Q1 2022 Lemonade Inc Earnings Call
Good morning, and welcome to the eliminated Inc. First quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May press star.
And then one on your Touchtone phone to withdraw from the question queue. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to Yale with noteworthy VP Communications. Please go ahead.
Good morning, and welcome to <unk> first quarter 2022 earnings call. My name is yellow listener Levy and I'm, the VP communications out lemonade.
Joining me today to discuss our results are Daniel Schreiber co CEO and co founder shy, winning Garko, CEO and cofounder and Tim Bixby Chief Financial Officer.
Our letter to shareholders covering the company's first quarter 2022 financial results is available on our Investor Relations website investor adult Lemonade dotcom before.
Before we begin I'd like to remind you that management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various important factors, including those discussed in the risk factors section of our Form 10-K filed with the SEC on March 1st 2022, and our other filings with the SEC any forward looking statements made on this call represent our views only as of today.
And we undertake no obligation to update them.
We will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors just as 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 are a letter to shareholders. Also includes information about our key operating metrics, including a definition of each metric why it 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.
Thank you Joe and thank you to everybody for joining US. This morning to review, our Q1 results and to allow us to update you on our expectations from the remainder of Q2 and indeed for the remaining of 2022.
I'm very happy to say that the year kicked off with a very strong first quarter, both our topline and bottom line came in ahead of expectations as enforced premium or RFP stood at $419 million, while our adjusted EBITDA loss for the quarter came in at $57 million.
This quarter, we also hit a big milestone for the company as it was the first full quarter in which eliminate offer the full suite of insurance product, but as renters home life pet and call in one market for the first time, a customer could mega bundle, we'll get all four eliminated policies that meet their insurance needs and one that we bundle discounts and whether he's led.
<unk> is known for.
So far this mega bundle is available in Illinois, and Tennessee alone and I think these markets offer an early peek into how meaningful growing with our customers can become as we rollout these products nationwide.
Growing with our customers has long been a central plank of our strategy.
Any dynamics, we see in both Illinois, and Tennessee reinforce that for example in one quarter alone we saw bundle rates in Illinois climbed 40% versus the rest of the country.
To the extent that this isn't indicative of things to come it is very significant customers with two lemonade products outspent. The average single product customer three tier one customers with three lemonade product ratio was 721, when we got to customers with all four products in these two markets that ratio jumped to nine to one.
Indeed annual dollar retention or ADR in Illinois jumped during Q1 to 90%.
While it's early days and small numbers and the noise subs is an encouraging case study.
As has been our strategy since day, one we want to be there for our customers as they go through predictable lifecycle events, moving buying home getting our costs tossing a family.
All of these are events with dramatic growth implications for insurance spend and with little corresponding marketing spend on our part.
This dynamic not only boost our bottom line. It is also the fastest contributor to our top line, while total premiums from single product customers grew at a rate of 61% relative to Q1 2021 premiums for customers with two lemonade products grew at a pace of 140 per cent and premiums.
For customers with three products jumped 390% during that same period.
So I will touch on the second plank of our strategy, winning with technology in a minute, but before that I'd like to say a word about two changes at our board of directors.
The first is that we recently announced that current Siedman Becca will step down from our board of directors effective at the conclusion of the annual meeting in June .
Parents company clear recently IPO and Karen was also appointed to the board of home depot.
As a result of concerns regarding Uber boarding which means subbing on too many public boards.
And just to avoid any questions around good governance, Karen will depart from our board.
I'd like to take this opportunity to thank Karen for the extraordinary contribution she has made to our company.
Full year tenure eliminate.
He has left an indelible mark on the company and has provided incisive and actionable council to shine and I at key junctures.
In an unrelated change Joel Cutler has today tendered his resignation from eliminate board Joel has recently learned of a serious health issue and he will be undergoing major surgery later this week.
Joe has served on our board since November 2016, and it would be hard to overstate the impact he has had eliminated.
Their steam and affection Sinai hold for him on behalf of all your friends eliminate Joel we want to wish you a speedy and complete recovery.
We're kicking off a search for two new board members and will of course update you as those searches conclude and with that let me hand over to shy put some more color on our loss ratio sorry over to you.
Thank you Daniel.
Last quarter I spoke about the measures we've taken to address underwriting profitability in our quest to achieve loss ratios of all lemonade product within a 75% target. We've always believed that building a technology powered insurance company is the way to achieve best in class customer experience efficiency and.
Of risk.
When it comes to loss ratios, our internal dashboards show increasingly profitable cohorts with every month that passes.
We're now using our fifth generation of machine learning LTV prediction models and these provide an ever improving estimate of the loss ratio each new customer as well or is there a likelihood to churn or cross sell.
The combination of these factors supports our real time view of customer lifetime value.
Upon a 90% gross loss ratio for the quarter. These dashboards show that the business. We generated in Q1 is expected to have a lifetime loss ratio comfortably within our 75% gross loss ratio target.
As we've spoken about before loss ratios are lagging indicators and changes in pricing underwriting and segmentation take time to develop and then get approved through regulatory filings and yet more time to earn in.
This lag between action and result is a structural reality of insurance, which is why we use predictive machine learning models, rather than backward looking loss ratios in our day to day management.
As much of the broader insurance industry's reported Q1 loss ratios were more significantly impacted by inflation as claims are quickly adjusted for inflation, while rates can take months to adjust we've been working hard to combat this would corrective measures and in the past year have filed about 100.
Applications for rate changes.
As regulatory approvals come in we look forward to bringing rates back in line with risk swap.
So one of our targets multiyear average loss ratio below 75% remains unchanged, it's important to remind our shareholders that while loss ratios spiked from time to time, we have reinsurance in place to help insulate us from such bumps.
Indeed, this quarter, we are reporting a 23% gross profit margin at a better than expected EBITDA notwithstanding the heightened loss ratio.
Now over to you Tim Great. Thanks, Sean I'll give a bit more color on our Q1 results as well as expectations for the second quarter and the full year and then we'll 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 66% in Q1 as compared to the prior year to $419 million. We believe that this metric captures the full scope of our topline growth before the impact of reinsurance and regardless of the time.
<unk> of customer acquisition during the quarter.
Premium per customer increased 22% versus the prior year to $279 and this increase was driven by a combination of increased value of policies overtime as well as a continuing mix shift towards higher value homeowner and pet policies.
As in the prior quarter.
The majority of the growth in premium per customer in Q1 was driven by product mix shift, including cross sales and the remaining 20% from increased coverage levels and pricing.
Gross earned premium in Q1 increased 71% as compared to the prior year to $96 million roughly in line with the increase in enforce premium.
Revenue in Q1 increased 89% from the prior year to $44 million and our gross loss ratio was 90% for Q1, 'twenty, one as compared to 96% in the preceding quarter.
Operating expenses, excluding loss and loss adjustment expense increased 68% in Q1 as compared to the prior year.
This was primarily driven by increased technology related personnel expense stock based compensation expense and legal and professional fees, partially offset by the impact of increased sales and 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 to support geographic product expansion and thus saw increases in each of the other expense lines.
Global head count grew 76% versus the prior year to 1162 with a greater growth rate in product development and underwriting teams.
Notably head count growth with just 20% when compared to six months ago. As we are seeing more efficiency gains in personnel expense in recent quarters.
Our net loss was $74 $8 million in Q1, or $1 21 per share as compared to the $49 million loss, we reported in the first quarter of 2021 well.
While our adjusted EBITDA loss was $57 $4 million in Q1 as compared to $41.3 million in the first quarter of 2021.
Our total cash cash equivalents and investments ended the quarter at $1 billion, reflecting primarily a use of cash for operations of $39 million during the first quarter.
Now with these goals and metrics in mind I'll outline our specific financial expectations for the second quarter and updated full year 2022.
For the second quarter of 2022, we expect enforced premium at June 30 of between 445 and $450 million gross earned premium of $103 million to $105 million.
Revenue between 46 $48 million.
Adjusted EBITDA loss between 70, and $65 million stock based compensation expense of approximately $15 million and capital expenditures of approximately $4 million.
And for the full year of 2022. Please note that we expect the metro mild transaction will close during Q2 and that our annual enforced premium is expected to grow approximately 70% during 2022.
The guidance that follows however, excludes the expected impact of the closing of the metro mile acquisition.
At yearend, we expect enforced premium.
Between 535% and $545 million gross earned premium between 426 $430 million revenue between 205, and $208 million and adjusted EBITDA loss of between 280 and $265 million.
And stock based compensation expense of approximately $60 million and capital expenditures of approximately $14 million.
And as we noted last quarter, we do continue to expect that 2022 will be our year of peak EBITDA losses.
With that I would like to turn the call back over to Daniel Daniel.
Thanks, Tim as is our practice, we'll now turn to questions. Most up voted by our shareholders on the same platform and the first one is from the people bank investor.
Also by Darren Q.
And it is why has there been no or little insider buying even as the market cap of eliminate has dropped.
I'll say that state the obvious that stocks have clearly taken a spectacular tumble in recent months lemonade has dropped about 50% year to date.
And this is fairly typical of what's really happened across the tech growth.
Our sector.
I'd like to believe for that reason that it says more about macroeconomic trends and cycles of investor sentiment than about lemonade, specifically, but turning to the specifics of the question.
I understand and often see the interest that people have an insider buying and selling.
I have to say honestly for myself.
Take little to no interest in it.
I have not once as best I can recall I've not once ask eliminates offices or board members or even my partner Si with who might discuss everything not ones that we discussed whether or why he is buying or selling what they are buying or selling shares literally not ones.
People buy and sell shares for many reasons and I've never found this to be a helpful gauge of anybody's.
Anybody's commitment or face and eliminate.
And then you mentioned the question who is off not about the actions of the company for whom I'm authorized to speak part of individuals who are careful whom I cannot let me just answer them.
For myself.
I have an incredibly high level of conviction in the long term prospects are eliminated and it says and indeed, the majority of our family's wealth isn't a single stock L. M D.
So and I expect that to be true for many years to come and I expect you would hear similar sentiments from all insiders and.
And I do hope that that addresses the concern that underlines the question.
The second question is a compound question by Chihuahua.
And it reads as follows what are some of the indicators that you track to analyze the AI engine efficacy, how do you tackle inflationary environments, where premiums are charging today's currency and claims must be paid in tomorrows and how do you guard against financial implications of rare events.
Okay. So that's obviously several questions and let me walk through them from last to first so we got against rare events through reinsurance.
In a massive.
Hum.
Way in which we've really avoided the worst surprises along the years and continue to.
Beyond that as we launch new geographies and new products that diversification and that actually is very protective as well.
Rare events that hit homeowners in California, I don't usually hurts pet owners in California, and don't hurt homeowners across the U S. Let alone in Europe , so being diversified geographically and product wise is a great protection against those railroad bins as well certainly dampens the impact.
The second question was really about inflation and that too was touched on earlier, but let me take the opportunity to add some color for the broader kind of examples of the broad actions that we're taking so.
For example on homeowners.
We are filing for rate increases, where we're finding for base rate increases really across the USA and we're doing that for whom condo and renters, indeed for pet as well.
And we expect to have new rates filed for about 90.
As a percent of our book of business across those products home condo renters and Pat before the quarter is out in.
In addition for homeowners.
We've implemented an automatic update to assess.
Assessment of the costs.
That would be associated with repair rebuilding of each home.
So that any inflation in the cost of construction materials should be captured in a correspondingly higher limits the system automatically assess and by extension automatically be higher rates and this will apply both to new policies.
And two existing policies when they renew and we expect to have that entirely operational before the end of this quarter as well.
Finally for call. We think we're in pretty good shape car definitely as a sector within the insurance industry is has been terribly perhaps worst hit by inflation.
But since we are new to this business, we don't have our older.
Older filings that need updating in fact, all of our filings or very much current and.
Submitted with full awareness of these inflationary pressures. So we don't anticipate having to take a further rate and call in the near term, but we will keep our finger on the pulse are clearly.
Finally, turning to the AI question well in accordance with best practices, we released multiple metrics for measuring our machine learned models and predictions.
For example for binary decisions such as classifiers, we typically use our methodology known as AUC, which stands for area under the curve and we use the Genie school for ordering challenges like rank ordering risks.
Now we use AI throughout our organization throughout our business from marketing efficiency optimization to underwriting to fraud detection to claims handling et cetera. So in many areas of our business. The AI acts autonomously, but in several areas like fraud detection or underwriting declamations or claim rejections.
The AI makes recommendations or flag things, which humans, then review and make a decision on.
And in those instances the human decision to establish a ground truth and that serves both as a benchmark for the AI efficacy, but also as a training sites to make it to continuously improve.
I hope that fully answers that question.
Another question comes again from the paper bag Investor and it asks about whether eliminate would release loss ratios on a byproduct basis in order to enable a better assessment of the AI impact on.
On underwriting I think that's a very fair question. It's one that we do discuss from time to time and that I saw paper bag that you also posted a question about an investor day in which we would share more information about AI and I I see these as related question. So I do expect we will hold an analyst day.
Before too long with a view to sharing a lot more information both about AI and about a byproduct loss ratios and perhaps cohort loss ratios.
But there is a real tradeoffs.
And that's something that we have to always bear in mind, because information that helps our investors can also help our competitors, which in time her to investors.
Eliminate is closely watched by the rest of the industry and while our detailed filings are public by law, a detailed results or not and that makes it harder for competitors to know which aspects of our business to copy because absent those our results it's hard for them to close that learning loop.
We do share selective numbers and insights when we think about domain to you to our investors we did that in the last quarter for example.
And in General I will tell you that we anticipated this tension.
Between wanting to be more transparent, but also wanting to protect areas of our business, where we think there is some exposure we address this in our founders' letter and let me just wrap up here by reading the relevant paragraph read there.
As follows we are transparent except when we are not we will explain why we zig zag and before throw at about our past mistakes some future plans, except when revealing that information might hurt the business and its disclosure is not required by law.
By disposition, we continue that we are transparent and depot to sharing more rather than less but we know that transparency is subject to diminishing returns and at some point negative returns we tried to be guided by that.
Okay and the final question comes from Antonio P and it asks for an update on the Metro while acquisition and integration.
Tony I'm very happy to share that almost all of the pre conditions to closing the metro miles you'll have been met.
Metro miles shareholders approved the deal with a 95% majority what we need now really is approval from insurance regulators, specifically in Delaware, where metro myeloid domiciled in the transaction will close.
Estimate all along has been that it will be able to do that in this quarter in Q2, and I'm still hopeful that that will happen. It would not be shocked if it slips into early Q3, but our best estimate remains as it was Q2 and the proprietary work has really gone very very well the teams have gotten to know each other and we have every reason.
We need to believe that integration will be hugely successful and very very speedy.
With that let me hand, the call over to the operator, so we can take some questions from our friends on the street. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your catch turns out if you are using a speakerphone. Please pick up your handset before pressing the keys.
Dropped from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
My first question is from Michael Phillips with Morgan Stanley . Please go ahead.
Great. Thanks, good morning, everybody.
Thanks for all the comments on the loss ratio that everybody provided what I do.
Didn't hear it maybe if you haven't if you want to share was was there any impact obviously, we were comparing to last year was pretty big impacts, but any impact on any kind of storms or catastrophe losses that will go back at 90%.
So.
No what I would call it from a significant cats are notable cats, but there is every quarter.
Our baseline level of cat, so nothing along the lines of youri or similar that we saw a year ago.
I would categorize it as sort of a typical relatively quiet quarter from a cat perspective.
Okay. Thank you and then.
Tim you mentioned in your comments that kind of any impact on loss ratio for the mix shift.
And you said that last quarter or two last quarter you said.
But they're ones with your renters.
What you said.
How much of it was.
How much of your businesses.
Now renters I think last quarter, you said it was less can you talk about how.
How much of a shift to homeowners than impac.
Impacted the loss ratio in this quarter too can you talk about the shift of homeowners and renters in the effect on the loss ratio.
Yeah, I would think of the mix shift as it is continuing.
He said the last several quarters.
We don't give an exact breakdown currently but as we did mentioned we recently crossed over you know from having renters above 50% to below 50%.
It continues to decline as a share of the total but relatively slowly.
A contributor to the loss ratio in the quarter. It was certainly primarily the mix shift has continued rate of mix shift.
But also fair to say that that the inflation impact starting to starting to be visible in the numbers that affects <unk>.
More than a pet or renters, but it will ultimately potentially affect all of the product line. So.
Primarily mix shift.
To a lesser extent.
Some of the inflation effects.
Okay. Thank you that's all for now.
The next question is from Matt <unk> of JMP. Please go ahead.
Hey, Thanks, good morning.
Daniel you gave some some helpful stats on some of the bundling take up particularly in Illinois, I think where you have four products live I was hoping you could help us understand kind of the cadence by which we might get more states that look like Illinois kind of you know how how the rollout will be in terms of getting more kind of three and four products states maybe.
We might stand by the end of the year.
Okay.
Hey, Matt good morning.
Well I think we'll see with the closing of <unk>.
Metro miles here, a sudden kind of jump in those states. So we are planning our launches of eliminate car product.
So as not to overlap too much with what's already in existence, and we expect to inherit pretty quickly. So I think youll see something of a step function change once the metro model deal closes.
Okay, Great and then just one other one I think you alluded to with kind of commentary on the market and Tim as well just with kind of you know 22 being peak EBITDA losses, I was hoping you could update us maybe on a little more longer term view of eliminates path to profitability, particularly given.
Kind of the recent changes in at least the market you know.
Demands.
So Matt let me kind of give you a few high level comments, then if Tim has anything to add I'll turn to him.
It's an opportune time to remind you and all of our shareholders that.
As a matter of policy eliminate does noted another has sold products or maintained campaigns or invested in territories that we don't believe to be marginally profitable.
So even though we are reporting losses at.
At a company wide level.
The places that we are investing our dollars in terms of promoting our products growing territories or acquiring customers or ones, where we think the CAC to LTV is incredibly compelling.
It's been hovering at all around three to one ratio now it can be misleading because if you look at our losses and it looks like would be selling dollars for 90.
But that's just not the case the reason it has skewed the way. It is is because the costs are born all upfront since we tend to be predominantly acquiring customers through direct to consumer advertising. So we take the tax hit right at the beginning that is then compounded by the fact that year one loss ratios are the <unk>.
Highest so all of our year one customers have the full brunt of the acquisition plus the worst loss ratios, but we are able to model out the lifetime loss ratios and we have every confidence in reason to believe in the historical data has proven that our models are doing this pretty well every reason to believe that they will return something in the order of a three X return on every dollar that we're spending.
But since we're growing fast increasing portion of not increasing a substantial portion of our business is still first year customers and even though they will be profitable over their lifetime, they're not profitable and the same accounting period and that is the predominant dynamic that's driving losses. The reason I'm delaying on this is because hazards.
As the denominator grows as our book grows the percentage, even though we're adding more and more customers the percentage of year, one customers declines and that happens naturally just through arithmetic and that is why we're able to forecast peak losses pretty soon.
The dynamics of CAC to LTV and historical investments that we've made in products and customers start giving the return on investment that we've long since spoken about.
And I'd say all of that by way of answering your question, which is that this isn't a major strategic shift. This is something that we have planned and anticipated and work towards really forever. This is as I said the arithmetic doing what it does which is that.
The older cohorts are showing them more profitable and contributing.
So the underlying parts of the business and newer cohorts are a smaller percentage than this thing works its way out. So we are continuing pretty much along the same strategy that we have been.
All along we continue to believe that these upfront investments will yield a longer term return on investment than some of the ways in which traditional insurance operators work with.
Doing it an entirely agent based distribution and then you've got less upfront expenses, but you've got a partner for life.
So that's really the way we view the path towards profitability it will emerge.
As we turn this corner, we hit peak losses in the not too distant future and then you will see these effects compounding all the way down to profitability.
Great. Thank you very much for answers.
Yeah.
The next question is from Yeah round Qunar of Jefferies. Please go ahead.
Thank you good morning, everybody.
So my first question is probably a continuation of the last quest.
A question and answer.
Can you maybe give us a little more.
Or data around the split between new and renewal customers.
Does that look like how's that been trending.
So I think.
Okay.
Our focus has shifted somewhat to expanding our existing customers now that we have the ability to bundle and upsell and cross sale and up.
At a greater level than we have in the past. So if you look at what are the metrics, we publish as net added customers, you'll see that vary quarter to quarter.
So it's kind of repeat and I think we've said in the past that's more of an output that input.
And so.
Gradually over time, we're seeing more of our increase in premium coming from from existing existing customers.
We look at annual dollar retention is a key metric for example.
Each each customer that we add.
Is spending more and staying with us longer it still under 100%, but making strong improvement and as Daniel noted in Illinois, you know where we've got there.
Broadest portfolio available, we're seeing even higher results. There if you go up to 90%.
So in terms of the.
To break down.
Can see it in the number of customers number of customers you've added.
I would say there is no <unk>.
Change in the last several quarters approach, which is we want to consistently increase the amount of premium coming from existing customers now that said, we're expanding into states where not in the.
The combination with metro miles that will enable us to do that more effectively.
Our product.
So youll continue to see a balance.
But the focus is really more on life.
Lifetime value and that's increasing the retention of existing customers.
Increasing the dollar premium potential value of new customers and we're seeing that.
Recent cohorts as shy noted.
Look quite strong and so when you see the amount of AD dollars, where we're continuing to put to work.
That's because we can see that cohort activity with a stronger result.
Yeah.
Publicly published numbers are a bit of a lagging indicator in our dashboards, we can see the.
Monthly and quarterly updates look very promising.
Okay.
And second question, probably further down this path.
Can you maybe talk about the spread between the loss ratios of new and renewal customers I don't know if you can quantify it or at least give us some direction is it.
Moving is it deteriorating things stable.
And then maybe as a follow up to that.
With each renewal.
Continuing to see an improvement in the loss ratio or does that start flattening out over two or three for renewal.
Hi, Arun yeah. So.
We do see steady improvements over time, when you look at the same cohort as it ages.
In our earlier comments, we spoke that lifetime loss ratio and that's really what we have in mind.
We don't measure the value of a customer by the loss ratio in the first three months, but really by the projected loss ratio over their lifetime, and we do see a fairly steady drop in loss ratio of cohorts that have been with us for three and four years, you'll see them occur.
The book drop of oftentimes 15, or more percent from year, one to year two and.
Not altogether different from year to year three it does vary by product. We don't have enough years of cohorts for example in pet let alone in cob, but certainly that has been the dynamic in homeowners.
Got it.
One last one if I could really quick you talked a little bit about some of the data that you were observing in Illinois as you launch I'm in a car.
What is the data similar in Tennessee was Tennessee, just leader and the Onboarding of car I was just surprised not to see equivalent data.
Yeah. It's just the launch of Tennessee was much more recent petzel. So we're not seeing any significant differences. It's only a few weeks of Tennessee, and we've got a full quarter of Illinois. So thats just more substantial but there's nothing in Tennessee that contradicts what all.
Diverges from what we've seen in in Illinois.
Thank you for the answers.
Yeah.
The next question is from Jason <unk> of Oppenheimer. Please go ahead.
Hey, this is Chad on for Jason how does the expansion of auto impact your outlook for the next two years.
And where where is the outsized impact on the P&L. Thanks.
Yeah.
So a couple of thoughts and then I'll jump in if he'd like so.
Car is similar in some ways and different in others. So we are you know historically, we've said that we're agnostic between the types of premium we get.
A bit of an exaggeration, we really do like a customer who has all the product types and so we do.
We're seeing the value of that we're seeing the specific impact in Illinois. So that it is important to us the more customers that does that trend continue.
From a cost perspective, we've built a significant amount of the cost to support the car product. So we've got a product in development team. That's in place we've got a customer experience.
Experienced in claim support infrastructure in place and the premium flow is still in its early stages and so a lot of that investment.
Has been made.
Loss ratios will show some pressure certainly versus renters, which is a much more mature product in a quite different product.
But I think the the challenges of car may look more like home and Pat in terms of our ability to launch new product.
A period of time, where we have less data and where we've shown a track record of being able to optimize fairly quickly. If you look at the track record of pet over the last few years of home over the last three years.
Theres been a consistent result.
Challenging early periods consistent optimization and now heading toward what ultimately is R. R.
Target LTV and target loss ratios.
So we've.
We've got the infrastructure in place with car I think the Metro model combination will.
Sure.
GAAP.
That we had with other products, which is a quick sort of a jumpstart the experience the data 100 million plus of in force premium so that will be different for our car launch, we'll be able to come to market with a bit more data intelligence around.
Our pay as you go or pay per mile product. In addition to our more traditionally priced product.
And ultimately we view the primary goal is maximizing premium per customer and that really means making car work for as many of our customers.
As it's appropriate for them.
Maybe I'll just add two or three quick thoughts.
One as we've spoken about this before but by our estimates are existing customers already spending over $1 billion on coinsurance. They just haven't had the opportunity of spending it with lemonade.
And indeed, the majority of our sales so far of eliminate car in Tennessee, and in Illinois has gone to existing customers.
Cost of acquisition was zero. So if that dynamic can scale. If we can continue to grow that book in part by acquiring new customers and generating new on ramps to eliminated by people who are searching for insurance that until now we didn't offer.
Complement that with offering it to existing customers I think that will change the dynamics and the economics of our business pretty materially changes retention and dollar retention in particular in powerful ways as Illinois has demonstrated.
Just think about the fact that today, we're selling homeowners insurance with one hand tied behind our back because people do expect to bundle human car and we can't do that we're effectively.
Sending away customers to our competitors, who then offer them a bundle discount.
And to date, we've not been able to contend with that head on as we rollout car. We will so I think you'll get the boost the obvious abuse of selling car the less obvious boost of selling car without as much of our CAC spend as you might imagine because of the cross sell dynamic that I referenced and thirdly, a boost to our homeowners insurance, because we'll be able to retain them.
Customers and attract them by offering them something that until now we weren't able to.
The final thing I would just add is that.
In home and Pat as Tim referenced we've had a learning curve by generating our own data.
We've got multiple billions of miles of data coming to us from Metro model and a highly differentiated product called products already launched and this will just be compounded by the all the capabilities. The metro and will bring is a highly differentiated product. This is not the same car insurance product that's available in market today and I think.
Advantages in terms of data from the telematics that we've spoken about in the past should compound over time pretty quickly.
Got it thank you.
Yes.
The next question is from Andrew Quail Germann of Credit Suisse. Please go ahead.
Hey, Thanks, a lot.
First I wanted to touch on expenses.
So tech and development.
It was $16 9 million up from seven one year over year.
G&A 22 versus 14 year over year, and I think Tim was touching on head count being up.
6%.
Could you could you give a little color on.
In Tech and development.
Where the spend is greatest.
Uh huh.
Where the focus is there and same thing on Jeep.
Sure.
And I think.
Important to note a couple of things about the expense flow you're you're.
Correct in the year on year comparison, and I think thats helpful.
I would know also that it's helpful to look at the sequential comparison as well.
Well the Q out later today, but you can see most of it in our letter.
Published yesterday, and what Youll see Theres really two primary expense line drivers its people and its marketing advertising customer acquisition cost and then we've kind of touched on the customer acquisition cost the year on year comparison for.
People is fairly significant growth, but if you look at quarter on quarter or year to date.
We've really seen a break in the sequential pattern.
We've continued to hire great folks, but the net adds over time versus our sequential history has slowed rapidly.
And that's a good thing what that means is.
We ramped up significantly over the course of 2021 particular for the build and launch of car. So we have to Frontload expenses car was the most significant launch.
Ever conducted.
But thats, where youre seeing.
Bulk of that increase in R&D and product expense, that's what you've seen the technology line. Those are the folks building that product and so it's front loaded and now we are at a point, where we've built that infrastructure that will continue to grow over time, but at a much more modest pace.
The premium increases.
So important to look at the sequential growth.
The and the head count I think we give the number.
Compare that to Q4, and you'll you'll see the hard data that supports what I'm, saying from a G&A perspective, a couple of things one.
In the expense lines those of course include.
Stock based compensation.
And that has spiked up on a year to year basis, primarily because of a higher historical stock price and past equity grants.
Backing out that stock based compensation it as a real expense, but backing it out from a cash perspective, we will give you a more apples to apples.
Cash expense.
Parison and then finally within the G&A line, we did have somewhat higher expenses in the professional services and legal area, which are not head count driven.
And so that.
Bumped up expenses in this quarter and more notably than in the prior quarter and probably.
We will see some benefit in the next quarter next couple of quarters as I would expect that not to repeat that quite that level, so a little bit higher in Q1 than the surrounding quarters in the G&A line.
That's very helpful. Tim.
Do you anticipate.
Any big deltas in your your G&A or Tech and development. Once you break metro miles versus where your expenses are now versus where metro miles expenses are or do you think both.
Entities expenses might be somewhat steady state.
So I would think of it.
In a couple of stages.
You can see our expenses for Q1, and you'll be able to see metro miles when they publish their figures which is.
Either just happened or or any moment I think they're on the same schedule as we are seeing quarterly schedule.
And so youll see the current run rate.
Yeah.
And so that sort of stage one stage two is at the point, where we bring the companies together and we expect that.
To happen before the before the end of the quarter, we're still optimistic that we're on track for that so likely third quarter would be the first quarter you'd see a consolidation of the two.
I would expect that.
Step up certainly when we bring the two companies together.
Effective as of the date they come together on a pro forma basis.
And then you'll start to see.
As we bring the companies together and we're able to take out redundant costs Metro model. For example has all of the required infrastructure costs of being a public company is to wait until those are fixed sort of or not fixed but those are overhead costs, but over time will dissipate as we bring the companies together.
In addition, we have a hiring.
Yes.
In our expense line in our guidance and our going forward plan.
Significant proportion of that planned hiring that's in our model will likely come from Metro model, We know it will come from Metro Mt.
And so you'll see somewhat gradually over a quarter or two as we bring the companies together more formally you'll start to see us come toward our run rate.
That is more of a go forward run rate. So it will be less than just combining the two companies together.
Significantly less.
But obviously more so than a lemonade stand alone.
Thanks that was helpful and just one more on.
The gross loss ratio of 90% and I know somebody was asking a little bit about it earlier, but would it be possible for you to breakout the underlying loss ratio what the cat piece was.
What the prior year development piece of that was.
So.
The stat filings will be out shortly but at a high level.
Prior period development round.
Rounded to zero so.
No material development there.
And then the cat piece as I mentioned was in line with prior periods without a significant cat and so that tends to be.
And the single single digits.
But really but I think most importantly, I, we touched on this a little bit, but maybe you can come back to us.
The inflation impact is significant.
It's hard in these early months, where its shifting.
Pretty quickly it's hard to pinpoint exactly you don't we don't.
Obviously guide to it.
But if you just look at some of the metrics that are out there of today versus a year ago Youre seeing effect of inflation rates in all the key components that go into it.
Rebuilding and home repairs and things like that.
Five or 10 or 15%.
Or more and so.
It's significant in that loss ratio now.
We're not taking comfort that everything is fine and we just need to catch up with inflation, but that's significant.
I think probably also worth noting what we've done about it.
We've taken a significant.
Continued to take significant steps in terms of rates and filings.
<unk>, which we had done historically on a consistent basis, but ramped up.
In conjunction with the new inflation data, we've gotten over the past year.
Something close to a 100% of our home and that business will be.
Subject to new rate filings in the coming months.
That will get us well.
To compensate for 100% of the inflation impact, it's a bit of a moving target.
We think we'll be in.
Good shape.
From both a specific rate.
<unk>.
Standpoint, as well as automatic rate adjustments, where it's allowable by law will have both of those components will continue to put those components in place.
Cars, a little bit.
New perhaps right where in one state will be rolling out in a number of states. So in some ways, it's easier for us to.
Just as we go as we rollout new states.
So.
Its something Thats clearly top of our radar list anytime you see inflation rates of 20% or more.
A curious thing we've taken that into account and you'll see it.
A bit of a lagging indicator, but youll see the effects of these filings take place over the coming couple of months and quarters.
No doubt tough inflation, maybe if I could just sneak one last one.
So what is it about your cash.
Sport that tells you that you can get to that 75% is it bundling renewals is it something else that debt.
Isn't that dashboard, telling you and you know in 90 this quarter can go to 75.
Hi, Andrew.
Thanks for that question.
The comment that I made was that the business that we acquired in the quarter was showing a lifetime loss ratio of under 75% of course, our actual book loss ratio includes sales from three and four years ago. So we do carry forwards.
Part of the business. It takes time to earn into these newer rates, but just to be precise that's what I was talking about was newly acquired customers in their lifetime loss ratio.
That is derived from machine learning models. So we now have several years of a mill.
And a half customers as the training set for those machine learning models and they are now able to predict with an increasing and pretty impressive rate of <unk>.
Precision.
How likely a customer is to claim how complex you would be able to churn how likely they are to buy more products.
And we use that in order to optimize our marketing campaigns that really generates plus a lifetime value.
As I said and I've got a few years of history to test. These models again, so we have confidence.
And then has grown.
Pretty significantly over the recent months as we see but they are just very good at telling us what these customers or how these customers will behave a year into and three down the road and it is those machine learned models and predictions.
We were referring to in saying that's newly acquired business. According to these machine learning models will be profitable business and the loss ratio will be a sub 75.
Okay. Thank you.
The next question is a follow up from Michael Phillips with Morgan Stanley . Please go ahead.
Hey, thanks for the follow up opportunity.
Your new homeowners customers can you tell us either maybe specifically or just broadly.
Or are those coming from graduations from renters or are they coming from purely new customers.
It's not purely new customers at all.
We see in a condo business, which is.
Typically the most common upsell. So rent is oftentimes will move from a rental to a condo and then from a condo to our homeowners.
We've seen a steady increase in the percentage of our condo business that comes from graduation, I haven't checked it in the last couple of weeks, but it was just shy of 20% last time I looked at it.
Which is about double what the percentage was at our IPO a couple of years ago. So that has been a study up into the right increase if memory serves across our book of homeowners, it's close to 15%.
I may be off by a percentage two or two percentage point or two but that is broadly speaking where the how the percentages breakdown.
The 15 day under <unk> 15 was purely new as sort of like 85% is graduation, 15th really Novo Jeanette.
No no I'm, saying, if you look at the totality of our homeowners book.
And you also how many of the people who are today, a homeowner either condo or homeowners.
About something about ballpark, 15% of them started life with us as renters and graduated that number is increasing quarter on quarter I believe every quarter since we launched pretty much we've seen that number increasing and condo is ahead of homeowners and thats closer to 20%.
Okay. Thank you. Thank you. The reason I ask is I think of you guys as being a homeowners insurance company Bye Bye first going after the renters, and then pleasing and delighting them as you say so that when they do mature and cocoa life stages. They didn't stay with you as they become owner as compared to specifically targeting our marketing towards.
Homeowners customers.
So that's how I think of you want to make sure that that's still accurate the way you kind of go about getting it getting the homeowners business.
Yes. It is.
Is accurate it is still the case that something close to 90% of our customers are joining us those first time buyers of insurance.
Oftentimes the on ramps that we spoke about.
Rent is the thesis that you just laid out for renters is now repeating itself with other products as well so Pat affords another on ramp.
People come looking for passing them, we'll add those are the products, but in broad strokes, yes.
Yeah.
Okay, great. Thank you for the clarification I appreciate it.
Okay.
The next question is from Tracy <unk> of Barclays. Please go ahead.
Good morning, apologies I had to join this call late was on another earnings call. So my question My.
My apologies.
Could you quantify the rate increases you're sequels.
<unk> filing unless you're getting any pushback from a regulator as they're trying to protect their constituents who are also facing higher inflationary pressure.
Hi, Tracy good morning. The question was not off so thank you for that.
It varies tremendously from product to product and state to state. So it wouldn't be responsible for me to give.
Give you a kind of a blanket answer for that really is a matrix of three or four by 50.
To do this with tremendous precision and in fact, even that in large measure understates things because rather than just doing them.
<unk> kind of crude base rate increases we do use all the data that we gather in order to become more and more refined in our segmentation and even as we raise rates rates in California for particular product, we might be decreasing it for some customers increasingly part of the customers.
It is a fairly complex matrix and yes of course, we do get pushback, there are places, where it's harder than easier or slower or faster to get rate approved.
I think the state of California has.
A special place in the Hearts of insurance nationwide for being a place that its been tricky, particularly for homeowners to take our rates commensurate with the risk and we've seen an outflow of a lot of insurance companies from that state for that reason, so I'm not sure it's actually protecting consumers. It I can make it harder for them to get insured.
But yes in some states and put some products is harder than in other areas.
Okay and are you, including in inflation guard.
Homeowner policies to complement rate increases I think that you can implement it right away.
Yes, so we do have inflation got approved in most states.
For homeowners products. So we do have that capability, but we're doing something beyond that we're doing a couple of things beyond that so one is we are doing broad base rate increases I spoke about the subtleties of segmentation, but when it comes to just keeping track.
Track trucking inflation, then we can do kind of base rate increases in order to keep track with inflation and some parts of our business is very necessary Tim.
Tim spoke about some of these numbers before but to add some color.
So association of Homebuilders say that rates infill construction have risen, 10% and five months, 20% in 12 months and over 30% over the last 24 months. So some areas like car like home or suffering hyperinflation in not just the inflation that we read about in the papers.
And so we are taking broad measures to keep.
Pop with with inflation, but beyond that.
Actually built into our system my references.
Leah.
Built into our system is the ability to adapt.
Update rather cub.
Which is the construction replacement cost in our homeowners policy to update that every time a policy is renewed.
So we have access to fairly broad and deep and current databases. So that we can engage with.
With increasing accuracy more than we ever had before how much it would actually cost to affect that replacement or repair.
And for both new products, new customers and on renewal, we are using the latest and greatest estimate so inflation does flowed that way has the limits increased because the cost of increase the rate.
Next to that it's pretty accurately and if in the past we were a little bit more tolerant underwriting guidelines, allowing people to.
Select.
Placement cost that is lower than what our databases are suggesting we gave a 20% wiggle room in the past new underwriting guidelines are tightening that up as well.
And we won't be insuring.
Homes whether.
<unk> ratio is less than 100%. So it will be trusting these datasets and insisting on the implementation and that should keep us continuously adapting to inflation as well.
Is there any shift to move to actual cash value from replacement cost.
No. Our policies are replacement cost is what our customers expect we pride ourselves on that there's new no talk of changing that.
Okay.
Okay.
This concludes our question and answer session and today's conference. Thank you for attending today's presentation. You may now disconnect.
Yeah.
Yeah.