Lemonade LMND Q4 2020 Earnings Call Transcript

Moderator: (00:00) Good morning and welcome to the Lemonade Incorporated Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Yael Wissner-Levy, vice president of communications. Please go ahead. Yael Wissner-Levy: (00:31) Good morning and welcome to Lemonade's Fourth Quarter 2020 Earnings Call. My name is Yael Wissner-Levy and I am the vice president of communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and co-founder; Shai Wininger, president, COO and co-founder; and Tim Bixby, our chief financial officer. Yael Wissner-Levy: (00:54) A letter to shareholders covering the company's fourth quarter 2020 financial results is available on our investor relations website, investor.lemonade.com. Yael Wissner-Levy: (01:03) Before we begin, I would like to remind you that management 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 are the result of various important factors, including those discussed in the risk factors section of our final perspective filed with the SEC on January the 14th, 2021, pursuant to Rule 424B4 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. Yael Wissner-Levy: (01:44) 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 non-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: (02:24) Good morning. Our fourth quarter saw continued progress along our key performance indicators, evidencing both quantitative and qualitative advances. As compared to Q4 2019, we saw our in force premium grow by 87%, our adjusted gross profits by 86%, and our losses per dollar of gross and premium roughly halved. Tim will elaborate on all our numbers shortly. But as strong as these metrics may be, the qualitative changes run deeper than the numbers suggest. Daniel Schreiber: (02:59) The main thing I'd like to highlight is that we have fully transitioned from monoline business as we were at our IPO a short few months ago to offering three highly differentiated products that span property insurance for homes to health insurance for pets to life insurance for humans. During this transition, we've learned several things of note. Daniel Schreiber: (03:21) The first is that our brand and technology are highly extensible. If there was any question about whether these could extend to higher value and higher complexity products, they're really no longer is, they do. The second is that our customers wants to buy multiple products from Lemonade. About half of our pet policies and half of our life policies have been bought by existing Lemonade customers with far-reaching implications for lifetime value and dollar attention. The third is that new products create new on-ramps for Lemonade. In the fourth quarter, more than 40% of our sales, our new product sales would not rent as policies, demonstrating that our high value products are not only destinations for upsells, but destinations in their own right. They are entry points to Lemonade, and this expands our total available market while lowering a customer acquisition costs. Daniel Schreiber: (04:23) In general, our customer journey has progressed from a relatively linear roadmap, where customers joining are young renters and graduates to become homeowners to far more multidimensional map within a way of on-ramps and intersections. This is great news for both customer acquisition costs and lifetime value of our customers. It's a level of symbiosis that we theorize about, that we aspired to, and it's heartening to see it play out even better in practice than the theory had projected. Daniel Schreiber: (04:56) All these learnings have emboldened us to continue down this road. Indeed, to double down on it. And we plan to keep launching products until we have catered to the totality of our customers' needs. I say we plan to, but in truth, we're beyond just planning. We haven't tried this before, but we actually have more people working on our next major yet to be announced product today than we have working on our homeowners or our renters or our pet or our life products. I look forward to the day in the not too distant future when I'll be able to share the reason for my excitement with a little less cloak and dagger. In the meantime, a few more points worth highlighting. Daniel Schreiber: (05:42) One is that our 2020 annual loss ratio was 71% as compared to 79% in the prior year. We've now seen an incredibly healthy loss ratio for the year, as well as healthy loss ratios across all four quarters and all four seasons, affording confidence that even as we grow fast, we are growing profitably. Of course, we will see occasional spikes in our loss ratio, though our reinsurance will mute the impact of these on the bottom line. And in this context, I want to say a few words about the Texas Freeze in Q1. Daniel Schreiber: (06:23) When Q3 saw unprecedented wildfires and hurricanes, we took pride in the fact that our courses underwriting meant that the impact of these catastrophes on our book of business was disproportionately liked. Now, hurricanes and wildfires do follow a probability distribution, and that allowed us to manage our exposures to that. The Texas Freeze that happened this month was different. It was a black swan event. Few models predicted that this unique weather pattern and none predicted the massive loss of power that the freeze engendered nor the massive loss of drinking water, that the loss of power triggered. These compounding catastrophes came without warning and impacted the entire state, a state where a quarter of our customers live. Daniel Schreiber: (07:13) For these reasons, it quickly became the largest catastrophe we as a company have ever contended with and it tested both our people and our financial model in important ways. I'm happy to tell you that both held up exceedingly well. We will provide a lot more color and detail when we report our Q1 results, but I'll say that we saw many thousands of claims in a space of just a few days and that our team works night and day and successfully remained incredibly responsive and helpful despite the extraordinary surge. Being there for our customers in such trying circumstances is exactly the promise of Lemonade, and I'm proud that we were able to live up to this promise. Daniel Schreiber: (07:57) As far as financial model, it too weathered the storm very well while our gross loss ratio will spike in Q1, our reinsurance structures are playing their designated role. And as our guidance for Q1 indicates, we do not expect the Texas freeze to have a material adverse impact on our financials in 2021. And with that, let me hand over to Shai for some product updates. Shai, over to you. Shai Wininger: (08:23) Thank you, Daniel. Last time we spoke, I mentioned that unlike previous product, Lemonade Life will be launching gradually before actively marketing it to new customers. I'm happy to report that so far the stage launch is looking good. Although numbers are modest, this is by design. Sales are in line with our expectations while conversion rates are ahead. Shai Wininger: (08:49) We're dedicating the first half of the year to learn, improve, and optimize Lemonade Life. And as anxious as we are to accelerate its growth, we remain true to our customer centric principles and we'll only start scaling it once we were satisfied it provides a magical experience that's fast, transparent, and easy to understand. Shai Wininger: (09:12) On other fronts, we are happy with the rate in which our non renters products are growing. With homeowners and pet representing more than 40% of our new business in the last quarter. This is in addition to the very strong cross sales of these products to existing Lemonade customers. Cross sales are an important part of our strategy because they fundamentally change the unit economics for the better. For example, the renter who also buys pet coverage generates a 4x increase in premium and dramatically improved the LTV to CAC ratio as this second purchase comes at nearly zero cost. Shai Wininger: (09:51) New products also help us grow our geographical footprint. And I'm happy to report that Lemonade is now available with at least one product in all 50 U.S. states. And as Daniel mentioned, we are working intensely on our next product. We're not yet ready to name it, but I do want to share everyone's excitement about this major project, which may well be the most significant launch we've ever done. And with that, let me hand over to Tim for a bit more detail around our financial results and outlook. Tim? Tim Bixby: (10:28) Great. Thanks, Shai. I'll give a bit more color on our Q4 results as well as expectations for the first quarter and the full year 2021, and then we'll take your questions. Tim Bixby: (10:38) We had another strong order of growth driven by additions of new customers, as well as a continued increase in premium per customer. In force premium grew 87% in Q4 as compared to Q4 in the prior year to $213 million. We believe that this metric captures the full scope of our top line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Premium for customer increased to 20% versus the prior year to $213. This increase was driven by a combination of increased value of policies over time, as well as mix shift towards higher value homeowner and now pet policies. Again, roughly two thirds of the growth in premium per customer in Q4 was driven by product mix shift, including cross sales and the remaining one third from increased coverage levels and pricing. Tim Bixby: (11:33) Growth started to premium in Q4, increased 92% as compared to the prior year to $50 million. In line with the increase in in force premium. Our gross loss ratio was 73% for Q4, in line with 73% in the fourth quarter of 2019. While our full year 2020 gross loss ratio is 71% versus 79% for the full year 2019. We continue to expect our gross loss ratio will vary over time within a target range for annual loss ratios of below 75% with occasional short term results, slightly outside this range. Operating expenses, excluding loss and loss adjustment expense increased just 10% in Q4 as compared to the prior year, with sales and marketing expense again lower slightly as compared to the prior year due to continued improvement in our marketing efficiency. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches and thus saw increases in each of the other expense lines. Our global head count roughly doubled versus the prior year to 567 with a greater growth rate in customer facing departments and our product development teams. Tim Bixby: (12:57) We continue to operate primarily under a work from home structure. It's worth noting that our Tel Aviv office has made good progress in getting many of our team members back to the office. And we anticipate that most of our team members will return to our other offices before year end. Tim Bixby: (13:14) Net loss was $33.9 million in Q4 as compared to the $32.7 million we reported in the fourth quarter of 2019. It was a notably larger customer and in force premium base. While adjusted EBITDA loss was $29.7 million in Q4 as compared to $31.4 million in the fourth quarter of 2019. Our cash, cash equivalents, and total investments balance ended the quarter at $578 million, reflecting primarily the net proceeds from our July public offering of approximately $335 million, partially offset by the use of cash for operations of $91.7 million since year end 2019. As a reminder, we closed a successful secondary offering in January, generating additional total net proceeds of approximately $640 million. And this is of course a Q1 2021 event, not yet reflected in the financials. With these goals and metrics in mind, I'll now outline our specific financial expectations for the first quarter and for the full year 2021. Tim Bixby: (14:25) For the first quarter, we expect in force premium at March 31 between $241 and $246 million, gross earned premium between $53.5 and $54.5 million, revenue between $21.5 and $22.5 million, and an adjusted EBITDA loss of between $43 million and $40 million. We expect stock-based compensation expense of approximately $5 million and capital expenditures of approximately $2 million in a quarter. And for the full year 2021, we expect in force premium at December 31 between $372 and $378 million. Gross earned premium between $270 and $275 million, revenue between $114 and $117 million, and adjusted EBITDA loss between $173 and $163 million, stock- based compensation expense of approximately $25 million, and capital expenditures of approximately $8 million in the year. Tim Bixby: (15:39) As a reminder, please note that GAAP accounting rules are such that ceded premiums are excluded from GAAP revenue. As a result of the change in our reinsurance structure effective last July 1st to a significant proportional reinsurance structure, our year over year revenue and gross margin comparisons are not directly comparable. Accordingly, we've published in force premium and gross earned premium as metrics that we- Tim: (16:03) ... 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. Tim: (16:13) Thanks so much for joining our third quarterly review. As a public company, we do appreciate your interest and support. With that, I would like to turn the call back over to Daniel to address some questions from our shareholders. Daniel? Daniel Schreiber: (16:27) Thanks, Tim. It's been a great pleasure for us to be able to engage with our retail investors through podcasts, YouTube, Twitter, other social media channels. What we've found is a community that is highly engaged, highly inquisitive, and highly supportive. We've engaged with smart people who really do sweat the details and are strategic and long-term in their thinking. These are investors after our own heart. We feel privileged that so many of them are also our customers. They often act as strong advocates for our products and indeed for our company. Daniel Schreiber: (17:09) Our investor community has also been a source of great ideas for us. In response to a couple of tweets that came at us from our retail investors that we signed on with [Sage Technologies 00:17:21] so that these investors, no less than our friendly Wall Street analysts, will be able to ask us questions on these calls. This quarter, and the first quarter that we're trying this, we received close to 100 questions. The same investor community helped us prioritize them by upvoting the ones that seemed most pressing to them. Daniel Schreiber: (17:42) Looking at the five to seven most upvoted questions, we see three central themes that I'll try and address. The first is one of global expansion. Neil F. asked the most upvoted question, which focused on our plans for the EU. Questions by [Arias 00:18:00] about the Asia Pacific and by Jordan about the UK were also very popular. That's kind of one bucket if you like. The second theme is about new products. [Jasmine 00:18:10] asked about our future product plans while Neil R. asked about the changes in car insurance with car OEMs, most notably Tesla entering the space. The third most upvoted question was from Amil. It asked what we think of crypto and whether we plan to invest in Bitcoin. Let me address these three sets of questions in turn. Daniel Schreiber: (18:39) The first, as I said, was about global expansion. In our shareholder letter last quarter, we wrote the following sentence, "While we are steadily enlarging our European footprint, it should be noted that our investments are lopsided in the direction of the US by design and will remain that way for the next while." Let explain and add a little bit of color to that. Daniel Schreiber: (19:03) We think about market as global. We don't expend too much thought about which state or which country our sales occur in. Our machine is trained to invest an incremental dollar in whichever channel offers the highest ROI at any given moment. It takes into account using machine learning models likely churn, expected claims, projected upsells. It derives from these a predictive lifetime value, which you then compare to the anticipated customer acquisition costs in that channel. This results in optimal and increasingly improving LTV to CAC ratios. It also dictates a ranking of products and campaigns that are being promoted based on the ROI for the incremental dollar spend. Daniel Schreiber: (19:54) The machine does not take into account whether the most profitable available business using that formula is in New Jersey or in Washington DC or in France. At the moment, this formula tends to find more compelling opportunities in the US than the EU. So long as that is the case, our growth will skew left. While we continue to grow in Europe, that is not at the moment where most of our profitable opportunities lie and therefore not where our growth is most pronounced. I do expect that the same calculus will yield different answers over time. As markets mature and as efficiencies get developed, we might find ourselves skewing more to the right in that regards. Daniel Schreiber: (20:42) In terms of expanding into new markets like the UK or Asia, there are a couple of things. The first is that we have an expansive vision for Lemonade. We think that our cocktail value proposition of great value, strong values and delightful product, is a cocktail that enjoys universal appeal. Therefore, it's a question of when, not if, with regards to those new geographies. Daniel Schreiber: (21:10) The second thing I'd say is that in deciding when to launch more markets and in which order to sequence them, we follow much the same algorithm as we use to determine where to invest our incremental dollar. We are very ambitious for Lemonade, but we try to temper that with the discipline of ensuring that we invest our energies where they will be most impactful. That really drives the prioritization and the roadmap. Daniel Schreiber: (21:34) I hope that gives some insight into how we think about our global expansion and prioritization of different geographies in terms of growth and in terms of launch. But I'm afraid I'm not going to announce here today which countries we plan to launch when. I'm sure, Neil and Jordan, that you'd appreciate those specifics, but I trust you value even more my not tipping our hand to our competitors. I hope this will be a satisfactory answer to your question, which brings me to the question on new products. Daniel Schreiber: (22:07) We have been very busy with new products, continue to be. For the first four years of our existence, we had only homeowners products. In our fifth year, we saw a profusion of products launched. We launched pet. We launched life. As I intimated, we have more in the oven. Much as I did though when talking about global expansion, hereto I'm happy to talk about our guiding principles while remaining intensely vague or almost evasive about the specifics. Daniel Schreiber: (22:35) As with new geographies, our ambition for new products is expansive. We want to cater to all our customer's needs and to become attractive to an ever-growing universe of customers and new products are really an essential component in achieving this. In our S-1 prospectus for our IPO, we included an illustration of our prototypical Lemonade customer. We showed a young woman who joined at age 25. All she has is a bike and some personal belongings. Then we showed how we could grow with her as she goes through predictable life cycle events. As she collects pets and human dependents and she adds valuables and vehicles and homes. Our product roadmap is developing in the service of this strategic vision of ours. Daniel Schreiber: (23:20) In terms of car insurance in general and the Tesla-related question in particular, let me say the following. The entire mobility space is going through unparalleled dislocations. Ride sharing is increasingly competing with car ownership while autonomous vehicles promise to transform the nature of how risk is allocated in the car industry. If a Tesla crashes while on autopilot, that could arguably be characterized as a faulty product issue rather than a faulty driver issue. They therefore may be better handled under the rubric of product warranty than car insurance. This is one of the many revolutions and transformations of the digital age. These kinds of transformations put incumbents on their back foot. They create tremendous opportunities for innovation for companies that don't have a legacy business to protect. We follow these dislocations with keen interest, but for now, that's all I'm going to say on this topic. Thank you for that question. Daniel Schreiber: (24:27) Finally, let me address Amil's question about crypto and Bitcoin. Crypto and DeFi, decentralized finance in general, are very interesting technologies. They enable really very novel businesses and business models. To date, we haven't seen compelling applications for blockchain or cryptocurrencies at Lemonade, but it's a fast moving space. We're entirely open and even excited at the prospect of that changing. Daniel Schreiber: (24:58) In terms of our investments, our most high-conviction investment is in LMND. We plan to deploy as much of our cash into our own business as we can profitably do. Of course, in the meantime, we will invest the cash that we don't need right now, but we certainly don't plan to make sizable investments in assets as volatile as Bitcoin. The opportunities in front of us are massive. We want to keep our powder dry and dependably available. Hopefully, Amil that makes sense to you. Daniel Schreiber: (25:34) With that, I'd now like to turn the call back over to the operator who can perhaps rejoin the call with Q&A instructions as we'll be happy to now take questions from our friends on the street as well. Thank you. Moderator: (25:49) We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Moderator: (26:16) Our first question is from Mike Zaremski from Credit Suisse. Please go ahead. Mike Zaremski: (26:23) Hey. Good morning, everybody. First question, I'm curious about the exciting new product launch later this year. Does the 2021 guidance contemplate that product launch? Also, kind of curious if the '21 guide contemplates whether you think there'll be any potential changes to the reinsurance program maybe as a result of this kind of black swan Texas event. Tim: (26:56) Yeah. Hey, Mike. Tim here. I'll take each of those in turn. The way we are approaching the guidance and our planning is similar to how we have in the past with new efforts. In the guidance for the full year, you'll see essentially all, or nearly all, of the investment and expense that we plan to make to both drive the current business, drive new growth, as well as build new products, those products that are already in the market and those products that we plan to bring to market. On the top line, we do not load in 100% of what we believe the opportunity is in terms of premium and growth. We're a little conservative on the top line and also conservative on the bottom line. Tim: (27:43) In terms of new products not yet announced, the impact on the year rounds to essentially zero. I think what we're telling the world in terms of our focus investment is we're leaning in. We've raised the additional capital. We feel that we can accelerate some things. We've really accelerated the cost and the investment in the hiring in people efforts. But because we don't yet really have hard clarity around launch dates or impact, we've not built in much from the top line perspective, but that that's kind of how we approach the guidance. Tim: (28:24) From a reinsurance perspective, the Texas situation while it's done for the people on the ground, it's still very much in progress in terms of the accounting and the processing of what the ultimate impact will be. These things, while the exact circumstances that happened in Texas are not perfectly modeled or perfectly expected, these things are expected. It's part of how the reinsurers go about placing their business. It's really a long-term relationship with us. Currently, we have no expectation that the Texas occurrence will dramatically change our long-term view of the value of reinsurance and what we ultimately pay. Our reinsurance partners are really focused on growth and long-term profit and all the things that I think we've delivered a really strong performance on thus far. I expect that to continue. Mike Zaremski: (29:15) That's helpful. My final follow-up is a stat you put into the shareholder letter that I thought was very positive. You talked about a 10% retention rate improvement. I was hoping maybe you could unpack that or give us a little more color. That's a lot of improvement. Do you think that's for the entire existing portfolio or do you think it's for kind of new business you're writing that has more cross selling and graduation rates in it? Tim: (29:49) Yeah. That's an important metric that we're tracking internally. As always, we strive to share more publicly as we get better data. We've clearly been focused on retention insurance since the very beginning of the company. Now that we're larger, we have more data and our dollar retention is really a better indicator of the long-term sort of health and growth of the value of the business and the value of our customers. We obviously are focused very closely on dollar retention. That's where we've seen that improvement. Tim: (30:22) We're not yet to the point where we want to bring that hard metric publicly, because we just want to have our arms around that data as it evolves, but we didn't want to give that indication that what we're seeing internally is exactly what we expect to see. It's as the book matures and as we see some of the benefit of what we call sort of seasoning, meaning a larger proportion of the book ages and those key metrics improve, we are seeing that in dollar retention. Hopefully, before too long we'll be able to share more concrete data on that, but wanted to at least share that bit of information. Mike Zaremski: (30:55) Thank you. Moderator: (30:59) The next question is from Mike Phillips from Morgan Stanley. Please go ahead. Mike Phillips: (31:04) Thanks. Good morning, everybody. You talk in your letter and you've said a kind of a similar comment in prior conversations about the product mix and the shift in new business. In here you talk about 40% is new, which is homeowners and pet. You give the quote in your letter how that's up from prior quarters. I guess I was wondering if you'd be willing or, you haven't been in pet very long, so I'm curious how much of that new business mix is purely from pets versus homeowners and that would be something you're willing to share. Tim: (31:42) Yeah. I think there's a combination of both. I think if we look out over the course of the coming quarters, we can see the point coming where less than a majority of our business will be renters. Having started out as primarily renters from a dollar perspective certainly, if not from a customer count perspective as well- Tim: (32:03) ... certainly, if not from the customer perspective as well. That day is coming. Tim: (32:05) Now, homeowners is larger, it's more mature. We've got more data and have made somewhat more progress. But the pet result, in just six months, have been pretty significant. So I'm not going to share a hard number, but it's definitely a combination of the two. In terms of the balance, maybe going forward, we can share a little bit more of that, but we're definitely seeing impact from both of those. Mike Phillips: (32:32) Okay. Not to put you on the spot, I'm just curious here, I get the philosophy behind ... do you think there will ever be a day when you give the customer accounts split by product line? Tim: (32:46) No, probably not. It's certainly something we could do. The reason for that is ... I don't mean to be glib, but the reason for that is because we'll have so many customers and we already are seeing this dynamic where customers have multiple policies. So if someone's a pet customer or a home customer? That's something we're factoring in and as we get a better feel for that, but that's just the dynamic that we want to make sure people understand is the cross-sell benefit and the upsell benefit. But that's something we'll keep in mind. Mike Phillips: (33:15) Okay. Thanks. And just last [crosstalk 00:33:17] I'm sorry. Go ahead. Yes. Sure. Daniel: (33:20) Sorry, hey, Daniel. I wanted to interject with another point, which is tangential to your question, and we got some questions over social media today from the Paper Bag Investor and others about the fact that while we saw very robust growth in Q4, we didn't see the same proportion of growth in our customer count, and I thought this is a good place to address that. Daniel: (33:42) So you're right, we don't break down the customers by product. I just want to make the broader point, which is, we don't guide for customer count in general. So what we are optimizing for is growth and profitability of our entire book of business. The top line metric that we use is in force premium, which is really a multiplication of how many customers we have times premium per customer, and what our machines are optimizing for is the output of that multiplication. Daniel: (34:14) So if we were just optimizing for customer count, we would just sell renters all day long. If we were just optimizing for premium per customer, we would only sell homeowners all day long. It's really the multiplication of the two which produces the best return on investment, and the more markets we have, and the more products we have, the more able we are to play the arbitrage of seeing where can we get the best return on the dollar invested. Daniel: (34:39) We kind of love all our children, all our geographies, all our products equally, but the way we allocate dollar to them is based on that formula. So the machines are constantly looking to optimize for that. The outcome of that is that in Q4 that we're reporting on now, Q4 2020, we actually spent fewer dollars on marketing than we did during the Q4 of 2019 even though we sold a lot more. Daniel: (35:03) In fact, we mentioned this in the letter, that our efficiencies increased 88%, 2020 versus 2019, and that's really helped by solving for how we get the most bang for the buck? And what we're optimizing for is growth of our business in dollar terms and not in policy count or in customer count, which is why that's also what we guide for. So to just get that in that. Thanks, Mike. Mike Phillips: (35:27) Okay. No. Thank you. That's helpful. Thanks for the rest of your call, again. Mike Phillips: (35:31) Last question for now is on Texas, and I appreciate your earlier comments, Daniel, on that and clearly the complexity of what's involved there. But I guess as you look at that now, it feels like one of the first times you guys have been under pressure from a pretty major cat. I guess are there any ... without going into the guidance and the EBITDA and the loss ratios that could come out of this thing, but just in general, are there any lessons that you have learned yet so far on that? As it's kind of one of the first, almost strains to your system, if you will, of lessons on adjustor availability or accessibility or anything else in your systems that maybe have been tested for the first time in something to this magnitude? Tim: (36:10) Yes. There are some interesting lessons, and while this is certainly the first of its magnitude, it's not the first that we've faced. Over the five years, we've had a couple of quarters with a pretty significant impact, but this one was unique. One of the things that we saw was essentially a year's worth of claims in a week for a given set of folks. So it was, one, really a test of our ability to muster the team to basically redirect and expand the available hours of the team quickly to keep the close rate significant and high. Our Net Promoter Score in normal times is something we're very proud of and it's there for a reason. It's a key focus of the business, and we were able to, as best we can tell thus far, maintain those very high Net Promoter Scores even through the course of the duress of the Texas event, both for customer support and for claims. Tim: (37:05) We've been able to close a very significant proportion of these claims very quickly, and that's really what we're there for, for our customers. We'll see what the ultimate impact shapes up to be. But the guidance for the full year and for the first quarter takes into account everything we know and the patterns we're seeing and how we see it evolving over the coming days. Tim: (37:28) The team has drilled for this and tested for this. You never quite know until it happens. If you could sort of read our internal messaging in Slack, you'd see that while it put a real strain on the system, we sort of passed that test with flying colors. Mike Phillips: (37:45) Okay. Thank you, Tim. I appreciate it. Speaker 1: (37:49) The next question is from Matt Carletti from JMP. Please go ahead. Matt Carletti: (37:53) Thanks. Good morning. Daniel, I just want to circle back to the commentary you just had on kind of the machines and new customers versus premium per customer. I know I'm trying to simplify a very complex issue here, but how does time fit into that? How would you look at it, does a potential kind of 25-year-old today that might only be looking for renters, but has a lot of long-term potential to move up that kind of graduation hill and add a lot of products, be that new customer growth versus somebody that might be renters today, but they'll add on pet today as well, but maybe not go much further than that? Daniel: (38:37) Yes. Hi, Matt. It's a great question and it gives me an opportunity to layer a little bit more of the sophistication of the system on top of my earlier comments. So before, I kind of said that we optimize for ROI, and I left it at that, dollars spent toward dollars sold. Daniel: (38:56) But actually, the machine is doing something far more sophisticated than that, and it's really in line with, I think, the premise of your question, which is not all dollars sold are born equal. Two customers can come in and both of them spend $100, and one will have a lifetime value of $50,000 because they're going to stay for a long time and increase their premiums. And one can actually have a negative lifetime value because they're going to make a big claim and churn in six months. Daniel: (39:21) The more able we are to predict the lifetime value, the more efficiently we can deploy cash against the appropriate or spend-to-CAC, the Customer Acquisition Cost, in a way that optimizes the CAC-to-LTV ratio. Our data science team has been continuously improving our ability to project lifetime value of our customer based on all the parameters that make a difference, so projecting churn, projecting upsells, projecting claims and using all of those together. Daniel: (39:53) So it's not simply that we say, "Renters versus homeowners." We're becoming increasingly nuanced and sophisticated in the machine's ability, not only to say, "France versus New Jersey," or, "Homeowners versus renters," but to get down to a much greater level of granularity and as your question implies, focus on lifetime value rather than on something as crude as geography or product. So all of that is happening, and it's part of the system that are aligning the whole time that we're getting better and better and better at that. Matt Carletti: (40:26) Okay, great. Then just one follow-up, if I can, on loss ratio. You had some discussion in the letter about how on the surface, it looks like there's just a little bit of improvement year-over-year, but when you peel it back, there's a new business penalty on the new business and the lines you had in place a year ago actually have improved performance quite well. Matt Carletti: (40:46) I think the quote was ... I might quote you wrong, but it was something along the lines of, "You're completely comfortable with the new business penalty." How should we read that on the outside? Should we read that as loss ratios in a good place, expect it largely flat going forward with maybe a little improvement, but not leaps and bounds as you grow into some of these new products? Would that be a fair takeaway? Daniel: (41:06) So maybe I'll say a couple of things. Then, Tim, if you want to come in, feel free. The main thrust of the passage that you're referring to is we are very long term in our thinking. We want to build a huge company over time and be extremely profitable. We think that we are today in a window of opportunity to create, really, a generational company, which is what we're very focused on. Daniel: (41:33) Launching new products is something we're getting pretty good at, and we've spoken at some length about the results of the launches for the last six months, and we've already hinted at launches to come. Those come with a near-term cost and a long-term profit. Part of the currency that we spend it in is ... you'll see that in our EBITDA. So part of what we're spending this year is, as I said earlier, we've got more people working on new products than on any of our existing product. Daniel: (41:59) But part of it is also going to be in near-term hit to loss ratio. So you do expect when you launch a new product, to see that new product penalty, and so long as we can see that the underlying data of aging cohorts suggest that the underlying profitability of the business is very strong, we won't be put off by the masking of that underlying profitability because of the near-term penalty that you pay with new products. We're going to optimize for the long term, not for the short term. Daniel: (42:29) So that's the thrust of it. We're comfortable doing that. We think that's how you build long-term, sustainable value and we want our investor base to understand that is the calculus that we'll be employing, and we're comfortable with it as well. That said, we do plan and anticipate that we will stay within our long-term guidance, notwithstanding that calculus. So Tim made a comment earlier about wanting to stay on a multiyear annual average beneath 75%. We think we'll be able to do that, notwithstanding the commentary that I just gave. Daniel: (43:03) So yes, we will be suffering higher loss ratios because of that penalty, but not to the extent that it would deviate from our long-term plans. Tim, anything to add to that? Tim: (43:15) No, that was great. Matt Carletti: (43:18) Thank you. Speaker 1: (43:20) The next question is from Ralph Shackart from William Blair. Please go ahead. Ralph Shackart: (43:26) Good morning. Thanks for taking the question. On the call, you talked about launching new products. Maybe if you can just give us a sense, how much easier is it for you to launch this incremental new product, especially with your growing brand awareness. Then, both from the perspective to drive the incremental adoption or perhaps faster adoption with the new products? Ralph Shackart: (43:42) And maybe just a bolt-on to that, as you add these incremental new products, you talked a little bit about LTV-to-CAC, but just some perspective on how you think about that LTV-to-CAC ratio projected into the future. Thank you. Daniel: (43:57) As I said in my comments, we're gaining confidence in doing exactly that. So had you asked me that question six months ago, I think it would have been a little bit more tentative. But we have now got a lot of data on pet, which is going very, very well, we're really thrilled with all of the aspects of that, the growth, the profitability, the customer satisfaction, the adoption rates and the dynamics between existing customers and new products, so the cross-sell dynamic, the fact that it creates new on-ramps, the total impact that that has on our LTV- to-CAC across the board. Daniel: (44:32) So we are gaining confidence that not only are we able, as I kind of wrote in the beginning of the shareholder letter, to walk and chew gum, we can do this from an operational point of view. But also that the financial impact of doing that is in line or ahead of what we had hoped and expected. And Shai made comments suggesting that although life is still early days, that the early indications are that that will follow hopefully a similar trajectory. Daniel: (44:58) So we do feel both operationally and in terms of our financial model that this is something we should be doubling down on, and indeed, it's exactly what we are doing. Tim, do you want to address that LTV-to-CAC part of that? Tim: (45:13) Sure. Yeah. From an LTV-to-CAC standpoint, I think we're seeing what we had hoped to see. So recently, currently, in the short term, we believe our data tells us were comfortably above two, between two and three in terms of LTV-to-CAC and we gave indications that we'd like to see it above three. We think we have a path to see that well above three, and that would be a step change but one that is doable. Tim: (45:43) We're seeing evidence that, notwithstanding the new business penalty that Daniel just walked through, we're seeing the indication that these things are true, that the two key levers are marketing efficiency and we've seen significant improvement in that over the course of the past 12 to 18 months. Then the other lever is retention, and the likelihood that a customer becomes a longer-term customer if they have more than one policy, which we're seeing to be true and borne out by the data, that a customer that's a little bit older and a little bit wealthier is likely to be a longer-term retained customer, and we're seeing that borne out by the data. Tim: (46:21) In fact, if you look at the average age of different segments of our customers, our overall customer average looks around 30. But if you parse that out and start to look at new business, whether it's in life insurance or pet insurance or segregated homeowners insurance, for example, you see that number several years higher. And we know that that correlates to greater wealth and greater need for insurance. So that's what tells us that we are on track to move the LTV-to-CAC from above two to above three, and we'll continue to share that. But the underlying data is very supportive of that. Ralph Shackart: (46:58) Great. That's helpful. Thanks, Daniel. Thanks, Tim. Speaker 1: (47:02) The next question is from Ron Josey from JMP Securities. Please go ahead. Ron Josey: (47:07) Great. Thanks for taking the question. I have two, please. First, Shai, you mentioned just a month in on life, and you're doing a stage event or stage launch for the product. Can you just provide more details here on what you're looking for as life rolls out nationally? And are you really starting looking at Lemonade's existing one million customers? Are there any similarities, lessons for the pet launch into life? Ron Josey: (47:28) Then the second question is just on growing awareness. I think in the letter, we talked about just broader, build bigger overall brand awareness. So Daniel, can you talk a little bit more about how your marketing strategy evolves? I'm assuming you go more national. But then to Matt's question earlier, you talked about going really after the LTV. So maybe talk a little bit more about how you're thinking about brand marketing and just overall marketing overall. Thank you. Daniel: (47:53) Hey Ron, good morning. Thanks for that. I'll try and tackle both. So Shai spoke a little bit about life, but he was also careful to say ... Daniel: (48:03) ... Shai spoke a little bit about life, but he was also careful to say that it's really going to be a few months until we put a pedal to the metal on life. And this is a complex product that we're doing in partnership with another carrier. We don't own a life insurance carrier, so these are complex partnerships, and we want to take our time and make sure that all the integrations and all of the data set that we're using and the entirety of the customer flow is up to the standards that we hold ourselves to. Daniel: (48:33) With insurance in general, you can't always beta test to these kinds of things. They're highly regulated products. You can't pretend to sell insurance. You have to test it in the market. And as we said from the very beginning, we did something of a cautious launch of life insurance. We have not promoted this. We have not put marketing dollars behind it. We're using these months to make sure that the user experience is delightful and the entirety of the technology stack is operating as we would expect it to. Daniel: (49:05) What I also intimated is that so far so good. In fact, we've been pleasantly surprised, not withstanding the fact that we really haven't put any marketing dollars behind this, and we've been very focused on customer experience and the technology. Not withstanding all of that, we are seeing conversion rates that are very strong and interest rates at a very strong. Albeit it's small and little data at this point. So we are seeing similar dynamics to pet, in the sense that we are seeing about half of the business come from existing customers and about half are from newcomers. And we're seeing strong premiums per customer, strong conversion rates. Daniel: (49:46) But I think, Ron, with your permission, we'll leave it that because we want to share real data once we have real volumes, and once we've been able to scale this a bit more, and we're still a few months from doing that, and we want to manage our own expectations on yours and always prioritize the customer experience before the growth. So we're going to spend the next couple of months getting that tied down to our satisfaction before we invest on that. Daniel: (50:14) In terms of the marketing, we have evolved and we continue to evolve. So part of the theme of today's announcements and core has been about how we've really moved from being mono-line to multi- line. And that begins to morph the message about the company from offering a product to offering insurance more broadly. So rather than saying insurance for renters or insurance for homeowners, we're getting tantalizingly close to the point where we can just talk about whatever your insurance needs are, we can address them. We're not quite there yet, but that's the arc of the journey that we're going through. Daniel: (50:52) So that allows us to shift a little bit of both of the media that we use and the messages that we use, and maybe I'll leave it at that just in kind of broad strokes, but that the specifics of things that we're still rolling out, so I'm going to pause there. Speaker 2: (51:07) Understood. Thank you, Daniel. Moderator: (51:10) The next question is from Ross Sandler from Barclays. Please go ahead. Ross Sandler: (51:16) Hey guys. Two questions. So if non renters is a third of the business today, where could that be in five years? And then the second question is, usually when a subscription business is seeing higher LTV and better retention, they would lean in more heavily on marketing. And you guys are kind of doing the opposite. You've seen all this efficiency and you're talking about the three to one LTV to CAC, but so when should we expect you to lean back in, is the question, and I guess longterm what's the right way to think about marketing as a percent of IFP or [inaudible 00:52:04]? Whichever ratio you guys are thinking about it internally. Thanks a lot. Tim: (52:11) Sure. Hey, Ross. So take those two in order. On the renters question as a proportion of the business, if you think about the overall market in the US, the renters proportion is relatively ... it's kind of the smaller portion, less than 10% of the total market. I think we'll skew renters for a fair bit because of the origin of the business. But I think over the period you're referring to, multiple years, three, four, five, six years or so, we would continue the shift we're seeing now and skewing more towards the overall market size. Tim: (52:48) The home market is 10 or 20 times the size of the renter market. The life market is probably a 100% or 150% of that in aggregate. So the numbers get pretty large, pretty fast in these newer products that we're launching. I'm [inaudible 00:53:07] expect that to continue. And there's also the dynamic where we're tapping naturally, you've got renters becoming homeowners, so it's both us acquiring new business as well as the shift within the business as our customers age and we see them ... Tim: (53:21) In terms of the marketing, the second question in terms of marketing, why don't we spend more? It's always the question we kind of face ourselves day to day as we're optimizing how much we spend, how much we invest. We've made a general commitment to not go out and acquire unprofitable business, but we've got the capability to really lean in and test new areas. So I think where you look at our marketing efficiency overall, when you dig into the details on that overall, you've got pieces of that that's much more efficient, much less efficient, and the less efficient areas are important for testing and gathering new data and learning. I think we have the opportunity to spend more now, and I think the guidance for next year suggests, tells you that we're leaning in versus kind of reaping the benefits and not growing quite as fast, so that is something we balance. I don't know, Daniel, if you want to add anything on the willingness to invest at a greater pace, but that's usually the guideline you can follow in this, what's the underlying profitability of each of those customers. Moderator: (54:35) The next question is from Jason Helstein from Oppenheimer, please go ahead. Jason Helstein: (54:42) [inaudible 00:54:42] just maybe can you guys dissect that last comment even farther? So obviously, [inaudible 00:54:45] giving us guidance. So as we're thinking about getting to that guidance, and maybe help us understand how much leaning into marketing versus pricing policy versus other product changes, and how much of that is driven by your desire to continue to increase the mix of homeowners versus other things? So I know you just kind of commented, but maybe if there's any more elaboration. Jason Helstein: (55:10) And the second question is, if look at the incremental IFP dollars quarter to quarter, and we divide that by net add, it was up 73% year over year at an acceleration from the 40% in third quarter, so maybe dissect this a bit. I mean, how much of this is a function of, again, pet versus homeowner versus rental? Just wanted to dissect that little bit. Thank you. Tim: (55:41) Yeah. I think that the best data to point you to is the impact that drive increase in premium per customer, because that really captures the story and what's going on there is you're on your 20% increase in premium per customer. That's been stable and improving actually. Typically if nothing else, all else equal, and you'd expect that to decline somewhat, but because we're launching new products, because they're at a higher price point and because they're working quite well, we're seeing a upward pressure on the premium per customer number. Tim: (56:15) In terms of the relative impacts, two thirds of that increase is driven by the shift in the mix of the products. There's a greater proportion of that mix that's driven by home than by pet, but the pet component is significant. It's probably three times as much of that driven by home than pet. So, it definitely is driven by ... if you think about the price points, the homeowner's price point is two or more times what the pet price point is, so there's some logic to that. Tim: (56:44) So I'd expect these to continue. There's no guarantee that premium for customer increases forever, but the dynamic is clearly positive, and clearly a upward pressure on that. When you enter the market as we did in an unloved area, that we can make profitable the renter's market, and then launching products as we have, and encourage customers, enable customers to graduate as we have it creates this metric, which is just a great way to capture the business. Tim: (57:12) So I think Daniel noted, customer count's interesting, but it's really the combination of customer count and the mid shift and the premium per customer that drives your [inaudible 00:57:21] premium. And that's how we're managing the business. So I would expect more of the same over the coming year. Life is a wild card, only because it's new and the data is nascent, but early indications are quite good. We've checked the box in that, as with pet, we're able to sell to new customers as well as cross sell existing customers. Life, we're seeing the same thing, new customers buying this product as well as existing customers. So, that's a great early indication we'll report more in the coming quarters. Moderator: (57:58) The next question is from our vendor, Rob [inaudible 00:58:01] from Piper Sandler, please go ahead. Rob: (58:05) Hi, and thanks for taking my question, and congrats on a good quarter. One of the things they indicated was pet insurance achieved marketing efficiency in just six months versus years for your home products. Now, how much of this is because of the specific product type versus doing your broader scale or your brand or data insights that you have? What I'm really trying to understand here is, should we expect as quick improvement in marketing efficiency in other products you're planning to launch, or was it just specific to the pet insurance? Tim: (58:46) I think it's a little of both. Lemonade was a different company on the day we launched pet insurance than we were when we launched Lemonade, to be sure. An extraordinary level of progress in terms of the data we collect and our knowledge and our understanding of that data and our capabilities, our people, our folks, our growth marketing teams, all of those much more adept four years in. Tim: (59:11) But on the other hand, pet is a tricky business. There've been pet insurance companies around for a very long time. Some of them are very good. We brought a Lemonade approach to pet and the way we talk about pets and the way we talk about the service we provide is dramatically different. Anybody who's been through the workflow of us versus our competitors has hopefully seen that as a distinct difference. That's why I think we've been able to succeed in that with both new customers, as well as cross-selling customers. Tim: (59:41) So I think for next products, for life and subsequent products, I think we'll see some of that benefit that we saw in pet, but that's not necessarily all. You get all of it when you design product that's fundamentally different. And when Shai talks about optimizing life, what we're really saying is we want to guarantee that it's fundamentally different than other experiences in the market, and launching a new product after life, that's the fundamental question. It worked with pet and our expectation is that we'll bring new products when we're able to say that it's fundamentally different and we'll see the marketing efficiency come with that. Rob: (01:00:17) All right. Terrific. Terrific. And just a quick follow up question. When it is compared, this year versus last year, you had your hands full, I mean, not withstanding a pandemic. There's product launches that you got under your belt, kind of a nice kind of scaling of the business. [inaudible 01:00:44] very successful 2020, but if you look at like '21 or the next, I don't know, one to two years, what are some of the big, big sort of priorities that you have for the overall business? Tim: (01:01:06) The way that I would think about it is I think 2020 was an interesting test of a number of things, some unexpected negatives and some extraordinary positives. And I think we'd be remiss if we didn't really thank the people who drove that. It wasn't the people on this call, it was 600 people and change around the world who delivered that along with the capital support of our investors. But those are the folks who really deserve the credit for what we were able to accomplish in 2020. Tim: (01:01:35) And I would point you back to Daniel and Shai's comments about, what are those 600 people doing? We've got the largest internal team to date working on things that are new, things that we have not yet launched. And that's what is exciting for the business, is not did we have a great year, although that is pretty exciting and we'd do a little bit of back patting, it's what's coming next. So if you kind of walk our virtual halls, I think the focus is on, great job, but what's coming next? I think we have to wrap there, given the time, but thank you so much, audience. Moderator: (01:02:13) This concludes the question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.