Lemonade, Inc. Q1 FY2022 Earnings Call

Good morning, and welcome to the Lemonade, Inc. First Quarter 2022 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Yael Wissner-Levy, VP of Communications. Please go ahead.

Good morning, and welcome to Lemonade's First Quarter 2022 Earnings Call. My name is Yael Wissner-Levy, and I'm the VP of Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's first quarter 2022 financial results is available on our Investor Relations website, investor.lemonade.com. Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-K filed with the SEC on March 1, 2022, 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 our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key operating metrics, including 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 will turn the call over to Daniel, who will begin with a few opening remarks. Daniel?

Thank you, Yael, and thank you to everybody for joining us this morning to review our Q1 results and to allow us to update you on our expectations from the remainder of Q2, and indeed the remaining of 2022. I'm very happy to say that the year kicked off with a very strong first quarter, both our top line and our bottom line came in ahead of expectations as in-force premium or IFP stood at $419 million, while our adjusted EBITDA loss for the quarter came in at $57 million. This quarter we also hit a big milestone for the company as it was the first full quarter in which Lemonade offered the full suite of insurance products that is renters/home, life, pet, and car in one market. For the first time a customer could mega bundle, or get all four Lemonade policies that meet their insurance needs in one app with bundle discounts and with ease Lemonade is known for. So far, this mega bundle is available in Illinois and Tennessee alone. And I think these markets offer an early peek into how meaningful growing with our customers can become as we roll out these products nationwide. Growing with our customers has long been a central plank of our strategy. And the early dynamics we see in both Illinois and Tennessee reinforce that. For example, in one quarter alone, we saw bundle rates in Illinois climb 40% versus the rest of the country. To the extent that this is indicative of things to come, it is very significant. Customers with two Lemonade products outspent the average single product customer 3 to 1. For customers with three Lemonade products, the ratio was 7 to 1. When we get to customers with all four products in these two markets, that ratio jumped to 9 to 1. Indeed, annual dollar retention or ADR in Illinois jumped during Q1 to 90%. So while it's early days in small numbers, Illinois serves as an encouraging case study. As has been our strategy since day one, we want to be there for our customers as they go through predictable life cycle events, moving, buying a home, getting a car, starting a family, all of these events have dramatic growth implications for insurance spend and with little corresponding marketing spend on our part. This dynamic not only boosts our bottom line, it is also the fastest contributor to our top line. While total premiums from single product customers grew at a rate of 61% relative to Q1 2021, premiums for customers with two Lemonade products grew at a pace of 140%. And premiums for customers with three products jumped 390% during that same period. So I will touch on the second plank of our strategy, winning with technology in a minute. But before that, I'd like to say a word about two changes at our Board of Directors. The first is that we recently announced that Caryn Seidman-Becker will step down from our Board of Directors effective at the conclusion of the Annual Meeting in June. Caryn's company, CLEAR, recently IPO-ed and Caryn was also appointed to the Board of Home Depot. As a result of concerns regarding overboarding, which means serving on too many public boards and to avoid any questions around good governance, Caryn will depart from our Board. I'd like to take this opportunity to thank Caryn for the extraordinary contribution she has made to our company over her four-year tenure at Lemonade. She has left an indelible mark on the company and has provided incisive and actionable counsel to Shai and I at key junctures. In an unrelated change, Joel Cutler has today tendered his resignation from the Lemonade Board. Joel has recently learned of a serious health issue and he will be undergoing major surgery later this week. Joel has served on our Board since November 2016, and it would be hard to overstate the impact he has had on Lemonade, nor the esteem and affection Shai and I hold for him. On behalf of all your friends at Lemonade, Joel, we want to wish you a speedy and complete recovery. We are kicking off a search for two new Board members and we'll of course update you as those searches conclude. And with that, let me hand over to Shai for some more color on our loss ratio. Shai, over to you.

Thank you, Daniel. Last quarter, I spoke about measures we've taken to address underwriting profitability in our quest to achieve loss ratios of all Lemonade products within a 75% target. We've always believed that building a technology-powered insurance company is the way to achieve best-in-class customer experience, efficiency and prediction of risk. When it comes to loss ratios, our internal dashboards show increasingly profitable cohorts with every month that passes. We're now using our fifth generation of machine learning LTV prediction models. And these provide an ever-improving estimate of the loss ratio of each new customer as well as their likelihood to churn or cross-sell. The combination of these factors supports our real-time view of customer lifetime value. Despite a 90% gross loss ratio for the quarter, these dashboards show that the business we generated in Q1 is expected to have a lifetime loss ratio comfortably within our 75% gross loss ratio target. As we've spoken about before, loss ratios are lagging indicators, and changes in pricing, underwriting and segmentation take time to develop and then get approved through regulatory filings and yet more time to earn in. This lag between action and results is a structural reality of insurance, which is why we use predictive machine learning models rather than backward looking loss ratios in our day-to-day management. As much of the broader insurance industry has reported, Q1 loss ratios were more significantly impacted by inflation as claims have quickly adjusted for inflation, while rates can take months to adjust. We've been working hard to combat this with corrective measures, and in the past year have filed about hundreds of applications for rate changes. As regulatory approvals come in, we look forward to bringing rates back in line with risk. So while our target multiyear average loss ratio below 75% remains unchanged, it's important to remind our shareholders that while loss ratios spike from time to time, we have reinsurance in place to help insulate us from such bumps. Indeed, this quarter, we’re reporting a 23% gross profit margin at a better-than-expected EBITDA, notwithstanding the heightened loss ratio. And now, over to you, Tim.

Great. Thanks, Shai. I'll give a bit more color on our Q1 results as well as expectations for the second quarter and the full year, and then we'll take your questions. We had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer. In force premium grew 66% in Q1 as compared to the prior year to $490 million. We believe that this metric captures the full scope of our top line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Premium per customer increased 22% versus the prior year to $279. And this increase was driven by a combination of increased value of policies over time, as well as a continuing mix shift toward higher value homeowner and pet policies. As in the prior quarter, the majority of the growth in premium per customer in Q1 was driven by product mix shift, including cross sales, and the remaining 20% from increased coverage levels and pricing. Gross earned premium in Q1 increased 71% as compared to the prior year to $96 million, roughly in line with the increase in in force premium. Revenue in Q1 increased 89% from the prior year to $44 million. And our gross loss ratio was 90% for Q1 2021 as compared to 96% in the preceding quarter. Operating expenses, excluding loss and loss adjustment expense, increased 68% in Q1 as compared to the prior year. This is primarily driven by increased technology-related personnel expense, stock-based compensation expense and legal and professional fees, partially offset by the impact of increased sales and marketing efficiency. We also continue to add new Lemonade team members in all areas of the company in support of customer and premium growth and to support geographic product expansion, and thus, saw increases in each of the other expense lines. Global headcount grew 76% versus the prior year to 1,162 with a greater growth rate in product development and underwriting teams. Notably headcount growth was just 20% when compared to six months ago, as we are seeing more efficiency gains in personnel expense in recent quarters. Our net loss was $74.8 million in Q1, or $1.21 per share as compared to the $49 million loss we reported in the first quarter of 2021. While our adjusted EBITDA loss was $57.4 million in Q1 as compared to $41.3 million in the first quarter of 2021. Our total cash, cash equivalents, and investments ended the quarter at $1 billion, reflecting primarily a use of cash for operations of $39 million during the first quarter. Now with these goals and metrics in mind, I will outline our specific financial expectations for the second quarter and an updated full year 2022. For the second quarter 2022, we expect in-force premium at June 30 of between $445 million and $450 million. Gross earned premium of $103 million to $105 million, revenue between $46 million and $48 million, and adjusted EBITDA loss between $70 million and $65 million, stock-based compensation expense of approximately $15 million, and capital expenditures of approximately $4 million. And for the full year 2022, please note that we expect the Metromile transaction will close during Q2 and that our annual in-force premium is expected to grow approximately 70% during 2022. The guidance that follows, however, excludes the expected impact of the closing of the Metromile acquisition. At year-end, we expect in-force premium of between $535 million and $545 million, gross earned premium between $426 million and $430 million, revenue between $205 million and $208 million, and adjusted EBITDA loss of between $280 million and $265 million, and stock-based compensation expense of approximately $60 million, and capital expenditures of approximately $14 million. And as we noted last quarter, we do continue to expect that 2022 will be our year of peak EBITDA losses. With that, I'd like to turn the call back over to Daniel.

Thanks, Tim. We'll now address the questions that our shareholders have upvoted on the SAY platform. The first question is from the Paper Bag Investor, asking why there has been little to no insider buying despite the decline in Lemonade's market cap. It's clear that stocks have taken a significant downturn recently, and Lemonade's value has decreased about 50% this year, which reflects broader trends in the tech growth sector. I believe this situation speaks more to macroeconomic trends and shifts in investor sentiment rather than specifically about Lemonade. Regarding insider buying, I understand the interest in this topic, but personally, I pay little attention to it. I cannot recall ever discussing the buying or selling of shares with Lemonade's officers or board members. People engage in buying and selling for various reasons, and I don’t see it as an indicator of commitment or confidence in Lemonade. However, I want to express my strong belief in Lemonade's long-term prospects, with most of my family's wealth tied to LMND stock. I anticipate that this sentiment is shared by other insiders as well, and I hope that addresses the concern behind the question. Next, a question from Charwak touches on multiple topics. The first part concerns how we analyze the effectiveness of our AI engine. We use various metrics for evaluating machine-learned models, including area under the curve for binary decisions and the Gini score for challenges like ranking risks. Our AI is utilized across different areas of our business, including marketing, underwriting, fraud detection, and claims handling. In many instances, the AI operates independently, while in others, it provides recommendations for human review. This collaboration helps establish a benchmark for the AI’s performance and serves as training data for ongoing improvement. The second part of the question deals with our approach to inflation. We are actively pursuing rate increases across all our products, including homeowners, renters, and pet insurance, with plans to implement updated rates for over 90% of our business before the end of the quarter. For homeowners, we have introduced automatic updates to adjust the assessment of repair and rebuilding costs, ensuring that any construction cost inflation is reflected in higher limits and consequently higher rates for both new and renewing policies. In terms of car insurance, while the sector has been heavily impacted by inflation, our filings remain current and aware of these pressures, so we don’t expect to need additional rate increases in the near term. Lastly, regarding the question about releasing loss ratios for different products to evaluate AI’s impact, we acknowledge this is a reasonable inquiry. We are planning to hold an Analyst Day to provide more insights into our AI efforts and product-specific loss ratios. However, there's a careful balance to maintain, as sharing too much information could benefit our competitors. We want to be transparent while also protecting sensitive areas of our business. We’ve discussed this tension in our founder's letter, emphasizing our commitment to transparency while being mindful of its potential drawbacks. Finally, we have an update on the Metromile acquisition. Almost all preconditions for closing the deal have been satisfied, with Metromile's shareholders approving the transaction by a 95% majority. We are currently waiting for approval from insurance regulators in Delaware before finalizing the transaction. We still hope to complete this in the second quarter, but it’s possible the closing could extend into early Q3. Integration efforts are progressing well, and we believe the merger will be smooth and efficient. With that, I’ll turn the call back to the operator for questions from our audience. Thank you.

The first question is from Michael Phillips with Morgan Stanley. Please go ahead.

Okay. Thanks. Good morning, everybody. Thanks for all the comments on the loss ratio that everybody provided. What I didn't hear it maybe if you have and if you want to share was there any impact? Obviously, we’re comparing to last year where there’s pretty big impacts. But any impact on any kind of storms or catastrophe losses that would impact the 90%?

There wasn't anything significant in terms of catastrophes this quarter, just a typical baseline level of cat losses. It's nothing like Uri or the situations we encountered last year, so I would describe it as a relatively quiet quarter from a cat perspective.

Thank you. Can you explain the impact on the loss ratio due to the shift in the mix? You mentioned this last quarter as well. How much of your business now consists of renters? I recall you indicated last quarter that it was below half. Could you discuss that? Additionally, how has the transition to homeowners affected the loss ratio this quarter? Please elaborate on the shift from renters to homeowners and its impact on the loss ratio.

Yes, I would think of the mix shift as continuing its pace in the last several quarters. We don't give an exact breakdown currently. But as we did mention, we recently crossed over from having renters above 50% to below 50%. It continues to decline as a share of the total, but relatively slowly. Contributor to the loss ratio in the quarter, it was certainly primarily the mix shift, if you discontinued greater mix shift. But also fair to say that the inflation impact are starting to be visible in the numbers that affects home more than pet or renters, but it will ultimately potentially affect all of the product lines. So primarily mix shift to a lesser extent some of the inflation impacts.

Okay, thank you. That's it for now. Appreciate it.

The next question is from Matt Carletti of JMP. Please go ahead.

Hey, thanks. Good morning. Daniel, you gave some helpful stats on some of the bundling take up, particularly in Illinois, I think where you have four products live. I was hoping you could help us understand kind of the cadence by which we might get more states that look like Illinois, kind of how the rollout will be in terms of getting more kind of three and four product states maybe where we might stand by the end of the year?

Hey, Matt, good morning. Well, I think we'll see with the closing of Metromile here a sudden kind of jump in those dates. So we are planning our launches of the Lemonade car product, so as not to overlap too much with what's already in existence, and that we expect to inherit pretty quickly. So I think you'll see something of a step-function change once the Metromile deal closes.

Okay, great. And then just one other one. I think both you alluded to with kind of commentary on the market and Tim as well just with '22 being peak EBITDA losses. I was hoping you could update us maybe on a little more long-term view of Lemonade's path to profitability, particularly given kind of the recent changes in at least the market demands?

Sure, let me share some high-level comments, and then I’ll let Tim add anything if he wishes. It's a good opportunity to remind you and all our shareholders that Lemonade has a policy of only selling products and investing in markets that we believe to be at least somewhat profitable. Although we are reporting losses at the company level, the areas where we are allocating funds for marketing, expanding territories, or acquiring customers are those where we find the customer acquisition cost to lifetime value ratio quite attractive, consistently around 3 to 1. It might seem misleading since our losses suggest we're selling products at a loss, but that's not the case. The costs are incurred upfront, particularly because we primarily acquire customers through direct-to-consumer advertising, leading to an immediate impact on customer acquisition costs. Additionally, first-year customers experience the highest loss ratios, facing both acquisition costs and elevated losses during that period. However, we are capable of modeling their lifetime loss ratios and believe, backed by historical data, that these investments will yield approximately a threefold return on each dollar spent. Currently, a significant portion of our business comprises first-year customers. While they are expected to be profitable over their lifetime, they don’t contribute positively within the same accounting period, which primarily drives our losses. This delay in profitability is due to our growth; as our customer base expands, the proportion of first-year customers will naturally decrease. Consequently, we anticipate peak losses in the near future as the dynamics of customer acquisition costs to lifetime value and previous investment in products and customers start to yield returns. This is not a major strategic shift but rather something we've planned for and worked towards for a long time. The older customer cohorts are becoming more profitable and contribute significantly to our underlying business, while newer cohorts constitute a smaller share, creating a self-correcting dynamic. We remain committed to our established strategy, convinced that our upfront investments will provide greater long-term returns compared to traditional insurance models that use agent-based distribution, which offers lower upfront costs but requires ongoing partnerships. This is how we foresee our path to profitability evolving. As we approach peak losses, you'll start to see the benefits compound and lead us toward profitability.

Great. Thank you very much for the answers.

The next question is from Yaron Kinar of Jefferies. Please go ahead.

Thank you. Good morning, everybody. So my first question, probably a continuation of the last question-and-answer. Can you maybe give us a little more color or data around the split between new and renewal customers? What does that look like? How's that been trending?

So I think, our focus has shifted somewhat to expanding our existing customers now that we have the ability to bundle and upsell and cross-sell at a greater level than we have in the past. So if you look at one of the metrics we publish, net added customers, you'll see that vary quarter-to-quarter. And it's to kind of repeat, I think we've said in the past that that's more of an output than input. And so, gradually over time, we're seeing more of our increase in premium coming from existing customers. We look at annual dollar retention as a key metric, for example. Each customer that we add is spending more and staying with us longer, it's still under 100%, but making strong improvement. And as Daniel noted, in Illinois, where we've got the broadest portfolio available, we're seeing even higher results, they're edging up to 90%. So in terms of the breakdown, I mean you can see it in the number of customers, net number of customers you've added, but I would say there's no change in the last several quarters approach, which is we want to consistently increase the amount of premium coming from existing customers. Now that said, we're expanding into states we're not in with the combination with Metromile, that'll enable us to do that more effectively with car products. So you'll continue to see a balance. But the focus is really more on lifetime value. And that's increasing the retention of existing customers, and increasing the dollar premium potential value of new customers, and we're seeing that. The recent cohorts as Shai noted, look quite strong. And so when you see the amount of ad dollars we're continuing to put to work because we can see that cohort activity with a stronger result, the publicly published numbers are a bit of a lagging indicator, and in our dashboards, we can see the monthly and quarterly updates that look very promising.

Okay. And second question, probably further down this path. Can you maybe talk about the spread between the loss ratios of new and renewal customers? I don't know if you can quantify it, or at least give us some direction. Is it improving? Is it deteriorating or is things stable? And then maybe as a follow-up to that, with each renewal, do you continue to see an improvement in the loss ratio? Or does that start flattening out over 2, 3, 4 renewals?

Hi, Yaron. Yes, so we do see steady improvement over time when you look at the same cohort as it ages. In our earlier comments, we spoke about lifetime loss ratio and that's really what we have in mind. So we don't measure the value of a customer by their loss ratio in the first few months, but really by the projected loss ratio over their lifetime. And we do see a fairly steady drop in loss ratio of cohorts that have been with us for 3 and 4 years. You'll see across the book a drop of oftentimes 15 or more percent from year 1 to year 2, and something not altogether different from year 2 to year 3. It does vary by product. We don't have enough years of cohorts, for example, in pet yet alone in car, but I think that has been the dynamic in homeowners.

Got it. If I could quickly ask one more thing. You mentioned some of the data you observed in Illinois when launching Lemonade car. Was the data similar in Tennessee? Was Tennessee just later in the onboarding for car? I was surprised not to see equivalent data from technical difficulty.

Yes, it's just the launch of Tennessee was much more recent, that's all. So we're not seeing any significant differences. It's only a few weeks of Tennessee, and we've got a full quarter of Illinois. So that's just more substantial. But there's nothing in Tennessee that contradicts or diverges from what we've seen in Illinois.

Thank you for the answers.

The next question is from Jason Helfstein of Oppenheimer. Please go ahead.

Hey, this is Chad on for Jason. How does the expansion of auto impact your outlook for the next 2 years? And then where is the outsize impact on the P&L? Thanks.

So I have a few thoughts, and Daniel can jump in if he wants. The car product is similar in some ways but different in others. Historically, we’ve stated that we are indifferent to the types of premium we receive, but that's probably a bit of an exaggeration. We actually prefer customers who use all of our product types. We’re noticing the benefits of this, particularly in Illinois, which is important to us, but we hope to see more policies from customers trending this way. From a cost standpoint, we have invested significantly in supporting the car product. We have a dedicated product development team, and we’ve established a customer experience and claims support infrastructure. The premium flow is still in the early stages, and much of this investment has already been made. Loss ratios will experience some pressure compared to renters, which is a much more established and different product. However, the challenges with car may resemble those we faced with home and pet regarding our ability to introduce a new product experience during a time when we have limited data. We have demonstrated a capacity for quick optimization in such situations. If you observe pet's performance over the last two years and home’s over the past three years, you will notice a consistent pattern: a challenging early phase, followed by consistent optimization, leading us toward our target lifetime value and loss ratios. We have the necessary infrastructure set up for car. I believe the Metromile combination will address a gap we had with other products, providing a quick boost to our experience with data, including over $100 million in in-force premiums. This will set our car launch apart, allowing us to enter the market with more data intelligence related to pay-as-you-go or pay-per-mile options, alongside a more traditional pricing model. Ultimately, our main goal is to maximize the premium per customer, which means making the car product effective for as many of our customers as possible.

I will just share a few quick thoughts. We've discussed this before, but according to our estimates, our current customers are already spending over $1 billion on car insurance; they simply haven't had the chance to spend it with Lemonade. Most of our sales of Lemonade car in Tennessee and Illinois have gone to existing customers, where our acquisition cost was zero. If we can scale this dynamic by continuing to grow our existing customer base while also attracting new customers who are looking for insurance we previously didn't offer, it will significantly change the dynamics and economics of our business. This will enhance retention and dollar retention, particularly in impactful ways, as we've seen in Illinois. Currently, we are unable to sell homeowners insurance effectively since customers anticipate bundling their home and car insurance, which we can't provide, leading them to competitors who offer bundle discounts. As we introduce car insurance, we will be able to address this issue. Thus, we will see an increase from selling car insurance, along with a less expected benefit of lower customer acquisition costs due to the ability to cross-sell to existing customers. Moreover, our homeowners insurance will benefit from improved customer retention as we can now offer something we couldn't before. Lastly, as Tim mentioned regarding home and pet insurance, we have been learning from our own data collection. With billions of miles of data from Metromile and a highly unique car product already launched, our offerings will be enhanced by Metromile's capabilities. This isn't the typical car insurance available today. The advantages we have from the telematics data we've discussed previously should accumulate rapidly over time.

Got it. Thank you.

The next question is from Andrew Kligerman of Crédit Suisse. Please go ahead.

Hey, thanks a lot. First, I want to touch on expenses. So, tech and development was $16.9 million, up from $7.1 million year-over-year. G&A $22 million versus $14.1 million year-over-year. And I think Tim was touching on headcount being up 76%. Could you give a little color on in tech and development where the spend is greatest, what products, where the focus is there? And same thing on G&A?

Sure. It's important to highlight a few things regarding the expense flow, particularly the year-on-year comparison. Additionally, examining the sequential comparison is beneficial. We'll provide more details later today, and much of it is in our letter published yesterday. You'll notice two main drivers for the expenses: personnel and marketing, specifically advertising and customer acquisition costs, which we have already discussed. The year-on-year growth in personnel costs is quite substantial. However, when comparing quarter-on-quarter or year-to-date, we've observed a significant change in our hiring pattern. While we continue to bring on talented individuals, the net additions over time compared to our historical patterns have slowed down considerably, which is a positive development. This slowdown indicates that we had a significant ramp-up in 2021, especially for the build and launch of our car. Therefore, we needed to front-load expenses for this major launch, which is reflected in the increase in R&D and product expenses within our technology line. Those expenses are largely associated with the personnel developing that product. Now that we've established the necessary infrastructure, we can expect moderate growth moving forward as premium increases occur. It's essential to examine the sequential growth alongside headcount numbers, and I suggest comparing that to Q4 for supporting data. From a G&A perspective, a couple of points to consider: first, the expense lines include stock-based compensation, which has surged year-over-year due to a higher historical stock price and previous equity grants. Isolating that stock-based compensation will provide a clearer cash expense comparison. Additionally, we experienced higher expenses in professional services and legal areas that aren't tied to headcount. This led to an increase in expenses this quarter compared to the previous quarter, although we anticipate some benefits in the upcoming quarters as we expect these costs not to reach the same level again. Therefore, we saw slightly elevated expenses in Q1 and the surrounding quarters within the G&A line.

Very helpful, Tim. And do you anticipate any big deltas in your G&A, or tech and development once you bring Metromile versus where your expenses are now and versus where Metromile's expenses are? Or do you think both entities expenses might be somewhat steady state?

I see this process in two stages. First, you will be able to review our Q1 expenses and Metromile's when they release their figures, which should happen soon. Both companies are following a similar quarterly schedule, so you will be aware of our current run rate. The second stage will occur when we merge the companies, and we expect that to happen before the end of this quarter. We remain optimistic about staying on track for that. As a result, the third quarter will likely be the first time you see a consolidation of the two companies. I anticipate that there will be a noticeable increase once we officially combine them on a pro forma basis. As we integrate, we plan to eliminate redundant costs. Metromile has all the necessary public company infrastructure costs, just as we do, which will diminish over time as we combine our operations. Additionally, a significant portion of our future hiring expenses will likely come from Metromile. This will gradually become evident over the coming quarters as we formally bring the two companies together, guiding us toward a sustainable run rate that is significantly lower than merely combining the two, but higher than Lemonade's standalone operations.

Thanks. That was helpful. And just one more on the gross loss ratio of 90%. And I know somebody was asking a little bit about it earlier, but would it be suitable for you to break out the underlying loss ratio? What the cat's piece was and what the prior year development piece of that was?

The statutory filings will be released shortly, but at a high level, the previous period's development was negligible. There was no significant change in that aspect. Regarding catastrophes, as I previously mentioned, the numbers aligned with previous periods without any major catastrophic events, which usually fall in the single digits. However, the most critical point I've touched on before is that the impact of inflation is substantial. It's challenging in these early months as it fluctuates quickly, and it's hard to determine exact figures. We don’t provide guidance on this, but if you compare some metrics from now to a year ago, you'll see effective inflation rates in key components of home rebuilding and repairs at around 5%, 10%, or even 15% or more. This has a considerable effect on the loss ratio. While we are not complacent, believing everything is fine, we recognize the need to catch up with inflation, which is indeed significant. It's also worth mentioning the steps we've taken in response. We have been actively increasing rates and filings, which we have consistently done historically, but we've accelerated this process in line with the new inflation data we've received over the past year. Nearly all of our home and pet business will face new rate filings in the coming months. Although it’s challenging to fully offset the inflation impact, which is constantly changing, we believe we'll manage reasonably well through specific rate adjustments and automatic rate adjustments where legally permissible. As for the car insurance segment, it's relatively new for us. Currently, we operate in one state, but we plan to expand to several states. This phased rollout allows us to adjust more easily. Inflation rates of 20% or higher are significant, and we have taken this into account. While there may be a lag in seeing the effects of these filings, you can expect to observe the impacts over the next couple of months and quarters.

No doubt tough inflation. Maybe if I could just sneak one last one. So what is it about your dashboard that tells you that you can get to that 75%? Is it the bundling, is it renewals? Is it something else that that's in that dashboard telling you, a 90% this quarter can go to a 75%?

Thanks for the question, Andrew. Shai mentioned that the business we acquired this quarter has a lifetime loss ratio of under 75%. Our actual work loss ratio reflects sales from three to four years ago, so we carry that forward as it takes time to incorporate these new acquisitions. To clarify, Shai was discussing the lifetime loss ratio of newly acquired customers. This ratio is based on machine learning models, which we’ve trained using several years of data from over 1.5 million customers. These models can now predict with increasing precision the likelihood of claims, customer churn, and potential purchases. We utilize this information to optimize our marketing campaigns to generate lifetime value. With several years of history to validate these models, our confidence in their accuracy has significantly improved recently. They provide effective insights into customer behavior over the upcoming years. The machine-learning models suggest that the newly acquired business will be profitable and will maintain a loss ratio below 75%.

Okay, thank you.

The next question is a follow-up from Michael Phillips of Morgan Stanley. Please go ahead.

Hey, thanks for the follow-up opportunity. Your new homeowners' customers, can you tell us either maybe specifically or just broadly, are those coming from graduations from renters? Are they coming from purely new customers?

It's not just new customers. In our condo business, which is the most common switching point, renters often move from rental properties to condos and then from condos to homes. We've observed a steady rise in the proportion of our condo business coming from these transitions. I haven't checked recently, but it was just under 20% last time I looked, which is about double the percentage from our IPO a couple of years ago. There has been a consistent upward trend. If I recall correctly, the percentage for homeowners is around 15%. I might be off by a percentage or two, but that is generally how the percentages break down.

The 15 was purely new. That’s still like 85 is graduation, 15 is fairly new, don’t you think?

If you look at the overall picture of a homeowner's portfolio and consider how many current homeowners, including condo owners, began their journey with us as renters, approximately 15% of them started as renters and then transitioned to homeowners. This figure has been rising steadily each quarter since our launch, with condos showing even higher rates at nearly 20%.

Okay, great. Thank you for the clarification. Appreciate it.

Good morning. Apologies I had to join this call late, was on another earnings call. So my question was already asked, my apologies. Could you quantify the rate increases you're seeking in your 100 filings? And if you're getting any pushback for it by regulators, as they're trying to protect their constituents who are also facing higher inflationary pressure?

Hi, Tracy. Good morning. The question was not asked. So thank you for that. It varies tremendously from product to product and state to state. So it wouldn't be responsible for me to give you kind of a blanket answer for that. It really is a matrix of 3 or 4 by 50, and we tried to do this with tremendous precision. And in fact, even that, in large measure understates things, because rather than just doing kind of crude base rate increases, we do use all the data that we gather in order to become more and more refined in our segmentation. And even as we raise rates in California for particular product, we might be decreasing it for some customers, increasing it for other customers. So it is a fairly complex matrix. And yes, of course we do you get pushback, and there are places where it's harder and easier, or slower or faster to get rates approved. I think the state of California has a special place in the hearts of insurers nationwide for being a place that it's been tricky, particularly for homeowners to take a rate commensurate with the risk, and we’ve seen an outflow of a lot of insurance companies from that state for that reason. So I'm not sure it's actually protecting consumers, it's actually making it harder for them to get insured. But, yes, in some states and for some products, it's harder than in other areas.

Okay. And are you including an inflation guard on your homeowner policies to complement rate increases? I think that you can implement right away.

Yes, we have implemented an inflation guard approved in most states for homeowners' products, providing us with that capability. Additionally, we are taking further steps. We are instituting broad base rate increases and monitoring inflation closely to ensure our rates keep pace. Recent data from the National Association of Homebuilders indicates that construction rates have surged by 10% in five months, 20% in a year, and over 30% in the last two years. Certain sectors, like home and automotive, are experiencing significant inflation beyond what is typically reported. Consequently, we are proactively adjusting our strategies to address inflation. Moreover, our system includes the ability to update the construction replacement costs in homeowners' policies upon each renewal. We have access to extensive and current databases, enabling us to assess repair or replacement costs with greater accuracy than ever before. For both new products and renewals, we rely on the most up-to-date estimates, ensuring that our coverage limits reflect rising costs accurately. Previously, we allowed for a 20% variance in our underwriting guidelines; however, we are tightening these standards. We will no longer insure homes with a replacement cost ratio below 100%, allowing us to trust and implement these datasets effectively to adapt to inflation continuously.

Is there any shift to move to actual cash value from replacement costs?

No. Our policies are replacement cost, is what our customers expect. We pride ourselves on that. There's no talk of changing that.

Thank you.

This concludes our question-and-answer session and today's conference. Thank you for attending today's presentation, you may now disconnect.