Q2 2022 Lemonade Inc Earnings Call
<unk> 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 one 2022, and there are 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 we 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 while each is useful to investors and how we use eats 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, and thanks for joining us to review, our Q2 results and our outlook for the second half of 2022 wells.
We will touch on a few important themes. This morning, some fees are laid out in more detail and with accompanying graph in our shareholder letter. So if you haven't read it this quarter I do encourage you to let.
Let me start by saying that our second quarter was strong with both bottom and top lines, beating our expectations.
<unk> premium or <unk> was $458 million and adjusted EBITDA came in at negative $50 million.
Overall, we feel that our business is beginning to hit its stride with improving loss ratios, increasing cross sells and up sells under seasoning book.
All three lead us to believe we will see peak losses this quarter with losses declining in Q4, and even as we continue to grow and expectation of shrinking losses year on year thereafter, as we progress on our path to profitability.
Let me expand briefly on each of the three drivers I mentioned loss ratios cross sells and seasoning.
Beginning with loss ratio at 56% in Q2, our loss ratio is still showing the strains of inflation so far.
Favorable trend line has emerged as we've said 10 percentage points of loss ratio over the past two quarters.
In our shareholder letter for the first time, we provide an overview of our machine learning models and the projected lifetime loss ratios. These generate.
These are hugely powerful tools for managing our business and may be unique in our industry.
Alyssa expands on why it is these leading indicators rather than the garden variety loss ratios that we use in our day to day management eliminate.
The upshot is that a leading indicators strongly suggest that the business. We're writing today will prove profitable even as lagging indicators take a few years to fully reflect this.
Indeed, an analysis of our new cohorts gives us confidence to reiterate our expectation that our business will operate on a multi year average loss ratio below 75% as we explained in the letter and a deep it already is.
Notwithstanding this positive trend, we do expect some bumps along the way for one we expect the acquisition of Metro model about which I will expand shortly to add something like 3% to five percentage points to our loss ratios for the next few quarters for.
Or another every now and then a cat event will puts an unforeseen dent in our loss ratios and thirdly, while inflation persists regulatory approval cycles can create a lag between us identifying the need for price change and our ability to implement it.
We're being very proactive in managing this risk, but thinking with regulatory cycles in an inflationary environment is an imperfect science and short term mismatches of risk and rate are liable to recur. If they do these two will present us a bump in our loss ratios.
To state the obvious expecting occasional reversal there is entirely consistent with our expectation that on a multi year average loss ratios will be sub 75% and as a reminder, we have a robust reinsurance program that shields, our EBITDA from the worst effects of short term spikes in loss ratios.
Turning to cross sells and Upsells in Q2, almost one quarter of our sales will cross sells of ourselves. That's an all time record for us and as part of a steady up into the right progression that we've been tracking for some quarters.
In a few markets, we eliminate card launched the numbers or better yet and about a third of our business in those states is from cross sells and Upsells sales that typically have zero marketing cost associated with them in this sense to the acquisition of Metro model and our continued rollout of eliminate car bode well.
While accounting for a quarter or even a third of new sales only about 4% of our approximately $1 7 million customers have more than one eliminate products today.
I would say this to highlight that while we're making solid strides with barely begun to unlock the potential of growing with our customers.
This has long been a core plank in our strategy and it's gratifying to see the impact it's having in recent quarters, let alone to extrapolate to where this can go over time.
The third trend I wanted to highlight is that we are fast approaching a tipping point, where the return on our earlier investments outstripped the costs of new investments.
It's not just that more and more of our sales are there cost to cross sell to up sells its also that more and more of our book consists of seasoned products and customers.
We have said all along that while the cost of launching new products, new markets and acquiring new customers are heavily frontloaded. These will prove profitable in the fullness of time.
That's what's happening the.
The passage of time is steadily moving more and more of these undertakings from the investment column to the return on investments column.
Hey, <unk>, it's early days and Thats good news.
To underline the point consider that almost three quarters of our premiums in Q2 were from customers, who have been with us less than two years and none of our pet or core customers have been with us that long.
While our book is more seasoned than it once it remains unseasoned by comparison to what it will be and indeed in comparison to what our competitors enjoy today.
Passage of time in other words is on our side too.
The upshot is that even as we continue to launch new products in new territories to new customers. We have turned the corner, we expect losses to peak this quarter Q3 and to continue to shrink thereafter charting a clear path to profitability.
That path to profitability brings me to my final update.
Being public with a highly liquid stock means that capital is readily available to us, but the cost of capital have jumped considerably and with about $1 billion in the tank, we see no needs to be dependent on further capital raises.
So we have changed gears with the aim of reaching profitability without having to top up.
This means we have decelerated, our spending on growth and hiring.
Jim will detail in our guidance. This will result in a more rapid improvement in our EBITDA a slower rate of growth and we believe no need for further fundraising.
To be clear, we will continue to execute on our strategy just at a moderated clip we changing pace, we're not changing course.
And even as our losses shrink we will continue to grow.
Not at our full potential we think that's the right tradeoff low cost of capital of elevated so it's a trade off we will revisit as the cost of capital wax and wane.
To wrap up my comments I would say that our business is doing what it was designed to do our past investments in new products customers and markets are bearing fruit.
We believe we are nearing the point of peak losses, and on our path to profitability and we've moderated our pace. So that we can reach the end of that path without being forced raises of capital.
And on that note, let me hand over to Shai for some updates on our acquisition of Metro miles Shai over to you.
Daniel.
<unk> Metro mile acquisition, just under two weeks ago and are feeling very good about how the deal shaped up.
Let me start with some numbers.
We issued less than $145 million worth of stock for this acquisition.
And in return received over $155 million in cash and equivalents.
Nearly 100000 new customers.
Over $110 million of ISP.
49 state licensed insurance entity, and telematics driving data from about half a billion road trips.
The number of states, where we are live with our car insurance product jumped from three to 10.
And this segment left from 1% of our IFC to about 20% overnight.
Then you touched on the cross sell implications of a wider footprint for our car product and this deal is testament to pay dividends and how fast we can grow with our customers, but probably the most exciting part of the transaction is the data the data science models and the car experienced teams that are now part of eliminate.
10 years ago Metro mile pioneered the use of continuous driving data feeds to predict losses per mile driven.
And is this decade long headstart now powered by the eliminated experience in technology that makes this combination so promising.
Metro miles car mounted sensors have been driven across billions of miles generating unique and proprietary datasets.
These were cross referenced with hundreds of thousands of claims closing the loop and enabling driving behaviors to this quarter for risk with great granularity.
Auto insurance is an extremely competitive market with a steep learning curve that can prove to be unpredictable and costly.
The most vulnerable time in the life of an insurance product is doing in its early years before data accumulates.
Incorporating metro models decade, long data and knowledge means reducing that risk and spending less cash along the way.
In addition to keeping some of the painful earnings of the core business. The deal also deliver some meaningful synergies having a single tech stack a single brand a unified team and a unified product line is far cheaper than funding competing brands competing teams competing systems and siloed products.
For all these reasons, we have high expectations from this deal and from the eliminated combo broadly.
But it is important to note that we're not planning to Russia and.
And for those of you who are looking for hints on how card is doing based on number of policies sold. Please note that we deliberately throttle that growth of car and plan to take the next several quarters to ensure we grow with a healthy loss ratio and equity and acquisition economics.
And with that let me turn it over to Tim Tim.
Great. Thanks Chuck.
Give a bit more color on our Q2 results as well as expectations for the third quarter and the full year and then we'll take your questions.
<unk> had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer.
In force premium grew 54% in Q2 as compared to the prior year to $458 million.
We believe that this metric is useful to understand 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 18% versus the prior year to $290.
This increase was driven by a combination of increased value of policies over time as well as the continuing mix shift toward higher value homeowner car and pet policies.
As in the prior quarter, roughly 80% of the growth in premium per customer in Q2 was driven by this product mix shift, including cross sales and the remaining 20% from increased coverage levels and pricing.
Gross earned premium in Q2 increased 60% as compared to the prior year to $107 million.
Roughly in line with the increase in in force premium.
Revenue in Q2 increased 77% from the prior year to $50 million the growth in revenue is driven by both increase in gross earned premium as well as a modest reduction in the proportion of premiums ceded to reinsurers.
Which was 70% in the quarter as compared to 75% in the prior year.
Also of note our quota share reinsurance structure changed as of July one 2022 as it did a year ago at this time.
Such that we began to seed 55% of our premium to reinsurers for the treaty year that ends June 32023.
For the year just ended at June 32022, we were seeding 70% as noted in our guidance does reflect this change.
Our gross loss ratio was 86% for Q2 as compared to 96% in Q4, 2021 and 90% in Q1 2022.
Operating expenses, excluding loss and loss adjustment expense increased 28% to $87 million in Q2 as compared to the prior year.
And this was primarily driven by increased 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.
Increases in each of the other expense lines as compared to the prior year.
Global head count grew 52% versus the prior year to 1135 with a greater growth rate in product development and underwriting teams.
Notably our head count is essentially flat versus six months ago up less than 2% as we continue to see efficiency gains and personnel expense.
Our net loss was $67 9 million in Q2 for $1 10 per share.
As compared to the $55 $6 million, we reported in the second quarter of 2021.
While adjusted EBITDA loss.
Was $50 $3 million in Q2 as compared to $44 million in the second quarter of 2021.
Our total cash cash equivalents and investments ended the quarter at approximately $1 billion, reflecting primarily a use of cash from operations of $80 million since year end 2021.
And with these goals and metrics in mind, I will outline our specific financial expectations for the third quarter and an updated view of the full year of 2022.
For the third quarter of 2022, we expect in force premium at September 30 between 595 and $600 million.
Gross earned premium between 127 and $129 million.
Revenue between 63% and $65 million and adjusted EBITDA loss of between <unk> 74, and $69 million.
We also expect stock based compensation expense of approximately $16 million capital expenditures approximately $3 million.
And we also note that we expect our share count, which will be weighted for additional shares issued in connection with the metro mile acquisition to total approximately 67 million shares at the end of the third quarter.
For the full year of 2022, we expect in force premium at December 31 of between $610 and $615 million.
Gross earned premium between 476 and $480 million.
Revenue between 236 and $239 million adjusted.
Adjusted EBITDA loss between $245 and $240 million.
And we expect stock based compensation expense of approximately $60 million capital.
<unk> of approximately $10 million.
And a share count weighted again for the additional shares issued in connection with the Metro model acquisition totaling approximately 70 million shares for the fourth quarter.
And as Daniel noted, we do continue to expect that Q3 will be our quarter of peak EBITDA losses, and with that I would like to turn the call over to Shai Shai.
Thanks, Tim we'll now turn to the top voted shareholders' questions submitted through the same platform.
And we'll start with paper bag, who is asking how we expect eliminate car to be rolled out in terms of availability and customer account, specifically, calling out, Texas, California, and New York.
And some others, including Matthew S also asking about lemonade car and the impact of metro mile.
On the mix.
So a covered much of this in my earlier comments.
<unk> touched on it too so I hope you feel you have received answers, but let me add this.
We plan to proceed extending our car business with both excitement and humility.
Excitement because the opportunity appears endless people love the product and we can't wait to see to use across the nation.
But theres also the ability because we appreciate the complexity involved in getting a call insurance product growing fast while achieving profitability.
Going back to our comments in the shareholders letter, we use machine learning LTV models to decide where we spend every marginal marketing dollars.
Our models take many parameters into consideration, including the cost of acquisition that churn loss ratio and even potential cross sell.
Right now our latest model LTV six is pointing our growth teams towards more profitable targets such as our pet product.
This brings me to another point, which is competitiveness.
Beyond having a superior experience the key to creating a competitive car product and growing as fast as price.
Now, it's important not to confuse having the best pricing with having the lowest prices.
These two are not the same.
And to be able to compete on price, while achieving profitability you need to be able to separate the good drivers from the riskier ones.
Other than the competition does.
And Thats, where telematics comes in.
The idea of using telematics for insurance has been around for a long time.
But for traditional insurers incorporating telematics is easier said than done.
Two decades after progressive introduce telematics their usage of that technology massively lags are one in.
In fact, it has been estimated that less than 4% of Americans with car insurance have telematics.
And even those 4% almost always turn it off after two weeks.
Because two thirds of drivers drive less than average most drivers who use telematics could see 30% to 40% savings if they were properly passed onto them.
That's great news to us, but not really for incumbents with tens of billions of auto insurance dollars on their books for them wholesale adoption of telematics and truly matching rate to risk.
Would likely lead to huge losses of revenue as they will require massive rate cuts for most of their book at.
It also means they will likely need to do a major rate hike for the remaining third of the book, which can lead to massive churn.
Unlike the 4% telematics adoption in the market, we are seeing a number closer to 90%.
And the opposite of that is that our wholesale adoption of telematics allows us to graduate from pricing, which is mostly based on the make and model as others have done for generations to pricing that's based on actual driving behavior.
Having said all that we're still looking to be very intentional about how we grow this business and with car now being 20% of our book and over $100 million in ISP.
We need to improve its loss ratios before we seek to grow it aggressively.
And to the question about availability of call in Texas, California, and New York.
The metro mile deal close we're now live in California.
We're actively working on Texas, and New York and expect to be live in both states among others within one year.
The next series of questions were around our cash flow more specifically Darrin asked if our risk of failure is substantially lower today than it was at the time of our IPO just a bit over two years ago.
Jacob J asked whether we will need to raise capital again.
So daniels introductory comments in our shareholders letter detail, how we're thinking about the cost of capital and how we believe that we're putting ourselves on a course to be cash flow positive without additional rate.
Yes.
This answers most of the questions on this topic.
But in a more direct answer to Darrin, our business has de risked significantly since the IPO.
What we described as our expectations and aspirations at the time has by and large turn into reality.
For example at the time of our IPO, we were at Monoline business with a plan to launch additional products and turn into a multiline carrier.
In the two years since we've launched now not one north two but three products pad life and car, making us the only multiline insurer tech in the U S.
At the time of our IPO, we told shareholders that big part of our strategy was actually growing with our customers in meeting their insurance needs as they go through a predictable lifecycle events.
Two years later, our cross sells and Upsells account for about a quarter over ourselves and growing.
At the time of our IPO, we had under 300 millions in the bank today, we have approximately $1 billion.
So by all measures pretty much eliminated significantly derisked.
At the same time, we don't for a second believe that we have delivered on our potential and believe that we have decades of growth potential ahead of us.
De risking is nice, but it isn't our destination, becoming one of the largest most advanced indefinitely. Most loved insurance brand world is.
Lastly, we have some questions around our stock price.
Jacob J active lemonade shares are fairly valued at the value of $20 and if we see a buyback plan at these levels as being a good capital allocation.
To be honest with all that's going on with the world in the markets right now our share price doesn't really preoccupy us.
Our job is to manage the company and not the stock which is a good thing because share prices are overwhelmingly driven by factors beyond our control such as monetary policy and investor sentiment.
As for buybacks those are excellent for companies with access capital rather than access opportunities that's not us our capital is therefore growing our business and Thats, where it will go.
And with that let me hand, the call over to the operator, so we can take some questions from our friends on the street.
Thank Keith if you would like to ask a question. We invite you to press star followed by one on your telephone keypad.
If you change your mind or wish to withdraw your question he compressed off followed by Jay.
I wanted to ask your question. Please ensure that you are on mute.
Our first question today comes from Michael Phillips of Morgan Stanley Mike.
Hey.
Okay.
Hi, Thanks, good morning, everybody.
First question kind of high level question, if we go back not too far from kind of the formation of lemonade.
Customer was those that the incumbents, they neither want to touch or couldnt, because they are cost efficiencies and these were customers that were you described is the first time a lot of more first time insurance buyers.
And your idea was too pleased and delight them over time, but that gives us some of your words.
They matured they would stay with you and you'll get a car got a house get a pet.
Stay with limited.
To a certain marketing strategy I think on your part of target customers. So the question is now that you're.
We're not just a monoline company.
Done a great strides.
But to what extent does this different kind of company lead to a different marketing strategy.
And a different customer base, that's no longer looking for just that one policy, but the monthly policies that you offer.
Michael Good morning.
Thanks for the question appreciate your good morning memory are there things that we settled.
It's gratifying.
At our fundamental strategy is unchanged.
We do still see the majority even overwhelming majority of our customers arriving.
Im not from competing brands.
Entice them to switch and save as a whole.
All industry, but rather picking the fruit off the tree cutting customers coming in for the very first policy.
So.
Core element of our strategy remains very powerful it does account for the majority of our book Indeed as best we can tell for the majority of our new sales as well.
But a couple of things have changed so one is that we now have multiple entry points. So back in the day really rentals was the only on ramp that we had so if you werent looking to enter the insurance world through renters.
Probably weren't able to.
Attracts you today, maybe before you're renting a car or maybe before Barry do you have.
Pat.
You need a life policy, you've just had your first child. So we are finding that the new products that we are offering are not merely.
Cross sell opportunities, but also incremental on ramps and depending on the product we do still see that the majority of those customers as best we can tell the data obviously is not.
Customer short, but as best we can tell are still first time buyers of insurance more often than not.
The second thing that has changed of course is that an increasing portion of our policies are now not two new onboarding customers, but to the existing installed base.
Somewhere in the ballpark of $1 7 million customers now post the Metro model deal.
We do now have a huge value unlocking selling to them. So an increasing portion of our sales on.
New sales at all tied to existing customers, but that's very much in accordance with our strategy as you correctly summarized as Jeff that mature application of that strategy.
Okay. Thank you Daniel.
Helpful.
The second question I have I'm going to preface by saying it is.
It's my lack of.
Understanding of your machine learning your AI pretty much differently than yours. So.
But help me here when you talked a lot of discussion on predicting launched lifetime loss ratios.
And in fact for each customer that you're on board you can do that and so.
So I wanted to be able to understand how four if I had to pick between two companies, where the company had a mature that around for a long time mature stable customers.
We have a lot of changing of its mix.
Versus a company that did have those things I think I feel more confident that they could stay in those things.
So help me understand how.
Company at 73% of premium comes from customers that some of the.
Less than three years, how do you how can you.
How do you have competency you can predict the lifetime loss ratios with such a changing mix of business. That's just something I would want to try to understand thank you.
Sure.
And paradoxically.
Company like US where would you say you would have been the least history of the place where you need it the most our business that is unchanging.
This quarter looks very much like the second quarter of the year before 10 years before.
Lagging indicators really do a decent job because nothing changes.
The result may come in lagging but.
Yes.
It looks very much like the policy for lagging indicators.
It is because I put it to you that we are fast evolving.
We need leading indicators rather than lagging indicators. So that is really the value of this is that for.
US managing the business, if we have to wait.
Many months, let alone many quarters to get a read on the impact of changes that were taking now in the product and the flow in a rate changes.
In our marketing campaigns. If every time, we make a change and we noted in the last 12000 software changes in the last year. If every time. They did change we had to wait such a long time to know whether it would be useful or not.
Correct.
And to move fast would be just overwhelmingly hampered which is why internally. We do use these leading indicators in more direct answer to your question.
We now have enough confidence in the fidelity of.
And the predictive power of these machine learning models to rely on them.
<unk> mean that they are flawless I'm sure there are not and we definitely see with every generational.
Build out of these machine learning, we see the fleet in the prior model we gained confidence.
We do not believe that they have.
Statistical significance, but sufficient precision for them to be far better.
And guide for how we should take corrective actions than the alternative.
The ability to move at the speed that we Havent iterate quickly based on leading indicators, even if they are in perfect results in a closer to a perfect outcome than if we waited on the lagging indicators.
It's probably probably where it's going in.
Adding I guess, sorry can I comment.
Yes, I'll start.
A comment if I may around.
Yeah.
But just an aspect of our unit economics that I think it is helpful to keep in mind in.
In this conversation.
It's common that companies think about their <unk>.
Lifetime value.
There are theoretical future lifetime value and how that can be optimized.
Moving.
Moving parts in those calculations, but there's one thing that's relatively unique.
And insurance number one versus other sectors and eliminated especially.
And it's our price points and so if you think about our average customer.
Premium our premium per policy is still starts with the two.
And it's about to start with a three with the addition of metro mile.
And so in an industry, where if we take.
One theoretical customer of ours, who has all of our policies and we have a few of those that's a 3000 dollar premium per your customer versus our average is around 300 or a 10 X increase in that.
<unk> ratio, while it's difficult to get that for every customer you can certainly get that for hopefully a good number of customers over time.
<unk> ratio really changes the dynamic of all of this.
Aviation in consideration of what LTV is and with LTV can be over time.
If you take that $3000 customer in an age of them, a little bit and make them a little wealthier maybe they get another car in a bigger house that 3000 number can be 10000 in terms of annual premium per year and so this is.
This is across the technology World. This is not a common thing where you're able to get 30 times.
What youre, starting customer guest possible, but it's quite rare.
And it's more common in insurance and lemonade really is.
Look it kind of takes you all the metrics that we share that is the one I think that maybe it gets.
Just the most often is as we're just getting started a 300 dollar number.
And where that can go over the coming years, so it really changes that LTV value.
Dynamic for us.
Yes.
Okay. Thanks that makes a lot of sense. Thank you.
Last question.
To your comments of not spending any little little to no spending marketing dollars in the near term much.
I'm much more new customers.
And I get your point of view.
You talked about another point to kind of a near term to your loss ratio, but to not spend in the near term marketing dollars for new customers there.
Can you help to slow any kind of comments that does that mean something in terms of confidence of kind of a customer base of data or the tech that you acquired there.
Okay.
No not at all.
Not at all.
The integration is real.
We have.
Good sense of what's involved it's well underway.
But today I need data that we spend on metro mile is not spent or eliminate brand for one so suddenly we'd be investing in another brand. Our goal is to have a single branch I spoke about the efficiencies of having a single brand.
Haven't moved them over onto our tech we are going to have a single.
Tech stack, we're determined to do that which means we have to port everything over we're always going to have a unified single Tech stack.
And the policies that we sell would be still on the old technology et cetera et cetera. So just as you go through each of the elements.
We haven't got all our filings done what we can do bundling across the metro model product lemonade product. So in each area. There is work to be done.
That is done we will be very happy to spend again.
We just think it would be suboptimal to spend those dollars today, we're going to wait until the integration is complete.
Okay makes sense. Thank you very much for your answers.
Thanks, Michael.
Thank you for your question. Our next question today comes from Thomas Smith Joint of <unk> Thomas <unk>.
Hey, good morning, guys. Thanks for taking my questions here.
Are there any updated statistics on the graduation phenomenon from renters to homeowners that you could share I understand the timelines there can be long and somewhat lumpy from quarter to quarter, but what are the concrete signs of that graduation is playing out as expected and just to confirm is the incremental customer acquisition cost truly zero for those graduate.
Hi, Thomas.
Sure.
The graduation has continued unabated.
A study up into the right.
If I'm misremembering every single quarter.
Second since prior to our IPO, we've seen the percentage of our homeowners book.
It has come in through graduation has increased.
Later numbers that I saw this might be very approximately around Brexit almost almost or sorry.
Is that 20% today of our HOS fix which is the condo.
Failed, 20% of that book.
People, who graduated they started with us renters.
They graduated.
And for homeowners, which is the next leg in.
People Gratulation, it's north of 10%. So it is pretty significant and continues to grow.
The incremental cost is not.
Not truly zero, but not far off sometimes they will have a question about one of our school they'll need a bit of customer support or things like that but in terms of the marketing spend which is where the real expense tends to be the overwhelming majority of these cross sells and upsells happen without any.
CAC expenditure at all without any marketing spend perhaps some customer support but I think it would not be.
It'd be far off if you round it down to zero.
Okay.
Thanks that makes sense and then just one other area of questions you.
You mentioned, having processed about twice as many claims in the last 12 months as the prior four years combined.
Gives you confidence that your fraud detection and appropriate claims handling there has kept pace with the substantial increase in claims volumes.
Especially as you think about perhaps tightening the belt on the expense side going forward.
Yes, that's a great question, perhaps during our Investor day, we can expand on that because theres been a tremendous amount of work done in this regard. So let me take too much time out to delve into the depths of the technology and in general when we talk about our forward detection will raise a little bit cagey, just because we don't know.
Tip, our hand to potential fraudsters them exactly what it is.
Good good.
As I'm sure you can understand having said all of that actually the volumes tend to play to our favor Robyn to our detriment the systems train on volume.
If it was humans that we're doing on the fraud detection that maybe there'd be overwhelmed by volume but.
And increasingly we're getting systems at a small smartphone pattern recognition driven.
<unk> forwards and using new technology, and the volume tends to be.
Wind in our back rather than a force that we have to fight against.
Yeah.
Makes sense. Thank you.
Thanks.
Thank you for your question. Our next question today comes from Jason Holstein.
Oppenheimer, Jason the floor is yours.
Thank you just wanted to ask a bit more about car. So just as you think about kind of getting the kind of unit economics up.
How much of this is you think you can leverage the kind of the underwriting that metro mile had already figured out.
And then I was just opposed to leveraging the marketing versus needing to build your own intelligence around underwriting for Metro miles. So just I guess, how fast do you think you can kind of scale of that.
Relative to the scaling that we've seen in your other historical businesses. Thank you.
Thanks.
Jason.
The data that Metro model have accrued shy elaborated on earlier.
Really stupendous.
But that is ready to go.
They that data is able to assess risk.
<unk> per mile driven at the level of granular.
Granularity that is really quite extraordinary.
The.
The change frankly in terms of.
Applying data tense.
Poland tend to if you like tends to be on the regulatory front. So.
Extracting insights and wisdom.
Appropriate pricing from the data is something that we're pretty adept and metro model brings a lot of strength in terms of both our personnel and our experience in.
That data.
Data.
But then it can scan in line for some months regulators pending approvals so.
That's really where we find that we hit speed bumps those are overcome in the fullness of time.
But that the challenging now it's compounded that.
Delay is compounded by a particular.
Particularly stock inflationary pressures within the cost base.
So a lot of the supply chain issue.
Carl vendors in your car repair shops et cetera disproportionately.
Nationwide, we are seeing inflation in the eight nine.
Percent area within the cost base, it's been more like 20 or 30% in some areas.
So a lot of the loss ratios that all car insurance companies have been facing.
Really to do with that how do you get regulators to approve the hikes that you know you need within the timeframes that inflation dictates and Thats really.
The rubber hits the road.
Intended.
Okay.
Thank you for your question on question today comes from Andrew <unk> Credit Suisse.
Your line is now open.
Thanks very much.
Just curious if this deposit.
<unk>.
What percentage of your non carb business is in California, and what percent of.
Metro miles car businesses in California.
Andrew Hi, so.
Eliminates.
Let me call product was never live in California.
The only business that you have in California is metro miles and the overwhelming majority of that business is in California.
In a few states I think seven or eight states.
But.
California is the largest by.
Paul.
Uh huh.
Non non carb business.
In California is that a big proportion.
For eliminate.
Yes, yes.
California represents.
Roughly.
What you would expect on a prorated basis population size, maybe it skews slightly disproportionately, but not out of whack.
Okay. One thing I was I was really curious about you had mentioned in the.
Shareholder letter the sixth generation lifetime value machine learning.
And.
You indicated that the fifth generation model.
Had a disposition toward California in the sixth generation model.
Located that some of that business wouldn't be profitable and as I thought about it.
There has been over the last few years a lot of concern in California, whether it's the regulators not giving adequate rate at times, whether it's weather conditions, it's been a very tough market. So the question is.
What does the new generate lifetime learning pick.
Pick up that the fifth generation didn't what was what was it that that fifth generation and wasn't cheap.
Yes, Thank you Andrew.
The fifth generation.
Yes.
Great.
Okay.
Yeah.
Apologies for the interruption.
We're just going to draw him backend.
Yes, thanks, so much.
Bear with us one moment.
Resume shortly.
Yeah.
Okay.
Operator.
Yeah.
Operator can you hear me.
Hello, Daniel.
Is connected into the Cologuard.
Hi, operator through here my apologies there.
Yes, we can hear you who has this is Daniel speaking.
And then we had someone asking a question I wanted to clarify that was your question on the call before we resume.
Yes. So this is Andrew and the question was around what's changed in the you heard the question.
Absolutely, yes, Andrew I apologize.
Dropped off the line if I could go back, but I didn't hear your question.
<unk>, how do you draw the line I apologize.
The LTV five model absolutely identified the trend that you asked about which is that California had a lot of cases that were not profitable business correct, we will already cognizant of that and quite cautious within California within the homeowners business.
Exactly those reasons, sorry didn't mean to imply malecha didn't mean to imply that we just discovered that California is a tricky place to do business, that's not the case correct.
What we do with every generation of the LTV as we get ever more granular perception.
So if we.
We had said okay is a pocket that looks like it could be profitable business in California.
Five it was at a certain level of specificity LGD six allows you that extra level of magnification, because one second.
Looked like this is a monolithic and all good let me subdivide that for you and show you that actually have pockets here that are good for your ultra pockets of battle back, which is why this metaphor of the telescope order of the microscope.
You get to see stuff.
Ever increasing level of granularity and Thats. What we did was we are willing to walk that within the mix of profitable pockets within California. It was really made up of better and worse.
White blood cells in Red blood cells, it's not just one monolithic global block and that's what we see at the Mic.
Microscope helps us to see with greater specificity. So.
It was a slew of different data.
That intermodal as we reference Greg Kurt a million.
Parameters.
Using the neural nets and hundreds of millions of parameters on what your trains it's hard for me to pick out one, but I think that perhaps the most.
<unk> was a greater granularity around cat modeling.
One of the things that we've heard is that LTV fix.
A far greater degree of specificity around predicting Pat and Catherine, California, particularly.
Is something that can lead to a great deal of glasses, though if I had to guess what was driving the model greater level of precision I would put it down to that.
Got it thanks, and maybe we could even get into more on that in the Investor day, but that was very helpful. Thank you.
Yes.
Thank you Andrew.
Thank you for your question, we'll be taking our next question today from the line of Casey Circus.
MS Research KC over Ta.
Yes.
Hi, Thank you. Good morning, My first question I wanted to touch on the full year enforced premium guidance that you guys shared because it implies a pretty significant slowdown in ISP added across both legacy eliminate and metro mile versus the second half of last year. So could you walk us through what you are contemplating for auto ISP.
Over the back half of the year, what's driving the slowdown.
Sure so that really represents our our adjusted approach for.
We're deploying cash and so we talked a little bit about the main drivers of that one is certainly the pace of our growth spend to acquire new customers.
Most significant one in a direct driver of <unk>.
ISP growth, it's not the only driver as we noted we're now getting.
Hi.
Cent range of new sales from projects, we expect that will continue.
Its climb but the majority do continue to come from growth spend and we're also seeing moderated pace of hiring and Thats also enabling us to drive up.
A better bottom line, even while we continue to grow.
In terms of ISP.
We don't expect to.
Much at all to drive additional Isps Metro mile. So we do expect that to continue to be a strong part of the business.
If we look at the first half of the year the legacy Metro mile.
That was well above 100 million well above $110 million, so that will happen.
And then inherent churn rate.
Of course, the second half of the year, but we think that.
Very strong.
We'll deliver the vast majority of the car.
We will continue to spend in support of all of our products including car.
Carl.
<unk>.
Essentially.
One or so percent of the business something like nearing 20% of the business.
In Q3, and Q4, once we hope to get into the numbers with metro mile.
In terms of the growth rate comparing to the prior year.
It's very much driven by the growth spend and so if you compare the.
Dollar spent in the second half of the year, yet, but it is implied in the guidance.
And I. Thank you all.
Marketing efficiency Thats in line with the past several quarters.
The growth capital the growth spend we do deploy in Q3 and Q4, we think we'll be as efficient or more so than it has been over the last several quarters, but will simply be deploying fewer fewer dollars.
So as Daniel said.
The double digit growth rate for a very long time the growth rate implied in the second half of the even.
Just for me.
Is it pretty strong and thats.
We will look at.
As with our overall capital base, we're able to raise capital we can adjust that patient growth, but balancing act, where we're playing now.
We think we'll see great results in Q3 Q4.
Got it thanks.
Do you care to give us any any anticipation of when you expect <unk> growth back on.
Well, we're not turning it off.
We're just moderating moderating the pace, so I would I would not think of it as eliminating growth spend by any means will.
It will be a considerable amount of considerable amount, but just not.
We won't see that increase that we saw in the second half of the last.
A couple of years because it is so we will be continuing to spend.
And we will.
Turning to sort of track the growth and track our path to profitability.
And balance those two.
If we see efficiency increase we have tended to spend more because things are good and as Daniel mentioned.
Our.
Our opportunities to spend our vast.
We're going to work carefully to make sure we have forces us to raise capital, but we do look forward to being able to increase that spend rate as soon as we see the data that supports it.
Alright fair enough if I could just sneak one more and I was wondering if you could help us understand the path forward for your reinsurance programs I believe letter indicated a gradual reduction down from the 55% session that you've reached today, but if I remember correctly last year. We also discussed a gradual reduction down.
The 70% level at the June 2021 renewals. So how much risk are you looking to retain over the next couple of years and should we expect another 10 to 15 point reduction in your session rate next year and then Additionally, do you anticipate any material changes to the way the metro mile business as being reinsured, when it's rolled into the laminate structure next summer.
Okay.
So, it's probably a little premature to think more than a year out on reinsurance, although obviously internally, we do think about it.
The dry.
A reduction over the past years has been both strategic.
And structural strategic meaning we've been comfortable taking additional risks.
As the book grows and as our loss ratio has become a little more predictable and as the mix shifts become a little more.
Visible to us if we looked at our reinsurance or from three years ago, you can see the tranches that we're that we're one year.
Contracts and.
The major tranche that was a three year.
Uh huh.
Agreement so the reduction from $75 to 55 is really driven by us not renewing the one year, we didn't renew one of them a year ago that took us from 75% to 70, we didn't renew a couple of the other one year deals this year.
Passenger light that took us from.
70, 255% and that will begin in Q3 and forward.
So.
Next year I think we have the opportunity to think more broadly.
<unk> said in the past and I think it remains true that.
From a risk perspective, we can have no reinsurance.
And still be comfortable with the capital we have at hand.
The needs of the business I was $1 billion.
We are comfortable and in fact.
Any quarters.
Because.
There have been cases, giving up potential profit.
And I think if you if you combine that with the cohort loss ratio a view that Daniel mentioned, where we can see that we're really.
Business over time with a more attractive loss ratio that that becomes even more interesting.
I think as we get closer to.
Q1, and Q2 next year it'll become a little more.
But the reinsurance market looks like.
And what our appetite might be.
But maybe Daniel jumped.
I think it's premature to say we're going to.
Methodically without any.
Percentage points, but I would say the opportunity to certainly consider.
And it'll be really.
Look at the what the terms are that are available to us.
And we'll know more about that in the coming quarters.
Hi, Jeff.
Yes.
Alright.
For us reinsurance terms not dominant in you can do about risk management, obviously risk concentration is part of it.
Al.
The surprises.
First of all weather patterns to talk like that can introduce into the economics that is definitely one of the benefits of reinsurance but.
Perhaps even larger driver for us in recent years has been the capital efficiency sort of regulatory capital how much capital we need to set aside the cost of capital and that tends to be very different for us until reinsurance companies and we quite aside from a risk concentration issue, which is not entirely disappeared, but it is solving itself.
We are resolving itself in that as much as we're becoming multiline multi geography and much larger that introduces a fundamental great a modicum of stability. The book kind of just by virtue of that.
But the issue that that doesn't solve it further capital efficiency and I had a quick question on balancing margin stacking because reinsurers clearly wants to make a profit and that profit is.
By solving a problem for us, but it does involve margin stacking.
<unk>.
But this cost of capital so it tends to be much more about financial opt.
Optimization, let me talk about risk alone.
Thank you for your question.
That was our final question today time, I'd like to hand back to the management team for any closing remarks.
Great. Thanks, so much we have no additional remarks, great to catch up today, and we look forward to you next quarter. Thanks, so much.
Thank you. This concludes the call today you may now disconnect your lines.
Okay.