Lemonade Stock

All right. Thanks, everybody. I hope everybody got some lunch. Enjoyed the session with Steve. But we're excited now to move on with Lemonade. We have Tim Bixby, CFO of Lemonade. Thanks for coming.

You bet.

So look, I actually want to start with a kind of a different question. You're preparing to move on from being CFO, right? So maybe talk about how leadership is changing, some strategic framing because excited for you and excited to meet who's next.

Sure. Happy to. And while I am moving on, I'm not moving on very far. I've been Lemonade's first CFO. I've been CFO of Lemonade for 9 years and change, 9.5 years. I've been asked to join the Board of Directors, which I've graciously accepted starting January 1. And so at that point, I'll hand the reins of CFO over to Nick Stead, who is our -- currently our SVP of Finance, superstar player internally at Lemonade for many years. So while it's a change of name, I don't expect a tremendous change of philosophy or strategy. But I will -- candidly, I will say it's a bit of an upgrade. Nick has done terrific work, and this has been in the works for quite some time. That said, one of the most notable things about Lemonade is the lack of change in a good way, meaning our approach, our strategy, our philosophy, our go-to-market vision and story is really unchanged today, 2026 versus our founding in 2015. That's awfully rare in any sector, technology, data, AI, financial services, that's a rare thing in a market and a decade that's been tumultuous in maybe a dozen different ways, Lemonade's metrics, Lemonade performance, Lemonade strategy has been awfully stable and consistent and up and to the right during that period.

So look, I don't know how familiar everybody is in the room with the business. So why don't you start by going through some of that evolution over time and where you are today versus where you started?

Sure. Lemonade sells insurance to consumers. That is a thing that's been around for a few centuries, if not longer. The average American insurance company, the average of the top 10, the biggest of the big, the winners is a little over 100 years old. Lemonade is not 100 years old. We're about 10 years old. We formed the company with 2 thoughts in mind, more than 2, but 2 key thoughts in mind. We will leverage and employ and use the current technology that's available. And by current, in 2015, we were kind of thinking more about 2025 and 2026 than 2015, to be honest. But the world of data, machine learning and AI, our founders at the founding of Lemonade knew it was coming. They didn't know when, they didn't know what day. They didn't know what happened in the last 2 weeks when that was going to happen. But they knew it was coming, and they wanted to build a company that would be enabled and ready to leverage sort of a tsunami of technology development in a way that would enable us, Lemonade to deliver a unique thing, which is delightful insurance, a consumer experience, a product, a user experience that's delightful. That was not something and really hasn't been something historically that was important or prevalent in insurance. Not many -- if we polled the audience today and ask how many people love their insurance company, not too many hands would go up. That's not a thing that was really sought after. If you got a group of 100 Lemonade customers in the room, you get a fundamentally different result. And it's not because we're great people, although I think we do have a bunch of great people, it's because we've used technology to deliver amazing things, a policy in 3 or 4 or 5 minutes, not a quote, but a policy, multiple products. We started out as a one product company. We now have 5, car, pet, home, life and rent. Many of our claims, more than half are paid out in real time in seconds. That is unheard of in insurance. I just filed a claim with a very large premium insurance company that is not Lemonade. I think it took 6 months, start to finish. And they're one of the best. And I had a good experience. Half of our claims -- more than half of our claims are paid out in 3 or 4 or 5 seconds using machine learning, AI, data and technology to give a delightful customer experience, create an NPS, a Net Promoter Score that's off the chart, 50, 60, 70, depending on how and when we're measuring it. That's also unheard of in the insurance business. And we can also do the normal things insurance companies need to do. You need to grow. You need to grow profitably. We are on track within a few weeks, we're going to start the fourth quarter. We expect the fourth quarter to be an EBITDA positive quarter for the first time. Now that's an important milestone. More importantly, we first talked about that quarter 4 years ago. We said somewhere around the end of 2026 is this model works. We've got visibility. Everything is on track, end of 2026. And here we are, it's a few weeks away. Q4 is not over yet and ain't over until it's over, but things are really on track. And I think we're -- and maybe I'll throw it back to you, but we are now building a set of customers that are beginning to know us as an insurance company as compared to a product company. When we first started, we -- people knew us as a renters company. And then it was maybe a pet company. And then there's a couple of car customers. And now we have autonomous with Tesla. But over time, all the pieces are coming together, both in the U.S. and in Europe, and customers are now beginning to appreciate us as an insurance company. And so that's the vision. 10 years from now, 20 years from now, we'll be up against as we are today, Allstate and State Farm and Chubb and the best of the best.

Well, congrats. It's tough to be a CFO and forecast 4 years in the future, but congrats on getting there. But can you talk about some of the challenges over time you've had in terms of growth like -- because, for example, I'd love to be a Lemonade auto customer, but I live in New York. So I haven't been able to find you guys.

Sure. So yes, there are a couple of challenges that we face as all insurance companies do. Regulation is a fact of life. Insurance is regulated state by state in the U.S. We appreciate and have great relationships with our regulator partners, but we don't manage their schedule and we don't set their deadlines. They do that. And so we are at the mercy of a process that has that sort of third-party component to it. We don't yet have all products available in all states. That's a handicap. Now we're awfully close. We're close to 50. We have 50 states in our life insurance policy, close to 50 in pet and rent. Home and car will take longer. They're newer, and we're launching those over time. But we still -- that's not an obstacle to our growth. But ultimately, we want to be all products in 50 states. So that's a challenge. On the other side of that challenge is regulators have a difficult job that's getting much more difficult. And again, in the last couple of weeks, it's going to get much more difficult at a faster pace. I think that Lemonade has been relatively successful in building a relationship where we're seen as perhaps more of a partner or an input or a resource for regulators because of our unique experience with AI and our deep understanding of how it works and what it can do and what it can't do and what the risks are. Again, we're -- there's lots of smart people on the planet dealing with these questions, but we've been doing nothing but preparing for this moment for 10 years. And so I think we now can have conversations with regulators that are relatively positive about where things are headed and where -- how risks might evolve and how we might work together in addition to the normal like getting rates and forms approved and getting a license and all of those realities of the business. So.

Maybe talk about some of the challenges competition -- your competition has had in certain geos in the U.S., how insurance is changing a little bit around how you're starting to see problems come up with homeowners finding insurance in tough states like Florida, coastal areas. It seems like insurance companies have pulled back from higher risk coverage. So maybe talk a little bit about how the industry is moving.

A couple of thoughts on the industry, maybe from a consumer perspective and then from a company perspective. From a consumer perspective, you're very right in that certain territories, certain regions, certain risks are getting more difficult to underwrite and more difficult to predict where -- how underwriting will evolve. We have sort of the good fortune of being very small. And so things that impact the industry at large tend to impact us less because we aren't the industry. That's not the case. If you're a $20 billion or a $50 billion or $100 billion insurer, things that impact the industry, by definition, impact you. And so what happens in Florida impacts you. What happens in California impacts you. We've chosen not to underwrite, for example, in Florida for homeowners insurance. Yes, someday, we'll be doing everything everywhere most likely. But we've chosen not to do that. We're cautious about what risks we take and where we take them. From a company perspective, competitively, we candidly don't spend a great deal of time thinking about or worrying about the competition and what they've done and how we're going to react to it. We're not -- we're not ignorant of it, but we don't -- we rarely change course or strategy as a result of what a competitor has done. And there's a couple of reasons for that. One is we believe that the movement, the momentum is toward a world of more data, more technology, more AI enablement, providing a better product, a better customer experience. And we believe that we're among the best at doing that and getting better every day, even though we're not yet at scale. And so one of the things you'll hear Daniel or Shai, our founders say frequently is if today, you said, I'll trade you fairly, I'll give you Progressive's data and system or GEICO's data and system, amazing super profitable, successful companies. The answer would be no. I wouldn't trade our data, our system, our capabilities for any other on the planet, not because today, they're not strong, but because what we see and feel of where the market is going 5, 10, 15, 25 years out is only in one direction. And what we have is one system that's enabled for data and machine learning and AI that gets a little bit better every day. That's unique, I think, to a small set of companies, notably in insurance where typically, historically, once a certain size or scale or scope is achieved, things start to get a little harder. You acquire a new system, you buy another company, you add a new -- it tends to get a little harder, not easier. For Lemonade, we're still at that stage where every incremental thing we do, every added customer, added product, added claim, we get a little bit better because, again, we have one system built from scratch that enables 100% of the process and the customer life cycle of the business. And so it gets a little bit easier each time with each incremental turn, not a little bit harder.

Management's framed 30%-plus growth as a long-term ambition, right, but not as a ceiling. So as the revenue base gets larger, what gives you confidence that Lemonade can continue compounding at that suggested rate?

So 30% is a good number for a few reasons. It's a level of our own choosing. We could grow 20% or we could grow 40%. But what you'd see would be fundamentally different. And we've made some commitments, and we're doing more than one thing at a time. There's capital intensity in insurance. Every insurance company has to provide a certain amount of surplus that they set aside for a rainy day and is subject to regulators' requirements. So that's in addition to everything else that we do, and we have employees and as we spend on growth to acquire customers and all the normal things that would flow through the P&L. But the obstacle to faster growth is not market size or addressable market. That, again, at a point, something between $1 billion and $2 billion run rate of premium currently. We -- at our last Investor Day 1.5 years ago, we kind of provided a line of sight of how we think we might get to $10 billion. Those are still -- they're very large numbers when you start from 0. But in the realm of insurance, they're still relatively small numbers. We can grow faster. I think there's -- at some point, I did some a bit of modeling on this verbally on the last earnings call. At some point, things break down from a capital surplus perspective, meaning if we were to grow 40%, somewhere in the high 40s, then we would need more capital to support that from a surplus perspective. And we could do that. We can raise capital, but it becomes more difficult to grow that fast and to generate it from your own profit. And that's just more of a math issue than a Lemonade issue. But 30%, if you kind of track us for many quarters in a row, I think you saw it go from the mid-20s to the low 30s, a little bit faster each quarter. Last quarter, another 0.5 point. So that can't go on forever, I don't think. But every quarter, we've grown a little bit faster. But we want to balance that with profitability. All the customers we acquire in a given quarter, we expect to be profitable. We don't acquire unprofitable business, but the company is still unprofitable because we expense all that growth spending upfront. That's unlike most insurance companies that have a somewhat different model. We committed to EBITDA breakeven in Q4. We're on track. I expect we are on track to achieve that. If we were to grow at a slower pace today, which we don't -- we've chosen not to do, and I don't recommend, if we were to grow at a slower pace today, we'd be arguably profitable breakeven or better today. So there's that interchange between growth and profitability that we think is important. We've indicated publicly that we expect GAAP breakeven to follow roughly a year after EBITDA breakeven. That is still the case. So we can do 2 or 3 things at once.

Okay. You've talked about expecting IFP growth to begin outpacing growth spend in '27. Can you unpack why that's happening and cohort maturation, cross-selling, brand awareness, all those things are going into that?

Sure. So there's a natural dynamic where acquiring a profitable cohort of customers in a month or a quarter or whatever period you look at, we've seen in the way that we do it and the type of customers we acquire that those cohorts stacking over time. And that's why you see this consistent progress toward -- with consistent bottom line improvement quarter after quarter, even though we're growing at pretty high rates. And so what I think you'll continue to see is that sort of that cohort stacking dynamic over time. I've forgotten the second part of your question, if you'd refresh me.

No, no, no. I'm tracking. I was asking about how quickly that can translate to operating leverage. And can you unpack why it...

Yes. There's a couple of things we're quite early in the process of. And by early, I mean, it's not where I think it can be. One of those is very few of our customers have more than one policy. Most of our customers have a single policy from a quantity perspective, that's renters because that's the lowest priced policy. Europe now has a large number of single policy customers at a lower premium rate. From a premium perspective, pet is now our largest -- because it's grown significantly and has a much higher price point than our renters product. Over time, that current rate of having multiple policies, that's about 5%. That should be about 30% or better if we were to just match what's sort of best-in-class. And so that is one aspect of where we would expect that evolution. The cost of acquiring a customer of premium from an existing customer is lower than a new customer. In some cases, it's free, which is the best way to acquire new premium. But in many cases, we are spending something greater than 0 to add on that second or maybe third or even fourth policy to an existing customer. Second piece to think about is our retention rate. We, like every subscription business, like every insurance company, have a certain pace of cancellations. We over-index on young new buyers of insurance by choice, by design, lots of our customers are first-time buyers of insurance. If you have a renters policy, maybe a pet policy, it's very common that's your first purchase of insurance. That's good news for most of those customers because Lemonade has defined their experience, and we think that's great for long-term retention. On the other hand, there's -- renters are transient and they change their minds and they get boyfriends and girlfriends and they move back with mom and dad and they move to a state where we don't have coverage. And so their churn or their retention tends to be a little more challenging than a second or third year customer or a home customer or a car customer. So there's a number of different trends that are evolving, but they're evolving slowly as our customer base grows, as the multi-policy rate increases and as our customers age, all of those drive greater lifetime value, and we think will drive more and more premium growth that we pay either nothing for or a lower amount for.

Okay. You've maintained a fairly consistent LTV to CAC over time. You kind of talked about it just now. It's not 0 cost to go find somebody else to sell, I'm sorry, a second policy to the same person. But what would cause you to lean more aggressively into acquisition?

So LTV to CAC lifetime value as compared to our customer acquisition cost is really the watchword of the growth business. We've got a team, a very sophisticated team with ever-changing and improving models that have been able to accomplish what is really a challenge, which is over a period of years where we have roughly tripled or perhaps quadrupled the amount of that we spend on acquiring new customers, they've maintained that LTV to CAC at right around 3, not exactly 3. It's 2-point something, 3-point something. We had periods where it was 4-ish when we were spending a fair bit less. But at a high level, broad brush, it's been right around that 3 level, which means those are expected to be very profitable customers over time. And they continue to do it at a higher rate, at a higher absolute spend over time. And that's a really tough thing to do. And if you look out over the history of insurance, you rarely see insurance companies doing all these things at once, growing at a high rate, maintaining an LTV to CAC ratio that's healthy and stable and improving profitability and loss ratio, which are sort of go hand in hand. It's a real -- doing one of those is hard, doing all of those at the same time is harder still. So...

What's the best way for investors to judge how well cross-sell is going? What are the things that we should look for? I mean, we can look at the size of each of your business lines, but we don't know how much of that's coming from selling through to existing customers.

So a couple of things. We disclosed it anecdotally in various quarters. We've talked about the 4%, 5% number. It was 3 something and went to 4%, now it's 5%, it's a little bit above 5%. So we do speak about it. It's not a hard number that's in the filings and maybe that will change at some point. We'll leave it to the new guy to make that choice. We talk about retention. We measure annual dollar retention that captures all the aspects, the real financial aspects, right, of the value of customers, not just the quantity of customers. And that's been about 85%. That's a good number, but it's not a best-in-class number. It's a little understated over the last year because we've actually trimmed our home business a little bit because we didn't like the profit profile. We've been able to grow at 30% plus rates and actually pull back our home business a little bit, which is a good thing. It's healthy for profitability. Our growth rate would have been higher otherwise. So we're able to kind of do those things at the same time. We're kind of past that. The home business is in a good place, and we expect to be able to grow it, not quite at the rates we're growing other parts of the business, but grow it versus let it decline or keep it flat. That will enable that ADR number to normalize. It's an annual measure, so it takes a few quarters. That, I think, will edge back into the high 80s. That should really be in the 90s. And I think I would look to that metric, not only the absolute number, but the trajectory of that number will be another good indicator. That number, when we're cross-selling more effectively, we're going to -- good news, we tend to share with the market, and we'll continue to do that. But you'll see that ADR number normalize and start to grow. That will be another indicator that cross-selling is working pretty well.

Okay. I want to see if there are any questions in the room. Okay. Renters, as you talked about earlier, is an important customer acquisition tool, but it's becoming smaller as a share of premium, right? So how do you balance maximizing the stand-alone profitability of renters while also continuing to build that business as an acquisition engine?

Yes. The renters product is just a great market entry tool. It's profitable on its own. It's really difficult for large incumbent players to be in that business profitably. 10 years ago, that was even more true. And we found that to be a terrific entry point. It was an unloved hard to make money aspect of the business, and we kind of jumped all over it. We're able to make money with those customers even at our base price can be something like $60 a year, and we can make money. $100 a year, our average is between $100 to $200 a year for that product. And those customers, we expect to be profitable. More interestingly, again, because many of those customers are first-time buyers, they're just out of the gate getting into the working world. They're renting their first apartment, renting their first home, they're a renter in a house, whatever it is. Those customers tend to be digitally savvy. They're younger by definition, typically. And over time, they'll do more things. They will get married and have kids and have pets and have cars and all of those things. And if we can be established as this is how insurance should work, we think that those folks can grow with us for a very long time. It's almost like a profitable or a breakeven at worst lead base for us to sell in all the other products that we provide. If you look at our current customer base today, and it's mostly renters by number, not by premium, something like 2/3 of our existing customers have a pet and don't have pet insurance with us and often don't have pet insurance at all. Like that's a real strong base that we're actively selling into. And about 2/3 have cars. And those folks do have car insurance, obviously, because it's required, but those are a little tougher sells, but we're also getting something like half of our new business in cars coming from existing customers. So we're really nailing all of these different paths, whether it's rent to pet, rent to car, rent to your first home, all of these different paths can work pretty nicely for us.

Staying on the car theme for a second. Car grew 60%, I believe it was in the second quarter. And -- but it's still early somewhat in geographic rollout. So what are the most important sort of gating mechanisms that are keeping you from going faster in car?

Yes. So car is growing very quickly. We're in the teens now in terms of its share of our total premium, but it is growing as fast or in some periods faster than our pet product. And the distinction there is car is just an enormous market everywhere, $350-ish billion in the U.S. and that's just many multiples of what the renters TAM and the pet TAM is. And so we can grow very rapidly in multiple products. And if you look out, we -- at our last Investor Day, we talked about what does Lemonade look like in one scenario at $10 billion. We indicated that car might be 30% maybe 35% of the total book of business. So it's not a majority at that point, which is $10 billion is a pretty big number, which is where we are today, but it's not a majority. Over the very long term, car and home should be the biggest. I think car is where we have the most distinct advantage because of telematics and the sheer amount of data that we collect around every mile driven by every one of our car customers. So that is where our real advantage, I think, lies versus our other products and versus the rest of the market. It's very early in that process. That said, we are -- even though we're in a fewer number of states, we're getting close to 50% population coverage in the U.S. because the states we are in are the larger population states. So getting close to 50% coverage. We're in 5 states now with our new autonomous Tesla partnership product, which is a very small number in absolute terms. We get a lot of questions like when -- what's that premium doing, a very small number in absolute terms. But boy, the growth trajectory of that, as we know, anything related to AI is growing rapidly, and there's going to be a tipping point. It's a product that's priced 50% below human-driven miles, software-driven -- we're insuring a driver. Sometimes the driver is a human, sometimes it's software. The data supports at least a 50% lower frequency of claim, lower cost of claim -- or sorry, not a lower cost of claim, but lower frequency of claim for car. There are many other studies in the market that suggest that's actually greater than 50%, better than 50% -- and so that's -- if you want to think about today versus the future, that's really where the future is coming. We don't know any better than anyone else when that sort of hockey stick turns, but it will come in the coming decade. And Lemonade, I think, will be at the forefront. We will be a first mover. We'll have the most data, and we'll be ready to really ramp it up when the market is there.

Okay. We're coming up to time here, but is there anything else you wanted to leave the group with in terms of how to think about sort of the next 3 to 5 years for Lemonade?

Sure. I think a couple -- maybe a couple of points. One, I think that's appreciated and maybe one that's a little less appreciated. So I do think while quarterly results are important and these short-term milestones are important, and we communicate them and we tend to achieve them. We had 24 quarters in a row of pretty consistent results relative to our guidance and market expectations. That's a good thing. And so I would expect that sort of resilience, visibility, predictability to continue. And in a market that is a macro market where unpredictability tends to increase, not decrease and our understanding of risk generally in the market, and this is not just AI, but obviously, AI is a big piece of it. I think agility in financial services and most importantly -- or specifically in insurance will be the most important asset. Capital is important. Technology is important, but agility, I think, will become and continue to be the most important. And Lemonade is arguably the most agile tech-enabled insurance company on the planet. We're not the biggest. We're among the fastest growing, but that agility, I think, is the key thing I would highlight for those who are thinking out 3 to 5 years because it's tougher to draw certain lines out 3 to 5 years than it was maybe 10 or 20 years ago in this type of a market. One thing that I think maybe -- and I think that is appreciated that in a period of time of great tumult, pandemics and wars and inflation and a number of shocks, I think, that we've seen in the last 10 years that were perhaps more intense than the decades before, Lemonade's performance and growth and strategy, as I started out at the beginning with are relatively unchanged and super stable and up and to the right. And I think 24 quarters into being a public company, we're now at the point where we can kind of say, okay, this is not luck at this point. We're really on the right track in a couple of ways. The underappreciated thing, I think, is perhaps the thing we did most -- at the very early stage of the business was we said we're going to build a single technology platform from scratch in-house, and we're not going to use any third-party software to run our systems. Now we use third-party stuff like every company does to do things that aren't critical to the business and general ledger and things like that. But the fundamental building block of technology that drives the most important operations of the business, including pricing and underwriting and customer experience, we have built all of that from scratch by a team that is in-house. That team is now super AI-enabled today versus where they were a year ago or 2 years ago, which is common to many companies. But that decision to have one platform built in-house, I think, made 10 years ago is still relatively unappreciated. Our biggest, best, most adept competitors, GEICO and Progressive and USAA and others tend to have scores of systems, if not hundreds. And boy, when you throw a new AI model at a company today and say, you got to figure this out by next week, I would much rather have one system to do that with than 600 systems. And I think over time, that will be a mantra we'll return to and try to reinforce why that makes our business so strong and so resilient.

All right. Tim, thank you for coming. Good luck in your next post, and appreciate it.

Thanks very much.

All right. We're going to go ahead and get started here. This is our -- sadly our last session of the KBW Insurance Conference, but we go out with a bang with Lemonade here. So thank you to Tim for joining us.

Tim, maybe I'll start off some news that came out from the recent quarter. You're going to be transitioning from CFO to a Board seat. So maybe talk about how did that transpire? Like why is this the right time for that move?

Sure. So we -- at Lemonade, we try and do everything pretty methodically, including succession planning. So this is not a sudden or new transition. It's been in the works for quite some time. I've been CFO with Lemonade 9-plus years. I've been a CFO in New York, various companies for about 25.

We have an extraordinary in-house candidate, Nick Stead, who will be taking over in January. I've been asked to join the Board of Directors, which is a little unique. But again, we try and do things a little differently at Lemonade. So I think that will be a great opportunity for the company and for me to have -- provide a little bit of continuity. And so we announced that and then January 1 will be the transition date, and Nick will take over full time at that point. He's been with the company 5 years, a real superstar, financial genius. I think he'll do great work.

Surely, a question for Nick. But do you -- from speaking with him, do you expect any sort of major moves in terms of like changing in how guidance or, sort of, approaching financial presentations, anything?

Yes. I wouldn't expect big changes. It's one of the benefits of being able to bring an internal candidate versus an external candidate. We've been side-by-side with Shai and Daniel, our 2 founders, for years now. So I wouldn't expect dramatic changes. But I would hope for some -- perhaps a slight quality upgrade. He's a young, smart, ambitious guy. I'm sure he'll have some thoughtful ways of improving the communication and continuing to do what we do.

Yes. All my conversations with him, I found him to be certainly a viable candidate for the role. So -- all right. We'll, kind of, switch into the business side of things. I always think one of the most, sort of, impressive things about Lemonade is the consistency of growing 30% across markets where, especially in today's softening market, everybody is clamoring for any sort of growth that you can find when you're fighting, sort of, these rate headwinds. You guys are planning for 30-plus percent growth this year. The long-term goal is 30-plus percent. What makes 30% feasible?

Yes. It's not a magic number. It has become a little bit of a magic number for us for a couple of reasons. Many of us come from a tech background and the concept of the Rule of 40 and being able to balance growth with profit or in our case, progress towards profit, and we're heading that direction quite methodically is an important one.

The compounding effect of 30% or something just above 30%, which is where we've been is over the course of a number of quarters or a number of years is pretty dramatic. But we also have other guideposts. Our marketing efficiency is a critical measure. We typically acquire something like 3x lifetime value as a ratio compared to our customer acquisition cost. That's another dynamic or another sort of a guidepost that we track. And we can grow faster. At some point, there is a limit. You have to provide certain capital surplus ratio requirements, but the market is not an obstacle for us.

These are huge markets. We are a very, very small player at between $1 billion and $2 billion in premium, which is where we are right now. We can grow at this pace for a very long time.

I think it was at the Investor Day where you laid out the goal of being a $10 billion company, and that's, sort of, the CAGR along that way was growing at 30%. Can you talk about, sort of, the mix shift in product lines that you guys are contemplating within that type growth for people that don't know, use are largely pet and renters right now, except the majority of the book, but auto and home should be a growing piece of the...

Yes, that's right. So we're well into the shift from primarily a renters book of business, which if you dial -- you rewind back to the launch of the business almost 10 years ago, we were something like 95% plus renters business. And that has consistently shifted over time.

Pet is now our largest. It's not a majority of the book of business, but it's the largest component. And that's been growing at a very rapid pace, along with car. The TAM, the total market size of pet and car radically different. Car is a $300 billion-ish plus business.

Pet is quite a bit smaller. But it's a nice bridge transition for us. We're really strategically acquiring insurance customers, not pet customers or rent customers or car customers, but insurance customers. And so our ability now to cross-sell from a renters policy to a home policy or from a pet policy to a car policy, all of that is well underway.

The last few quarters, we've seen our pet and car books grow 50% plus year-on-year growth rates. And so our renters book is now less than 1/3 of the business. So I would expect that mix shift to continue. A couple of years ago, our last Investor Day about 1.5 years ago, when we, kind of, set the $10 billion benchmark. I think the implication of car at that point was something around a 40% share. Today, it's in the teens, edging toward the high teens. So I would think of that as the shift over the coming years.

Do you think long term and maybe even beyond this $10 billion number, do you think Lemonade should just resemble the industry premium mix, which is dominated by home and auto?

I think so. I think that's right. We have, I think, changed the market somewhat. So I think the renters market looks very different today than it looked 5 or 7 years ago, in part because of what Lemonade has been able to do. We've been able to take what was an often unloved or hard to profit -- make profit sector of the business and change the mindset there. You'll see ads now from large incumbent insurance companies that focus on renters insurance.

That was not the case 5 years ago. I don't think we should take all the credit for that, but I do think we deserve some of the credit for that. Pet, likewise, we were able to do in 4 or so years what other single product pet providers took 10 or 12 years to do. That means something is intrinsically -- something is structurally working well in our approach to this market, and it's working across multiple products.

I do think we have the products we need today. We can grow to $2 billion or $5 billion or $10 billion of premium without significant new product adds. We'll always keep that door open and there are additional products we might provide, but I think we have essentially what we need to get there.

Is it still the case that your typical new customer, it's the first insurance product they've ever purchased?

It's often true, but not always true at this point. We're getting better at cross-selling, but I don't think we're quite great at it yet to our own existing customers. But every day, we get a little bit better. We've started to invest in brand marketing. We don't spend a lot of money, but compared to the 0 spend that was 3 or 4 years ago, it's a significant increase.

And so you'll now see in key large markets where there's a density of our target customers, you'll see out-of-home advertising or more general brand advertising, and that's a transition. Our brand awareness has gone from 0 to low single digits and is heading towards a rate that we like, which is heading towards a double-digit awareness.

All that takes time. We're pretty good at unique approaches that don't require Super Bowl ads or dramatic spending, but that process is underway.

The college football team jersey patch is becoming pretty popular if you...

Here we go. We'll never say never.

Yes. Do you mind sharing with us the latest cross-sales stats that you guys are disclosing in terms of what percentage of either premium or customers are multiproduct customers and maybe, like, on a new business basis.

Yes. So this is really where the opportunity lies, and we are working hard to push that number up, but -- and it does take time. So we're still at that sort of 5% -- between 5% and 6% rate of customers that have more than one policy. That's well below what industry norms are. It's not surprising or new information, but I think that's a gap that we are actively working to close.

Part of that is just is presence. We're not yet in every product in every state. One of the real benefits of the sort of explosive growth in AI model capabilities in the last several quarters is you've seen our launch pace in states accelerate dramatically. And so that's an area where I think that cross-sell capability will increase.

Eventually, we'll have every product in 50 states in the U.S. We'll have additional products in Europe and Europe, we just have 2 products in 4 states. So a lot of potential room left to grow there.

Is your most frequent cross-sold customer of pet and renters?

It is, and we just talked about this in a couple of meetings. All the paths are happening. So that is the top path because we have a larger -- a pretty high quantity of renters. But all the paths seem to be happening. Most of our renters customers have a pet or 2, something like 60%.

Most of our customers have a car that is insured, at least one car that is insured, and that's typically with another provider, not Lemonade at this point. And so those are really good indicators. I think we'll see a balance of growth, both from existing customers expanding, but also bringing in new customers.

That balance may shift over the next 2 or 3 years, not dramatically, but it may -- I would expect you'll continue to see more growth coming from existing customers.

And are you fine with the conclusion of saying there's 0 incremental CAC associated with cross sales? Is that an over assumption?

It is absolutely true, but it's not always absolutely true. We are -- and this is to the great dismay of the CFO and the finance staff. We do spend money to sell to existing customers. That's not unique to Lemonade. And I would kind of send you back to the brand awareness comments I made.

We have lots and lots of customers who know we have a renters product and don't necessarily know we have a homeowners product or a pet or a car product. And that is an area where you can see where large incumbents who've spent billions of dollars over decades that's how they've surmounted that challenge.

Now we don't intend to spend billions of dollars over decades. We intend to approach that in a Lemonade way, and we are making progress on that front. But we do have customers that come through all products and add a second product. So all the different chains are definitely working.

The U.S. is certainly where I'd say more of the focus is, more of the airtime is, but Europe has actually been an interesting addition to the growth story. What is the strategic importance of being in Europe? Is it purely just diversification or another growth opportunity market? And what sort of is the outlook there? Do you feel like there's still countries you could grow into in Europe and even maybe other South America or anywhere else?

Having a presence in both the U.S. and Europe is unique. It's very uncommon. We're not the only ones, but it's an awfully small group who are focused -- significantly focused on both. Part of it is because we can. It wasn't a dramatic risk nor a dramatic investment to enter Europe when we did. It took us a few years to kind of get our arms around some of the more nuanced differences, the obvious differences of language and regionality we were familiar with. But understanding and becoming really adept at price comparison websites, for example, which is where the vast majority of business is done in Europe, took some time.

And then we saw things sort of -- it wasn't quite a light switch, but a pretty dramatic improvement after several years in market such that we now have our largest territory is our newest territory. So the U.K. is our most recent launch. We've got all the learnings and sort of pain points from the other 3 territories that we're able to bring to our launch in the U.K.

And so we're getting better as we go. We're in 4 territories. We only have 2 products in Europe. I expect we'll have more. We've talked about the potential value of a pet product in Europe and a car product in Europe, neither of which we have yet.

So I think those are still to come. Europe someday should be more or less equal to the U.S. from a market size perspective. Obviously, we -- the key focus is in the U.S., but we're seeing triple-digit growth. We're seeing loss ratios come down. It looks a lot like what we saw in the early years in the U.S. now being replicated in Europe.

To the extent that it's largely sold via price comparison sites, is there really no purpose of spending on brand awareness over there? Is it lower priority?

Yes, it's a different dynamic. It's not quite so black and white is that, but it does require that you invest in different ways in different territories. I don't know that there's 0 benefit, but at this point, it's very focused on the direct-to-consumer aspect.

In the U.S., the reason I think about this is because with Europe, you're only having a couple of products, there's not really an opportunity for that graduation phenomenon. I guess my comment or question wants to be, do you still like the graduation phenomenon that you guys talked about probably several years ago was when you most prominently talked about it, but the idea of finding a customer early in their financial journey with renters or pet and then growing with them as their financial needs grow with the product?

I think initially, that was very focused on sort of a renter becoming a homeowner because that's the business that we were in at that time, and that was really our only opportunity. I think it's much more -- it's much broader than that now, which is my comments about acquiring insurance customers versus product customers. And so really all the same advantages we've seen in the U.S. are replicating in Europe and whether that's a cross-sell and ultimately, that's what's driving our thinking about launching a pet product and launching a car product is we think we'll see similar dynamics. So I would say graduation is certainly interesting, but it's a broader view now, which is all these folks over time tend to acquire more goods, have more risk, have greater wealth over time and have greater insurance needs. So yes, we see it very similar in Europe.

Have you guys disclosed what the #1 Lemonade customer in terms of, like, how big it is or how many products that individual has? Think of the horizon.

Yes, we've not done that recently. So this is probably -- this is pretty dated, but it's quite a notable distinction. Our average premium per customer still starts with a 4. It's less than 5.

It's not $4,000.

It is not $4,000 less than $500. Our -- we do have customers that have all of our products. It's a limited because that only occurs in a few states in the U.S., but it's definitely north of $10,000 per year versus $400. That's obviously a pretty dramatic increase. The average in the U.S. has somewhere between $4,000 and $5,000 of premium. I don't know if you've checked your insurance bill, but I imagine it's well into the 4 or maybe 5 digits. And so that's really where we're headed.

I'll take a second to pause and see if there's any questions before we move on. I certainly want to talk about -- this has been a great excellent conversation around the growth side of things. Ultimately, as a financial analyst, we want to see what this translates to on the bottom line. And so I think 2027 is your sort of target year to be the first year of full year positive adjusted EBITDA. What are the stepping stones? What have the stepping stones been to getting to that milestone?

Yes. So things are right on track. We've indicated that Q4 this year, we expect to be our first full quarter of positive EBITDA and that the subsequent year will be wholly positive. We've not given any quarterly guidance yet at this point. We likely will early in next year. I think this theme of sort of the Rule of 40, we like. And again, not that it's a typical insurance metric.

We think keeping that balance of growth and profitability and seeing that line improve, and it's not so much the Rule of 40, like 40 is the number, but the idea that we have, for some time, I think, for us, an almost limitless market. And that if we can support a 30% growth rate and take the profit line from negative to positive, and we're on track to do that, and those 2 can kind of work in tandem. And we think that's the best -- has been and will be the best strategy for us.

From a profit perspective, it's a little bit of a in this period, it's a little bit of an optics game, right, because negative one and positive one are -- both are kind of 0, but we get that we live in the real world and investors and others who are watching the company, that's a pretty dramatic difference.

But I do think we'll continue to lean in on growth. I think we've done a really nice job of sort of showing that we can deliver positive adjusted free cash flow, showing we can deliver free cash flow, positive free cash flow. EBITDA positive is now just on the horizon. So I think checking these boxes as we go through are the important ones.

Being able to talk about LAE as being dramatically better than best-in-class, like, that's a really important sort of a margin impact. I'm a little less focused, I would say, on what's the exact bottom line improvement quarter-over-quarter, but more what's the year look like? What's the following year like -- what's the following year look like? Is the 3:1 LTV/CAC ratio holding? Is the cross-sell number expanding? Is the dollar retention number? Like these are all really important metrics that we've developed over time, if they're all improving, that bottom line will certainly follow. But in some ways, we think of it -- we'll think of it more as an output than an input.

When you think of the -- like what could sort of take that trajectory off track, I tend to think a lot of it is within your control and even in the sort of the insurance risk retention that you have, it's short tail lines. It's not -- you don't have much CAT risk. You don't have casualty that could develop adversely. It's really thinking about like marketing dollars and hiring engineering talent maybe to oversimplify it, but it does feel like a lot of it is in your control, right, in terms of getting to that number?

I think that's absolutely fair. We don't have an advantage in predicting the weather, and we don't pretend to. That can happen, but that tends to be a short-term thing that can affect the quarter. We've seen that a couple of times over longer periods. We've got a couple of years of somewhat calmer weather and less impact. But yes, the big things outside of a spike in claims are really under our control. We've got essentially, in broad strokes, about 1,300 employees at the company. 2 or 3 years ago, we were -- 4 or 5 years ago, we were 1/3 the size. We had about 1,300 employees. And so while that -- I'm not saying that number will be static forever, we can grow 2x, 4x, 6x, and there's just no scenario that we can see where that headcount has to grow dramatically. It will grow more than 0, but I think that's kind of a box that we can check. And every day, that gets a little better with AI improvement. We can do things like launch 10 states in a year, and it we used to take us several years to do that. And the team is essentially the same size as it was. So these are -- you're kind of seeing the benefits of some of these improvements we're able to make.

Am I recalling it correctly that the guidance has been or the expectation or target has been that GAAP profitability will follow 1 year after adjusted EBITDA turns?

We said roughly a year, and we've said that very specifically. We've not yet said this quarter -- this will be positive, and that's a choice we've made. And we have an Investor Day coming up in the fall, and we'll kind of take a look at our best view -- forward view at that time, and we may give a little more expansive view at that point. But I would think of approximately a year later. For us, it's pretty -- the difference is not dramatic. It's stock-based compensation, which is a fairly static number. It's related to employees. We know how many employees we have and interest expense, which is a pretty knowable predictable number.

You probably haven't been in some of the meetings with a lot of the other companies, but topics like ROEs and combined ratios come up a lot. Do you have a sort of a target or a guidepost for investors that traditional insurance investors that want to think about ROE and combined ratio for Lemonade at scale, maybe call it your $10 billion premium number. If that's scale, is there an ROE and a combined ratio around that?

There is not, and that's a choice we have made, but I will answer the question. So we see no evidence that says we shouldn't be best-in-class. And best-in-class is really an expense ratio side of the equation, meaning a loss ratio in the 60s, we're kind of there and whether it ebbs and flows and it's up and down, and obviously, that can change over time, but I don't think we'll have a -- the product we're selling is paying for a customer's claims. So I don't think we'll have an underwriting advantage, but a lot of that we would expect to put back into the price to the customer to enable growth. And so loss ratio, I would expect to be in a range that is comparable to other strong performers. And the way I think about it is that as somewhere in the 60s.

The expense ratio side of the equation, I think, is where the dramatic significant advantage is most likely to play out. Expense ratio averages, and this is our smaller part of the world, P&C and the consumer side of the business, typically around 30%, best-in-class, maybe 15%-ish. We see no evidence where we shouldn't be best-in-class or better. And so there will come a day when we'll have -- we'll spend some time talking about combined ratios and those kind of metrics. That's where I would expect us to be. But that day is still a bit in the future.

We'll switch over to talk a little bit about maybe the market backdrop, and this has been sort of a subject that's been permeating this conference and frankly, the past months or quarters, just the soft market conditions and especially in personal lines and what that's leading to across the competitive environment and how that translates into rate reductions and heightened competition for acquiring customers. How did those 2 variables impact like your go-to-market strategy now? Have you sensed a need for Lemonade to pull back because marketing dollars can't be spent as efficiently?

Candidly, it doesn't affect us a lot. It does affect us. We don't ignore these things. We're not immune to these things. But it doesn't change what we do and what our plans are to do significantly. And the reason for that is we are such a small part of the market that even when we're growing at 30% plus, even when Pet is now our largest book of business, we're starting to be -- look like an equivalent provider as those who have been doing it for a very long time. These are still very small relative to the total market. Compare that to a GEICO or Progressive or an Allstate or a State Farm, all these folks we compete with, when the market changes, they are the market. And so it really has a significant impact on them.

Does it affect us at the margin? Yes, do we grow 1% more, 1% less? Maybe. Is a given state or a given product going to face a little bit more of a headwind? Maybe. But the big picture is wholly unchanged. We are launching more states. We are growing 30% plus. All of the AI enablement is full speed ahead 1,000 miles an hour. None of those fundamental sort of strategies are much changed in 6 months or 12 months from now, these factors will change.

Is the digital marketing costs for lines of business like Renters and Pet, which are the majority of your mix right now, are those correlated or sensitive to the auto side? Like right now, I think of the GEICOs and the Progressives of the world are spending aggressively, mostly focused on auto. Yes, they're expanding in the home as well. But does that impact the cost of customer acquisition and Pet?

I'm not sure I have a great answer to that, to be honest. For us, the channels are fairly distinct, meaning we know quite quickly which product that customer is likely to be a potential buyer of. And there are certain channels that are wholly focused for us, not necessarily for everybody, on Pet versus Rent versus car, there's some overlap. And I think we're quite adept at quickly reallocating growth spend based on what we're seeing, what that LTV/CAC ratio is. I don't know that I don't really have good data that says this shift in the car market is affecting Pet. So that's what I got.

That's fair. We'll switch over to maybe a fun topic that I'm sure you're excited to talk about on the autonomous vehicle side. Maybe starting off for audience members that aren't familiar with Lemonade's products that you guys came out with in February. Do you want to give a sort of an overview of what that was?

Yes. So we put together a partnership -- or a product in partnership with Tesla over several months last year that is providing traditional car insurance, but for those who are using a Tesla fully supervised driving (sic) [ Tesla Full Self-Driving ] or autonomous driving. And what the data shows and what many studies that you may be familiar with show is that the accident rate, the frequency, not necessarily severity, but the frequency is dramatically lower for each mile, every mile that's driven under autonomous versus a human driver, something on the order of 50% and our cost is something on the order of 50% lower for those miles driven. There are other risks that are unaffected. The tree falls on the car, it's obviously not -- that risk is unchanged.

And so this product is in rollout mode. We're in 5 states at this point, started in 2. We're now in 5. The N is very small. There's not many folks who are driving many miles under fully autonomous, but it's growing pretty rapidly. It's not a premium driver for us yet, but I would think of it as an indicator of where Lemonade is headed.

When we got the information and sat with Tesla and understood the data, our reaction was, this is amazing, let's go. They did not -- they've not gotten that reaction from other players, at least not yet. There may be others that come over time. But if you go to a large car insurance provider with billions of premium and say, I have a thing where we're going to charge 50% lower rates, it's not very interesting. To us, we're like, let's go. This is amazing, and we're going to learn a ton. We're going to gather data. We're going to roll this out in as many states as we can. And so that's the mode we're in now. And it's -- I think it's another sort of a proof point of our model, which is we're underwriting drivers and whether they're a human driver or whether they're a software driver, just the driver. And so the data suggests and supports this risk level. And for us, it's just another input. So it feels radically different because the human side of it obviously is radically different. But from a risk perspective, it's same data, same underwriting models, better result and a better price for the customer.

That's a small piece, though, I guess, of Lemonade Car when you look at the absolute premiums and dollars associated with it. Maybe talk a little bit about Lemonade Car specifically and sort of what you think differentiates Lemonade Car from maybe other traditional auto insurers?

So a couple of notable differences. One, as with everything we try to do, we're very -- as data-driven as possible. In car, that means telematics. It means the more data we can get, about your driving behavior, your driving experience, the better for us in evaluating your risk and the better for you in terms of a more accurate price. It is still very common for car underwriting to be a world of averages. If you have 2 customers that have a similar car and a similar background, maybe a similar credit rating, maybe a similar address, their price is going to be awfully similar, if not the same.

Under a Lemonade underwriting approach using telematics-enabled data, those 2 individuals are going to be priced fundamentally different and not 5% or 10% different, but significantly different pricing because it's based on their actual driving behavior. When do they drive? How many miles do they drive? How aggressively or conservatively do they drive? That's what really drives risk, and that's what drives our underwriting model. That's thing one.

Thing two is there are other car insurers who utilize telematics, but all telematics is not equal. At Lemonade, almost 100% of our car customers are being tracked almost 100% of their miles. That's not the case at any other provider. So 90%, 90-something percent times 90-something percent is 90-something percent. Other providers -- and we don't have exact numbers, but it may be 10% times 10% and now you're at 1%. So it's a radically different density of data that's being captured. And we think that's only to the benefit of evaluating risk and differentiating amongst drivers and giving a better price. Something like just very rough strokes, something like 2/3 of car customers are overpaying typically if you had a more granular view of their risk and about 1/3 are underpaying. And the third are so much worse, that's the reason the math works out.

And so every -- the more we can get at that average, we're going to be much more attractive to those folks that are overpriced. And perhaps we don't get the ones that are underpriced, and we don't necessarily want that business. So those are very distinct differences. There are some restrictions. California has different rules of what you can and can't do. That may change over time. But those are pretty distinct advantages that I think we have.

And is pay-per-mile still a prominent product or like a piece of the mix of Lemonade Car?

It is. Customer preference tends to win out, and that's a more specific type of customer who wants to know that they're paying the lowest price, but is open to more variability. And the flip side of that coin is there's a benefit to saying, all right, my rate is going to be this every month, but we do provide the pay-per-mile product. But the -- I would layer that telematics is a more important driver than the strict pay-per-mile. And the pay-per-mile aspect, you can charge a fixed rate, but we still collect that mileage data. So there's different levels of benefit to us, whether they're on the pay-per-mile product or even if they're not on the pay-per-mile.

Pause here again and see if there's any questions here before we finish up on AI. I would maybe say, I mean, AI has obviously been an important component of the Lemonade story and how you guys use it across the entire value chain of the ecosystem within Lemonade. What's maybe a use case or something sort of recent that you guys have found a use case for AI that you feel like is differentiated?

The list is pretty long. We don't have a good view into what others are doing because it's -- we tend to talk about it more than the average company because it's a core of who we are and what we do. I think a couple of areas that I might highlight. One, and these are things I think you can see outside, we launched more new states in our renters product in the first 6 months of this year than in the prior 3 years. That's a direct effect of the ability to adapt and understand and file in a very specific market. Every state is notably different in terms of the approval requirements, the rates and forms that you're filing, and that flows through into product. And the reason we can do that is because things that used to take both an engineer and a product manager working in tandem or a few of each that might have taken a few weeks or a few months can now be done in a few days. And that enables that -- you can't really shorten the regulator process, but you can really radically shorten the internal process to launch a new state. And sometimes that's an entire new product in a new state. But more often, it might be a feature that in an existing state where it's a little less publicly visible, we don't make a big deal about it, but we can launch those in pretty good time.

I think another place you're seeing it is in our ability to grow the business, but actually have -- grow the business and improve the customer experience. Yet have fewer people providing that -- whether it's customer service or claims support. And the way you do that is automating the simple stuff and consistently moving that line and then applying your people to the more complex or the more nuanced or the more the types of claims that can benefit from more human interaction or customer support. So we've seen that. We've been able to provide dramatically more claim settlements, dramatically more customer inquiries with fewer heads than we were able to 2 or 3 years ago. All of that is really AI-enabled.

And then the last piece that's probably worth mentioning is this came up in a couple of meetings today, which is when a new -- the pace of capabilities is increasing. A new model comes out and that model compared to the one a week ago or a month ago or 6 months ago is radically different, far more complex and that the pace of that change is accelerating, not decelerating. This is all kind of stuff we know.

Our model, our people, the DNA of our organization embraces that. And so we're able to quickly evaluate new models, determine the security level and get what makes sense into the product and into what actually touches customers in an hour or a day or a week or whatever the right time frame is, that is not common in large insurance companies. It is not common yet that someone wholly embraces something that came out last week versus 6 weeks ago or versus 6 months ago in terms of these AI capabilities. So I think that's an advantage that we'll continue to carry.

Okay. All right. Well, that takes us out of time. So I want to thank Tim, Lemonade for joining us, and thank you all for coming to the KBW Insurance Conference.

Thank you.

Good afternoon, everyone, and thanks for joining us for a fireside chat with Lemonade. Excited to have the company's CFO, Tim Bixby joining us.

So this is our, I think, sixth year we've done this and kind of maybe our last year as you're formally transitioning away from CFO at some point over the next year. So yes, so anyway, so six times is a charm, as they say, right?

That's right.

And I think we did start this live. At one point, it was like an in-person maybe the first 2 years. So anyway.

Okay. So let's like jump right in. So I think everybody knows if you have a question, you can put it in the chat. I already see some questions already down below. Otherwise, e-mail me at [email protected].

Okay. So let's start with IFP, very strong quarter, up 33%, 11th consecutive quarter of accelerating growth, third quarter and full year implied kind of sustained growth. I guess as you think about the business, what could cause IFP to slow? And I guess, like within your control and without your control? And how are we thinking about next year despite you not giving formal guidance yet?

Sure. So for Lemonade, growth is a gift, right? More growth is better. That's not always true in insurance. And historically, it's often been the opposite for many insurance companies. Growth and profit were at odds, you had to choose one. For us, it's typically the opposite. More growth typically leads to faster learning, more improvements. And you said it yourself, something like 11 quarters sequentially in a row of more rapid growth, accelerating growth, and at the same time, significant profitability improvements, loss ratio improvements during that whole period.

From a go-forward basis, we've kind of set 30% plus as our marching orders. And we first indicated that, I think, at our last Investor Day, which is almost 2 years ago at this point. And we've done it and then some. And we've gotten 30% and then grown that a little bit each quarter. I don't know that you can't accelerate every quarter forever. There's a limit to that, I think.

And I think to the question of what can get in the way or what can offset that or slow that is it's really about choosing. As long as we can acquire profitable customers, a lifetime value that's forecast by us and by our models, that's healthy, we can grow at that rate, and we've indicated 30% plus as far as the eye can see. And the good news is, since we made that declaration 2 years ago, we've been able to do it at ever-increasing absolute numbers, higher gross spend dollar amounts, though the growth rate is slowing somewhat by our -- again, by our choosing and maintaining the marketing efficiency and the kind of march toward EBITDA breakeven, we've indicated that's just around the corner.

So we feel very comfortable with that 30% plus. Our ambition is more. Our ambition is to increase that a little bit each quarter versus what is more typical, which is a flattening or a decline that day might come, but our ambition is to continue the trend.

Okay. So yes, we're going to go through a bunch of top line metrics and then because there's some questions in the chat, we will kind of get the margin. So customer growth, most recent quarter was 23%, premium per customer 8%. And I think you expect kind of no material kind of change in that -- in the near term. I guess talk about the dynamics of premium per customer, what drives that 8% cross-sell versus mix versus pure rate?

Sure. I think premium per customer is a good output. It's not a great input, but it's a good metric to track. There's some noise there, particularly as our Europe business grows quite rapidly. The premium per customer in Europe, even though it's both renters and home is relatively low compared to the U.S. business. The home policy in the U.S. is quite a bit -- quite a bit higher. So you have to be a little cautious in the -- just looking at absolute customer numbers.

But in terms of premium per customer, I think our current theme will continue. We've seen a roughly 8% year-on-year growth rate. I think you will continue to see that, you should expect that the remainder of this year, probably through next year. Looking out a little further into '28, late '27, '28 and beyond, I think there will be upward pressure on that premium per customer where that growth rate might move up a bit versus down from that 8% run rate. And that I think is -- that is really driven by mix shift. I think that when you see our current pet growth rate and car growth rate in the 50s versus the overall growth rate in the 30s, that will start -- you really start to see that play out in the numbers in those out years. And so I would think of that 8% is edging upwards a couple of years from now.

Okay. So kind of segueing to car grew 60% year-over-year in the quarter. [indiscernible] of new car sales from existing customers, so really good cross-sell. I guess -- and this is -- it is not widely available yet. So just -- I guess the goal is to have it in the majority of the U.S. by the end of next year. So I guess just like help us understand like where does this go? Is this like do we assume car accelerates from that 60%? And then just, I guess, how does that also a little bit impact margin just because there's different maybe requirements per state as you add more states?

Sure, sure. So more of the same. Generally, we expect car will grow because of the TAM and because of our efforts at quite a bit faster than the overall business. The state rollout is interesting, but it's not indicative, I think, of the trajectory or the growth rate much, meaning more states is good, more population is better. But we're in more than 40% of the U.S. population already, even though the number of states, it's a dozen or so, but more than 40%. By next year, that should be more than 50%. And so while it's 50% is less than 100%, it's moving pretty nicely.

The growth rate of our autonomous product in terms of coverage is pretty notable. The premium is negligible. But I would look to the pattern of expanding coverage as a theme for Lemonade. So we'll expand in traditional car states. We're now up to 5 car states already in our -- in the autonomous Tesla partnership product. So our ambition, ultimately, for sure, is 50 states for all products. But our growth trajectory is not hindered in any way by the pace of expansion. And at this point, the driver is really regulatory hurdles. We've become quite efficient at the rate filing process. That was not true 3 or 4 years ago. We were kind of new to the game and we had to build that -- build that team, build that skill, build those muscles, and we've done that.

One of the places we're seeing the most AI automation benefit is in those filings. A filing has to be done and approved by a human, but a lot of the infrastructural work, the logistical work is repetitive once you get to know a state. And so we're getting really good at getting filings in. And then ultimately, we're still subject to the regulator's approval.

Maybe talk about the unit economics of the kind of AV versus non-AV car policy? And then kind of the choices you're making around if it is more attractive -- you can -- it is a better margin product. Do you kind of give that back by a lower premium, so...

Yes, there's a couple of dynamics there. And again, and I would take this as directional, again, because the N is very, very small at this point. It's thousands of customers, not millions of customers. So you got a couple of dynamics that are different. One is obviously the price is notably different. The risk -- the expected frequency of a claim is notably less and the price is intended to kind of capture that impact, meaning if you're doing it right, you're holding that margin potential intact. You're just paying less claims and you're kind of returning that to the customer in the form of price.

The second piece that's probably more interesting is the marketing piece or the customer acquisition cost, because autonomous -- because it's a very specific subset of driving, it's not just Tesla, but having a partner like Tesla, who kind of leads this market, I think, creates an opportunity where the customer acquisition cost can be different. And I got to be -- we got to be careful about what I can and can't say, you're going to pay to acquire customers one way or the other. But I'd be hopeful that the ability to acquire customers is more efficient when you have a very targeted audience, you've got a strong brand awareness and partnership through Tesla and you bring another brand that kind of is closely tied with the way they operate and the way they think in the form of Lemonade.

I would think you have benefits both on the claims or loss ratio side of the house, but also on the expense ratio where you have a CAC advantage as well. So ultimately, we want to preserve the gross profit, autonomous or non, and we want to preserve the bottom line profit, autonomous or non. Will they be exactly the same? No. But I think because of those 2 dynamics still, the potential -- they'll both be quite attractive to us.

So like, again, thinking about kind of broadening the company, I think you did 14 state products, combination launches in 100 days. I think that goes to your point about like getting better at automating the paperwork and the applications. With nationwide kind of now being -- I think it made you kind of -- should we think of now renters can now be a national, more broader product, which then just increases, again, like more efficient customer acquisition, new customers in the funnel, et cetera.

Yes. I think that's true. And I think our preference on the rollout is to do versus say. And so I think looking at the first 6 months gives you an indication of our appetite. We can roll out faster than historically. A lot of the automation and AI-enabled work we're doing under the covers, under the hood where it's a little tougher to see it. We can tell you about our R&D investments and the ROI we expect from them. This is a great example. Being able to launch a state and a product in a week or a month instead of 6 months is a new capability. We've reached a new level in the first half of this year.

Now I wouldn't take the first half of this year, which is a new high and then extrapolate that out, but it gives you a feeling for what's possible. And like everything else with Lemonade, we don't see an end in sight, meaning what we did in the first half of this year, we think it would be better in the second half and better the year after that. And so at some point, this rollout question will be behind us. But we have a little ways to go before we're there.

Okay. So let's talk about LAE hit 5% versus industry average around 9%. I mean, how much further can that go? And I guess -- I mean, this literally is the AI [indiscernible] structural advantage. I mean -- do we see evolve how you're thinking about kind of pricing versus margin, so?

Yes. It's a great indicator. I think when we were getting to about 7%, we indicated we thought we might be able to cut that in half again. We cut it in half from 14% to 7%. We thought aspirationally, maybe we can cut it in the half again. And we're already at 4%. That wasn't too long ago, right? That was a few quarters ago and we're already at 5%. And the good news is it's not just one product that's fueling this, one type of claim. It's all the products are showing that improvement. Now each product has a different LAE. They're a different -- there's a range of low to high. But they're all showing improvement, which is another -- like another good sign that this is a fundamental advantage. It's not like a one-off because one product is better than the others. So we like that.

And there's no sort of a floor in sight. Now there's obviously a floor of -- you can't go to 0 or you can't go below 0. But I think the cutting in half from 7 is a reasonable aspiration. At the time, I didn't say it, one of our founders, I think, tweeted it, but it was -- it's an ambition that's within reach.

So talk about -- so of the synthetic agents program has become more efficient for you. I think you cut the cost of capital by 6 points. Do we -- where does that 6-point savings go to? Does that change your LTV CAC hurdle? Do you just -- do you reinvest that in more growth? Like how do you think about where the 6-point of savings land?

Yes. I mean it phases in over time. So it's not an overnight. I mean the renewal starts in January, meaning -- and we've got 2 great partners, General Catalyst has been a fantastic partner for many years in this area. Hannover Re is a unique player in the market that's been with us as a reinsurance partner for 10 years. So these are companies that know us really, really well. And that's why we're able to put together this structure and improve the economics a little bit.

It will phase in, though, over time. So January will be the switch over. We'll continue to repay all the cohorts that we've borrowed via General Catalyst until they're all repaid, and that will continue over time. There's no sort of balloon repayment or anything. So that plays out over the next couple of years. But in January for new sales, new borrowings, new growth spend that will come from Hannover Re at the lower rate. And so from a P&L perspective, you'll see that the benefit of that lower expense rate phase in over the course of those couple of years. And then ultimately, it will all be at the new rate. But it comes in over time, not overnight.

We -- it runs through our G&A cost rather than below the line, this interest expense, and we think that's -- we chose to do that. And we think because it's an operating expense, it's tied to growth and customer operations, it makes sense to put it there versus not.

I don't think it would fundamentally change our LTV model because, again, it's an expense, it's not free. So -- but it helps at the margin to give us a little more freedom to lean in or to lean towards growth on cases that are maybe closer to the edge.

Starting about, I think you recently deemphasized gross margin as a percent in favor of gross profit dollars, right, arguing the structural cost advantage will show up in pricing. I guess we've seen some nice improvement. Like where -- like as you're looking out, I don't know if you want to say what long term is, but maybe several years out, where gross margins should be, I guess, given the whole mix of products?

I mean a significant part of the shift in gross margin over time has been -- it's a combination of growth and loss ratio improvement for sure. And loss ratio will now ebb and flow more than it will just decline or improve over time. By definition, when you're in the 60s, I think we have a 59% or -- but we're in the 60s, loss ratio shouldn't be in the 40s or 50s. That means something is unhealthy about the business. So you'll see an ebb and flow in this -- probably in this range of the 60s.

So the change or the potential improvement in gross margin will be primarily efficiency driven versus loss ratio driven. LAE factors into it. Our LAE is embedded in the loss ratio. And so that -- for some companies, it's not. And so you have to sort of think about that dynamic. And then we've got some other components of gross margin. We distribute products that are not underwritten by us. It's relatively small, but that will grow over time. So I think you'll see gross margin sort of normalized, not too far from where they're headed maybe by the end of this year. I think you'll start to see sort of a more normalized rate. But again, you said the most important part, which is it's all about growing gross profit, maximizing that growth rate versus what the gross margin percentage is. I would think of the gross margin as an output and the gross profit dollars as the goal.

So we didn't ask you about gross loss ratio. So 60%, there were 7 points of favorable prior period development, 3 points of cat. Like what's the right target level, I guess, [indiscernible] are thinking about over, like, the next few years and what the loss ratio should be?

I would expect it not too far from the mid-60s. I think we've -- some of these patterns replicate, some don't. We've had fairly favorable cat experience that doesn't last forever. So we have to be somewhat thoughtful about that. That's part of the reason we've been cautious about growing our home book of business. We've renewed with our reinsurance partner with greater protection against named storms. That doesn't show up in the P&L. But from a risk perspective, it mitigates some of that risk. So we're being thoughtful about that.

There's mix shift components to it. The renters book is super healthy, pet is edging up a little bit, car is showing nice trajectory. So I would expect not too much divergence from that sort of mid-50s -- or sorry, mid-60s range for gross loss ratio. And again, to the extent we can -- the gross loss ratio goes up, premiums come down and conversion can improve, that can drive a faster growth rate, that would be a good thing.

So on EBITDA, your guidance implies positive EBITDA in the fourth quarter. You said EBITDA should be positive for next year, but not necessarily every quarter. I guess, investors because there was 1 or 2 questions in the kind of queue on this, like does that mean -- like if it plays out like that, and then we're talking about like positive margins in every quarter for 2028 and kind of off to the races? Or just more to do that, that could like limit that linearity?

Yes. I think that's fair. And while the Q4 guide for this year is important and notable because it's a change from negative to positive. Once you've kind of made that shift, we didn't want to get too focused on Q1 versus Q2 versus Q3 next year. There's nothing fundamentally different about Q1, Q2, Q3 next year versus Q4. So the potential for positive every quarter is, for sure, there because it will be pretty thin and there's uncertainty about weather and things like that. It could be in the first 3 quarters. It could be tight, and that would be fine and in line with our expectations. Q4 will be solidly positive, and the year will be solidly positive.

And so I would read it that way. And then, yes, for sure, the following year, you're past that kind of trough period where it's pretty tight. And that pattern is -- we're seeing that better than this year. If you look at the actuals -- actual EBITDA Q1 to this year, the guide for Q3 and Q4, you see a similar dynamic, a fairly consistent Q1 through Q3, a bit of a step up in Q4, and that's the pattern we'll most likely see next year. All of that, of course, is subject a little bit to weather and cat. But everything else equal, that pattern is fairly predictable.

And then like, again, translating that to earnings, this is another question in the queue. I mean, look, we've got you kind of positive EPS in 2028. I guess, just how do you think about your ability to control like the earnings number once you're like in the positive EBITDA range like several quarters in a row?

I mean the difference for us between EBITDA and earnings is pretty straightforward. It's stock comp and interest expense. And both are very predictable. We had a bit of a step-up in stock comp in Q2 and we kind of talked about that with these unique -- some unique founder -- multiyear founder grants. That's a step change, but that's not a repetitive thing. So that's will be at a new normal and then it's very predictable. And so our ability to the extent EBITDA is positive, and we have comfort and a track record with that, our net earnings will follow.

Stock comp and interest expense are actually, in many ways, much more -- much easier to predict absent wild stock swings than customer growth is. And so our confidence level is quite high. We have not indicated an exact date yet, but we have said within a year, roughly a year after EBITDA positive, we would expect net income positive. Your model is in the right range. So I think we're on track with that.

So I mean, to that point, once you have like consistently positive free cash, the balance sheet is healthy, there is leverage, but the thought would be like this business should always have leverage and you have [indiscernible] is basically the idea of if your choices are M&A or buybacks. And again, this is -- it's probably premature like it's not now, but like as we're thinking about 2028 and folks are kind of going, okay, like what's their ability to offset stock comp dilution with that? Like how do you think about that? Like do you think once like -- it's like, okay, we clearly making money, EBITDA, GAAP, like where does the money go?

I mean I think our first bias will always be growth. So we're -- we're at the edge of growth in a good way, I think. We can -- we've shown that we can grow a little more, a little faster each quarter, not only a faster growth rate. But if you do the numbers, the absolute number is growing at a pretty healthy clip of added business. But we want to see a bottom line that is positive, and we want to see it that is #1, and predictably positive, number #2 and then growing over time. But I think our bias will be towards growth before you get to things like buybacks or M&A, which are the 2 things you noted again, because we can grow -- we can grow 40%, 45% annually, at least before you get real pressure from capital surplus requirement, which is really -- that's kind of the next thing that's not prohibitive, but it's a thing that you got to finance that one way or the other.

And so I think our bias would be in that range of 30% to 45% to lean towards growth. Someday, if that's not the case and growth rates moderate or we're so large that 20% growth looks amazing, then we might consider things like a buyback or that kind of thing, dividends, that kind of thing.

Okay. So let's now shift to AI, which can be like wide-ranging topics. So one, I mean, if you were to think about your organization's ability to deploy AI to improve efficiency, like where do we think we are on like the scale of like 1 to 10? Like, 10 is like it's doing everything and there's nothing more; 1 is, we're still learning how to use AI. Where do you think you are right now?

I think relative to where we ultimately can be, I think we're probably at 1.

Okay.

I think relative to...

And I guess like why I think we all acknowledge the capabilities of what these models can do. And is it just like, hey, look, we haven't unleashed them because, I don't know, we're worried about hallucination. We're worried about leaking customer data. We're worried about token maxing and uncontrolled spending, like, why only at 1? Because I feel like, I don't know, like I think that would probably is a surprise to some folks that say only at 1?

Well, I was going to -- the second half of my statement was going to be, I think -- and I think if we're at 1, then all of our competition and potential competition is at 0.1, just to put a finer point on it. So we're pretty far along. But yes, 1 out of -- and the goalpost keeps moving. So that 10 today looks very different than it looked 3 months or 6 months ago.

So the reason I say that is we see dramatic day-to-day impact in subsets of our workflows. But not -- it's hard yet to see it in 100% of a given workflow. So I'll give you an example of what does that mean? Adding features or launching a new product in a state might have taken us 6 months in an old structure. And that's just our part of it. Designing, reviewing, QA, testing, all the different steps that have to -- could have taken -- could have taken or in some cases, can still take months. And that's before you get to regulators. We'll ignore regulators for now.

We can now do certain types of products or certain type of features in certain type of locations, that set of work that might have taken months in hours or days. And so we've taken subsets of work from very long to very short. But we can't take the regulator out of it. And we haven't been able to apply that to 100% of all workflows. And so you're kind of stuck -- your bottlenecks tend to move around.

In finance, similar example. We've taken a -- there's a process where we reallocate our P&L, either actual or forecast through a reinsurance waterfall, either based on a new reinsurance set of agreements or a scenario or a pro forma that we want to consider as a new structure. We want to roll all the numbers through and see what the impact is. That kind of -- to get something quite accurate either for the actuals has to be perfect -- perfectly accurate or for a scenario, you want it to be very accurate. That kind of work could have taken days or weeks for a bunch of humans to do a bunch of work. And now we've automated that to such a point where I can -- I don't see all the nitty gritty, but I can do something like that in a couple of hours or a day or 2, something that used to take weeks.

And we're applying that across the board in places that we either don't talk about publicly because it's competitive or things that are a little bit more arcane. But what we don't see yet is when you do that across all of a set of workflows. And so we're in finance, we're ultimately shooting for a 4-day close from a 20-day close. Now for us, I mean, the 4-day close doing every step. Some big giant companies close in 4 days because they skip a bunch of steps and there's lots of estimates and they -- because they have to do that. We want to do a perfect 100% lockdown close in 4 days instead of 20 days, we're getting pretty close.

Part of the reason we can have 50 people in finance today and 50 people 4 years ago when we were 1/3 the size and far less complex is because of this kind of work.

What we haven't yet nailed is sort of the piece where AI can enable us or point us in the right direction for -- to move some needles that have been tougher for us like cross-sell, and retention. Those are sort of the Holy Grail and sort of the magic goal of all of insurance is if you can move retention a little bit, has huge value. If you can move cross-selling, cost to existing customers a little bit has huge value. We're nowhere near sort of cracking the code and whether that's using AI or a human, it's usually a combination...

Do you think that's because there's really not enough liquidity in the system and like -- I think it's like it would modify the pattern, right, where we like, we did this, and this was like that was [indiscernible] if you don't have enough of the data points, you can't know that, right? So like, again, once you're doing renters nationwide, you're going to have a lot more kind of data points around how you move somebody from just a renter to something else. I don't know, like, that would be the reason why, because I think most people don't really can't -- the data won't, you throw the data in, and it won't tell you that answer today?

Well, there's knowing and there's implementing, right? So we have to -- you've got a lot of steps to kind of flow that through and you're deploying capital and you're doing it in a way that's SOX-compliant, and you got to satisfy the regulators. And so the AI enables the capability, but the doing still has a pretty rigorous set of structures that we have to satisfy.

I don't think it's the scope of the -- where we are live in terms of territory. I think it's -- I do think it is the pace of learning, which is accelerating and our comfort with it. A lot of our investment has gone towards making all of these steps more efficient. But I do think it's still pretty early.

[indiscernible] I like given you -- I think you've clearly been at the forefront of using AI and big data insurance at scale. If you're telling me that it's still these roadblocks, I can only imagine what the legacy companies like. And I guess for them, it might be like, hey, we could bring like AI into marketing, and you get some efficiency there, like, oh, okay, like that could be meaningful, whereas you guys have always been like super efficient at marketing, right? So some of this is like we may hear from incumbents, we did AI with this and they're just picking something that like we're just highly inefficient whereas you're starting a much higher -- the bar is already higher.

Yes. And there's another dynamic. So that's exactly right. The system -- we have one single system that we've built internally to kind of push everything through, which is hard, but wildly dramatically easier than if you're a typical incumbent. There's another aspect, which is the tools are changing so fast. And we -- the release of last week versus the release of 3 weeks ago or 3 months ago has dramatic impact. And you have to have the skill set to adapt to that, decide what to use, what not to use, how fast to adapt and how to use that new release and when to ignore the new release, like these are really hard decisions that come very rapidly. And this is just business as usual for us, and we're quite adept at it. But that's a challenge before you even get to implementing it, understanding what it is and how to use it is super complex.

Did you ever get to a point where you were getting nervous about the cost of deploying AI and not having to rein that in? Or it's generally stayed pretty much within the bands?

Not really. I mean, by definition, I'm always nervous about something that's new from a forecasting and budgeting perspective. But from an absolute dollar perspective, it's been nominal and manageable. And we haven't had any -- I think it was the $0.5 billion surprise at Amazon or whatever it was. We haven't had those kinds of issues.

So what is -- what do you think is the most exciting thing right now from a consumer standpoint? So if a consumer like try Lemonade 3 years ago and now they go and download the app and try it again, like what are they going to notice and be pleasantly surprised it's different?

I think the difference in the user experience today is still as striking or more so than it was 5 years ago. Forget AI for a moment, if you can. Our -- the most undervalued asset we have is how extraordinarily seamless and facile the user experience is for Lemonade. And we have 3 million customers, and so we got 3 million people who know that and then a bunch more who've tried it, who know that. But in a market of 150 million in the U.S. and another couple of hundred million in Europe, these are just tiny, tiny numbers. And the customer doesn't care about how fast we deploy, all they care about is a seamless, incredible experience. And there's no one who's remotely close.

And everything we've done is out in the open. All the tools are available to everybody. And we've seen nobody who's coming anywhere near to closing that gap. All of the things we're talking about are really on the back end, which is great. It's great for us, great for profit, great for investors. But the hardest -- in many ways, the hardest part we did first, which is that user experience and now being able to deliver that at half the cost or a lower CAC or an LAE of 5 instead of 14, like that's where the magic comes is that the product itself is -- it's just unparalleled.

So last question. I mean, obviously, you're seeing really good growth for a lot of positives going on in the business, and yet the housing market is really kind of not particularly strong unless you're looking at the affluent side of housing. And one can argue that by definition, you probably skew more average, not affluent, maybe in some cases below just because of the renter mix. If housing started to -- if we ever got into a rate lowering cycle, and we actually started seeing housing loosening up, which is still not guaranteed because of the structural issues in housing, but like when is the last time you felt like you saw that as a tailwind at your back? Because, again, to the point of like you think you got this great cool product, but most people don't think about their insurance, right?

So if you're not moving or you're not buying a new car, you're probably not thinking about switching, right? There's a lot of people who haven't had the opportunity to even think about trying the product.

Yes. I think one of our benefits is given our size, even at these high growth rates, we're going to be small for a while. And so these -- the macro trends tend not to buffet us too much. That said, a radical shift in housing starts or lower interest rates or whatever could definitely benefit us more first-time buyers is better. People switching from renting to buying is certainly a potential tailwind for us. But that's why we're -- that's why the multiproduct strategy has always been a core benefit for us is that's a subset of the market. And there will be ebbs and flows in each of the product lines. Our ultimate goal is just more humans no matter how -- where AI goes. We want 3 million going to 6 million going to 9 million humans using Lemonade and using all the products. So all those things are good.

Great. Well, we're going to stop there. Thanks, everybody, for joining us. Thank you, Tim, for your time, and we look forward to seeing you all at our next session.

Thanks, Jason.

Hello, everyone. Thank you for joining us, and welcome to the Lemonade Second Quarter 2026 Earnings Call. [Operator Instructions]

I will now hand the conference over to the Lemonade team. Please go ahead.

Good morning, and welcome to Lemonade's Second Quarter 2026 Earnings Call.

Joining us on our call today is Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bixby, Chief Financial Officer; and Nick Stead, SVP Finance.

A letter to shareholders covering the company's second quarter 2026 financial results is available on our Investor Relations website at lemonade.com/investor.

I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the SEC and our more recent 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 performance indicators, including number of customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex CAT, trailing 12-month loss ratio and net loss ratio and 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 for some opening remarks.

Good morning. I'm happy to report on another excellent quarter, marked by accelerating growth, strong underwriting performance and continued progress towards profitability.

In-force premium reached $1.43 billion, growing about 32.5% year-over-year and extending our streak of accelerating growth to 11 consecutive quarters. Revenue grew even faster, increasing 79% to $294 million, and gross profit increased 76% year-over-year to a record $113 million.

As a result, adjusted EBITDA loss improved 54% to $19 million, and we remain on track to deliver our first positive adjusted EBITDA quarter in Q4 this year, followed by positive adjusted EBITDA full year 2027. Against that backdrop, we remain confident in our outlook and are reiterating our guidance across IFP and EBITDA while raising our guidance for both gross earned premium and revenue.

During the quarter, we also completed our annual reinsurance renewal as well as the extension of our synthetic agents program with important upgrades to each. As it relates to reinsurance, the renewed program modestly increases the share of premiums that we retain while meaningfully strengthening catastrophe protection, including named storm coverage that was largely absent under the expiring structure.

The agreement related to our synthetic agent extension provides $0.25 billion in growth financing at roughly 9.8% cost and applies to growth spend in '27 and '28. This amounts to more than 6 percentage points improvement in our cost of capital, materially lowering expected interest expense on a go-forward basis.

With the financing of our growth investment improving, let me turn to that spend and its efficiency. Over the past several years, we've substantially increased our growth investments while holding the LTV to CAC ratio stable at roughly 3x, no mean feat.

Some of you have noted that this growth spend outpaced the corresponding growth in in-force premium. The concern that I understand it is that this gap signals declining efficiency that each incremental growth dollar is buying less premium than once it did. It doesn't, and I'd like to walk you through why.

With our direct-to-consumer distribution and predictive LTV models allocating that spend, we ratchet spending up and down and shifted from one product to geography to another in real time in pursuit of those sterling 3x returns. In 2023, as inflationary pressures shrank the opportunities for profitable spend, those controls naturally reduced our growth investments to about $55 million.

We implemented rate changes to counter inflation. And as those came online, we added about $15 million of incremental growth spend each year. Now a similar dollar addition to a growing base produces a lower growth rate. So, spend growth decelerates by construction.

On the premium side, the dynamic pushes the other way. Growth spend is a flow. It's expensed and reset each year. The premium it buys is a stock. Cohorts stay on the books, layered on top of every cohort before them. So, while spend growth decelerates, the premium of those dollars created keeps compounding, boosted further by our accelerating cross-sell.

The bottom line is this, the observation is accurate, but it doesn't point to any underlying degradation in our efficiency. It's a mathematical artifact of our spending slowdown in response to inflation and our subsequent catch-up spending. Beginning in 2027 and beyond, we expect IFP growth to outpace spend growth, a key driver of operating leverage and profitability.

And before I hand over, [indiscernible] this morning's other announcement. At year-end, after more than 9 years as our CFO, Tim Bixby will pass that baton on to Nick Stead, our Senior Vice President of Finance, and Tim will step up to Lemonade's Board of Directors. This transition was years in the making, instigated and paced by Tim himself.

And today, almost all of our financial functions already report to Nick. So expect this handover to look like everything else Tim has engineered here, the capital raises, the IPO, 6 years or beat and raise, which is to say planned, disciplined and seamless. Congratulations to both Nick and Tim.

With that, I'll hand over to Shai, who will cover a couple of key insights across the business. Over to you, Shai.

Thanks, Daniel. First, I wanted to update on our LAE ratio, that is the cost of handling claims. This is a key metric when looking at insurance carrier efficiency with an industry average of around 9%.

In the second quarter, we delivered our best ever LAE ratio result of 5%. This improvement is a continuation of a multiyear trend made by the growing use of our Lemonade OS technology, which drives AI across the claims operation. It is notable that the gains have been broad-based with record low LAE ratios in the quarter across each of our product lines.

Beyond boosting our profitability and pricing power, the LAE ratio is a way to compare our efficiency versus other insurers. And what these numbers show today is that our competitors spend almost twice as much as we do on handling claims, and we're not done here by any means.

Next, I wanted to touch on our expansion efforts. In the past 100 days, we launched 14 additional state product combinations, which included both a meaningful push towards nationwide availability for renters product as well as the launch of our autonomous car product in Colorado and Indiana.

That's made possible by continued investment in our proprietary technology platform, which reduces the effort required to launch new products and enter new markets. We believe that nationwide availability in renters will unlock a much broader partnership opportunity with potential partners for whom that is a key requirement.

On the road map, we expect to see more geographical expansion, most notably with regards to our car product. We have several state launches expected in the near term. And before the end of 2027, I believe our car product will be available to the majority of drivers in the United States.

And with that, I hand it off to Tim, who will cover our financial performance in a bit more detail. Tim?

Thanks, Shai. Let's start with Q2 results, which were excellent. In-force premium grew more than 32% year-on-year to $1.43 billion, driven by customer growth of 23% and premium per customer growth of 8%.

We added about 166,000 new customers in Q2, more than 12% greater than the roughly 148,000 in the prior year quarter. Within our reported gross loss ratio of 60%, our favorable prior period development of 7% was driven primarily by our homeowners, multi-peril and car products.

Total CAT impact in the quarter was 3%, excluding CAT prior period development. And on a net basis, we saw 5 points of favorable prior period development, of which 2 points were related to CAT. Prior year development, which we report on a net basis, was $12 million favorable in Q2 and $16 million favorable year-to-date.

Gross profit increased 76% to $113 million, while adjusted gross profit increased 74% to $114 million for a gross margin and an adjusted gross margin of 38% and 39%, respectively. These metrics use revenue as their denominator. Our adjusted gross profit as compared to gross earned premium was 34% in Q2, up 8 points from 26% in the prior year.

Revenue grew 79% to $294 million, while our adjusted EBITDA loss improved to a loss of just $19 million. Notably, revenue grew nearly 50 percentage points faster than IFP due to dynamics related to our sustained trend of increased premium retention at reinsurance renewals in recent years.

Importantly, adjusted free cash flow was positive for the fifth consecutive quarter at $19 million and has been positive 8 of the last 9 quarters, while operating cash flow was negative $3 million, following a common seasonal pattern. We ended the quarter with roughly $1.2 billion in cash and investments, of which about $330 million is required to be held as regulatory surplus.

Annual dollar retention, or ADR, remained stable sequentially at 85%, continuing to reflect the impact of our prior clean the book actions within our homeowners product line. And as a reminder, ADR is measured relative to prior year's IFP. So, while those portfolio actions are now largely behind us, they will continue to impact the reported ADR metric for the next couple of quarters before rolling out of the comparison period.

Operating expenses, excluding loss and loss adjustment expense, increased by $53 million or 41% to $182 million in Q2 as compared to the prior year.

And now I'll hand it off to Nick, who will walk us down the P&L and break down those expense lines a bit. Nick?

Thanks, Tim. Let's do that.

Other insurance expense increased year-over-year by $5 million or 25% in Q2 as compared to a 32% growth rate of gross earned premium. This includes certain expenses that are variable in nature, and so typically grows at rates not materially different to that of the top line.

Total sales and marketing expense increased by $18 million or 30%, primarily due to increased growth spend as compared to the prior year. In Q2, growth spend was $64 million, up 30% or $15 million as compared to the prior year. Importantly, as we continued to ramp growth spend, marketing efficiency levels remained stable and strong in the second quarter with an LTV to CAC ratio above 3x, in line with prior year.

Technology development expense was up by $8 million or 34% year-on-year to $30 million. The growth was driven in roughly equal parts by the SBC impact of recent equity awards to our executives, which were not reflected in the prior year quarter, growth in personnel-related expense and higher software costs supporting our expanding AI capabilities.

G&A expense increased 85% as compared to the prior year to $48 million. The year-on-year increase in G&A was driven primarily by a onetime tax refund benefit in the prior year period, the SBC impact of recent multiyear executive equity awards in the current period and growth in interest expense. Excluding those items, the year-over-year growth rate of G&A expense was 2%.

Headcount increased slightly by 65 or about 5% year-over-year to 1,339 in Q2. The increase is attributable to net hiring in our product and engineering teams, and we expect that most of the year's net hiring activity is behind us.

Net loss was $43 million in Q2 or $0.56 per share as compared to a net loss of $44 million or $0.60 per share in the prior year. Excluding the onetime benefit related to the tax refund I had mentioned from the prior year, the current period net loss result represents a 22% year-over-year improvement. Adjusted EBITDA loss was $19 million in Q2, dramatically improved as compared to a $41 million result in the prior year.

Our detailed guidance for Q3 and the updated full year of 2026 is included in our shareholder letter and represents 33% Q3 and full year ISP growth, roughly 9% Q3 revenue growth and 65% full year revenue growth and unchanged a positive full quarter of adjusted EBITDA in the fourth quarter. Based on our third quarter and full year guidance, implied fourth quarter adjusted EBITDA is approximately $8 million.

With that, I would like to pass it over to Shai to answer some questions from our retail investors.

Thanks, Nick. We now turn to our shareholders' questions.

We received a question about our IFP growth rate acceleration streak, when it might end and what factors could extend it.

11 consecutive quarters of IFP growth rate acceleration is a remarkable run by any measure, but especially for us as it's roughly 1/4 of our life as a company. What is most notable about that streak though, is that it has never been at the expense of profitability. LTV to CAC ratios remain healthy and strong at roughly 3x and adjusted EBITDA breakeven is precisely on track as compared to prior expectations.

Our third quarter and full year guide contemplates the next point of IFP growth up to 33%, but we haven't given precise expectations for 2027 just yet. We have many growth drivers, but perhaps it's helpful to think through the lens of LTV to CAC. When unit economics improve, we are able to invest more aggressively in growth.

We see opportunities on both sides of the equation. We seek to increase LTV through sustained momentum in cross-sells, which can drive gains in retention. And we seek to improve CAC efficiency through more granular AI-driven pricing, which can provide a tailwind to conversion rates. We continue to focus on these key drivers that we believe can drive sustainable profitable growth.

We received a question around our new car insurance business, specifically the share of customers acquired via marketing versus cross-selling.

We continue to deliver excellent growth in our car business, 60% year-over-year in the second quarter. We're seeing strength across both of these channels. In the quarter, we saw both the highest ever period of new business to car and the highest ever period of car sales to existing Lemonade customers. In recent periods, car sales typically represent between 40% to 50% of new to Lemonade car sales.

We also received an interesting question around our adapting to new AI models as they come out.

One of our core advantages is that we're model agnostic. We're not tied to any one frontier model provider. We continuously benchmark the latest models against one another to identify the best combination of capability and cost for each specific use case.

When a new model is released, our teams typically begin evaluating it immediately, where we see performance advantage, moving from evaluation to implementation can happen in a matter of hours. The benefit isn't usually 1 dramatic step change. It's the cumulative effect of incremental improvements. To name a few, those improvements increase automation rates, they reduce human intervention, improve customer experience and lower cost to serve.

I believe our system's ability to run multiple models at the same time while constantly evaluating them in real life is an advantage that helps drive the improvements in efficiency and operating leverage you've seen over the past several years.

With that, I'll pass it over to the moderator, and we will take some questions from the Street.

[Operator Instructions] Your first question comes from the line of Jason Helfstein from Oppenheimer.

I'll have kind of 2 separate questions. So first is, what's the team most excited about right now? Obviously, a number of things going on, product, geo, et cetera? So what are you most excited about?

And then just second, as we're all trying to think about how the model spools forward and thinking about potential operating leverage in 2027, 2028 without giving specific guidance, I guess, do we think that gross margins and contribution margins can kind of continue to maintain the current path as you expand product and geo coverage? Just any kind of way, obviously, as we're all trying to think about what that bogey is for 2028 to support valuation.

Jason, good to hear from you. These are exciting times. So there's a lot to be excited about. If I had to pick one, I think I would say car, where we're just seeing kind of all the pistons going, all the quips around car kind of right themselves.

But we really are seeing a lot of acceleration, a lot of improvement. There are a lot of changes and implementations and launches being planned and worked on, and we'll elaborate on those during our Investor Day, but there's a lot of reason for ongoing optimism in the sense that in this huge market where we are really just absolutely tiny and have so much headroom, we have advantages that we can sustain and can compound.

And vaguely related to that, I'd add a second one, which is a little bit more vague, but there is a strong sense in the team, and I think it's reflected in our results quarter after quarter now, which is that the wins at our back. The machine is doing what it's meant to be doing.

These 10 years of hard work at building the technology that we've built is throwing off results, throwing off growth, throwing off gross profit, compounding on a regular basis, all the data infrastructures, the AI infrastructure, some of which Shai mentioned a couple of minutes ago, the brand work that we've built, the team that we've built that this machine is really functioning very, very well, and it's just a pleasure to -- from my vantage point to sit back to some extent and watch it compound and keep doing what it's doing, 11 quarters in a row of acceleration, and we think there's a lot more where that came from going forward.

I'll touch on the gross margin question briefly and then see if Tim or Nick wants to add more. But my comment is less by way of a direct answer and more by way of kind of challenging the premise or kind of a little knit, which is to say we are not -- I am not -- we are not focused on gross margin per se.

The metric that we focus on, and we do encourage our investors to focus on as well is gross profit because there will be times where we can increase our profitability through shrinking gross margins and times when we cannot. And we're just talking about car, and I've spoken about this repeatedly on prior calls, which is that you see some incredible elasticity of demand in core products like car and our ability to actually shrink gross margins over time.

That is to say, to price more aggressively than our competitors because we have a structural advantage that manifests in an entirely different cost structure. (Have a look at what we just announced in terms of LAE, spending something in the ballpark of half as much of our customers' premiums in order to give a better experience in claims.)

But that kind of structural advantage allows us to produce a pricing advantage that will allow us to continue to grow and take market share. It will not manifest necessarily as an advantaged play in gross margin, but it will manifest in growing gross profit, which is the more important of the 2 metrics, if you follow my line of thinking.

And with that, let me just see if Tim or Nick want to come in as well.

Yes. Daniel has it exactly right. And I think from a -- if you kind of translate that to a modeling perspective, the growth drivers for gross profit are clearly the top line growth, the gross loss ratio, and that is really advantaged by the loss adjustment expense improvement that you've seen, and we had a nice deep dive in the materials today, and we've updated you from time to time on that, and that's something we expect to continue.

In addition to that, the top line growth accelerating also puts upward pressure on that gross profit. So while we would not expect to see such dramatic loss ratio impact as we've seen historically, something like 30 points of gross loss ratio improvement over time as expected and as planned, but a result of lots of hard work over time, you'll now see the gross loss ratio move around as much more of an output than an input.

But the gross profit, I would expect to grow materially in line with top line growth and even mix shift doesn't hurt us, mix shift tends to help us, again, with the loss ratio or the loss adjustment expense looking nice, not only in aggregate, but also if you isolate by product, we see that same dynamic. So even as mix shifts, we'll still see that nice benefit.

So, I think we've given you enough breadcrumbs today, we'll continue to do so to kind of model out that gross profit. We'll certainly update in the next quarter and at Investor Day and give a little more detail, but all the trends are quite good there.

And sorry, I'm told that -- I misspoke, Jason. I hope I was understood, nonetheless. But just looking at our LAE, we are at 5% industry is at around 9%. And I was saying that they spend about twice as much of their customers' premiums than we do of our customers' premiums on the bureaucracy of handling claims. And that we tend to believe is probably indicative of a broader trend beyond claims as well. But if I misspoke, I hope I've clarified that.

Your next question comes from the line of Tommy McJoynt from KBW.

Do you envision the inputs of getting to 30-plus percent in-force premium growth shifting a bit where customer count growth decelerates in the low 20s and premium per customer growth accelerates from the current mid- high single digits? Are those inputs likely to change?

Thanks, Tommy. I would expect no material change in the near term as to those relative growth rates. I think customer growth will continue to be the primary driver of IFP growth, but I also would expect the year-over-year growth rates of premium per customer to gradually and modestly increase as has been the recent trend.

Okay. Got it. And there's been sort of a hot topic in the industry has been around the future of distribution, especially with some of the AI technology enforced today. Over time and what you guys are currently working on, has your approach to complementing your core direct-to-consumer form of marketing with using human independent agents changed at all over time? And has AI either changed your strategy around that?

Tommy, no, not materially. It's much the same. Our focus is on direct-to-consumer. We do have an agent program as well, but that is relatively niche and the overwhelming majority of our sales are direct-to-consumer.

We're fine with people using their agents to do their shopping on their behalf. We're actually overly weighted by agentic processes, basically the way the training data that Claude or Gemini or OpenAI's chatbots contain or the materials that they're trained on are materials that we're very proud of.

It's the customer feedback, it's the pricing that we have, it's the response times that we offer our customers. So if you do what we have done multiple times, which is see how often those agentic bots or processes will recommend Lemonade or will end up choosing Lemonade, you'll see that we're comfortably overweighted. So from that point of view, we feel quite comfortable with the emerging technologies and see no need to adjust our strategy.

There's an interesting analog maybe worth mentioning when you think about our direct-to-consumer efforts and where that is some at times different in Europe, for example, a pretty significant amount of business goes or originates through price comparison websites.

And so one of the key learnings in our early time as we built and grew that business was figuring that out. How do we bring our direct-to-consumer advantages to a process where there's a third party in the mix, even if just peripherally or just at the start. And so this is not entirely new to us. Obviously, AI and Agent is a different realm, but it's something with which we have some real experience.

The ultimate goal, of course, is to get that consumer into a Lemonade feeling experience as quickly as possible and whether that's through a price comparison website through a small agent testing area where we have some work happening through AI agentic, those are all things with which we have some real experience.

Your next question comes from the line of Ryan Tunis from Cantor Fitzgerald.

First of all, congrats to both Tim and Nick. So first question, I guess, just taking a step back, there's -- this seems like a really good quarter in terms of thinking about from a bottom line perspective, right?

I mean this new metric in terms of the convergence of the IFP growth and the customer acquisition spend, there's more good commentary on the loss adjustment ratio. You're retaining more of your gross premium that should add operating leverage as well. All that's good. It doesn't sound like to me -- and correct me if I'm wrong, but it doesn't sound like to me that's coming at the expense of how you guys have been talking about growth. I guess that's the first part.

And then second part is just the operating expense piece in terms of the relative growth there and how that could contribute to operating leverage in 2027 would be helpful as well.

Ryan, thanks. I'll just comment on the first part and then hand over to Nick for the second part of your question. But yes, all of that, you highlighted a few things that we're proud of and that are, I think, quite an outlier in terms of the industry. So getting to an OAE of 5% across our book, 7% in our car business. Our car business is just a couple of hundred million dollars in size. The industry is several hundred billion dollars in size.

So we're talking about something that is a pro of the industry, and yet we are lapping the industry at large in terms of the efficiency metrics. That's something that I think is indicative of a structural difference that we've been talking about for a while and that now is manifest in the P&L really almost on every line. So definitely, those kinds of metrics, and I'm glad, Ryan, that you're highlighting them, those kind of metrics are exactly the things that drive our growth.

We speak about on multiple occasions how we have a bunch of machine learning algorithms, essentially AI, some 50 of them that work in concert in order to allocate our spend. And really, what they're doing is taking all of that information and figuring out what does our cost to serve, what kind of customers are we acquiring, how long will they stay for, what claims behaviors will they have?

You throw all of that into the mix and outcomes a lifetime value of the customer. And the way we hunt for those threefold ratios of LTV to CAC is by scouring and competing campaigns, products, geographies against each other in almost an algo trading kind of structure in order to keep finding that growth.

And you'll see in the comments in our letter and in our earlier comments that when inflation shrank that pool, our growth shrank down. And now that we're in a much better place, that is an enabler of growth. So, the premise of your question is absolutely right. The better we get at each of those metrics that automation, that precision at new products launch in new territories, obviously, the more growth you can expect to see.

And Ryan, maybe I can jump in on the second piece of the question around forward expectations for expense growth. And I might take that by line item. I'll start with other insurance expense. That's the line item where we typically see less benefit from leverage. Those are certain line items that are somewhat more variable and so increase more or less in line with premium.

Sales and marketing expense typically grows in line with the pace of growth spend. And you're right to mention that insight in the letter where we outlined that in 2027, we expect the growth rate of growth spend to continue to decline below the growth rate of IFT for the year and beyond. And so that's an increasing driver of leverage.

And then for both G&A and tech development expense, we see more significant benefit from leverage. And so, I would expect the sequential growth rates for those line items to be quite low. I'd perhaps note the year-over-year growth rate of the upcoming couple of quarters may be somewhat noisy due to the impact of that recent multi-year equity award to our executives that we have mentioned. So perhaps it's helpful to model those growth rates sequentially from the Q2 baseline.

Notwithstanding many of those drivers, I'd just mention that these are more or less in line with the way we have been thinking about expenses. And the way you can see that is in the reiteration of our adjusted EBITDA guide for the year and a positive fourth quarter.

Very helpful. And just a follow-up, definitely a lot more small ball, but a follow-up is just the pet insurance gross loss ratio looked like it picked up a little bit this quarter. Just curious if there's any notable color around that.

Yes, happy to take that one. We are impacted by an industry-wide vet cost inflationary trend. And from our view, that is the primary driver of the modest increase in our pet loss ratio, both sequentially and year-over-year. We are actively taking rate through the system to offset that impact. I'd say notwithstanding the significant rate that is being taken by both us and our competitors, the growth rate of the broader pet insurance market continues to outpace those of the other lines of business where we operate.

Your next question comes from the line of Andrew Andersen from Jefferies.

And again, congratulations to you both. On the quarter, Tim, I think I heard you say car produced some favorable development. I don't think that's too different from what some of the larger peers are seeing. But can you maybe just talk about what you're seeing in reserves to release some this quarter even with the book still scaling rapidly here?

Yes, that's exactly right. So we've seen a trend in the quarter that was not too dissimilar from a few prior quarters, which is both the home business and the car business primarily had some favorable development, somewhat different causes, car growing significantly and a significantly improved loss ratio over time.

It's not uncommon to be somewhat more conservative in reserving as your business changes rapidly, and our business in car has certainly changed absolutely for the better, but also in terms of its growth rate, in terms of its diversity across states and a lot of that has come together to enable us to reanalyze those prior reserves and continue to release.

Home is a little different. Home, it's not so much the growth rate. We've actually just kind of edged past our clean the book efforts in home. And so, we've done a couple of things there. One is to really look at from a macro perspective, business that today, we wouldn't write, and that's really been 1.5 years or so in the making and really passed that point.

That said, the remaining business was still somewhat conservatively reserved in light of new data and our current understanding of the book and that enabled us to release those reserves. By definition, our forward expectation is today's reserves are exactly right. And we'll kind of see how the subsequent quarters play out, but those were consistent trends.

Okay. And recognizing it's early, but you had mentioned at the top of the call, just the autonomous product, car products are live in a couple of states. What have you learned maybe about the frequency or severity of this product relative to the traditional auto book?

Awfully, early. And so that's not something we've put any real data out on. And so we'll kind of have to stick with what we've disclosed so far. The good news there is that the trends are positive. We've seen nice reception from those customers who qualify for that product. The end is quite small, but the trends are quite positive.

And I think if you look out across the market as we do and see the data that's released not from Lemonade, but across the market, the frequency numbers without question, are significantly -- or not significantly are notably lower. The 50% number that we've quoted is really our number, data-driven through the data that we've analyzed as we put that product together. But the public numbers we're seeing are that amount of savings or greater.

So we're quite optimistic about where that product will head. It's a multiyear adoption rate. We'll see how that plays out. And that's probably as much as we can say at this point.

At this time, there are no further questions. This concludes today's call. Thank you all for attending. You may now disconnect.

All right. Good morning, everybody. We're happy to have Dan Schreiber, the CEO of Lemonade with us here today. And Dan, thank you for taking the time. It's an exciting time to talk about the business.

Yes. Good morning.

Yes. So if we can get it started, the broader market is seeing a softening trend in personal lines and then the industry is seeing notably slower growth. But your business mix is obviously fairly different from other larger carriers. And in fact, this would be your 10th consecutive quarter of accelerating growth, right? So if we think about the business going forward, can you help us think about how you can win in an increasingly challenging market environment?

Good to be with everyone. We've got some formidable competitors at the best of times, right? So we're up against some companies that have been doing this for decades, if not centuries, and have the advantages of scale that we lack. And so we always approach the challenge in the spirit of your question, which is how can we win against all of this impressive and seasoned business. And our answer to that is a pretty simple formula, which is we don't play the same game that everybody else plays.

We are a tech-first company, and that allows us to do things in our own lane. And our basic hypothesis is that technology can yield cost advantage. Cost advantage yields price advantage, price advantage yields strong growth. So yes, you see that now across our P&L. I'll give you a couple of indicators of that, but that is really how we aim to continue to win, which is to say, in the last 3, 3.5 years or so, we have seen our business almost triple. Our revenue almost tripled. We've added close to 1.5 million customers. Our gross profit has done much better. We're more than 10x the gross profit.

And yet our headcount is smaller today than it was 3 or so years ago. So you're seeing the kind that drives efficiency like nothing else, and there are a lot of metrics within insurance, we might come back to LAE and others that give you an insight into just how efficiently Lemonade is operating. And that when you pass some of those cost advantages on to the customer, you win in good cycles and you win in bad cycles. In some ways, you win even more in tough cycles when people become more price sensitive and the competition becomes fiercer, your advantage is more pronounced as the old Warren Buffett about when the tide goes out, you see who's got a swim suit on.

No, that's very helpful. Speaking of price sensitivity, right, personal auto is probably the hallmark of that perhaps. Now going back to your prior Investor Day, you laid out a very ambitious goal of 10x the business going forward. And a big part of that is the car business, the personal auto business. This is playing well so far. And if we think about the near-term aspiration for the auto business, can you maybe help us think about what aspect of that business is where you think the opportunity lays for you? And what are the aspects you kind of have to be a little bit more careful about so far?

Sure. So if I said earlier in broad strokes about our business that the anchor of our strategy is our structural advantage in technology, and that yields the downstream benefits that I described, you see a perfect illustration of that in our auto business, in our car business. The rest of the industry prices people based on things that make people squirm in their chair, credit score, gender, marital status, education level. These are the state-of-the-art of the incumbency for how to decide what kind of driver you are.

And at Lemonade, we use signals. We use telematics. We actually have through your phone, usually, we've got incredibly sensitive, not only GPS, but accelerometer and a bunch of other sensors driving in your car monitoring how you're driving. And well over 90% of our customers have that enabled all of the time. So we have a continuous stream of data. We've collected over 1 trillion data points already. And suddenly, we can pierce through all of the proxies that are used. And the name of the game in insurance is always about de-averaging, taking groups that look monolithic to your competitors and you see the nuances within them.

So take young drivers as for instance. Young drivers on average are bad drivers, but averages is a curse word in insurance. You want to deaverage at every opportunity. So young drivers go to insurance companies, they get a high rate. They come to Lemonade, and it will depend on how they drive. So a lot of young drivers who don't have a credit score to speak of yet and don't have a driving history to speak of yet and are not of the right age group of the [ Robinsons ] to use the progressive kind of target audience, they are disadvantaged profoundly by the traditional methods of underwriting and Lemonade is able to give them prices that are unmatched by the others. 2/3, my example was on young drivers, but zooming out across the age groups, 2/3 of drivers are better risk than average. 2/3, they drive fewer miles, they drive better. But traditional methods can't capture who is average and who is better than average. We're able to give 20%, 30% savings to those 2/3.

And then you ask people, is Lemonade better priced or not. It will depend on which 1/3 you fall into. There will be some people who will say, those guys gave me such a high rate. I'm sticking with GEICO and good ridden that's absolutely -- the system is working as designed. And then others will find that we're giving them 20%, 30% discounts. Remember that GEICO built a $50 billion business on the promise of saving you 15%. This is such a price elastic business, such a price-sensitive business. that small cost advantage passed on as price advantage can deliver very rapid growth. Our car business today is -- our new sales are growing at over 100% year-on-year. So we are seeing that take off in that business.

And this is certainly an exciting subject to talk about on your next Investor Day later this year.

Thanks for the plug. Yes, November in New York.

Exactly. So maybe staying on that car topic a little bit, right? On the Investor Day, at the time, telematics was a competitive advantage you talked about in the auto business. More recently, the conversation feels like it's shifting more towards the autonomous side of things. And you started a Tesla autonomous insurance products, and then that's been expanding into various states. Can you tell us maybe about -- well, first, about the thoughts behind the product in terms of how to guardrail the risks, right? And then -- but also maybe just the need of being a first mover there and then where we're going from the autonomous products for this whole vehicle business going forward?

So for the benefit of those who aren't familiar, we launched a product that says, if you use Tesla FSD in the 3 states where it's available now and the list keeps growing, per mile for those miles that you let FSD drive, we will reduce your premiums by half. That's a pretty dramatic saving. I was talking about 15%. This will reduce the cost per mile driven by half. And that's really a data-driven conclusion. [ FSD ] is a better driver than you or me. It's a safer driver than [ UME ].

The data backs that up, and we're able to do some things that the rest of the industry can't do. We can price per mile those kind of proxies that I spoke about earlier have no idea how many miles you drive. They're looking at your credit score. That's a very crude measure. 4 million people will give you the correct average answer, but it doesn't give you the kind of precision. We are down at the atom of being able to price per driver per mile. So once you build something at that level of precision and granularity, you can always amalgamate it into all different kinds of products. And one of them is the FSD product that we just launched.

So I think it is an expression of a profound structural advantage in our ability to go to micro pricing of per mile per driver and our ability to see who the driver is through the machinery and not through the legal form that was -- the contract that was signed at the time they bought the policy. So this isn't just about named driver. This is about AI seeing AI. We see you. We see that FSD has taken over. We see how it drives. We know which version of FSD you have and whether you updated the firmware and whether yours is one of the newer Teslas with a better, faster machinery because the sensors improved over time or not and to get that kind of granularity.

And if you can do that, I think that just gives you a great test case or an example of just how profoundly different the whole flow downstream from the policy is at Lemonade versus everyone else. So yes, I don't know if I'd say that we had to be first. We are the only ones who are able to do this. It was almost inevitable that we would be first. So we have the full stack that allows us to offer this. It's in line with our brand. It's aligned with our technological capabilities. So it was natural that will be for us and today, it's the only.

Do you feel that competitors will be fast followers? Or you think there's maybe going to take a while for them to even get there? Just curious your thoughts.

My best guess is that you will see some -- I don't have any insight. This is a full year speculation. My best guess is that they will scramble to get something that sounds similar. So they might start giving discount for cars with FSD. But I think getting to the kind of granularity that I described is beyond their systems and will take them a very long time.

So basically, from fee per month to fee per mile is really not the easiest thing to do.

No. The billing systems aren't supported. They don't have the telematics. The haven't integrated the APIs with the OEMs, I think they've got a journey ahead would be my best guess.

Okay. I really appreciate that. So maybe on the autonomous, right, how big do you think this opportunity is for you and for the industry? I think from our perspective, even for some very aggressive assumptions, right, L3 or better autonomous vehicles will be around, call it, 15% of the total cars by 2035. How should we think about the size of the opportunity for Lemonade at this point?

I think that's probably right. For a long time, the dominant mode of transportation is not going to be autonomous driving. It is clearly going to be the fastest-growing segment. So you're going from 0% to 15% of a $350 billion insurance market, that's great for Lemonade. Because we're small in general, there's a broader point here. If you're the CEO of a $50 billion, $60 billion, $70 billion, $80 billion insurance company, you are massively invested in the status quo. You actually don't want telematics, forget FSD.

Telematics is not good for your business because these X-ray glasses that allow you to see that 2/3 of your customers are overpaying is something you'd rather not know. What are you going to do? Reduce prices for 2/3 of your customers? Is that going to do a lot of good for your tenure CEO of whatever company it is? No, that's going to be quite damaging to it. And then you have to raise prices for 1/3 of your customers and have them churn out. None of this is good for somebody who has to protect a traditional business. We have the advantage of being very small. Car is our most recent product. Earlier products launched and have done very well.

Renters, we've grown to a dominant position in the market. Pet launched only 4 years ago and has grown to $0.5 billion and growing very, very fast. Now the #1 most searched pet insurance in the United States. cars behind all of those because it's our most recent product. But that same trajectory should allow us to do something very significant in a market that is 20, 30x bigger than the pet or renters market. So I think we'll be able to do this for a very long time. And for us, because we're so small, coming back to your question, growth -- rapid, rapid growth can happen in places that may look small if you're running Progressive today. But for us, we will yield that 10x and 10x again. very dramatically. So if we are dominant in niches, young drivers for the reasons I said, autonomous driving for the reason I said, and we have other business beyond that can allow us to continue to grow. We mentioned 10 quarters of accelerating growth, car accelerating faster still. I think we've got a lot of headway ahead of us there.

So even if, let's say, you do the 10x, there's still quite a bit of opportunity for you just simply because the areas you are in is where you really can compete much better than everybody else essentially.

No doubt. And when we 10x our business, we will be barely noticeable. State Farm will still loom over us almost 10:1. So we could 10x again before we become truly one of the larger players on the field. This is such a huge sector, 11% of GDP. It's got so much headroom. And that is true just in the United States. We're not just in the United States. We are in Germany and Holland and France and the U.K., and we're growing very rapidly in Europe. We're seeing triple-digits growth in Europe as well. So the footprint, the TAM that's available to us means that from our modest beginnings in place today, we consider the market opportunity to be infinite as far as our planning matters or the next few years matter.

And very global as well.

It is global. Absolutely.

So actually, that would be a great segue into the other parts of the business, right? So when we go back to the 10x the business part, the other aspects of that would be fairly robust growth through, let's call it, home, pet renters, European business there as well. So can you maybe help us think about the trajectories in various businesses there? Obviously, renters originally was a very big business for you, still is important. So just curious on how you think about the various aspects of the business.

Yes, definitely. So renters was our original product. It's been overtaken by pet. So we're seeing this layering effect as we add more products. One of the things that's worth mentioning as well is that it's not just new products, it's the interrelation between them. I'll come back to them in a second in terms of cross-sell and all that. But -- so pet is very fast growing, 50%, 60% annual growth. The market itself is growing, but we're growing faster than the market. So that's a great -- a really great product.

And it's a gift that keeps giving. We think there's a lot of legs to run and run and run in terms of pet insurance. Just crossed, as I say, $0.5 billion there. So that's a fabulous plank of the business. But ultimately, it's a smaller TAM. It's not like home, it's not like car, which is where -- between them, you've got about $0.5 trillion in the United States alone. Pet and renters are still somewhere around the $10 billion mark plus/minus. Different orders of magnitude, no doubt. But that's growing very fast. Europe, again, a relatively recent addition. We launched it significantly after we launched in the United States. It's doing better age adjusted than America was for us.

So growing faster, better profitability. It's got a lot of dynamics. We learned a lot of lessons from our initial launches here, and we're seeing those markets do well. And even within Europe, we're seeing progress. We launched in sequence Germany, Holland, France, the U.K. and how well we're doing in each market tracks the same thing. Germany, not so great. Holland better, France, better still. U.K. is on fire. So we're just seeing very rapid progression as we learn and as our systems get smarter and smarter and smarter. So Europe, we're seeing triple-digit growth in Europe now several years in a row as well.

Renters, the dollars are growing, but as the denominator grows for reasons that I touched on in terms of the TAM, we're seeing the percentage growth rates and its ability to swing the entirety of the business becomes harder and harder. So we're seeing growth in the teens. We expect that to continue. But renters is really important. The majority of our customers are still renters, just not the majority of our dollars. And it's so important because it's feeding a feeder for the cross-sell of so many products. So I don't know if we should come back to that separately, but it's a strategic role. We've got over 2 million renters, and that's hugely powerful for us as we think about further expansion and cross-selling.

So maybe -- yes, let's maybe focus on that a little bit, right? Renters, you use that as sort of almost as a hook, so to speak, some of the other areas of the business. But if we were to think about just future of the renters business, is it -- from your perspective, is it just a key for cross-selling going forward? Or is there a way to say you still have a lot more room to kind of organically grow that business and then compounding the cross-selling going forward?

It's definitely the latter. It's growing very fast. Among first-time buyers of insurance, and this is strategically important, people stepping onto the conveyor belt of life, buying their first policy. There isn't good data, but as best I can tell, Lemonade is the #1 brand. You stop a 20-year-old in your office and say to them, what insurance do you have? The chance of them answering Lemonade is higher than for any other brand out there. I put it to you that nothing is more predictive of future market share than market share among first-time buyers of insurance. It's also very highly differentiated from how the rest of the sector works. You watch television for 5 minutes, and you'll see 3 different ads, all saying, I switched and I saved.

All of insurance is about moving from one basket to another, we're picking the fruit from the tree. We're out there getting first-time buyers of insurance, onboarding them to Lemonade and then growing with them. So I think renters will continue to grow. We will cement and grow our position among first-time buyers of insurance. So it's a growth engine. It is a highly profitable product. It is a product where our tech advantage, that formula that I said, tech, it gives you cost advantage, gives you price advantage, gives you growth advantage is at its purest because the premiums are so small, so much of what you're paying is for the overhead. The risks are so modest.

And if you're super efficient, that's where you'll see it the most because there's least denominator to compete with there. So we continue to be massively advantaged there. We pay our claims in a matter of seconds. Our cost to settle claims is marginal, really drops to -- the marginal cost drops almost 0 because most of our claims get paid without any human intervention at all. All of our policies are sold that way. It takes you 90 seconds to buy an insurance policy from Lemonade from the comfort of your pajamas at any time of day or night, anywhere in the world.

To get a Starbucks takes late at Starbucks takes about twice as long. So you do see that a lot of these dynamics that I'm talking about are manifested most powerfully in renters. And then yes, it creates a huge stream of customers to whom you can upsell. It's kind of [indiscernible] in that sense because they were acquired for very low [ CAC ], which paid for itself very quickly. And then you have an installed base to which you can upsell the other products.

And then those renters eventually evolves into homeowner insurance customers. And then maybe just between the renters and the home business, right, like obviously, homeowners is a more competitive business than renters just given the environment. How do you, one, maybe maintain an underwriting discipline so that you can compete against the other bigger homeowner insurance companies. But also on the claims point you're pointing out, when you can settle claims very fast, how do you guardrail against fraud and things of that nature? Can you maybe help us with the process itself?

So I'll start with the guardrails. The way we deploy AI, this has been true for a while. It becomes more and more true with every passing day, but is in places where AI outperforms humans. So your question has a premise nestled in it that we need guardrails that are human in the nature. I reject the premise. What we're seeing about 90% of the time that we get a customer complaint, it's about something that a human did, not what an AI did. We only allow AI to step into places where it outperforms humans and not only in terms of the rigor of its decision-making, but it's empathy. We deal with deeply human situations. Oftentimes, it's the worst day of your life. We had to deal with people -- many thousands of people in the L.A. fires.

We -- your most beloved pet who is a household member has just been diagnosed with an awful disease. Your household burgled, your neighbor is suing you for something that you think might bankrupt you. These are really tough situations that we're handling. And there was an assumption that, oh, you need a human in the loop to exude empathy to handle it. It's just not true. It's just not true. LLMs can understand these nuances and respond with empathy that outperforms humans. And if I'm paying your claim in 3 seconds, you don't demo the fact that you didn't have 3 months of a relationship with a claims adjuster, you're pretty happy. Our costs drop and your satisfaction goes through the roof. So of course, we have guardrails. Of course, we rigorously test all these things. We sandbox every technology before we let it loose. But our experience is that once it passes those internal guardrails, it actually outperforms humans at a fraction of the cost.

So it's really about thoughtful deployment of AI, not blanket.

100%.

On top of that, with a very quick claim settlement, you essentially have very high customer satisfaction that helps you maintain and cross-sell. That's right. No, that's -- it's actually quite interesting because just like in auto where your advantage younger customers and then they eventually become renters and eventually become homeowners is quite an interesting flywheel you have here. Exactly right.

And quite distinct from the way the incumbency thinks about these things, yes.

For sure. Yes. So maybe on that cross-selling point, right, you -- when we think about from renter pets to home and cars, how do you think about bundling -- because there's obviously another competitive point that a lot of your competitors, the bigger competitors will use bundling to their advantage, right? But also at the same time, there's quite a bit of synergy in the business products you just described. So is there a way to think about bundling? Or how do you think about that process going forward and versus competition as well?

First of all, you're absolutely right. This is an area of focus. I'll give you some numbers, but about 1/3 of our policies are sold to existing customers. So if we just hold a pet or a rental policy or home policy, the chances are 1 in 3 that it's [indiscernible] and going to an existing customer. So we're already seeing quite a lot of that. In car, it's been higher. It's been about half of our policies are being sold to existing customers. That's a stunning competitive advantage because Progressive GEICO, these incredible companies, they're all car first. They bear the full CAC, and it's an expensive acquisition cost. The most expensive Google AdWords are around car insurance. So you're spending a lot of money upfront.

If we can get half of our customers [indiscernible], that's a structural advantage, and we pass those savings on to our customer and that feeds the machine that I spoke about earlier. And yet, even though it's about 1/3 already if you look at our total IFP, almost 20% of our IFP is bundled IFP -- premiums, sorry. So it's getting there. And yet, we're behind. we're behind and the incumbents are better placed to do bundling, particularly of home and car. Car insurance for us is still unavailable to most Americans. We're approaching 50%, but we're still in our rollout. And it doesn't perfectly map where we have homeowners available, which is also being rolled out. So I think a lot of headroom for us to grow as we do more and more of our rollout as we get better overlap of all of our products availability. There are some states where all of our products are available, and we see that impact, but most states we're not there yet. So I think a lot of place for us to grow.

So essentially, in that flywheel because your CAR is really not the starting point, your LTV to CAC should be notably higher. And then as bundling expand, that should be a very healthy LTV to CAC going forward.

Absolutely.

Okay. Perfect. Really appreciate that. So maybe that actually segue nicely into how we think about financial targets, right? Obviously, I'm presuming you're going to talk about it at the 2026 Investor Day. But on the prior Investor Day, you laid out a road map to profitability, right? You're looking at net income positive exiting 2027. So based on where we are today, I think the way for the math to work, I think it's fair to say that we'll have to look for notable expense management, right, from a G&A, sales and marketing and such. Can you maybe help us think about that path currently going into GAAP income profitable 2027? How should we think about just that process from here on to, call it, the next 1.5 years?

Yes. So if you look at our financials, to date and the projections that we gave at our last Investor Day in '24, the Investor Day before that in '22, and generally look at all the guidance, we've given guidance over 20x since our IPO. It is with notable precision. We've yet to miss guidance. We're well ahead of what we told investors in 2022. We're also ahead of what we told investors only 18 months ago. So I do think that our ability to predict our business is surprising given how young and fast-growing our business is. So there is something almost mechanical. We've built a machine that is cranking and it's cranking in ways that are reasonably predictable.

Maybe one of the most clean ways of looking at that is if you look at our EBITDA margin, you'll see really just not quite straight but almost straight line up into the right which intersects at 0 in Q4 of this year, which is why we've guided already 4 years ago that in Q4 of this year, we will be EBITDA positive. And you see all of the breadcrumbs along the way. It just happens to intersect there and then it continues on. And if you draw that line forward about a year later, I don't know exactly, but about a year later, you'll find that we cross over the elements that EBITDA is missing, which is stock-based compensation and interest payments and then you get to net profitability.

But I don't want to present it as an inevitability, but it is fairly predictable, fairly mechanical. We've already hit and we're actually a year ahead of when we said we would cash flow positive. This is our third year of being cash flow positive, somewhat unusually insurance is cash flow positive before EBITDA positive. But I feel reasonably confident as much as one can be in a given set of circumstances that the predictions or guidance that we gave, including getting to net profit sometime around late '27, maybe early '28, but roughly a year after EBITDA positive is on course.

And I think part of that, I kind of want to emphasize you've been consistently outperforming your guidance as well. So right, like it's been a very strong trajectory so far. One thing I think like you touched on earlier is really about the AI capabilities. And obviously, you're a technology-first company. And then -- but as we think about the evolution of AI going forward, do you see competitors kind of catching up? What are the areas where you think you have the best long-term potential where maybe competitors probably just can't catch up?

We founded everybody every session that everybody will hear today, AI will be sprinkled all over the place.

It wouldn't be a financial conference without it.

Yes which wasn't true just a few years ago, but yes. You've been following us long enough to know that we've been talking about this 10 years ago as well. Nothing that we discovered in November of '23 -- '22. So this was the founding thesis of Lemonade. And the reason is because even before LLMs, insurance is an extraordinary sector because it's one of the only truly [indiscernible] products. There is nothing physical that's being manufactured. It's a statistics, it's probability theory that is being monetized.

It's the ability to ingest data and use it to make predictions about the future that lies at the very core of what insurance is about. That is what you're monetizing. The ability to look at past patterns and predict future patterns as a result of that. And up until the modern era, insurance companies were the best in the world at that. They were home to the best statisticians. They had the best data sets. But in the last 20 years, clearly, it's Google, it's Silicon Valley, it's high-tech companies that were engineered with modern big data infrastructures and machine learning capabilities. Lemonade was engineered that way.

We are an engineering-based company founded by 2 tech founders, and we are really bringing Silicon Valley into insurance. That is a structural advantage that is today manifest, I think, in every line in our P&L. We touched on some of the ways in which it's manifesting. Had we believed then that instead of that, we could just transform existing behemoth, that would have been a much more profitable thing to do. If you take $100 billion of business instead of starting from scratch and eking out your growth and you just transform $100 billion of business using technology, that will produce much better return on investment. We didn't believe it's possible.

The structural difficulties, the innovative dilemma that [indiscernible] and [indiscernible] traditional insurance companies is well studied, well understood and very real. Allianz, one of the largest insurance companies in the world spends about $3 billion a year on IT. The industry as a whole spends absolutely staggering amounts of that. Since our founding, I think the industry has spent something close to $1 trillion on IT. We've spent less than $0.5 billion, and yet our technology is far superior to what those $1 trillion have generated over that intervening time. So I don't expect a turnaround anytime soon.

In fact, what's happening now, the acceleration that we're seeing with AI means that the frontier is moving so fast that if you're not riding that wave, if you're not at the frontier, no matter what press releases you issue and what efforts you spin up, you're getting further from the frontier rather than closing the gap. And I think there's no question that today and for the foreseeable future that the incumbents will be moving faster than the frontier is moving. So actually, the frontier is moving away from them rather than closing the gap. That's my best assessment based on what we're seeing so far.

That's pretty interesting. So we'll see what happens, right? Maybe we're close to time. If anybody have any questions, if not, I can keep going. I do have one last one. So obviously, a big part of the personal line business is distribution, right? And then one thing we talk about all the time is technology and evolution of AI. Do you foresee an environment where in the future, maybe personal line distribution will be significantly changed by AI to the point where maybe the distribution side is perhaps much less relevant where carriers will just directly go to customers or what have you. Just curious if you have any thoughts on the distribution side and how that could evolve because of AI.

It's quite possible. We are seeing very early innings of people buying through agents. And when you say insurance, you have to explain what kind of agents you mean? I don't mean the traditional broker. I'm talking about AI agents. At Lemonade, we talk about agents and agents -- so we're seeing early innings of that. And you can imagine a machine-to-machine purchase in that situation. We're fine with that. The cost advantage that we spoke about earlier means that already today, if you ask an LLM about your different insurance needs, Lemonade will be featured in a way that is disproportionate to our size.

Some markets like in the U.K., which are price comparison driven, we're already seeing a much more algo trading style environment where the human contact is far less important and the machine-to-machine is driving a lot of it, and we're doing very well. I mentioned earlier the U.K., our fastest-growing market. So I think we're well prepared for that eventuality. I don't know how fast we move into that future. People have been able to buy insurance on a website for a long time and yet a lot of them still go to the high street agent. So we'll see how fast human behavior adapts, but the capabilities surely are there.

Just given your AI native architecture, you'll be there regardless of whether or not the industry is there.

That's safe to bet.

Perfect. Really appreciate your time. We're at time. So thank you. Thank you Thanks. Really appreciate it.

Thank you.

Well, thank you, everybody. I'm Paul Newsome. I cover the insurtechs, among other things for Piper Sandler. Very happy to have the CEO of Lemonade, Daniel Schreiber here to chat about Lemonade and technology and all the fun things that we have there.

I apologize in advance, I have -- getting over a cold. So I'm going to rely on you to [indiscernible] also speaking. But maybe we could talk -- begin some of the conversation with a fairly broad question.

We're here at a fintech exchange conference. How do you see insurance fitting into the fintech ecosphere? And how do you see the opportunities just a big picture perspective as it fits in broadly...

Good morning. And I wish you a speedy recovery.

Thank you very much. I'm on my way I just had...

Speed recovery. Good morning, everyone. Great to be with you. I think insurance is the most disruptible industry on the planet, but I'll use your question as a way to kind of highlight that. So you've got kind of banking and lending and those kind of more traditional financial services, and you've got insurance as somewhat distinct -- but actually, they're pretty similar in size.

If you look at the contribution to GDP, they both hover a few decimal points of the side of 3%. If you look at the Fortune 100, you'll find that there are actually twice as many insurance companies as there are banks on the Fortune 100. But they're sizable, huge kind of industries. And yet, one has seen so much more innovation than the other.

So I'll give you a few measures of that. But last year, something like $115 billion was invested in fintech, about $5 billion in insurance. So you're talking about an over 20-fold, 20x outspending by one sector over the other. If you look at the market caps of fintech companies on public traded exchanges versus insurtechs, you're talking again at an over 20x if you look at penetration rates, new bank and Stripe and Revolut and you're talking about hundreds of millions of customers, you're talking about single-digit million customers of insurance, all of which is to say you've got these 2 behemoth sectors, one of which has seen tremendous amount of innovation, one of which has seen rounds down to 0.

And you see this in the incumbent responses as well. So banks and major financial institutions outspend insurance companies about 3:1 on IT. There's a competition going on, and they've had to invest, and we see major innovations, open banking for traditional banks, over 50% of their interactions are now app-based. And you can transfer it with insurance, where it's still broker-based going into your local State Farm agent and on the high street, it's really kind of remarkable how distinct they are.

So I think when -- if you look at all the amazing value that's been created in banking and you contrast it with the value that's waiting to be made on insurance, that should give you a cause for pause and ask yourself whether the alpha isn't really on the other side of the fence there.

So if it continues to evolve in the way we think it's going to, does that imply a larger role for insurance than as technology becomes improving or is it becomes a smaller? Well, you hear insurance folks talk about how different types of technology will sort of eliminate risks. But I'm curious as to whether or not you think that what's happening from a technology perspective will make the biggest industry bigger or smaller, current looks of it?

I hope it makes it smaller. And the reason I say that is insurance premiums are a direct correlator of risk and exposure. So to the extent that technology can help us mitigate risk, we should be paying less premiums. We see that today with our car insurance, our auto insurance, where we use telemetry.

All of our customers do that. We even have amazingly high connections to Tesla. And if you're driving with FSD, which is safer than any member of your household, we will give you like 50% discount per mile driven. So assuming we've get to much safer technologies and in the case of auto, it's lives are at stake, not just dollars, it is true that the cost of repair goes up a bit because these are computers on wheels rather than just mechanical machines, but the frequency drops pretty precipitously.

So I would like to see it's contract. It doesn't matter. We're talking about multitrillion dollar sector. These are 11% of GDP is insurance today. So you've really got such a huge sector. And at the same time, you see -- I'm wishful thinking saying it would be great if it went down, but cyber exposure and other things like that keep going up. So there's an offsetting going on there.

Yes. I'm a long time said that the size of the insurance is equal to the size of the claims. As long as there are lawyers and inflation, we're all going to be in business for a long time.

You're right. Yes.

One of the things that I've struggled with as an outsider looking into the industry is sort of the competitive moat of technology. And I think part of that has to do with the fact that as an outsider, it's just very difficult to tell if company A has come with better technology than thee company B. Obviously, your company has been sort of a leader in trying to use artificial intelligence and other technology. Can you talk a little bit about just sort of how as an outsider, we can see that competition other than obviously the results over time?

Sure. It's a challenge. We founded the company in 2015, and our first -- my first slide deck to my Board was about artificial intelligence. Playfully said kind of artificial intelligence, not artificial delays, and that was kind of the founding deck.

So we didn't discover AI in November 2023. This is -- or '22. This is what we've been doing since the founding of the company. And suddenly, everybody, of course, is talking about AI. It's like pixie dust that you sprinkle on your earnings and there's loads of press releases coming out, and it makes it genuinely difficult. Is it AI or is it DS?

I have some theories.

Yes. I think there are lane to pierce through and have a look, and I'll try and unwrap it for you a little bit. Insurance accounting is convoluted and it makes it difficult, and they do not offer the kind of metrics that we use to track automation rates. But there are 2 or 3 things that it's very hard to obfuscate.

One is what we call the scaling quotient. And what I mean by that is the following. And since ChatGPT came out as -- take that as a kind of good point of 3.5 years, our business has grown considerably. We're talking about almost threefold the revenue now than we had then. We've added not quite, but close to 1.5 million customers. Our gross profit has more than tenfold increased over the course of 3 and a bit years. And yet, our headcount today is smaller than it was then.

To be able to scale your business like that, see almost 3x the revenue and add millions of customers and shrink your headcount, that's an incredible Telltale sign, and it has not been replicated by any of the incumbents. They're not growing at the rates that we're growing. We've now had since GPT 10 consecutive quarters of accelerating growth, not just growth, but accelerating growth. So we're growing very rapidly.

But no change to our operating expenses net of marketing, no change to our headcount over 3 years. That is mind-blowing. It's very rare outside of the insurance space. It's nonexistent in insurance. So that would be one measure that I think is helpful.

Another one which is usually disclosed by incumbents and allows maybe the only true apples-to-apples metric is something known in the industry as LAE, stands for loss adjustment expense. And that is basically a measure of every dollar premium I take in, how much do I spend or waste on the bureaucracy of managing claims, not on paying your claim, but in the overhead, which is why it's such a helpful measure of efficiency. The more I have to spend on bureaucracy, the less efficient I am.

Now [ obviously ], there's an advantage to scale. We're at $1.5 billion roughly to round it there for a second. GEICO Progressive, State Farm, you're talking about anywhere between $50 billion and closer to $100 billion. So they loom over us 50-fold bigger than we are. And yet their LAE ratio stands hovers at around 10% 1 point below, 1 point above. That seems to be kind of best-in-class. They're spending something like $0.11 on the dollar on the bureaucracy of handling claims. We're at [ $0.6 ].

And that halved over those same 3 years. We have almost threefold more claims today with a smaller claims team than we had 3 years ago. So we're just seeing this explosion of business with no explosion -- correlating explosion of costs. And we've already guided that we think as we double our business again, that might drop from 6 down to 3 or 4. So we've just got this new reality where our variable costs have become fixed costs. And as we continue to scale our business, the profitability just grows as a direct result of that. And that gives you a clear snapshot of us versus incumbents who are 50x bigger and yet twice as inefficient, if you like.

There are other places that are harder to measure, for example, the precision with which you underwrite claims. Loss ratio is not a helpful measure, although we've seen 10 consecutive quarters of improving loss ratios, but I don't actually point to that. You can get there just by raising prices. So I don't think that tells you that you're using AI.

But here's a nice snippet. We have about $0.5 billion book of pet insurance. And in the last year, the sector, the industry took a lot of rate. They kept raising prices. So you saw something like 27% increase in prices across the industry. Our rate increases were less than half of that. We were at 12%. So we took much less rate.

We outgrew the industry 3:1. We grew -- they were growing at like 17%, we grew at 50-something percent, 55% if memory serves. So we took less rate. We grew 3x faster and our loss ratios were better. That does tell you about the precision of the pricing. That's not just lazy raising rates. That is modest raising rates in precise places so that the loss ratio doesn't move and yet your growth means that you're being priced very, very competitively.

So I think there are -- if you look for Telltale signs and you don't just look at the press release, you try to pierce through, you think there are numbers to be found all over the place. I'll say one other thing that it's -- we are a young and fast-growing insurance company. We are outspent clearly on IT or technology by the incumbency. And that is a very poor indicator of anything at all.

State Farm, which is the largest P&C insurance company in the U.S., spend something like $3 billion a year on their IT. Gartner estimates that this year, the whole sector will spend something like $0.25 trillion. Just in the U.S., I think since we were founded in 2015, our competitors have spent something like $1 trillion on IT. We spent less than $0.5 billion. So we have, call it, $500 million. We're being outspent pretty dramatically at 2,000 fold or whatever it is.

And yet, our technology is better than any incumbent technology by a mile. This isn't something that you can just throw dollars at. If your business model is one where you have human beings selling and being an agent and a broker on the high street, your data collection is appalling, your ability to harness data is appalling. I saw an interesting study from 2019 that the #1 cause of loss for some of the incumbents was other garbage in, garbage out, that kind of problem doesn't get solved by just throwing dollars at it.

Yes. The kind of related to that, one thing I -- everyone notice is that the industry is large and there's an enormous range of performance, particularly in personal lines. Could you talk a little bit about how broadly you might compare to some of these companies that are spending a ton of money that are doing much better, right? I mean it's one thing to compare yourself to State Farm or generic regional insurer, which clearly has green screens and programming that I probably did when I was a young guy, and we can tell the stories of that versus like a Progressive or GEICO, which managed to have very low expense ratios overall.

As an outsider, why should we think, hey, Lemonade has really gotten ahead of even some of the better ones as well? Is there something we could point to? Or maybe that's just going to be the subset will be those handful of folks who really won't be just Lemonade at the end of the conversation.

Progressive from an outsider's perspective as well, but my sense is that they are leading the pack. I'm not sure I'd put GEICO in the same breath. At last year's AGM, Berkshire Hathaway, who owns GEICO, spoke about this. Ajit Jain, the Vice Chairman, who runs Insurance, said that GEICO is doing very poorly on technology. They've got this wonderful honesty kind of policy at Berkshire, so it's easy to get a visibility.

And he said, GEICO has 500 and then he paused and corrected himself and he said, actually over 600 disparate systems that don't talk to one another. Lemonade has one. And it wasn't bought. It was built. We're an engineering -- culture engineering team. We built it in-house. We control everything. It's the same system that will allocate the marketing dollars and acquire the customers, and we'll use 50 different machine learning models to make predictions about every single person hitting our website, what is the likelihood to claim to convert to churn, to cross-sell.

We're going to amalgamate all of that and produce a lifetime value prediction on every single person hitting our website in real time, the likes of which doesn't exist by any of these systems. We'll then allocate dollars based on a kind of an algo trading system of which campaign is generating the best return on marginal dollars spent.

Then an AI will sell you the insurance once you click on that link and you come through, we've got an AI Maya, and she will use all of that information in real time to make the best offering to you to give you the right defaults to offer you the right add-ons, when you have a support question before or post purchase, that will be handled by AI.

And finally, when you make a claim, the majority of our claims are handled without a single human being in the loop at any point, millions of claims. And some people blown the lack of the human contact, not our customers. If I can pay a claim in 2 or 3 seconds, which we do all day long, you're not building the lack of the human -- please wait for your call is important to us and it will be answered and all of that.

So I think these things speak for themselves. You look at NPS as one metric, and you'll see that notwithstanding the fact that we are a cost leader, we are a service leader as well. Technology lets you do that. You can -- with a 3-second claim, you're happy and my cost just crush, which is why the LAV is where it is.

And honestly, when you start thinking about the incumbency in general, and I'm not picking on names, GEICO happens to speak about these things kind of...

Please do.

There are structural reasons why it's very difficult to get rid of those green screens or to transform your business. And they start with -- I know quite a lot of the CEOs of the largest insurance companies, it starts with them having the wrong investor base. Their investor base wants a 5% dividend and total stability and what's needed is massive transformation.

They have the wrong management team. They were groomed for business preservation, not for business transformation. Their systems date back to the '80s and instead of having a black box, they have a black hole, and they just throw billions of dollars into it. They have a distribution network that means they don't -- they'd love to move to an app-based distribution, but it would sacrifice all of their current channel conflict would be unmanageable.

So they are deeply encumbered. And the reason we founded Lemonade is because we don't know of a solution to their innovative dilemma. If I thought I could just sell them, shovel them pick axis and tell them, hey, just bolt this on top of what you have, we would have done that. I think their job is much harder than ours. Starting from scratch as a tech company is very helpful.

And remember that insurance is the most disruptive, I said earlier for financial reasons, but think about it from an AI perspective, it is an ephemeral product that is all about statistics. That's what insurance is. I am monetizing probability theory. Everything else is distribution. It's at its core, it's about ingesting data, having high-quality data being a data leader using machine learning to find the multivariate correlates and being able to price accordingly and then serve customers at the lowest cost to serve. One of those maps on to loss ratio, one maps on to expense ratio.

It has long-term issue.

Of course. So I think that the fact that everybody else is so encumbered with these old systems and these other issues that we've discussed makes it very, very difficult to drag themselves into the 21st century.

Your thoughts on distribution. Obviously, a hot topic with the brokers [indiscernible] and maybe you could talk about what you see as the technology changes, especially recently in distribution. And obviously, you have a direct channel, but I'll let you talk to.

Yeah, I'll be fine, okay. From our point of view, actually, distribution surprising me very little in terms of the AI ramifications. I was just kind of saying that the 2 core metrics in insurance are loss ratio and expense ratio, loss ratio is about precision of pricing, expense ratio is about cost to serve.

You combine the 2 and it's called rather unimaginatively the combined ratio, and that's what that's about. And LLM and Agentic AI maps onto one and machine learning and deep learning maps onto the other, which is why it's so disruptible. The distribution piece, as consumers move more and more to LLMs in order to recommend their insurance or even send their agents to buy the policy for them, we're just fine with that.

If you now ask your LLM of choice about pet insurance or renters insurance or clients, Lemonade will be over-indexed quite significantly. And the reason for that is that consumers going back to things we said earlier, we tend to be a cost leader because we use technology to get to the best cost. We tend to have the highest NPS because of that same reason, technology is the common denominator to both of those.

LLMs scour all the sources out there, ingest that and then we'll play it back to you when you ask them who's good at insurance. So we're actually finding that we are punching considerably above our weight on LLMs. And to the extent that distribution becomes increasingly headless, where it's your agent talking to my agents, we're fine with that as well.

We're not relying on human agents or what we call agents. We're very comfortable with the machine to machine. Everything that we do is MCP or API-based. In some places like in the U.K., which tends to be price comparison website-based distribution rather than anything else, we have the equivalent of algo trading going on there, where we can bid for every lead that comes in very effectively.

So being a cost leader has got to be an advantage in the current scheme, but even more so when all of the Geckos and cockney accents get displaced by just agents talking to each other and looking at the core facts. That's an advantage to us rather than a disadvantage.

So the key issue is to be essentially distribution neutral.

Carriers that. I think the key issue is to be a cost leader and to offer the best product and the best service because -- not because you're living on thinner margins, but because your underlying cost structure is automated through AI and that costs less than humans, and that will then flow through in all the distribution methods.

Makes sense. Getting towards the end, I should ask at least a few numbers questions. Fourth quarter positive EBITDA, very focused. Any thoughts about mechanically how that's going to emerge over the course of the year and the sustainability of that over time? And is it just more of the same? Or is there something else that we should be thinking about in the next year or two?

I think the simplest way to think about our business model is to kind of think about something that's [ Yay-shaped, ] where the top is tracking gross profit growth. Gross profit is much more helpful than revenue or premium because it incorporates the quality of the revenue. If you've got a bad loss ratio, then you don't get much gross profit. But track gross profit dollars, not margins because oftentimes higher loss ratios will yield more dollars given the price elasticity of demand.

So track gross profit dollars. This last quarter, we announced results, which reflected 159% growth year-on-year of our gross profit dollars. So this is just a rocket ship. And then track our underlying expenses. Because if that continues, where we have underlying expenses net of marketing spend, but all of our OpEx basically stand still and gross profit keeps surging, you just know that, that translates into profitability.

And if you look at our EBITDA margin over the last several years, it's a straight up into the right line. We announced about 4 years ago that we're going to be profitable -- EBITDA profitable in Q4 of this year. That's still what we're saying because the machine is operating in a highly predictable way. We just can calculate the rate of growth and how many gross profit dollars are needed to drop through to the bottom line. And this is our third year of cash flow positive.

It's not like we've been burning cash along the way, but the GAAP accounting follows for whatever reason, we'll get to EBITDA profitable, and that will keep -- as far as we can tell, that will continue forever in a day. So we're not expecting any near-term reversals on that.

Is there a terminal value to what point you get to true scale and...

Is the one of the exciting things. Insurance, the prize at the end of the rainbow is stunning, right? The dominant insurance companies around the world today date back the young ones to the 18th century. You've got the Lloyds and the AXA. AXA is over 200 years old. Lloyd's is 300 years old. Aviva in the U.K., 330 years old, and they grow to be $100 billion, $150 billion a year.

So that is where our sights are set. We're not planning to slow down anytime soon. We're going to, as best we can, continue to compound. We are in all 50 states. Rather unusually, we also operate in Europe and in the U.K. for some reason, the Atlantic seems to be a barrier for most insurance companies, but we're operating all over the place.

And we see tremendous opportunity, which we hope will compound for many years to come. We could 10x our business, and we would still barely be noticeable to our competitors. We'd have to 10x again before they really start paying attention. That's a nice position to be in.

It's a big business.

Yes.

Well, I want to thank you guys for. Thank you, Dan, for being here. Appreciate it very much.

Thanks.

Hello, everyone. Thank you for joining us and welcome to Lemonade's Q1 2026 earnings call.

Operator Instructions]

I will now hand the conference over to Lemonade to begin the call. Please go ahead.

Good morning, and welcome to Lemonade's First Quarter 2026 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bitsy, Chief Financial Officer; and Nick Stead, SVP Finance. A letter to shareholders covering the company's first quarter 2026 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the SEC and our more recent 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 performance indicators, including number of customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat, trailing 12-month loss ratio and net loss ratio and 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 for some opening remarks.

Good morning, and thanks for joining us to review Lemonade's results for Q1 '26. This was another excellent quarter, marked by continued acceleration in growth, strong underwriting performance and clear operating leverage across the business. In the first quarter, in-force premium reached $1.33 billion, growing 32% year-over-year. This extends our streak of accelerating growth to 10 consecutive quarters. Revenue grew even faster, up 71%, boosted by a recent reinsurance transition and the result in higher premium retention.

Underwriting performance continues to be very strong, and it is the combination of accelerating growth and strong underwriting results that led to 159% growth in our gross profit. We also saw solid cash flow from operations, generating $17 million in adjusted free cash flow, a $48 million improvement year-over-year. On the bottom line, adjusted EBITDA loss narrowed 64% year-over-year, reflecting continued progress towards profitability, and we reiterate our long-standing expectation that Q4 this year will be EBITDA positive as will the full year of 2027.

We often note 2 specific drivers that power our financial performance, grow the business and scale the operation. I'll share a couple of comments on each of those. As it relates to growth acceleration, strength in marketing efficiency has been a consistent tailwind for us. Conventional wisdom suggests that increased growth spend comes at the expense of efficiency, yet we continue to see the opposite.

Since Q1 2023, we've grown our spend by roughly 200% while maintaining an LTV to CAC ratio of above 3. This is enabled by our proprietary LTV AI that dynamically allocates capital to maximize returns and is supported by the diversity of channels, products and geographies, which we enjoy. At the same time, increased bundling activity is boosting customer lifetime value, which enables us to scale growth investments while preserving strong unit economics. The second notable driver of our performance is leverage across our expense base. In the first quarter, we surpassed $1 million of IFP per employee, representing a nearly 3x improvement over the past 4 years. This progress reflects the growing impact of our AI and automation tools, which are enabling us to scale efficiently.

The impact of 10 years of investment in AI infused into our single proprietary and vertically integrated system is now visible throughout our business and on pretty much every line of our P&L. Against that backdrop, we expect recent trends to continue and are raising our full year guidance for both top and bottom lines and looking forward to continuing to deliver increased growth and increased profitability throughout 2026 and beyond. With that, let me hand over to Shai. Shai?

Thanks, Daniel. I'm going to spend a few minutes discussing PE, which is now our largest line of business and recently reached a notable milestone, $500 million of IFP, becoming the first product in our portfolio to reach that milestone. In less than 6 years from launch, we become the most searched pet insurance brand in the U.S. and the fourth largest carrier, competing against incumbents with decades of operating history. As it relates to growth, a couple of drivers to highlight. We have a notable cross-sell advantage versus many pet insurers with over 3 million customers to whom we can sell directly CAC free. In fact, 85 million of current pet IFP was sourced from our existing customer base. We also benefit from high conversion rates due to delightful AI-powered customer experiences.

Lastly, our distribution strategy is diversified across direct-to-consumer channels and partnerships, which has allowed us to scale spend quickly without reliance on any one channel. At the same time, we have a structural expense advantage versus peers. Our AI-powered automation engine enables excellent expense efficiency when it comes to claims management. Unlike many of our other lines of business, Pet is a high-frequency, low-severity product, which means that a vast majority of customer claims are excellent candidates for our end-to-end automation. With that, I will lead off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with Q1 results, which were excellent. In-force premium grew 32% year-on-year to $1.33 billion, driven by customer growth of 23% and premium per customer growth of 7%. We added 158,000 new customers in Q1, 37% more than the roughly 115,000 in the prior year. Within our reported gross loss ratio of 62%, our favorable prior period development of 3% was driven primarily by our homeowners, multi-peril and car products.

Total cat impact in the quarter was 5%, primarily due to winter storm activity, and this excluded cat prior period development. Prior year development, which we report on a net basis, was $4 million favorable in Q1. Gross profit increased 159% to $100 million, while adjusted gross profit increased 119% to $101 million for a gross margin and adjusted gross margin, both of 39%. These metrics use revenue as their denominator.

Adjusted gross profit as compared to gross earned premium was 33% in Q1, up 13 points from 20% in the prior year. It's worth noting that the prior year results include the impact of significant California wildfires as well as a California fare plan assessment, all reported in Q1 last year. Revenue rose 71% to $258 million, while our adjusted EBITDA loss improved to a loss of just $17 million.

Notably, revenue grew roughly 40 percentage points faster than IFP, a dynamic we expect to continue through at least midyear. Importantly, adjusted free cash flow was positive for the fourth consecutive quarter at $17 million and has been positive 7 of the 8 last quarters, while operating cash flow was negative $1 million, following a common seasonal pattern. We ended the quarter with roughly $1.1 billion in cash and investments, of which about $290 million is required to be held as regulatory surplus. Annual dollar retention or ADR remained stable sequentially, primarily due to the continuing impact of our clean the book efforts in our home business at 85%, flat versus the prior quarter.

Operating expenses, excluding loss and loss adjustment expense, increased by $32 million or 25% to $159 million in Q1 as compared to the prior year. Now let's break down those expense lines a little bit. Other insurance expense decreased by $2 million or 8% in Q1 versus the prior year versus a 32% growth rate of IFP. The prior year period included the $7 million California Fare plan expense assessment.

And absent this fee, the annual increase in this line item would have been about 26%, a bit less than our top line growth rate of 32% Total sales and marketing expense increased by about $23 million or 53% due to increased growth spend versus the prior year. In Q1, gross spend was $54 million, up 43% as compared to the prior year. Importantly, as we continue to ramp growth spend, marketing efficiency levels remained stable and strong in the first quarter with an LTV to CAC ratio above 3x, in line with the prior year. We expect Q2 gross spend to step up about 12% versus Q1 and expect total gross spend of about $235 million for the full year 2026.

Technology development expense was up 22% year-on-year to $27 million, and G&A expense increased 18% as compared to the prior year to $42 million. Notably, G&A improved sequentially and was down by about $1 million versus the prior quarter. The year-on-year increase in G&A was driven primarily by an increase in stock compensation and interest expense. Our expected stock compensation expense for the year is expected to be approximately $95 million. This is somewhat higher than our previous guidance, primarily due to a multiyear equity grants given to our 2 founders.

Headcount increased slightly by about 2% to 1,291 in Q1 as compared to the prior year. Our net loss was a loss of $36 million in Q1 or $0.47 per share as compared to a net loss of $62 million or $0.86 per share in the prior year. Adjusted EBITDA loss was $17 million in Q1, dramatically improved versus our EBITDA loss of $47 million in the prior year.

Our detailed guidance for Q2 and our updated full year 2026 guidance are both included in our shareholder letter, and that new guidance represents a 32% top line growth rate in Q2 and a 33% full year top line growth rate. Roughly 77% revenue growth is implied by our Q2 guidance and roughly 63% full year revenue growth implied by that guidance. And unchanged, we do expect a positive full quarter of EBITDA in Q4 this year. With that, I'd like to pass back over to Shai to answer some questions from our retail investors. Shai?

Thanks, Tim. We now turn to our shareholders' questions. We'll start with Paperbag, who asked why ADR hasn't improved faster. So just to level set, ADR or annual dollar retention is a training metric. It compares the IFP generated by a specific cohort a year ago and measures how many dollars we are able to retain from that same group 12 months later.

Over the past year, ADR has been held back by a targeted nonrenewal initiative in our homeowners line focused on reducing cat-exposed business. That deliberate move created a temporary headwind for ADR while improving the overall health of our business and has largely wrapped up by the end of 2025.

Looking ahead, that headwind should start to fade as those cohorts roll off the base used to calculate ADR. It's also worth noting that if you exclude homeowners, ADR actually improved over 300 basis points year-over-year. Paperbag also asked about multiline customers currently about 5% of total, asking when we'll see that tick upwards. It's a great question, Paperbag. And actually, if you look at the dollars rather than customer count, you can already see the impact of cross-sell showing up quite clearly in our financials. As of the end of Q1, 18% of total IFP is bundled. Importantly, cross-sold business is largely acquired with little to no CAC, which is a meaningful driver of the improvement you're seeing in our overall profitability.

With improving performance and growing data, we now have greater confidence in the impact of cross-sells on new customer LTV. Higher LTV gives our growth team more room to operate, so they can increase allowable CAC and lean further into growth while still maintaining our 3:1 LTV to CAC ratio. We've seen a strong momentum here over the past few quarters, and we feel good about continued acceleration, especially as we expand KAR into more states. 19B asked for an update on our efforts to build an excellent shareholder base with strong institutional ownership.

Our Investor Relations efforts are producing excellent results. In the past couple of years, we've seen institutional ownership, excluding SoftBank, increased by more than 50%. A handful of our top 20 shareholders are net new institutions who initiated the position in the past year or so. This work is ongoing, but we are encouraged by the recent momentum. NDK asked what prevents a competitor who launched tomorrow with unlimited compute and the latest models from being where we are in a couple of years. That's a thoughtful question.

Thanks, Andy. Well, our differentiation doesn't stem from access to AI tools, but rather from a decade of compounding execution around an AI-first architecture, unique organizational structure and successful navigation through complex and expensive regulatory environments in multiple geographies. We've spent the last 10 years building, training and integrating our technology and h-g models into every layer of the business, turning real-world data into continuously improving underwriting, pricing and claim loops now show up in superior growth and efficiency metrics. Importantly, commercial AI models as advanced as they may be, can't price insurance on their own.

Underwriting and pricing depend on statistical models trained on large data sets built over time, and that's where our advantage is most pronounced. A new entrant would start from 0 on data, regulatory approvals, brand trust and production- validated models. These are things that only accrue with time. Meanwhile, our head start means that our systems keep learning and accelerating. So even with equal technology, the distance continues to widen. In short, you can launch with cutting-edge AI, but you can't fast forward the decade of compounding data integration and operational learning that defines our advantage. With that, I'll pass it over to the moderator, and we will take some questions from the Street.

Your first question comes from the line of Jason Helfstein from Oppenheimer.

So I'll ask 2. Just talk a bit about the AV insurance. When could that begin to kind of impact the financials? And I guess, how are you thinking about the initial margin impact on that business? Just so any color there as we all begin to think about that? And then just, Tim, when do we reach normalized or peak levels with the reinsurance transition?

Jason, Daniel here. So I assume that by AV, you mean autonomous because a lot of our cars are AVs already, and that's nothing. Yes. So this is something that's very exciting, really, I think, a dramatic demonstration of the kind of capabilities that we bring, and it shows our differentiation, I think, at its maximal effect, which is that we are able to price every mile driven per driver, and we recognize AI as a driver and therefore, we can price it accordingly. This launched and has been very well received.

We're seeing our conversion rate for these policies almost twice as good as our average conversion rate, something like a 70% increase in conversion for such customers. But it has launched in only a couple of places so far. So the rollout will be throughout the year to all of our markets. But at the moment, it is still relatively modest in terms of the impact on our financials as reported at the moment. As the year rolls out, you'll see this being expanded to more and more states, and we will gather steam as it goes, and we'll update you throughout.

Yes. And on the reinsurance question, Jason, you're right on the transition or the shift in the rate of business that we are retaining continues to shift in our favor where we're retaining more business over time. We renewed our reinsurance last about 9 months ago in July. And so that retention rate has increased consistently quarter-over-quarter since that time. Q1, the seed rate was about right around 30% versus the peak last year of 55%. Q2, that will ebb further. We'll retain more. The ceding rate will be something like 25%. And then we'll normalize in Q3 at right around that 20% rate that we announced when we renewed last year.

So it phases in over 4 quarters. That assumes no change in our reinsurance. At July 1, that's our renewal date. We're well into that process now as is typical each year for renewal. We've not yet determined what that will be. That's something we do share with the market once we get to final terms that we like. We have some optionality there. As we have for quite some time, we can confidently retain more business. So the likeliest outcome there is perhaps no change or perhaps a greater rate of retention. It's unlikely that we would see it at a higher rate, and we'll share that update not too far out post the July 1 renewal date.

Your next question comes from the line of Andrew Anderson from Jefferies.

You've highlighted operating leverage from automation. Where specifically are you seeing some savings today? And how much of that is being reinvested versus dropping through? I'm just kind of taking a look at some of the operating expense line items that are still growing.

Yes. So we kind of think about expenses in really 3 buckets, and this has been really consistent over time. There's truly variable costs, and there's a few of those, things like premium taxes and processing fees and that -- those tend to vary quite in line with the growth rate of the business. So if we're growing 31% or 32%, then you'll see those expenses kind of grow in line with that. That's a relatively small bucket. The largest bucket is our fixed cost, and that's things like salaries and overhead and legal and finance and compliance and all of those things that every insurance company has.

And those scale consistently really, really well over time. I'd point you to the shareholder letter where for some time, we've shared a chart, which the highlight today, I think, was a headcount decline over 3 years, where the premium has more than doubled or tripled over the same time. So that's where we really see scale. The expenses that are increasing tend to fall into the discretionary bucket. They're at our choosing.

So the most clear one is growth spend, where we choose and determine our growth rate. We work hard to push that up each quarter. You've seen the results of that with growth rates increasing sequentially quarter after quarter. And that's the result of 2 things. Our investing more, maintaining our LTV to CAC ratio, maintaining that marketing efficiency, coupled with really an unlimited TAM, total addressable market. And so those come together and you kind of see that every quarter. We do choose to invest in other things that have either short-term or medium-term payback, and we continue to do those as well, but those are really at our discretion.

So over time, you'll see a similar trend, I would expect, where you'll see great leverage, continued growth. Our guidance implies a 32% Q2 growth rate, 33% for the full year. And I expect continued scale across all of those expense lines.

And Andrew, maybe if I can jump in. I think one place in particular, you can really see the impact of AI-powered automation at scale is in the cost of adjudicating claims, and that's our LAE ratio, which is currently at 6%, which we consider levels that are roughly -- that are best-in-class today and materially improved over time.

And which acquisition channels are contributing the most to incremental growth today, whether that be direct or cross sales? And maybe how does agency factor into distribution, if you can size that at all?

Yes. So I'll take that and then maybe Nick jump in. So the short answer is all of the channels, meaning every month, every quarter, we've been successful at expanding into new channels. That doesn't mean the existing channels are going away, but there tends to be a broadening or a deepening of the number of channels. And so the concentration in the top 5 or so channels today is much less than it was 2 or 3 years ago. So that long tail is getting longer. And that's really the result of an amazing growth marketing team that through human intelligence and really intense AI automation have been able to do that quarter-over-quarter.

Our partners are strong and continuing to get stronger. it's the minority of growth. The vast majority of our sales come from our direct-to-consumer efforts, and that will -- I expect that will continue for quite some time. But the indirect or the partner referral that continues to be strong, whether it's homesite or Chewy or real estate management or landlords. We've got a really long set of folks who drive lots of strong sales for us. Nick, anything you want to add on the agent front?

I was just going to note that we're seeing real strength across channels to your question, Andrew. and that is both new business to Lemonade as well as cross-sells to existing customers. As it relates to new business, we saw our highest ever new sales volume in the first quarter, and we've been able to sustain really strong efficiency metrics on our growth spend. And at the same time, on cross-sales, we saw a near doubling year-over-year of cross-sales to existing Lemonade customers. And those are trends we really hope to sustain strength across our various channels that have enabled our growth acceleration curve until now.

Your next question comes from the line of Tommy McJoynt from KBW.

Yes, I had suspected that all of the effectively free advertising and brand building that Lemonade benefited from with the media's attention on the autonomous vehicle announcement in the first quarter that, that might allow Lemonade to actually dial down its need for growth spend while still exceeding the 30% in-force premium growth. Can you talk about why that wasn't the case? Does sort of mainstream media coverage of Lemonade help with attracting customers?

Tommy, Daniel here. That coverage is fabulous for us in terms of general perception. I think it draws attention to the widening gap between us and everybody else. The rest of the industry pricing based on gender and credit scores and marathon status. And on the other end of the spectrum, you have us partnering with Tesla to price per mile and per version of the AI that's driving.

So definitely, that captures the imagination. I think it drives home the unique elements that Lemonade has and the differentiation from the industry. So that drives attention and brand building, but that was never about getting clicks and sales instantaneously. This is the kind of long-tail investment in brand that builds over time. We see our organic sales growing. We see our conversion rates growing. We see the trust scores and brand recognition growing. You'll have noticed in Shai's comments that in pet, for example, we are now the #1 most searched brand.

So we are definitely seeing the cumulative effect of all the coverage of Lemonade and our differentiation in our tech-centric offering. But we had no -- the expectation implicit in your question was never shared by us.

Okay. That all makes sense. And switching over to the stock-based comp. I saw for the full year, the guide for stock-based comp was raised by $20 million. To clarify, is that an incremental? Or is that just a switch from cash comp to stock-based comp? And is that new $95 million a fair base level to assume in the out years as well?

Yes. So I would think of that as a step-up that will be a new roughly base level. I would note that those are unique grants and are multiyear in nature. All of that info is disclosed and out there. But big picture, there's a performance-based aspect to a subset of those grants. -- and that focuses on the next 2 years and requires significant value increase in order for those to become vested and drive value. In addition, there's a long-term multiyear grant that you've seen at other thoughtful companies, particularly for the founders to kind of drive a long-term vest. Our standard vesting for new employees is 4 years. These grants are have an 8-year view with a thoughtful vesting pattern.

So I think of this as a onetime for a multiyear view. If you think about our stock-based comp kind of zoom out a little bit and look over, say, the last 5 years or so, which gives a better picture and takes away some of the noise of stock volatility and things like that and look at our actual effective burn rate or dilution rate, which is really the thing that financially we're concerned about, it's right on target with best-in-class. It's sort of a 2-ish percent number, 1 point something to 2-point something over that very long-term period. That's really the focus number for us, and we expect over time that, that will continue to be the case. Founder grants are unique things, and so you'll see some volatility in the short term due to that.

And also, I maybe wanted to add, notwithstanding the increase in our expectation for expense within the calendar year, we're seeing stock-based comp scale very nicely as a percentage of any metric you'd like to index against, whether that be in-force premium, revenue or gross profit. Those levels are improving and from our view, healthy relative to benchmarks.

Your next question comes from the line of Mike Zaremski from BMO.

My first question is a follow-up on Lemonaid's, I think probably best-in-class loss adjustment expense ratio. Does it have something to do with -- on an NAIC statutory basis, we've always seen that Lemonade's claims, we call it denial rates, so claims closed with no payment has been materially higher than the peer average or industry averages. Does that have something to do with kind of why the LAE ratio is so much better than others?

So the short answer to that is no. the more thoughtful answer is that Lemonaid is -- has some unique aspects to the business. We have a very large number of relatively low premium policies because of the nature of our renters business. That has changed and diminished over time. So the renters book of business in terms of premium is now under 30% of the business in the high 20s. It used to be 90-something long, long ago. So the book of business is nicely diversified.

That said, if you just count the policies, you're going to get a very large number of renters. And so that can skew rejection rates because you can get a lot of claims, which are thoughtful claims, but not necessarily a covered claim, claims below the deductible for example, claims that are not covered by the policy. And that's not uncommon when you have a customer base who in a certain subset can be newer to insurance. It might be their first policy or it might be the first time filing a claim. And so that will definitely skew the numbers. If you isolate the part of our business that makes us look more like a more established incumbent, if you took just homeowners and car and pet, for example, you'd see a different number that looks much more in line. And I think our NPS scores and our customer satisfaction scores, which I would put up against any insurance company on the planet, show that over the arc of the total business, Lemonade almost every time as best we can, does the right thing and pays every valid claim effectively.

And let me just also to note, Mike, sorry, LAE ratios cost to manage claims over earned premium and claims without payment generally don't have costs attached to them. So I wanted to offer that as well. But I want to take the opportunity to share that fully aligned to Tim's points around product mix and how that has certain nuances within our LAE ratio. But we're actually seeing favorable trends in LAE over time across all of our lines of business. And that's especially true in CAR, where we've seen notable improvement in recent periods and our CAR LAE ratio is, at this stage, not materially different than the overall Lemonade result of 6%. So we're encouraged to see that momentum across lines.

That's thoughtful. My follow-up is just kind of also benchmarking kind of looking at Lemonade's gross combined ratio, about 138% this quarter, improving materially year-over-year. If I benchmark Lemonade to the industry and maybe Anders business mix is a bit different. I think the industry is running 90%-ish, so lower. I'm curious, does Lemonade have a goal to kind of lower that gross combined ratio materially over time towards the industry average? Or will there always be kind of a material gap?

Yes, you're exactly right. The improvements have been dramatic. a little color, something like a 60-point improvement, I think, which is significant. And obviously, you're really seeing it in the expense ratio for sure. The loss ratio, we reported a gross loss ratio of 52%, this quarter at 62%. So we're right where we need to be with loss ratio. Expense ratio continues to show dramatic improvement. Two things to note. Because of the nature of reinsurance, depending on the way you calculate combined ratio, there's a couple of different ways, but reinsurance certainly has an impact on that where the growth and the net will differ. But anyway life, we're seeing significant improvement. we're right on track is breakeven. You'll see that in Q4 for the full quarter for the first quarter, we've noted that for several years now. That's the point where b.ll.Asy10,'ades quite close.

So we're right on track for that. And that's not the fact that the vast majority of our business, we're expensing the cost of acquiring that business upfront. So that's a headwind for us. It's a good news, bad news for our business. We love it because we're able to acquire customers, we have to expense that upfront. So given that it's a handicap, it's a nuance of our business you're seeing these really dramatic improvements quarter-over-quarter. So we feel like it's right on track. We now move to your next question, which comes from the line of Bob Wong from Morgan Stanley.

First question is on the growth of the car business. I just -- I know you addressed it a little bit, but I just want to maybe double-click on that a little bit more. Obviously, Pet is now one of the bigger business here. And if we go back to the Investor Day thinking about it, you were talking about car eventually being the biggest driver for 10x your business going forward. Just given the current competitive environment, can you maybe just talk about your competitive positioning versus the industry and where you are in the car business today and how we should think about that growth engine going forward?

Bob, yes, I think a lot of what I would encourage you to think about going forward is really a straight-line continuation of what we've seen in the last year or 2. So we shared, if you go back a year, car was growing at something memory was about 9%. contrast that with the 60% of this quarter. If you went back a year more, you'll probably be in negative growth territory.

So not only are we reaching fast growth rates and rates of acceleration, but we're seeing very rapid acceleration from negative to positive to 60%. We don't intend to slow down too much thereafter. And the IFP component of car in our book is still modest, but its portion of our sales in the last quarter is already pretty significant, something like 1/3 of our sales in the last quarter came from car. So because we have a larger base, it will take time for it to capture its fair share, but it's catching up pretty dramatically.

So definitely significant. The other thing I would point out, and I touched on this in earlier responses, we think we have an offering that is highly differentiated and structurally advantaged relative to the incumbency. We are, to the best of our knowledge, unlike any incumbent in that over 90% of our customers have continuous telemetry on. And that just really gives us x-ray goggles into which risks we have, how we should be pricing them rather than using broad strokes proxies that are meant to, in some way or fashion, mirror driving behavior like where you live and your gender or age, education level, we're pacing through all of those, de-averaging those really big monolithic groups and being able to price every individual per se as they drive depending on a per mile basis oftentimes and adding AI into that mix as another driver. So I do think that this is a structural advantage that will allow us to continue to compound that business and the messages that you're recalling from our last Investor Day are ones that we would stand behind absolutely today as well.

Okay. Really appreciate that. Second question is on autonomous, not specifically for your business, but really just how you think about the growth trend of autonomous vehicles for the industry going forward, right, right? So right now, if we think about autonomous, the L3 or better autonomous vehicle penetration rate is still very insignificant. As we think about just the autonomous vehicle technology advances as well as penetration rate going forward, can you maybe help us think about the potential size of that market and the growth opportunities there for the industry, but also for Lemonade. Just curious your thought on that.

I'll share a couple of thoughts and then invite my colleagues to add if they feel I missed anything. Cars have very long ownership cycles, and therefore, newer technologies do take a while to penetrate into the installed base. But there's got to be little doubt that various degrees of autonomy is the future, and it is going to be growing much faster than the rest of the industry. And Tesla may be leading the way, but every major car manufacturer is adding these capabilities. And they aren't entirely binary. They have everything from various forms of adaptive cruise control all the way up to full self-driving of the likes of Tesla.

And we can see into each of those different gradations and we can price them accordingly. So if you widen the aperture a bit, you start seeing all different ways in which cars are adding safety features and degrees of autonomy and those are absolutely things that we are focused on and pricing into our policies. So I think if you are a $50 billion, $60 billion, $70 billion insurance company with dominant market share, this may seem insignificant. but our market share is maybe 0.1% of what a Progressive or GEICO is right now.

We have maybe less than 1 per market share, which is to say we can see in this emerging sector, a very promising growth opportunity. We don't limit ourselves to it, but I think you will see autonomy impacting our financials much more significantly than perhaps on the incumbency with a very, very large installed base.

Yes. I think you're exactly right. This is this is an area where I'd love us to have a better crystal ball than you do, but I fear we may not. What we do know is 2 things. One, the numbers today are small. And as Daniel noted, small numbers can have a really significant impact on a company the size of Lemonade. -- if you're a $1 billion player versus a $50 billion player, that plays to our advantage. Two, the name of the game here when you have an uncertain growth curve, and this like many other technology advancements, this adoption rate will be very, very slow and then all of a sudden, it will be very, very fast. And the point of that bend in the curve is quite difficult to predict.

Lemonade and our depth and level of agility is such that we love that. fast, quick, thoughtful adaptation is really what we were built to do. And so when that curve comes, whether it's a year from now or 6 years from now or something in between, we'll be ready and we'll be more as adept as any player in the market to react to it. And we'll have several years of autonomous experience behind us rather than still to build. So we love these curves, and we're looking forward to it coming.

There are no further questions at this time, and we've reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

I'm really thrilled to have Lemonade here with us. Tim Bixby is their CFO. Tim, thank you. Welcome.

Good morning.

Maybe start at the top, just Lemonade has kind of one of the early insurtechs and really set out to fundamentally rethink insurance. And as the company has scaled, as you kind of sit back and reflect, what aspects of the original vision have proven the most durable and where in kind of the -- as you've gone along and you had to maybe adapt the most?

Sure. Yes. Good morning, everybody. I think one of the most striking things about Lemonade, and there's a few striking things about Lemonade is the consistency of the original vision. So from the original whiteboard or napkin concept in 2015, where our 2 founders, Daniel Schreiber and Shai Wininger got together and started the kickoff to today, really, the change has been almost nominal in terms of the original vision, strategy, go-to-market approach, AI first from day 1. Our first policy was sold by AI Maya. Our first claim was managed by AI Jim. And this was in 2016.

Lemonade was founded the year that OpenAI was founded. So a lot of water under the bridge since then, but we were built really for this day. And this day, meaning '21, '22, '23 up to what we're seeing day by day now from an AI perspective. But fundamentally unchanged and what the core premise of that is insurance can be done fundamentally differently from a user perspective, from a consumer experience perspective, if enabled by the latest and greatest technology, whether that's the LLM from last week or machine learning from 2015 and everything in between.

Perfect. And I mean, you obviously mentioned AI there a few times and going back 10 years ago, I know you guys were -- before it was really an everyday word. So you've been kind of preparing for the AI world and some of the rapid advances we're seeing more recently for a long time. What's your view or anything more you can add to the headlines around insurance via GPT has kind of been the last few weeks or SaaSpocalypse, kind of a lot of the theaters in the market.

Yes. this cycle is similar to the ones I've seen before and then, of course, different and fundamentally different in a couple of ways. But a lot of similarities to cycles we've seen historically where the fancy new thing comes and it gets very exciting and then it will be immediate disruption. And I think the selling insurance via LLM or GPT or cloud or what have you is interesting. But the experience is poor. And whether that experience will be poor a week from now or a month from now or a year from now, we don't know, but we don't need to know.

Lemonade has had the highest standards of customer experience at heart in our DNA from day 1. And using an LLM to sell insurance will be no different. If and when we get there, we'll be at the front of the line. We talk to these folks all day every day, but the consumer experience will drive it.

Yes. Great. You guys made a pretty exciting announcement recently related to Tesla and auto insurance product for FSD. Maybe can you talk about that a little bit? And then more broadly, kind of what is at top of mind for Lemonade as you think about kind of the autonomous vehicle wave that's coming?

Sure, sure. I think the most notable thing from my view about the Tesla announcement that was not sort of the flashy part. It's nice to have a big announcement with a big partner and a company like Tesla that has lots of folks who love it and then lots of other folks as well. And so that's always good from a PR perspective and I kind of plant the flag perspective. But from my view, under the covers, I think what I would take away from it, if I were kind of looking at the company from the outside is the pace and the speed and the agility with which we're able to do these things.

And so whether autonomous and assisted and supervised and there's some different flavors of driving that are coming to fruition here, whether the acceleration and the pace of adoption is faster or slower in between, it doesn't matter. It doesn't matter for us because we'll constantly be at the forefront. There's probably a tipping point before too long where this is kind of a rule of thumb where if once 10% of the miles are fully autonomous or supervised, that creates sort of a dynamic where there's likely to be seismic market shifts. Today, we're at 0.1% and then fully autonomous is [indiscernible]. And so it's going to -- we're going to have a little bit of time to think that through.

Lemonade was a pioneer in paper mile, which feels low tech now, but we've been in that for many years where a customer who drives less and is therefore a much fundamentally lower risk. There's not -- they're not no risk, but a lower risk. We have a pricing model that's been adaptable to that paper mile model for years. And so autonomous is one more -- it's a major step change beyond the paper mile approach, but that's one of the reasons we were able to put something together with the Tesla folks, with our product team in just a matter of months. Our employees are friends, some of our employees have worked at Tesla. And so these things are just natural when you're AI first and data first, and there'll be many more to come.

Cool. Great. Maybe if we shift to your -- as we think Lemonade going forward, the recent shareholder letter talked a little bit about some investment areas where I think the way you guys termed it was like medium-term ROI. Can you expand a little bit there, kind of what you're thinking about, what we might expect to see?

Sure. I think another striking thing about Lemonade perhaps is the visibility and the predictability of the model. So even though in an era with an insurance that has been really one of the most tumultuous the last 6 or 8 years in history, even in that era, Lemonade's key metrics have been sort of up and to the right in an almost surprisingly linear fashion, while the outside world and the macro world have been quite a bit more volatile. We set out a target to prove that we can do several things at the same time, dramatically improve our underwriting, go from a relatively immature insurance company to a mature insurance company, show loss ratios that consistently improve quarter over quarter-over-quarter with a new customer base and significant growth and doing all of that without moving the sort of the goal line of EBITDA positive.

So we planted that flag. I think it was as much as almost 4 years ago at this point, and it hasn't moved. And part of that is by our own choice, but part of it is the visibility and the predictability of our model and our ability to grow at a pace of our own choosing. Importantly, the market is not our limitation. We could grow faster. The insurance market, the addressable market is enormous by every -- almost every measure. But we spend money to acquire each new customer typically. Sometimes it's a cross-sell, but we spend that money upfront and it burdens the P&L, and we want to be able to show that we would hit that breakeven point. Despite that, under the covers, we're continuing to invest.

And so to your specific question, there are things that we can see in -- under the covers, in the numbers, in the analytics that are tougher to see externally where we can invest in areas where we know they'll have positive ROI in the medium term, but perhaps not in year and some of that is built into the guidance. Nevertheless, we're going to grow at a faster rate than last year. We expect loss ratios in line or better than industry best. Our loss adjustment expense, a key measure of the efficiency of the underlying machine is something like 6% in Q4. Industry norms are 9%, ours used to be 15%. So we can do more than 2 or 3 things at once.

Yes. Can you maybe expand on that a little bit because maybe people don't know Lemonade as well, like it's been pretty impressive kind of your -- how your expenses have gone, how your headcount has gone versus your premium over the past few years. Maybe talk a little bit about that and how you've really used technology to scale the business.

Yes. I think that's -- I've been with Lemonade 9 -- almost 9 years now. And I think one of the most pleasantly surprising things that I started to see in the numbers several years ago is when this dynamic broke, right? And the traditional dynamic in insurance is you're going to add a certain amount of business or add a certain number of customers and you're going to add a good slug of costs and maybe there's some efficiency gains. And what we started to see in the numbers about 3 years ago was headcount increases falling to 0, netting to roughly 0 and our top line accelerating, our ability to continue to grow the business.

And so after a few quarters of convincing ourselves that the change has come, that's really the underlying benefit of our approach and our single system. We have a single -- one data stack, one technical system that supports and drives the entire business. And the reason that dynamic started to occur, a big part of it is we were able to take big chunks of cost out of the system, not just become more efficient, but just eliminate entire cost. So for example, in our pet insurance business, which is a really interesting -- has some really interesting unique dynamics. One is frequency. So the frequency in a normal line might be 2% or 3% or 5% of your customers have a claim in a given year.

With pet, it's something like 100% or 120%. There's just a constant flow, which we actually like. It enables the flywheel to move faster. It builds our data advantage and it expands our data advantage faster. And so something like 50% or 60% of our claims in pet, we were able to take to 0, close them, pay them in real time, money in the bank account within a few seconds. And so it's not just getting more efficient. It's literally pulling pieces of cost out of the P&L. And so that's -- it's part of what drives that LAE improvement. And when you're able to get to these sort of efficiency gains that are visible and sustainable and we're so subscale. We're $1 billion plus insurance company at $10 billion or $100 billion, then you're starting to get to some real scale and those are the folks we compete with. But when you start to see this at our scale, that's what really tells you the model is really working well.

Yes. Yes. You touched on it there, just kind of the more data and the feedback loops. And if I kind of tie a couple of things together, like on one side, with kind of what's going on with AI and so forth, there are a lot more AI tools available to competitors today kind of easily attainable than -- I mean, you guys had to build it from scratch 10 years ago. So when you kind of take that on one side and say, like does that hurt your kind of competitive advantage or the moat that you've built around the business.

But on the flip side, like how important is all those new product lines you've added, the new geographies you've added and that -- really just that data and that feedback loop like how do you think about those 2 things?

Yes. It's -- the common question is, can you build Lemonade overnight over a weekend now, and it took us years to put together. And I think the underlying advantage is not for Lemonade sort of a silver bullet. It's kind of the culmination or the combination of all these different pieces. And so if you just took an extreme example, let's say, you took the Lemonade's front end and you gave it to a large incumbent for free. AI feels free even though you have to pay for it. But let's say you could code that thing up and hand it off to one of our competitors.

The question is what do you do with that capability? It's not getting the capabilities, what do you do with the capability. The real value of the Lemonade system is built under the hood on our proprietary data. We all share publicly available data, and that's been true for a very long time. And so if AI enables some of those sort of external facing pieces to be easier to build or easier to code, then that may very well be. But our fundamental advantage, we think, is actually expanding, not shrinking because of the pace of the sort of acceleration here. If we're all accelerating at a similar speed, whoever started first, this is -- you heard Daniel published this in the last couple of days.

If you started earlier and you're all accelerating at the same speed, your advantage is going to widen, is not going to narrow. It's kind of like it's a little bit of the -- it's a different version of the innovator's dilemma where for decades, to be an amazing insurance company, you had to be a bit of a Sumo wrestler, right? You had to be really big and really smart and have a lot of reserves, and that was how that system was built over decades and decades. And we're playing in a different game. And so we're not trying to Sumo wrestle the Sumo wrestler. We're doing the biathlon and we have a rifle and some skis and -- and next week, the sport is going to change again and whoever is most agile, and that's really where our advantage lies, not mastering today's model release, but knowing that we're going to be best fitted to master 3 releases from now in 6 or 12 or 18 months.

Yes. That makes sense. Along those lines of constantly expanding, growing, I think a lot of people think of Lemonade as a U.S. company, but Europe is kind of stealthily getting on the map and growing and you have a number of countries there products. Can you just spend a couple of minutes talking about kind of the strategy there and kind of maybe how the regulatory environment there is welcomes that...

Yes. So one of the -- again, going back to day 1, one of the strategic pillars of Lemonade was we can go where the market is. We don't bring in 1,000 agents, and we don't build big buildings and put our name on them. And so it became clear to us that we could launch Texas, for example, with no employees in Texas or we could launch Michigan with no employees in Michigan. And so we kind of planted the flag in Europe, and we said we're going to do this because we can. If you had asked me in my prior life before Lemonade, I probably would have strongly recommended against it for all the normal reasons, risk and capital and all those things. And that was really the reason we did it because we could.

And for a while, for a few years, it was under the covers. And now it's really -- Europe has come into its own. It's got some really interesting dynamics from a pricing perspective. There's no pricing regulation, price comparison websites drive a lot of the business. At first, we didn't like that because we didn't have an advantage. The direct-to-consumer model was really our fundamental advantage. We had to learn it. We had to become part of it. We failed a bit, and then we started to succeed quite a bit. And so Europe someday can be -- it should be half the business, right? The relative market size is 50-50.

We're following the game plan from the U.S. We've gone from 1 product to 2 products. We think car insurance will be great in Europe. We don't have it yet. We think pet insurance likewise will be great to add. More than half our business in Europe is from the U.K., which is our newest territory. More than half the business is from home insurance versus renters insurance. That's the newer product. So it's -- again, we're seeing this pattern that we saw in maybe 2016, 2017, 2018 in the U.S., and we have a nimble team. And it's actually -- it's interesting when you think about the sort of LLM question, can GPT sell insurance.

In some ways, Europe was a bit of a test case, right? We had to figure out price comparison engines a little distant from our customer experience. We figured out we had to mail it. Now obviously, AI and the LLMs are going to be a step change beyond those websites. But maybe that was a bit of a dry run that prepped us.

Good point. Okay. Great. I mean CFO is here, so let's put a financial hat on. Can you talk a little bit about the virtual agents and the kind of the growth financing arrangement that you put in place? It is pretty unique, but it seems to be working very well. You've renewed it, so on, like it's, I think, a big -- something people might gloss over, but is pretty unique.

Yes. It's -- so we have a synthetic agents program we call it. We really -- we developed it. When I say we developed it, we have partners who are thinking along the same line. General Catalyst is our partner in this. Others in the market do it. It's a bit rare outside of tech and software, and it's a little more common in private companies than public companies. And we found it to be a bit of a sleeper to put it mildly, which is -- it's one of the few financing mechanisms I've ever seen or experience that does everything you want it to do and none of the bad things that you don't want it to do.

And with all due respect to all the bankers and lenders in the world, there's always a trade-off, cost and covenants and all that stuff. And there's so much flexibility built into this program, and it gives us downside flexibility, but it also enables us to make decisions going forward. So we can grow at the pace of our choosing. We've been able to replicate the benefit of agents where we're competing against big incumbents with large installed agent bases. Now those can be a liability and can be cumbersome to manage and train and pay. But the nice thing about them is you can -- it stretches out your customer acquisition cost over a very long period of time, essentially the lifetime of the customer.

So we were able to do that, replicate that. There's a cost, right? So the partner makes a healthy return, but it's debt like. It's got all the advantages of debt where we're able to get the balance sheet benefit, lessen the cash flow burden, but also maintain our flexibility. There's no covenants. There's no limitations. There's no decisions we make that we can't -- couldn't make otherwise because of the debt -- a traditional debt structure. So it's just been ideal for our business and the kind of customer cohorts that we acquire, and it's just -- it was a good -- it's been a great fit.

Great. Before we open it up for questions in the last few minutes, maybe I'll ask you this kind of one forward-looking kind of look -- as you look out 5 to 10 years, I guess, look out 10, Lemonade is kind of 10 years old now. So let's look out 10 years, like what -- how do you, one, see where Lemonade is; but two, just the broader insurance landscape, at least in your personal lines sort of universe, particularly with AI coming of age and those sorts of things.

So I think in broad strokes, we have what we need. We don't have to -- there's another continent or 2 out there that we're not in, and that's always an opportunity. There's other products that we could launch, but we don't need to, but we likely will over time. But we have the core capabilities. We have the core products. We'll go -- we're in 50 states with a couple of products, but we're not in 50 states with all products. We'll continue that geographic expansion.

I think from a 5- or 10-year view, we have always believed that there's room in the insurance world for a single -- at least a single digital leader, the Spotify of insurance, the Uber of insurance, the Netflix of insurance. And that doesn't mean that sort of indicates a winner take most dynamic, which I don't think is how insurance plays out. But there's no one in the market that's ahead of us. 4 years ago, I would say that same sentence kind of waiting for the shoe to drop and the companies to flood in, and we've still not seen that. Our real direct competition is really ourselves, right, to maintain our standards, to adapt to these new technologies, to accelerate growth, to do all the things we've been able to do.

So I think in the same way that people love and use Spotify and would panic if you took it away from them, I think Lemonade will occupy a place like that in financial services and insurance 5 or 10 years from now.

Great. We got a couple of minutes left if there's any questions in the room.

[indiscernible].

Yes. So I think maybe you're getting at the long-term view of employment and compensation and some of those economic issues that are starting pretty starting to come pretty fast. I'll just assume that might be where you're going. So we are highly cognizant of the benefits of AI to businesses and cost structures and all those things. And we are even more cognizant of the broader pressures that we expect or might expect developing on consumers.

In the short term, consumers -- we're providing a service and a product that's of utmost importance to a consumer, whether they're wealthy or not wealthy or employed or unemployed or it's a critical need. And so while recession-proof might be an exaggeration, there's a bit of truth to that. People will pull down their discretionary spending, but they want to make sure their bike is covered and their pet is covered in their home, their most important asset is covered. And so I think that, that will be a short-term and a medium-term dynamic.

But in the long term, we have to have customers, and they have to have -- be healthy customers that have -- that own valuable things. And so it's in all of our incentives as leaders of businesses to think about these things. And so I don't -- I have no more magic vision than the next guy. I do -- the leader of Lemonade, Daniel Schreiber, has actually done quite a bit of thinking along these lines and outside of work is kind of a key thought leader in how these economic structures play out. And so it is a top of mind thing for us. And it's top of mind for me and probably you, anyone has kids and grandkids, and it's critically important. But from a Lemonade's perspective, we'll be at the front of the line, but we do have a greater responsibility, I think.

Great. We are at time. So thank you, Tim.

Thank you. Thanks.

Thank you. Appreciate it.

Hello, everybody, and welcome to the Lemonade Q4 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]

I'd now like to hand over to the Lemonade team. Please go ahead.

Good morning, and welcome to Lemonade's Fourth Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's fourth quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor.

I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the SEC and our more recent 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 performance indicators, including number of customers, In force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat, trailing 12-month loss ratio and net loss ratio and 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 for some opening remarks.

Good morning, and thank you for joining us to review Lemonade's results for Q4 2025. By any measure, this was our strongest quarter ever, and it capped a year of excellent financial execution and operating performance. In the fourth quarter, In force premium grew to $1.24 billion, up 31% year-over-year, and this extended our streak of accelerating growth to 9 consecutive quarters. Revenue grew even faster, up 53%, reflecting both growth and improving economics across the business. Indeed, I'm pleased to share that this growth translated directly into profitability metrics.

Gross profit increased 73% year-over-year to a record $111 million. And if I zoom out to take a 3-year perspective, our gross profit has been compounding at an annual compounded growth rate in the triple digits. As a result, adjusted EBITDA loss narrowed to just $5 million in the quarter, placing us on the brink of breakeven, and this represented a $19 million improvement year-over-year. Indeed, we generated $37 million in positive adjusted free cash flow in the fourth quarter, capping a strong year of cash generation. 2025 was our second consecutive year where we saw our cash reserves swell.

Somewhat unusually, insurance is a business that tends to turn cash flow positive before GAAP accounting positive, though the one almost inevitably follows the other. This then is as good a spot as any to reiterate, our long-standing expectation that we will be EBITDA profitable in Q4 of this year and EBITDA positive for the full year of 2027.

We continue to be highly focused on growth and accelerating growth because it's a gift that keeps on giving. Faster growth drives better data and further sharpens our segmentation and pricing capabilities. This powers improving underwriting performance and rapid gross profit growth, and we can swiftly redeploy gross profit thus generated into profitable growth investments with compelling unit economics, and so the cycle continues. It's energizing to see the flywheel continue to compound even as we scale.

What's particularly encouraging is that all this progress is broad-based. Pet, Car and Europe are all coming into their own as powerful growth drivers, each combining hyper growth with improving underwriting performance.

In our shareholder letter, we highlight critical initiatives we are investing in this year to leverage the latest AI technologies to further enhance our go-to-market operations, pricing and cross-selling capabilities. We believe that these initiatives can drive durable competitive advantage in pricing and unit economics that support our ability to sustain an industry-leading gross profit growth profile for years to come.

One last thing I wanted to take a moment to draw your attention to our upcoming Investor Day. This event is scheduled to take place in November of this year in New York and online. Specifics will follow, and we certainly hope you'll be able to join us for significant updates on our vision, AI capabilities and ambitious plans.

And with that, I'll hand over to Shai. Shai?

Thanks, Daniel. A key vector for us is autonomous insurance and specifically Lemonade Autonomous Car, which we announced and launched a few weeks ago, starting with Teslas. As physical objects such as vehicles increasingly shift from being controlled by humans to being operated by AI, insurance needs to evolve as well. Historically, the industry has priced auto insurance using proxies, credit scores, marital status, education and other similar features. We always believe that telematics is a much more precise tool than these blunt proxy, measuring the driving itself rather than something broadly correlated. But when a car isn't driven by a human, these proxies lose touch with reality altogether.

Lemonade Autonomous Car is priced based on 3 modes: when a car is parked, when it's driven by a human and when it's driven by AI. By integrating directly with the car's onboard computer, we can tell which mode that car is in at any given moment, distinguishing between various kinds of risk and pricing each accordingly. When the car is driving itself and doing so more safely than a human, the price reflects that. Our system accounts for the vehicle software version as well as for the quality and precision of the hardware sensors and computational units. As the car becomes better and safer with software updates or hardware upgrades, our pricing will automatically respond and continue to drop.

As of this moment, autonomously driven miles using Tesla's FSD are priced at about 50% of the equivalent human-driven mile, and we expect this to get better over time. We believe this represents a fundamental shift for the industry. As autonomous driving becomes safer and more widely adopted, prices should fall transparently and dynamically.

With that, I'll hand it off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our Q4 scorecard. In force premium grew 31% year-on-year to $1.24 billion, driven by customer growth of 23% and premium per customer growth of about 7%. We added about 550,000 new customers in 2025, 35% more than the prior year. Within our reported gross loss ratio of 52%, our favorable prior period development of 9% was driven entirely by non-CAT prior period development, primarily from our home and car products. Prior year development, which we report on a net basis, was $11 million favorable in Q4 and about $30 million favorable for the full year. Gross profit increased 73% to $111 million, while adjusted gross profit increased 69% to $112 million for a gross margin of 48% and an adjusted gross margin of about 49%. These metrics use revenue as their denominator. As a reminder, adjusted gross profit as compared to gross earned premium was 39% in Q4, up 10 points from 29% in the prior year.

Revenue grew 53% to $228 million, while our adjusted EBITDA loss improved to a loss of just $5 million. Notably, revenue grew more than 20 percentage points faster than IFP, a dynamic we expect to continue. Importantly, adjusted free cash flow was positive for the third consecutive quarter at $37 million and has been positive 6 of the last 7 quarters, while operating cash flow was $21 million. We ended the quarter with roughly $1.1 billion in cash and investments of which about $250 million is required to be held as regulatory surplus.

Annual dollar retention, or ADR, remained stable as we continued our clean the book efforts in our home business at 85%, flat versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $30 million or 24% to $154 million in Q4 as compared to the prior year. Let's break those expense lines down a bit.

Our other insurance expense grew by just $1 million or 6% in Q4 versus the prior year as compared to a 31% growth rate of our top line IFP. Total sales and marketing expense increased by $17 million or 35% due primarily to increased growth spend versus the prior year. In Q4, growth spend was $53 million, up 48% as compared to the prior year. Importantly, as we continue to ramp growth spend, our marketing efficiency levels remained stable and strong in the fourth quarter with an LTV to CAC ratio above 3x, in line with prior year.

We expect Q1 growth spend to be at a similar level as Q4 and expect a total growth spend of about $225 million for the year. Technology development expense was up 14% year-on-year, $25 million, while G&A expense increased 29% as compared to the prior year to $43 million. The year-on-year increase in G&A expense of roughly $10 million was made up primarily of 3 items: an increase in noncash stock compensation expense of about $2 million, an increase in interest expense of roughly $1 million and an increase in bad debt expense of approximately $5 million.

Our headcount increased slightly by about 4% to 1,282 in Q4 as compared to the prior year. Our net loss was $22 million in Q4 or a loss of $0.29 per share as compared to a net loss of $30 million or $0.42 per share in the prior year. Our adjusted EBITDA loss was $5 million in Q4, dramatically improved versus a $24 million EBITDA loss in the prior year. Our detailed guidance for Q1 and the full year of 2026 is included in our shareholder letter and represents 32% Q1 and full year top line growth year-on-year, roughly 60% full year revenue growth and of course, positive full quarter EBITDA expected in Q4.

And with that, I'd like to pass back to Shai to answer some questions from our retail investors. Shai?

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. There were a couple of questions from Paper Bag about our loss ratio and recent autonomous car insurance launch. Thanks, Paper Bag. As we have explained on a few occasions before, perhaps in more detail during our most recent Investor Day, we don't think of loss ratio as a stand-alone target, but rather as one metric or lever to optimize our quest for maximizing gross profit. Sometimes maximal gross profit is achieved by lowering loss ratios, sometimes by raising them. Our pricing strategy is solving for maximum gross profit in absolute dollar terms rather than any ratio.

Turning to our autonomous car product. With our telematics infrastructure, we're able to evaluate and price the risk associated with every driven mile accurately. In the case of Tesla FSD, the data we have shows that miles driven with it are more than 50% safer than when driven by human. This allows us to drop rates and become more attractive to customers versus peers, which is, in turn, lowering our customer acquisition costs and helps us win and retain more business.

Responding to your question about our 30% growth, I would think about this autonomous car insurance launch as a first step of a much broader strategy and direction that will materialize over time. Indeed, it could take years before we see a step change in autonomous car ownership. And with that said, we believe it is critical to begin now with building the best product for that future with the best experience pricing, underwriting and coverage.

In the near term, as we highlighted in our shareholders' letter, our growth drivers are increasingly diversified such as we are not reliant on any one segment or product line to drive growth above 30%. Pet and Car are both seeing IFP growth in the 50s and Europe in the triple digits, for example.

In another question, we were asked how soon car will expand to remaining U.S. states. We launched new states as soon as we can from a regulatory perspective, but only after we are confident that we can competitively and profitably price risk in each state. Our improving car results, both top and bottom line, speak for that discipline. Launching a state requires thoughtful preparation from marketing, pricing, product, tech, legal and finance perspectives. With our local platform and the agentic automations we're constantly layering into it, we're becoming very effective in this process, collapsing stages that used to take months into days. I believe we now have the most advanced regulatory and compliance process in the market, and we're only getting started. That said, states we've already launched represent roughly 50% of the U.S. car insurance market, a TAM measured in many tens of billions, and car is available to about 50% of our existing customers.

We've been launching multiple car states since the beginning of 2025 and expect to continue to launch new states with our autonomous car product throughout 2026. By 2027, I expect Lemonade car product to be available to the overwhelming majority of the U.S. population.

In another question, Charwak asked, with AI simplifying the insurance industry, what will keep Lemonade in an advantaged position over incumbents who might be willing and ready to modernize their software stack? How does Lemonade continue to differentiate and stay ahead? This is a question we get a lot, and I think the answer comes down to structural and cultural differences that are nearly impossible to overcome.

Lemonade was built as an AI-first organization 10 years ago. Every team member was hired into that environment. People who didn't thrive in a tech-first, fast-paced culture like ours moved on. Today, I estimate more than 95% of our team operates with an AI-first mindset. Our product and tech organizations are at the core of the company, which makes us product-led, customer-centric tech organization. In many ways, the AI explosion is the moment Lemonade was built for. We built the data infrastructure from day 1. We collect every signal, and we have been doing so for a decade. We have a highly rated app that customers love and actively use, which keeps them connected and allows us to continuously optimize pricing for the safest customers.

Now compare that to traditional insurers. These are companies built on the foundations of people, not technology. They treat tech as a cost center, not their core. They rely on third-party vendors that are themselves built on legacy systems, which leaves insurers with hundreds of disconnected systems they need to run their business. It's very hard for an organization like that to compete with a full stack tech-first company like Lemonade. In fact, in the history of all tech revolutions, you can probably count on the fingers of one hand, the companies that dominated prior to the tech revolution and still were there in a dominant position when the dust settled. It would be naive to expect that incumbents will be in this place forever. Of course, they're already talking about increasing investment in AI and sharing a case study here and there. But by the time they make meaningful progress, we believe we'll always be several steps ahead.

In the next question, CyberCat asked, how does Lemonade think about AI reducing uncertainty while creating new risk categories? I have to say, CyberCat, that a shrinking TAM does not keep us up at night. Even if AI compresses pockets of TAM, the resulting market opportunity remains essentially limitless relative to our client size. But with that said, I agree with the premise of your question. We are already seeing this in our existing suite of products with the expansion of autonomous driving. I think it's true that AI will continue to redefine the insurance industry with regards to the types of risks and products that are relevant over time, perhaps in ways that aren't immediately obvious today.

With that, I'll pass it over to the moderator, and we'll take some questions from...

[Operator Instructions] First question comes from Jason Helfstein with Oppenheimer.

So when we look at the numbers, we can clearly see an improvement in marketing efficiency. You obviously talk about it. We can see it kind of like a contribution margin. When I think about what that kind of implies to '26, it would like -- it looks like the EBITDA guide would be particularly conservative unless you plan to make other OpEx investments or essentially kind of like lean into potentially pricing for growth. So maybe talk about how you're thinking about that, i.e., reinvesting marketing efficiency into growth or just that it's conservative. And maybe tie that you made 3 points in the earnings letter that you plan to lean more into cross-selling and kind of automated pricing and improved pricing accuracy. So maybe just like we'll take those 3 comments, and I don't know if you want to link that back to like the first question, if it's connected?

So I'll take a shot at a subset of that, Jason, and then maybe my partners will jump in. Daniel has joined me here. And we've also asked Nick Stead, our SVP of Finance, to join us to perhaps answer a few questions. If I kind of think -- zoom out and think about '26 generally from a growth perspective, actually, Q4 was a pretty good proxy for how we're thinking about it. So you saw a couple of things happening really coming together in Q4. Certainly, the underwriting or loss ratio side of the business came in very nicely. But from a growth perspective, which is really the core of the focus right now, which is how do we grow effectively? How do we maintain an LTV to CAC that we are comfortable with, number one, and excited about improving over time, number two. And how do we lean into that over time.

And so we saw that come together nicely in Q4, where we were able to see -- free up a little more spending, free up a little more capital to invest because we saw nice underwriting results, and we plow that back into additional growth. So you see overperformance on the top line versus our guidance. That's because we deployed a little more growth spend than anticipated, and that's a good thing. So that's a backward-looking view. If you take a forward-looking view into '26, we're guiding to our very strong track record of being able to maintain a solid LTV to CAC of 3 or better.

What we do see here and there in certain pockets and certain channels and certain products and certain geos is overperformance, and that's when we're able to lean in. So I think what you see embedded in the guidance is some of that continued goodness, but we have not changed our philosophy of taking everything good that's happening in the most recent period and extrapolating that forward. So I think you're right. There's probably a similar potential to overperform. We think growing a little bit faster each quarter is important, and we grow at a pace of our own choosing. We're guiding to 30% plus. Obviously, we -- the market will enable us to do more. It's essentially an endless market. But I think at this point of the year, we're 6 weeks in. We like what we're seeing in January and February to date. And so that guidance reflects real optimism about being able to spend more, significantly more in '26 than in '25. That's a continuing trend and to potentially see that growth rate accelerate.

Yes. I agree with everything. The only thing I'd say, Jason, thanks for your question. There isn't designed buffer or conservatism built into the number. We're guiding as best we can as we always do. We do always look for opportunities to surprise ourselves and you and everybody, but our guiding strategy is to guide to pretty much what we have line of sight to. And what I think may be making the difference that you're kind of pointing to is captured in some of the things you referenced, which is we are investing in quite a lot of R&D work this year. So we highlighted 3 areas of investment. There are others that we didn't detail and even those we just touched on in passing, but we are undergoing very significant investments really that compound one another.

We see 2026 as a year of multiple engineering efforts quite aside from the fact that the kind of ground beneath our feet is moving because the models keep getting better and better every day we wake up to a more powerful brain at the very core of what we're doing. But beyond that, Shai mentioned the local platform that is going to look very different by the end of '26 than it is at the beginning of the year. And we spoke about our cross-selling platform, our pricing machine as we're calling it and our revenue machine, all big initiatives that should collapse time, increase precision and ultimately lower expenses. But perhaps some of the delta that you're pointing to and that you're assuming is conservatism is actually going to be spent on those initiatives.

Jason, it's Nick. I just wanted to jump in. On your question around expenses in 2026, you can think about operating expenses as being broken into 2 chunks. There's growth spend and then the remainder of operating expenses. Growth spend will continue to increase in 2026 as it has in '25 and '24. The remainder of the expense base should generally remain stable or closer to stable, growing in the single digits as compared to the top line, which is growing above 30%.

We now turn to John Barnidge with Piper Sandler.

My question is about adjusted EBITDA profitable in '27. How do you think about the target for premiums to surplus at that time? And do you think you can operate at greater leverage given some of the operational scale you've begun to achieve?

Yes. So from an EBITDA, maybe two questions in there perhaps. From an EBITDA perspective, we do expect Q4 this year, '26 to be fully positive as well as the full year of '27, which would be the first full year of EBITDA positivity. While we've not indicated growth rates beyond '26, we have been consistent in our communication that a 30% plus growth rate is our goal and an accelerating growth rate each quarter is also our goal. And so I would expect that ambition to continue into '27 and beyond given the immense size of the market that we're in and the markets that we can potentially be in.

From a surplus leverage perspective, we noted that we have about $250 million currently that's held as required for surplus. That's relatively quite capital light. We take advantage of a captive structure and we have reinsurance in place and other structures that, in combination, enable us to keep that surplus satisfactory for all regulatory requirements, but also to a minimum so that we can deploy capital in all the ways we choose to grow the business. We expect that to continue.

All of our forecast modeling tells us that we have more than ample surplus to support very ambitious growth rates even beyond our current growth rate and with ample cushion left over. And I think you can take real confidence, our forecasted breakeven points for EBITDA has essentially been unchanged for almost 4 years at this point. And so our visibility is quite good. Our leverage enables us to continue to be capital light, and we are more than sufficiently capitalized to grow at really ambitious paces through '27 and beyond.

We now turn to Tommy McJoynt with KBW.

The first one here is, obviously, there's been a lot of headlines around some advancements in ChatGPT and sort of the integration of carriers with that distribution model. Do you guys have any plans to allow tools like ChatGPT to actually bind policies for Lemonade? Or would the preferred route be to use ChatGPT as a search tool that ultimately leads to Lemonade where they could bind a policy?

I am so sorry. Tommy, let me start over. Can you hear me okay now?

All good. Yes.

Okay. I gave you a wonderful answer, but it was all lost because I was on mute. What I was saying was that we use AI in many, many aspects of our marketing. At the moment, not on the most front-end aspect of our marketing, but everything other than the skin deep kind of chat interface which ChatGPT has integrated with some players, obviously, from the skin on and it's all AI. When it comes to that kind of outermost layer, we generally love our own AI for that. Maya does and has done a great job chatting with customers, offering them an incredible experience. That isn't to say that we would never use something like a ChatGPT interface, but it's not something we've launched yet. And if we decide to do that, you'll be the first to know.

Okay. Understood. And then switching gears, as you guys have rolled out this autonomous vehicle insurance product on the car side, that obviously introduces a variable level of premium that's charged to customers on either a 6-month basis or a monthly basis. Is it your vision that over the long term, most car insurance will move to a variable level of pricing rather than a fixed 6-month term premium?

Yes and no. We today have both models. We have models where you can pay per mile. And we have others where it's fixed, and it's kind of customers' choice. And we don't have all of the options in all of the markets right now, but that is where we see this going and several states are there already. And this is really a choice, a style choice. Do you want -- you can remember the early days of mobile where you could pay by minute or buy plans and family plans and other things where you bought buckets and rollover months and all that kind of stuff. We think there's plenty of ways to do pricing around it. The big difference between what we're doing and everybody else is that we know the cost per mile. We are making predictions. Shai spoke about this in his comments earlier.

We are making predictions based on a plethora of data that come to us in real time at very high granularity from really high fidelity machinery that allows us to know that when you're driving, where you drive, how much you drive, how you drive and if it's you driving or the car, all of that means that we can price per mile with tremendous precision. If you then prefer to buy a bulk and have a fixed price, that's fine. We can use all of that information in order to price it for you as a fixed price, which will correct episodically and other people prefer to pay per mile, and we offer that as well. Both of them are fueled by the same AI engine and data set underneath.

[Operator Instructions] We now turn to Jack Matten with BMO.

Just a follow-up on the strategic initiatives and you talked about it in the letter, including the enhanced cross-sell platform. Just wondering if you could unpack that a little bit more. I know it references of car and home. And over the past year or so, I think you deemphasized home insurance growth a little bit. So just wondering how you view that line of business as part of Lemonade's overall mix longer term?

Sure. So that was a good tidbit that we put in the shareholder letter to give a feel for the kinds of things that not in a year when we are really continuing to focus on growth, on autonomous car, on really nice financial results, we're also continuing to invest in further reaching capabilities that we think over time will continue to not only help us maintain our advantages, whether AI-enabled or otherwise, but actually to expand those advantages versus incumbents. And those three areas we noted are really the core of what is a lot of interesting activity going on in terms of investment in future stuff.

Cross-selling continues to be important. More than 5% of our customers have multiple policies at this point. That's a really important metric. Almost 20% of our In force premium, however, is coming from customers with multiple policies. So cross-sell -- our ability to cross-sell, which is a really efficient way to increase IFP and accelerate growth without quite as much of a growth spend investment is important. And then the other two pieces really pillars of the -- our underwriting capability, which is pricing, constantly focusing on being able to deaverage pricing -- price on a car driver's behavior and not on their credit score and also to optimize how we allocate growth spend. So those are really three of the real key areas we're continuing to invest both with current resources and actually we will grow those resources to some extent over '26.

All of that's embedded in the guidance. All of that, we expect to deliver significant future ROI. Yet when you peel it all apart, our overhead expense, even with those incremental investments, is growing very modestly in the low single digits from an operating expense standpoint and almost our entire growth and expenses on -- growth expense to acquire new customers. That's a theme you've seen now for several years running, and that will continue, we expect well into '26, '27 and beyond.

Got it. And just one on the Tesla FSD initiative. I appreciate the color you gave earlier on this. But just wondering if you could unpack the opportunity you see for Lemonade and how much you think it eventually contributes to the share of your business? And then just given Tesla also has its own insurance offering, can you talk about how Lemonade is positioning its offering from a competitive standpoint?

We love talking about Lemonade, but we will shy away a bit from talking about Tesla and their plans and their goals. They're a terrific partner and setting a standard in so many ways, but we'll let them speak for their goals and aspirations. From our view, we want to be where our customers are and where our customers are going. We've had a pay-per-mile product in place for years. It's not right for every customer, but it enables us to do what we're best at, which is take deep levels of granular data and use that to price a customer most effectively. And often, that's to give the customer a better price, an autonomous vehicle, autonomous driving falls into that category without question.

Pricing the driver of the car, and that's where that driver is a human driver or an AI driver or no driver at all. The risk is still there, and we are best placed in the market to be -- I think -- we think, to be a partner to Tesla, but also to be a -- to kind of lay the groundwork as this part of the car market evolves. We think it helps us accelerate things that change more quickly play to our best strength, which is agility and a data-driven platform. And so we're really optimistic about it. We don't -- a little premature for us to say the impact on the financial and forecast model is. And as Daniel said, when it's the right time, we will certainly do that, and you'll be the first to know.

Ladies and gentlemen, we have no further questions. So this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.

Good morning, and thank you all for attending the Lemonade Q3 2025 Earnings Call. My name is Brika, and I'll be your moderator for today.

[Operator Instructions]

I will now hand over to the Lemonade team to begin.

Good morning, and welcome to Lemonade's Third Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's third quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor.

I would like to remind you that management's remarks made on this call may contain forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our letter to shareholders and the Risk Factors section of our Form 10-K filed with the SEC on February 26, 2025. 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 certain performance metrics, 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 for some opening remarks.

Good morning, and thank you for joining us to review Lemonade's results for Q3 '25. I'm happy to report another very strong quarter. Our in-force premium grew to $1.16 billion, marking our eighth consecutive quarter of accelerating growth. Our revenue was up 42% year-on-year, while our in-force premium enjoyed 30% growth, growth rates we were not expecting before 2026. Happily, our strong top line metrics were matched by our profitability KPIs. Our gross margin climbed into the 40s, while our gross profit more than doubled to $18 million, propelling us steadily and predictably towards EBITDA profitability in Q4 of next year.

All our products and regions contributed to this dynamic of accelerating top line and improving profitability, though it is worth spotlighting car, which saw 40% growth with more than half of that coming from existing Lemonade customers essentially CAC-less acquisition. That's transformative to car's unit economics as is the 16% year-on-year improvement in car's loss ratio, which came in at a lovely 76%.

Staying with loss ratios, our company-wide gross loss ratio in Q3 was 62% and our trailing 12-month loss ratio was 67%, both our lowest ever. If nothing unexpected happens in the coming weeks, I anticipate that we will set a new record once more this quarter, Q4. Against this backdrop, it's worth remembering that while declining loss ratios and expanding gross margins are a thrill, they are not per se what we are solving for.

As I explained at some length during our Investor Day 1 year ago, the metric we are looking to maximize is gross profit dollars. Loss ratios always affect gross profit but not always as a simple counter movement, whereby lower loss ratios yield higher gross profit. In reality, the relationship is non-onotomic, meaning that often a higher loss ratio will yield higher gross profit. The underlying mechanics are obvious when you think about it. Given the incredible price sensitivity in insurance, each percentage reduction in price can often yield outsized returns in terms of conversion and retention.

Lower prices worsen gross margins and loss ratio, yes, but the attendant boost in revenue often more than makes up for that. This means that for some parts of our business, certain products, certain channels, certain segments, a higher loss ratio and slimmer gross margins will actually translate into higher gross profit. Given the choice, we will always privilege dollars over percentages, which is why when we see an opportunity to trade higher loss ratios and slimmer gross margins for higher absolute gross profit dollars, we will take that trade 10 times out of 10. And indeed, as noteworthy as our loss ratio progression has been in these past 2 years, during that time, our gross profit has surged by 261%.

The full significance of this comes into sharp relief when paired with the fact that during the same time, our underlying expenses increased by single digits. This means that we've essentially transformed our variable expense into fixed costs. That's extraordinary. It's the hallmark of an AI-first company, and it is the reason why our gross profit trend line charts our path to profit and beyond.

And with that, I'll hand it over to Shai.

Thanks, Daniel. I wanted to shed some light on something that captures one of the ways AI shows up in our results, the LAE ratio. For those less familiar with our industry, LAE or loss adjustment expense measures the cost of handling claims as a percentage of premiums. It's a simple but powerful indicator of operational efficiency, and it is one of the few metrics that truly allows apples-to-apples comparison of the underlying efficiency of different insurance companies. It should be noted, though, that this metric is influenced by economies of scale. And so the larger the insurer, the more they are expected to have a good LAE ratio. For reference, large carriers typically report around 9% LAE. In other words, they spend about 9% of their premium dollars to handle claims on top of the claim payment itself.

I'm happy to report that our investment in automation has been paying off. And despite our relatively small size in comparison to the largest U.S. carriers, we reached a superior level of efficiency with an LAE of 7% on average across all of our products. In fact, in the past 3 years alone, we've cut our LAE ratio in half and the number of Lemonade claims adjusters actually declined, all this despite our claim volume growing 2.5-fold.

Using blender, our AI-powered insurance operating system, claim adjusters are able to handle 3x the claim volume they could before, all while providing our customers with a more transparent and instant experience. But having the best-in-class LAE is not where we stop. We wanted to take this further and expect to cut the LAE ratio in half yet again in parallel with our next doubling of the business.

With that, I hand it off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our Q3 scorecard. In-force premium grew 30% year-on-year to $1.16 billion, driven by customer growth of 24% and premium per customer growth of about 5%. We added a record 176,000-plus net new customers in the quarter. Gross loss ratio was 62%, an improvement of 11 points year-on-year and 5 points sequentially, while trailing 12 months gross loss ratio improved 3 points sequentially to 67%.

Prior period development was 5% favorable, driven by 2% unfavorable CAT prior period development and 7% favorable non-CAT prior period development. Total CAT in the quarter, excluding the cat prior period development was 4% -- favorable prior period development was driven primarily by home, car and EU operation, while the unfavorable CAT development was related primarily to the California wildfires in Q1. And on a net basis, prior period development was similar with non-CAT about 6% favorable and CAT 4% unfavorable for a net impact of about 2% favorable.

Prior year development, which we report on a net basis, was $6.3 million favorable in Q3 and $18.9 million favorable year-to-date. Gross profit more than doubled to $80 million as did adjusted gross profit to $81 million for a gross margin of 41% and an adjusted gross margin of 42%. These metrics use revenue as their denominator.

Adjusted gross profit as compared to gross earned premium was 29% in Q3, up 11 points from 18% in the prior year. Revenue grew 42% to $195 million, while our adjusted EBITDA loss improved by about 50% in the year to a loss of $26 million. And it's worth highlighting that revenue grew fully 12 percentage points faster than IFP, a dynamic we expect to continue through at least Q2 next year, primarily due to the recent increase in retained business through our quota share reinsurance structure renewed July 1.

Our Q4 revenue guidance, in fact, implies a roughly 49% year-on-year growth rate at the high end of the guidance range. Importantly, adjusted free cash flow was positive for the second consecutive quarter at $18 million, while operating cash flow was positive $4 million. And we ended the quarter with just under $1.1 billion in cash and investments, of which $278 million is held as regulatory surplus.

Annual dollar retention, or ADR, began to improve again as expected and was up 1 point to 85% versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $17 million or 13% to $141 million in Q3 as compared to the prior year. And let's break those expense lines down a bit. Other insurance expense grew by $4 million or 22% in Q3 versus the prior year versus a 30% growth rate of in-force premium. Total sales and marketing expense increased by $6 million or about 12% due to increased growth spend versus the prior year.

In Q3, that growth spend was about $46 million, up 16% as compared to the prior year. We expect Q4 growth spend to be at a roughly similar level, which would put us at a total growth spend of about $180 million for the year. We continue to see both ROI strength and diversity across growth channels, where we've been able to maintain our LTV to CAC ratio above 3:1 across products, across channels and across geographies.

Technology development expense was up 13% year-on-year to $25 million, primarily due to increases in personnel expense, while G&A expense increased 11% as compared to the prior year to $35 million, primarily due to an increase in interest expense. Headcount decreased sequentially from 1,274 in Q2 to 1,259 in Q3 and was up about 3.5% versus the prior year and essentially flat versus 24 months ago. Our net loss was $38 million in Q3 or a loss of $0.51 per share as compared to a net loss of $68 million or $0.95 per share in the prior year.

Our adjusted EBITDA loss was $26 million in Q3, significantly improved versus $49 million EBITDA loss in the prior year. We're well positioned to continue to fund this growth to expand across geographies and continue to diversify our customer mix. With over $1 billion of cash investments, efficient capital surplus management and positive adjusted free cash flow, we're well positioned to fund our growth strategy without need for additional capital.

Given strong year-to-date performance, we are raising our full year 2025 guidance across in force premium, gross earned premium, revenue and EBITDA loss. Our expectation for positive adjusted EBITDA for the full quarter of Q4 2026 remains unchanged. And with the recent change in our quota share ceding ratio, we expect our ceding rate to continue to decline in Q4 to roughly 40%. Our Q3 results show continued execution on and ahead of our targets, 30% premium growth, double-digit loss ratio improvement, a doubling of gross profit, revenue growth well outpacing premium growth, recurring positive cash flow and a strengthening balance sheet. We are delivering a unique combination of growth and profitability improvement and are doing both at scale with real discipline.

Let's talk through our Q4 expectations, and then we'll take some questions. For the fourth quarter, we expect in force premium at December 31 of between $1.218 billion and $1.223 billion, gross earned premium between $283 million and $286 million, revenue between $217 million and $222 million and an adjusted EBITDA loss between $16 million and $13 million. We expect stock-based compensation expense of approximately $18 million and a weighted average share count of approximately 75 million shares for the quarter.

And this implies for the full year, gross earned premium of between $1.044 billion and $1.047 billion, revenue between $727 million and $732 million, and adjusted EBITDA loss between $130 million and $127 million, stock-based compensation expense of approximately $61 million and a weighted average share count for the full year of approximately 74 million shares.

And with that, I would like to pass over to Shai to answer some questions from our retail investors.

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. Paper Bag asked, with the Local and L2 announcement, what tangible things will be accelerated as the number of car states we plan to launch in 2025 and beyond changed? Are there any new products planned to be coming out faster? And will we see further operating leverage in our engineering teams?

Thanks, Paper Bag. The local platform represents a major leap forward in how we build and evolve our insurance products. And yes, it's already accelerating a lot of what we do. For those who aren't familiar, Local is what we call our next-generation LLM first no-code insurance product builder. And it effectively gives our teams a new way to configure, design, test and launch complete insurance products and experiences without needing to write or deploy code. Local is being built in a modular way. It is already deployed and delivering value in some parts of the business, even though much work remains before local is complete. And based on the rollout so far, processes that used to take weeks can now happen in hours.

And yes, it accelerates our operating leverage by freeing our engineering teams to focus on higher impact initiatives since much of the product improvements and tests we're doing can be handled directly by our product and actuarial teams with no engineering involved.

Paper Bag also asked, what is the reason or rationale for the recent board seat nominations of PayPal's CMO and Meta's VP of AI Product and are there potential partnerships with either company in the works? Paper Bag, the rationale for the additions of Jeff and Prashant to our Board is that both of their areas of expertise, AI and brand are central to Lemonade's strategy.

Jeff and Prashant each bring exceptional experience that aligns directly with where we are headed as a company. Prashant is Meta's VP of AI Products, prior to which he was Meta's VP of Generative AI, giving him a unique insight into how cutting-edge AI can be deployed at scale. Jeff is CMO at PayPal and Venmo and was previously Global Head of Marketing at Airbnb. So he has shaped some of the world's most loved and enduring consumer brands. As we continue to leverage AI to deliver delightful customer experiences and ultimately transform the insurance industry, their experience and perspectives will be invaluable in helping guide our next phase of growth. There are no specific partnerships with either company to highlight at this time. Our rationale is strategic expertise and not corporate collaboration.

There are several questions about the future of FSD and how we are positioning our car insurance product in that shifting landscape.

So I'll share some thoughts responsive to that general theme. This is an area we pay close attention to. The time line for widespread autonomy is uncertain. It could take longer than the optimists predict or accelerate faster than most expect, and we're building with that range of scenarios in mind. Whenever autonomy reaches its tipping point, we believe we are well positioned to capture what many incumbents might see as a threat. The shift toward autonomy plays to our strengths. The future of car insurance is increasingly about pricing per mile driven and distinguishing between human and system-driven miles. Our system is built around usage-based pricing, real-time data and flexible coverage, precisely the infrastructure needed for that future. And we don't have any legacy systems or traditional business models holding us back.

Lastly, there were a number of questions about our Tesla integration.

We recently announced a direct integration with Tesla's API, which with proper customer consent allows us to pull driving data straight from the vehicle. This gives us access to a much richer and more precise array of data than what's possible through a phone app or plug-in device. Things like seatbelt usage and more accurate trip insights, for example. It's the kind of granular telemetry that becomes critical as cars get smarter and more autonomous, data that not only sharpens our pricing and underwriting precision today but also positions us to learn directly from the evolution of FSD systems over time.

As for ensuring FSD miles at near 0 cost, we aren't able to share material updates on that at the moment but promise to do so when we can. What we can say is that integrations like these are early building blocks for the future where usage-based and system-driven pricing becomes the norm and where our platform is already designed to adopt.

And with that, I'll pass it over to the moderator, and we will take some questions from the Street.

We.

[Operator Instructions] We have the first question from Tommy McJoynt with Keefe, Bruyette, & Woods.

You noted about half of new car customers were existing Lemonade customers and thus were effectively CAC-less. How does that level compare to prior periods? And is the plan for the majority of new car customers for the foreseeable future to be CAC-less?

I would say that, that 50% rate has been consistent, plus or minus for a few quarters now. So it's a good number. It's a stable number. The CAC-less approach is without question, part of our focused, driving customers to multiple policies. We've seen growth in the multiply policy rate above 5%. It has increased sequentially every quarter for quite some time. But I would think of that 50% plus or minus number is a good stable number that we expect can continue.

Just to add to that, in addition to these customers being CAC-less, they are remarkable in other ways. They tend to have much better loss behaviors, loss patterns. So they are less costly not only to acquire but to service. They tend to have higher retention rates. There's a lot to love about these cross-sold customers. We -- in the letter we refer to them or in my comments refer to them as CAC-less, it would be more accurate to almost think about it as negative CAC. These are customers that tend to be profitable in whatever line of business we acquire them through and then they add a car policy on to that. So it's really an important part of the business.

I will just add that while 50% or as we said, over half of our customers coming this way is a big deal. It's a core plank of our strategy, always has been. That part grows more organically, whereas the one that we target is less organic, and we have dials that we can dial that up or down. So the more you find us spending on acquisition, the more that will affect those ratios over time.

Got it. And then switching over, looking at the ceding commission revenue line, was there a contingent or profit share tailwind in that ceding commission in the third quarter? It looks like it was a higher percentage of ceded premium than it had been running at.

The bulk of that ceding commission is driven by loss ratio and because the loss ratios came in quite nicely, a record low in the quarter. As you know, there's a sliding scale of commissions. So the commission varies somewhat up and down based on the loss ratio. There's a cap and a floor, a high and a low. So at some point, you cap out when your loss ratios get really, really good. So that was the main driver in the quarter. And probably worth a reminder, the ceding commission that you see on the face of the P&L is about 4 points different than the actual ceding commission, and that's an accounting nuance.

I think you'll see an effective ceding commission rate of about 28% in the quarter. But on a P&L basis, because of the accounting nuance, you see about 24%. So you're exactly right, a couple of points better both year-on-year and sequentially.

Your next question comes from Jason Helfstein with Oppenheimer.

I'm going to try to sneak in like 2 and then a quick housekeeper. So obviously, we're seeing like impressive improvements in kind of the contribution ratio efficiency. No doubt you are finding ways to use AI to make the business more efficient. That being said, where would you rate yourself on like at a 10, this would be us using all of the AI tools out there that we could and where you are? That's question number one.

Question number two, again, you've got the business dialed in now between kind of growth and marginal contribution improvements. Is there anything philosophically to think that you're going to lean more into growth because of the way the business is and the metrics are playing out?

And then lastly, Tim, just expenses were up on a year-over-year basis and sequentially in the third quarter, like OpEx, i.e., technology and G&A more than we've seen in a while. Just is there just anything to call out from an expense standpoint in the quarter?

Jason, -- so the AI is now -- the impact of our AI deployments, I think, is now reflected on pretty much every line in our P&L. So you're quite right. We see it almost anywhere you look. We spotlighted the LAE as a way to really provide apples-to-apples comparison and that way you can see how dramatically different it is from the incumbency. You could look at the fact that we've OpEx -- sorry, our gross profit has gone up tenfold in the last 3 years, whereas our headcount hasn't moved, has actually moderately declined. So there are a lot of indications of something pretty dramatic happening in terms of the AI, and we see that in terms of all the efficiencies.

And if you look at the life cycle within kind of the customer engagement with Lemonade, you'll see AI everywhere. It starts with how and where we deploy the marketing dollars that attract you as a customer. So as you know, about 90% of those dollars that Tim referenced earlier that we deploy to acquire customers, about 90% of them are guided by AI, some 50 different machine learning models that optimize how we spend, where we spend based on LTV to CAC predictions of every customer, every segment, every advertising campaign.

Then when you come to us, our recommendation of products and also some other settings and cross-sells during the purchase process is AI-driven. And then later, when you engage with us and ask customer support or claims, and you'll see again the majority of our claims being settled without human intervention by AI. So by one measure, I would say that we score very high on your 1 to 10 scale. We really do use AI across the board. The majority of our code, software engineering is now written by AI. So we're really seeing this everywhere.

At the same time, I think if you take a zoomed out perspective and you kind of judge today by where we will be a year, 2 years, 3 years from today, I think you'd rate us as a. I think we're just getting started. And there is so much more that we see that we can do. We're scrambling to do it all. As we are doing that, the ground beneath us is shifting because models are becoming so much smarter, so much faster. So I think both we have done a lot and we have done very little, one measured against what the industry knows and the other one measured against the potential that we see coming over the course of the next few years.

Another word about your second question. Can you -- Tim, do you have that?

Yes, it was about just philosophically now that everything seems to be kind of working would you consider leaning into more growth and pushing out like kind of profitability targets and then there would be housekeeping expense.

Okay. So yes and no, and we tried to touch on this in our earlier comments. We see ourselves turning EBITDA profitable in Q4 of next year. That's not moving. I don't anticipate any change in that. That's been our expectation for some 3 years, and it's becoming increasingly obvious, I think, to people outside the company and why we're so confident of that. So that particular profitability metric is unlikely to change. But there are other metrics that talk to profitability, such as gross margins, which we see as more pliable. So what we are optimizing for is gross profit dollars.

And in pursuit of maximizing gross profit dollars, there will be segments where we will let loss ratio rise because the elasticity of demand is such that, that will spike demand and retention in a way that offsets the margin becoming a little bit more constrained. So depending on which -- pick your metric, and I'll give you a better answer, the gross profit dollars, we expect to maximize, and we don't expect to take our foot off the pedal there at all. And the ultimate EBITDA breakeven is locked in for Q4 of next year, and we're not anticipating that changing.

Great. And then a couple of notes on the expense side. You're right that the tick up in this quarter was a little higher than is typical. We do see it vary quarter-to-quarter. I don't see that as a step change or an ongoing change. But particularly in the quarter, growth spend, obviously, is a notable year-on-year increase, and we break that out. We're spending a bit more for tech personnel, and you see the offsets from that in efficiencies elsewhere but that's a dynamic where if you isolate that line, over time, you can see some increase there year-on-year. Some of it is just purely inflation. The team size doesn't grow dramatically but the cost goes up modestly.

In G&A, our interest expense growth, and that grows with our growth spend more or less because we're -- as you know, we're financing about 80% of that growth spend. So from an expense standpoint, it jumps out. But from an overall cash flow benefit standpoint, obviously, that's a terrific benefit to our -- the IRR measures of the company as a whole. A little bit of noise in our merchant fees, which can be seasonal, meaning they can move a little bit more or less than the premium in the quarter. So a number of little things, but the big picture is unchanged, single-digit expense growth and 30% plus top line growth, and you see that in the chart that we published, and that's what we expect going forward.

Your next question comes from Katie Sakys with Autonomous Research.

A couple from me. I guess, first, it sounds like there's a bit more growth scheduled for 4Q than previously messaged the last time you hosted a call. So I guess I'm just trying to reconcile the change in the IFP guide for the full year '25 given the magnitude of 3Q results relative to previous guidance. It doesn't sound like you're messaging necessarily a pull forward in growth into 3Q from 4Q, but it kind of does seem like the full year guide implies a bit of a sequential deceleration next quarter back down below the 30% growth rate. So I'm just looking for some additional color there on the change in the full year guide when 3Q IFP netted out relative to the previous guide.

Sure. Katie, your math is right. So when we have a big beat on a key metric in a quarter, then obviously, we evaluate how much of that we expect to continue forward and how much we want to make certain adjustments on the top line, that IFP number captures the entire business, not just the additional sales or the new sales or the growth rate. So while our growth spend has increased and our new sales, we expect to increase as well, we're cautious about retention. Our Q3 results were actually quite good, and we're able to overperform but we're somewhat thoughtful about that top line going into Q4 because that captures the entire business.

The opposite is true on the other line items. So in gross earned premium and revenue, we captured not only the beat in Q3 but additional increase in Q4. So there's a little nuance there between the metrics, that's what's going on.

Okay. Yes. No, that makes total sense. It's just -- I mean, ADR, like to your credit, improved versus last quarter, showing upward progress there. I understand, obviously, some of that is coming from the lapping of nonrenewals on home from last year. But I mean, it looks like you guys are doing well in terms of retention versus maybe we were at the start of this year. So I'm just curious about the conservatism, like you were able to exceed the 30% IFP growth rate this quarter. So what in the financial plan is potentially looking a little bit less positive as we end up the year, especially as retention continues to improve?

I would think of it as all quite positive if you're looking for our view and how we see things rolling out, particularly in the fourth quarter where we're a month plus in. We have pretty good visibility. I'd remind that we continue to be really thoughtful about our home book of business. The underlying numbers actually look quite good, the loss ratio and the other metrics. But we continue to work through what we've called our clean the book exercise. That continues unchanged. Actually, it will have a level of impact in the second half that's similar to the first half.

But that continues, and that's part of our plan. So we're growing at a 30% rate despite that sort of pruning of our customer base. So all your questions are fair, but I think we're quite optimistic I just want to be thoughtful about the parts we know about and the parts we don't yet know about, which is the remainder of the quarter.

And maybe, Katie, sorry, just for the benefit of people listening on who haven't done the math as you have, our guide does anticipate a 30% next quarter at the high end of the guide. We've guided at something between 29% and 30% growth for Q4. So we're certainly not anticipating or guiding to any considerable reversal or slowdown as guided.

Okay. And then if I could just sneak in one more. I can appreciate that the trailing 12-month gross loss ratio is trending well below the 73% target you guys have previously messaged. Just kind of thinking about that in the context of the changes to the quota share structure and ongoing maximization of gross profit dollars. Is 73% gross loss ratio still the right target for the business at this point? Or do you eventually see a pathway to taking that target down lower?

It's a great question, Katie. And to be honest, we've tried to be responsive to questions such as this one and provide a target loss ratio. But I do want to give you an insight into how we think about this, which is that there isn't a target per se. Loss ratio is an input, not an output. It's a lever which we use to optimize the business. It's not necessarily evident that the business is optimal. So because we are as efficient as we are and our other cost structures are declining as they are, we are in a position to be price leaders, a thesis that we developed at some length almost a year ago during our Analyst Day on November 20 of last year, which is to say, we think that there is a structural advantage that Lemonade enjoys where in a price-sensitive market like ours, but oftentimes a 1 percentage move on price will yield a fivefold increase in conversion or other metrics.

It may make sense for us to continuously refine within certain markets and certain segments get to very competitive price points. And that will put pressure on gross loss ratio. But just to give you a hypothetical, I spoke earlier about the CAC-less acquisition of great customers in the car business. Why do we need to optimize to a 73% or any other particular number for these customers where there is no cost to acquire the customer and almost no cost to service the customers. You can envisage a situation where we could lower prices so dramatically where we would be profitable with a 90% loss ratio. The math here and the degrees of freedom that we have is pretty dramatic and something that will be very, very hard for the incumbency to replicate.

So we are using the data to guide us in terms of what is optimizing gross profit. At times, that will mean selling a lot more with thinner margins, at times not. Some of our products are more price elastic, some are less, some campaigns are more elastic, some are less. So it will aggregate into a loss ratio that we will report on a quarterly basis. But we're thinking about loss ratio less and less as one big aggregate number with a target more and more as fine-tuning of optimization of by product, by campaign, by region, and that will result in different loss ratios, different product lines but always in the service of maximizing gross profit.

I hope that gives you -- I hope that helps give you an insight into how we are approaching the question that you're asking.

We now have Zachary Gunn with FT Partners.

So I also just wanted to follow up on the gross loss ratio, so down 5 points overall, up 13 points in Europe. So can you just talk a little bit about what drove that decrease in Europe? Is it benefits of scale? Was it product mix? And then just I'll get my follow-up on that topic as well. I think previously, you've talked about U.K. being really strong in Europe from a growth perspective, maybe Germany being a little bit weaker. Any updates there within the European market of what you're seeing?

Sure, Zachary. Let me start it off and then Tim, please come in with anything that you feel I missed. Our European business is doing spectacularly well. We put a spotlight on it a couple of quarters ago, I think, but it really is. We're seeing something like 170% growth in our European business this quarter. We're seeing our customer base doubling year-on-year and a very healthy loss ratio. I think we mentioned in the last quarter, if memory serves, that when our American business was at this -- or the size, this dimension, its loss ratio was 30 points worse than we are in Europe today. So things that are moving along the same trajectory as our U.S. business. But to some extent, we've learned lessons and built systems and to some extent, the nature of the European business allows us to do things faster.

And let me just unpack that last sentence for you, which is in the U.S., as you know, regulators across the 50 states have varying requirements. But by and large, there are systems, hoops, loops that we have to jump through before we can affect price changes, not so in Europe. In Europe, there are other regulatory constraints but we have freedom or much more freedom to price and to change prices dynamically, which means that when we pick up signals in terms of pricing inaccuracies, there isn't the time lag that we have in the U.S., we're able to course correct instantly. And our systems are set up to do just that.

So we are seeing that our business there is much more responsive to any signal that we pick up. And I think that as much as anything else, we've got a fabulous team. We've got lessons learned and some scar tissue from where we missed steps in the past but that more than anything else has just allowed us to move at a pace that we just can't in the U.S.

Tim, anything you wanted to add to that?

Yes. Just general good news across the board, I think, and particularly from a loss ratio perspective, we're starting to see some mix benefit. So as the U.K. grows and in particular, the renters book in the U.K., that sports a nice effectively low loss ratio, that starts to show up in the total. So that's part of the driver. Some of it is prior period impact, also favorable in the quarter, and that's good news. That just means when you have a younger book of business and you're more thoughtful in your reserving, you can at times have a favorable release of prior period. We saw a bit of that in our French book, which is a smaller book of business.

With the U.K. heading in aggregate above the 50% level, that bodes well. But we're also seeing nice improvements in other territories as well. We've gone from having really no home business in Europe to having a really nice and effective home product now in 3 of the 4 territories. So Europe is really hitting on all cylinders. It's still a relatively small portion of the book but it's become material, and you'll likely hear more about it from us as we go forward.

Your next question comes from the line of Andrew Andersen with Jefferies.

Just looking at pet, it's been growing pretty well and the loss ratios seem pretty stable there. I was wondering if you could just touch on kind of the competitive environment you're seeing with pet, maybe how you feel your pricing is relative to some of the industry? And if you could maybe touch on what you're seeing in terms of loss trends there.

Yes. Again, I feel like a broken record. The things I said about the EU are also true in pet, super stable and predictable loss ratios at this point, a little bit of seasonality. The partnership with Chewy continues to hum along. about almost 5% of the business now has been driven through that partnership. From a competitive standpoint, we've done in 4 or 5 years. I think what it took pet-only providers that are really, really strong players in the market, 10 or 12 years to do. So we really like what we're seeing from a pet perspective. From a pricing perspective, I would think of it as similar to our other products where while we don't aim to be -- to underprice the product or to be price anything as a loss leader, we will often be, if not the most -- the least price, a super competitive price. So we do lose business if it doesn't satisfy our LTV model requirements but we're typically quite competitive with the strongest players.

And I just want to go back to some of the LAE comments and the potential for improvement in that ratio over time. I'm just trying to think about how you are managing kind of maintaining a similar customer service level but also taking into consideration, I imagine at some point over time, there will be a pivot back towards some more homeowners and auto will be a different or a higher mix of the book. So how do you kind of manage through the different customer service levels and the changing needs there, but also using automation efforts?

Andrew, you'll note in the letter, we break down the LAE by product. And you'll see that there's a uniformly down to the right shape to all of the curves, all of the products, including the more complex ones that you're asking about. So we are seeing that we're able to use AI across the board, across the product line to great effect and to achieve dramatic improvements in terms of automation. The very nice thing about using AI to do this work is that it's never at the cost of customer service. It is to the delight of customers. The overwhelming majority of complaints that we get, I think well over 90% for that things that humans do rather than AI does.

So when we deploy AI to do these things, it's not the old thing that you used to get when you dialed United Airlines and you have to repeat yourself 7 times to be understood and press 1 and press 3 and press 5 and you knew you were interacting with a machine. These are very high level -- we only deploy the technology once it reaches very high levels of customer satisfaction. And once it does that, it usually exceeds or in the areas that we agree to let it go live, it exceeds what humans do because it's much faster. The error rate is often lower. So we're seeing it able to handle ever more complex things.

Jason asked me earlier about kind of our scale of 1 to 10, and I think that would apply here as well, which is you can see how much we've done. And at the same time, we just think that there is a whole lot more that we can do. We really do see a blue ocean in front of us of areas that we can improve. So we're fairly bullish on kind of if you zoom out on the prospects of AGI within the next few years, which really means that machines will be able to do every activity, every intellectual activity that humans do today.

And therefore, the idea that some of these products are more complex and require humans today is both true and transient. I think in the coming years, you will find that we'll be able to deploy systems to take care of all of our customers' needs, lowering our costs and raising the level of customer delight.

And I think add a thought, sorry to interrupt. I think there's a note or 2 in the letter that's kind of elegant around this concept of shifting variable cost to fixed cost. And so if you think from a customer satisfaction standpoint or a customer experience standpoint, very specifically, in the older world, even if you automated responses or interactions with customers, you had to have a human evaluating and improving those responses. So they weren't -- so they were constantly improving and getting better. And that human evaluating those responses became a variable expense. They had to review and think and make judgments even though they weren't actually responding to every request with the tools -- with the AI tools we now have at hand, even that review process with a human intervention can be automated such that an improvement in the response can filter out to our entire customer base in real time.

And so this concept of constantly looking for variable expenses that we can convert to fixed expenses is really -- it sounds simple but I think in the world of AI, it really helps to kind of sharpen the focus on how these things actually turn into things you can see on the P&L.

[Operator Instructions] We have Jack Matten with BMO Capital Markets.

This is Charlie on for Jack. I'm sorry, we joined late, so apologies if you addressed this. But we saw Shai tweeted this morning that Lemonade plans to start lowering rates. Can you elaborate more on the timing and magnitude of when you may plan to file for these rate cuts and which lines of business are you talking about specifically?

Charlie, yes, we've addressed this both in my opening comments and in answer to previous questions. So I'll keep my comments brief. I didn't see Shai tweet what was alleged. So I think what Shai said is that -- or certainly what he meant -- the point that we're trying to get across is that there is a sense in which we -- and there was a question about this, we've achieved everything that we said we were going to achieve in terms of loss ratios and they're at record lows, and we're anticipating them potentially going even lower this coming quarter. And yet, we don't always see -- this is a moment to kind of take a victory lap and we're thrilled with it and it's excellent but we don't always see lower as better. That's what we were saying. And there are times when you can optimize gross profit with higher loss ratios as well.

And it can be counterintuitive because you think lower means more profit but it also means taking a hit in terms of conversion and retention and therefore, growth. And the smart thing as far as we're concerned is to optimize not for a particular loss ratio number but to optimize for gross profit. It's what we do. And all that means is that different loss ratios for different products, different campaigns, different regions over time. There's nothing dramatic. We're not signaling any findings that are imminent or we're not guiding to a new target loss ratio or anything like that. We think the loss ratio, in fact, will continue to improve in the near term, just saying that it's important for our investors to be aligned with us about what metrics are important ultimately. And we think gross profit is the one that we're solving for and loss ratio is an input to it. I hope that clarifies that.

Yes. Sorry about that. And I guess for my second question, I know you've already adjusted your main quota share program to retain 80% of top line. Are there any other changes regarding your broader reinsurance program that you're thinking about heading into the new year given the expectation for reinsurance costs to continue to moderate?

Yes. I would say we're right on track with our typical approach to reinsurance, which is we're constantly thinking thoughtfully about what we might change or improve. But structurally, that renewal comes in July. We have the opportunity to add or subtract things during the course of the year, which we do almost never but we certainly have that opportunity.

So we're constantly looking at those ways that we might help manage both the benefits of reinsurance from a volatility standpoint as well as managing capital surplus, and that really is the driver there. But we are in a great position with the renewal that came through July 1. We're heading towards a point by midyear next year where we'll be ceding just about 20% of our premiums and losses to our quota share partners. As you know, it takes a while to flow through the book once you get to a renewal as the business renews over the course of the year. The impact of that will be such that in Q4, our effective overall seed rate might look more like around 40%. So you're seeing, as expected, that decline as we move closer and closer to the next renewal.

In the early part of the year next year, we'll start to get more serious with our partners as we have in the past and think through what that next renewal might look like.

If I could just sneak in one more. Any color on the competitive environment in pet? It feels like we've been hearing more public insurance carriers talking about that business more and more.

Nothing notable. I think we're still finding -- it's funny when you kind of look at the market from a competitive standpoint, you hear about either Google algorithms changing or competitors getting more aggressive and these things definitely happen from time to time. But if we look at our Q2 results, our Q3 results, our view into our guidance for Q4, it's really steady as she goes. Even frequency and severity of claims in the quarter was not notable, and that's good news for that book of business because it is -- continues to grow in terms of its share of our overall business. So while we kind of track the competitors, it's not top of the list of the things we think about. The things we are doing are working. They're working well. And pet as it has been for quite some time, is a key pillar that enables us to grow at 30% plus.

Our final question from the phone lines comes from [ Luke Nelson ] with Cantor Fitzgerald.

I just have a couple of brief questions this morning. My first question being with card, it's roughly around 15% of IFP today. Where do you guys kind of see that mix trending long term? So is 25% the right ceiling? And are there limits on auto exposure we should be thinking about?

So best indicator, I think, is to kind of think back a bit to our recent Investor Day, which is about a year ago now. So it's not quite so recent but we sketch out a plan and a vision to track and drive growth at the company from $1 billion of premium to $10 billion. And what we sketched out at that time was a CAR component of that of around 40%. I would think of that as sort of a thematic share but a pretty good one. It could be more, could be less. The TAM for car is in just the U.S., not to mention Europe, which we don't have a car product in yet. But in just the U.S., it's just an enormous potential market and even just our own customer base is an enormous market for us.

So there's really no restriction from a TAM perspective. It's about us optimizing the LTV to CAC, really driving that cross-sell dynamic because that's what helps us with retention. The gross loss ratio improvement was terrific. So if you think about a mid-teens ratio today and a 40% CAR share at $10 billion, your number is not far off. 20%, low 20s is certainly within reason in the coming couple of years. We -- the nice thing about Lemonade is the mix of business is quite diverse. And so that number can ebb higher or lower, and we'll still be well able to track to our growth rate targets overall but I think CAR will end up in that range that you're thinking about.

Got you. That makes sense. And then just my last question is a 2-parter, and you might have touched on it previously, but I noticed retention increased to 83% but ceding commission increased as well despite the reduction in reinsurance. So can you kind of walk us through that dynamic? And where do you expect retention to trend over the next few quarters?

Sorry, if you could -- I think I misheard your question. Was it around ceding rate? Or was it around retention?

Right. So yes, my question was, I noticed retention increased to 83%, but at the same time, ceding commission income also increased. So can you just kind of walk through the dynamic between the 2? And where do you expect retention to trend over the next few quarters?

Yes. So a couple of metrics just to pull apart there. So we disclosed a retention metric, which is a customer metric. So ADR is annual dollar retention. And just as a reminder, that's the dollars from any given cohort of business, 1 year later, how much have you retained. And that number has tracked upward nicely from the 70s to the high 80s over many, many quarters consistently. It dialed back a couple of points over the past few quarters because of our home effort to clean the book, and we had some nonrenewals there that camped that number down. We've now seen that reverse as we expected. It went from 80 -- up 1 point this quarter sequentially. So it feels like we might be back on track to have that number increase. That's customer retention, stable and improving.

From a ceding commission standpoint, that's a bit of a -- that's a different part of the business, and that's really related to the premium we share and the losses we share with our quota share partners. And so that, I'd kind of send you back to our earlier comments about the quota share renewal. So at July 1 this past year, we were ceding -- or June 30, we're ceding about 55% of our book of business. That has shifted such that it will move from 55% to about 20% over the 12 months from Q3 to Q2 that we're in right now.

The commission we earn on that is a variable rate commission, and that's -- you'll see that pretty clearly outlined in our 10-Q disclosures that we'll file today, so you can kind of dig into the nuances there but we continue to get a mid-20% roughly ceding commission on all the premium that we see to that partner. And so we'll see fewer dollars. That's a good thing but we'll continue to earn a healthy commission rate on all those dollars that we see for our partners.

Thank you. I can confirm that does conclude our question-and-answer session here. And I'd like to conclude the call. Thank you all for your participation. You may now disconnect, and please enjoy the rest of your day.