Lemonade, Inc. (NYSE:LMND) Q1 2024 Earnings Call Transcript

Lemonade, Inc. (NYSE:LMND) Q1 2024 Earnings Call Transcript May 1, 2024

Lemonade, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning everyone and welcome to the Lemonade First Quarter 2024 Financial Results. My name is Angela and I'll be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Yael Wissner-Levy from the VP of Communications at Lemonade. Please go ahead.

Yael Wissner-Levy: Good morning, and welcome to Lemonade's first quarter 2024 earnings call. My name is Yael Wissner-Levy and I’m the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's first quarter 2024 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 2023 Form 10-K filed with the SEC on February 28, 2024 and our other filings with the SEC.

Any forward-looking statements 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 ex-CAT, and net loss ratio, and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business.

With that, I will turn the call over to Daniel for some opening remarks. Daniel?

Daniel Schreiber: Good morning and thank you for joining us to discuss Lemonade's Q1 results. I'm happy to report that 2024 got off to a strong start. Year-on-year, our top line grew 22%, our adjusted EBITDA loss improved fully by a third, and our gross profit more than doubled. The quarterly loss ratio came in at 79%, down 8 points from this time last year, while our TTM loss ratio, that is the trailing 12-month loss ratio, came in 6 points lower than the same time last year. These loss ratio improvements indicate that the growing sophistication and diligence in our rate modelings and filings are bearing fruit. In addition, they reflect that our claims accuracy is strong and getting stronger, and this is helping with favorable prior year development.

And indeed, that our growing underwriting precision is delivering lower frequency of claims outright. All in all then, a strong quarter, very much keeping us on track, or perhaps better than on track. In fact, we're happy to update that we now project the net cash flow positive by the end of this year. This acceleration in our cash flow profitability is made possible by a couple of factors, the most notable being how technology in general and AI in particular continue to deliver on the promise at the very core of Lemonade's thesis. This quarter, for example, saw a 22% top line growth, but only a 2% increase in operating expense and an 11% decrease in headcount, all of these metrics year-on-year. These numbers tell a powerful story. With this in mind let me hand over to Shai to tell you more about our recent efficiency improvements.

Shai over to you.

Shai Wininger: Thanks Daniel. This quarter I wanted to highlight a metric we don't often talk about called LAE or loss adjustment expense. LAE represents the cost associated with handling claims and by extension, operational efficiency. LAE is an essential piece of the loss ratio and for large insurers who enjoy the benefits of scale, it tends to run around 10%. I'm happy to report that after years of technology-driven improvements in our claims automation and operations, with nearly 50% improvement in the last two years alone, we ended Q1 at an impressive 7.6% LAE ratio. This achievement was made possible by the ongoing advancement of our Blender insurance operating system, which incorporates AI, machine learning, and other cutting edge technologies to help our team become more efficient.

Blender uses AI to minimize human involvement at multiple points of the claims journey. It automatically validates and extracts important information from documents. It can itemize invoices, detect pre-existing conditions, and much more. And as we continue to break apart our claims process and automate it piece by piece, our loss adjustment expenses improve, and our loss ratio continues to trend down. I believe that building our core technology in-house buys us an ever-growing advantage over the industry, both in efficiency and capabilities, and expect to continue seeing this positive impact flowing into our financial results and plans. And with that, let me hand it over to Tim to cover our financial results and outlook in greater detail. Tim?

Tim Bixby: Great, thanks Shai. I'll review highlights of our Q1 results and provide our expectations for Q2 and the full year and then we'll take some questions. As Daniel and Shai noted, it was a great quarter with good progress on all of our key metrics including growth, gross loss ratio, and our cash outlook. Premium per customer increased 8% versus the prior year to $379, driven primarily by rate increases. Annual dollar retention or ADR was 88% up one percentage point since this time last year. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases, and churn. Gross earned premium in Q1 increased 22% as compared to the prior year to $188 million in line with our IFP growth.

And revenue in Q1 increased 25% from the prior year to $119 million. The growth in revenue was driven by the increase in gross earned premium, a slightly higher effective seeding commission rate under our quota share reinsurance primarily related to reserve adjustments, and a near doubling of investment income. Our gross loss ratio was 79% for Q1 as compared to 87% in Q1 2023 and 77% in Q4 2023. The impact of catastrophes or cats in Q1 was roughly 16 percentage points within the gross loss ratio and nearly all driven by convective storm and winter storm activity. Absent this total cat impact, the underlying gross loss ratio was 63% and nine points better than the prior quarter and nearly 10 percentage points better than the prior year. Our prior period development was a roughly 6% favorable impact in the quarter.

And worth noting that the cat or catastrophe prior period development impact was about 2% unfavorable while non-cat was about 8% favorable. Given the notable ups and downs of the quarterly gross loss ratio, it's all the more useful to continue to consider our rolling four-quarter view of loss ratio, which we include again in our shareholder letter, to get a feel for the longer-term trends for loss ratio. Our trailing 12-months, or TTM loss ratio was about 83%, and this is 6 points better year-on-year. From a product perspective, loss ratios improved across the business as compared to the prior year with the exception of home which did not. Gross profit and adjusted gross profit have shown notable improvement over time driven by continued premium growth coupled with loss ratio and investment income improvements.

Q1 gross profit increased by a 110% to $35 million versus the prior year while adjusted gross profit increased by 78% over the same period. Gross profit has grown significantly, more than tripling in two years, while quarterly adjusted gross profit has more than doubled over that same period. Operating expenses, excluding loss and loss adjustment expense increased just 2% to $98 million in Q1 as compared to the prior year. Other insurance expense grew 27% in Q1 versus the prior year, a bit more than the growth of earned premium, primarily in support of our increased investment in rate filing capacity. Total sales and marketing expense increased by $2 million or 8% primarily due to our increased growth spend, which was partially offset by lower personnel related costs driven by efficiency gains.

Total growth spend in the quarter was $19.8 million, up about 14% as compared to the prior year. We continue to utilize our synthetic agents growth funding program and have financed 80% of our growth spend since the start of the year. As a reminder, you will see 100% of our growth spend flow through the P&L as always, while the impact of the new growth mechanism is visible on the cash flow statement in the balance sheet. And the net financing to date through our synthetic agents program is about $28 million as of the end of Q1. Our technology development expense declined 4% to $21 million, due primarily to personnel cost efficiencies and our G&A expense declined 9% as compared to the prior year to $30 million, primarily due to lower professional service fees and lower insurance costs.

Personnel expense and headcount control continue to be a high priority. Total headcount is down about 11% as compared to the prior year at 1,236, while again, our top line IFP grew about 22% in the same period. Our net loss was a loss of $47 million in Q1 or a loss of $0.67 per share. This was about 28% better as compared to the $66 million loss or $0.95 per share loss we reported in the first quarter of 2023. Our adjusted EBITDA loss was a loss of $34 million in Q1 as compared to the $51 million adjusted EBITDA loss in the first quarter of 2023 or about 33% better. Our total cash, cash equivalents, and investments ended in the quarter at approximately $927 million, down just 2% since year-end 2023. And with these metrics in mind, I'll outline our specific financial expectations for the second quarter and for the full year 2024.

For the second quarter, we expect in force premium at June 30 between $839 million and $841 million, gross earned premium between $197 million, $199 million, revenue of between $118 million and $120 million, and an adjusted EBITDA loss of between $49 million and $47 million. We expect stock-based compensation expense of approximately $15 million in the quarter, capital expenditures of approximately $3 million, and a weighted average share count of approximately 70 million shares. And for the full year of 2024, we expect in-force premium at December 31 of between $940 million and $944 million, gross earned premium between $818 million and $822 million, revenue of between $511 million and $515 million, and an adjusted EBITDA loss of between $155 million and $151 million.

For the full year, we expect stock-based compensation expense of approximately $62 million, capital expenditures approximately $10 million, and a weighted average share count of approximately 71 million shares. And with that, I'd like to hand things back over to Shai to answer a few questions from our retail investors.

Q - Unidentified Analyst : Thanks, Tim. We'll now turn to our shareholders' questions submitted through the SAFE platform. First, Henry asked for more insight on the rollout of auto nationwide?

Shai Wininger: Hi Henry. It usually takes a few years to stabilize the performance of new insurance product after launch. During that period, we test products at lower scale and continuously improve pricing, underwriting, and operating efficiency to get the product to be compatible with our LTV targets. Once that happens, we can increase our marketing efforts and grow faster. By the way, despite the fact that car's loss ratio isn't yet where we want it to be, it did improve 18 points in 2023, which was the biggest and fastest loss ratio improvement across all of our business lines that year. So while there's still work to be done, a lot has already happened and I expect we will begin rolling out car more broadly early next year.

Unidentified Analyst : In the next question, Paperbag wanted to know more about our strategy of balancing growth between the U.S. and Europe?

Shai Wininger: Hey Paperbag, there are a few reasons why we're bullish on the European opportunity beyond its sheer size. First, Europe offers attractive and scalable distribution opportunities on the B2B, B2C side, such as large institutional partnerships, as well as price comparison websites. Secondly, Europe is less cat-prone compared to the U.S., offering diversification benefits to our loss exposure, particularly for home insurance. Finally, in Europe, we have much more flexibility over pricing and risk selection relative to the U.S. due to differences in the regulatory environment over there. This, for example, allows us to experiment with pricing models by making multiple changes on a daily basis. In terms of balancing growth across products and geographies, our strategy is simple, we allocate our incremental dollar to the product market and campaign that shows the best LTV to CAC return.

In a sense, our products and geographies compete against each other, and so budget allocation frequently and dynamically changes based on seasonality, pricing changes, competitors, new capabilities, and so on.

Unidentified Analyst : In the next question, Sumeet asks whether we are profitable and what is our growth targets for the next three to five years?

Shai Wininger: Hi Sumeet. As you probably heard on this call and read in our letter we are excited by the accelerated timing of us getting to net cash flow positive at the end of this year 2024, such that by Q1 2025, we expect to be generating positive cash flow on a consistent basis. We expect to reach profitability as measured by adjusted EBITDA the following year. Once we're generating positive cash flow, we'll be able to lean in and reinvest this additional cash in faster growth. As for your question about our growth targets, we previously indicated our expectation for a multi-year average IFP compounded annual growth rate in the mid-20s. While we're not revising this today, we may accelerate our growth rates as new incremental growth opportunities come along.

Lastly, paperback asked about the automation index, a metric we used back in 2018 and for some current efficiency metrics. Thanks for the question paperback. This is something near and dear to the Lemonade ethos and to me personally. As I mentioned a few minutes ago, our LAE is outstanding and an excellent way to benchmark our efficiency. The percentage of emails handled by generative AI also continues to grow as our generative AI platform now handles 22% of all incoming emails and was recently trained to handle SMS messages as well. One signal that I believe shows our efficiency improvements as a whole is our total OPEX, which remained virtually flat for two consecutive years, while our business has roughly doubled. By the way, the old automation index metric from 2018 was retired long ago because it couldn't keep up with the growing complexity of our business and failed to properly reflect things like multiple policies per customer, difference in service, efforts among products, geographies, and so on.

Regardless of this particular metric, our automation levels have increased dramatically since 2018, and I expect to see this continue. And now I'll turn the call back to the operator for more questions from our friends from the Street.

Operator: Thank you Shai. [Operator Instructions]. The first question comes from Yaron Kinar with Jefferies. Your line is open.

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