Lemonade Inc.(LMND) Q4 2020 Earnings Call Transcript LMND Earnings Call – Preliminary Transcript
Lemonade Inc.( NYSE: LMND ) Q4 2020 earnings call dated Mar.02, 2021 Presentation:
Operator
Good morning, and welcome to the Lemonade Incorporated Fourth Quarter 2020 Earnings Conference Call.[Operator Instructions]
I would now like to turn the conference over to Yael Wissner-Levy, Vice President of Communications.Please go ahead.
Yael Wissner-Levy — Vice President Communications
Good morning, and welcome to Lemonade’s fourth quarter 2020 earnings call.
Mining is Yael Wissner-Levy and I am the Vice President of Communications at Lemonade.Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President, COO and Co-Founder; and Tim Bixby, our Chief Financial Officer.A letter to shareholders covering the company’s fourth quarter 2020 financial results is available on our Investor Relations website, investor.lemonade.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 final perspective filed with the SEC on January the 14th, 2021, pursuant to Rule 424(b)(4) and our other filings with the SEC.
Any forward-looking statements made on this call represent our views only as of today and we undertake no obligation to update them.
We will be referring to certain non-GAAP financial measures on today’s call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance.Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders.Our letter to shareholders also includes information about our key operating metrics, including a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business.
With that, I’ll turn the call over to Daniel, who will begin with a few opening remarks.Daniel?
Daniel Schreiber — Co-Founder and Chief Executive Officer
Good morning.
Our fourth quarter saw continued progress along our key performance indicators, evidencing both quantitative and qualitative advances.As compared to Q4 2019, we saw our in force premium grew by 87%, our adjusted gross profit by 86% and our losses per dollar of gross earned premium roughly halved.Tim will elaborate on all our numbers shortly.But as stronger these metrics may be, the qualitative changes run deeper than the numbers suggest.
The main thing I’d like to highlight is that we have fully transitioned from monoline business as we were at our IPO a short few months ago to offering three highly differentiated products that span property insurance for homes to health insurance for pets to life insurance for humans.During this transition we’ve learned several things of note.The first is that our brand and technology are highly extensible.If there was any question about whether these could extend to higher value and higher complexity products, there really no longer is, they do.
The second is that our customers wants to buy multiple products from Lemonade.About half of our pet policies and half of our life policies have been bought by existing Lemonade customers with far reaching implications to lifetime value and dollar retention.The third is that new products create new on-ramps to Lemonade.
In the fourth quarter, more than 40% of our sales, our new product sales were not renters policies, demonstrating that our high value products were not only destinations for upsells, but destinations in their own right.They are entry points to Lemonade.And this expands our total available market, while lowering our customer acquisition costs.
In general, our customer journey has progressed from a relatively linear roadmap where customers join young renters and graduate to become homeowners to a far more multi-dimensional map with an array of on-ramps and intersections.This is great news for both customer acquisition costs and lifetime value of our customers.
It’s a level of symbiosis that we theorized about, that we aspired to and it’s heartening to see it play out even better in practice than the theory had projected.All these learnings have emboldened us to continue down this road, indeed, to double down on it.And we plan to keep launching products until we have catered to the totality of our customers’ needs.
I said we plan to, but in truth, we’re beyond just planning.We haven’t shared this before.But we actually have more people working on our next major yet to be announced product today than we have working on our homeowners or our renters or our pet or our life products.I look forward to the day in the not too distant future when I’ll be able to share the reason for my excitement with a little less cloak and dagger.
In the meantime, a few more points worth highlighting.One is that our 2020 annual loss ratio was 71% as compared to 79% in the prior year.
We’ve now seen an incredibly healthy loss ratio for the year as well as healthy loss ratios across all four quarters and all four seasons, affording confidence that even as we grow fast, we are growing profitably.Of course, we will see occasional spikes in our loss ratio, though our reinsurance will mute the impact of these on the bottom line.
And in this context, I want to say a few words about the Texas freeze in Q1.When Q3, so unprecedented wildfires and hurricanes, we took pride in the fact that our cautious underwriting meant that the impact of these catastrophes on our book of business was disproportionately light.Now hurricanes and wildfires do follow a probability distribution and that allowed us to manage our exposure to that.The Texas freeze that happened this month was different.It was a black swan event.Few models predicted this unique weather pattern and none predicted the massive loss of power that the freeze engendered nor the massive loss of drinking water that the loss of power triggered.
These compounding catastrophes came without warning and impacted the entire state.The state where a quarter of our customers lives.
For these reasons, it quickly became the largest catastrophe we as a company have ever contended with, and it tested both our people and our financial model in important ways.I’m happy to tell you that both held up exceedingly well.We will provide a lot more color and detail when we’ll report our Q1 results.But I’ll share that we saw many thousands of claims in a space of just a few days and that our team works night and day and successfully remained incredibly responsive and helpful despite the extraordinary surge.Being there for our customers in such trying circumstances is exactly the promise of Lemonade, and I’m proud that we were able to live up to this promise.
As for our financial model, it too weathered the storm very well.
While our gross loss ratio will spike in Q1, our reinsurance structures are playing the designated role.
And as our guidance for Q1 indicates, we do not expect the Texas Freeze to have a material adverse impact on our financials in 2021.
And with that, let me hand over to Shai for some product updates.Shai, over to you.
Shai Wininger — Co-Founder, Chief Operating Officer and Chief Technology Officer
Thank you, Daniel.Last time we spoke, I mentioned that unlike previous products, Lemonade Life we’ll be launching gradually before actively marketing it to new customers.I’m happy to report that so far the stage launch is looking good.Although numbers are modest, this is by design.Sales are in line with our expectations, while conversion rates are ahead.We are dedicating the first half of the year to learn, improve and optimize Lemonade Life.
And as anxious as we are to accelerate its growth, we remain true to our customer-centric principles and will only start scaling it once we’re satisfied it provides a magical experience that’s fast, transparent and easy to understand.
Another trance, we’re happy with the rate in which our non-renters products are growing with homeowners and pet representing more than 40% of our new business in the last quarter.This is in addition to the very strong cross sales of these products to existing Lemonade customers.Cross sales are an important part of our strategy because they fundamentally change the unit economics for the better.For example, the renters who also buys pet coverage generates a 4 times increase in premium and dramatically improve the LTV to CAC ratio as the second purchase comes at nearly zero cost.
New products also help us grow our geographical footprint.
And I’m happy to report that Lemonade is now available with at least one product in all 50 U.S.states.And as Daniel mentioned, we are working intensely on our next product.
We’re not yet ready to name it, but I do want to share everyone’s excitement about this major project, which will be the most significant launch we’ve ever done.
And with that, let me hand over to Tim for a bit more detail around our financial results and outlook.
Tim?
Tim Bixby — Chief Financial Officer
Great.Thanks, Shai.I’ll give a bit more color on our Q4 results as well as expectations for the first quarter and the full year 2021 and then we’ll take your questions.We 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 87% in Q4 as compared to Q4 in the prior year to $213 million.We believe that this metric captures the full scope of our top-line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter.
Premium per customer increased 20% versus the prior year to $213.
This increase was driven by a combination of increased value of policies over time as well as mix shift towards higher value homeowner and now pet policies.Again, roughly two-thirds of the growth in premium per customer in Q4 was driven by product mix shift, including process and the remaining one-third from increased coverage levels and pricing.
Gross earned premium in Q4 increased 92% as compared to the prior year to $50 million, in line with the increase in in force premium.
Our gross loss ratio was 73% for Q4, in line with 73% in the fourth quarter of 2019, while our full year 2020 gross loss ratio was 71% versus 79% for the full year 2019.We continued to expect our gross loss ratio will vary over time within a target range for annual loss ratios of below 75% with occasional short-term results slightly outside this range.
Operating expenses, excluding loss and loss adjustment expense, increased just 10% in Q4 as compared to the prior year with sales and marketing expense again lower slightly as compared to the prior year due to continued improvement in our marketing efficiency.We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches, and thus saw increases in each of the other expense lines.
Our global headcount roughly doubled versus the prior year to 567 with a greater growth rate in customer-facing departments and our product development teams.We continued to operate primarily under a work from home structure.
It’s worth noting that our Tel Aviv office has made good progress getting many of our team members back to the office.And we anticipate that most of our team members will return to our other offices before year end.
Net loss was $33.9 million in Q4 as compared to the $32.7 million we reported in the fourth quarter of 2019 with a notably larger customer and in force premium base, while adjusted EBITDA loss was $29.7 million in Q4 as compared to $31.4 million in the fourth quarter of 2019.
Our cash, cash equivalents and total investments balance ended the quarter at $578 million, reflecting primarily the net proceeds from our July public offering of approximately $335 million, partially offset by the use of cash from operations of $91.7 million since year end 2019.As a reminder, we closed a successful secondary offering in January, generating additional total net proceeds of approximately $640 million, and this is of course a Q1 ’21 event not yet reflected in the financials.
With these goals and metrics in mind, I will now outline our specific financial expectations for the first quarter and for the full year 2021.
For the first quarter, we expect in force premium at March 31 of between $241 million and $246 million.Gross earned premium between $53.5 million and $54.5 million.Revenue between $21.5 million and $22.5 million.And an adjusted EBITDA loss of between $43 million and $40 million.We expect stock-based compensation expense of approximately $5 million and capital expenditures of approximately $2 million in the quarter.
And for the full year 2021, we expect in force premium at December 31 of between $372 million and $378 million.
Gross earned premium between $270 million and $275 million.Revenue between $114 million and $117 million.And adjusted EBITDA loss between $173 million at $163 million.Stock-based compensation expense of approximately $25 million.And capital expenditures of approximately $8 million in the year.
As a reminder, please note that GAAP accounting rules are such that ceded premiums are excluded from GAAP revenue.
As a result of the change in our reinsurance structure, effective last July 1, to a significant proportional reinsurance structure, our year-over-year revenue and gross margin comparisons are not directly comparable.Accordingly, we’ve published in force premium and gross earned premium as metrics that we believe are useful to analysts and investors because each captures the overall growth trajectory of the business before the impact of reinsurance.
Thanks so much for joining our third quarterly review as a public company.We do appreciate your interest and support.And with that, I would like to turn the call back over to Daniel to address some questions from our shareholders.Daniel?
Daniel Schreiber — Co-Founder and Chief Executive Officer
Thanks, Tim.It’s been a great pleasure for us to be able to engage with our retail investors through podcasts, YouTube, Twitter,other social media channels.
And what we found is a community that is highly engaged, highly acquisitive and highly supportive.We have engaged with smart people who really do sweat the details and are strategic and long-term in their thinking.These are investors after Owen Hart [Phonetic] and we feel privileged that so many of them are also our customers.And they often act as strong advocates for our products and indeed for our company.
And our investor community has also been a source of great ideas for us and it’s in response to a couple of tweets that came at us from retail investors that we signed on with CA Technologies so that these investors, no less than our friendly Wall Street analysts, will be able to ask us questions on these calls.And this quarter and the first quarter that we are trying this, we received close to 100 questions.And the same investor community helped us prioritize them buy up voting the ones that seems most pressing to them.
Looking at the five to seven most up voted questions, we see three central themes that I’ll try and address.
The first is one of global expansion.Neil F.
asked the most up voted question which focus on our plans for the EU and questions by areas about the Asia Pacific and by Jordan about the U.K.
were also very popular.So that’s kind of one bucket, if you like.
The second theme is about new products.Jordan asked about our future product plans, while Neil R.
asked about the changes in car insurance with car OEMs, most notably, Tesla entering the space.And the third most up voted question was from Emil.And it asked, what we think of crypto and when we plan or whether we plan to invest in bitcoin.
So let me address these three sets of questions in turn.The first, as I said was about global expansion.
And in our shareholder letter last quarter we wrote the following sentence.While we are steadily enlarging our European footprint, it should be noted that our investments are lopsided in the direction of the U.S.by design and will remain that way for the next while.
Okay.
So let me explain and add a little bit of color to that.
We think of our market as global.We don’t expense too much thought about which state or which country our sales occurring.I’m assuming this trend to invest incremental dollar in whichever channel offers the highest ROI at any given moment.
So it takes into account using machine learning model, slight return, expected claims, projected upsells.
And it derives from these a predictive lifetime value which then compares to the anticipated customer acquisition cost in that channel.
This results in optimal and increasingly improving LTV to CAC ratios.And it also dictates a ranking of products and campaigns that are being promoted based on the ROI for the incremental dollar spent.The machine does not take into account whether the most profitable available business using that formula is in New Jersey or in Washington DC or in France.At the moment, and this formula tends to find more opportunities, more compelling opportunities in the U.S.than the EU.And so long as that is the case, our growth will skew left.So while we continue to grow in Europe, that is not at the moment where most of our profitable opportunities lie, and therefore, not where our growth is most pronounced.I do expect that the same calculus will yield different answers over time.
And as markets mature and as efficiencies gets developed, we might find ourselves skewing more to the right in that regard.
In terms of expanding into new markets, like the U.K.or Asia, there are couple of things.
The first is that we have an expansive vision for Lemonade.We think that our cocktail value proposition of great value, strong values and delightful product is a cocktail that enjoys universal appeal.
And therefore, it’s a question of when not if with regard to those geographies.
The second thing I’d say is that in deciding when to launch more markets and in which order to sequence them.We follow much the same algorithm as we used to determine where to invest our incremental dollar.We are very ambitious for Lemonade, but we try to temper that with the discipline of ensuring that we invest our energies where there will be most impactful.
And that really drives the prioritization and the roadmap.
I hope that gives some insight into how we think about our global expansion and the prioritization of different geographies in terms of growth and in terms of loans.But I’m afraid I am not going to announce here today which countries we plan to launch, when.And so Neil and Jordan, you would appreciate those specifics, but I trust you valley even more by not tipping your hand to our competitors.So I hope this will we a satisfactory answer to your question, which brings me to the question on new products.
We have been very busy with new products, continue to be.For the first four years of our existence, we had only homeowners products.
And in our fifth year we saw a perfusion of products.We launched pet, we launched life, and as I intimated, we have more in the oven.Much as I did when talking about global expansion, here too I’m happy to talk about our guiding principles, while remaining intentionally vague or almost evasive about the specifics.
So as with new geographies, our ambition for new products is expansive.We want to cater to all our customers’ needs and to become attractive to an ever-growing universal customers and new products are really an essential component in achieving this.
In our S-1 prospectus for our IPO, we included an illustration of our prototypical Lemonade customer.We showed a young woman who joins at age 25 and all she has is a bike and some personal belongings.And then we showed how we could grow with her as she goes through predictable lifecycle events.
As she collects pets and human dependents and she adds valuables and vehicles and homes.And our product roadmap is developing in the service of this strategic vision of ours.
In terms of car insurance in general and the Tesla-related question in particular, let me say the following.The entire mobility space is going through unparalleled dislocations.Ride sharing is increasingly competing with car ownership, while autonomous vehicles promise to transform the nature of how risk is allocated in the car industry.If a Tesla crashes while on auto-pilot that could arguably be characterized as a faulty product issue rather than a faulty driver issue.And they therefore may be better handled under the rubric of product warranties and car insurance.
So this is one of the many revolutions and transformations of the digital age.And these kinds of transformations put incumbents on the back foot and they creates tremendous opportunities for innovation for companies that don’t have a legacy business to protect.
So we follow these dislocations with keen interest.But for now, that’s all I’m going to say on this topic.Thank you for that question.
Finally, let me address Emil’s question about crypto and bitcoin.So crypto and defi, decentralized finance in general, are very interesting technologies and they enable really very novel businesses and business models.To date, we haven’t seen compelling applications for blockchain or crypto currencies at Lemonade.But it’s a fast-moving space and we’re entirely open and even excited at the prospect of that changing.
And in terms of our investments, our most high conviction investments is in LMND.
And we plan to deploy as much of our cash into our own business as we can profitably do.Of course, in the meantime, we will invest cash that we don’t need right now, but we certainly don’t plan to make sizable investments in assets as volatile as bitcoin as the opportunities in front of us are massive and we want to keep our powder dry and dependably available.Hopefully all that makes sense to you.
And with that, I would now like to turn the call back over to the operator who can perhaps rejoin the call with Q&A instructions as we will be happy to now take questions from our friends on the Street as well.Thank you.
We are still processing the Q&A portion of the conference call.
We will be updating it as soon as we analyze and process the con call.Stay tuned here for more updates.
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