Lemonade(LMND) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics - Gross earned premium in Q4 increased 69% YoY to $151.3 million, driven by in-force premium growth [12] - Revenue in Q4 increased 116$88.4 million, supported by a reduction in premium ceded to reinsurers to 58% from 72% in the prior year [12] - Gross loss ratio improved to 89% in Q4 from 96% in Q4 2021 and 94% in Q3 2022, with underlying non-cat loss ratio improving by 9 percentage points sequentially [12] - Net loss in Q4 was $63.7 million ($0.93 per share), compared to $70.3 million ($1.14 per share) in Q4 2021 [14] - Adjusted EBITDA loss in Q4 was $51.7 million, nearly identical to the$51.2 million loss in Q4 2021 [14] - Total cash, cash equivalents, and investments stood at approximately $1 billion at the end of Q4 [14] Business Line Data and Key Metrics - Annual dollar retention (ADR) increased by 4 percentage points to 86$625 million in Q4, with organic growth at 38% excluding Metromile acquisition impact [34] - Customer count increased 27% YoY to 1.8 million, while premium per customer rose 30% to $346, driven by Metromile and a shift toward higher-value policies [34] - Technology development expense increased 43$9 million sequentially [13] Market Data and Key Metrics - The company faced challenges from inflation, geopolitical unrest, and rising interest rates but managed to blunt their impact through rate filings and operational adjustments [2] - Winter Storm Elliott impacted Q4, but the loss ratio continued to decline, indicating a strong underlying downward trend [3] - The company operates in 4 countries with 5 product lines, diversifying its business compared to its monoline structure three years ago [57] Company Strategy and Industry Competition - The company focuses on three key levers for 2023: growing with customers, improving the loss ratio, and continuing growth [4] - Automation and AI are central to the company's strategy, with significant progress in claims handling and operational efficiency [18][44] - The company is integrating Metromile and discontinuing high-cost services to improve expense ratios and scalability [39] - The company aims for a long-term loss ratio under 75%, with renters insurance already achieving this target [46] Management Commentary on Operating Environment and Future Outlook - Management believes peak losses are behind the company and is progressing toward profitability [31] - Inflation has impacted the loss ratio across all products, with car insurance seeing the most significant impact (10-11 points), followed by home and pet (5-6 points), and renters (1-2 points) [26] - The company expects in-force premium for 2023 to be between $695 million and$700 million, with adjusted EBITDA loss between $245 million and$240 million [36] Other Important Information - The company has slowed headcount growth significantly, with IFP per employee increasing 35% in 2022 [17] - The company discontinued dozens of high-cost services post-Metromile acquisition, improving expense ratios [39] - The company is leveraging AI for claims handling, with 40% of claims fully automated and 55% partially automated [66][84] Q&A Session Summary Question: Impact of AI advancements on the company and competition - The company believes its AI infrastructure, built from the ground up, provides a competitive advantage over incumbents [44] Question: Loss ratio improvement and business mix impact - The underlying non-cat loss ratio improved by 9 percentage points sequentially, with a 7-point improvement YoY excluding cat impacts [45] Question: Long-term loss ratio targets - The company targets a loss ratio under 75%, with renters insurance already achieving this [46] Question: Inflation impact on loss ratios - Inflation has impacted all product lines, with car insurance seeing the most significant impact [26] Question: AI claims handling process - AI handles 40% of claims fully and 55% partially, with significant automation in claims triage and processing [66][84] Question: Operating expense trajectory - Sales and marketing expenses declined sequentially, with advertising spend now at 55% of the sales and marketing line [69] Question: Reinsurance market impact - The company is navigating a hard reinsurance market, with renewal discussions ongoing and ceding rates expected to decline further [57][72] Question: Pet insurance loss ratios - Pet insurance loss ratios have been impacted by inflation, particularly vet labor costs, but the company sees positive trends in loss ratio improvements [65]