Lemonade, Inc. Q1 FY2023 Earnings Call

Thank you for standing by. My name is Sydney, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lemonade Q1, 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. We will now turn it over to you Yael to begin the conference.

Good morning, and welcome to Lemonade's first quarter 2023 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, our Chief Financial Officer. A letter to shareholders covering the company's first quarter 2023 financial results is available on our Investor Relations website.

Good morning, and thank you for joining us to discuss Lemonade's Q1 results and our updated outlook for the year. We are heartened by the continued progress we're seeing across all the KPIs that we rely on in managing our business. Our growth metrics, IFP, of course, but also its component parts like annual dollar retention and premium per customer, all moved up nicely. And at the same time, our loss ratio and adjusted EBITDA loss both moved down nicely. And I think that tells a compelling story. Looked at from another angle, we see that our gross earned premium and gross profit both grew by over 60% year-on-year even as our operating expense grew by only 4%. Whichever way you look at it, Q1's results suggest that the business is progressing, both in size and profitability very much in line with what we'd hoped to see. As Tim will share shortly, we're boosting our adjusted EBITDA guidance for the year by some 20%, and suggesting that we don't see this goodness as limited to Q1, but rather that we believe Q1's results will be reflective of an improved trend line on our path to profitability. Delaying on the loss ratio for a minute longer despite continued inflation and an increased frequency of natural disasters, our loss ratio continued its descent, clocking in at 87%, down from 89% in the previous quarter and 94% in the quarter before that. This welcome decline is even more pronounced when examining the underlying progression net of cat. Using this filter, we see a 7 percentage point drop quarter-on-quarter and a 16% drop over the past six months. As mentioned in previous calls, we expect our current trajectory to broadly continue, albeit with occasional hiccups when outside cats introduce a brief reversal. Powering this progress is continuous advancement in our AI and machine learning capabilities and the increasingly predictive power of the data sets on which they are fed. Our models will continue evolving as our data becomes richer and more extensive bringing us ever closer to achieving true precision pricing and underwriting. Finally, I want to highlight that our much anticipated partnership launched in Arizona this week, and we'll continue to roll out across the U.S. in the weeks to come. We're eager to see the results of combining two such tech-powered and values-aligned companies to serve pet families nationwide. With that, I'll hand the call over to Shai.

Thanks, Daniel. I'd like to spend a few minutes on the hottest topic around generative AI. AI has always been an integral part of our DNA. Lemonade was built as a tech-powered insurance company. We were the first to provide customers with a human-like chat-based experience that works 24/7 and handles all of our direct sales. This year, ChatGPT-4 and other large language models made a huge leap forward, a jump that I believe will change our lives in ways we can't fully imagine. The potential impact this technology brings to businesses like ours is substantial. Generative AI and specifically GPT and its successors are technologies that can reason and learn like never before. They have the potential to not only improve efficiency and customer service, but to revolutionize the way we assess risk and make decisions. This technology will help us better anticipate customer needs, respond to more claims instantly and ultimately provide better coverage at lower costs. For our competitors, though, adapting to this change will not be easy. A traditional insurance company depends on hundreds of disparate software tools to run its business, many of which are outdated legacy systems built decades ago by third-party vendors. Integrating generative AI technologies like ChatGPT will require a considerable amount of time, effort and investment. Yet Lemonade was built for this moment. Over the years, we've updated our systems to use the latest AI technology as models evolved and became increasingly better. Today, we use dozens of AI models to do pricing, underwriting, customer service, payments, and many other internal operations. We even built our own internal AI framework to help us manage and deploy models seamlessly and quickly across the organization. We now have more than a hundred different initiatives, which we believe can have a meaningful impact on our business. As a result, we expect to see more savings in the next 18 months and anticipate continued improvements in both our expense and loss ratios. And with that, I'll turn the call over to Tim, who can provide more detail on our Q1 results and a view into the rest of 2023.

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. It was a strong quarter on every key metric with good progress on loss ratio, marketing efficiency and expense management. In-force premium grew 56% in Q1 as compared to the prior year to $653 million. Customer count increased by 23% to $1.9 million as compared to the prior year. Premium per customer increased 26% versus the prior year to $352. This increase was driven primarily by the Metromile acquisition impact. Annual dollar retention increased by five percentage points to 87% versus the prior year, a new high. Gross earned premium in Q1 increased to 61% as compared to the prior year to $154 million. Revenue in Q1 increased 115% from the prior year to $95 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 roughly 56% in the quarter as compared to approximately 71% in the prior year. Our gross loss ratio was 87% for Q1 as compared to 90% in Q1 2022 and 89% in Q4 2022. The impact of natural disasters in Q1 added roughly 14 percentage points to the overall gross loss ratio. Operating expenses, excluding loss and loss adjustment expense, increased just 4% to $96 million in Q1 as compared to the prior year. Our net loss was $65.8 million in Q1 or $0.95 per share as compared to the $74.8 million loss we reported in the first quarter of 2022. While adjusted EBITDA loss was $50.8 million in Q1, an 11% improvement as compared to the $57.4 million adjusted EBITDA loss in the first quarter of 2022. Our total cash, cash equivalents and investments ended the quarter at approximately $993 million, reflecting a use of cash for operations of $46 million since year-end 2022. And with these goals and metrics in mind, I'll outline our specific financial expectations for the second quarter and for the full year 2023. For the second quarter, we expect in-force premium at June 30 of between $665 million and $668 million, gross earned premium between $156 million and $158 million, revenue of between $96 million and $98 million and adjusted EBITDA loss of between $58 million and $55 million, stock-based compensation expense of approximately $15 million, capital expenditures of approximately $3 million, and our weighted average share count, we estimate to be approximately 70 million shares. And for the full year of 2023, we expect in-force premium at December 31 of between $700 million and $705 million, gross earned premium of between $645 million and $650 million, revenue between $392 million and $396 million and an adjusted EBITDA loss of between $205 million and $200 million.

Thanks, Tim. We'll now turn to the top-voted shareholders' questions submitted through the platform. Darren asks, how can we expect investors to support the current team if insiders aren't buying shares at today's low levels? Darren, thanks for the question. As you can imagine, we can't get into our team's personal financial considerations. Each of our colleagues has their own situation, their decisions to buy and sell shares are guided by personal factors that I'm unaware of. But I can speak for myself, and I know Daniel is in a similar position. Lemonade has been and remains by far our largest holding, and we don't plan for that to change anytime soon. For that reason, we're both completely aligned with our investors financially. I wouldn't recommend investors buy or sell shares by mistakenly treating insiders' liquidity decisions as signals. Instead, I hope others will focus on whether you believe Lemonade can deliver on the vision we've outlined and how that would benefit current shareholders. Well, the second question, Brian A. asked about Lemonade car progress and plans for the next six months. We are extremely pleased with the progress made in our car product and especially since acquiring Metromile. We've taken tremendous strides forward in two key areas; firstly, in data infrastructure. We continue to optimize our operations, and once we are able to transition all of Metromile's customers to Lemonade systems, we will unlock even more savings. Certainly, George, profitability is our top priority, and our updated guidance reflects our commitment to further improving the bottom line.

Yaron, good morning. Good to talk to you. We spoke about this slowdown. Tim referenced earlier that we saw a significant improvement in our marketing efficiencies. For every dollar that we spent, we got 12% more sales than we had planned, and therefore, all of our sales are kind of ahead of plan, but it doesn't impact the loss ratio plans that we have. We do not anticipate that adversely affecting the progress or introducing adverse selection. This is an area where I would note that we've made a modest shift in how we put the guidance together. So the last couple of quarters, we have a reinsurance structure that's almost entirely renewing at July 1. This is something we've known about for some time and have been working actively on. Things are going well. In terms of the guidance, the previous guidance assumed that our existing reinsurance structures would continue in place. Our current guidance anticipates nearly all the outcomes that we think are reasonably likely. We're quite comfortable that it represents where we expect to be when those deals are inked shortly.

Can you talk if you embraced more of a kind of a refi or a captive structure that some others in the Insurtech industry are thinking about? How that potentially impacts kind of reported financial results?

A captive structure is something we've thought about and designed as a potential option going forward. I wouldn't be surprised that there is some aspect of coverage that continues. I believe it will be a combination of those things, and we'll figure out the proportion that makes sense, and we have factored the likely outcomes into our guidance.

The sales and marketing line, I would expect that our expense lines to be roughly in a similar ratio as you saw in Q4 and Q1 relative to each other. We like the progress towards profitability and the expense efficiency and the guidance implies that it will be steady with what you saw in Q1.

The Holy Grail for everybody is trying to figure out what the loss ratio is by product. Can we talk about a relative relationship between the lines of business with healthy loss ratios and the ones that are nonetheless growing?

We're closely focused on net new customer acquisitions. We've been not keen on a strategy of shrinking to excellence. Our retention rates are quite high, but we do really keep a close eye on growth. What you saw in Q1 reflected many filings in many large states with very aggressive price increases.