Earnings Call Transcript - LMND Q2 2023

Operator, Operator

Hello, and welcome to the Lemonade Q2 2023 Earnings Call. My name is Alex and I will be coordinating the call today. Now, I will hand it over to your host, Yael Wissner-Levy from Lemonade. Please go ahead.

Yael Wissner-Levy, VP of Communications

Good morning, and welcome to Lemonade's second quarter 2023 earnings call. My name is Yael Wissner-Levy, and I am 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, our Chief Financial Officer. A letter to shareholders covering the company's second quarter 2023 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 3, 2023, our Form 10-Q filed with the SEC on May 5, 2023, 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 performance indicators, including customers in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio excluding catastrophic events, and net loss ratio, along with definitions 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?

Daniel Schreiber, Co-CEO and Co-Founder

Good morning, and thank you for joining us to discuss Lemonade's Q2 results and our updated outlook for the year. The second quarter exceeded our expectations on both top and bottom lines despite the outsized weather events, which dampened results across the entire industry. Tim will provide all the details shortly, though. The headline is that our in-force premium grew 50% year-on-year, while our operating expense grew only 9% and our net loss decreased. Premium is growing more than five times faster than expenses, highlighting the scalability of our business. As we continue to grow, we expect this dynamic to drive our progress towards profitability. The importance of achieving scale was the driving force behind a major piece of news in Q2, the launch of our synthetic agents program with a long-time investor, General Catalyst. We believe this program is something of a game changer and have written about it at length on our blog. I encourage you to study this program as it is not quite like anything we've seen before, and we believe its impact on our business will be material in 2024 and beyond. Let me explain it briefly. Our direct-to-consumer business model has served us extremely well, and we have no plans to change it, but it does have one downside: customer acquisition costs (CAC) are borne upfront, and it takes us about 24 months to recoup that initial outlay. To be clear, our expenditure on CAC is money well spent because over their lifetime with us, our customers typically repay their CAC three times over, even accounting for the time value of money. But because it takes time to recoup the initial outlay, rapid growth is typically cash flow negative. If we invest $100 million on CAC in year one, for example, and $200 million in year two, and $300 million in year three, we could expect that $600 million of CAC investment to yield about $2 billion in gross profit over time, which is a compelling return on investment. Without this synthetic agents program, long-term profitability comes at the expense of near-term cash reserves. This trade-off limits our pace of growth, particularly while the cost of capital is elevated. Slowing growth preserves cash, which is good, but it also caps the amount of gross profit we can generate, slowing our path to profitability and lowering our terminal value. Insurance companies that sell through independent agents don't have this issue. The agent finances the CAC, and the insurance company can grow without depleting cash reserves. But while we do partner with agents to some extent, we prefer not to let this become our primary distribution model. For one, the agent-mediated business replaces the magical Lemonade experience with the agent's own interface, commoditizing our brand and watering down the data we collect. For another, the agent stipend offers matches half of the gross profit of the customer over the life of the customer, greatly reducing the lifetime value (LTV). So while agents do solve the cash flow gap, their costs in terms of gross profit, brand, data, and customer relationship are significant. This is where synthetic agents come in. Synthetic agents were designed to provide the cash flow benefits of independent agents without what we perceive to be their biggest downside. Synthetic agents finance our CAC, or up to 80% of it to be precise, and they get the equivalent of a 16% commission from those cohorts they helped finance. They have no other recourse whatsoever, just a right to a portion of the premiums that wouldn't have existed if it wasn't for their funding. That is broadly similar to independent agents. But unlike independent agents, payments to synthetic agents aren't for the lifetime of the customer; they stop after 2 to 3 years, and Lemonade owns 100% of the LTV thereafter. That's a huge difference. The upshot is that our synthetic agents program enables rapid growth without foregoing the customer relationship, without diminishing LTV, without depleting our cash reserves, and without selling equity to finance our growth. Additionally, this quarter also saw the renewal of our reinsurance program, notwithstanding one of the hardest reinsurance markets in many years. The reinsurance program is for the same 55% seed as we had previously to the same top-tier reinsurers, yielding similar capital efficiency. There are some changes to the renewed program, particularly around the treatment of catastrophe events; named hurricanes are excluded, for example, and there's a $5 million per event cap. Yet these are risks we can comfortably bear in our newly formed captive structures while maintaining our target capital efficiency. Taken together, the impact of our reinsurance program and synthetic agents program is significant. In their elemental state, the capital burdens of insurance—both regulatory capital and working capital—would weigh us down, slowing growth, idling cash, and delaying profitability. That's why our Q2 agreements are so material. Our reinsurance partners relieve our regulatory capital burden through our quota share program, and General Catalyst relieves our working capital burden through our synthetic agents program. At least from a capital perspective, therefore, the agreements that came into effect July 1 mean that we're all set to grow and to go the distance, which brings us to the next hurdle we need to clear before picking up our growth rates: most notably, rate approvals and the loss ratio more broadly. In my remarks last quarter, I said and I quote, we expect our current trajectory to broadly continue, albeit with occasional hiccups when outsized catastrophe events introduce a brief reversal. I stand by those comments. Q2 indeed saw a reversal due to outsized catastrophe events, but the underlying trend line continues to be in line with our expectations. Our rate filings have gained steam and approvals are also coming in faster now. Significantly, California approved a 30% rate increase for our homeowners product and 23% for our pet business. It will take some time for these rates to earn in, and we still need to take more rates, but we have reason to believe things are moving as they ought to. Importantly, in parallel to our rate approvals picking up, inflation has been slowing down. This is really significant to us. And so long as these trends continue, as I said last quarter, we'll continue to expect the downward trajectory of our gross loss ratio to broadly continue, albeit with occasional hiccups when outsized catastrophe events introduce a brief reversal. And with that, let me hand over the call to Tim, who can provide more details on our Q2 results and a view into the second half of 2023. Tim?

Tim Bixby, CFO

Great. Thanks, Daniel. I'll review highlights of our Q2 results and provide our expectations for the third quarter and the full year, and then we'll take some questions. It was a strong quarter across the board, with continued loss ratio progress despite catastrophe headwinds, really nice marketing efficiencies, and impressive expense control. In-force premium, or IFP, grew 50% in Q2 as compared to the prior year to $687 million. Absent the impact of the Metromile acquisition, organic annual growth was approximately 28%. Our customer count increased by 21% to $1.9 million as compared to the prior year. Premium per customer increased 24% versus the prior year to $360. This increase was driven primarily by both volume growth and mix shift, including the impact of the addition of Metromile's pay-per-mile customers and, to a lesser extent, increased price and coverage. Annual dollar retention (ADR) was flat as compared to the prior quarter and improved by 4 percentage points to 87% versus the prior year. We measure ADR on an annual cohort basis, including the impact of changes in policy value, additional policy purchases, and churn. It's worth noting that our ADR may decline somewhat in coming quarters as we recently passed the 1-year anniversary of the Metromile acquisition on July 28. This will add a base of customers with slightly higher churn rates than the rest of our book. I expect this headwind to ADR driven by the change in product mix will dissipate over subsequent quarters. Our gross earned premium in Q2 increased 53% as compared to the prior year to $164 million, roughly in line with the increase in in-force premium. Revenue in Q2 increased 109% from the prior year to $105 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 53% in the quarter as compared to approximately 71% in the prior year. Absent the change in the proportion ceded, revenue growth would be roughly in line with the growth in our gross earned premium. Our gross loss ratio was 94% for Q2 as compared to 86% in Q2 2022 at 87% in Q1 2023. The impact of catastrophe events in Q2 was roughly 21 percentage points within the gross loss ratio. Excluding the impact of all catastrophe events in Q1 and Q2, the underlying non-cat loss ratio showed solid improvement of roughly 8 percentage points from the prior year and roughly flat versus the prior quarter. Certainly, backing out catastrophe events is not something we can actually do as an insurance business, but we do think providing additional transparency and detail around our results can be analytically helpful. Operating expenses, excluding loss and loss adjustment expense, increased by 9% to $95 million in Q2 as compared to the prior year. This is primarily driven by increased personnel expenses, stock-based compensation expenses, and legal and professional fees, in large part from the Metromile acquisition, partially offset by lower sales and marketing expense. Other insurance expenses grew 55% in Q2 versus the prior year, roughly in line with the growth of earned premium. While total sales and marketing expenses declined by $12 million or about 33%, primarily due to lower growth acquisition spending to acquire new customers. Notably, our growth spend efficiency improved significantly in Q2, in large part due to this lower spend level. Each dollar spent on growth generated roughly 75% more IFP this quarter versus the prior year. We spent approximately $12.5 million for growth advertising in the quarter or roughly 50% of our total sales and marketing spend. Technology development expenses increased 35%, primarily due to the Metromile acquisition, while G&A expenses increased 37% as compared to the prior year but notably decreased 6% as compared to the prior quarter. Personnel expense and headcount continued to be quite stable despite continued growth in customers and premium. In fact, our headcount actually decreased 2% as compared to year-end 2022 to 1,333 and has been essentially flat for three quarters running. Headcount increased 17% as compared to the prior year, primarily due to the acquisition in Q3 last year. Net loss was $67 million in Q2, or a loss of $0.97 per share, as compared to the $68 million loss we reported in the second quarter of 2022, or a loss of $1.10 per share. While our adjusted EBITDA loss was $53 million in Q2 as compared to the $50 million adjusted EBITDA loss in the second quarter of 2022. Our total cash, cash equivalents, and investments ended the quarter at approximately $942 million, reflecting primarily a use of cash for operations of $97 million since year-end 2022. With these goals and metrics in mind, I'll outline our specific financial expectations for the third quarter and for the full year 2023. For the third quarter, we expect in-force premium at September 30 to be between $703 million and $706 million; gross earned premium between $166 million and $168 million; revenue between $102 million and $104 million; and an adjusted EBITDA loss of between $51 million and $49 million. We also expect stock-based compensation expense of approximately $16 million; capital expenditures of approximately $3 million; and a weighted average share count of approximately 70 million shares. For the full year 2023, we expect in-force premium at December 31 to be between $710 million and $715 million; gross earned premium between $654 million and $658 million; revenue between $402 million and $408 million; and adjusted EBITDA loss between $199 million and $196 million, along with stock-based compensation expense of approximately $62 million. We also expect capital expenditures of approximately $12 million and a weighted average share count of approximately 70 million shares. And with that, I would like to hand things over to Shai.

Shai Wininger, Co-CEO and Co-Founder

Thanks, Tim. We'll now turn to our shareholders' questions submitted through the safe platform. In the first question, an investor asked about our plan to reach profitability between the years 2025 and 2027 as we laid out in last year's Investor Day. He asked for a timeline update for when we think profitability would most likely occur. Based on what we know today, we see minimal changes in our multiyear breakeven timing. When we shared long-term financial scenarios in November 22, it was before our synthetic agents funding and before a notable improvement in our EBITDA. So we plan to work that into our long-term planning and give a more updated view shortly. In the second question, an investor wanted to know about our Giveback program, noting that the Lemonade Twitter feed has demonstrated a left-leaning bias for the company and asking how the company will show political neutrality going forward. This has been a topic that has always been top of mind for us since we started the company. Lemonade was founded as a public benefit corporation and integrated social impact into the core of its mission. That means that we may be vocal about topics like gun control and climate change, which can be considered political, but we stay above the fray when it comes to party politics. Beyond doing the right thing, we believe that taking a stand is important for our business and brand, even when it comes at the cost of not being everyone's cup of tea. As part of our branding strategy, we'd rather be loved by some than ignored by all. As for our Giveback causes, we believe you will find a wide range of options for which most of our customers can find a cause that aligns with our values. We welcome your and others' thoughts on charities that could be part of our Giveback and have no intention of making this a politically charged program. In the next question, another investor asked how many generative AI prototypes have made it into production and what the estimated impact is for '23 and beyond. Using generative AI, we plan to take our automation even further. I believe many insurance companies will find it extremely challenging and quite risky to implement generative AI in their systems. For one, generative AI models are highly unpredictable by design, making it impossible to create consistent and compliant results. Secondly, companies that rely heavily on agents will see much lower efficiency gains using this tech because they often don’t communicate directly with their customers. Since we handle and control 100% of our customer communications, being able to automate a large portion of those can reduce our expense ratio. As we started experimenting with generative AI, it became clear that we needed a way to attain these models. Regulators require predictability and auditability, things that aren't a strong suit of large language models. This has been an area of focus for us, and I'm proud to say we've now solved it. With our new generative AI compliance platform, we're combining the generative capabilities of large language models with our predictable, consistent, and compliant chat platform. We're now able to deploy fully compliant generative AI capabilities at scale and in a very short time. We're still in development, but I'm happy to report that our new generative CX technology already handles hundreds of customer emails and is capable of performing complex tasks autonomously. Our new system can cancel policies, handle non-renewals, add interested parties, and more, with new functionality coming online almost every day. In parallel, we're also developing features that utilize the vision capabilities of generative AI, allowing you to review documents such as VAT records and examine damage photos. Together with our existing models, we're seeing extremely positive results. As I mentioned before, I believe generative AI, when combined with Lemonade tech, will help reduce our operating costs from software development to customer service. And with that, let me hand the call over to the operator so we can take some of the questions from our friends on the street.

Operator, Operator

Thank you. Our first question for today comes from Yaron Kinar from Jefferies. Your line is now open. Please go ahead.

Yaron Kinar, Analyst

Thank you. Good morning. My first question or a couple of questions are on the reinsurance program. Is there a loss corridor in the new reinsurance structure? And also, maybe you can touch on the fact that you're now retaining the hurricane risk through the affiliated entity at Bermuda? How should we think about, let's say, catastrophe losses this quarter—net losses this quarter—and that track catastrophe losses in 3Q when you had in, if they were applied with the new reinsurance program or gone up, they have been the same.

Tim Bixby, CFO

Sure. Thank you, Yaron. This is Tim. A couple of comments on the new reinsurance structure. In terms of a loss corridor, no, there's not a traditionally defined loss corridor. There is a sliding scale commission, so it's somewhat more nuanced than our prior structure, which was a fixed static commission rate with some potential upside. But overall, I would sort of point out that the quota share ceding proportion is the same, and the players are the same, so it is substantially unchanged. With the acceptance that you noted, we are retaining more of the catastrophe risks. So, for example, named hurricanes are fully excluded. If you roll back historically, our losses have been not zero, but quite low for named hurricanes and that's more a result of how we underwrite and where we're present. In terms of other storms, obviously, in the last 2 years, we've had fairly significant and quite unique storms that were not named hurricanes, and so our previous reinsurance did exactly as designed, which was to protect us against the most unpredictable events, and those kind of actions perform as they should have mitigated a significant amount of those losses. That's why we're able to achieve an EBITDA result, for example, in this quarter despite a fairly elevated gross loss ratio.

Yaron Kinar, Analyst

Got it. Thank you. And then my second question on the synthetic agent. Given that it now lowers your upfront cash burn or would potentially do so, do you see yourself updating your growth targets near term and longer term? And maybe taking them up?

Tim Bixby, CFO

Hey, Yaron. Yes, I think we will. We now have the flexibility, certainly from a financing point of view and from a capital structure point of view, to do a lot more degrees of freedom. When we gave our last in-depth analysis back in November during our Investor Day, we spoke about a 20% to 25% growth rate on a multiyear CAGR basis as being optimal. You grow much slower, and we don't get to scale. Grow much faster, and the capital that's required along the way would be too excessive. So there was a path to profitability with the money we have. But now we actually have quite a wide corridor on one end of that, to the right of that; we can now expand significantly without meaningfully impacting our cash reserves. So from a financial point of view and from a capital requirements point of view, there are new degrees of freedom. As we mentioned earlier, we will be constrained by other things. We still only want to grow profitably. So getting rates approved and being able to grow in places where we see the kind of LTV to CAC that we want is a precondition to accelerating our growth rates. But as those rates come online and as our products continue their downward march in terms of the underlying loss ratio, we do hope to be able to pick up our growth rate. Our guidance for this year remains as we upgraded a little bit, but it remains largely as we've spoken about in the past because we don't anticipate all those conditions coming through in the next two quarters.

Yaron Kinar, Analyst

Thank you, understood.

Tim Bixby, CFO

Yaron, if I might. Sorry, Yaron, if I might. I was just checking my notes here. I skipped over one of your questions, which I think is worth clarifying, which was around the reinsurance. If you look at Q2, which was notable for its combination of catastrophes, a very large quantity of relatively small events that aggregated a significant number for that kind of event, we would expect to continue to be covered under the new structure. So not exactly the same, but substantially unchanged given what we saw in Q2.

Yaron Kinar, Analyst

Got it. But the sliding commission structure wouldn't have impacted the net results?

Tim Bixby, CFO

It would have in isolation, but again, on a macro view over the course of the year would not have a significant impact.

Yaron Kinar, Analyst

Got it. And then a quick numbers question on prior period development. Did you have any in the quarter?

Tim Bixby, CFO

Yes, but fairly modest. The vast majority of the impact was in the current period.

Yaron Kinar, Analyst

Okay. Do you have the number by any chance?

Tim Bixby, CFO

Let me double-check that, and I'll add that in a moment. We'll go on to the next question. Thanks.

Operator, Operator

Thank you. Our next question comes from Josh Shanker of Bank of America. Your line is now open. Please go ahead.

Josh Shanker, Analyst

Yeah. Good morning. Following up a little bit about the conversation with Yaron on growth. You've spoken in the past about conserving cash until the capital markets are more willing to embrace limited ambitious plans. But you materially exceeded the growth guidance in 2Q '23, and this is before the capital light agents program was put in place. Did Lemonade grow more quickly than desired? And how much control do you have for raining in the growth in the back half of the year before the rates that you're really desiring push through?

Tim Bixby, CFO

Yes, this has been a continuing theme for a couple of quarters now. When we're by choice, choosing lower growth rates, lower spend rates to conserve capital, and what you see when you're in large and established growth channels is that when you dial back spend, by definition, reducing your less efficient or less productive spend, what you're left with is the more efficient opportunities. And so sometimes it's difficult to predict how much more efficient you will become. Some of the upside you've seen versus our own guidance, particularly in Q1 and Q2, has really been a result of that. For example, in Q2, if we compare it to the prior year, you saw a 75% increase in the efficiency of our spending dollar for dollar versus a year ago. Now we can't take credit for all of that. We're spending fewer dollars. If we were to spend the same number of dollars as a year ago, I would expect that efficiency difference would not be so significant. It would likely be favorable; we consistently get better over time in increments, but it would probably not be so dramatic as you saw. Going forward into the rest of the year, we have guidance that lays out a mid-teens growth rate for the year in terms of ISP because we're updating guidance quarterly, we do try and capture some of that overperformance or underperformance, which we haven't had, but the variance in what our guidance is. So I wouldn't expect - we don't expect to see that dramatic an overperformance versus our guidance, but you could see some portion of that repeat.

Josh Shanker, Analyst

Thank you very much.

Tim Bixby, CFO

Just to return quickly to Yaron's question regarding prior period development, just over 1% or so, 1.3% was prior period development, with the remainder being otherwise.

Josh Shanker, Analyst

And the 1.3% was favorable or unfavorable?

Tim Bixby, CFO

Unfavorable.

Josh Shanker, Analyst

Okay. And then so coming back to the growth question. I mean if I subtract the Q4 guidance from the Q3 guidance, the guidance basically implies almost no growth in Q4. You have the 30% rate coming through in homeowners and 23% in California; if I layer that, it suggests that there's almost no policy count growth. Your anticipation is that you can shut it down, I guess. Is that - am I reading the numbers correctly when I think that way?

Daniel Schreiber, Co-CEO and Co-Founder

Josh, Daniel here. Yes, what growth we're going to see in the next 6 months will be largely skewed toward Q3. It is the moving season, it's when every dollar goes further. So we are taking our dollars spent and skewing them towards Q3 in general. We’ve spoken about this in prior years. Q4 gets busy for a couple of reasons. Q4 sees a tapering off in the moving season, but also just the shopping season and the holiday season means that ad words become more costly. So we will definitely skew our spending towards Q3.

Josh Shanker, Analyst

Thank you very much.

Operator, Operator

Thank you. Our next question comes from Bob Wang of Morgan Stanley. Your line is now open. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. One quick question regarding your commentary around AI. As you mentioned, maybe not generative AI, but AI broadly, I think in the past, you talked about machine learning, which is a much lower form of AI, so to speak, if at all, would get you to about a sub-75% loss ratio. Can you explain the path to achieve that sub-75% loss ratio for you, given technological implementation going forward? And how do you plan the next 2 years and the next 5 years in terms of data infrastructure as well as your AI integration?

Daniel Schreiber, Co-CEO and Co-Founder

Hey, Bob. So I think our AIs are pretty much where we need them to be. Our analysis was shared—what LTV-6 did back in November—where LTV-6 graduated to LTV-8. It's worth noting that our machine learning AIs are mature and focused on risk assessment. Every customer that comes into Lemonade has about 50 different machine learning models making predictions about the likelihood to claim, severity of a claim, likelihood to channel, likelihood to upsell, etc. So we have a robust infrastructure now making fairly specific and detailed predictions, and as we audit them, we are finding them to hold true. Our confidence in relying on these models grows with every timing of the cycle. The big hurdle today for us regarding loss ratio does not lie in machine learning or AI; it's about getting regulatory approvals, and once those have been received, implementing them. Particularly in an inflationary environment, you price a policy today and you don’t get to amend it for another year except in car, where you get one opportunity midyear. This causes a delay between pricing and claims, especially with inflation that was significant—10% last year and more in some cases. Hence, you could be fielding a claim six months from now that’s higher than what you priced today, and we only get a renewal chance to adjust this once a year. As inflation normalizes and rate approvals pick up, our ability to control loss ratios will improve. While we will still face challenges with high inflation, the trends we are seeing provide optimism that we are beginning to break the back of this cycle. With both inflation decreasing and approvals speeding up, we expect to be able to move toward our loss ratio goals.

Unidentified Analyst, Analyst

Okay, that's very helpful. Is it fair to imply from what you said so far that the technological development so far is somewhat secondary to the regulatory and macro environment? Would the current regulatory environment potentially nullify a lot of the technological advantages you're gaining?

Daniel Schreiber, Co-CEO and Co-Founder

It’s a fair question. I'd draw your attention to a couple of things. If you look at our loss ratios by product, the high cat impact of this past quarter perhaps masks some of the dramatic improvements that we shared in our last report. Our per-product loss ratios show that we're experiencing significant improvements, especially when you look at our pet business, which is now almost as large as our homeowners business. While we are in a high inflation environment, it is true that the industry, including us, suffers due to macroeconomic pressures. Our competitive advantages should become even more evident as conditions stabilize. Our strategy of being superior at selecting and pricing risks is fundamentally sound, and it positions us well for long-term success.

Unidentified Analyst, Analyst

Thank you. That's very helpful.

Operator, Operator

Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Your line is now open. Please go ahead.

Jason Helfstein, Analyst

Thank you. I want to go back to your original long-term plan, whether you came public, etc. Regardless of your views about climate change, it seems that storms are becoming more frequent. Do you feel that as a result, if starting again, you would need to have a bigger business to absorb the risk? How has this affected the recent announcements, and how do you think about growth now versus 5 or 7 years ago?

Daniel Schreiber, Co-CEO and Co-Founder

That's a great question, Jason. Rather than suggesting a different course of action, it confirms our multi-product, multi-geography strategy. Yes, we saw some pretty severe outcomes this quarter, but we are not just a homeowners business. That represents a sizeable minority of our business. The rest of our operations are performing well. The multi-product and multi-geography approach already helps mitigate the worst of these risks. The fact that we reported solid EBITDA and top-line performance despite a 94% gross loss ratio speaks to the resilience of our business. While we cannot ignore the increasing frequency of major catastrophes, the insurance model ultimately gets a handle on that through pricing. We are diversifying geographically and by product, translating into a healthier business as time progresses.

Tim Bixby, CFO

If you look at the broader picture since going public, one of the surprises during this period of more volatile storms is how well we've navigated through that. We’ve faced elevated results, but they haven't been too far out of line with larger incumbents, suggesting a solid position for us moving forward.

Jason Helfstein, Analyst

And then regarding your technology, with large language models and AI becoming more accessible to other companies, do you think that poses a competitive threat? It seems this could disrupt your position as pioneers in technology.

Tim Bixby, CFO

We are not particularly worried about increased competitive access to technology. This has always been the case. The large models enable substantial opportunities. However, having built our platform in anticipation of just such data advantages means we have a distinct edge.

Daniel Schreiber, Co-CEO and Co-Founder

Just to finish, I would note that significant legacy challenges exist for many established players. These systems, which sometimes don’t communicate well, create obstacles that can be hard to overcome. However, we remain confident that our models and technologies give us a strong position in the market.

Mike Zaremski, Analyst

Hey, good morning. Thanks for taking my question. First question is just a numbers question on the catastrophe losses on a gross basis. We're calculating it was around 21 points. Is that similar on a net basis?

Tim Bixby, CFO

Yes, it is.

Mike Zaremski, Analyst

Okay. And my follow-up, you mentioned in the prepared remarks that Metromile's churn rate is slightly higher than the rest of the portfolio. Looking back, I read that Metromile’s annual customer retention rate was around 60%. Is that still kind of around that level?

Tim Bixby, CFO

Yes. We don't disclose that specifically, but the retention rate is somewhat better under our management framework. The premium run rate has continued even though customer count has declined, indicating stabilization.

Matt Smith, Analyst

Hi, thanks. I wanted to stick on the Metromile theme a little bit. One of the points in the letter was that the auto loss ratio hasn't improved significantly. Given that you have more personalized data for those customers, what's the plan to improve that loss ratio going forward?

Daniel Schreiber, Co-CEO and Co-Founder

Good to talk to you, Matt. Yes, we have clarity here. The bulk of our auto business comes from the Metromile segment, heavily concentrated in California. We're waiting for rate approvals that will significantly impact the loss ratio for that segment. While we are seeing some improvement in retention, we are temporarily slowing growth to align rates with risks in key markets. We are expanding into other states where premium adequacy exists, but tackling the existing loss ratio remains the priority. On the synthetic agents, our LTV to CAC ratio remains strong at over 3 based on past performance. We've maintained that despite increasing catastrophe events. Our long-term retention and cross-sell will also contribute positively and drive that consistent performance.

Operator, Operator

Thank you. Our next question comes from Yaron Kinar from Jefferies. Your line is now open. Please go ahead.

Yaron Kinar, Analyst

Thanks for taking my follow-up. On the loss ratios provided, can you clarify the loss ratio for homeowners excluding customer acquisition costs?

Tim Bixby, CFO

Yes, we chose to be strategic with that detail, but we’ve seen good progress overall. While we haven’t disclosed specific lines, our improvements show a general downward trend.

Yaron Kinar, Analyst

Got it. And can you confirm where that improvement is coming from?

Tim Bixby, CFO

Most of it stems from enhanced underwriting discipline and careful selection of risks, which has demonstrated success in adjusting loss ratios.

Operator, Operator

Thank you. This concludes today's conference call. Thank you all for joining, and you may now disconnect your lines.