Q2 2020 Lemonade Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Lemonade second quarter 2020 earnings call.
This time, all participants are in listen only mode.
After the speakers presentation, there will be a question and answer session to ask a question. During the session. You you will need to press star one on your telephone keypad.
Please be advised the today's conference is being recorded few acquire any further assistance. Please press star zero. Thank you and I like to hand, the conference over to your presenters Lemonade management team. Please go ahead.
Good morning, and welcome to limit Inc. second quarter Twentytwenty earnings call. My name is yeah, what's your levy and I'm the VP communications at Lemonade.
Joining me today to discuss our results are Daniel Schreiber, CEO and co founder shy, winning their CEO and co founder and he makes the lemonade CFO.
Well letter to shareholders covering the company's second quarter Twentytwenty financial results is available on our Investor Relations website at Investor Dot Lemonade Dot com.
Before we begin I would like to remind you that management's remarks on this call may contain forward looking statement within the meaning of the private Securities Litigation Reform Act 1985.
Actual results may differ materially from those indicated by those forward looking statements as an adult various important factors, including those discussed no risk factor section of our form 10-Q, three months ended June Thirtyth 2020, and other filings with the SVP.
Any forward looking statements made on this call represent our views only as of today, 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 maybe important thing busters that that's our operating performance.
Reconciliations of these non-GAAP financial measures for the most directly comparable GAAP financial measures are included in their letters to shareholders.
Our letter to shareholders also includes information about our key operating metrics bidding a different definition of each metric white each is useful to investors and how you can monitor and manage a visit.
We have also prepared a visual presentation that investors can consult to follow along with his discussion and it can be accessed at investor Dot Lemonade Dot com.
With that I'll turn the call over to Daniel who will begin with a few opening remarks Daniel.
Thank you.
Good morning, I'd like to welcome all shareholders longstanding came into the hands perspective to the inaugural earnings call over the many.
Since this is my first time talking to many of you I'm going to take a few minutes to provide some context.
Strong second quarter results, which Tim will expand on shortly.
Lemonade was founded that will be calling them in terms of company one built from scratch woman Unconflicted business model and an entire digital substrate.
We set out to replace brokers and bureaucracy, we bought and machine learning meaningful there are people like an instance, everything.
Our hypothesis was that by placing the consumer habits and huh.
Building the policy the technology and business model around China would achieve a level of customer satisfaction on move in the sector.
Thank you. This is largely happens played out on net promoter score stands at about 70 Liberum of customer July to usually reserves for brands like Apple with Tesla.
Confused because of them to eliminate the number one position on many of the destinations where Americans reviews, our insurance company.
Perhaps up to a surprising when you consider that the median time to buyer policy from eliminated about 90 seconds.
Roughly a third of our claims are paid instantaneously.
First time buyers of in terms can often say, 50% by choosing eliminate this level of service and automation has generated very rapid growth.
Increasing efficiencies trends captured wasn't a second quarter numbers, our topline enforced premium increased 115% year on year, while our adjusted gross profit grew by over 200% year on year.
Rapid growth is always welcome but in our case it double double Juicy in addition to boosting our truck and bus wanting to gen prove textures proprietary and highly predictive data.
And George is the business of using data to quantify risk and a digital substrate allows us to capture something like 100 fold more data.
Tradition broker based incumbents.
I believe that represents a structural and growing competitive advantage.
These data service training centers, all of our systems fueling a cycle of continuous improvement.
Let me turn of the flying we don't want a marketing campaigns become more effective a box gets better understanding across movie fraud detection picks up ever thing to signals.
Tweens bought to Jim lunch, which claims depending on which to escalate with growing precision.
[noise] what was amounts we how conclusion system, allowing us to target price and Android risk with growing accuracy, which is the very core of insurance.
The impact of is continuous learning is on display in the second quarter results too I mean, that's captured by a gross loss ratio, which was 67% for the quarter.
This represents a 10th consecutive quarter of declining loss ratios and the loss ratio has hung over the past two years.
This rate of improvement in loss ratio appeal to the best to my knowledge without precedent in the history of insurance industry.
And it's all the more unusual for coming at a time very rapid growth.
While our strategy to delight consumers in order to build a number and to leverage that growth to extend our datadvantage, we moved to integrate with our customers.
This has been an evidence in the steady growing percentage of homeowners, who started life with us as rentals the trend that continued unabated in the second quarter.
In July we launched health insurance with pets affect me offering outside of the while the homeowners insurance and the milestone on agenda to offer a comprehensive solution to our customers with potentially far reaching implications for continuity tension and lifetime value.
So I will share from 34 to numbers were not pet launch in a couple of minutes.
In many ways than our second quarter was a straight line continuation of the progressions. We've seen in recent quarters in years rapid topline growth increasing efficiencies declining loss ratios, but it would be a mistake to take the second quarter results as pedestrian already foregone conclusion, because early in the course and.
Painted things playing out very differently.
With millions per node and much of humanity and walk down the early days of the course, we resolved to cost of discretionary spending pools are non essential hiring and enable customers to postpone the payments to us in recognition of the widespread hunch. It could be 19 has engendered.
He brace for a spike in churn drop and good morning to slowdown in productivity and the hits to our cash flow.
Thanks for the none of these materialized.
Despite our maxing pullback and notwithstanding the shutdown at all of our offices are key performance indicators for Q2 outperformed not only our worst concerns.
But even on a pre pandemic aspirations.
No one is what time, the pandemic, where they're coming will take in Q3 or beyond but we're heartened by the resilience our team our company and our business demonstrated in the second quarter.
Indeed, the Crystal ball, there seems to have been fundamental accelerate the trends woods digitization throughout society eliminated thankfully on the Rightside dislocation.
Our IPO prospectus includes our founders lesser document with side and I outlined our approach to managing lemonade.
And I hope that investors, who share our thinking will be drawn to eliminate but equally in the who but those who do not see their fortunes elsewhere.
There's a linked to this last on the home page of our Investor Relations website like when you recommend you read it one of the points make there is that we view our plans as hypotheses.
Updated data accumulate.
Our plan is to adapt.
Hugely demonstrated this in spades as I mentioned faced with unprecedented uncertainty early in the quarter, we decided just to decelerate commodities and meaningfully we prepared for growth to take a disproportionate hit.
Then monitored signals from the market in real time click through rates funnel analysis retention numbers cost per click and many more has adapted to the encouraging signals. As these came in the quarter had a happy ending but it's important for me to show how that sausage was made.
Cause its illustrative of how we think it's how we operate in debit to be driven by data, but data often incomplete and while waiting for more data decreases error rates. It also blondes potential upside.
As Q2 demonstrated we prefer to make decisions under conditions of uncertainty and to abandon badlands, assuming the data revealed them to be sir.
We believe that translates into greater volatility, but also into better aggregates returns.
If you trade between the short time in the long term between optimizing for predictability. This is optimizing for value maximization.
It could trade, we're comfortable making and as our shareholders do hope youre comfortable with the way when they can use to.
And with that let me hand over to shy to give me some more updates side.
Thanks Ben.
Daniel spoke about the financial impact or lack of financial impact of the lending business.
I'd like to add some color from the operations perspective, where I'm pleased to report that things are in good shape.
In early March entirely M&A team started working from home.
Since then we need based on cloud infrastructure, our teams each to Disney arrangement overnight and with no interruption to our business activity.
If anything were seeing productivity improvements across the organization and for the first time, we actually launched in European country as well as a new product line from home.
We've also been able to recruit onboard new p. members throughout the company.
In fact at this point over a quarter over Q.
And on boarded remotely during the coming.
We invested a lot of bottom here for into keeping the team engaged and happy at home.
And our employee satisfaction rate, which we constantly measure are the highest ever seen.
Switching gears to pet insurance.
As Daniel mentioned the release of the Pet Health insurance line earlier this quarter is a significant milestone for the company.
The bulk of test product entirely from scratch, we thinking coverages user experience depends process pricing and even the policy document itself.
Our best product offers a hassle free digital experience.
Lightning fast Cayman asking for customer service and as a nation of leftover premium to animal focused charity or customers choose.
The new patent chains is now available in more than 30 stay with prices starting at $10 per month.
As part of this new leases also introduced a first lonnie bundle, allowing an additional 10% savings when bundling and insurance with one of our renters or homeowners policies.
And Pete to share the reception has been positive and the feedback we're getting from customers translates into net promoter score of well over 80.
But as incurred as we are by the initial results. It's important to member that introducing in reinsurance products to market takes time.
In the for sale in the early days of this process.
In other news on August six we announced our annual came back in which a portion of underwriting profits guilty charity that our customers choose.
Let me maybe grows so does the potential to keep that.
And this is the nation amounted to more than 20 at the first one came back in 2017.
And is higher than our previous years combined.
This year, we gave back more than $1 million to non profit organizations into due to divest the corporate response unit.
The spread of project and the associated.
With the health of our community, we funded treatments for more than 50000, IC you quoted patients.
980 family covered rent for more than hungry, it's probably household and more.
Given today's one of the highlights of the year 14.
And we do hope that as shareholders you to filler seven pride of ownership stake.
And now let me hand over to team for more detail on our financial results in helpful. Tim.
Great. Thanks Chuck.
I'll give a bit more color on our Q2 results as well as expectations for the rest of 2020, and then we'll turn to questions.
Had another strong quarter of growth driven by additions of new customers as well as continued increase in premium per customer.
Enforce premium grew 115% as compared to the prior year to $155.1 million. This metric captures the full scope of our topline growth before the impact of reinsurance regardless of the timing of customer acquisition during the quarter.
Premium for customer increased 17% versus the prior year to $190. This increase is driven by a combination of increased value of policies over time as well as mix shift toward higher value homeowner policies.
Gross burns printed in Q2 increased 121% as compared to the prior year to $35.3 million inline with the increase in enforced premium.
Our gross loss ratio continues to improve as it has for many quarters and came in at 67% for Q2 as compared to 72% in the first quarter this year and down from 82% in the second quarter of 2019.
With a Q2 gross loss ratio in the sixties I'm pleased to note that we are now within our target range and achievement, we've been focused on selling our first policy.
We expect that our gross loss ratio will vary over time, then this target ranges between 60 and 70%.
And while it is likely that our gross loss ratio may occasionally move above this average.
In periods with notable severe weather for example, we expect our average gross loss ratios remain in the sixties.
In any event due to comprehensive reinsurance, our net loss ratio and hence our unit economics in most unlikely to change much quarter to quarter or even year year.
Operating expenses, excluding loss and loss adjustment expense increased fairly modestly in Q2 as compared to the prior year with sales and marketing expense actually lower in Q2. This year due to continued strong improvement in our marketing efficiency.
Our marketing spend in Q2 generated more than twice the sales as compared to a year ago in terms of the amount of customer premium acquired.
We also continue to hire new lemonade team members in all areas of the company in support of customer and premium growth and thus saw increases in each of the other expense lines.
Also to note certainly in expenses increased as we continue to prepare for life as a public company.
We expect those expenses to continue to increase in the coming quarters as we enter our first full year the public company.
These expenses include among others, DNL insurance premiums, which have increased significantly for most newly public companies in recent quarters.
I note that the timing of certain expenses, particularly marketing spend and new higher payroll expense in the second quarter was influenced by the onset of the pandemic with significant belt tightening in April and early May.
We began to reverse this approach in the second half of Q2, as we gain more visibility into the impact on our business.
We began to revert to prior growth spend and hiring patterns by early June and expect that seem to continue into the second half of the year and likewise to influence our investment strategy as well as our financial expectations.
Our net loss in the quarter was $21 million as compared to $23.1 million in the second quarter 2019, and our adjusted EBITDA loss was $18.2 million in Q2 and improvement as compared to $23 million of loss in the second quarter of 2019.
Our cash cash equivalents in total investment balances ended the quarter at $295.4 million, reflecting use of cash for operations of approximately $35.5 million since year end 2019.
And the recent closing our initial public offering in early July brought us additional net proceeds of approximately $335 million.
We had 381 employees as of June 30 will increase that number over the coming quarters, we resumed our normal Highland pace. After a brief pause during the early weeks as a pandemic, we've since higher dozens of new employees and have become quite adept at remote onboarding.
We continue to have the vast majority of our global workforce working remotely.
And at April Wash, our second European territory early in the pandemic with a 100% remote workforce with great vigor and efficiency.
Our progress in the first half of the year Infilling influencing our investment both for the second half.
With continued steady growth and strong marketing efficiency, we have resumed a bullish stance on both growth and hiring.
We plan to redeploy savings generated during the early Q2 into the second half of the year and increased somewhat beyond.
While our full year expense plan in EBITDA loss expectations are relatively unchanged. The timing has shifted such that we plan to invest more in the second half, which will offset the savings in the second quarter and we expect will set us up nicely for continued growth into 2021 and beyond.
It's worth taking model to review the our model differs from traditional broker based insurance incumbents in a number of ways.
One is that we expense the vast majority of our customer acquisition expense upfront at inception.
While we earn back the return on that investment over the life of the customer.
And this is in contrast to many insurance company to incur ongoing commission expense for customer acquisition at a much lower initial late but typically for the life of the customer.
And this is another key reason that we measure and report in force premium, which give some additional insight into what we are acquiring when we invest in growth.
Customer acquired in Q2 for example drove significant acquisition investment in the quarter, but on a GAAP basis very little incremental earnings in force premium captures more fully the topline impact of this growth investment.
And with these goals and metrics in mind outline our specific financial expectations for third quarter and for the full year in 2020.
For the third quarter, we expect enforce premium as of September thirtyth of between 170 and $175 million. We expect gross earned premium of $37 million to $39 million GAAP revenue of between 14 and $15 million.
And adjusted EBITDA loss of between 32 and $33 million.
We expect stock based compensation expense of approximately $3 million and capital expenditures of approximately $1 million.
And as Bill noted, we should reiterate that GAAP revenue will change from roughly $30 million Q2 to 314 and $15 million as guided in Q3, and this is as expected and its related to the implementation of our new proportional reinsurance structure as of July one 2020.
The GAAP accounting rules are such that ceded premiums are excluded from GAAP revenue.
And accordingly, we publish enforce premium and gross earned premium as helpful metrics that captures the overall growth trajectory of the business before the impact of reinsurance.
For the full year 2020, we expect the following in force premium at December 30, Onest of between 190 and $195 million.
Gross earned premium of $147 million to $151 million GAAP revenue of between 86 and $8 million.
Adjusted EBITDA loss of between 106 and $109 million.
Stock based compensation expense for the full year, approximately $11 million and capital expenditures of approximately $4 million for the full year.
Thanks, so much for joining our first quarterly review as a public company. We are grateful for your interest and for your support.
And with that we'll now turn the call back over to the operator, who can hopefully rejoin the call with culinary instructions and we'll be happy to take questions.
Certainly at this time, if you'd like to ask your question. Please press star one on your telephone keypad, Michael Phillips with Morgan Stanley. Your line is open.
Thanks, Good morning.
First question you talked about how you didn't see much impacts from furlough stay at home on topline metrics.
And let the my customers as for as for cancer payments and although it was good I guess did you see any impact on and wall side, whether whether a pause in claims activity for the first maybe first month or so of the furlough anything on that side that impacted that 67% growth while for sure.
Yes, Hey, Mike Thanks.
The differences, yes, but fairly modest.
So we did see some dynamics, particularly in the earlier part of the quarter as people really we adjusted their behaviors and it was sort of a shock to everyone's system, we did see things kind of quiet down pretty quickly.
And then a normalized a bit so I would say there is a modest tailwind in the loss ratio for the quarter due to the pandemic.
Nothing dramatic, but I would say more slightly more favorable than unfavorable things are starting to normalize a bit more now.
But I wouldn't I would expect.
The trends are showing at the end of the quarter Q2 to persist.
At a fairly stable rate for some time.
Okay. Thanks.
Yes, the both do it yourself and Dan talked about on the principles to hold shifted out because of mix shift and thats kind of bounce from them happening for a while.
Dan says.
The homeowners from under the homeowner kind of graduation rate as a trend that continued unabated in the quarter isn't you can give us in terms of metrics around that that we can that we can see or or from you guys. It talks about specifically on those numbers this shift between renters Omar.
Yes, so we don't give.
A deep breakdown of those metrics, but it obviously is something we track pretty closely internally.
The themes I think that we.
That's fair over the past couple of quarters have continued so we're continuing to see more new customers at a pretty stable ratio come in the form of homeowners and if you look at the premium per customer over the past several quarters continuing into Q2 and into our guidance, we expect that trend to continue we.
Do have some control over the homeowners proportion of the business because we.
Our somewhat more cautious as we build a book of business as we move in the homeowners, but all systems are pretty much go and so we're focused on increasing the proportion of homeowners over time.
Effect that to start to look more like the market over the longer term today, it's obviously skewed more toward venture center homeowners, but in the US as you know the business is the vast majority of homeowners overtime will continue to move that direction.
It's also probably worth.
Reminding that we're seeing some increased from our existing customers, regardless of whether they graduate to condo or homeowners. So our average rent or for example.
Pays us more in year, one in year two of your free.
They did when they first start and that's a trend has continued to see so I think the the premium per customer will continue to grow.
Thats, what specifically, but we see those trends continuing and.
Thank you should expect to see.
As to be more color on has become a couple of quarters.
Okay. Thanks, and last one and then maybe you can look here with us.
And maybe it's not.
Fair quarter talk about that from a material only goes this on your answer.
Because of what you did pull back in the marketing spend but you did mention that you're still getting more premium per dollar of marketing spend when you have before.
But we've also talked a lot about kind of the LTV to CAC expense and how that ratio has trended up over trucks is it fair to comment on that given the pullback or the two distorted because the pullback in marketing spend or anything to talk about about.
Kind of that LTV to CAC ratio and how that look this quarter versus prior quarters.
Yes, I would think of the LTV to CAC dynamics as strong and stable and trend that we had seen for the last.
Few quarters is continuing improvement and so.
The those trends I think we'll continue with regard to our spend that sort of a different dynamics. So when when we noted that we pulled back a little bit in the early part of the quarter that literally just spending fewer dollars, but did not really impact the unit economics. There were just curious units and then we.
We have resumed the normal spending pace as we got towards the middle or second half of the quarter and I really back to where we originally expected to be in most cases somewhat ahead so stronger.
Marketing economics, very strong feel in terms of how we think the second half of the are shaping up in terms our ability to spend.
Growth investment widely and get the return we expect it's a little early to say that there I think is not fair to say, yes, theres, a dramatic shift and LTV to CAC those dynamics than to evolve number four gradually over time, but but what we're seeing is stable and positive.
Okay. Thanks to my will falls in the hop back in for Cameron, Thanks very much.
Ron Josey with JMP Securities. Your line is open.
Great. Thanks for taking the question appreciate it I just wanted it may be Daniel and Tim talked with more about guidance, particularly with your commentary in the letter around threeq using being seasonally the strongest in the quarter. The remains unknowns around school closing and moves or whatever however, it seems further commentary the guidance nothing really materialize in April so can you help us on tackle that more.
Your guidance as it appears a little bit lower expectations in the quarter didn't really materialize in twoq doing so maybe any insight on what you're seeing in July and August and the assumptions in guidance would be helpful. Thank you.
Sure so.
Two different dynamics Q Q2 was really driven by us and our reaction to cut the high level of uncertainty that everyone is feeling March April may be early may and so we proactively made those decisions in terms of what we would spend in London and.
As thing strengthened we ramped back up.
And during that period were pretty cautiously watching the other KBR is what's happening with churn what's happening with payments, what's happening with just general customer behavior.
And as the days in recent times, there, which is not much changing which is always.
Good news in terms of how we think about to deploying more dollars and so when we.
Laid out our thoughts and expectations for the second half a year.
The decisions that we control that we manage we decided to takes pick that savings from Q2, if you want to terminate a savings money that was unspent, an early brought a quarter and invest that in the second half because we are seeing return we are finding ways to deploy those dollars and it's working.
The uncertain parties apart, we don't control, which is the historical seasonal trend, which if you look at the past two years, maybe even made in three years, it's been pretty.
A pretty discrete or visible step change with Q3, higher Q4, lower and really driven by the moving dynamic.
During the rest and Thats if uncertain this year.
We're confident that we can deliver the numbers over the course of the year. It may be that theres some shift among months.
Between August September October versus prior years, and I think we've built in net conservatism into our guidance such that.
If we see we expect to say with a little different prior year ago will be in good shape is dramatically different than the methodology will have it to react new but so far when I see anything thats too dramatically different than in prior years, but we want to be cautious.
Thats Super helpful. Thank you Kim.
Ross Sandler with Barclays. Your line is open.
Hey, Tim just wanted to follow up on the the customer acquisition.
Conversation from from a couple of questions ago. So we're seeing across the digital advertising industry. The cpms have come down pretty markedly.
Through through the curve it impact and you guys are seeing fairly dramatic improvement in your unit costs are requiring a customer even before covert so with those two dynamics in place.
And the increased efficiency.
And the fact that Youre now winning back in June one do you expect the customer growth rate or the gross or premium growth rates to ramp back up and then related to that.
Retention rate that you guys disclosing the us one of around 65% or so our is pretty good at leave some room for improvement. So what are the biggest drivers of churn in order. Your during two to Drybulk retention rate. Thank you.
Sure. Thanks.
So.
A couple of thoughts in terms of the first question on customer ramp.
Bar.
The right between our spend and tuck in acquisitions, it's pretty linear so when we turn things up.
You see right away, it's almost a real time.
In the day or in the week they do.
Change, how we invest what channels, we use coming dollars were putting forth and so what we're seeing what we're spending today, we're getting reaction to that and so the facts into how we see the second half playing out in terms of.
Both customer acquisition and premium acquisition worth, noting that while we certainly track.
And report the number of customers and the premium.
If you had to pick one that we think is more important it's really the the premium.
A renter customers are great customer and we'll keep them.
As long as we can hopefully for lifetime and our graduate drive more value, but if we can acquire a customer the homeowner.
Efficiently and effectively we'll we'll we'll do that too and so the reason we guide to top line in terms of enforce premium and at the customers for that very reason is is we and our growth came early optimizing for premium and sometimes the customer count can vary a little bit, but we expect to see obviously growth in both of those.
We also expect.
The premium per customer to continue to grow just the the underlying dynamics of the trends we've seen in the continued mix shift toward homeowners.
In terms of churn and I don't know, maybe Daniel can chime in a little bit. This is something obviously there is this kind of long term and short term short term we've been very focused on what is new and what has changed what's covert driven was behavior driven.
What's unique across product lines.
Between renters in homeowners.
And from.
From a a short term perspective, a pandemic perspective again, we're not seeing.
Much dramatic at all.
Allowed customers to defer payments that much.
They happened there.
We're tracking turned very carefully not much has changed in terms of a longer term. What we're doing is what we plan to do which is.
Maintain a an extraordinarily high NPS, so that we can retain customers for as long as possible hopefully a lifetime, we launched new product. So for the first time, we have pet insurance.
Which is a new coverage type for the first on eliminate customer can have two different policy types and take advantage of bundling and bundling discounts and Thats something obviously has been on our plan for very long time, but thats actually in the market and so I think our theme on churn is keep doing exactly what we're doing.
The primary goals that we set out.
And that includes new coverage types, great customer support.
And then.
As we get better color on that what we'll certainly share it.
I don't know us Daniel have any other.
I thought senator churn or customers in general.
Thanks, Hey, Ron just a couple.
Just color point.
So.
There is real estate that try to go continue to improve so first off the aging of our cohort.
Last year in terms of retention across the industry frankly is one.
And given the growth rates that were experiencing a very large portion of our customers are first tier customer. So a big portion of our businesses from a retention prospectively Midwest category.
Just in terms of the aging of the cohort trendy even within the year, we see.
The West couple of months of channel. The first couple of months policy.
You add months in years to a cohort retention numbers start improving pretty significantly.
Beyond what I would say that.
Different products or we have have very different dynamics as well or retention dynamics.
Renters tends to be younger consumers are more transient that go to college, they come back a pretty muted with our voice and with a girlfriend blue backroom all those kinds of changes.
And then also move from state to state oftentimes the move into a state where we've not yet logs to all of those reasons addressed it part of.
Nature outdoors stage of like over those customers.
Tim alluded earlier to the growing portion of homeowners book, that's two helps because our retention numbers among homeowners is.
Significantly higher.
[music].
As we launch more territories mentioned that in passing but also new products like Pat.
We are able to cater to our customers more fully.
And that in addition to everything else, but I spoke about militates and table higher retention levels over time.
I'm.
Having said all about I'd also add a different gloss on the whole story so.
What do you think about.
Couple of legal channel retention I think it's got to categorize it as one of two broad strokes.
Well two broad stroke. So you think about people who leave at that cable company to go to Netflix when they come back cable.
They're not going back that is Chuck.
Cable look now discovered in new areas consuming media and that is another trees, that's going to be repurchase anytime soon.
I mean, when somebody leaves Netflix because.
Traveling in Europe are very of just moved into their boyfriend OCO funding, Australia Council any of those dynamics. They remain kind of alumni right. There still ambassadors of goodwill They love the company and they will return I know I myself accreditation to.
Leave Netflix two or three different occasions.
To begin Netflix consumer.
I think if you think about base to paradigms lemonade pull squarely into the latter so let me do you see customers, leaving more often they not believe with allotment quite literally when they leave we also for comment about why believing we are quite a lot of data on that at roughly 100 for company. If I had let me guys, but I need to get it might go find on moving to the state.
Moving to college or what have you just to put some numbers behind that if I look about China.
Excuse me.
[music].
We do sell them, but we do sometimes get customers that are unhappy with the service and make sure that as a reason for timing, but they are outnumber. The 11 to one by people say, how moving in with my family and Thats why Im complex.
We pride ourselves on giving earlier exceptional claims experience, but on occasion customers feel how dumb by in terms of claims and they can say that thats why the leaving.
Those people out number 36 to one literally 36 to one by people say I'll be back.
So I hope all of that gives you both central about why do you think that churn rates.
Prove structural reasons, but also why because people are leaving US I think we'll come back as circumstances in my life change and how the need for insurance once more.
Ralph Schackart with William Blair. Your line is open.
Good morning.
One of the kind of talk about customer conversation again.
The ads were much stronger than our model that Tim I know you talked about some pullback in advertising and while I know you optimize for policy just kind of wanted to understand that dynamic maybe some perspective, good drivers with customer growth in the quarter, one indicated still quite throughout the quarter and maybe some trends post quarter on the customer looks like.
Sure so.
A couple of different.
Letters were pulling went on and there's a there's different dynamics. It all kind of comes together and looks a little simplistic. When you just look at the number of customers added in the quarter, so, but if I pull those apart a little bit.
I would think about.
Timing trends.
Product trends and spending trends so from a timing perspective, I think we've kind of covered that we.
End of end of March early April April sat down and said, we really don't know what Q2 looks like in the world.
Certainly and to some extent lemonade.
And so we're just very cautious we didnt go to zero, you never want to kind of cut gross spend to zero.
Because this takes quite a while to ramp anything back out, but we we pared back fairly significantly in gathered more data.
From a mix perspective, we tend to optimize.
But we tend to optimize and so some days some campaigns.
Things are stronger with higher return on renters, and some days its homeowners and some channels are particularly suited to one or the other.
So there tends to be an ebb and flow overall, if you looked at say a week or month, we see a relatively consistent.
Portion of the business Thats homeowners, but that kind of hides what's going on under the covers which is we've got a lot of states. The pilots. We've got a lot of campaigns to playwear and he's got a growth team that really.
Spend is 24 hours, they're thinking about how to maximize the return on those dollars.
And it is working if you look a year ago versus today, you know more than.
Question. Many dollars are coming in for every dollar that we spend.
In terms of.
How we see that playing forward again, I think the seasonality is a little bit of a wild card, but I'll tell you.
Recessions, we have with the team thinking about how to deploy dollars.
The challenge the challenges not where can we spend the challenges how much can be spent as we're seeing really strong returns and.
So we're trying to balance the spend with the overall health of the business, we don't want our NPS scores to suffer we don't want.
Really terrific progress on our loss ratio to change radically it can vary a little bit, but we don't want to.
Also things that are performing really well.
Hi.
Seeking growth at all costs, but that it had the dynamic really is that we are finding ways to spend dollars at a very strong return.
And it doesn't seem like it's dramatically sort of pandemic driven by get the continuation of themes. We saw over the past several miles in the past few quarters as opposed to a step change that we saw in April or May. So we're really encouraged by the combination of all three of these and how that grows team is really performing.
That's helpful to maybe one more I talked about how the business merger stronger coming out pandemic, just maybe some perspective and Howard emerge a stronger a little bit more color there, perhaps so the long term impacts for the business. Thank you.
Yes, it's interesting so I.
We're seeing what a lot of.
Pat or digital companies are seeing which it seems and trends, we saw our amplified or accelerated or some other way through the put his changes we expect it happened over a year to are happening over over a month or two.
We're seeing the same we're feeling the same folks who want to.
At the just 20 or 30 go sit down and in insurance agents office, where dwindling before the pandemic.
And certainly during a pandemic thats gone to probably close to zero in many cases.
These trends are probably not ever going to go back to where they work and so we are while we're not taking it has a given we expect this acceleration to can continue into really be right our wheel house.
We were.
We have a higher company able to work from home before the pandemic you Didnt do it too frequently although probably each person has done it from time to time departments are tested it so really within a few days of work from home I was just business as usual.
We were able to launch entire new European country.
In April with 100% remote folks with terrific results zero customer awareness, but anything was.
Different than would otherwise have been we're thinking carefully about how we deploy employees.
And where offices on all those under the company's or thinking about but we really feel we have.
Pretty dramatic degrees of freedom based on how the company was built one system from a digital substrate designed to do Justice, we Didnt know how to say a pandemic within from accelerate Ellis up at the the businesses, where we design for this.
Great Thats helpful. Thanks.
Our next question comes from line of Jason Frank with Opco. Your line is open.
Hey, Jason Helfstein.
Should not have stalled my last night the operator.
Two questions, maybe talk a bit more about the outlook for the third quarter in the back half given the second quarter beat versus your expectations is did you see any any pull forward into the second quarter that.
Maybe.
Yes that year, then kind of compensating for the outlook and then the main question that we get from client is just the concept around bundling given how important it generally as for the industry.
And mostly people focused on the importance of automotive insurance bundling.
Really.
You've hit you have targeted a more millennial customer I.
I think automotive ownership generally is lower amongst that growth when we can kind of think about.
What the secular trends are for automotive ownership talk broadly how you're thinking about bundling, obviously, you're launching pad.
If they like auto are important.
How do you check that box are you thinking about maybe partnering with auto insurance companies or is that just something that you may have to launch on your own over time. Thank you.
Sure So I'll take the first rather than.
Videos, Daniel Amir saw ups.
For the overall product strategy, maybe take that one second so from a pull forward.
The.
Question the way if I did anything when we kind of thought that through and what I read around we're getting customers in advance we will have gotten otherwise.
The way, we kind of thought about is number one obviously just great results and good returns and ramping up spend was working so that was step one step two is we had all as planned and expected that things were returned to a more normalized growth pattern in 2021, and then beyond regardless of kind of where we are now.
In the pandemic and so we have ambitious goals and expectations for 22021 and beyond and so I think our.
Increase in spend in our increase in our expectations for our in force premium for the second half is really just setting us up for a higher.
Base or foundation going to 2021, so rather than I would think of it less as.
Our Q3 approach our Q4 approach, our Q1 approach and more day long term growth approach.
And we can power through.
The a little bit of uncertainty on seasonality and we're expecting planning that Q4 can be strong.
Now Kennedy as strong as Q threes.
Think it's possible historically, it's been a lighter quarter in Q3, but we're ready.
And built into our expectations, our guidance and ability to invest more.
And we'll obviously continue to manage and monitor that.
But we're thinking I think more about 2021 at this point and launching with a great foundation than we are worried as much about what's happening in.
August or September.
And just a couple of thoughts about the bundling question.
So.
We do think about our customers.
As being Rob unusual indirect and trucks landscape attract customers.
Finally young.
90% of our customers as best we can tell I'm joined here for the time that there's never been to another insurance company, so rather than playing the switch to nice saved game upon which the industry is really predicated refine AFFO for your different sport.
We are acquiring customers before the traditional insurance companies I've got two and typically at a time that data, particularly one time because.
The total premiums are relatively modest earlier right.
And then as we.
The lifetime and continue to get.
Number one ratings in terms of comparison sites or MTF 17 or bases.
We hope to retailers life as they go through predictable lifecycle again.
The insurance so by your call, which would certainly be one of those in the full time.
But but it is important for me to stress kind of the underlying the core elements.
We also feel acquiring customers at a time that we're competing with non consumption delighting them and then growing with them.
Somebody said, we were very cool analyze our businesses separately on your funding from James with eighth grade so that kind of a dynamic club.
Peter your non consumption acquiring fabulous customers and then going with him.
Actual pets insurance, which we launched a few weeks ago is part of exactly that the majority of our customers our pet parents.
This is a low for the on the addressed market. The premiums for pack insurance are very substantial equivalents to condor insurance pretty much.
So that is our first step of first foray outside of homeowners in order to flesh out the offering and the prioritization of our products as we bought about customer Centricity. So we think about a customer. Please how at this time.
Okay. Okay, what are the needs the joint as initial graduate to a confidential graduate to how monitor additions will get.
The adult the cat, perhaps the to underwrite yes in the fullest uptime show lead older. These other insurance products. So we hope to be that for.
So without talking about car insurance, specifically I think that the fact that we don't yet have all of our.
Products out there is a handicap.
Other.
Other insurance companies will offer more complete list of products than we have and the fact that we're managing to grow at over 100% year on year. Notwithstanding the fact that we haven't yet fully fleshed out I think is encouraging because it means that there is a lot of opportunity faster growth trial and.
Retention rates improve LTV improve everything else that's got a rig as it is now as we offer new products, particularly will get better.
One of you invested is Google and this increases a little bit out of date, but just give you a sense with this.
Total us a while ago that best thing.
And the same volume of such as for Lemonade car insurance Auto insurance, So bear with me eliminate herm insurance. So we don't feel like any lack of demand out there for lemonade and our entire assessors brands.
Our technology licenses.
Oh built with extensibility might be able to looks more products were pretty rapid succession and I think what you saw on three weeks ago with pet insurance as a sign of things to come.
Thank you.
Keith Terry with Goldman Sachs. Your line is open.
Great. Thank you.
Just wanted to dig a little bit more and a couple of areas on the homeowners graduation that you've talked about.
Curious, if you're getting even even just sort of qualify for us a little bit more how much of the growth in homeowners, you're seeing or comp is coming from existing rental customers.
Graduating as we talked about versus a completely new homeowners being attracted to to the platform by the marketing work that you're doing.
And then.
One of the big narratives around the last quarter and just the.
The environment is this this migration.
Younger.
Or bidding.
Single people.
Nationals back to their back to their suburban homes with their with their with their parents as part of that and that certainly didnt seem to show up in your numbers and I'm. Just curious what part of that narrative you think might be wrong is that a couple other follow up questions as well.
Sure. So a couple of thoughts there and then and jump in.
Daniel if you like in terms of.
A portion of the homeowner acquisition. The we're seeing that can continued trends so historically most.
Most recent quarters.
The majority of homeowners that were adding or are.
New customers that were going out and acquiring.
Right.
Yes.
But we've had a consistent theme of existing renters into buying a condo or or buying a home and moving up but the majority are still direct acquisition and the one direct obviously, we manage and direct proactively and the other tends to be just driven by life events.
Interestingly enough I think there could be as much in the current environment endemic driven that could cause there to be more.
Relocation or more home ownership or more.
This is made about where people live than their long term commitment to those places.
It's a little early and the data is very light to be able to say that for sure.
But that is something where we can actually see.
More of those decisions that drive graduation, being made as opposed to less so I think part of what you're not seeing in Q2 is that.
Hi, everybody who moves.
On somebody's moving elsewhere to a new location, because they're tired of the city in the renting into apartment on their own and that.
They require insurance.
So I think I think it's a mix.
We'll continue to proactively acquire homeowners directly.
Then we're of course doing what we everything you can to ensure that when our customers face those life decisions when they're ready to move when they're ready by the first home when they need more coverage.
We'll be there were there with pet now and we'll look to add others over time.
With that but think about it.
Great. That's really helpful. When you when you look at the the improvement significant improvement there was made in the gross rough gross loss ratio. This this quarter could you help us by Disaggregating sort of the components are that how much of that was.
Higher denial rates on claims are higher premiums.
Being be paid.
Or just fewer claims coming on I know you sort of addressed a little below that that that earlier or was there something else that contributed that.
Maybe we're not thinking about.
So I would think of it as a continuation of prior trends.
With some benefit from the pandemic and we're not we don't.
Typically quantifying it but I would think of it has nominal certainly helped a little bit didnt hurt in terms of that progressing from 72% in the prior quarter five points of improvement we have seen that in several prior quarters. The most recent prior quarter was was actually the anomaly with improvement was on the only 1%.
No.
I would say the impact.
From change in claim behavior or denial of claims is totally zero.
Our practice is unchanged tenants.
I would categorize as extremely customer friendly, but within reason we are very good at detecting fraud, we are very good at detecting.
Claims that are not appropriate and into early part of our business model, it's part of our.
Behavioral analytics approach to the business, but that was unchanged essentially in the quarter nothing's really important to us. So I think of it has very nominal tailwinds.
And we're in the right now so if we think about one if we noted and I think it's important to.
Well on a bit as we're in the target range, 60% to 70%.
Is better than industry.
Rich.
Gross loss ratio you don't want to go to zero.
I wanted to decline forever, if something's wrong with your business, you're giving up growth.
There's other opportunities are not taking advantage of but in that 60% to 70% range because it's very strong performance.
It will vary as we build the book as we launch new products as we launched the Geos, but we don't expect it to vary dramatically.
Outside of that range, so think of it as we're kind of at that target within a few percentage points.
Great numbers, so thats really helpful.
Sorry, I guess I know you're going to actually brief comments.
Yes, I just wanted to build or what.
Instead as well so.
This isn't as big decisions about the pandemic. This was a 10th consecutive quarter of declining loss ratio. So this is really something.
I've got as being very strong trends with harped on loss ratio, but of course the last two years. So this is something systemic.
I think to point out is it's not price.
While we have implemented some price changes recently it takes a while to an into that.
I think you'll be fat to round that down to zero in terms of how much of a loss ratios effect of price changes, which is pretty striking because most companies that include a loss ratio will grow at by raising prices and that's really what's going on.
We do have a sense I think this is one that is being appreciate it is in this industry research in this is all the more but that you already noted the business of underwriting or in Sri property. So much as people and you really want to getting to a sense of.
Understanding what kind of risks people represent.
And that comes back to the fundamentals of lemonade acquiring about 100 times more data then broker based businesses.
How many are closed loop system that can use those data in ways that are unavailable to more traditional incumbents. So using that data in terms of crude you target to the marketing campaign, how you onboard how you handle claims fossil supports inquiries and having that single.
Vantage point, which is customer centric so that.
Data collected in any one interaction between every other interaction I think really if you want to look.
And also what is the fundamental.
Talent about.
Uh huh.
Separates us in steady decline in loss ratio is exactly that is that digital infrastructure and the AI that was implemented and how that.
Great very closely system that reinforce itself with every time of the flywheel if you like.
Nothing I'd just say that.
You know this of course, but loss ratios are lagging indicators.
On changes that you take today in terms of any of your baxter's pricing like because costs are underwriting or anything else.
We'll take time to flow through.
The book.
And in addition to to that being generically true I go back to the comments I made earlier about churn, which is that loss ratios of first year cohorts are historically less than second year cohort and project cohorts and that is true at an industry wide level as well. So it's yours cohorts also give us.
Some some wind in our sales.
You have been steady progressions and structural reals.
That have driven the loss ratio in the final thing at the risk of.
Thank you.
That loss ratio decline that steady decline over the course of years now.
Being all the more extraordinary not merely because it has been so sustaining so dramatic but that it has come at a time of over 400% compounded annual growth correct and that really does apply in the face of insurance Orthodoxy, which preaches that you called go fast and gets passed a dramatically concurrently with too.
Live intentionally lumber to each other I think that makes sense when youre a broker based business human.
Because rapid growth can overwhelm humans too much data these people cutting corners and being overwhelmed of course, we have built on an AI infrastructure. It the other way around those targets with great returns.
Hit it.
Improved performance and getting smarter payout precondition to it so hopefully that will help you understand that the loss ratio.
Now that doesn't it's really helpful. In innovative I guess may a quick one on on Pat.
What what allowed the company to lower the entry level price for pet insurance I seem to recall when you announced the product last month that was $12 and then you noted in yesterdays release on the call today that we had gone up to 10.
And then also just curious what if any impact the bundling discounts offered for Pat.
Would have on the on the loss ratio and then I'm Don Thomas.
Maybe I'll kick it off.
Clearly with some more.
I will say two or three things.
The first one is that.
While our expense ratio today looks high because we're spending a lot on customer acquisition the fundamentals of our business actually lead feel very light module cost.
[music].
The biggest and Boston.
And most efficient insurance companies in America has about a ratio of one at a 400 customer to one employees was about a 401 ratio and even among the top five that drops off pretty quickly and you get to like 150 to one.
Eliminated over 2002 on so the digital infrastructure that we just spoke about in terms of healthy with loss ratio certainly helps with expense ratio in terms of automation.
Streamlining if you're paying your claims.
But other than that any human intervention at all and on boarding customers being about 100% with them Algorithmically.
Just on how that will translate into an ability to price more.
Aggressively and indeed, the same is true with our went to the insurance right entry level buyers of renters insurance from lemonade.
You'll typically see something in the order of 50% fiber percent savings competitor incumbents and in the early days people.
So what we're selling dollars for 90 cents, where it was selling other loss of unsustainable, but I think our loss ratio at 67%. So thats not the case that we're able to drive efficiencies.
Two things at a cost point at price points on the cost structure that is unfamiliar with industry at large so a lot about I think spilled over half of it fit and renters. It will spill over to Patrick trends, but one other thing that I wanted to say is.
We are experimentalists.
And we do you view products that relaunch and new geography, but we launch we may have.
Attractive loss ratios in the early days.
And that tuition fee that we pay now thankfully.
Like.
September 2016, when we launched our initial product because then we had made denominator everyday all attrition was.
Okay.
All of our business was to boost the tuition today, we could have a sizable business growing fast.
So I don't think you'll see Pat or other new products is it even if we got the pricing wrong, but my point is we're okay with launching new products using our best data best guess.
Smart people doing best of luck, but also I understand but until we have generated the kind of data set that we need there'll be some some areas and we will improve pretty quickly after that.
Tend to think about.
First year of new products.
What we want to onboard as many customers as possible in order to generate those data sets and then in the second year to start implementing linings and really just hit our target loss ratio.
And you've seen that with renters missing that in homeowners and it wouldn't be a shock to me if we saw something similar with past as well.
Great. Thank you as much.
Your own Kinner with Goldman Sachs. Your line is open.
Thank you very much.
Hey, Pat My question, but I will follow up on on Pat maybe quite understand.
What impact the bundling Pat and.
And lenders could have on the loss ratio confirmed as the company's under your offering.
Okay.
Yes.
I would give a little too early to say I wouldn't expect it to be dramatic.
So our numbers the trends we've seen in the factor in the target ranges.
On something that we expect to continue.
Obviously.
Debt.
Better data as we go.
Response to pet has actually been quite quite positive quite strong.
And I would think of.
Maybe the whole business in aggregate and the way, we think about you know expenses and losses in the combined ratio aspect, which is more of the traditional insurance.
Is that improvements coming everywhere and so to extent, we're managing and growing the business. We've got more than just the loss ratio lever to pull.
But I wouldn't expect it to cause dramatic shifts.
Generally.
People have more than one type of policy or better risk.
There's a more coverage, but thinking more thoughtfully about what they protect and so those again as with much of our business there is.
For every potential negative impact is likely one or more likely positive impacts and I think we see that in bundling, we see that with Pat and it's something you said pretty consistently across the whole business.
Got it. Thank you and then one last one on my end.
When you talk about your loss ratios being better than industry average is that for rentals, specifically is that the industry average Caldwell.
I wanted.
Think there's no real sort of PNC average it's in the low Seventys range, that's where we were last quarter and so just kind of generally referring to a pretty general.
Market metric.
So it's not something that's something we notice, but it's not something you manage ourselves by.
But it's notable that in just three years in the market we're on par with.
Billion dollar wise incumbents that have been around for decades.
Got it you have any sense, where the renters industry averages on a loss ratio.
I'm not going to I'm not going to quote that you can probably get a bit of metric if I haven't deteriorated somewhat higher than normal homeowners as it is for us, but we're seeing continued improvement in both the renters and the homeowners loss ratio over time.
Okay. Thank you.
There are no further questions at this time I would now like to turn the call back over to the eliminate team for final remarks.
Thanks, everyone for tuning in this morning's on the entire Lemon 18 wishing you less than a good morning, you can find the letter to shareholders.
On our website at Investor Day, Lemonade crime, and we look forward to staying attacks have a good morning.
This concludes the Lemonade second quarter 2020 earnings conference call. We thank you for your participation you may now disconnect.