Q2 2023 Lemonade Inc Earnings Call
Hello, and welcome to the eliminated Q2 2023 earnings call. My name is Alex and I'll be coordinating the call today.
If you'd like to ask a question at the end of the presentation. You can press star followed by one thank you Pat.
Maybe for your question you May press Star followed by <unk>.
I'll now hand, the MTR highest yeah, well, what's not levy from eliminate please go ahead.
Good morning, and welcome to eliminate second quarter 2023 earnings call. My name is al listener Levy and I'm, the VP communications and eliminate joy.
Joining me today to discuss our results are Daniel Schreiber co CEO and co founder shy, winning her co CEO and co founder and Tim Bixby, Our Chief Financial Officer.
A letter to shareholders covering the company's second quarter 2023 financial results is available on our Investor Relations website, investor Dot Lemonade Dot com.
Before we begin I would like to remind you that management's remarks on this call may contain forward looking 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 3rd 2023, our Form 10-Q filed with the SEC on May 5th 2023, and our other filings with the.
He says.
Any forward looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
We will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders and.
The letter to shareholders also includes information about our key performance indicators, including customers in force premiums premiums for our customer annual dollar retention gross earned premium growth loss ratio gross loss ratio ex cat and net loss ratio and a definition of each metric why it is useful to investors and how we use each.
To monitor and manage our business with.
With that I'll turn the call over to Daniel for some opening remarks, Daniel Good morning, and thank you for joining us to discuss eliminated Q2 results and our updated outlook for the year.
The second quarter bested, our expectations on both top and bottom lines. Despite the outsized weather events, which dampened results across the entire industry.
Tim will provide all the details shortly though the headline news that our in force premium grew.
<unk> percent year on year, while our operating expense grew only 9% and our net loss decreased.
Premium is growing more than five times faster than expenses highlights the scalability of our business.
As we continue to grow we expect this dynamic to drive our progress towards profitability.
The importance of achieving scale was the driving force behind a major piece of news in Q2, the launch of our synthetic agents program with a longtime investor General catalyst.
We believe this program is something of a game changer and Ive written about it at length on our blog and we cover its mechanics in the back of the shareholder letter published yesterday I do encourage you to study. This program as it is not quite like anything we've seen before and we believe its impact on our business will be material in 2024 and beyond.
Let me explain it briefly.
Our direct to consumer business model has served us extremely well and with no plans to change it but it does have one downside custom acquisition costs known by the acronym pack.
One upfront it takes off about 24 months to recoup that initial outlay.
To be clear our expenditure on CAC is money well spent because over their lifetime with us our customers typically repay debt tax three times over even accounting for the time value of money.
But because it takes time to recoup the initial outlay rapid growth is typically cash flow negative.
If we spend $100 million in attack in Q1 for example in $200 million in year, two and $300 million in year, three we could expect that $600 million of cash investments to yield about $2 billion and gross profit over time, which is a very compelling ROI.
But before we saw that return a bank account would see a dramatic and it's not a sustainable approach at higher growth rates.
Without this synthetic agents program long term profitability comes at the expense of near term cash reserves.
This tradeoff limits, our pace of growth, particularly while the cost of capital is elevated.
<unk> growth preserves cash which is good but it also caps the amount of gross profit, we can generate slowing our path to profitability and lowering our terminal value.
Now insurance companies that sell through independent agents don't have this issue the agent finances, the CAC and insurance company can grow without depleting cash reserves.
But while we do partner with agents to some extent, we prefer not to just become a primary distribution model.
One the agent mediated business replaces the magical eliminate experience with the agents one interface Commoditizing, a brand and watering down the data we collect.
For another the agent siphons off as much as half of the gross profit of the customer over the life of the customer greatly reducing the lifetime value or LTV.
So our agents do solve the cash flow gap that costs in terms of gross profit brand data and customer relationship are significant.
Which is west synthetic agents come in synthetic agents were designed to provide the cash flow benefits of independent agents without what we perceive to be the biggest downsides how.
Synthetic agents final talk track all up to 80% of it to be precise and they get the equivalent of a 16% Commission from those cohorts they helped finance.
No other recourse whatsoever.
Just a right to a portion of the premiums that wouldn't have existed if it wasn't for that funding.
That is broadly similar to independent agents.
But unlike independent agents payments to synthetic agents aren't for the lifetime of the customer far from it.
After two to three years eliminate owns 100% of the LTV thereafter that.
A huge difference.
Secondly, synthetic agents adjust financial partners and therefore, they don't intermediate the relationship between us and our customers.
Our model remains direct to consumer and we own the customer relationship the customer experience and the customer data another huge difference.
The upshot is that a synthetic agents program enables rapid growth without forgoing the customer relationship without foregoing much LTV without depleting, our cash reserves and without selling equity to finance our growth.
Synthetic agents that paved the way to a larger business and more profits sooner and with more cash in the bank and hopefully you see why we believe this program is something of a game changer.
Staying with the theme of making the most of our capital. In addition to announcing a synthetic agents program. This quarter also saw the renewal of our reinsurance program notwithstanding one of the hardest reinsurance markets in these many many years.
The re up the program is for the same 55% seed as we had previously to the same top tier reinsurers, yielding similar capital efficiency.
There are some changes to the renewed program, particularly around the treatment of cat events named Hurricanes are excluded for example is a $5 million per event cat yet.
Yet these are risks, we can comfortably back in our newly formed captive structures, while maintaining our target capital efficiency.
Taken together the impact of our reinsurance program and synthetic agents program is significant in that.
Elemental state the capital burdens of insurance, both regulatory capital and working capital would weigh us down slowing growth idle cash and delaying profitability.
That's why our Q2 agreements assuming material our reinsurance partners relieve our regulatory capital burden through a quota share program and general catalysts relieves, our working capital burden through a synthetic agents program.
At least from a capital perspective, therefore, the agreements that came into effect July one mean that we're all set to grow and to go the distance.
Which brings us to the next hurdle, we need to clear before picking up a growth rates, most notably rate approvals and loss ratio more broadly.
In my remarks last quarter, I said and I quote we expect our current trajectory to broadly continue, albeit with occasional hiccups when outsized cats introduce a brief reversal.
And by those comments Q2, indeed, so a reversal due to outsized cat events, but the underlying trend line continues to be in line with our expectations.
Our rate filings have gained steam and approvals are also coming in foster now significantly, California approved a 30% rate increase for our homeowners product and 23% of our pet business.
It will take some time for these rates to earn in and we still need to take more rates, but we have reason to believe things are moving as they ordered too.
Importantly in parallel to our rate approvals picking up inflation has been slowing down. This is really significant to us and so long as these trends continue as I said last quarter. We will continue to expect the downward trajectory of our gross loss ratio to broadly continue, albeit with occasional hiccups when outsized cats introduce a brief reversal.
<unk>.
And with that let me hand over the call to Tim who can provide more details on our Q2 results and a view into the second half of 2023 Tim.
Great. Thanks, Daniel.
I'll review highlights of our Q2 results and provide our expectations for the third quarter and the full year and then we'll take some questions.
It was a strong quarter across the board with continued loss ratio progress despite cat headwinds really nice marketing efficiencies and impressive expense control.
In force premium our ISP grew 50% in Q2 as compared to the prior year to $687 million.
Absent the impact of the Metro mile acquisition organic annual growth was approximately 28%.
Our customer count increased by 21% to $1 9 million as compared to the prior year.
Premium per customer increased 24% versus the prior year to $360. This increase was driven primarily by both volume growth and mix shift, including the impact of the addition of metro miles pay per mile customers and to a lesser extent increased price and coverage.
Ceded to read insurers to roughly 53% in the quarter as compared to approximately 71% in the prior year.
Absent the change in the proportion ceded revenue growth would be roughly in line with the growth and our gross earnings premium.
Our gross loss ratio was 94% for cute too as compared to 86% in Q2, 2022, and 87% in Q1 2023, the impact of Cats, and Q2 was roughly 21 percentage points within the gross loss ratio <unk>.
Absent the impact of all cats in Q1, and Q2, the underlying non-cash loss ratio showed solid improvement of roughly eight percentage points from the prior year in roughly flat versus the prior quarter.
Certainly backing out cats is not something we can actually do an insurance business, but we do think providing additional transparency in detail around our results can be analytically helpful.
Operating expenses, excluding loss and loss adjustment expense increased 9% to $95 million in queue to as compared to the prior year.
This is primarily driven by increased personnel expense stock based compensation expense and legal and professional fees in large part due to the metro mile acquisition, partially offset by lower sales and marketing expense.
Other insurance expense grew 55% in Q2 versus the prior year roughly in line with the growth of earned premium.
While total sales and marketing experts declined by $12 million or about 33%, primarily due to lower growth acquisition spending to acquire new customers.
Notably our growth spend efficiency improved significantly in queue to in large part due to this lower spend level. Each dollar spent on growth generated roughly 75 per cent more ISP this quarter versus the prior year.
We spent approximately 12 and a half million dollars for growth advertising and a quarter or roughly 50% of our total sales and marketing spend.
Technology development expense increased 35%, primarily due to the metro mile acquisition, while G&A expense increased 37% as compared to the prior year, but notably decreased 6% as compared to the prior quarter.
Personnel expense and head count continued to be quite stable. Despite continued growth in customers in premium.
In fact, our headcount actually decreased 2% as compared to here in 2022 to 1333.
And has been essentially flat for three quarters running.
Head count increased 17% as compared to the prior year, primarily due to the acquisition in Q3 last year.
Net loss was $67 million in Q2 or a loss of 97 per share as.
As compared to the 68 million dollar loss, we reported in the second quarter of 2022 or a loss of $1.10 per share.
While our adjusted EBITDA loss was $53 million in queue to as compared to the 50 million dollar adjusted EBITDA loss in the second quarter of 2022.
Our total cash cash equivalents in investments ended the quarter at approximately $942 million, reflecting primarily I use of cash for operation of $97 million since year end 2022.
With these goals and metrics in mind I'll outline our specific financial expectations for the third quarter and for the full year 2023.
So for the third quarter, we expect in Forest premium is September 30 of between 703 and $706 million.
Gross earned premium between 166 and $168 million revenue between $100 million to $104 million.
And then adjusted EBITDA loss of between 51 and $49 million. We also expect stock based compensation expense of approximately $16 million capital expenditures of approximately $3 million and a weighted average share count of approximately 70 million shares.
And for the full year 2023, we expect in forest premium at December 31.
Between 710 and $715 million grew.
Gross earned premium between 654 and $658 million revenue between 402, and $408 million and adjusted EBITDA loss between 199 and $196 million.
In stock based compensation expense of approximately $62 million.
We also expect capital expenditures of approximately $12 million and a weighted average share count of approximately 70 million shares.
And with that I would like to hand things over to shy.
Thanks to him we.
<unk> turned to our show hold those questions submitted through the say platform.
And the first question paperback asked about our plan to reach profitability between the years 2025 in 2027 as we laid out in last year's <unk>.
Asked for a timeline update for when we think perfectibility would most likely occur well paperback based on what we know today, we see little bit changes are multi ear breakeven timing.
When we shared long term financial centers in November 22, it was before our synthetic agents funding and before a notable improvement in our <unk>. So we planned to work that into our long-term planning and give them more updated view shortly in the second question Patrick K wanted to know about or give back program. So I think that eliminate.
Twitter feed has demonstrated the left leaning bias for the company.
And noting that I tweeted back that is unintentional.
He asks how the company will show political neutrality going forward well Patrick This is a topic that has always been top of mind for us since we started the company.
<unk> was founded as a public benefit corporation and integrated social impact into the core of its DNA.
That means that we may be vocal about topics like gun control and climate change, which can be considered political but we stay above the fray when it comes to party politics.
Beyond doing the right thing, we believe that taking a stand is important for our business and brand even when it comes at the cost of not being everyone's cup of tea as.
As they once wrote is part of our branding strategy, we'd rather be loved by some then ignored by all we believe that being bold and having an opinion helps our brand rather than hurts. It but please take the time to read or post on this issue and I think you'll find that while their values driven they're also sensible moderate and without any intentional.
Party or political affiliation.
This is where I believe our give back and the Lemonade foundation coming into perfect alignment with our team and with our investors.
As far as <unk> causes I think you will find that we offer quite a wide range of options from which most of our customers phone a cause that aligns with our values.
Patrick to southeast answer, we welcome yours and others thoughts on charities you believe can be part of our give back and have no intention of making this a politically charged program and the next question daring ask how many generals prototypes have made it into production and what is the estimated impact on 23 and beyond.
So just to give some context last quarter, we spoke about the potential positive impact of January <unk>, our business and how this is the perfect while waiting time for it to be added into our already highly advanced AI and machine learning platforms using generative AI, we plan to take our automation even further along.
Find other major tech developments now going into our platform.
<unk> will start to see efficiency gains in a year or so I believe that many insurance companies will find it extremely challenging and quite risky to implement generative AI into our systems.
<unk> generally models are highly unpredictable by design and it's often impossible to create the consistent and perfectly compliant result.
Secondly, insurance companies rely mostly on agents will see much less efficiency gains using this tech because more often they are not.
They don't communicate directly with our customers since we handle and control 100 per cent of our customer communications.
Being able to automate the large portion of those can translate to reductions in our expense ratio.
Which leaves us with a compliance challenge as we started experimenting with generative it was clear that we needed a way to obtain these models.
Regulators require predictability and audit ability things that aren't as strong sides of large language models.
This has been an area of focus of ours, and one which I'm proud to say, we've now salt with our new generating of AI compliance platform, we're able to come by and degenerative capabilities of large language models with our predictable consistent and compliant check platform where.
We are now able to deploy fully compliant generativity I kept waiting to that scale and in a very short period of time, we are still running and led mode, but I'm happy to report that our new generative CX technology already handles hundreds of customer E. Mails and is capable of performing complex tasks with zero intervention from our team.
Our new system cancels policies handles nonrenewals ads interested parties and secondary insurance and more with new functionality coming online almost everyday and Paulo. We're also in advanced stages of development of features that utilize the vision capabilities of generative AI.
Allowing it to review documents such as Vet records look at damage photos and more.
Mixed with our existing models, we're seeing extremely positive results as I mentioned before I believe the general <unk> when combined with Lemonade Tech will help reduce our operating costs from building and maintaining software to how we service our customers and I promise to share more about it soon.
And with that let me end the call over to the operator, so we can take some of the questions from our friends on the street.
Thank you as a reminder, if you'd like to ask a question you can press start flight by one on your telephone keypad.
To remove your question you may <unk>, so I'd like to.
These and show your Unmated lately when asking you a question.
Alpha ask questions, let's say comes from it yet, but I only came out from Jeffries. Your line is now open. Please go ahead.
Thank you good morning.
My first question or a couple of questions are are on the reinsurance program.
Last corridor and the new reinsurance structure and also maybe you can touch on the fact that you are now retaining.
The hurricane risk through the affiliate that I need to be in Bermuda, how should we think about let's say losses cat losses, the ordered network losses.
Losses, this quarter and <unk> when you have Ian.
They were applied with the with any reinsurance program.
Gone up down it's been the same.
Sure So just.
Thanks, John This is Tim a couple of comments on the new reinsurance structure. So in terms of a lost card or no there is not.
A traditional.
Traditionally defined last quarter. There is a sliding scale commission. So it's somewhat more nuanced and our prior structure, which was a fixed static commission rate with some potential upside.
So it's somewhat different but overall I would sort of point out the quota share seating proportion has the same the players are the same so substantially unchanged.
With the exception that you noted we are retaining more of the cat risk. So hurricane for example, named Hurricanes fully excluded if you roll back historically, our losses have been.
Zero, but quite low four named Hurricanes and that's more a result of how we underwrite and wherever presence. So no real homeowners presence in Florida, and then fairly conservative underwriting and other areas, where we are active.
Homeowners.
In terms of other storms, obviously in the last two years, we've had fairly significant and quite unique storms that were not named hurricanes and so our our existing or previous reinsurance did exactly as designed which was protect us against the most unpredictable events in those.
Those kind of performance.
Could happen mitigated significant amount of those losses, that's why we're able to hit achieve.
Chief in EBITDA results for example in this quarter, despite a fairly elevated the gross loss ratio.
We're not designing for the things that have happened in the past really thinking more broadly and so we are taking on more risk we will use our new captain structures that we've put in place those are recent ads.
That enables us to continue to be sort of capital light in our approach, but we will take a bit more volatility risks and we would have had previously but given the hurricane history and that exclusion were quite comfortable with that.
Got it thank you.
And then my second question with synthetic agent given that it now lowers your.
Casper would potentially do so do you.
See yourself updating your growth targets your term and longer term, maybe taking them up.
<unk>.
Yes, I think we will we now have the flexibility starting from our financing point of view from a capital structure point of view to do a lot more degrees of freedom.
Significant you expanded when we gave our loft.
In depth analysis back in November during I invested a we spoke about 20% to 25% growth rate on a multiyear kind of take a basis as being optimal grow much slower and we don't get to scale grow much faster in the capital.
That's required along the way would be to excessive so there was a path to profitability with the money in the bag that path remains available to us, but now actually we've got quite a wide corridor on one end of that to the rise without we cannot expand.
Significantly without meaningfully impacting our cash reserves. So at least from a financial point of view from from capital requirements point of view there on your degrees of freedom as we mentioned earlier, we will be constrained by other things, we still or do you want to go grow profitably.
Getting rates approved and being able to grow in places, where we see that kind of <unk>, but we want is a precondition to accelerating growth rates, but add those rights come online as our products continue the downward March in terms of the underlying loss ratio, we do hope to be able to pick up our growth rate the one asterix.
I will underline as guidance.
Guidance for this year remains as we while we upgraded it a bit but it remains largely.
Spoken about in the past because we don't anticipate all those conditions.
Coming through in the next two quarters. So we do think that the next two quarters will still be quarters, where we slowed down my growth and focus on implementing those rates are running into them and we are hopeful that at some point in 2024.
If things go to plan, an early MBA and if it may take a little bit longer they'll take a little bit longer but the June 2024, we will be able to uhm reaccelerate growth.
Thank you.
You wanted to run if I'm if I might.
Sorry, you're wrong, if I might I I was just checking my notes here I skipped over one of your your questions, which I think is worth clarify which was around the reinsurance. If you look at Q2, which was notable for its combination of of cats are very large quantity of relatively small.
Events that aggregated to a significant number.
For that kind of event, we would expect to continue to be covered under the new.
Structure, so not exactly the same but substantially unchanged given what we saw in Q2.
But the <unk> sliding permission striker wouldn't have come back to the net result.
It would have in isolation, but again, a sort of a macro view over the course of the year would not have a fever.
Got it and.
And then a quick numbers question on P Y D or prior period Department did you have any in the quarter.
Yes, but fairly modest.
The vast majority of the impact was.
In period.
Okay.
Do you have the number by any chance.
Let me double check that I'll add that in a moment.
Okay.
Thank you <unk> will can go onto the go onto the next question. Thanks.
Thank you.
Next question comes from a <unk> Bank of America got honest now open. Please go ahead.
Yeah. Good morning, following up with you about the conversation with you run on growth you know you spoke in the past by conserving calf until the capital markets are more willing to embrace lemonade and business plan.
Materially exceeded the growth guidance and you're twenty-three and this was before the capital like Derek agents program was put in place.
The lemonade grow more quickly than desired and how much control do you have <unk> and the growth in the back half of the year.
Before the rate that you're really desiring pushes through.
Yeah. This has been a sort of a continuing theme for a couple of quarters now when we're.
When were by choice choosing lower growth rates lower spend rates conserve capital.
And what you see when you're in a large and established gross channels is that when you dialed expand your by by definition, reducing your less efficient or less productive spend and what what are you left with is the more efficient and so sometimes it's difficult to predict.
How much more efficient you'll become and so somebody upside you've seen versus our own guidance, particularly in Q1 and Q2 has really been as a result of that so Q1 or sorry Q2. For example, if we just come back to you to the to the prior year you saw something like 75 per cent increase in the efficiency dollar for dollar versus.
A year ago now you can't take credit for all of that we're spending fewer dollars. If we were to spend the exact same number of dollars a year ago I would expect that efficiency difference would not be so significant would likely be favorable.
Consistently get better overtime in increments, but it would probably not be so dramatic as you saw so going forward into the rest of the year, we have a guidance it lays out sort of a mid.
Mid teens growth rate for the year in terms of I S. P.
Because we're updating guidance quarter by quarter.
Do try and capture some of that over Overperformance or are under performance, which we haven't had but but the variance and what our guidance. So I wouldn't expect we don't expect to sort of see that.
Dramatica and Overperformance versus our guidance, but you could see some portion of that repeat.
Coming back to your own question real real quickly on the prior period development, just over 1% or so.
1.3, or so percent was prior period development and the remainder was otherwise.
<unk>, <unk>, <unk>, <unk>, 1.3% favorable or unfavorable.
Unfavorable.
Okay, and then coming back to the growth question I mean subtract the four Q guidance from the three Q Garden the garden.
Basically implied almost no growth.
In.
Four Q you have <unk>.
30 per cent rate coming through and homeowners and 23 per cent in California. If I later that I mean, it does suggest that there's almost no policy account real fit your anticipation is that you can you can shut it down I guess.
Is that I'm reading the numbers correctly, where I think that works.
Hi, Josh Uhm Daniel.
Yes, yes.
What <unk>.
<unk> six months will be largely skewed on Q3. It is the moving scene, where every dollar goes further so we are taking a dollars spent and we're gonna.
Skewed them towards Q3 in general we spoke about this in prior years to pull gets busy for a couple of reasons. One of them is as I say, the moving season tapers off but also.
Just the shopping season with the holiday season means that adwords become more costly. So we will definitely skewed towards a Q3 spend do we expect policy count growth in queue for we do but I think the broad strokes of your analysis hold.
Thank you very much.
Thank you Uhm next question comes from a bubble clang of Morgan Stanley .
It's now open. Please go ahead.
Hi, good morning.
One quick question regarding your.
Your commentary of around a I right at me.
Maybe not generative AI AI broadly I think in the past you talk about machine learning, which is a much lower form of AI. So to speak if at all what gets you to about a stop 75 per cent loss Rachel.
Just as we see the continued development of AI and then continue.
More efficient data analytics, especially on a cloud which is much more scalable kill maybe help us think about.
What would be the path to achieve that sub 75 per cent.
Loss ratio for Ya, just given the technological implementation going forward and how do you plan. The next two years in the five years in terms of data infrastructure as well as their your AI.
Hey, Bob.
Sure.
I think <unk>.
Pretty much where we need them to be.
Analysis shed what L. T V. Two six did back in November .
Graduated to LTV eight it's west of delineating size comments, where abouts generative AI, which is.
We spoke about it and I invested day, but it suddenly exploded over the course of the last few months, obviously learning AIG are mature and they're much more focused in on risk assessment. So every customer that comes with a lemonade. We have about 50 different machine models, making predictions about like you have to claim severity of a claim <unk>.
<unk>, <unk> et cetera, et cetera, So we have a pretty robust infrastructure now, making fairly specific and detailed predictions.
And as we ordered them, we're finding them to be uhm holding true. So we have confidence in relying on these models is growing with every timing of the cycle.
Big hurdle today for us in terms of loss ratio does not lie in the domain of machine learning, it's about getting regulatory approval of months. There has not been received implementing them.
Particularly and I and inflation.
Heavy environment.
Let's start with before you even get to regulatory.
Huddled. The fact that you price of policy today, and you don't get to amend it for another year other than and call you got one opportunities humid here means that if inflation has been significant 10%.
A year ago, we had let alone for 15 or 20% that you saw in the fields of car and home repairs.
It means that you probably today and then you might you feel the claim six months from now which may be 10% higher than the price. When you set it and you don't get another bite at that Apple until renewal a year later.
And that is if regulators approved every bit of you'll finding.
More likely since regulatory processes take more time, and sometimes have limitations on how much right don't approve and at what frequency.
It may take longer than a year and then once it's approved you don't have any.
Period, because everybody who was price at the old the policy you have to wait until the renewals come up and it will take you out pretty much a full year for those new right to take effect, which is why if inflation remains high during a constant.
Race adapt rates you don't have a knowledge gap machine tell us exactly what rates we needs to have for each risk. What we have is a time lag between when that knowledge comes in when it actually hits on books.
Dissipate in two ways, one as inflation comes down I did indeed today as it has come down significantly and were feeling that and the second one is we pick up our Rachel filing and.
And approvals and we're seeing that as well it will remain so long as inflation remains elevated it will remain a cat and mouse game I don't want to pretend that that goes away and it would seem is across the industry.
In the event as we're seeing these two trend lines.
Common one on top of the auto which is decreasing inflation and increasing rate. The two combined to give us optimism that were broken the back of this thing on a path toward getting to where we need to go.
Okay, that's very helpful, but sorry, if I can just like stay on that topic of my follow up.
Then in that case is it kind of fair.
Fair to imply from what you've said so far that essentially the technological development so far.
It's somewhat of a secondary to essentially the the regulatory in the macro environment, whereas.
The underwriting efficiency from you know the tech driven underwriting really is more of a secondary and then that that the macro environment such as you know.
Catastrophe losses, or the current regulatory environment would essentially nullified a lot of the tech advantage of you are having <unk> that the wrong way to think about how should I think about it.
Alright, It's a fact question Ah did draw your attention to a couple of things one is having a look at all the loss ratios byproduct.
The high Cat impact of this past quarter past mosques some of the dramatic improvements that we shed in our last time just draw your attention look what happened to homeowners X catch dropping from like 100 times of the sixties over the course of the last few months when you're neutralized cat as Tim said, we have to pay for cats.
<unk> <unk>.
Sidestep, our responsibility for paying for cats, but it does demonstrate.
Fundamental improvement and indeed, if you look at some of the best players in the industry and the loss ratios of some of the best known names I won't maiden name's, but everybody in this cold knows who they are and you look at what that.
That loss ratio as well for this last quarter, you'll see that we came in significantly better than some of the best known names in the industry, suggesting a competitive advantage. So no doubt while we are in a high inflation environment, you will see the whole industry as well as us suffered the brunt of that that is true, but we can also see when you look.
Kind of beneath the headline is that there was a competitive advantage emerging and as inflation received I think the competitive advantage remains it is already in evidence if you know where to look and as time's normalize it would become more and more pronounced in in the long term that is how this industry is one by being.
Superior selecting risks in pricing them and I think that the technology and infrastructure that we're building affords us that advantage agreed that when this storm howling outside it's hard to see that but as the storm passes us by I think it will become increasingly obvious.
Thank you that's very helpful.
Thank you next question comes from Jason helps thing of Oppenheimer.
<unk>. Please go ahead.
Thank you I I want to go back when.
You originally kind of came up with the the long term plan.
Whether it's you know when you guys can't public et cetera, I mean, like I think regardless of your views about climate change it does seem that.
Dorms or just.
Yeah, it's more frequent right, whether depending on how you categorize the weather et cetera, et cetera, you feel that as a result of that like <unk> or like we're starting again, you say, we need to have a bigger business.
To kind of absorb the rest cause it's all about spreading it out and then just how that again that may have been some of the catalyst for some of the recent announcement just how you think about that now.
If you reflect back five or seven years. Thank you.
I'll take a better better than Tim come come in with anything that I've omitted Jason.
Jason that's a great question I think that.
Rather than suggesting a different course of action Reconfirms us in Ah Multiproduct multi geography strategy.
So.
Yes, we saw some pretty severe outcomes. This quarter Uhm of course, we're not just a homeowners business that's.
Sizable <unk> a sizeable minority on my businesses.
Fraction of my business about a quarter of our business.
And the rest of our business is performing very very well and we had again product loss ratios you see what's happening in our pet business, which is now all of them.
Just as large as a homeowners business you see what's happening in our renters business, which is larger than a homeowners business. So I'm multiproduct multi geography is already mitigating the worst of those risks indeed.
The fact that we are able to Ah report that I'd be glad that we reported a beat on the bottom line I'm Gonna beat on the top line notwithstanding a 94% growth loss ratio I think speaks volumes to the structures that we put in place including reinsurance.
It's it's.
I don't want to <unk>, but if we didn't tell you our loss ratio. Just so you are financial was up here now.
You wouldn't know that this was a particularly severe loss quarter. So there are structures in place.
That allow us to buffer ourselves from the last <unk>.
Storms and to be able to deliver a strong editor.
Hotline, notwithstanding so coming full circle I I agree with your underlying premise, which is that major catastrophes are becoming more frequent studies that has been our experience.
Ultimately insurance get a handle on that.
Pricing once you understand risks you can price for them. There is a time lag in doing that we discuss the regulatory another time legs that will allow it cos correct in the meantime, I will tell you part of our slowing down and we laid this out and you're coming from and the latter is to focus on the areas or the last half exposed.
So Tim already mentioned that we all have been for these many years, it's very cautious about wildfire exposure and hurricane exposure, we understood those risks and we're pretty conservative we have been able to write around those as these other risks become more pulverable to us we all fight stepping them as well we have written stuff prior that we are now paying.
Four but if you were to look at ourselves. These many quarters, you'll see that new sales and exposed areas are really the minimum. So we are taking a course corrective actions. We all filing for the price is right that we need we are diversifying up further geographically byproduct and I think all of that translates into a help their business is <unk> <unk>.
But.
Let me think I admitted that.
I would just add one one thought which is again.
Again, if you're sort of looking broad brush at the several years since going public probably one of the.
The largest surprises in this period of more.
What feels like in the short term more frequent intensity of of more volatile storms, we've whether that test.
Nicely.
We've seen elevated results, but they have not been too far out of line for much larger and much larger incumbents.
I think if we'd seen it would have been more reasonable I think in this period with newer products and a much smaller.
William to actually see more of a loss ratio challenged and we've seen so I think that's good news and then on the expense ratio side I think if you just look at the the.
Consistent improvement in consistently declining losses relative to our premium line really solid improvement there too. So I think that's been a.
We didn't set out for the last three years to be a test of this rigor, but I think we've whether that test very well.
And just like a technology question so.
Now that.
Models and machine learning is becoming more accessible to other companies.
Without some of the hard work that.
Like yourself did as early kind of pioneer.
Pioneers do you think that is a competitive threat because.
I'll just definitely were not available and are gonna become more available yeah. Your competitors choose to use them for the next kind of upstart competitor et cetera. Thanks.
We're not too troubled by.
We're not too troubled by large competitors access to technology, it's been something that's been true forever.
Certainly there are things about large language models in the transition to the past year or so.
That are new for all of us, but having built our platform from day one in anticipation of just such data advantages only I think amplifies the advantages that we believe we haven't place.
Yeah I just.
Jason.
Wow [laughter].
[laughter], Okay I thought it as often as I was just gonna say, if you look back at Uhm somebody I I come into the amount of time, but went back to Hathaway Helga <unk> a few months ago edgy, joining the vice chair of Gotcha Hathaway spoke about guy come in he said that.
We have some 500 system and then he corrected himself and he said it's actually over 600 systems that don't talk to each other.
Those kinds of legacy.
Challenges.
I don't Wanna say, insurmountable, but respecting make it very very difficult.
Kind of challenges that shy referenced in his comments, which is these are novel and powerful technologies by applying them seamlessly integrated into the operations of the company.
Highly nontrivial message, so just reinforcing what Timmy size I think that a headline it sounds like all everybody would be able to deploy these technologies, having now and it's <unk> a thousand and put a lot of effort into these.
Models and trained our own models, we rest easy that Tim's comment for exactly right. This is not a major threat to us.
Thank you.
Thank you Uhm next question comes from like seven ski from BMO. Your line is now open. Please go ahead.
Okay, great. The morning, Thanks for taking my question.
First question is just the numbers question on the Apple Catholic with office on a gross basis.
Calculating it was around 21 point is that similar on that basis.
Yes. It is.
Okay.
Okay and my follow up.
Tim mentioned that.
That.
The end of prepared remarks that metro miles turn right slightly higher than the rest of the portfolio I was looking at the Metro miles.
Annual customer retention rate et.
Et cetera around 660 per cent annually back when it disclosed within 22 is is that kind of metro miles annual retention rate kind of are still around that level.
Yeah. So we don't disclose that specifically <unk> a couple of things I'd change obviously since we took over the book are are how we deal with customers renewals and marketing of horses.
More in the realm of eliminate approach then metro mile approach.
The the retention rate is somewhat better under the period of time when they've been part of eliminates previously.
And what's been interesting is the actual premium run rate has continued.
Even though I'm a customer base has declined we've not been proactively increasing that customer base.
And therefore, the churn has outpaced the growth and therefore, the customer count has declined the premium level has been fairly steady it has declined but at a much more modest rate than we are.
Originally assumed when we acquired the business.
That's helpful. Thank you.
19, our next question comes from Matt Smith of <unk> Financial Your line. This time open and please go ahead.
Yeah, Hi, I wanted to stick on the Metro My all seem a little bit one of the.
Notes you made him the letter was that the.
Auto.
Loss ratio you haven't really made a lot of progress on and it would just strike me that you you probably have more kind of textured and personalized data for those customers. So I'm wondering what what's the plan that.
Trying to get that loss ratio and like going forward.
Hey man, it's good to talk to you. Thanks for the question.
Yes, we have.
Good amount of clarity.
The bulk overwhelming majority of a coppersmith pay per mile Metro my own business.
And the overwhelming majority of that premiums are in California.
We've got a book that is very geographically concentrated and there's a <unk> awaiting right approvals that which I hope will be coming in the not too distant future that would be a big unlock for that loss ratio, but.
Such a concentration we're very dependent on a single approval cycle in order to get the rights back in line with the risks.
So are you seeing it.
It struck me that you're not trying to grow that piece of the business until you get the the loss ratios.
Kind of in line, they're just trying to prove that out in the California market first and then kind of expand and tried to have more bumbling and other geography.
We do have it in a number of states. So we are selling car in close to a dozen states, but in terms of just fixing the existing loss ratio, which is where the bulk of the results come from your referring earlier to the comment.
From a lesser that said that car hasn't improved dramatically I'll just explain why I Starkel book hasn't improved dramatically in terms of new sales, we are making those absolutely in the areas, where we feel our rates are adequate <unk> happens to account for a small part of the book.
Okay.
And then if I could just switching over to the synthetic agent.
You mentioned the again the L. T V. The CAC ratio over three in your opening comments Daniel.
You know I'm just curious given.
What's your modeling versus what your realized results event is that what confidence do you have in that ratio kind of holding over time, given the increasing cat event that we've seen recently.
It's been surprisingly, perhaps constant so we've been through as a company or the meat industry.
As an economy, some tumultuous years, but we've seen that overall being fairly stable fairly constant slightly improving over time.
So.
I I I I I hesitate to say too much about the future, but the optimism Mister Jonathan. This is an area that we can continue to improve upon as a retention rates continue to improve as a cross and rates continue to improve as a new rates come online I think there is room for.
Optimism on that regard <unk> I'll I'll put it in my side I see uhm headwinds that we're aware of.
Okay, alright, thanks, so much.
Sure. Thank you.
Thank you next question comes from that you're right now from Jeffries.
It's now open. Please go ahead.
Thanks for taking a follow up.
On because.
I appreciate you, providing the discrown loss ratios by lying.
But for homeowners you offered a X cats, the total number with cats cause of Wall Street here.
Yeah, we we chose that carefully we haven't we haven't disclosed the the home right. It somewhat more elevated and you can probably back into it by the sheriff business, but we have not disclosed every line item you just wanted to show her we're making good <unk>.
<unk>.
And so will will hopefully share more overtime.
And you are around I'm glad you came back in so I can correct my earlier.
Misstatements.
To you and to Josh on the on the prior period development. So.
I said it was.
I'm, sorry, what was actually favorable by one percentage point. So I just wanted to correct that for the record and for the transcript.
Got it thank you.
<unk> if.
If I may ask.
Hey, you round your unfortunate your audio it broke up a little bit for US can you just repeat that please.
Oh.
Yeah, maybe.
Maybe tell us where the <unk> came from.
Nothing notable it was it was only only one point so I wouldn't highlight any specific category it was fairly immaterial.
Got it okay.
Then he going back to the synthetic agent so I want to make sure.
About the accounting correctly does do the court assistant without the agency.
Above the line in Tokyo marketing or do they go below the line into essentially a coupon or debit payment.
So just to try to think about the mechanics, a little bit expense.
The expense that we spend to actually acquire customers will be unchanged and that will continue to flow through the sales and marketing expense line as as in the past is current and that that will not change the incremental expense, which is the return earned by general catalyst the provider.
The the 16% IRR will show up as an interest expense so that'll be excluded from EBITDA, but in the interest expense lines on the piano.
Okay. Thank you.
Thank you next question comes from told me about joined of Stifel. Your lines now open. Please go ahead.
Hey, guys. Thanks for taking my question I wanted to go back a little bit to the new captives that you guys are introducing <unk> I guess, just you see them as strictly a form of capital efficiency or is there an opportunity for true risks transfer whether.
Third party capital behind it.
I think we have optionality with the.
Cameron captive.
That's.
That's really a wholly integrated and we will basically.
<unk> all that risk on consolidated basis, So that's really a capital driven structure.
With the Bermuda transformer, there are opportunities and structures that exist there that are not available to us otherwise.
We're over time, there could be interaction with third parties, that's not something that we.
Instituted yet, but there are opportunities there where there could be third party involvement and so stay tuned as we roll those out over the coming quarters and will provide more clarity when that when that becomes more operational.
Okay got it and then other question just on the synthetic agent understanding that the the cadence of deploying customer acquisition spend might be lumpy and essentially pushed out a couple of quarters is it fair to assume that the full maximum of $150 million.
Financing liability would be on the balance sheet by the end of next year just.
Given your trajectory of marketing spend.
So I think it's certainly possible, but I won't because we're not giving guidance to be on the current year I won't say that that is our expectation, but it's certainly within the realm of reason and again coming back to our earlier comments.
The <unk>.
Driver of our decision there is primarily rates coming online last reached improvement the underlying or L. T D to CAC of each of the product lines and so if we see that improvement continue or or perhaps accelerate and obviously we can.
Move the growth of higher than that would make it more likely that we have.
Have that full amount by year end.
So, it's certainly possible, but but not certain.
Okay got it and and then my last question. This is obviously or your first kind of form of of leverage that you're putting on a balance sheet do you expect the rating agencies to treat this financing any differently than I guess, what would be traditional that on the balance sheet.
Well I can't speak for rating agencies as a regulator, but yeah I I would expect it would take into account the.
Two terms or structure.
Actually no recourse other than the cash flows that result from the acquired cohorts.
Which is significantly different as distinct from traditional that that said it is a unique structure, we're not one.
One of a a fairly rella.
Relatively small number of companies that are employing something like this that has these unique aspects, we're hopeful though that that.
Those distinctions will be recognized.
Got it makes sense.
Thank you. We currently have no further questions for today. So that concludes today's conference <unk>. Thank you all for joining you may now disconnect your lines.
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