, Paperback wanted to know more about our strategy of balancing growth between the US and Europe. Hey, Paperback. There are a few reasons why we're bullish on the European opportunity beyond its sheer size. First, Europe offers attractive and scalable distribution opportunities on the B2B2C side, such as large institutional partnerships, as well as price comparison websites. Secondly, Europe is less cat prone compared to the US, offering diversification benefits or loss exposure, particularly for home insurance. Finally, in Europe, we have much more flexibility over pricing and risk selection relative to the US due to differences in the regulatory environment over there. This, for example, allows us to experiment with pricing models by making multiple changes on a daily basis. In terms of balancing growth across products and geographies, our strategy is simple. We allocate our incremental dollar to the product, market and campaign that shows the best LTV to CAC return. In a sense, our products and geographies compete against each other, and so budget allocation frequently and dynamically changes based on seasonality, pricing changes, competitors, new capabilities, and so on. In the next question, Sumit asks whether we are profitable and what is our growth target for the next three to five years. Hi Sumit. As you probably heard on this call and read in our letter, we're excited by the accelerated timing of us getting to net cash flow positive at the end of this year 2024, such that by Q1 2025 we expect to be generating positive cash flow on a consistent basis. We expect to reach profitability as measured by adjusted EBITDA the following year. Once we're generating positive cash flow, we will be able to lean in and reinvest this additional cash in faster growth. As for your question about our growth targets, we previously indicated our expectation for a multi-year average IFP compounded annual growth rate in the mid-20s. While we're not revising this today, we may accelerate our growth rates as new incremental growth opportunities come along. Lastly, Paperback asked about the automation index, a metric we used back in 2018, and for some current efficiency metrics. Thanks for the question Paperback. This is something near and dear to the Lemonade ethos and to me personally. As I mentioned a few minutes ago, our LAE is outstanding and an excellent way to benchmark our efficiency. The percentage of emails handled by Generative AI also continues to grow as our Generative AI platform now handles 22% of all incoming emails and was recently trained to handle SMS messages as well. One signal that I believe shows our efficiency improvement as a whole is our total OPEX which remained virtually flat for two consecutive years, while our business has roughly doubled. By the way, the old automation index metric from 2018 was retired long ago because it couldn't keep up with the growing complexity of our business and fell to properly reflect things like multiple policies per customer, difference in service efforts among products, geographies, and so on. Regardless of this particular metric, our automation levels have increased dramatically since 2018 and I expect to see this continue. And now I'll turn the call back to the operator for more questions from our friends from the street.
spk04: Thank you, Shai. Everyone, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. We'll pause here briefly as the question is being registered. The first question comes from Yaron with Jeffery. Your line is open.
spk12: Thank you. Good morning. Tim, you had offered the catastrophe and prior development impacts on a gross basis. Can you offer those on a net basis as well? Sure.
spk11: The distinction between gross and net this quarter was as small as it's ever been primarily as a result of reserve releases. So the total difference in gross and net was 1% or less than 1%. So the answer is the same for the difference that you're requesting to, very minimal.
spk12: Got it. Okay, thank you. And I know you had mentioned the acceleration of the timeline to free cash flow positive. Can you talk through some of the drivers for the change or the acceleration?
spk11: Yeah, so we noted that net cash flow, and this is really the simplest measure of cash investments and equivalents on the balance sheet. Is it going up or is it going down? You've seen a couple of periods already where it's actually gone up. The second half of this past year, in fact, our net cash investments actually increased. And that was a notable change. So now we're in this period where we're heading towards sustainable, continued generation of cash instead of use of cash. We're not quite there. This coming, the current quarter, I actually expected to be flatter or better. And so by the end of this year, that should be consistently net positive. The drivers, really just better granularity and understanding of the levers. Our reinsurance agreements do tend to move that cash flow a bit out of sync sometimes with the ebbs and flows of the business itself, the growth in customers and the growth in premium. And so the greater understanding of the current reinsurance agreement going forward, we're in negotiations for upcoming reinsurance. We expect that to be fundamentally strong and similar. And the underlying unit economics of customers. We're getting a little bit more comfort with that. Some of the tech efficiencies that we noted, those are sustainable. We've seen some of those for a number of quarters, but until you get two or three or four quarters under your belt to really confirm that they're sustainable improvements, those are the kinds of things that give us greater confidence now to really pinpoint that cash flow positive period.
spk12: That makes sense. Thanks. And if I could sneak one more in before I requeue the growth spend seemed a little bit light relative to the full year target. I'm assuming that's just a matter of ramping up as that spend as you expect to accelerate growth over the course of the year. Or is it that you are expecting to revise that target down?
spk11: Yes, you're exactly right. It's the former. So the year on year comparison is a little out of sync with the year on your quarter comparison is a little out of sync. Q1 a year ago was relatively high in terms of growth spend versus the full year 23. And we've got the opposite effect this year. We're ramping up. If we looked at January, February, March, we'd get consistent ramp up. So the full year target is unchanged. And as we head into Q2 and forward, you will see an acceleration versus the prior year.
spk12: Thank you. Best of luck.
spk04: Thank you. The next question is from Tommy McJoyne with Stiffle. Your line is open.
spk06: Hey, good morning. Thanks for taking my questions. I know it's only a point or two when I look at the difference between the gross and the net loss ratio. But this was the first time that the net loss ratio was lower than the gross loss ratio. I don't think that's kind of ever happened before. I don't think so. So just kind of can you talk through as to like how that, you know, mechanically happened?
spk11: Yeah, there's typically two main drivers of a difference between gross and net loss ratio. One is unallocated loss adjustment expense, which is a part of our expense structure that is not subject to the reinsurance agreements. As that number ebbs and flows, it can drive a greater or lesser difference between gross and net. The second main driver is we do have reinsurance coverages where we pay premiums, but we have very little claims. And that's a typical quarter. And that can swing from quarter to quarter. This quarter specifically, that ULY number was notably low because of reserve adjustments. And so when you get a swing in those two numbers, it can really bring the net and the gross close together. I don't expect it's a new normal, but we can see quarters where it's relatively similar.
spk06: Got it. Makes sense. And then separately, do you have an update on your latest thoughts for what kind of a normalized cat load for the year should be? And has that changed at all with your focus on really leaning into growth on the renters and pet side and maybe less so on the home and auto side, just kind of how that has impacted your expected cat load?
spk11: So at a high level, I would say no fundamental change in isolation. In isolation, the Q1 number was a little bit higher in percentage terms, 16% impact on the quarter. But important to note that in that 16%, there were no named storms. It was a relatively broad distribution of technically cat events, but not the cat load. It was not enormous cat events. So lots of storms kind of clearing that cat definition threshold that's really been unchanged for many years. So it's interesting in terms of the combination of events in Q1. It's not notably, doesn't fundamentally change any of our assumptions. It tends to be isolated to our home product, which is again, typical. But I would say sort of business as usual, the underlying trends continue to be the same consistent improvement. And I'd highlight that the trailing 12 months number as a good metric because it takes out a bit of the variance of seasonality and cat impact and variations across product.
spk06: Got it. Thanks,
spk04: Tom. Thank you. The next question is from Jason Halstein with Offenheimer. Your line is open.
spk05: Thank you. Two questions. So one just on kind of AI. I mean, you know, the whole world is kind of woken up to what the benefits of using AI and LMS. And obviously you guys were much earlier on this and you've talked to us about how you train models and, you know, just the time it takes until you actually then deploy those models of the business. So can you just elaborate? How are you seeing kind of the newer technology, the newer LMS? You know, ultimately you think of help you either with onboarding, underwriting, adjudicating claim, just kind of when, you know, when would we see kind of some of those benefits or just how do you think about the newer models that are available? That's question one. And then secondly, just a question on auto doesn't the inflationary pressure that we're seeing around auto make you less bullish on your outlook for car? And just how are you thinking about expanding bundling of car over the next few years? Thank you.
spk08: Hey, Jason, good morning. You're quite right, of course, AI is all the rage right now, but it's been in our tagline since the founding of the company. So this isn't something new. And the way I tend to think about it is that a lot of the foundational work that we've been doing in terms of risk assessment, risk selection, risk pricing, which is really about using the stunning amounts of data that we're able to collect as part of our onboarding. Process and in general, just being by being a purely digital provider of insurance that gives us perhaps orders of magnitude more signals than traditional insurance companies get. And then we're able to match those two claims afterwards. I remember being told once, I don't know if this is still true, but that the number one cause of loss in America is other, which is to say that a lot of the systems record things rather poorly. And therefore, even if you were to collect data, as customers come in, it's hard for you to reconcile that with systems at the end of claims are recorded since it's all manual and the data then becomes very poor quality garbage in garbage out. And then even if you were to extract those insights, you don't have systems in place that can deploy data. And we deploy them because agents generally can't do much with these kind of machine learning insights. So there are systemic reasons why we think we have an advantage at the foundations, the plumbing, the matching rates to risk work. And that has been true for some years, and we've been building out those models and we've shared our LTV models and the 50 different machine learning models that inform us every single time any prospective customer comes to our site. We've spoken about these systems at length and that all continues to grow and is quite independent of LLM. This is using really machine learning, deep learning models and touches on the very
spk00: deep
spk08: stuff about insurance companies and their ability to monetize probability theory and statistics. What's changed in the last couple of years is that AI has also got very proficient at understanding and generating the written word, quite distinct from the numbers game. And there we've been able to really harness these technologies very powerfully in our customer support side of the house. We have a lot of documents that are inbound, whether it's receipts or more complicated documents, health reports from vets, the state of a building from surveyors, oftentimes, you know, verbose 50 page technical documents that need to be reviewed in some detail. And then you also have to generate responses based on them. And we've been able to harness these very, very rapidly because of the structural advantage that I kind of referenced in passing earlier. This applies equally to these kinds of systems when everything is built digitally, we're able to harness these capabilities. And I think this isn't something that's merely future looking. One of the points that we've tried to make this quarter and last quarter is that, you know, a few years ago when we spoke about these themes, it was a hypothesis that perhaps cohered but was unproven. I think you see it very clearly now in the numbers. The numbers this quarter speak of a 22% top line growth and an 11% decrease in headcount. That is dramatic. And I'd put it to you pretty much impossible without that level of automation and without being able to use LLM to do what previously humans had to do over the course of the last two years. The size of a book has doubled, our gross profit has trebled and operating expense hasn't moved. Those, quite aside from the LAE that we did a deep dive on right now, I think are all glaring proof points that these technologies are being harnessed in powerful ways. In terms of auto, of course, we'd like to see inflationary pressures abate. But no, bullishness is not contingent on that. We want to see some of our rate filings approved and implemented. We've got a couple of iterations to do, but we do remain bullish. We think if inflation doesn't explode, but simply continues in the way it is, that we probably have systems in place that we'll be able to keep up with that now. Inflation indeed has not passed us by and yet in auto last year, we saw a loss ratio improvement of 20 points, notwithstanding the rather severe headwinds that we faced there in terms of inflationary pressures. So I do think we've broken the back of that. We're on the kind of announcing our systems and our filings kick in in a way that is able, so we hope and believe, to overwhelm the inflation that we're still seeing out there.
spk05: Thanks. Appreciate the call.
spk04: Thank you. The next question is from Katie Sackies with Autonomous Research. Your line is open.
spk03: Hi, thank you. Good morning. I first wanted to ask sort of on the drivers of this quarter's ex-cat loss ratio improvement, could you give us a little bit more color as to what products drove that and sort of, you know, how sustainable you think some of those stages might be over the last year?
spk11: Sure. Probably worth noting that the distinction between cat and non-cat has some arbitrariness to it. And so anything that's just over the cat threshold becomes a cat and just under it isn't a cat. And so there's some of that going on, particularly in a quarter where we've got a lot of frequency, many, many storms as opposed to one or two single dominant cats, which we have seen on very rare occasion. One a few years ago, one a couple years ago, but those are really the exceptions. So I would say this is kind of a normalist quarter, but a higher cat load and a lower underlying measure. So I think looking at both of them in tandem, looking at all the loss ratio information that we share in aggregate, including the trailing cold months is important. All of the products, with the exception of home, show the year on year improvement quarter over quarter, you know, versus the prior year improvement this quarter. We will and do continue to see quarterly ebbs and flows. Q4 is typically a notably low cat quarter, although that's not been the case for a couple of years, a couple of fourth quarters in the past few years. So I would I would focus on the big picture, consistent improvement in all products, a little bit more of a health decline in home. But our long term view on that is nonetheless strong. We've finally seen rate approvals start to move at a more healthy pace in larger markets. Some carriers pulled out entirely from certain markets. We've not done so. We proactively moderated our growth in products where the loss ratio was somewhat elevated in territories and states where the loss ratio was somewhat elevated. And now we have the ability to switch that the other way as we see improvement. So I would say steady as she goes and we're comfortable, we're on track to our ultimate target, which is in the low 70s and into the high 60s.
spk03: Thank you for that detail. I guess following up on your discussion of rate action and inflation levels, are there any particular geographies where you guys are feeling like you're getting more than enough pricing and really feel like you could lean into growth there? Or are you kind of thinking about growth sort of across the entirety of the country and the geographies you underrate?
spk11: So at a high level, yes, it feels like we have kind of crested the hill. That was probably not the case three quarters ago where we had large important territories with large rate increase approvals still pending. That is no longer the case. There are many approvals still pending, but they are more widespread. They are somewhat smaller. And so I think we've caught up substantially, but there's still a bit of room to go. Inflation continues at a much more moderated pace. But our assumption is that it's going to continue at some reasonable rate. Our capacity is dramatically higher and more efficient in terms of filing, getting rate filings in and done and approved than it was. So we've got some pretty good territories where our growth went to zero or pretty close to zero. California is probably the most notable one. Even there we've seen a couple of quite sizable rate approvals, and we're seeing that almost across the board. It's a little unpredictable in terms of the date and month that those approvals will come. But again, really, I think passed certainly passed the worst part of it and now into more of a standard mode with aggressive filing, good follow up and earning in rate across the board.
spk04: Great. Thank you very much.
spk11: Thank you.
spk04: Thank you. The next question is from Andrew Cleagerman with TD Securities. Your line is open.
spk02: Hey, good morning. Hey, good morning and yeah, really nice, nice progress. I guess the first question is around the retention ratio at 88 percent, super strong. I think you noted it's up a point. What is it about lemonade that drives that retention? What would you say kind of differentiates lemonade that's going to make people want to stay with you as opposed to just moving to the next carrier and getting a cheaper price?
spk08: Andrew. Hi, Daniel here. Thanks for the question. Yes. The annual dollar retention continues to strengthen and I'm glad you highlighted that. There are a few things that differentiate lemonade in a way that's relevant for this particular metric. One is the level of customer satisfaction that we enjoy. Perhaps a universal measure of that is NPS Net Promoter Score. The industry doesn't do very well by that measure. I think the low teams is pretty customary or commonplace. Being negative is not unusual. And we tend to be in the 70s, sometimes in the 80s, across all touch points with customers, including claims experience. And shockingly, we have an incredibly high NPS even for declined claims. There's something about interacting with our AIs, the instant nature of the relationship, the ability to respond playfully, but precisely and any time of day or night from the comfort of your phone to pay as many as 50% of claims without any human intervention within a matter of seconds of the submit button being pressed. All these have powerful brand building capabilities and they reflect themselves in retention. The second one is the ability to upsell, which frankly is just in its nascent stages. And I do expect this to become a far more powerful force on ADR as we go forward, which is to say the majority of our customers join us when they're young and oftentimes first time buyers of insurance. That is a powerful part of our strategy. So among first time buyers of say renters insurance in the US, we may be the number one in terms of market share. If not, we're pretty close. We get a dramatically disproportionate number of first time buyers of insurance coming to lemonade. Our technology is responsible for that as well. We're able to get entry level price points that are very difficult under more traditional insurance models. But when you're doing everything digitally, the marginal cost to serve plummet sometimes drops at the margins to zero and therefore able to get very attractive yet profitable business in at the low end. It's a low end disruption. But those customers then grow up. They graduate. They get a pet. They get a car. They get a ring. They get a job. They get kids. They need life insurance. They need car insurance, etc. All of those reflect themselves powerfully in annual dollar retention or they just get more stuff. So as their personal GDP grows and the average in America in the first 10 to 15 years of adulthood is to 10x and 15x your net worth, that will reflect itself in a similar 10x or 15x of the premiums that you pay to an insurance company. So combining those two, getting customers young when incumbents want them the least because they're paying five, six bucks a month, being able to delight them so that they don't want to go to anybody else when they come to needing that next policy, the expanded policy, an additional kind of coverage. And you put all of that together and you have a snapshot of our thinking. And I think that's reflecting itself in ADR. As I say, as car becomes more prevalently available, as we feel more confident in promoting some of our home insurance policies and geographies where we felt underpriced, I think you'll see those numbers grow further.
spk02: Really interesting. And then just with regard to the AI in general, do you feel that Lemonade has enough of a head start that competitors won't be able to copy it or catch up? Can you give a sense of whether Lemonade is a step or two ahead and can stay at that
spk08: pace? I'm sorry, I missed the first two words of that sentence. In what sense? It's
spk02: kind of a tricky question. I don't know if you can answer, but I want to get a sense of, is Lemonade's AI ahead of the competition such that you can stay a step or two ahead persistently? Maybe there's a way to answer that. I don't know. It's a tough question.
spk08: Sure, sure. Sorry, I just hadn't heard the beginning of the sentence. It's a tough question, which we think about a lot and have a view on. So I'll share our perspective. We think the answer is unequivocally yes. We think that there are structural advantages to being built by technology founders in recent years in the age of AI and having architected business from the get-go that way. And incumbents in this sense are encumbered. They're very, very smart. They know everything that you and I know, but they have objectively just a lot of legacy to deal with. In a couple of days time will be the Berkshire Hathaway annual general meeting. This time last year on that stage Ajit Jain, who runs insurance there, the vice chairman, spoke about Geico, whom they own outright and said that Geico has 500. And then he corrected himself and said, actually, it's over 600 different systems that don't talk to one another. Well, when you have that kind of legacy and Geico has the advantage of being a -to-consumer, other competitors are even more encumbered because they've got 40,000 agents by way of distribution and it's very hard for them without conflicted channel strategies to really adopt a -to-consumer AI-driven approach. But even if that weren't the case, just when you aren't built as a tech company, when you aren't led by people who understand technology, when your systems were built in the 1980s on COBOL and you can't even hire engineers who know that programming language, and therefore instead of having a black box, you have a black hole where you have to continuously invest just to stay afloat, those are genuinely difficult systems and problems to overcome. I'm not saying that no incumbents will overcome them and I'm sure they will all make as much use of AI as they can, but I do think that taken together, that amounts to a structural disadvantage that will be difficult for them and advantageous to us. It's something I can wax lyrical about for a while, but I hope that gives you some sense of how we think about this.
spk02: Yeah, very helpful. And if I could just sneak one more in on the auto insurance, could you specify roughly how much of the written premium now is in the auto line and competitor in -to-consumer was talking about how they started to see a little competitive pressure at the end of the first quarter. Do you still feel with all your rate approvals and new rollouts, the ability to keep growing or do you see competition kind of getting a little tougher to compete?
spk11: Sure, so in a big picture sense, auto is a smaller relative piece, but a substantial piece of the business around 15% or so of the current run rate IFP that's made up of both -per-mile, which is the majority of that, three-quarters or maybe a little bit more of that is -per-mile, but the remainder is fixed price or more traditional price. More importantly to note, I think, is our auto product in terms of its understanding and integration of telematics is second to none. We sort of capture data through telematics for nearly 100%
spk00: of
spk11: our customers, our car customers, and for nearly 100% of their travel, of their mileage. And you multiply those two together, you get a very high number that is uncommon in the industry. In fact, the largest incumbents track a very small percentage of their car customers through telematics and a very small number of the miles of those. So a fundamental difference there. I did see the comment that you noted in terms of increased competition. I took that to be a bit of a throwaway about the coming quarter, unique to maybe how the competitor views their numbers unfolding. So no, we don't see any fundamental changes in the market or our opportunity for car.
spk02: Thanks very much.
spk04: Thank you. The next question is from Max Smith with Halter Ferguson Financial. Your line is open.
spk10: Hi, thanks and congrats on a strong quarter. I wanted to circle back to the sales and marketing and kind of customer growth spend question from earlier. I noticed there wasn't any new information on the LCB to CAC kind of trends this quarter. So I wonder if you can just kind of lay the groundwork on what are you seeing on that kind of marginal dollar potential to spend? And is there anything that is causing the kind of flows since you do have the financing available under the synthetic agent arrangement?
spk11: No, so I would term the growth spend and our growth efficiency is all systems are go. So we're following our plan of accelerating the spend and our growth rate that began to ramp up as planned and expected in January. When you just see the quarters numbers, it's a little harder to see. But January, February, March, April, consistent increases ramping up to what we expect. And we've communicated as a rough almost a doubling of our growth spend year on year in terms of the efficiency. We just look at Q1, for example, versus the prior year quarter. We did see an improvement, something on the order of 15 or so percent more efficient for each dollar in terms of the in force premium acquired or the cost per dollar acquired. So good progress. We think of LTV to CAC, which is obviously a very fairly common measure of well above three. In fact, over the course of last year, we saw numbers that looked in edge from the high threes and towards four. That was when we were spending at a lower rate where things tend to get a bit more efficient. But even at this high rate, we're continuing to see strong LTV to CAC ratios well above three. So things are tracking nicely and our full year spend supported and made from a cash perspective much more efficient through our synthetic agents program. So things are running full steam ahead. We're financing about 80 percent of our spend since the beginning of the year. And things are right on track.
spk10: Thanks, Tim. That's really helpful context. And maybe just more philosophically, how do you think about the kind of tradeoffs between the spend impact on your gap metrics and kind of current period profitability? As you mentioned earlier, wanted to get to EBITDA, adjusted EBITDA positive by next year. But with the LTV to CAC where it is, you could certainly argue for more spend, which would create kind of near term gap margin pressure. So how do you think philosophically around the tradeoff for the kind of near term impact of that increased spend potential versus the really attractive economic interesting on a customer cohort basis?
spk11: Sure. So it sounds like you've been sitting in our growth marketing meetings where we debate this question in real time on a kind of a day in day out basis. And that is I think you describe the tradeoff exactly right, which is on the one hand, all the business we're acquiring and expect to acquire is profitable business. At some point, as you increase growth spend, that doesn't go to infinity and efficiency starts to slow and you get to a point where you become less comfortable with that and acquiring that end customer for the end dollar of spend. And so that's really the frontier that we're constantly pushing. We believe it's important for the health of our business, the long term health of our business and our commitment to ourselves and to our shareholders that cash flow break even profitability is not the only thing, but it's a critical next step for the business. We can do both at the same time. We've guided to a year where growth will accelerate from the low 20s to the high 20s by year end. Our goal and expectation is because of the strength of the unit economics that we're seeing and the positive trends in both lost ratio, which which is part and parcel with getting additional rate. All of those trains, all of those trends suggest that we'll continue to be able to spend a bit more. And as that continues, I think we'll see into next year and beyond our ability to continue to kind of kind of push that push that envelope. Last thing I would note is one of the real benefits of being a multi product company and a multi continent company is we have a lot of levers to pull to find that optimal mix of profitable business, high LTV to CAC and still keep us right on track for fundamental bottom line improvement that we and investors want to see.
spk10: Thanks. And if I could just squeeze in one more quick one. The premium for customer increase sequentially was a little bit higher than I was expecting. Is there any notable trends that you're seeing either on race earnings or bundling or upsells, anything that was driving that that improvement?
spk11: It's really a bunch of small things. So not not one notable thing. The biggest change, of course, is that that ratio of drivers used to be more of a mix used to be 50 50 or 60 40 between rate increases and product mix changes. Since now that's almost entirely shifted to rate increases as expected sort of as planned. We're getting right across products. And so the you're not seeing as notable a product mix shift as you saw maybe two years ago. So the bulk of it has been driven by rate. I expect that'll continue not forever, obviously, but for the next next few quarters. And the underlying drivers are consistent and improving. So retention, improving multi-line customer rate, the number of percent of customers with multiple policies. All of those are continuing to show improvement. But as Daniel noted early on, you know, less than five percent of our customers have multiple policies. There's no reason that can't be a number that looks like 30 or 40 or 50 some day. And that's the long term goal.
spk10: Thanks so much and congrats again on a really strong quarter. Thank you.
spk04: Thank you. The next question is from one with Morgan Sandy. Your line is open.
spk07: Good morning again, like a very strong quarter. Just one question on your guidance. You beat the quarter by the midpoint by about seven million in revenue, by about eight million in adjusted EBITDA against your prior guidance. But in your full 2024 guidance, you're increasing your revenue guide by about five point five million. And by adjusting EBITDA, you're increasing by about four point five million. It feels like that increase is a little low. Just curious if there were any revenue and earnings pull forward or what is the rationale behind the guidance when you beat the numbers by significantly more?
spk11: Yeah, great question. And there is a nuance that's worth highlighting there that I think you're hitting on quite cleverly, I will say, which is in the first quarter, we did see a positive impact on all the KPIs a little bit ahead of our expectations and certainly ahead of the guidance. Revenue in particular can be impacted by reserve releases and reserve adjustments. And there's a typical pattern in Q1 that was a little strengthened by the nature of our reinsurance agreements. So we had a reserve adjustment. It had a bit of an outside benefit because of our variable commission that we have our reinsurance agreement. That drove a little bit of the revenue performance in Q1. And because that's not a typically sustainable or ongoing operating benefit that reserve adjustments happen, you know, positive and negative quarter to quarter on occasion, we didn't assume that that would replicate going forward. It was not logical to assume that replicated. And so that accounts for the vast majority of that difference that you're seeing in terms of the overperformance in Q1 versus the guidance for the remainder of the year for revenue.
spk07: Got it. Really appreciate that. Thank you for clearing that up. And that's all my questions.
spk04: Thank you. The next question is from Tommy Madjai from Stiefel. Your line is open.
spk06: Hey, guys, just a quick follow up here. When we were talking about the catastrophe loss discussion, I wanted to ask, is there a threshold, like in terms of a dollar amount or percentage amount that you guys use to define what falls into the catastrophe bucket versus the non-cat bucket?
spk11: Yeah, we use a standard NCS rating. So if it gets a cat number, that becomes a cat. So we don't have our own proprietary measure. We just use a standard measure out there in the market. Notable that it hasn't changed. It's a $25 million threshold that has not changed for a very long time. But it's a standard measure and one that we have used.
spk00: Okay,
spk04: thanks. Thank you. We have no further questions, so I will hand back over to the management team to conclude.
spk11: Thanks so much. That wraps up our comments and thanks so much for joining and we look forward to seeing you again next quarter.
spk04: Thank you. This concludes today's call. Thank you for joining. You may now disconnect your line.
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