Lemonade, Inc. Q4 FY2022 Earnings Call

Hello, and welcome to the Lemonade Fourth Quarter 2022 Earnings Call. My name is Harry and I'll be your operator today. I'd now like to hand over to Yael to begin. Yael, please go ahead now.

Good morning, and welcome to Lemonade's fourth quarter 2022 earnings call. My name is Yael Wissner-Levy, and I'm the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's fourth 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, our Form 10-Q filed with the SEC on November 9, 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 their operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key operating metrics, including in-force premium, premium per customer gross loss ratio, and net loss ratio and a definition of each metric, why each is useful to investors, and how we use each to monitor and manage our business. With that, I'll turn the call over to Daniel for some opening remarks. Daniel?

Good morning, and thank you for joining us to discuss Lemonade's results for the fourth quarter and the entire year of 2022, as well as our outlook for 2023. The year 2022 presented challenges to businesses globally, including high inflation, geopolitical unrest, rising interest rates, and declining markets. Nevertheless, Lemonade had a strong year despite these global challenges. While we were certainly impacted by these circumstances, we are grateful that we were able to respond effectively. When inflation increased our loss ratio, we responded by drastically increasing our rate of filings. Although inflation remains a concern, it appears to be on the decline. In response to rising capital costs, we have curtailed our spending to ensure our substantial reserves will sustain us for the long term. Consequently, we believe that the peak of our losses is behind us, and we are on track toward profitability. Additionally, we have made progress internally by launching new products, entering new markets, integrating Metromile, and growing our business by two-thirds year-over-year. Overall, we have managed to transform the crisis into an opportunity, and we ended 2022 significantly stronger than we began it. Focusing on the fourth quarter, we are pleased to report strong results with both revenue and profit exceeding expectations. The fourth quarter also presented unique challenges and surprises for insurance companies, particularly regarding seasonality and extreme weather. Typically, the last quarter of the year sees fewer renters and homeowners moving, more holiday activity, increased acquisition costs, and slower sales. This year, likely due to reduced spending by companies across sectors, our marketing efficiency improved more than we had expected, positively impacting both our revenue and profit. However, we faced an unpleasant surprise with winter storm Elliott causing hardship for many Americans during the Christmas holiday. Such a late-year storm is unusual, and the fact that our loss ratio continued to decrease despite this event indicates a strong underlying trend. We saw ongoing improvements in our loss ratios across the board, aligning with the forecasts we provided at our November Investor Day. Now, I will turn it over to Shai for insights into 2023. Shai?

Thanks, Daniel. In 2023, we'll focus our efforts on three key levers of our business: growing with our customers, further improving our loss ratio, and continuing our growth. You'll read more about each in our shareholder letter, but I'd like to add some more color. Starting with ADR, our annual dollar retention, which is a helpful indicator for our growing-with-our-customers strategy. Today, we reported that our ADR climbed four percentage points to 86%, an all-time high, though in Illinois, where all our products, including Lemonade Car, have been available for a full year, ADR now stands at 95%, hopefully a sign of things to come. Having said that, ADR, loss ratio, and growth are intertwined in both obvious and non-obvious ways. For example, we have broad efforts to continue to drive down our loss ratio to our target range. And in some cases, this includes parting ways with customers whom we cannot adequately price. Pockets of mispriced customers can always arise, but the inflationary environment of recent quarters has increased their size and prevalence. Our machine learning models have become fairly proficient at identifying these mismatches, and so we're slowing growth in these areas. Within the limitations imposed by regulation, in the more badly mispriced areas, we won't make do with slowing or stopping growth; we will actually put growth into reverse. We'll do that by non-renewing unprofitable business. Non-renewals will put downward pressure on all three of our core metrics: ADR, loss ratio, and growth. Downward pressure on loss ratio is the goal and is welcomed. Some pressure on ADR may appear to be unwelcome, though when the business we're parting ways with is a drain on our profits, this is actually welcome too. Gross profit retention, if you like, will still be going up, which brings us to the downward pressure on growth. The time lag between filing new rates and these being approved, implemented, and earned in can be considerable. Fortunately, we have reasonably good visibility into those dynamics and can target our growth accordingly. But as long as sections of the market remain mispriced, opportunities for profitable growth will remain somewhat constrained, and our pace of growth will track to the pace of new and profitable rates coming online, which is a good segue to Tim, who can provide more details on our guidance for 2023 as well as on our Q4 results. Tim?

Great, thanks. I'll give a bit more color on our Q4 results as well as expectations for the first quarter and the full year, and I will take your questions. We had a strong quarter of growth driven by the addition of new customers, a portion of them related to the Metromile acquisition, as well as a continued increase in premium per customer. In-force premium or IFP grew 64% in Q4 as compared to the prior year to $625 million. Absent the impact of the Metromile acquisition, organic annual growth was approximately 38%. We believe that IFP is useful to understand the full scope of our top-line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Our customer count increased by 27% to 1.8 million as compared to the prior year. And premium per customer increased 30% versus the prior year to $346. This increase was driven primarily by the Metromile acquisition impact and, to a lesser extent, a combination of increased value of policies over time as well as a continuing mix shift toward higher-value homeowner and car and pet policies. Annual dollar retention, or ADR, increased by four percentage points to 86%, a new high. 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 Q4 increased 69% as compared to the prior year to $151.3 million, roughly in line with the increase in in-force premium. Revenue in Q4 increased 116% from the prior year to $88.4 million. The growth in revenue was driven by the increase in gross earned premium as well as a reduction in the proportion of premium ceded to reinsurers to 58% in the quarter as compared to 72% in the prior year. Our gross loss ratio was 89% for Q4 as compared to 96% in Q4 2021 and 94% in Q3 of 2022. The impact of catastrophe in both Q3 and Q4 was notable, with Hurricane Ian impact in Q3 and winter storm Elliott impacting the end of Q4. Absent the impact of all catastrophes in Q3 and Q4, the underlying non-cat loss ratio showed solid improvement of roughly nine percentage points from Q3 to Q4. Operating expenses, excluding loss and loss adjustment expense, increased 12% to $95 million in Q4 as compared to the prior year. This increase was primarily driven by increased personnel expense, stock-based compensation expense, and legal and professional fees, in large part due to the Metromile acquisition, partially offset by lower sales and marketing expense. Other insurance expense grew 68% in Q4 versus the prior year, roughly in line with the growth of earned premium. Sales and marketing expense actually declined by $10 million, primarily due to lower growth acquisition spending to acquire new customers, offset by certain one-time software expense rationalization costs that we expect will reduce future recurring expenses. Technology development expenses increased 43%, primarily due to increased personnel and hosting expenses to support customer and product growth. While G&A expense increased 35% as compared to the prior year but notably decreased by $9 million as compared to the prior quarter. We also continued to add new team members in all areas of the company though at a much more modest pace than we've seen for several quarters in support of customer and premium growth and geographic expansion. Global headcount grew 22% versus the prior year to 1,367, primarily due to the impact of the closing of the Metromile acquisition in July. Absent the impact of the Metromile acquisition, year-on-year headcount would have remained roughly flat. Net loss was $63.7 million in Q4 or a loss of $0.93 per share as compared to the $70.3 million net loss we reported in the fourth quarter of 2021 or $1.14 per share. While our adjusted EBITDA loss was $51.7 million in Q4, nearly identical to the $51.2 million net EBITDA loss in the fourth quarter of 2021. Our total cash, cash equivalents, and investments ended the quarter at approximately $1 billion, reflecting a use of cash for operations and capital expenditures of about $163 million since year-end 2021, offset entirely by an increase of about $165 million acquired in conjunction with the Metromile acquisition. With these goals and metrics in mind, I'll outline our specific financial expectations for the first quarter and full year 2023. In the first quarter, we expect in-force premium at March 31 to be between $635 million and $637 million, gross earned premium of between $148 million and $150 million; revenue between $87 million and $89 million and adjusted EBITDA loss of between $65 million and $63 million; stock-based compensation expense of approximately $15 million; capital expenditures of approximately $2 million, and our share count weighted for additional shares issued in connection with the Metromile acquisition totaling approximately 70 million shares. For the full year 2023, we expect in-force premium at December 31 to be between $695 million and $700 million, gross earned premium of between $632 million and $636 million; revenue between $375 million and $379 million; and adjusted EBITDA loss between $245 million and $240 million; stock-based compensation expense of approximately $60 million, capital expenditures of approximately $8 million, and a share count for the full year totaling approximately 72 million shares. And with that, I would like to hand things over to Shai.

Thanks, Tim. We'll now turn to the top-voted shareholders' questions submitted through the platform. The first question is coming from Darren, who is asking about our thoughts on the increase in negative reviews related to our customer support team. While we take all of our employee feedback very seriously and have put in place tools and procedures to make sure everyone is able to speak up and help us become better. From day one, we've instilled a culture of openness, directness, and hunger for feedback. In fact, being direct is one of our core values. Our managers are all trained to embrace failure as much as they celebrate success and to ask their teams to provide them with direct feedback on what's working, what's not, and how they're doing as managers. Several years ago, we implemented an anonymous employee feedback system and since then, we collect extensive feedback from employees constantly and across the board. Within our existing team and through the anonymous system, which we think is the most reliable, we haven't seen any decrease in satisfaction in the last six months. In fact, during that time, we've seen an increase in engagement across our teams as well as by our customer service organization. While we appreciate sites such as Glassdoor and recognize their place in the job market, they fail to serve as reliable operating data sources for us, and we prefer to be guided by the more dependable nuanced and benchmark data sets that our tools provide. On the next question, Paperbag wanted to know what are the ways we're reducing costs in overhead? And how do we plan to reduce costs further and become as efficient as possible? Paperbag, thanks for the question. Efficiency is something we've been monitoring seriously since we started. In fact, I wrote several posts about our vision of the autonomous organization and how we're using technology to lead the market in efficiency. We are big believers in automation, and this has been in the company's DNA and plans from the very beginning. For example, our operating expenses in Q4 versus Q3 decreased by about 13%. For sales and marketing alone, this decrease was 24%. Efficiency is something we're laser-focused on, and I hope these examples help show that. More generally, I'm happy to say that much of the costlier tech infrastructure building is behind us. Due to that, we've slowed our headcount growth significantly. Here are a couple of data points to help demonstrate this. The first is that our IFP per employee increased by 35% during 2022. The second is that our expenses as a percent of our gross earned premium improved by 32 percentage points during the same period. It's worth underscoring that this progress was notwithstanding our acquisition of Metromile, which added considerably to our expense load in the short term. While we're still in the process of integrating Metromile's core systems in the fourth quarter, we discontinued dozens of high-cost services, which we no longer require as a combined entity. It's also worth noting that our expense ratio today is built for scale and we should be able to continue to grow significantly without matching increasing costs. This is important because getting to our target expense ratio will require a combination of expense control, the numerator, and growing our business, the denominator. The superpower of technology and automation, as you know, is most pronounced at scale, and that will be true of Lemonade’s efficiency too. The third question is coming from Anand. He's asking, when is Lemonade planning to offer Metromile auto to all states? Thanks, Anand. I assume that by Metromile auto, you mean pay-per-mile car insurance. In terms of our rollout plans, beyond reiterating our long-term aspirations to offer all products to all customers, I'm afraid we don't preannounce specific rollouts. All I will say is that we're impatient to get these great products into the hands of as many of our customers as possible as soon as practicable. The next question is: how confident are we that our loss ratio will improve, that customer churn will reduce, and that we can cut operating expenses significantly and why? On all points, loss ratio, retention, and reducing expense load, we do see encouraging trend lines and reasons for continued optimism. This quarter's results reinforce this with loss ratio declining, dollar retention climbing, and greater efficiencies than ever before. In my answer to Paperbag, I shared some stats on this. In short, though, our confidence in continued progress comes from our technology and how fast it's learning and impacting our KPIs. As our systems become more sophisticated and training data sets become more expansive, we become better at pricing and selecting risks, which translates into healthier loss ratios. We become better at automating processes like customer support and claims, which translates into healthier expense ratios, and we get better at delighting and cross-selling to our customers and that translates into growing customer and dollar retention. That's the short answer. To get a full answer with examples, statistics, trend lines, and projections, I'd encourage you to watch the presentation from our November Investor Day, where we provided detailed explanations for what we're seeing. And with that, let me hand the call over to the operator so we can take some more questions.

Our first question today is from Jason Helfstein of Oppenheimer. Jason, your line is open if you'd like to proceed.

Two questions. The first kind of big picture and the second more specific. So it appears that AI technology is going to be, in time, easily licensed from Microsoft, Google, probably Amazon to whatever companies want to use it and probably a more cost-efficient and easier than would have been available. How do you think that impacts Lemonade specifically as well as your competition broadly? So that's a big picture question. And then just second, can you talk about how the loss ratio in the quarter was impacted by business mix to the extent we were comparing it to last year's loss ratio?

Jason, so I'll take the first part and then hand it back over to Tim. We're deeply gratified to see the real explosion of kind of third wave AI that has captured a lot of imagination. It was curious for me. We opened, as you may recall, our November Investor Day with examples of generative AI and what it can do, and it was really a week or two later that ChatGPT came out and it exploded into common knowledge, and people have been talking about it for the last few months in the AI world. So no doubt these technologies are becoming incredibly powerful and far more pervasive and available. So I accept the premise of the question. But in a way that is important to understand, I think, and we try to touch on it in the November presentation as well. If you haven't built your company, if you haven't architected it to allow AIs access to deep, textured, and precise information, it's really hard to see how it's going to glean the kind of insights that we built our business upon. So, data sets that have been built up over generations that are disparate and not intertwined are going to be very, very difficult for AI to truly mine in an efficient way. Broker-based distribution systems and human interfaces of all kinds are going to make it harder again for them to get high-precision training data sets. So we do feel like we have affected our business from the ground up and from day one have spoken about how Lemonade has been built for AI. It's easy to say that today, but we've been saying that consistently since the day we were founded, which is why we believe that we'll be able to leverage these capabilities as they mature in a way that is frankly unmatched by any of the incumbents. Tim, let me hand over to you to tackle the second part of Jason's question.

Sure. Shifting gears to the loss ratio and the cat impact and some of the seasonality I think you're getting at, Jason. In the fourth quarter, we did see cat impact as we have also in the third quarter, which tends to be the highest impact with two pretty significant storms. One of the things we highlighted in the materials we put out is that absent all the cat activity, we saw a significant underlying improvement in the loss ratio sequentially, something on the order of nine points of improvement. So while the seasonality is something that is unpredictable but consistent, meaning Q3 tends to be higher, but you don't always know what the impact is. Absent that all of the cat impact, about a nine-point improvement. A similar result compared to the prior year in the fourth quarter. So if you strip out again, all of the cat impact, we would have seen something on the order of a seven-point improvement. So really, with or without just about any comparison, this showed the continuing underlying improvement in loss ratio in Q4.

Our next question is from the line of Josh Shanker of Bank of America Merrill Lynch.

Sorry about that. Yes. My question is more long-term. If we think out five years into the future, what is an appropriate loss ratio for the mix of business that Lemonade has? And what's the appropriate loss ratio for the incumbent carriers at the same time?

So I would think some – we’re better able to answer from our own perspective as compared to the industry. So I’ll start with that. From a Lemonade perspective, a loss ratio that’s well under 75%, if not under 70%, is the long-term plan and the long-term goal. We’ve seen that already in a subset of our business. If we isolate renters insurance, for example, we shared some a little more granular detail in our Investor Day. And so we can see where we’ve already achieved that with the more mature products. There will certainly be volatility quarter-to-quarter, and there’s a seasonality impact, but that continues to be the long-term goal. I think we’ve started to see and will continue to see the impact of a pretty dramatic increase in rate filings, which we expect will continue to move us fairly rapidly toward that goal, not just over five years, but over the coming quarters. In terms of the industry, I’m a little more reticent to say what’s appropriate for the other players. I think we’re pretty focused on our path to profitability and our loss ratio, and I think with the rate filings we have in place and coming online, we expect that we’ll see good results in the coming quarters on that.

I just wanted to follow up on your earlier comment about the numbers in the renters segment. Should we anticipate that long-term, renters will have a significantly better loss ratio compared to other products? Is that an expectation for the industry? Does Lemonade believe that renters will generate margins similar to the rest of the business, or will they demonstrate a notably better loss ratio like other companies in the industry?

So maybe two ways to think about that. So one, yes, the underlying profitability is there, and we've shown it; we're experiencing it now. But, on the other hand, one of the levers or options that we have is to deliver some of that value back to our customers in the terms of pricing. And so that's something we've done historically where we don't automatically take every bit of benefit to increase our profitability. Our renters product is quite attractively priced. We don't compete solely on price with that product, but because of our cost structure and because of our go-to-market strategy, it continues to be pretty attractively priced. But I would say that we have that optionality to do that. That's one of the levers as our product mix changes that enables us to generate a little more visibility. For example, this coming year, we’ll probably lean a little more into growing the renters book than we have in the past, not dramatically, but modestly because that’s a little more profitable while we wait for some of the rate impacts to come online and some of the other products. It continues to be one of our healthy levers that we can pull from time to time as we grow the business.

And maybe just to add another sentence on that. One of the ways to think about this is optimizing for gross profit dollars. As you take up pricing, loss ratio, of course, being a ratio is one that you can manage. So you could raise prices that would increase your loss ratio but would also increase your cost of acquisition and dampen retention and market share. Conversely, you can lower prices; you'll have a lower loss ratio, but you'll be able to grow and retain customers faster. We'll be looking to really optimize for gross profit dollars, which is the multiple of the two. So as we – with each of the products, including with the renters, that will be the kind of logic of where we end up in terms of loss ratio.

Well, thank you for the answers. Very complete. Appreciate it.

Our next question today is from the line of Andrew Kligerman of Credit Suisse.

Kind of curious in the write-up, you talked about some pressures on the pet services products as well as the home and car repairs in terms of loss cost inflation. Given I just don't see a lot of companies with these pet services, could you give a little color on what loss ratios you're seeing in the pet services area and just some color on the inflationary environment for that product?

Sure. I'll share some thoughts on inflation in general and specifically regarding pets. This is an ongoing discussion we've had for several quarters, which others have also noted. We've experienced the effects of inflation across our entire portfolio, with the most significant impact seen in home, followed by pet and car, and to a lesser extent in renters. The challenge in accurately assessing the loss ratio impact makes it somewhat difficult, but based on our observations, car has shown the most significant loss ratio impact, influenced by the acquired business through Metromile, with an impact of about 10 or 11 points. Home and pet are more closely aligned at around five or six points, while renters may see a one or two-point impact. It’s important to note that due to seasonality and other factors, inflation can't be entirely isolated, but that’s our perspective on it. In the pet market specifically, labor costs, particularly for veterinary services, constitute a significant portion of the expenses and are under upward pressure, along with various other costs. We provided additional details on loss ratios during our Investor Day presentation, showing a consistent improvement quarter over quarter. In fact, our fourth quarter loss ratio experience was slightly better across sub-product loss ratios than what we communicated at Investor Day, indicating positive trends. From a macro standpoint, we feel confident in our ability to keep pace with inflation over the next year, and we hope that this optimism is reflected in our guidance. We always set our guidance based on what we believe we can realistically achieve, and as our planned filings proceed, we might see a more favorable impact.

That's very helpful. I was reading through the shareholder letter, and you mentioned AI GIM. Could you provide an example of how AI GIM would handle a claim? What might be a typical claim for AI GIM?

Andrew, let me take a run at that. So AI GIM begins pretty much all claims processes at Lemonade; something in the order of 98% of our claims begin with a conversation with AI GIM. Almost regardless of the nature of the incident, your first port of call at Lemonade will be the app. In the app, you'll be very quickly talking to AI GIM. Now there are claims that AI GIM can handle from start to finish. In fact, it's not far from half of our claims, it's about 40-something percent of our claims, where AI GIM will ask you a host of questions. So you're in the coffee shop and your laptop is missing and AI GIM will ask you to upload a video just explaining in kind of normal language what exactly happened. If you have receipts, AI GIM might ask you for those; it might ask you for a police report if you have that. Tell us exactly what is necessary. In almost half the cases of claims, 40-something, I think it may be around 45%, there will be no need for any human intervention at all. In the remaining cases, he will do the triage and ask for the information, but something in the claim will be such that he’s not authorized to close out the case. In that case, he will direct it to a claims professional, and AI GIM has access to all our claims professionals, knows what their area of expertise is, and knows what their workload is. He will send them a link where they can open up directly at the dashboard with all of their claim laid out in front of them: the video, the receipts, et cetera, et cetera, and any concerns that AI GIM flagged. So if there are any things that stopped AI GIM from paying the claim, that will also be laid bare in front of the claims professional, and they will take it from there. So even in those 55% odd claims that are handled partially by humans, a lot of the heavy lifting is already done by AI GIM. So he really is the stalwart of our claims infrastructure.

Our next question is coming from Tommy McJoynt of KBW.

The first one, can we drill down a little bit on the operating expenses? So both sales and marketing and G&A saw some solid decline sequentially. How should we think about the trajectory of those two expense lines going forward? And along that same line, when you think about the marketing spend, how much of that is a function of just waiting for rate adequacy?

Yes. I have a few comments, and I welcome everyone in the analyst group, especially our new contributor. One important point we want to highlight, which you have also been emphasizing, is how we break down our expenses, and I will address that. It's also crucial to reiterate what we've communicated for some time: we anticipated that Q3 of last year would be our peak loss quarter. As we analyze our current and future expenses, that expectation remains valid. Q4 performed quite well, aligning with our expectations, and some uncertainties turned out positively. In Q4, we actually exceeded our own expectations as well as the market's. Therefore, the notion of peak losses still holds. You pointed out in one of your notes that peak loss may refer to quarterly or annual figures. I think it's important for our investors to understand that we also expect our annual losses to continue declining. Last year was somewhat of an anomaly due to the impact of Metromile, an acquisition that closed in July, which increased our expense run rate. If we had annualized that from the start of the year, our EBITDA would have indicated a loss more like $2.70 or $2.80 for the year, while we ended up in the 220s. Our goal is to see the peak losses from the previous year decline. While our guidance is somewhat conservative, that trend remains. Regarding your specific questions about expenses, Q4 serves as a strong benchmark for our expense breakdown. When you compare Q4 to the previous three quarters, you'll notice a shift both in the total amounts and the composition. The most significant change occurred in the sales and marketing line, where we've chosen to moderate our growth rate; our top-line guidance suggests a growth range of about 11% to 12%. This is likely the largest shift. Moving forward, the breakdown should resemble the fourth quarter in terms of ratios across other insurance expenses, sales and marketing, tech development, and G&A. Those ratios are expected to stay similar to what you observed in the Q4 breakdown. Additionally, within the sales and marketing line, advertising, or gross acquisition spending, has consistently been the primary component, usually around 70% of that total line. However, we have decreased that figure as we have moderated our growth rate. You will notice in the Q4 actuals, when we file our 10-K, that this has dropped to approximately 55% of the sales and marketing line. I believe that's a reasonable ratio to use going forward, indicating some moderation in Q4 and suggesting that those trends will continue throughout 2023.

That's great detail. My second question is about the impact of the hard reinsurance market on your expectations for 2023. Can you quantify the rate online or the change in chief ceding commissions? Additionally, could you remind us how dependent you are on 1/1 renewals compared to midyear renewals? An overview of the reinsurance would be appreciated.

Tommy, Daniel here. Our main reinsurance agreements come up for renewal midyear. We're coming off of a three-year quota share agreement. It was actually tiered some elements that were annual recurring, and some of it was three years. Those will come up for renewal midyear, so end of June. We are in regular contact with all of our reinsurance partners, and I think your characterization is spot on; this is a hard reinsurance market; prices in general of reinsurance have become tighter. Our need for reinsurance has declined as our business has grown and diversified. When we signed those agreements three years ago, we were a monoline business really in one country. We've now got five lines, four that we're underwriting, and we're across four countries. So that kind of diversification helps a great deal. We are looking at a series of options in front of us given the cost of reinsurance. But to be honest, the way this industry operates, it's very hard to do this too far in advance. The reinsurance industry tends to operate on a 60 or 30-day renewal window. If you're lucky, you can do stuff 90 days out, but we're really too early in the year to know exactly what that would look like. Hopefully, by this time next quarter, we'll have greater clarity.

Understood. I want to note the specific impact on seating percentage. If you consider the primary reinsurance structure, which is the quota share, that seating proportion has changed over the past two years. A year ago, the seed rate was 70% at the last July renewal, and now it has dropped to 55%. The way this affects the financial model is that it doesn't occur immediately; it's a gradual change. You will see the seed rate adjust in the P&L from that 70% level last July down towards the 55% level next July. It's not a direct path; it's not entirely linear, but it is mostly linear, and it's an ongoing shift. Looking beyond July, as Daniel explained, we continue to incorporate in our guidance that there will be no significant changes until we have a clearer understanding of what the renewal situation will look like.

Thank you. And we have no further questions registered at this time. So we will conclude the Lemonade fourth quarter 2022 earnings call. Thank you all for joining. You may now disconnect your lines.