Conference Transcript - LIFE 2026-06-02

Speaker 3

All right. Thank you everyone for joining us. We have Peter Kolas with us here today, CEO of Ethos. Peter, thank you so much for your time and for making it out from the South Bay.

Speaker 2

Thanks for being here, Mike. Appreciate it.

Speaker 3

All right. So, you know, you guys have had incredible growth recently, triple digit range, first couple quarters out of the gate here since your IPO have gone great from that perspective. Can you discuss the relative strength in your direct channel specifically, when we see this triple-digit growth, how much of that is increasing your paid media spend versus core underlying improvement in organic traffic, brand conversion, those sorts of things?

Speaker 2

Yeah, it's a great question. So I think if you look at Q1 and just our pattern of growth in the direct business, we're able to create economic gains up and down the stack all the way from underwriting more, approving more people at better prices, improving the end-to-end user experience so people check out at higher rates and convert at higher rates, improving the marketing to become more efficient, improving our persistency and retaining more paying clients at higher rates. And so all of those things improve our unit economics that then allow us to commensurately increase marketing spend at our target unit economic rates, which in the direct side is, we hold ourselves to fully burdened variable cash positive by month two of a policy's life. So we have an almost immediate cash cycle and negative working capital cycle. And so if you look at Q1's growth, we were able to grow 136% year over year at a relatively similar unit economics as a year before. And so that's really what we aspired to do.

Speaker 3

And can you, you've talked about the ROAS in the direct business, how strong it's been. Can you kind of ballpark how much of the ROAS trend is kind of internal versus also external factors, whether it be you have better placement in your market, on your ad spend, in the broader ecosystem, or it's your own kind of self-improvement?

Speaker 2

The vast majority is internal, you know, kind of gains up and down the vertical stack, like I talked about. And then we actually, in our scenario planning and our forecasting, always try to model for, you know, negative externalities, whether it's like, you know, increased paid media costs or whatever other dynamics. And so we just aspire to be that much better internally so that we can always keep growing with this great model of improve efficiency, improve unit economics, increase advertising spend commensurately to be at our target unit economic rate.

Speaker 3

And then the other thing coming out of earnings, I think, was the big improvement in persistency and the clawback changes that happened from that. What was your take on that, unexpected, but great to see improvement in persistency and what that kind of signals longer term?

Speaker 2

So life insurance is a great anti-churn feature built into it, where if your health stays equal, all else equal, your policies, a new policy cost would increase by about 10% per year on a compounding basis. It gets more expensive to replace as it gets older. So there's no economic rationale for churning a policy unless you have instability in your income and you cannot afford those ongoing premiums. And so because of that, we actually see quite stable and historically improving persistency trends. And so we're excited to continue seeing that you know, and just ensuring that we've got appropriately conservative and prudent persistency assumptions for each of our products and each of our distribution strategies that go into our gap financials.

Speaker 3

Got it. And when we think about your Q2 guidance, there's some underlying moderation and growth that's implied by the top line guide. How much of that is just a function of kind of lower self-inflicted, lower marketing, lower marketing intensity, or does it necessarily mean that conversion is lower?

Speaker 2

Historically, Q1 has been one of our strongest quarters seasonally versus Q2, but also I think we just have established a prudent guidance philosophy as we've entered the public markets.

Speaker 3

And when we think about the persistency piece within that, I'm sure you can't speak to future changes in persistency, But in terms of like the cadence of when that or how often you will see persistency changes, is that something that we should expect?

Speaker 2

Yeah, it's a great question. So we re-examine persistency assumptions every quarter on a quarterly basis. And those assumptions go through, you know, one, they're initially set by our chief actuary, Troy Thompson, who was the former chief actuary of Legal and General America. They are then stress tested by both a third party auditing actuarial firm called Milliman. They're the leading actuarial third-party consultants. And then it's also stress tested by our auditor, Ernst & Young's specialist actuarial team. So that whole auditing process happens on a quarterly basis. And we look at, does there need to be any refinements? You know, from a philosophy standpoint, we try to set those assumptions as conservatively as we can within the framework of GAAP. And if you look at over the last several years, each year there's been typically a single digit, you know, increase to revenue based on revising those assumptions upwards.

Speaker 3

Got it. And within that persistency piece, you use the word churn, which I heard from, you know, more part of my debates throughout the IPO process, is there going to be churn here in a downward economic cycle because people will look at their subscriptions and see, hey, this, but to your point, there's this negative type of correlation where you're actually providing a subscription that increases in value over time. Can you update us on kind of like what you're seeing from a macro perspective from consumers and how they're treating that?

Speaker 2

Yeah, I think if you look at the 08 recession, there was not a material increase in lapse rates in the industry and in churn rates in the industry. If you look at our business that as we progress through COVID and then interest rate increases, there was not a material increase in churn. And if you look at our population that we're insuring, we feel comfortable that not too much of it is concentrated to more exposed socioeconomic populations. So, you know, it's possible, but it's not one of, I'd say, like the top things that could go wrong.

Speaker 3

Got it. So now let's shift over and hit on AI. Clearly, there's a lot of AI-related anxiety across, you know, I'm a Smith Internet analyst, across the entire space. At some points, it seems ethos has been caught up in that narrative. How would you address that debate for investors who worry about whether or not you're on the right side of the AI disruption narrative? And what would you point to to either reinforce confidence in your positioning or reframe that debate entirely? It's more incremental.

Speaker 2

Yeah, it's a great question. My prediction is that AI will be a useful tool for consumer research in origination of where the journey starts in life insurance. I don't foresee the entire transaction moving into an LLM in the same way other shallower and simpler purchases to execute might. When you look at Ethos absorbs a lot of data, both data the client is giving us, but also data that we're pulling from third-party sources, we're running an extremely complex predictive underwriting model. We're in real-time communicating back and forth with the client. So it's very specialized and it's very, very precise. And I just don't think it's realistic that that is transposable into an LLM. Now, we launched a ChatGPT integration more focused on the origination and quoting. And so we're excited to see if that ends up becoming a material contributor and another growth channel in the same way that SEO or SEM or affiliates is. Obviously, we're using AI as an enabler throughout our organization in all the enterprise use cases, you would assume. But I don't see it being transformative for our industry other than for adding an additional source of origination. And we have a great geo optimization effort that has been doing a great job at being front of mind and being a trusted source of information for these LLMs.

Speaker 3

And you mentioned the ChatGPT app. Is there any initial learnings that you could share on kind of, we hear from other Smith internet companies, maybe there's an uptick in conversion for certain categories of consumers that are coming through an LLM versus a more traditional source. Anything you could speak to there?

Speaker 2

I can't speak to it off the top of my head. Yeah, it'd be interesting to see are they a more researched, informed, and higher conviction source of traffic coming through. If you look at our marketing and how we acquire clients on the direct side, the majority of our ad spend goes towards top of funnel channels like television, radio, social media, podcasts, et cetera, where a client is not necessarily looking for life insurance. but we are effective at convincing them, hey, you have this need, check this off your box, solve it immediately. We're also the leaders in bottom of funnel marketing like search, affiliates, et cetera, where someone is looking for life insurance. And we have the best unit in economics, the highest converting funnel that allows us to dominate that segment. And so I would expect that both organic LLMs will do a great job and if the LLMs ever decide to monetize that traffic, that we would do a great job there as well.

Speaker 3

Got it. And when you think about your experience with ChadGPT, would you consider yourself LLM agnostic? So you're open to more partnerships, longer term, deeper funnel partnerships as well? Or is that more just discovery focused and research focused?

Speaker 2

Open to more partnerships. The depth would depend on what's practical. I think we're going to be the leading innovator and experimenter in LLMs rather than someone that's like stuck in the past way of doing things. So like no one will out AI ethos in life insurance. I can guarantee you that. I think generally, if you look at our industry and you take a step back, every carrier, if you look at the top 20 carriers in the industry, the top 20 carriers are every single one of them is over 100 years old. And they all sit upon this legacy infrastructure of third-party antiquated mainframe and on-prem vendor managed services and technology suites that are fractured with disparate data infrastructures. And so they have a very hard time enabling AI in an effective way because the systems are so fractured, the data is so unclean. And so because Ethos has a completely native end-to-end platform and technology suite, it's allowed us to build an AI platform internally for all sorts of enterprise use cases across the board. And I really think that we are the best position to actually utilize this technology and further accelerate our growth and our efficiency with it.

Speaker 3

Then when you speak to the carriers, how do they think about AI? Is it something that, you know, being a more arcane industry overall, like you say, many are hundreds of years old, you know, is it something that they're using to change their own systems internally? Is it something that's, you know, changing your conversations with your carrier partners at all?

Speaker 2

Well, it has not changed conversations. It's not become a meaningful part of the industry that we're aware of. I think slow to adopt legacy infrastructure and technology issues, slow to enable technology talent at the carriers. So I do think it's an opportunity for them, but I don't know at what rate things will And I don't know how those changes will actually show up in ability to compete with our model where we've got the most advanced algorithmic underwriting. We have a completely native end-to-end digital platform. We've got a huge accumulation and data advantage in algorithmic underwriting and direct-to-consumer user experiences, intuition about what the agents want with an incredible agent platform. So there's a lot of advantage that we've compounded in our time and scale. And so I don't think it's realistic that someone else is going to recreate ethos anytime soon.

Speaker 3

You talked about the kind of product engineering advancements and acceleration that you've gained from implementing AI throughout your workflows. Can you give us any specific examples of what AI is helping with internally for advancing that product engineering? And is it something that we could see eventually driving some sort of leverage in the business potentially from cost savings? Or do you do so much more with it that it's not necessarily cost savings?

Speaker 2

Yeah, it's a great question. So like one of the biggest like input metrics we look at is the rate of experiments, like meaningful experience that we can run in our direct-to-consumer business, right? And if you look at three years ago, the time it would take to get statistically significant results on a direct-to-consumer experiment was like three months. And now it can be like three days. And so you look at, okay, you've got all this excess traffic to test and iterate on, driving more and more efficiencies and gains in the conversion funnel. Does our product and engineering team need to scale proportionally to that traffic? Or can we get more and more efficient at unblocking the product design, iteration, building, testing, rollout, launch, strategy, et cetera? And so I think as we've seen, you know, typically around like 30%, 35% increase in engineering efficiency thus far with AI. And we're excited for that to keep, you know, getting larger and larger. So that's one of the big ways where, hey, it just helps us run more product experiments and tests and make a better client or agent experience, leading to better economics, which then we can reinvest into more growth.

Speaker 3

Can you speak a little bit more to the AI impact on the agent experience? and kind of what's interesting is within agentic AI, you have this huge agent, third-party agent business. Could you create your own kind of ethos, always on agent that's effectively selling policies?

Speaker 2

It's a great question. I think, you know, we all already have done that. That's our direct business, right? Which is fully automated and operates with a 98% gross margin and sells life insurance 24 hours a day, seven days a week on holidays. And so if you look at that, we are experimenting with where we have historically augmented it with human sales agents if you want to talk to a human or if it makes economic sense to have a human reach out to you if you you know applied but didn't buy and i think we're looking at augmenting that now with ai and you know we're then looking at feeding incremental marketing dollars directly into that ai but we'll have to see if that's as efficient or more efficient than just our self sort of, you know, self-guided, very simple and approachable process that clients go through today.

Speaker 3

You had that chart in your S1 that talked about agent productivity. It had been increasing pretty dramatically over time. Does AI make them even more productive? And could you speak to how that chart is trending today at all?

Speaker 2

It's a great question. We haven't refreshed it since we put out. I'd say that we've seen just continued strong growth in our agent business in Q1 and Q4 since we went public. If I look at, I think about our agent operating system as like Uber for Uber drivers, where the agent signs up, they can buy leads from Ethos, the Ethos CRM will market to their clients, they can sell a policy in 10 minutes, they get paid the next day, they can reinvest those commissions in more lead prospecting and lead buying activities, and so on and so forth. And so in the P times Q equation, their Q can be so much higher with Ethos, allowing them to earn so much more lifetime commissions with Ethos and be more successful in their careers. And so I think there's room for AI to be a counselor to those agents helping with the right product recommendation or how to talk to the right client, et cetera. I don't know if it's like the number one most important thing in how they change their workflow today.

Speaker 3

Got it. So let's zoom out a bit. We have about 10 minutes left. If anyone has any questions for Ethos as well, we'll open it up. So zooming out, talking about the business model, I often say there's an insurance investor who doesn't understand the internet angle, and there's an internet investor who doesn't understand the insurance angle. But from traditional insurance investors, I'll often here about how you have to start from zero activated policies each quarter. There's no recurring nature of your book. How do you respond to that sort of bearish view of your model? Is it about the large consumer internet, TAM? Is there a broader long-term opportunity with new product additions? What would be your counter-argument there?

Speaker 2

It's a great question, Mike. So every single year, around 10 million people buy individual life insurance in the U.S., whether or not ethos exists. There is this implicit demand. There are new marriages, new babies being born, new houses being bought with mortgage debt incurred, new college tuitions that need to be planned for. And so all of these life changes push people into the buyer pool. And ethos direct is the most efficient way for people to buy. And ethos for agents is the most efficient way for agents to sell. So what we've observed is there's this constant reoccurring stream of people who are showing up to buy our policies. On the agent side, there's an additional facet to it, which is we go and recruit an agency. That agency rolls us out to all their agents immediately. Those agents sell repeat business all day, every day. That agency is constantly recruiting more agents onto our platform without us doing any incremental work and at no cost to us. And then we can expand our share of those agent and agency sales by improving our operating system and broadening the product portfolio so they can sell more products for more use cases. And so that's where we've seen those incredible cohort charts of agent productivity just continues to improve. So I would say that while the revenue is not recurring, it's reoccurring in a lot of different ways.

Speaker 3

And then from the internet investor's point of view, when it comes to your carrier relationships, can you talk about how those carrier relationship dynamics are changing this year? You know, how are their risk appetites and underwriting standards changing and to what extent their underwriting models and approval rates can become more favorable for you longer term?

Speaker 2

It's a great question. So we launched two new carriers in Q4, Aflac and North American Salmons, a new cancer insurance product and a new accumulation index universal life insurance product. And then we also added, I can't remember if it was Q4 or Q1, but a new whole life insurance product with Banner Life that we already partnered with. So we have 12 products with six carriers today. In our model, we are not dependent on the carrier to decide who should be approved, right? Ethos is executing the underwriting. Not only are we executing the underwriting, we're designing the underwriting guidelines and algorithms to execute. And then we're telling a carrier, hey, we're placing this risk on your balance sheet. And it's within the general constructs and frameworks of our partnership. So because we're at steady state and scale with many of our carrier partners, there isn't really much change day-to-day, quarter-to-quarter, year-to-year within the underwriting frameworks. The carriers know the risk. They understand the component of the buy box that we are giving to them, and they're accurately priced for it, and they just want as much of it as we can possibly give them, more than we are giving them today. So we feel very comfortable about the supply of balance sheet capacity today in relation to the supply of premiums that we're giving them. We will continue to add more carrier partners, both as we broaden the product portfolio, but also as we keep scaling and adding more layers of redundancy of overlapping products in the buy box, if that makes sense. In the same way that we've done with term and whole life and index universal life, where we now have multiple products in each of these categories. So there's a fair amount of redundancy within our product portfolio across the six carriers.

Speaker 3

And you signed a big partner with Liberty Mutual as well. And then there was one nitpick question on the earnings call about exclusivity. Can you talk about exclusivity? Does that become less important over time as you continue to grow and lead as by far the largest kind of online life marketplace?

Speaker 2

It's a great question. Ethos can partner with whoever we want. So there's no exclusivity in the agreement. I think it made a lot of sense for Liberty Mutual to partner with us because Ethos uniquely delivers this incredible instant buying life insurance experience and at high approval rates where we have a policy for almost everyone. And so you think about a non-expert like Liberty Mutual where they've got a client relationship already at stake, right? someone who has home and auto with them, they don't want to offend that client with a denial or a long, drawn-out, underwriting, and lengthy application process. And so with Ethos, it allows them to complete the whole solution, monetize the life component of the solution effectively at a high converting rate, and deliver an NPS experience that's up there with Apple and Tesla and other just incredible client experiences. And so I think Ethos uniquely allows non-experts to sell life insurance confidently in a way that didn't exist previously.

Speaker 3

Got it. Very helpful. Is there any questions from the audience? Now would be a good time. Got a few minutes left. Yes.

Speaker 1

I don't know if this is better, but I was wondering kind of your thoughts on the take of whether you see AI becoming the main platform through which consumers will access financial products, or if you feel like it's just an add-on, like more of like a distribution channel versus like the end market kind of place.

Speaker 2

It's a great question. If you look at like SEO today, it's a very small part of the overall market and how we acquire clients. So it may be another SEO. It might be a much larger component of it. Our internal execution plans are as if it's going to be a really large part of the market so that we can dominate both the organic effort of LLMs and if they ever decide to monetize the paid different from LLMs, but it's too early to tell. I think it makes a lot of sense for a client. Life insurance, the rates are not easily accessible online. There's no training data that ChatGPT can access to get up to date, you know, across the board, carrier rates, understanding how, what health class you're actually gonna be approved for based on your specific health condition and how carriers will underwrite you. So I don't think it's realistic that it's gonna be perfectly portable in, but it may be able to give them generic advice that they use to inform their opinion.

Speaker 3

So you've had some volatility in the stock since the time of the IPO. From your perspective, from the questions you're getting from investors, is there a topic that you think is most misunderstood since the time of the IPO? Anything around the business model and what gives you the most confidence going forward?

Speaker 2

Yeah, I'd say two things. The first is I don't think people appreciate the fact that life insurance is a massive $140 billion a year industry. And Ethos is a small single-digit percentage of it with a very transformative model compared to everybody else. So, you know, if I just take a step back, everyone in the industry is really stuck in the past. And Ethos is very different. And we're really able to, you know, compound at a much higher growth rate than the industry. The industry is growing around 3% a year. And so I'm excited for us to continue compounding and growing at a rapid rate compared to the industry and doing it responsibly. The second is, you know, investors have asked us, why don't you have 30 carrier partners? And the reason is we're not looking for generic off-the-shelf carriers and products in the same way that a brokerage would have. We really partner with carriers deeply to build deep proprietary custom products specifically for our go-to-market needs and partner with carriers that can handle scale and can be great long-term partners. And so that really informs the strategy of who we elect to partner with and why we're not trying to have one of everything on our shelf. Got it.

Speaker 3

Can you speak a bit to kind of your current balance sheet structure, your capital allocation priorities, and also kind of you generate this large receivable over time as you have, you sign policies and a significant chunk of the cash comes in year two and thereafter. So how do you think about that increasing receivable over time?

Speaker 2

Yeah, so we collect 77% of our lifetime commissions on month two of a policy's lifetime, which allows us to be variable cash positive on a fully burdened basis by month two. By the end of year three, we've collected 86% of our lifetime commissions. And after that, there's a stream. that commission's receivable is an asset. We could decide to monetize it if we want to. We have in the past. We haven't announced any plans to do so, but with it, we could do everything under the sun from buybacks to strategic M&A to really whatever we want.

Speaker 3

And one other debate that I've heard from insurance investors, to your point on you have such a large TAM and you're still a very small percentage penetration within that, I think some insurance investors may kind of nitpick that from the angle of, well, what are you really great at if you're such a low percentage? And my counterpoint tends to be within a certain segment, call it term life policies, you're a little bit higher percentage and then you're adding in smaller percentages, layering on those over time and the other verticals. So where do you agree with that? And kind of where do you stand in terms of adding those additional verticals over time?

Speaker 2

Yeah, well, that's not really a fair way to view it because, I mean, we're a recently started company. You know, we started in 2016. We launched in 2018 in our direct business. We launched in our agent business in 2020. And so I'd say it's pretty remarkable how quickly we've grown in that time period. You know, we're today in three of the five major categories of life insurance and so we've got without launching any more new products we have a lot of room and ability to grow and multiply from where we are today we could and if you look at like our Q1 results it was done with pretty much the same product portfolio and mix of products that we had a year before that just to demonstrate so I expect us to keep compounding and getting larger. We're a business that gets better as it gets bigger, right? We've got this virtuous data cycle where the more clients we absorb, the more intelligent we get at running user experiment tests, more intelligent we get at underwriting risk, the more intelligent we get at predicting who's the next client that we should bring in. We have more data to inform what our next product to build is. We have more agent usage data to figure out how we should tweak the agent platform. So we've really observed it's a business that gets better as it gets bigger. And so, which is common in insurance and financial services businesses. And I think if you look at us compared to the typical carrier that's got all this antiquated technology and manual process, a life carrier actually has a hard time being a virtuous learning organization because there's so much friction in that data cycle. And so with Ethos, we're all about keeping that cycle as clean and fast and informative as possible so that we just keep getting better as we get bigger. We have one minute left.

Speaker 3

Anyone has any more questions? I guess my last one would be on the product cycle we've talked about. I think historically you added maybe four or five products annually. I don't know if I'm adding too many there. Three or four. Okay. What's the biggest bottleneck when it comes to that product addition over time? Has it been technological, product development, engineering, or is it more so on the carrier side? You need to add carriers that have different product sets?

Speaker 2

Yeah, it's a great question. The engineering work kind of is what it is, and it's kind of a couple-quarter lead time. It's mostly about identifying the right high-conviction opportunity, identifying and finding the right carer who wants to go into that part of the market with us in a big way and really commit to the product vision that we have and is able to deliver the pricing and underwriting and commissions to Ethos that we would like. And so, you know, sometimes we can find that quickly. Sometimes it takes a longer time to find that carrier. And you kind of have to meet them when they have the availability and when it's right for their IT roadmap and their operational resources and roadmaps. So one of the nice things is as we've gotten larger, it becomes easier to guarantee carriers that, you know, volume and profitability because they know, hey, it's no longer an experiment, right? All right. Well, thank you so much for joining us later. It was really helpful.

Speaker 3

Great question. Thank you, everyone. Thanks, everyone.