Earnings Call Transcript - LMND Q3 2020

Operator, Operator

Good day, and welcome to the Lemonade, Inc. Q3 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, today's event is being recorded. I would now like to turn the conference over to Yael Wissner-Levy. Please go ahead.

Yael Wissner-Levy, VP Communications

Good morning, and welcome to Lemonade's third quarter 2020 earnings call. My name is Yael Wissner-Levy, and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, COO and Co-Founder; John Peters, Lemonade’s Chief Underwriting Officer; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's third quarter 2020 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-Q for the three months ended June 30, 2020, 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'll turn the call over to Daniel, who will begin with a few opening remarks. Daniel?

Daniel Schreiber, CEO

Good morning. I'm happy to report that our third quarter returned strong results across all key performance indicators. Despite concerns that the pandemic might disrupt migratory patterns and affect our seasonally strongest quarter, we in fact saw robust growth and sustained improvements across our unit economics. Year-on-year, our in-force premium or IFP doubled. Our adjusted gross profit jumped 138%, while our losses per dollar of gross earned premium halved. Tim will elaborate on all our numbers shortly. Perhaps the most noteworthy thing that happened this quarter is something that didn't happen. The dog that didn't bark, to borrow a phrase from Sherlock Holmes. In Q3, we had a major non-event, which is easily overlooked and which I'd like to highlight. Wildfire season in the Western United States started early this year, and the fires in Q3 alone made this year California's most destructive fire season ever. Hurricane season was equally ferocious. The National Hurricane Center names storms alphabetically, starting with A, but by mid-September, they had literally run out of letters and had to start over this time with the Greek alphabet. That has never happened so early. These unprecedented disasters hit the most populous states in the union, which are also home to the majority of Lemonade’s customers. Against this devastating backdrop, we see the significance of the dog that didn't bark. Our loss ratio for Q3 remained perfectly healthy. In fact, at 72%, it was over 7% lower than the corresponding quarter last year. As a reminder, below a 75% loss ratio, our reinsurers make money. A 25% take is safe even without reliance on reinsurance, and this typically leftover money will get back. If our annual gross loss ratio occasionally topped 75%, that would also be okay. Our economics would largely remain unchanged because our reinsurers would finance most of those excess losses. But the fact that our loss ratio didn't spike even as catastrophes did is a notable non-event. To put it into perspective, the industry is forecasting that home insurance companies will cover about $10 billion of catastrophic losses for Q3. If our underwriting was nearly at the industry average, based on our market share, we could have expected cat losses of about $17 million and a gross loss ratio of about 100%. Our actual cat losses though were about 75% lower than expected, and our loss ratio declined year-on-year. This I believe is a testament to our cautious approach to underwriting in wildfire zones and hurricane-prone areas. And it shows that we're not growing by loading up on tail risks. Speaking of tails and dogs barking, the second notable event this quarter was our launch of pet health insurance. It's our first foray into an insurance sector beyond homeowners. It's off to a roaring start. About 40% of pet policies were sold to first-time Lemonade customers. These newcomers alone delivered about nine times more IFP than we generated from newcomers to Lemonade in the three months following our initial launch four years ago. We did that at a rate of marketing efficiency that it took us three years to achieve with our renters product. Not only has pet insurance provided an additional on-ramp to Lemonade, but about 5% of these newcomers added a renters or homeowners policy within their first quarter with us. As compelling as the metrics look for newcomers, they are even better for existing customers who comprise the majority of our pet insurance buyers. Each of these added an average of $450 to their premium and almost quadrupled their median premiums without us incurring any additional costs to acquire the incremental premiums. Pets may be our first step beyond homeowners insurance, but as you will soon hear, it won't be our last. Our experience three months post-launch affirms our strategy of acquiring customers young when their needs are modest and ensuring they have a fabulous experience with Lemonade so that as they progress through predictable life cycle events, their insurance needs grow, often by orders of magnitude, and they do that growing with us. This significant up-sell and cross-sell dynamic continues to gain momentum within our homeowners business as well. About 12% of our condo policyholders in Q3 started as renters at Lemonade and then graduated to homeowners with us. In fact, while our overall IFP doubled year-on-year in Q3, our IFP from customers graduating from renting to owning grew by over 300% during the same three months. This is significant. The premiums of these graduates grew sixfold on average, from $150 before their graduation to $900 after, again, with no incremental cost to acquire the additional premium. We believe these trends, both within homeowners and between product lines, have tremendous runway. We hope to give them a further boost by adding more products. And on that note, let me hand over to Shai to update you on what's coming next. Shai?

Shai Wininger, COO

Thank you, Daniel. In the insurance industry, there is an invisible boundary between property & casualty insurance and life insurance. The regulatory frameworks for the two are quite distinct, and insurance companies tend to settle into one domain or the other. We understand their considerations, but we strive to prioritize product launches based on customer needs rather than regulatory frameworks. This is why, in recent months, we established the Lemonade Life Insurance Agency and why we plan to bring the Lemonade experience to the term life market in the coming months. Beyond giving you a heads-up about the forthcoming product launch, I'd like to use this announcement to highlight how we approach products and initiatives, and their associated risks and returns. It is noteworthy that we're placing a bet on term life, even though we're not certain it will be a winner. Teams we respect at other tech-enabled insurance companies have struggled to make the economics of digital acquisition work with term life policies, and we offer no guarantees that we can do better. So why are we launching term life? Because there are important differences between us and them, differences that make this a smart bet despite the uncertainty. For one, the downside is modest because we'll be leveraging technologies and systems already in place. We will not be underwriting those policies ourselves and will have a captive audience of 1 million customers to whom we can market for free. Our technology platform, user experience, and incredible customer service can be leveraged for products we build from scratch, as well as for ones that others have built. For another, the same life events that trigger graduation from renting to homeownership often trigger the purchase of one’s first life insurance policy as well. The average age for buying a first home in the U.S. is about 33, which is also about the average age when college grads have their first child and is the average age of Lemonade customers. Finally, while the cost of the spread is not high, the potential reward is large. According to researchandmarkets.com, the global term life insurance market stands at about $800 billion this year, and is expected to grow more than 10% compounded annually to over $2 trillion by the end of the decade. As we wrote in our S1 founders’ letter, we prefer to make decisions under conditions of uncertainty and to abandon bad bets as soon as the data reveals them to be so. That translates into greater volatility, but also to better aggregate returns. It’s a trade we are comfortable making. And with that, let me hand over to Tim Bixby for a bit more detail around our financial results and outlook. Tim?

Tim Bixby, CFO

Great. Thanks, Shai. I'll give a bit more detail on our Q3 results, as well as expectations for the fourth quarter and the full year 2020. We had another strong quarter of growth driven by the addition of new customers, as well as a continued increase in premium per customer. In-force premium grew 99% in Q3 compared to Q3 in the prior year to $188.9 million. 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 19% versus the prior year to $201. This increase was driven by a combination of increased value of policies over time, as well as a mix shift toward higher value homeowner and now pet policies. Roughly two-thirds of the growth in premium per customer in Q3 was driven by this product mix shift, and the remaining one-third came from increased coverage levels. Our gross written premium in Q3 increased by 104% compared to the prior year to $42.9 million, in line with the increase in in-force premium. Our gross loss ratio is 72% for Q3, despite significant catastrophic activity in the quarter, representing an improvement from 78% in the third quarter of 2019. We continue to expect our gross loss ratio will vary over time within a target range for annual loss ratios, but below 75%, with occasional short-term results slightly outside this range. It’s notable that the average gross loss ratio in the P&C sector overall in recent years is approximately 82%. Even in a more challenging CAT quarter, our gross loss ratio remained highly competitive. Operating expenses, excluding loss and loss adjustment expenses, increased just 11% in Q3 compared to the prior year, with sales and marketing expenses again lower by nearly 25% versus the prior year due to continued improvements in our marketing efficiency. Certain G&A expenses increased as expected, related primarily to public company expenses like corporate insurance and professional services. We also continued to hire new Lemonade team members across all areas of the company, in support of customer and premium growth and new product launches, resulting in increases in each of the other expense lines. Global headcount roughly doubled versus the prior year to 459 people, with a greater growth rate in customer-facing departments and product development teams. Our net loss was $30.9 million in Q3, slightly better than the $31.1 million loss we reported in the third quarter of 2019, with a notably larger customer and in-force premium base. Adjusted EBITDA loss was $27.6 million in Q3 compared to $30.4 million in the third quarter of 2019. Our cash, cash equivalents, and total investments balance ended the quarter at $597.4 million, reflecting primarily the net proceeds from our July public offering of approximately $335 million, partially offset by cash used for operations of $71 million since the year-end of 2019. With these goals and metrics in mind, I'll outline our specific financial expectations for the fourth quarter and the full year of 2020. For the fourth quarter of 2020, we expect in-force premium at December 31 of between $200 million and $205 million, gross earned premium of $46 million to $48 million, GAAP revenue of between $18 million and $19 million, and adjusted EBITDA loss of between $34 million and $32 million. We expect stock-based compensation expense of approximately $3 million and capital expenditures of approximately $1 million. For the full year of 2020, we expect in-force premium at December 31 of between $200 million and $205 million, gross earned premium between $154 million and $157 million, GAAP revenue of $91 million to $93 million, and adjusted EBITDA loss between $103 million and $100 million. We also expect stock-based compensation expense for the full year of approximately $11 million and capital expenditures of approximately $4 million. As a reminder, please note that GAAP accounting rules state that ceded premiums are excluded from GAAP revenue. As a result, this change in our reinsurance structure that was effective on July 1 renders our year-over-year revenue and gross margin comparisons non-comparable. Accordingly, we published in-force premium and gross earned premium as metrics that we believe are useful to analysts and investors because each captures the overall growth trajectory of the business before the impact of reinsurance. Thanks so much for joining our second quarterly review as a public company. We do appreciate your interest and support. With that, I would now like to turn the call back over to the operator, who can perhaps rejoin the call with Q&A instructions, and we'll be happy to take your questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. And today's first question comes from Ismael Dabo with Morgan Stanley. Please go ahead.

Mike Phillips, Analyst

Hey. Thanks. Good morning everybody, it’s Mike Phillips actually. Appreciate the time and congrats on a nice quarter. I guess I'm going to start off with the top line and customers. Last quarter you guided to it could be a tough quarter this quarter, due to seasonality and people not moving as much as they typically would. Can we drill into the new customers and the growth there, not the in-force premium, but actual new customers? Where did you see that come from? Did you see the headwind you expected or was that headwind offset by something else or did that headwind not materialize? So kind of just drilling down into where the new customers came from, I guess.

Tim Bixby, CFO

Hey, Mike. Sure, the customer growth came in remarkably as expected, but as expected in a more normal year, we had been cautious in Q2 heading into Q3 about what some of the cyclical changes might be this year. The reality is we just haven't seen them. We're seeing seasonal patterns repeat. A significant part of the reason, I think, that the numbers came in quite strong this quarter is that the things we were a little more concerned about early in the year are not happening to a great extent. So we're continuing to add customers at a very healthy pace. Important to note that we do focus even more on dollars than customers, so premium growth is paramount. Sometimes the ebb and flow of the customer count can be slightly out of sync with that, but we're really happy with both the customer count growth and the premium growth. I think you'll see sort of in the guidance and then from the comments we make today that we're really seeing the year come together from a seasonality standpoint, very much in line with what we've seen in prior years.

Mike Phillips, Analyst

Okay. Thanks, Tim. You talked about the CAT numbers. Your net loss ratio was actually really strong, obviously. How much of the 6% CAT number that you talked about were in the growth side? What was your CAT net loss ratio? If you could also talk about what was underlying a really strong, I guess — if we back out something from CAT, I don't know how much the 6% was on that basis, but what was behind the really strong underwriting result on that basis?

Tim Bixby, CFO

Yes, I would think – I don't have a disclosable number today. We'll have the statutory filings out shortly for specific CAT numbers. But generally, I can’t say that we saw roughly 10 points of impact from CAT in the quarter. A normal quarter does have some CAT impacts, so not all of that was incremental from the more significant activity, probably something like half — roughly half of that impact I think would be out of the norm. One thing to know when you're looking at the net loss ratio versus the gross loss ratio, there are some nuances because of our reinsurance transition that happened on July 1. We'll continue to share that overall gross loss ratio that 72% number is really the apples-to-apples comparison. If you back out the CAT and you think about where we were last quarter at 67%, it’s pretty much right in line. Even with CAT activity, we remained consistent with where we were in Q1. We're really pleased with how our underwriting enabled us to weather what I think was a pretty significant test this quarter and bring the loss ratio both on the growth and net basis, showing really strong performance.

Mike Phillips, Analyst

Okay. Quickly, just a quick follow-up there. When you say 10%, Tim, did you mean the net 63 would have been 53 without the CAT?

Tim Bixby, CFO

I'm focused on the growth, but yes, sort of think of it on a gross basis.

Mike Phillips, Analyst

Okay. And then, I guess last one for now, I'll circle back. On your comments on the sales and marketing spend, Tim, you mentioned how there are some efficiencies there and that you're getting into the dollar amounts which were lower. Was there any proactive reasons to lower it because of what you thought might happen in the quarter with people not moving? So did you pull back any proactively on sales and marketing because of concerns in the quarter?

Tim Bixby, CFO

We don’t really pull back and anticipate some things; we're not sure whether they're going to happen. We're managing this in real-time. So, when we see the ability to spend, we spend. When you see the quarter in aggregate, it's hard to see the ebbs and flows of how we manage growth spending on a day-to-day basis. We saw again, really consistent patterns with what we've seen in prior quarters, or sorry, prior years. Q4 is a seasonally tighter quarter, generally, that's what we've seen for a few years now, and I think that is reflected in the guidance. Just doing a year-on-year comparison on what we're spending for marketing and what we're bringing in, it is pretty significant. Year-on-year, we’ve seen a doubling of efficiency more than doubling of efficiency, which has been a significant improvement over the past four quarters.

Mike Phillips, Analyst

Okay. Thanks. Last one real quick, I guess, and then I'll jump off. In your comments on the lifetime value, you talked about the IFP and how that grew by over 300% in the quarter compared to last quarter from the graduation to homeowners. In your comments on the condo, it went to 12%; the 12% of condos have graduated from renters. I guess I want to specify on the wording here in the lifetime piece. The 300%, is that graduating from two condos, or can you make a distinction between condos versus homeowners and their 300%? Or is that true condo versus homeowners? That's why I’m asking.

Tim Bixby, CFO

Yes. Two very different metrics, but on the same topic. The condo percentage is condos alone at 12%. The 300% we looked at all of our homeowner graduation. Whether condo or home, combined, we saw an uptick, a graduation rate three times higher than a year ago, so good progress, but those are two different metrics.

Mike Phillips, Analyst

Yes, sure. Okay, thanks Tim. Appreciate it. Congrats, guys.

Tim Bixby, CFO

Yes. Thank you.

Operator, Operator

And our next question today comes from Jason Helfstein with Oppenheimer & Company. Please go ahead.

Jason Helfstein, Analyst

Thanks. Kind of two questions. At first maybe just broadly, why life insurance versus car insurance? Because I think that’s a question people have. Do you think about vertical expansion? And then the second kind of with the launch of the life, how do you think that’ll impact reported marketing efficiency? And to the extent that you lean into that, is there a way to - would you be able to kind of separate out the impact over the next 18 months, so we can understand kind of the efficiency of the legacy business versus the investments and new business, etc.? Thanks.

Daniel Schreiber, CEO

Jason, good morning, Daniel here. Let me take the first part of your question. It's not life instead of auto; as we've spoken about at different times, our aspirations are pretty expansive. We're looking to build one of the pivotal insurance companies for the 21st century, which will be customer-centric and cater, in the fullness of time, to all of our customers’ needs, growing with them as those needs grow. Three months ago, we launched life; we've announced today that we didn’t — sorry, we launched pet; we’ve announced today that within three months we will launch life. You see that we're at a fairly steady pace of launching new products, and you can assume that before we're done, we will launch all the products that our customers need. So it’s really just a question of sequencing rather than why one rather than the other. As Shai mentioned, specifically around life, there is a goodness of fit to other things that we talk about. Tim just gave some numbers to Mike about graduation. We do see that this kind of life event triggers buying habits for life and home overlap. We feel like there is a goodness of fit at the right stage in life, but this isn’t one product instead of the other; it’s just one before the other. Tim?

Tim Bixby, CFO

Yes. From a marketing efficiency or unit economic standpoint, at this point, you shouldn't expect any dramatic shifts in how we think about what we invest in marketing versus the dollars we acquire. We'll think of the customers holistically. I think we’ll see something shaped like pets to some extent, where some customers will buy life only as their first product, and then hopefully branch into other Lemonade products and vice versa. We're nearing 1 million customers soon. We anticipate that some percentage of those existing customers will also have life insurance needs. It’s common when we launch new products that our internal key performance metrics and indicators start at a certain place and improve over time, which is the nature of anything new. I expect that to be the same for us, but we have in the past optimized reasonably quickly. Pet got to a place quite a bit more quickly than our renters launched and we are quite good at that. I wouldn't expect dramatically different unit economics due to the life launch.

Jason Helfstein, Analyst

Thank you.

Operator, Operator

And our next question today comes from Ron Josey at JMP Securities. Please go ahead.

Ron Josey, Analyst

Great. Thanks for taking the question. Daniel, I wanted to drill down a little bit more on life insurance. In your letter, you talked about launching based on customer needs versus the regulatory framework. So maybe a follow-up to Jason's questions in terms of sequencing. Can you talk to us about what your research tells you with the launch of life, why life comes first? Also, what is your research telling you in terms of what your users are asking for? You mentioned multiple times that, Shai, you mentioned about abandoning bad bets based on data. Could you talk to us about KPIs and timelines you set to make these decisions as we see newer verticals launch, what seems to be a cadence of every quarter now? Thank you.

Daniel Schreiber, CEO

Ron, hi, thanks for that. Yes, we did elaborate on this a little bit in the shareholders' letter as well, but we believe that sometimes launching a product is the best market research. There is data out there about term life insurance; I gave some indication about why we think the life events that drive home insurance purchases could also trigger life policies. Honestly, we're approaching life insurance a bit more cautiously. The data is mixed; the market is vast, going from hundreds of billions to trillions of dollars. The overwhelming majority of our homeowners customers do pay term life insurance, and we want them to pay it to us. Those are sizeable premiums, meaning the price is worth pursuing. As Tim mentioned, we'll have about 1 million customers to market to internally, which also speaks to Jason's question about cost of acquisition and these other dynamics. While we are being cautious because we’ve seen others struggle in this arena, we like placing these kinds of bets. The risks we take are quite modest; we leverage everything we've already built—technologies, branding, user experience, support staff, licenses. The risk is pretty low compared to the upside. Life is launched in that way, and we're excited to use all that we've built for renters and homeowners to layer on new products. So it is a bet, but it’s a modest one with tremendous upside. We like those kinds of bets; the expected return is compelling.

Ron Josey, Analyst

That's great. Thank you, Daniel.

Daniel Schreiber, CEO

Thanks, Ron.

Operator, Operator

And our next question today comes from Ross Sandler of Barclays. Please go ahead.

Ross Sandler, Analyst

Hey guys. Just two questions. It looks like we're generating the highest gross profit per customer yet in company history, so congrats on that. Can you just talk about how retention and CAC trended against your 3Q plan? If LTV to CAC continues to improve, should we expect you to lean back in and crank up the marketing a bit more in the future? The second question is, as a California resident, fire season was pretty rough out here. Can you just remind us how the partnership with Palomar works? Are you guys underwriting renters and homeowners in California, or are they doing it on your behalf? Just remind us how the California arrangement works. Thank you.

Tim Bixby, CFO

Sure. So California is essentially all us for this purpose. We do have earthquake coverage available through Palomar, but the vast majority of the coverage and the things we've been discussing today, that's all Lemonade. We're exposed, but clearly, by the really strong performance in loss ratio, we’re exposed at a very limited level. Your other questions, focusing on retention first, retention is stable and modestly up. If you look at the year one and year two retention levels that we've disclosed very specifically since going public, those are steady and stable. Dollar retention and internal longer-term metrics we can see are becoming more positive. The headline is that nothing is deteriorating in a year of uncertainty, which is part of our confidence in how we're spending, guiding, and heading into Q4 and next year. Regarding marketing, lean-in is the way we think about it. If you look over the past quarters, where we've seen cost savings or EBITDA improvement, we've tended to reinvest. We've been optimising in real-time throughout Q3. Q4 is seasonally lighter, but I expect we’ll continue to lean in. We won’t give guidance for next year at this point, but our past approach is the best guide for our future. For many quarters, we've explored more investment when we have more confidence; as LTV to CAC ratios improve, we continue to do that.

Operator, Operator

Thank you. Our next question today comes from Matt Carletti with JMP. Please go ahead.

Matt Carletti, Analyst

Hey, thanks. Good morning. Just hoping to touch on pet insurance quickly, clearly off to a good start. I hope you could comment on kind of lessons learned. I mean, it seems like things are going well. What has surprised you? How can you take those lessons and apply them to going into life insurance or whatever else might be ahead of us?

Daniel Schreiber, CEO

Hi, Matt, it’s Daniel here. It's been three months since the launch, and the first three months have been a surprisingly positive start. With insurance, you can't really beta test products; we were just talking about this in the context of life. Sometimes you collect market research live and learn your lessons post-launch rather than pre-launch. We did try to do our diligence beforehand, but one never really knows until you encounter the customer. We were very excited about the pet insurance product. Unlike some other categories, home, rent, and life, the pet insurance market is woefully under-penetrated; around 99% of pet parents in the U.S. have no pet insurance. It’s small, but it's a fast-growing opportunity for us to rethink pet insurance from scratch, including coverage and experience, applying everything we've learned over the past five years. The nice thing is not only that preparation seems to be rewarded; we see strong interest and sales and a lot of marketing efficiency beyond expectations. Not that we knew what to expect, but we now see the 40% of customers buying the pet insurance are new and represent an entirely new set of avenues to acquire customers we wouldn't have reached otherwise. Additionally, 5% of these new customers have added a renters or homeowners policy within their first quarter. For existing customers, who comprise the majority of our pet buyers, the median premium has nearly quadrupled, all-in-all, we're feeling very good about the pet's trajectory and its potential to continue growing and replicate with future products.

Matt Carletti, Analyst

Great. If I could just get a quick clarification regarding the life insurance launch—just want to confirm, when you say you will be underwriting it, you mean you will be purely acting in an agency capacity, won’t be retaining any risk, but obviously controlling customer experience and marketing and all those sorts of things?

Daniel Schreiber, CEO

That’s exactly right. The user experience will be very much a Lemonade experience. But the underlying policy will be on somebody else's paper. For the consumer, this will mostly be a transparent issue. Yes, that’s exactly what you just described.

Operator, Operator

Thank you. And our next question today comes from Heath Terry of Goldman Sachs. Please go ahead.

Heath Terry, Analyst

Great. Thank you. Daniel, I'd like to dig a little bit further into graduation. To the extent that the urban exodus wasn’t a negative for the renters business, could it have been a positive for your homeowners business? Did you see any Lemonade renters moving out to become Lemonade homeowners customers?

Daniel Schreiber, CEO

Hey, Heath. I don’t have any data to support or debunk that thesis. So I really can’t confirm or deny that. If you have something, Tim, please step in.

Tim Bixby, CFO

I really don’t know either. I haven’t seen anything specific indicating movement trends either way.

Heath Terry, Analyst

Got you. And then on the life insurance side of things, to the extent that, you've gone in this direction of opening your customer base to other insurers, is this something that you could see yourself quickly doing on a commission-based agency basis in other P&C categories, maintaining a Lemonade experience, but using this type of model to quickly add auto and all those categories at a much faster pace than you might have otherwise?

Daniel Schreiber, CEO

Thank you, Heath. Let me share how we think about these things. This is not our first time doing this. Palomar, for example, deals with our California earthquake insurance and elsewhere; we do not write those on our paper. However, the customer experience is integrated and seamless through our platform. In some categories, we feel there is a poor fit between the kinds of risk we want to retain and the experience those insurance involve. For instance, term life is a low-frequency claims experience, mostly occurring after the policyholders' passing. Unlike the high-frequency claims of pet and home, this involves a relatively low need for customer interaction and claims handling. In other categories, we might find it makes more sense to partner with someone else for the underlying risk while we maintain the user experience. Each situation will be determined on how we can best serve consumer interests and provide a superior experience. The same principle applies to auto insurance.

Heath Terry, Analyst

Great. Thanks, Daniel.

Operator, Operator

And our next question today comes from Mike Zaremski with Credit Suisse. Please go ahead.

Mike Zaremski, Analyst

Hi, good morning. I’m curious if there were any changes in how your new customers have shown nice policy growth better than expected, I think? Any changes in how your customers were acquired? I think there were some third parties that showed that the app downloads of Lemonade might have been down a little bit. Can you tell me if that’s incorrect? Maybe you saw a migration to the desktop?

Daniel Schreiber, CEO

Yes. So kind of a two-part question. The short answer is, no. No real change. There’s immense change hourly or daily, but consistent themes are optimizing key channels and returning to profitability that are substantially unchanged. The proportion of customers who download the app really fluctuates; changes based on our system. We have made a shift on how customers were acquired or optimized channels. It appears that downloads were somewhat less recently, but this was an intentional move that we made to optimize how the customer experience works. It’s an interesting indicator, but it’s not a great measure of overall growth. Our guidance provides the best view of what we expect that to be.

Mike Zaremski, Analyst

Okay, interesting. I guess, just lastly, can you just tell us who will be underwriting the life insurance policies?

Daniel Schreiber, CEO

That's not something up for disclosure at this point.

Operator, Operator

And our next question today comes from Arvind Ramnani with Piper Sandler. Please go ahead.

Arvind Ramnani, Analyst

Thanks. Congrats on adding this life insurance. You’ve certainly made it clear that you’re going to chase a much broader range of products. How should we think about the timeline for auto insurance policy? Is it more of a near-term or a longer-term priority?

Tim Bixby, CFO

Our practice is not to disclose timing until we disclose any. You saw that with the launch of pets. We’ll let folks know about upcoming plans for Europe and for life. Auto is an important market for our customers and critical to our long-term vision, and we want to provide everything our customers need. While we’re not communicating specific timing today, it’s fair to say that it's an important market for us as we look to the future.

Arvind Ramnani, Analyst

Great. And one more question regarding the life insurance policy; could you talk about some rationale for using an agency model? As you look to add additional products, what goes into figuring out agency versus owning the policy itself?

Tim Bixby, CFO

It's a combination of things. One is speed; products take time to build, particularly at our level of customer engagement and customer delight. We want to be comfortable with potential partnerships to get quality products at A+ level to our customers. A regulatory standpoint may involve time; it’s much quicker to leverage a partner. Additionally, we have a significant history with Palomar and our life product will be more significant, and we’ll consider agency products as we continue to launch new products in the future.

Daniel Schreiber, CEO

The only thing I would add particularly with life is that insurance companies are already in two insurance markets in Europe and the U.S. Those are property & casualty carriers. To write life policies on your paper would require us to stand up another independent insurance carrier. We need user experience differentiation. In some of these products, the claims experience becomes a massive differentiator, while underwriting becomes long lead items. The big differentiation here will focus on the user experience, which we can achieve without standing up an additional insurance carrier. So that’s another consideration, just to bear in mind.

Arvind Ramnani, Analyst

Great, that’s super helpful. Just one last question. I wanted to get some clarity on customer acquisition. We’ve seen nice improvements—can you provide more granularity on that efficiency?

Tim Bixby, CFO

It’s not really a silver bullet answer. We’ve got a larger and smarter team than we did a year ago, and that was also true a year ago compared to the prior year. Seasonality factors in significantly. The amount of growth we generated in IFP in Q3 versus year-to-date is nearly identical to what we saw last year. While the ins and outs can vary day-to-day, over the quarter, we came in quite in line with earlier quarters. We are improving in every small area; our creative today compared to a year ago looks better with an improving customer fit leading to better conversion rates. As we recognize who are right customers, that helps enhance our marketing efficiency and investment. There’s probably better word of mouth; more people are aware of Lemonade as we approach a million customers, which of course is a tiny number in absolute terms but relatively it becomes a stronger customer acquisition driver. Lastly, our performance metrics from J.D. Power and Clearsurance are top of the market. They consistently show steady improvement as well.

Arvind Ramnani, Analyst

Great, that's terrific color. Thanks again for answering the questions.

Daniel Schreiber, CEO

Great, looks like we’ve answered all the questions. Let me wrap it up here. Great to have everyone participating. Excellent questions. Thank you very much, and we’ll see you in the quarter.

Operator, Operator

Thank you. This concludes today’s conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.