Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Year-on-year top line grew 22%, adjusted EBITDA loss improved by 18%, and gross profit grew by 155%.
- Gross loss ratio improved to 79%, a 15-point improvement year-on-year.
- Q2 was net cash flow positive, with expectations for consistent positive cash flow moving forward.
- Significant efficiency improvements due to technology, with operating expenses remaining stable despite growth.
- Successful launch of homeowners insurance in the UK and France, expanding geographic diversification.
Negative Points
- Elevated CAT losses impacted the quarter, contributing to a gross loss ratio of 79%.
- Non-renewal of certain CAT-exposed homeowners policies expected to remove $20-$25 million of in-force premium (IFP) in the second half of 2024.
- Operating expenses, excluding loss and loss adjustment expense, increased by 13% year-on-year.
- Total sales and marketing expenses increased by 48%, driven by increased gross spend.
- Adjusted EBITDA loss for Q3 is expected to be between $58 million and $56 million, indicating continued financial challenges.
Q & A Highlights
Q: How is Lemonade leveraging AI technology to improve underwriting, claim processing, and overall customer experience? Are there any major business risks or challenges to further leveraging AI?
A: Shai Wininger, President and Co-Founder, explained that Lemonade is leveraging AI at every stage of the customer journey and in many internal operations to drive efficiency, improve underwriting, and enhance customer experience. AI is used in underwriting, customer service, claims management, and even employee management. For example, over 30% of incoming customer communications are now handled by AI without human intervention. The company expects to continue focusing on additional applications of AI to deliver measurable business impact.
Q: Can you share performance metrics and customer feedback from states where all five of Lemonade's insurance products are available? What are the main challenges or limiting factors preventing a broader rollout to additional states?
A: Shai Wininger noted that in states like Illinois, where all products are available, multi-line customer rates are roughly double compared to the rest of the book. Metrics such as retention rates and customer feedback (measured by NPS) also improve after bundling. The specific order of state expansion is based on growth potential, expected profitability, and resource allocation. The company plans to roll out car insurance to several additional states during 2025, focusing on profitability predictions and regulatory approval rates.
Q: Could you provide more details on the non-renewals of CAT-exposed home business? In which states are these actions primarily taking place, and are there particular years of business that you're focused on?
A: Timothy Bixby, CFO, explained that the non-renewals are focused on policies with higher-than-target loss ratios, primarily within the home book. These tend to be older policies written two to four years ago. The expected impact is the removal of $20 million to $25 million of in-force premium (IFP) from the book in the second half of 2024, which will boost cash flow and profitability in the medium term and reduce CAT volatility.
Q: Can you talk about the premium to surplus ratio that Lemonade expects to maintain as your business mix evolves? Also, it looks like your invested asset balance has been falling in recent quarters. Is that something the company expects to continue?
A: Timothy Bixby stated that Lemonade aims to maintain a roughly 1:6 ratio of required surplus to gross earned premium, leveraging quota-share and captive structures for capital efficiency. Regarding the invested asset balance, he noted that while the cash balance has increased as a percentage of the total, this trend is expected to moderate or flatten out. The company is earning strong returns on cash and investments, and the total cash and investments balance is expected to remain above $900 million.
Q: How far through the rate increases are you on the in-force book, and how should we think about the ultimate target for the expense ratio going forward?
A: Timothy Bixby mentioned that the company is still earning in rate increases, with a significant portion expected to earn in well into next year. Daniel Schreiber added that Lemonade aims to have an expense load that is best in the industry, targeting an expense ratio in the teens at scale. The company has already achieved parity with the best in the industry for the LAE component of the expense stack, recording a 7.6% LAE last quarter.
Q: With the decision to non-renew certain CAT-exposed homeowners, was that previously contemplated in guidance?
A: Daniel Schreiber confirmed that the decision to non-renew certain CAT-exposed homeowners was not previously contemplated in guidance. However, the company reiterated its guidance, indicating that it expects to manage within the existing guidance despite the non-renewals.
Q: Can you provide more color on the 5 points of favorable prior-year development (PYD) and the 2 points of unfavorable CAT PYD?
A: Timothy Bixby explained that the 5 points of favorable PYD were more concentrated in the pet product but distributed across other products except for home. The 2 points of unfavorable CAT PYD were primarily driven by significant storms from a year ago and earlier this year.
Q: How should we think about the impact of the homeowner non-renewals on the LTV to CAC ratio?
A: Timothy Bixby noted that the LTV to CAC ratio remains a forward-looking metric based on current models. Newly acquired customers are expected to be fully profitable, with a typical LTV to CAC ratio of around 3:1. The non-renewals are focused on older policies that have become unprofitable, and the company expects to maintain a similar LTV to CAC ratio for new business.
Q: Can you provide more details on the expected gross spend for Q3 and Q4?
A: Timothy Bixby stated that the full-year gross spend expectations remain unchanged, with Q3 typically being the highest gross spend quarter. The company plans to invest roughly $25 million more in Q3 compared to the prior year, with a similar elevated spend expected in Q4.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
