Q4 2020 Lemonade Inc Earnings Call
Good morning.
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'll be an opportunity to ask questions. Please note. This event is being recorded I would now like to turn the conference over to L. Wizner Levy Vice President of Communications. Please.
Go ahead.
Good morning, and welcome to Lemonade fourth quarter 2020 earnings call. My name is yeah, we're working on Levy and I am the Vice President of communications at Lemonade, joining me today to discuss our results are of Daniel Shreiber, CEO and cofounder shy of winger President C O O N E.
Founder and Tim Bixby, our Chief Financial Officer.
Our letter to shareholders covering the company's fourth quarter 2020 financial results is available on our Investor Relations website investor adult Lemonade Dot 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 the result of various important factors, including those discussed in the risk factors section of our final prospectus filed with the SEC on January of the 14th 2021 pursuant to rule for two for before and our other filings with the SEC.
Sure.
Any forward looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
We will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders. Also includes information about our key operating metrics, including a definition of each metric why each is useful to investors and how we use each to monitor and manage our business.
With that I'll turn the call over to Daniel who will begin with a few opening remarks Daniel.
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 in force premium day by 87% adjusted gross profit by 86% and on.
The losses per dollar of gross earned premium roughly half of timber.
Tim will elaborate on all of our numbers shortly.
But as strong as these metrics might be the qualitative changes run deeper than the numbers suggest.
The main thing I'd like to highlight is that we have fully transitioned from the monoline business. As we were at the IPO of 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.
The first is that our brand and technology are highly extensible.
If there was any question about whether these could extend at the higher value and higher complexity products. They are really no longer as they do.
The second is that our customers want 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 retention.
The third is that new products creates new on ramps to eliminate in the fourth quarter more than 40% of ourselves on new product sales would not renters policies demonstrating that our high value products on not only destinations for upsells, but destinations in their own right. They.
They are entry points to eliminate and this expands our total available market, while lowering our customer acquisition costs.
In general our customer journey has progressed from a relatively linear roadmap where customers join us young renters and graduate to become homeowners choice.
So a form of multi dimensional map with an array of on ramps and intersections.
This is great news for both customer acquisition costs and lifetime value of our customers.
Level of symbiosis debt, we theorized about that we aspire to.
And it's heartening to see it play out even better in practice and the theory had projected.
All of these learnings have embolden 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.
Then we have working on our homeowners, all our renters or a pet or a 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 the little less cloak-and-dagger.
In the meantime, a few more points worth highlighting.
One is that our 2020 annual loss ratio was 71% as compared to 17, 9% 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 of.
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 share a few words about the Texas freeze in Q1.
When Q3, so unprecedented wildfires and Hurricanes, we took pride in the fact that our cautious underwriting meant that the impact of these catastrophes on our book of business was disproportionately light.
Now Hurricanes and wildfires do follow a probability distribution and that allowed us to manage our exposures of that.
The Texas freeze that happened this month was different it.
It was a black Swan event few models predicted this unique where the pattern and nonproductive the massive loss of power that the freeze engendered, nor the massive loss of drinking water that the.
The loss of power triggered.
These compounding catastrophes came without warning and impacted the entire state.
State, where a quarter of our customers live.
For these reasons it quickly became the largest catastrophe, we as a company have ever contended with and it tested both of 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 on Q1 results.
But I'll share that we saw many thousands of claims in the space of just a few days and that our team worked night and day and successfully remained incredibly responsive and helpful. Despite the extraordinary SGR.
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.
As for our financial model, it's to weather the storm very well, while our gross loss ratio will spike in Q1 of reinsurance structures of playing the designated ROE and as our guidance for Q1 indicates we do not expect the Texas for us to have a material adverse impact on our financials and 2021.
And with that let me hand over to Shai for some product updates shy of it to you.
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 the so far the stage launched is looking good.
Although the numbers are modest this is by design.
Sales are in line with our expectations while conversion rates are ahead.
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 will only start scaling. It once we've satisfied it provides a magical experience that's fast transparent and easy to understand.
On other fronts, we're happy with the rating, which are non renters products are growing with homeowners and pet representing more than 40 per cent 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 generate a for X increase in premium.
And dramatically improves the LTV to CAC ratio as the second purchase comes at nearly zero cost.
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 the Han mentioned, we are working intensely on our next product.
We're not yet ready to name it but I do want to share everyones excitement about this major project, which may well be the most significant launch we've ever done.
And with debt, let me hand over to Tim for a bit more detail around the financial results and outlook Tim.
Tim.
Great. Thanks, Sean I'll give a bit more color on our Q4 results as well as expectations for the first quarter on the full year 2021.
Then we will take your questions.
We had another strong quarter of growth driven by additions of new customers as well as the continued increase in premium per customer in force premium grew 87% in Q4 as compared to Q4 on the prior year to $213 million we.
We believe that this metric captures the full scope of our topline growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter.
Premium per customer increased 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 on pricing.
Gross earned premium in Q4 increased 92 percentage compared to the prior year to $50 million in line with the increase in enforce premium.
Our gross loss ratio was 73 per cent for Q4 in line of 73% in the fourth quarter of 2019, while our full year 2020 gross loss ratio was 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 the saw increases in each of the other expense lines are.
Our global head count roughly doubled versus the prior year to 567 was the greater growth rate in customer facing departments and our product development teams.
We continue to operate primarily under a work from home structure, it's worth noting that our TV of 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.
Net loss was $33 $9 million in Q4 as compared to the $32 $7 million, we reported in the fourth quarter of 2019 was of notably larger customer and in force premium base, while the 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 of 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 for Q1, 2021 event not yet reflected in the financials.
With these goals and metrics in mind I will now outline our specific financial expectations for the first quarter and for the full year 2021.
For the first quarter, we expect in force premium at March 31 of between 241 and $246 million.
Gross earned premium between 53.5 and $54 5 million.
Revenue between 21, five 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 the quarter.
And for the full year 2021, we expect in force premium at December 31 of 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.
As a reminder, please note the 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 two of significant proportional reinsurance structure, our year over year revenue and gross margin comparisons are not directly comparable.
Accordingly, we published in force premium and gross earned premium has metrics that we believe are useful to analysts and investors because each captures the overall growth trajectory as the business before the impact of reinsurance.
Thanks, so much for joining our third quarterly review as a public company. We do appreciate your interest and support and with that I would like to turn the call back over to Daniel to address some questions for our shareholders Daniel.
Thanks, Tim.
It's been a great pleasure for us to be able to engage with our retail investors through podcast Youtube twist of the other social media channels.
And what we found is a community that is highly engaged highly inquisitive.
The highly supportive.
We've engaged with smart people, who really do sweat the details on.
On our strategic and long term in the thinking these are investors after or in the hot and we feel privileged that so many of them of old so our customers and they often act as strong advocates for our products and indeed for our company.
The Investor Community has also been a source of great ideas for us and it's in response to a couple of tweets that came at us from a retail investors that we signed on with Sei technologies. So that these investors no less than a friendly wall Street analysts will be able to ask us questions on these calls.
And this quarter on the first quarter that we are trying this we received close to 100 questions and the.
At the same investor community helped us prioritize them by up voting the ones that seemed most pressing to them.
Looking at the five to seven most of bloated questions. We see three central themes that I'll try and address the first is one of global expansion Neil F asked the most up voted question.
Which focused on our plans for the EU and questions by areas of.
About the Asia Pacific and by Jordan about the UK. We're also very popular so that's kind of one bucket. If you like the second theme is about new products Jasmine I asked about our future product plans, while Neil on.
About.
The changes in kind Torrance with car Oems, most notably Tesla entering the space.
And the third most of them voted question was from Emel and.
It asked.
What we think of crypto and when we plan of whether we plan to invest in bitcoin.
So let me address these three.
Set of questions on time.
The first as I said it was about global expansion.
In our shareholder letter last quarter, we were.
The following sentence.
While we are steadily enlarging our European footprint. It should be noted that our investments of lopsided in the direction of the U S by design and will remain that way for the next while.
So let me explain and added a little bit of color to that.
When you think of a market is global we don't expense too much thought about which state of which country are sales of current.
The machine is trained to invest incremental dollar in whichever channel of is the highest rois at any given moment.
It takes into account.
Using machine learning models likely churn expected claims projected up sells.
And it derives from these of predictive lifetime value, which then compares to the anticipated customer acquisition cost in that channel.
This results in optimal and increasingly improving LTV to CAC ratios and it also dictates of ranking of products and campaigns that are being promoted based on the ror of for the incremental dollar of spend.
The machine does not take into account, where the the most profitable available business.
Using that formula as a new Jersey or in Washington, D C or in France.
At the moment and this formula tend to find more opportunities more compelling opportunities in the U S and the EU.
So 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.
And as markets mature and as efficiencies get developed we might find ourselves skewing more to the right in that regards.
In terms of expanding into new markets like the U carry on Asia, I'd say a couple of things. The first is that we have an expansive vision for lemonade.
We think that a cocktail value proposition of great value strong values and delightful product.
Is a cocktail of it enjoys universal appeal and.
And therefore, it's a question of when not if with regard for those new geographies.
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 used to determine where to invest on incremental dollar.
We are very ambitious for lemonade, but we tried to temper that with the discipline of ensuring that we invest of entities, where they will be most impactful and that really drives of the prioritization on the roadmap.
I hope that gives you some insight into how we think about a global expansion and prioritization of <unk>.
Different geographies in terms of growth on 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. So Neil in Jordan, but you would appreciate those specifics, but I trust you value, even more might not tipping our hand to our competitors. So I hope this will.
The a satisfactory answer to your question.
Which brings me to the question on new products.
We have been very busy with new products continue to be for the first for years of our existence, we had only homeowners products and in our fifth year. We saw of profusion of products, We launched pet we launched life and as I intimated, we have more on the oven.
Much of as I did the when talking about global expansion hates who I'm happy to talk about our guiding principles, while remaining intensely vagal almost a base of about the specifics.
So as with new geographies ambition for new products is expensive, we want to cater to all our customers needs and to become attractive to an ever growing universe of customers and new products are really of the essential component in achieving this in.
In our S. One.
Prospectus for the IPO, we included an illustration of a prototypical lemonade customer.
We showed of young woman, who joined the at age 25, and all sizes of bike and some personal belongings and then we showed how we could grow with her as she goes through predictable lifecycle of events as she collects pets in human dependence on.
She adds valuables and vehicles on homes and our product roadmap is developing in the service of this strategic vision of ours.
In terms of kind turns in general and the Tesla related question in particular, let me say the following.
The entire mobility spaces going through unparalleled dislocations ridesharing is increasingly competing with car ownership, while autonomous vehicles promise to transform the nature of how risk is allocated in the car industry.
If of Tesla crashes, while on autopilot that could arguably be characterized as of 40 product issue rather than a faulty driver issue and they therefore may be better handled on the rubric of product warranty then I'm kind of churns. So this is one of the many revolutions in transformations of the digital age.
Age and these kinds of transformations put incumbents on the back foot.
And they create tremendous opportunities for innovation for companies that don't have of legacy business to protect.
So we followed these dislocations with keen interest but for now that's all I'm going to say on this topic.
Thank you for that question for.
Finally, let me address Mo's question about crypto and bitcoin.
So crypto and M D.
<unk> decentralized finance and general of very interesting technologies, and enable really very novel businesses and business models.
To date, we haven't seen compelling applications for blockchain or cryptocurrency lemonade, but it's a fast moving space and we are entirely open and even excited at the prospect of that changing.
In terms of our investments on most high conviction of investment is in the L. M M D.
And we plan to deploy of much of our cash into our own business as we can profitably do.
Of course in.
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 on massive and we want to keep our powder dry and dependably available hopefully ml debt that makes sense to you and with that I would not.
And now like to turn the call back over to the operator, who can perhaps rejoined 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre 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.
Our first question is from Mike Zaremski from Credit Suisse. Please go ahead.
Hey, good morning, everybody.
First question I'm curious.
About the exciting new product launch later this year.
Yeah.
Does the 21 2021 guidance contemplate.
On that product launch and also kind of curious just the 'twenty one guide kind of play.
Whether you think there'll be any potential changes to the reinsurance program. Maybe is as a result of this kind of black Swan.
Texas event.
Yeah, Hey, Mike can you hear of she'll take.
Each of each of those in turn so the the way we are approaching the guidance on our planning.
Is similar to how we have in the past, but with new efforts and so in the 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.
For those products that are already in the market and those products that we plan to bring the market.
On the top line, we do not.
Load in of 100% of what we believe the opportunity is in terms of premium and growth. So we're a little conservative on the top line.
And also conservative on the bottom line in terms of.
New products, not yet announced the.
The impact on the year is.
The rounds to essentially zero, so I think what we're telling the.
The world in terms of our focus of investment is we're leaning in we raised additional capital we feel that we can accelerate some things and so we've really accelerated the cost of the investment in the hiring the people.
But because we don't yet really have art clarity around launch dates for impact.
Built in much from the topline perspective, but.
That's the kind of how we approach.
The the guidance and from a reinsurance perspective.
On the extra situation, while it's done for the people on the ground, it's still very much on progress in terms of the.
The accounting in the in the processing of what the ultimate impact will be.
These things while the exact.
Circumstances that happened in Texas are not perfectly model the perfectly expected these things of our expected and it's part of how the reinsurance go about placing their business in and it's really of long term relationship with us so.
Currently we have no expectation that the.
The the Texas occurrence will dramatically change our long term view of the value of reinsurance on what we ultimately pay.
Our reinsurance partners are really focused on.
Growth in long term profit in all of the things of that I think we've delivered.
Really strong performance on thus far and I expect that to continue.
That's helpful. My final follow up is a.
The stat, you put into the shareholder letter that I thought was the.
The very positive he talked about.
On a 10% retention rate improvement I was hoping maybe you can the unpack that or give us a little more color.
That's a lot of improvement do you think that's for the entire of our existing portfolio or do you think it's for kind of new business, you're writing that's.
That has more on cross sell it and graduation rates on it.
Yes.
An important metric that we're tracking internally and as always we.
Strive to share more publicly is to get better data.
Clearly been focused on retention and churn since the very beginning of the company now that we're larger and we have more data.
Dollar retention is really a better indicator of the long term sort of health and growth of the.
The value of the business on the value of our customers. So we obviously are focused Mary.
Closely on dollar retention and that's where we need for net improvement we're not yet for the point, where we want to bring that hard metric publicly because we would just want to have our arms around that data as it evolves, but we did want to give that indication of what we're seeing internally.
Exactly what we expect to see is as the book matures and as we see some of the benefit of of what we call sort of seasoning, meaning a larger proportion of the book ages in the key.
Key metrics include improved we are seeing that in dollar retention and then hopefully before too long, we'll be able to share more concrete data on that but wanted to share that bit of information.
Thank you.
The next question is from Mike Phillips from Morgan Stanley. Please go ahead.
Thanks, Good morning on body.
You talked in your letter and you said the.
Kind of a similar comment in prior conversations about the product mix.
And the and the shift of new business and here, you're talking about 40% is new which is homeowners on pet.
And you get the quote in your letter and how that's up from from prior quarters. I guess I was wondering if you'd be willing to or.
You haven't been very long so.
I'm curious how much of that.
New business mix is surely from pet versus homeowners and other something you'd be well on share.
Yeah, I would think of it as a combination of both.
I think if we look out over the course of the coming quarters, we can see the point coming were less than the majority of our business.
We will be renters, and having started out as primarily renters from a dollar perspective certainly.
It's not from a customer count perspective as well.
It's coming now homeowners is larger it's more mature we've got more data and have made some of more progress, but the pet.
The result in just six months have been it's been pretty significant and so it's.
I'm not going to have a hard number but it's definitely a combination of the two.
In terms of the balance you know maybe going forward, we can share a little bit more of that but.
You've seen the impact from for both of those.
Okay not the.
For you on the spot I'm, just curious of I guess, the philosophy behind when you give your customer count do you think there'll ever be a day. When you gave the customer count split by product line.
No probably not.
It's certainly something we could do in either of the reason for that is.
But the reason for that because it will have so many customers. We already are seeing this dynamic where customers have multiple policies and so it's something on the customer or a home customer that's something we're factoring in as we get a better feel for for that but that's just the dynamic that we want to make sure people understand is on the cross sell benefit and the upsell benefit.
But that's something we'll keep in mind.
Okay. Thanks.
Yes, I'm sorry.
Yeah sure I'm, sorry, Hi, Daniel I, just want to interject with another point, which is tangential to your question.
Got some questions on the first of all media today for the pay per bag of investing in others.
The fact that while we.
So very robust growth in Q4, we didn't see the same proportion of growth in our customer accounts on I thought this was a good place of true.
To address that so.
You're right, we don't breakdown the customer's byproduct I just wanted to make the board of point, which is we don't guide for customer count in general.
What we are.
Optimizing for growth and profitability of the entire book of business the topline metric that we use.
In force premium, which is really multiplication of of how many customers we have times premium per customer.
And one of them machines are optimizing for is the output of that multiplication.
So if we were just optimizing for customer count we would just the rent is all day long if it were just optimizing for premium per customer we would only sell of homeowners all day long, it's really the multiplication of the two which produces the best return on investment and.
And the more markets, we have the more products, we have more able we are to them.
Play the arbitrage of saying where can we get the best return on the dollar invested.
On a love all of our children all the geographies of all our products equally but the way we allocate to dollars to them is based on that formula. So the the machines are constantly looking to optimize for that and the outcome of that is that in Q4 that we're reporting on that of Q4 2020, we actually spent a few of dollars on marketing than we did during the Q4.
2019.
Even though we sold a lot more the fact, we mentioned this on the lesser of that efficiencies increased 88% 2020 versus 2019, and that's really how it's by solving for how do we get the most of the Bang for the Buck I'm only the optimizing for is growth of our business in dollar terms and not in policy count or in customer count, which is why that is.
Most of what we guide for sort of just get that in the thanks Mike.
Okay no. Thank you that's the that's helpful. Thanks for the extra color Dan.
Last question for now is on Texas and I. Appreciate your earlier comments Danielle on that until all of 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 cats and I guess are there any without one of the guidance and the EBITDA on the loss ratio of better that could come out of the same but just in general.
Are there any lessons that you have learned yet so far on that is it's kind of one of the first almost strains to your system. If you will lessons on adjusted availability or accessibility of anything else on for systems that maybe have been tested for the first time in some of those to the magnitude.
Yeah, there are some.
Interesting lessons and while this is certainly the first of its magnitude. It is not the first that we've faced.
Over the over the five years, you've had a couple of quarters with pretty.
The significant impact, but there was this one was unique and one of the things with debt. We saw was essentially a year's worth of the claims in a week for for a given set of folks. So it was it was one really of test of our ability to muster. The team took basically redirect and expand the available hours of the team quickly to keep the.
The close rate significant.
And high our net.
Of motor score in normal times is something we're very proud of.
And therefore, the reason, it's a key focus of the business and you're able to.
As best we can tell thus far maintained those very high net promoter scores even through the course of the.
For the rest of the of the Texas events, both for customer support and for claims.
We've been able to close the very significant proportion of these times very quickly.
And that's that's really what we're there for them 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, you're seeing and how we see it evolving over the over the coming days the.
Team has drilled for this and tested for this you never quite know until it happens and if.
If you could sort of read on our internal messaging and flat you'd see that while it was but the real strain on the system.
We sort of pass that test with flying colors.
Okay. Thank you Tom appreciate it.
The next question is from Matt <unk> from JMP. Please go ahead.
Hey, Thanks, good morning.
Daniel I just wanted to circle back to the the commentary you just had on.
Kind of the machines and new customers versus the premium per customer.
I know what I'm trying to simplify a very complex issue here, but how does the time Inc.
Of that how how would you look at it does.
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 on add a lot of products.
That new customer growth versus some.
Somebody that might be renters today, but they're also the add on pet today as well, but maybe not go much further than that.
Yeah, Hey, Matt it's of great.
The question and it gives me an opportunity to lay out a little bit more of.
Of the sophistication of the system on top of my earlier comments, so before and I kind of said, we optimized for all rely on my left of that back to dollars.
<unk> spent towards.
Sold 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 of dollar sold of born equal to customers can come in and both of them spend of $100 a month on the half of lifetime value of $50000, because they're going to stay for a long time and increase the premiums.
It can actually of a negative lifetime value because they can make a big claim and China in six months.
And the more able we are to predict the lifetime value of the more efficiently we can deploy our cash against the the appropriate spend the cat the customer acquisition cost and the way that optimizes, the CAC to LTV ratio and our data science team has been continuously improving our ability to project lifetime.
Value of the customer based on all the parameters that make a difference so the debt.
Protecting channel projecting upsells projecting claims and using all of those together.
Together, so it's not simply that we say oh rentals west as homeowners we'd be coming.
Increasingly nuance and sophisticated and the machines the ability not only to say, France versus new Jersey, or how many of us versus renters, but to get down to a much greater level of granularity and focus on your question.
Implies.
On lifetime value rather than on something as crude as geography of products. So all of that is happening and it's part of the systems that are learning the whole time that we're getting better on better and better on that.
Okay, Great and then just one follow up if I can on loss ratio you had some discussion on the letter about.
While on the surface it looks like there's just a little bit improvement year over year, but when you Peel it back.
The new business penalty on on the new business and that the the lines you had in place a year ago actually of improved performance quite well.
And I think the the quote was it might quote you wrong, but it was something along the lines of your completely comfortable with the new business penalty on how.
Should we read that on the Outback should we read that as loss ratios in a good place expect debt largely flat going forward with maybe a little improvement, but not not leaps and bounds as you grow into some of these new products would that be a fair takeaway.
Some of maybe I'll share a couple of things on Tim If you want on come on feel free.
The main thrust of the the the passengers that you're referring to is we have very long time, and I think we want to build a huge company over time and be extremely.
The profitable.
And we think that we are today on a window of opportunity to create really a generational company of which is what we're very focused on.
Launching new products or something we're getting pretty good out of them have spoken at some length of about the results of the launches for the last six months of of already hinted that launches to come.
Those come with the near term.
Cost on the long term profit and part of the currencies that we spend it and as you'll see that on the EBIT as a part of what we're spending this year is as I said earlier, we've got more people working on new products and on any of our existing product.
But part of it is also going to be in near term hits to the loss ratio. So you do expect when you're launching the products 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 when won't be put off by the masking of that underlying profit of its ability because of the near term a penalty that you pay with new products, we can optimize for the long term it out for the short term so that's the.
The thrust of it we're comfortable doing that we think that's the way you built on long term sustainable value and we want our investor base to understand that that is the calculus that we will be employing and got comfortable with it as well that said, we do plan on anticipate that we will stay with in a long term of guidance notwithstanding that calculus. So.
Tim made a comment earlier on about wanting to stay on the long term annual multi.
Multi year annual average beneath the 75, we think we'll be able to do that notwithstanding the commentary that I just gave so yes.
Yes, we will be suffering of higher loss ratios because of that penalty but.
But not to the extent that it would deviate from our long term plans, Tim anything to add to that.
No that was great.
Okay. Thank you.
The next question is from Ralph Shakur from William Blair. Please go ahead.
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 or is it for you to launch the incremental new product, especially with your growing brand awareness.
From the perspective to drive the incremental adoption of perhaps faster adoption with the new products and maybe just the 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.
And in the future. Thank you.
Hum.
As I said in my comments.
Comments, we're gaining confidence in doing exactly that so you know how do you ask 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 the data on pet, which is going very very well, where we're really thrilled with all of the aspects of that but the growth of the profitability of the customer satisfaction the adoption rates.
And the dynamics between existing customers and new products of the cross sell dynamic. The fact that it creates new on ramps for the total impact for that has on our LTV to CAC.
The board. So we are gaining confidence that not only are we able as I kind of wrote at the beginning of the shareholder lots of to walk and Chew gum. We can do this from an operational point of view, but also about the financial impact of doing that is in line or ahead of what we had hoped and expected in China comments, suggesting that.
Although the life is still early days of the early indications all of that that will.
We'll follow hopefully of a similar trajectory. So we do feel both operationally and in terms of our financial muddle. The this is something we the should it be doubling down on the and indeed it.
It's exactly what we are doing.
Tim do you want to address the LTV to CAC that part of the sure yeah for from an LTV to CAC standpoint, I think it's we're seeing what we had hoped to see and so.
Yeah.
Recently currently in the short term.
I believe on our data tells us we're comfortably above two between two and three in terms of the LTV to CAC.
And we gave indications that we'd like to see it up a free and we think they are of a path to see that well above three and that would be a.
The step change, but one that is doable and we're seeing evidence that notwithstanding the new business penalty. The Daniel just walked through we're seeing the indication that these things are true the the two key levers our marketing efficiency and we've seen significant improvement in that over the course of the past 12 to 18 months and then the.
The other lever is retention.
And the likelihood that a customer becomes a longer term customer if they have more than one 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 of longer term retained customer and we're seeing that borne out of the data in fact, if you look at the.
The average age of the different segments of our customers our overall customer add.
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 segregate homeowners insurance. For example, you see that number several years higher and we know that that correlates to the greater wealth and greater need for insurance and so that is what tells US that we are on track to move the LTV to CAC from above to the above three and we will continue to share that but the the underlying data.
Very supportive of that.
Great. That's helpful. Thanks, Danielle Thanks, Tim.
The next question is from Ron Josey from JMP Securities. Please go ahead.
Great. Thanks for taking the question I have I have two please first on shy you mentioned are just a month in on life and you're doing a stage event for our stage of launch for the product. He will provide more details here on what you're looking for is life rolls out nationally and you know are you really starting looking at lemonade existing millions of customers are there any similarities lessons for the pet launch in the law.
And then the second question is just on growing awareness of I think of the letter we talked about just broader build a bigger overall brand awareness. So Daniel can you talk a little bit more about how your marketing strategy evolves I'm, assuming you'd go more national but then to Matt's question earlier, you talked about going really after the L. T V. So maybe talk a little bit more about how youre thinking about brand marketing and just.
Overall marketing overall, thank you.
Hey, Ron good morning, Thanks for that.
I'll try to tackle both of them.
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 our pedal to the metal on life.
And this is a complex product that we're doing in partnership with <unk> with another carrier, we don't we don't own out of life insurance carriers for these are complex partnerships.
And we wanted to take on time and make sure that all of the integrations on all of the data set that we're using in the entirety of the customer flow is.
It's up to the standard that we hold ourselves to.
As you know where the.
Insurance in General you can't always beta test of these kinds of things of highly regulated products you can't.
Per tend to sell insurance you have that you.
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 promote the desk, we have not put marketing dollars behind it.
Using these months to make sure that the.
The user experience is delightful and and the.
The entirety of the technology stack is operating as we would expect it to.
Most of my old friend tomato does that so far so good in fact, we've been pleasantly surprised that notwithstanding the fact that we really haven't put any marketing dollars behind that for marine very focus on customer experience.
The the technology notwithstanding all of that we are seeing conversion rates, but on a very strong on interest rates on a very strong.
Albeit it's small and little data at this point so on.
We are seeing similar dynamics to patch in the sense that we are seeing about half of the business coming from existing customers on about half of it from new comments.
And we're seeing strong.
The premiums per customer strong conversion rates.
I think Ron with your permission will leave at that because we want a share of real day to once we have real volumes of months of being able to scale. This a bit more on 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 on before the growth. So we're going to spend the next couple of months getting.
Types down two two on satisfaction before we invest on that.
In terms of the marketing.
We have evolved and we continue to evolve so the parts of the.
Theme of today's announcements on and call. It has been about how we've really moved from being one of line multiline and the begins to morph the message about the company from offering a product to offering insurance more broadly so robin, saying, you know insurance for renters or the insurance of homeowners were getting tantalizingly close to the point, where we can just talk.
What are we doing trucks in Utah, we cannot address them, we're not quite there yet, but that's the arc of the journey that we're going through.
So that allows us to shift a little bit of both of the media that we use on the messages that we're years.
And maybe I'll leave it at that doesn't in kind of broad strokes about the the specifics of the things that we're still rolling out some of them kind of paused that.
Understood. Thank you Daniel.
The next question is from Ross Sandler from Barclays. Please go ahead.
Oh, Hey, guys.
Two questions so if not.
Non renters as of third of the business today, where could that be in five years.
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 of the sufficiency.
And you're talking about.
The three to one LTV to CAC, but.
So when should we expect you to lean back in the question and I guess long term, what's the right way to think about marketing.
Marketing as a percent of.
As a percentage of RFP or.
<unk> whichever of our ratio of you guys are thinking about it internally thinks.
A lot.
Yeah.
Sure Hey, Ross so.
Take those two in order on the on the renters question as a proportion of the business, which if you think about the.
The overall market.
In.
In the U S. The renters proportion is relatively kind of the.
A smaller portion of a less of a 10% of the total market.
I think it will skew renters for a fair a bit just because of the origin of the business, but I think over the period you were referring to multiple you execute for five six years or so we would continue the shift we're seeing now and skewed more towards the overall market size.
You know the whole market is.
10, or 20 times the size of the rental market.
Uh Huh of life market is.
100 per cent or 150 per cent of VAT in aggregate so the.
<unk> get pretty large pretty fast in these newer products that we're launching I'm.
So I'd expect that to continue.
And there's also the dynamic where you what's happening naturally he's got renters, becoming homeowners and so it's it's both of us acquiring the business as well as the shift within the business as our customers age in the season.
In terms of the marketing and the second question in terms of marketing you know why don't we spend more of its always the question, we kind of face ourselves day to day as we're optimizing how much we spend and how much of invest.
We've made a.
General commitment to not go out and acquire unprofitable business.
But we've got the capabilities to really lean in and test new areas. So I think for sure.
Look on our marketing efficiency overall.
When you dig into the details on that overall you've got.
Pieces of that that is much more efficient much less efficient than 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.
The just tells you that we're leaning in versus them.
The kind of reaping the benefits and not growing quite as fast. So that is something we rebalanced I don't know Daniel if you want to add anything on the.
The the willingness to invest at a greater pace, but that's that's usually the guidelines. We've been following is what's the underlying profitability of each of those customers.
The next question is from Jason <unk> from Oppenheimer. Please go ahead.
I'll just maybe can you dissect that last comment even further so obviously, you've given us guidance, so everything of that kind of like getting to that debt.
EBITDA guidance.
Maybe help us understand how much of leaning into marketing.
Versus pricing policy versus the other product changes in and how much of that is driven by your desire to just you know continue to increase the mix of homeowners versus the other thing. So I know, you're just kind of comment maybe if there's any more elaboration and the second question. If we look at the <unk>.
Incremental.
Dollars quarter to quarter, and we divide that by net add on it was up 72% year over year and an acceleration from the 40% in the third quarter the meat.
The bid I mean.
How much of this is the function of <unk>.
Can you kind of.
Pat versus homeowner versus.
The event all of it.
Yeah, you wanted to attack that of all the thank you.
Yeah.
The best day to the point you to is.
The.
Impacts the drive increase in premium per customer because that really captures the the story on what's going on there is.
Year on year of 20% increase in premium per customer that's been stable and improving actually.
Typically if nothing else all else equal you would expect that the declined somewhat but because we're launching the products because they are the higher price point and because of the working quite well, we're seeing upward pressure on the premium per customer number.
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 shift that's driven by home.
Then by pet the pet component is significant it's probably three times as much of that driven by home and pets.
So it definitely is driven by.
If you think about the price points the homeowners price point is two or more times with the pet.
Price point of it so there's some some logic to that so I would expect these to continue theres no guarantee that the premium per customer increases forever, but the dynamic is clearly positive and clearly upward pressure on that and that's really the you know when you enter the market as we did in an unloved area that we can make profitable of the renters.
And then launching the products as we have them encourage customers enable customers to graduate as we have it. It creates this metric which is just a great way to capture of the business. So I think.
Daniel noted customer count interesting, but it's really the combination of customer count and the mix shift and the premium customer that drives your in force premium and that's that's how we're managing the business. So I would expect more more of the same over the coming year life of the wildcard only because it's moving in the the data is very is.
Is the nascent but the early indications are quite good.
We've checked the box in that as with pet, we're able to sell for new customers as well as cross sell existing customers life. We're seeing the same thing new customers buying this product as well on its existing customers. So that that's of great early indication and will.
The report more on the coming quarters.
The next question is from Arvind <unk> from Piper Sandler. Please go ahead.
Hi, Thanks for taking my question and congrats congrats on good quarter.
One of the things he indicated was the pet insurance achieved the marketing efficiency in just six months Ah versus yours for your home products.
Now how much of this is because of the especially of product type versus your broader scale of a brand or data insights that you have one of them.
I'm really trying to understand here is you know should we expect the quick improvement in marketing efficiency.
In other products.
You're planning to two of launch of versus just specific to the pet insurance.
I think it's a little of both.
You know the.
Lemonade was a different company on the day, we launched pet insurance and be aware of when we launched lemonade to be sure.
An extraordinary left.
Level of progress in terms of the data, we collect and our knowledge our understanding of that data.
And our capabilities are our people our folks our growth marketing teams all of those much more of depth for years in.
But on the other hand pet is a tricky business there've been pet insurance companies around for very long time, some of them of very good day.
Lemonade approach of pet and the way, we talk about pets and the way we talk about the service. We provide is just dramatically different anybody who's been through the workflow of us versus our competitors.
Has hopefully seen that it's a distinct difference and thats why I think you've been able to succeed in that.
With both new customers as well as cross selling customers.
So I think.
For next products for for life and subsequent products I think we'll see some of that.
Benefit that we saw on pet, but not necessarily all you get all of it when you design a product that's fundamentally different and when shy talks about optimizing life.
What we're really saying is we do you want to guarantee that it's fundamentally different than other experiences in the market and launching of new product. After life. You know that that's the fundamental question at working with pet.
And our expectation is that will we will bring new products when the when we're able to say that it's fundamentally different and we'll see the marketing efficiencies that come with that.
Perfect perfect.
A quick follow up question you know when it is compared to sales versus last year, you had the our hands, hence for the meaning of not withstanding a pandemic the.
The product launches that you've got under your belt.
Kind of a nice nice kind of scaling the scaling of the business.
The unit.
All of them and take a very very successful you know 2020, but if you look at like 21 or the next one to two of yours.
What are some of the big big sort of priority of this debt that you have for for the overall business.
The way that I would think about it is.
I think 'twenty 'twenty wasn't industry test of a number of things.
Some unexpected negatives and some extraordinary positive and I think we'd be remiss. If we didn't really think of the people who drove that it wasn't the people on this call. It was 600 people.
And change around the world, who deliver that along with the the capital support of our investors, but those of the folks who really deserve the credit for what we're able to accomplish in 2020 and I would point you back to the Danny.
Daniel the Chinese comment about what are those 600 people doing we've got the largest internal.
Internal team today working on things that are new.
We have not yet launched and that's what is exciting for the business is not.
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 rank there given given the time, but thank you so much.
Okay.
This concludes the question and answer session.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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