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Lemonade(LMND) - 2024 Q2 - Earnings Call Transcript
LMNDLemonade(LMND)2024-07-31 17:05
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Financial Data and Key Metrics - Revenue increased by 17% YoY to 122millioninQ22024,drivenbya22122 million in Q2 2024, driven by a 22% increase in gross earned premium, higher ceding commission rates, and a 45% increase in investment income [11] - Gross loss ratio improved to 79% in Q2 2024, down from 94% in Q2 2023, with CAT losses contributing 17 percentage points to the gross loss ratio [11] - Adjusted EBITDA loss improved by 18% YoY to 43 million in Q2 2024 [15] - In-force premium (IFP) grew 22% YoY to 839million,whilecustomercountincreasedby14839 million, while customer count increased by 14% to 2.2 million [10] - Premium per customer increased by 8% YoY to 387, driven primarily by rate increases [10] Business Line Performance - Gross loss ratio improved across all product lines, with YoY improvements ranging from 5% to 30% [12] - Homeowners insurance, particularly CAT-exposed policies, remains the most challenging segment, with the company planning to non-renew 20−25millionofIFPinthesecondhalfof2024toreduceCATvolatility[16][17]−Thecompany′spetinsuranceproductshowedfavorabledevelopment,contributingtothe520-25 million of IFP in the second half of 2024 to reduce CAT volatility [16][17] - The company's pet insurance product showed favorable development, contributing to the 5% favorable non-CAT prior period development [59] Market Performance - The company expanded its homeowners insurance into the UK and France, contributing to geographic diversification and reduced CAT exposure [5] - In Illinois, where all five insurance products are available, multiline customer rates are roughly double the rest of the book, with superior retention rates and high customer satisfaction [19] Strategic Direction and Industry Competition - The company is focused on reducing CAT volatility by growing products with lower CAT exposure, such as pet and renters insurance, and diversifying geographically [5] - The next-generation technology platform, codenamed L2, is expected to bring significant efficiency gains and accelerate product operations, positioning the company to adapt quickly to market changes [9] - The company aims to achieve best-in-class expense ratios, with a long-term target in the teens, driven by technology-first operational efficiencies [51][52] Management Commentary on Operating Environment and Future Outlook - Management highlighted the company's progress in reducing CAT volatility and improving loss ratios, with a trailing 12-month gross loss ratio of 79% [6] - The company expects to maintain positive cash flow consistently, except for Q4 2024, due to timing issues [6] - Management is optimistic about the auto insurance segment, citing strong customer satisfaction and the potential for cross-selling to existing renters and homeowners customers [30][31] Other Important Information - The company contributed over 2 million to 43 nonprofits globally as part of its giveback program, bringing total contributions since inception to over 10 million [7] - The company plans to hold an Investor Day on November 19, 2024, in New York City, where it will provide updates on strategic expansion plans and growth trajectory [4] Q&A Session Summary Question: Details on non-renewals of CAT-exposed home business - The non-renewals are focused on older policies written 2-4 years ago, primarily in states with higher-than-target loss ratios, and are expected to generate 50-60 million in net positive value despite a short-term impact on IFP growth [22][23] Question: Capital surplus and investment income trends - The company maintains a target premium-to-surplus ratio of 1:6 and expects cash and investment balances to remain above 900million,withstrongreturnsoncashinvestments[25][26]Question:Autoinsuranceexpansionandmarginexpectations−Thecompanyplanstoexpandautoinsurancetoadditionalstatesin2025,focusingonprofitabilityandregulatoryapproval,withexpectationsofmutedmarginpressureduetocross−sellingopportunitieswithexistingcustomers[29][30]Question:Impactofnon−renewalsonlossratioandCATlosses−Thenon−renewalsareexpectedtoimprovethelossratioandreduceCATvolatility,particularlyinthehomeownerssegment,whichisthemostCAT−exposedpartofthebusiness[43]Question:Cedingcommissiontrends−Thecedingcommissionratewas18900 million, with strong returns on cash investments [25][26] Question: Auto insurance expansion and margin expectations - The company plans to expand auto insurance to additional states in 2025, focusing on profitability and regulatory approval, with expectations of muted margin pressure due to cross-selling opportunities with existing customers [29][30] Question: Impact of non-renewals on loss ratio and CAT losses - The non-renewals are expected to improve the loss ratio and reduce CAT volatility, particularly in the homeowners segment, which is the most CAT-exposed part of the business [43] Question: Ceding commission trends - The ceding commission rate was 18% in Q2 2024, slightly lower than the prior year's 20%, due to a shift from a fixed to a variable structure, with expectations of some volatility quarter-to-quarter [44] Question: Premium per customer growth and rate increases - The company is approximately halfway through its rate increases, with 100 million remaining to be earned in, and expects to continue earning at a similar pace into next year [48] Question: Long-term expense ratio target - The company aims for an expense ratio in the teens at scale, driven by technology efficiencies and operational excellence, with the potential to pass some savings on to customers [51][52] Question: LTV to CAC and growth strategy - The company maintains an LTV to CAC ratio of approximately 3:1, with expectations of continued profitable growth and a focus on acquiring marginally profitable customers [60][63]