Lemonade Inc (LMND) 2020 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Lemonade second-quarter 2020 earnings call. (Operator Instructions). Please be advised that today's conference is being recorded. (Operator Instructions). Thank you. I'd now like to hand the conference over to your presenters. Lemonade management team, please go ahead.

Good morning and welcome to Lemonade's second-quarter 2020 earnings call. My name is Yael Wissner-Levy and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, COO and Co-Founder; and Tim Bixby, Lemonade's CFO. A letter to shareholders covering the Company's second-quarter 2020 financial results is available on our Investor Relations website at investor.lemonade.com.

Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by those forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-Q for the three months ended June 30, 2020, and other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today and we undertake no obligation to update them.

We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders.

Our letter to shareholders also includes information about our key operating metrics, including a definition of each metric, why each is useful to investors and how we each use to monitor and manage our business. We have also prepared a visual presentation that investors can consult to follow along with this discussion and it can be accessed at investor.lemonade.com. With that I'll turn the call over to Daniel who will begin with a few opening remarks. Daniel?

Thank you, Yael. Good morning. I'd like to welcome our shareholders, long-standing, newly minted and prospective, to this inaugural earnings call of Lemonade. Since this is my first time talking to many of you, I'm going to take a few minutes to provide some context for the strong second-quarter results which Tim will expand on shortly.

Lemonade was founded as a new kind of insurance company, one built from scratch on an un-conflicted business model and an entirely digital substrate. We set out to replace brokers and bureaucracy with bots and machine learning, aiming for zero paperwork and instant everything. Our hypothesis was that by placing the consumer at the center and building the policy, the technology and the business model around her, would achieve a level of customer satisfaction unknown in the sector.

Thankfully this is largely how things played out. Our Net Promoter Score stands at above 70, a level of customer delight usually reserved for brands like Apple or Tesla. And consumers have [upvoted] Lemonade to the number one position on many of the destinations where Americans review their insurance company.

Perhaps that's less surprising when you consider that the median time to buy a policy from Lemonade is about 90 seconds. Roughly a third of our claims are paid instantaneously and first time buyers of insurance can often save 50% by choosing Lemonade. This level of service and automation has generated very rapid growth and increasing efficiencies, trends captured well in our second-quarter numbers. Our top-line in-force premium increased 115% year-on-year while our adjusted gross profit grew by over 200% year-on-year.

Rapid growth is always welcome, but in our case it does double duty. In addition to boosting our top and bottom lines it generates troves of textured, proprietary and highly predictive data. Insurance is the business of using data to quantify risk and a digital substrate allows us to capture something like 100-fold more data than traditional broker-based incumbents. We believe that represents a structural and growing competitive advantage.

These data serve as training steps for all of our systems, fueling a cycle of continuous improvement. With every turn of the flywheel our marketing campaigns become more effective, our bots get better at understanding our customers' needs. Our fraud detection picks up [every single] signals and our claims bot, Jim, learns which claims to pay and which to escalate with growing precision.

All this amounts to a powerful closing system, allowing us to target, price and underwrite risk with growing accuracy, which is the very core of insurance. The impact of this continuous learning is on display in our second-quarter results too, and is best captured by a gross loss ratio which was 67% for the quarter. This represents our 10th consecutive quarter of declining loss ratios and our loss ratio has halved over the past two years.

This rate of improvement in loss ratio is, to the best of my knowledge, without precedent in the history of the insurance industry, and is all the more unusual for coming at a time of very rapid growth.

While our strategy is to delight consumers in order to grow their number and to leverage that growth to extend our data advantage, we also aim to grow with our customers. This has been in evidence in the steady growing percentage of homeowners who started life with us as renters, a trend that continued unabated in the second quarter.

In July we launched health insurance for pets, our first major offering outside of the world of homeowners insurance, and a milestone on our journey to offer a comprehensive solution to our customers with potentially far-reaching implications for customer retention and lifetime value. Shai will share some early thoughts and numbers on our pet launch in a couple of minutes.

In many ways then our second-quarter was a straight line continuation of the progressions we've seen in recent quarters and years -- rapid top line growth, increasing efficiency, declining loss ratios. But it would be a mistake to take the second-quarter results as pedestrian or a foregone conclusion because early in the quarter we anticipated things playing out very differently.

With millions furloughed and much of humanity in lockdown, in the early days of the quarter we resolved to cut our discretionary spending, pause our nonessential hiring and enable customers to postpone their payments to us in recognition of the widespread hardship COVID-19 had engendered. We braced for a spike in churn, a drop in demand, a slowdown in productivity and a hit to our cash flow. Thankfully none of these materialized.

Despite our marketing pullback and notwithstanding the shutdown at all of our offices, our key performance indicators for Q2 outperformed not only our worst concerns but even our pre-pandemic aspirations. No one knows what turn the pandemic or the economy will take in Q3 or beyond, but we are heartened by the resilience our team, our Company and our business demonstrated in the second quarter.

Indeed the coronavirus seems to have been a fundamental accelerator of the trend towards digitization throughout society, and Lemonade is thankfully on the right side of that dislocation.

Our IPO prospectus includes our founder's letter, a document where Shai and I outline our approach to managing Lemonade, in the hope that investors who share our thinking will be drawn to Lemonade, but equally in the hope that those who do not will seek their fortunes elsewhere. There is a link to this letter on the homepage of our Investor Relations website and I warmly recommend you read it.

One of the points we make there is that we view our plans as hypotheses to be updated as data accumulate. Our plan is to adapt. Q2 demonstrated this in spades. As I mentioned, faced with unprecedented uncertainty, early in the quarter we decided to decelerate our marketing spend meaningfully, and we prepared for our growth to take a disproportionate hit.

We then monitored signals from the market in real time, click-through rates, funnel analysis, retention numbers, cost per click and many more, and adapted to the encouraging signals as these came in. The quarter had a happy ending, but it's important for me to share how that sausage was made, because it's illustrative of how we think and how we operate.

We endeavor to be driven by data, but data are often incomplete. And while waiting for more data decreases error rates, it also blunts potential upside. As Q2 demonstrated, we prefer to make decisions under conditions of uncertainty and to abandon bad ones as soon as the data reveals them to be so. We believe that translates into greater volatility but also into better aggregate returns.

It's a trade between the short-term and the long-term between optimizing for predictability versus optimizing for value maximization. It's a trade we are comfortable making and, as our shareholders, we do hope you are comfortable with the way we are making it too. And with that let me hand over to Shai to give you some more updates. Shai?

Thanks, Daniel. Daniel spoke about the financial impact or lack of financial impact of the pandemic on our business. I'd like to add some color from the operations perspective where I'm pleased to report that things are in good shape.

In early March, the entire Lemonade team started working from home. Since Lemonade is based on cloud infrastructure, our team switched to this new arrangement overnight and with no interruption to our business activities. If anything, we are seeing productivity improvements across the organization and, for the first time, we actually launched a new European country as well as a new product line from home.

We've also been able to recruit and onboard new key members throughout the Company. In fact, at this point over a quarter of our team were recruited and onboarded remotely during the pandemic. We invest a lot of thought and effort into keeping the team engaged and happy at home. And our employee satisfaction rates, which we constantly measure, are the highest we've ever seen.

Switching gears to pet insurance, as Daniel mentioned, the release of the pet health insurance line earlier this quarter is a significant milestone for the Company. We built the pet product entirely from scratch rethinking coverages, user experience, the claims process, pricing and even the policy document itself.

Our pet product offers a hassle-free digital experience with lightning fast claim payments, best-in-class customer service and a donation of leftover premiums to animal focused charities our customers choose. The new pet insurance is now available in more than 30 states with prices starting at $10 per month.

As part of this new release we also introduced our first Lemonade bundle allowing an additional 10% savings on bundling pet insurance with one of our renters or homeowners policies. I am pleased to share that the reception has been positive and the feedback we are getting from customers translates into a Net Promoter Score of well over 80.

But as encouraged as we are by the initial results, it is important to remember that introducing a new insurance product to the market takes time and that we're still in the early days of this process.

In other news, on August 6 we announced our annual giveback in which a portion of underwriting profits go to charities that our customers choose. As the Lemonade community grows so does the potential of the giveback and this year's donation amounted to more than 20X the first one we gave back in 2017, and is higher than our previous three years combined.

This year we gave back more than $1 million to nonprofit organizations, including the Direct Relief COVID Response, UNICEF, the Trevor Project and the ACLU. With the help of our community we funded treatment for more than 50,000 ICU COVID patients, fed 980 families, covered rent for more than 100 struggling households and more.

Giveback Day is one of the highlights of the year for our team, and we do hope that as shareholders you two will feel a certain pride of ownership with this day. And now let me hand over to Tim for a bit more detail on our financial results and outlook. Tim?

Great. Thanks, Shai. I'll give a bit more color on our Q2 results as well as expectations for the rest of 2020 and then we'll turn to questions. We had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer. In-force premium grew 115% as compared to the prior year to $155.1 million. This metric captures the full scope of our top-line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter.

Premium per customer increased 17% versus the prior year to $190. This increase was driven by a combination of increased value of policies over time as well as mix shift towards higher value homeowner policies. Gross earned premium in Q2 increased 121% as compared to the prior year to $35.3 million, in line with the increase in in-force premium.

Our gross loss ratio continued to improve, as it has for many quarters, and came in at 67% for Q2 as compared to 72% in the first quarter this year and down from 82% in the second quarter of 2019. With a Q2 gross loss ratio in the 60s I'm pleased to note that we are now within our target range, an achievement we've been focused on since selling our first policy.

We expect that our gross loss ratio will vary over time within this target range of between 60% and 70%. And while it is likely that our gross loss ratio may occasionally move above this average, in periods with notably severe weather, for example, we expect our average gross loss ratio to remain in the 60s. In any event, due to comprehensive reinsurance, our net loss ratio, and hence our unit economics, is most unlikely to change much quarter-to-quarter or even year-to-year.

Operating expenses, excluding loss and loss adjustment expense, increased fairly modestly in Q2 as compared to the prior year with sales and marketing expense actually lower in Q2 this year due to continued strong improvement in our marketing efficiency. Our marketing spend in Q2 generated more than twice the sales as compared to a year ago in terms of the amount of customer premium required.

We also continued to hire new Lemonade team members in all areas of the Company in support of customer and premium growth and thus saw increases in each of the other expense lines.

Also to note, certain G&A expenses increased as we continue to prepare for life is a public company. And we expect those expenses to continue to increase in the coming quarters as we enter our first full year as a public company. These expenses include, among others, D&O insurance premiums, which have increased significantly for most newly public companies in recent quarters.

I know that the timing of certain expenses, particularly marketing spend and new hire payroll expense, in the second quarter was influenced by the onset of the pandemic with significant belt-tightening in April and early May. We began to reverse this approach in the second half of Q2 as we gained more visibility into the impacts on our business.

We began to revert to prior growth spend and hiring patterns by early June and expect that theme to continue into the second half of the year and likewise to influence our investment strategy as well as our financial expectations.

Our net loss in the quarter was $21 million as compared to $23.1 million in the second quarter of 2019, and our adjusted EBITDA loss was $18.2 million in Q2, an improvement as compared to $23 million of loss in the second quarter of 2019.

Our cash, cash equivalents and total investment balance ended the quarter at $295.4 million reflecting the use of cash for operations of approximately $35.5 million since year-end 2019. And the recent closing of our initial public offering in early July brought us additional net proceeds of approximately $335 million.

We had 381 employees as of June 30; we will increase that number over the coming quarters. We resumed our normal hiring pace after a brief pause during the early weeks of the pandemic. We have since hired dozens of new employees and have become quite adept at remote onboarding. We continue to have the vast majority of our global workforce working remotely. And in April we launched our second European territory early in the pandemic with a 100% remote workforce with great vigor and efficiency.

Our progress in the first half of the year is influencing our investment approach for the second half. With continued steady growth and strong marketing efficiency we've resumed a bullish stance on both growth and hiring. We plan to redeploy savings generated during early Q2 into the second half of the year and increase somewhat beyond.

While our full-year expense plan and EBITDA loss expectations are relatively unchanged, the timing has shifted such we plan to invest more in the second half, which will offset the savings in the second quarter and, we expect, will set us up nicely for continued growth into 2021 and beyond.

It's worth taking a moment to review that our model differs from traditional broker-based insurance incumbents in a number of ways. One is that we expense the vast majority of our customer acquisition expense up front at inception, while we earn back the return on that investment over the life of the customer.

And this is in contrast to many insurance companies that incur ongoing commission expense for customer acquisition at a much lower initial rate but typically for the life of the customer. And this is another key reason that we measure and report in-force premium, which gives some additional insight into what we are acquiring when we invest in growth.

A customer acquired in 2Q, for example, drove significant acquisition investment in the quarter, but on a GAAP basis very little incremental earnings. In-force premium captures more fully the top-line impact of this growth investment. And with these goals and metrics in mind, I'll outline our specific financial expectations for the third quarter and for the full year of 2020.

For the third quarter we expect in-force premium as of September 30 of between $170 million and $175 million. We expect gross earned premium of $37 million to $39 million, GAAP revenue of between $14 million and $15 million and an adjusted EBITDA loss of between $32 million and $33 million. We expect stock-based compensation expense of approximately $3 million and capital expenditures of approximately $1 million.

And as Daniel noted, we should reiterate that GAAP revenue will change from roughly $30 million in Q2 to between $14 million and $15 million as guided in Q3. And this is as expected and it's related to the implementation of our new proportional reinsurance structure as of July 1, 2020.

The GAAP accounting rules are such that ceded premiums are excluded from GAAP revenue. And accordingly, we publish in-force premium and gross earned premium as helpful metrics that capture the overall growth trajectory of the business before the impact of reinsurance.

For the full year of 2020 we expect the following: in-force premium at December 31 of between $190 million and $195 million; gross earned premium of $147 million to $151 million; GAAP revenue of between $86 million and $88 million; an adjusted EBITDA loss of between $106 million and $109 million; stock-based compensation expense for the full year of approximately $11 million; and capital expenditures of approximately $4 million for the full year.

Thanks so much for joining our first quarterly review as a public company. We are grateful for your interest and for your support. And with that we will now turn the call back over to the operator who can hopefully rejoin the call with Q&A instructions and we'll be happy to take questions.

(Operator Instructions). Michael Phillips, Morgan Stanley.

First question, you talked about how you didn't see much impact from furlough/stay-at-home on top-line metrics. Not that many customers asked for extension of payments and all that was good. I guess, did you see any impact on the loss side? Was there a pause in claims activity for the first -- maybe first month or so of the furlough? Anything on that side that impacted that 67% growth loss ratio?

The short answer is yes, but fairly modest. So, we did see some dynamics, particularly in the earlier part of the quarter, as people really readjusted their behaviors and it was sort of a shock to everyone's system. We did see things kind of quiet down pretty quickly and then it normalized a bit.

So, I would say there's a modest tailwind in the loss ratio for the quarter due to the pandemic, nothing dramatic. But I would say more -- slightly more favorable than unfavorable. Things are starting to normalized a bit more now, but I would expect the trends we were seeing at the end of the quarter of Q2 to persist it a fairly stable rate for some time.

You both -- yourself and Dan talked about on the [premium] policy, how it shifted up because of mix shift and that's kind of been a trend that's been happening for a while. And then Dan said the homeowner -- from renter to homeowner graduation was a trend that continued unabated in the quarter.

Is there anything you can give us in terms of metrics around that that we can see -- or from you guys that talks about specifically those numbers of the shift between renters and homeowners?

We don't give a deep breakdown of those metrics, but it obviously is something we track pretty closely internally. The themes I think that we have cared over the past couple of quarters have continued. So, we are continuing to see more new customers at a pretty stable ratio come in the form of homeowners. And if you look at the premium per customer over the past several quarters continuing into Q2 and into our guidance, we expect that trend to continue.

We do have some control over the homeowners proportion of the business because we are somewhat more cautious as we build the book of business as we move into homeowners, but all systems are pretty much go. And so, we're focused on increasing the proportion of homeowners over time.

We expect that to start to look more like the market over the longer-term. Today it is obviously skewed more to renters than to homeowners, but in the US, as you know, the business is the vast majority of homeowners. Over time it will continue to move that direction.

It's also probably worth reminding that we are seeing some increase from our existing customers regardless of whether they graduate to a condo or homeowners. So, our average renter, for example, pays us more in year one and year two and year three than they did when they first started and that's a trend we've continued to see.

So, I think the premium per customer will continue to grow. We don't guide to it specifically, but we see those trends continuing. And I think you can expect to see more color on that in the coming couple quarters.

Thanks. Last one and then maybe I can re-queue I guess. Maybe it's not a fair quarter to talk about this; I'm not sure (inaudible) your answer because of what you did with pullback in the marketing spend. But you did mention you're still getting more premium per dollar marketing spend that you had before.

But we've also talked a lot about the LTV to CAC expense and how that ratio has trended up over time. Is it fair to comment on that given the pullback or is it too distorted because of the pullback in marketing spend? Or anything you can talk about that LTV to CAC ratio and how that looked this quarter versus prior quarters?

Yes, I would think of the LTV, the CAC dynamics, as strong and stable. And a trend that we had seen for the last few quarters is continuing improvement. And so, those trends I think will continue.

With regard to our spend, that sort of has a different dynamic. So, when we noted that we pulled back a little bit in the early part of the quarter, that literally just spending fewer dollars but did not really impact the unit economics. There were just fewer units and then we kind of resumed the normal spending pace as we got towards the middle of the second half of the quarter and really back to where we originally expected to be in most cases somewhat ahead.

So, stronger marketing economics, very strong feel in terms of how we think the second half of the year is shaping up in terms of our ability to spend -- both investment wisely and get the return we expect. It's a little early to say that there -- I think it's not fair to say yet there's a dramatic shift in LTV to CAC. Those dynamics tend to evolve more gradually over time. But what we're seeing is stable and positive.

Ron Josey, JMP Securities.

I just wanted maybe, Daniel and Tim, talk a little more about guidance, particularly with your commentary in the letter around 3Q being seasonally the strongest in the quarter. There remains unknowns around school closing and moves and whatever. However, it seems, per the commentary in the guidance, nothing really materialized in April.

So, can you help us unpack a little bit more your guidance as it appears a little bit lower expectations in the quarter didn't really materialized in 2Q? And so, maybe any insights on what you're seeing in July and August and the assumptions and guidance would be helpful. Thank you.

Sure, so two different dynamics. Q2 was really driven by us in our reaction to the high level of uncertainty that everyone is feeling March, April, maybe early May. And so, we proactively made those decisions in terms of what we would spend and when and as things strengthened we ramped that back up.

And during that period we were pretty cautiously watching the other KPIs, what's happening with churn, what's happening with payments, what's happening with just general customer behavior. And as the days and weeks went by there was just not much changing, which is always good news in terms of how we think about deploying more dollars.

And so, when we laid out our thoughts and expectations for the second half of the year the decisions that we control, that we manage, we decided to take that savings from Q2, if you want to term it as savings, money that was unspent in the early part of the quarter and invest that in the second half. Because we are seeing the return, we are finding ways to deploy those dollars and it's working.

The uncertain part is the part we don't control which is the historical seasonal trend which, if you look at the past two years, maybe even three years, it has been a pretty discrete or visible step change with Q3 higher, Q4 lower and really driven by the moving dynamic of people in the US and that's just uncertain this year.

We are confident that we can deliver the numbers over the course of the year. It may be that there is some shift among months between August, September, October versus prior years. And I think we've built in enough conservatism into our guidance such that if we see who we expect to see, which is a little different versus prior years, we will be in good shape.

If it is dramatically different, then that's something we will have to react to. But so far we're not seeing anything that's too dramatically different than prior years, but we wanted to be cautious.

That's super helpful. Thank you, Tim.

Ross Sandler, Barclays.

Just wanted to follow up on the customer acquisition conversation from a couple questions ago. So, we've seen across the digital advertising industry that CPMs have come down pretty markedly through the COVID impact. And you guys have seen fairly dramatic improvement in your unit costs of acquiring a customer even before COVID.

So, with those two dynamics in place and the increased efficiency, and the fact that you're now leaning back in in June, when do you expect the customer growth rate or the gross earned premium growth rates to ramp back up?

And then related to that, the retention rate that you guys disclosed in the S-1 of around 65% or so is pretty good, but it leaves some room for improvement. So, what are the biggest drivers of churn and what you doing to drive up that retention rate? Thank you.

So, a couple thoughts. In terms of the first question on customer ramp, our -- the relationship between our spend and customer acquisitions is pretty linear. So, when we turn things up you see it right away. It's almost a real-time in the day or in the week that you change how we invest, what channels we use, how many dollars we are putting forth.

And so, what we are seeing and what we're spending today, we are getting reaction to that. And so, that factors into how we see the second half playing out in terms of both customer acquisition and premium acquisition.

Worth noting that while we certainly track and report the number of customers and the premium, if we had to pick one that we think is more important it's really the premium. A renter customer is a great customer and we'll keep them for as long as we can, hopefully for a lifetime, and they will gradually drive more value. But if we can acquire a customer as a homeowner efficiently and effectively we will do that too.

And so, the reason we guide to top-line in terms of in-force premium and not the customer is for that very reason, is we and our growth team are really optimizing for a premium. And sometimes the customer count can vary a little bit, but we expect to see obviously growth in both of those. We also expect the premium per customer to continue to grow just to the underlying dynamics of the trends we've seen and the continued mix shift toward homeowners.

In terms of churn -- and I don't know, maybe Daniel can chime in a little bit -- this is something, obviously, there's kind of long-term and short-term. Short-term we've been very focused on what is new and what has changed. What is COVID driven, what is behavior driven, what's unique across product lines, between renters and homeowners.

And from a short-term perspective, a pandemic perspective, again, we are not seeing much dramatic at all. We have allowed customers to defer payments, not much really happened there. We are tracking churn rate carefully, not much has really changed.

In terms of the longer term what we're doing is what we planned to do, which is maintain an extraordinarily high NPS so that we can retain customers for as long as possible, hopefully a lifetime. We've launched a new product, so for the first time we have pet insurance, which is a new coverage type. For the first time a Lemonade customer can have two different policy types and take advantage of bundling and bundling discounts.

And that's something, obviously, that's been on our plan for a very long time but now it's actually in the market. And so, I think our theme on churn is keep doing exactly what we're doing, hit the plans and goals that we set out, and that includes new coverage types, great customer support. And then as we get better color on that we will certainly share it. I don't know if Daniel had any other thoughts on either churn or customers in general.

Just a couple of added color points on churn. So, the reason we believe that churn will continue to improve, (inaudible) the aging of our cohorts. The worst year in terms of retention across the industry frankly is year one. And given the growth rates we are experiencing, a very large portion of our customers are first year customers.

So, a big portion of our business is from a retention perspective in the worst category just in terms of the aging of the cohorts. And indeed within the year we see the worst couple of months of churn or the first couple of months of the policy. And as you add months and years to a cohort the retention numbers start improving pretty significantly.

Beyond that I would say that the different products we have very different churn dynamics as well, or retention dynamics. So, renters tend to be younger consumers, they are more transient. They go to college, they come back. They move in with their boyfriend, with their girlfriend, they move back home -- all those kinds of changes. And they also move from state to state and oftentimes they move into a state where we're not yet launched.

So, all of those reasons are just part of the nature of the stage of life of those customers. Tim alluded earlier to the growing portion of homeowners in our book. That too helps because our retention numbers among homeowners are significantly higher.

As we launch more territories, I had mentioned that in passing, but also new products like pet, we are able to cater to our customers more fully. And that, in addition to everything else that I spoke about, militates in favor of higher retention levels over time. But having said all of that I'd also add a different gloss on the whole story.

So, when you think about customers leaving or channel or retention, I think it's fair to categorize it in one of two broad strokes. So, you think about people who leave their cable company to go to Netflix. When they cut that cable they're never going back. That is churn. They have left cable to now discover a new way of consuming media and that is not a change that's going to be reversed anytime soon.

When somebody leaves Netflix because they're traveling in Europe or they have just moved in with their boyfriend or girlfriend and they're sharing accounts or any of those dynamics, they remain kind of alumni. They are still ambassadors of goodwill, they love the company and they will return. I know I myself have had an occasion to leave Netflix on two or three different occasions and I'm back to being a Netflix consumer.

I think if you think about those two paradigms, Lemonade falls squarely into the latter. So, when we do see customers leaving, more often they don't leave with a love note. Quite literally when they leave we ask them for a comment about why they're leaving we get quite a lot of data on that. And oftentimes it's accompanied by hey, I love you guys but I'm moving in with my girlfriend, I'm moving to this state, I'm moving to college or what have you.

And just to put some numbers behind that, if I look at our churn, we do sell them, but we do sometimes get customers that are unhappy with the service and they give that as a reason for churning. But they are outnumbered 11 to 1 by people saying hey, I'm moving in with my family and that's why I'm canceling.

We pride ourselves on giving a really exceptional claims experience, but on occasion customers feel hard done by in terms of claims and they can say that that's why they're leaving. But those people are outnumbered 36 to 1, literally 36 to 1 by people who say I'll be back.

So, I hope all of that gives you both a sense about why we think that churn rates are going to improve for structural reasons. But also why those people who are leaving us I think will come back as circumstances in their life change and they have need for insurance once more.

Ralph Schackart, William Blair.

I wanted to talk about the customer conversation again. The adds were much stronger than our model. But Tim, I know you talked about some pullback in advertising and, while I know you optimize for policy, just wanted to understand the dynamic. Maybe some perspective of the drivers of customer growth in the quarter. What did the cadence look like throughout the quarter? And maybe some trends post quarter on the customer growth side.

Sure. So, there's a couple different levers we are pulling and there's different dynamics, it all kind of comes together and looks a little simplistic when you just look at the number of customers added in the quarter. So, if I pull those apart a little bit I would think about timing trends, product trends and spending trends.

So, from a timing perspective I think we've covered that. We, end of March, early April -- April sat down and said we really don't know what Q2 looks like in the world, certainly, and to some extent Lemonade, and so were just very cautious. We didn't go to zero, you never want to cut gross spend to zero because it just takes quite a while to ramp anything back up. But we pared back fairly significantly and gathered more data.

From a mix perspective, we tend to optimize -- just period, We tend to optimize. And so, some days, some campaigns, things are stronger with higher return on renters. And some days it's homeowners and some channels are particularly suited to one or the other. So, there tends to be an ebb and flow overall.

If you looked at say a week or a month, we'd see a relatively consistent proportion of the business as homeowners. But that kind of hides what's going on under the covers, which is we've got a lot of states to play with, we've got a lot of campaigns to play with and we've got a growth team that really spends 24 hours a day thinking about how to maximize the return on those dollars and it is working. If you look at a year ago versus today, more than twice as many dollars are coming in for every dollar that we spend.

In terms of how we see that playing forward, again I think the seasonality is a little bit of a wildcard. But I've got to tell you, the sessions we have with the team thinking about how to deploy dollars, the challenge is not where can we spend, the challenge is how much can we spend because we are seeing really strong returns. And so, we are trying to balance the spend with the overall health of the business.

We don't want our NPS scores to suffer, we don't want really terrific progress on our loss ratio to change radically. It can vary a little bit, but we don't want to alter things that are performing really well by seeking growth at all costs. But the dynamic really is that we are finding ways to spend dollars at a very strong return.

And it doesn't seem like it is dramatically pandemic driven, like it is a continuation of things we saw over the past several months in the past few quarters as opposed to a step change that we saw in April or May. So, we are really encouraged by the combination of all three of these and how that growth team is really performing.

That's helpful, Tim. Maybe one more. You talked about how the business emerges stronger coming out of the pandemic. Just maybe some perspective on how it emerges stronger, a little bit more color there and perhaps the long-term impact to the business. Thank you.

Yes, it's interesting. We are seeing what a lot of tech or digital companies are seeing, which is themes and trends we saw are amplified or accelerated or another way for me to put it is changes we expected to happen over a year or two are happening over a month or two. We are seeing the same and we're feeling the same.

Folks who want to at the age of 20 or 30 go sit down at an insurance agent's office were dwindling before the pandemic. And certainly during the pandemic that's gone to probably close to zero in many cases. These trends are probably not ever going to go back to where they were. And so, we are -- while we're not taking it as a given, we expect this acceleration to continue and to really be right in our wheelhouse.

We were -- we had the entire company able to work from home before the pandemic, we didn't do it too frequently, although probably each person had done it from time to time. Departments have tested it. So, within a few days of work from home it was just business as usual.

We were able to launch an entire new European country in April with 100% remote folks with terrific results, zero customer awareness that anything was different than it would otherwise have been. We are thinking carefully about how we deploy employees and where offices are and all those things other companies are thinking about.

But we really feel we have pretty dramatic degrees of freedom based on how the Company was built. One system from a digital substrate designed to do just this. We didn't know, obviously, a pandemic was going to come and accelerate all this stuff but the business was really designed for this.

Jason Frank (sic - Helfstein), [Op Co].

So, two questions. Maybe talk a bit more about the outlook for the third quarter and the back half. Just given the second quarter beat versus your expectations, did you see any pull forward into the second quarter that maybe -- that you're then kind of compensating for in the outlook?

And then the main question that we get from clients is just the concept around bundling given how important it generally is for the industry. And mostly people focused on the importance of automotive insurance bundling. Clearly you have targeted a more millennial customer. I think automotive ownership generally is lower amongst that group and we can think about what the secular trends are for automotive ownership.

So, just talk broadly how you're thinking about bundling. Obviously you're launching pet. If things like auto are important, how do you check that box? Are you thinking about maybe partnering with auto insurance companies or is that just something you may have to launch on your own over time. Thank you.

Sure, so I'll take the first one and then maybe if Daniel has any thoughts on the overall product strategy, maybe take that one second. So, from a pull forward -- the question -- the way you phrased it, I think it's interesting. We thought that through and what are we doing, are we getting customers in advance that we would've gotten otherwise? The way we kind of thought about it is, number one, obviously just great results and good returns and ramping up spend was working, so that was step one.

Step two is we had always planned and expected that things would return to a more normalized growth pattern in 2021 and beyond regardless of where we are now in the pandemic. And so, we have ambitious goals and expectations for 2021 and beyond. And so, I think our increase in spend and our increase in our expectations for our in-force premium for the second half is really just setting us up for a higher base or foundation going into 2021.

So, rather than -- I would think of it less as our Q3 approach, our Q4 approach, our Q1 approach and more of a long-term growth approach. And we can power through a little bit of uncertainty on seasonality. And we are expecting in timing that Q4 can be strong.

Now can it be as strong as Q3? I think it's possible. Historically it has been a lighter quarter in Q3, but we are ready and built into our expectations, our guidance an ability to invest more. And we will obviously continue to manage and monitor that, but we're thinking I think more about 2021 at this point and launching with a great foundation than we are worried as much about what's happening in August or September.

And just a couple thoughts about the bundling question. So, we do think about our customers as being rather unusual in the insurance landscape. So, we attract customers surprisingly young. About 90% of our customers, as best we can tell, are joining us at a time that they've never been to another insurance company.

So, rather than playing the I switched and I saved game upon which an entire industry is really predicated, we find ourselves playing a different sport where we're acquiring customers before the traditional insurance companies have got to them. And typically at a time that they don't particularly want them because total premiums are relatively modest earlier in life.

And then as we delight them and continue to get number one ratings in terms of comparison sites or NPS in the 70s or 80s, we hope to retain them for life as they go through predictable lifecycle events and car insurance or buying a car would certainly be one of those in the fullness of time.

But it is important for me to stress the underlying -- the core element of our philosophy of acquiring customers at a time that we are competing with non-consumption, delighting them and then growing with them. As somebody said to me when they kind of analyzed our business, he said to me you are finding LeBron James in eighth grade.

So, it's that kind of a dynamic of competing in non-consumption, acquiring fabulous customers and then growing with them. And our step towards pet insurance, which we launched just a few weeks ago, is part of exactly that. The majority of our customers are pet parents. This is a woefully under-addressed market. The premiums for pet insurance are very substantial. They are equivalent to condo insurance pretty much.

So, that is our first step, our first foray outside of homeowners in order to flesh out the offering. And the prioritization of our products is really born of our customer centricities. So, we think about our customer placed (inaudible) at the center -- said, okay, what are the needs?

There are renters and she'll graduate to a condo, then she'll graduate to homeowners. In addition she'll get the dog, the cat, perhaps the diamond ring. And, yes, in the fullness of time she'll need all these other insurance products and we hope to be that for her.

So, without talking about car insurance specifically, I think that the fact that we don't yet have all of our products out there is a handicap. Are there other insurance companies who will offer a more complete list of products than we have?

And the fact that we're managing to grow at over 100% year-on-year notwithstanding the fact that we haven't yet fully fleshed it out I think is encouraging because it means there's a lot of opportunity for us to grow further and improve retention rates, improve LTV, improve everything else as good as it is now as we offer new products presumably it will get better.

One of our early investors is Google and this information is a little bit out of date, but just to give you a sense of this. They told us a while ago that they are seeing the same volume of searches for Lemonade car insurance or auto insurance as they were seeing for Lemonade home insurance.

So, we don't feel like there's any lack of demand out there for Lemonade and our entire systems, our brand, our technology, our licenses were all built with extensibility in mind to be able to launch more products with pretty rapid succession. And I think what you saw three weeks ago with pet insurance is a sign of things to come.

Heath Terry, Goldman Sachs.

I just wanted to dig in a little bit more in a couple of areas. On the homeowners' graduation that you've talked about, I'm curious if you can even just sort of qualify for us a little bit more how much of the growth in homeowners you're seeing or companies coming from existing rental customers graduating, as we've talked about, versus completely new homeowners being attracted to the platform by the marketing work that you're doing?

And then one of the big narratives around the last quarter and just the environment is this migration of younger urban single people -- professionals back to their suburban homes with their parents as part of this. That certainly didn't seem to show up in your numbers. And I'm just curious what part of that narrative you might think might be wrong. And then a couple other follow-up questions as well.

Sure, so a couple thoughts there and jump in, Daniel, if you'd like. In terms of the proportion of homeowner acquisition, we're seeing a continued trend. So, historically in most recent quarters the majority of homeowners that we are adding are new customers that we're going out and acquiring, direct new adds. But we've had a consistent theme of existing renters that are buying a condo or buying a home and moving up. But the majority are still direct acquisition.

And the one direct, obviously, we manage and direct proactively and the other tends to be just driven by life events. Interestingly enough, I think there could be as much in the current environment, pandemic driven, that could cause there to be more relocation or more homeownership or more decisions made about where people live and their long-term commitment to those places.

It's a little early and the data is very light to be able to say that for sure, but that is something where we could actually see more of those decisions that drive graduations being made as opposed to less. So, I think part of what you're not seeing in Q2 is that for everybody who moves home, somebody's moving elsewhere to a new location because they're tired of the city and they're renting a new apartment on their own and that may require insurance.

So, I think it's a mix. We will continue to proactively acquire homeowners directly and then we are of course doing what we -- everything we can to ensure that when our customers face those life decisions, when they're ready to move, when they are ready to buy their first home, when they need more coverage we'll be there. We are there with pet now and we'll look to add others over time. That's how I would think about it.

That's really helpful. When you look at the improvement -- significant improvement that was made in the gross loss ratio this quarter, could you help us by disaggregating the components of that? How much of that was higher denial rates on claims, higher premiums being paid or just fewer claims coming in? I know you sort of addressed a little bit of that earlier, or was there something else that contributed that maybe we're not thinking about?

So, I would think of it as a continuation of prior trends with some benefit from the pandemic. And we are not specifically quantifying it but I would think of it as nominal. It certainly helped a little bit; it didn't hurt in terms of that progression from 72% in the prior quarter. 5 points of improvement, we have seen that in several prior quarters. The most recent prior quarter was actually the anomaly where the improvement was only 1%.

So, I would say the impact from changing claim behavior or denial of claims is probably zero. Our practice is unchanged and it's -- I would characterize it as extremely customer friendly but within reason. We are very good at detecting fraud, we are very good at detecting claims that are not appropriate and it's really part of our business model, it's part of our behavioral analytics approach to business. But that was unchanged essentially in the quarter and that's something that's really important to us.

So, I would think of it as very nominal tailwinds and we are in the range now. So, if we think about one of the things we noted, and I think it's important as well on a bid is we are in the target range. 60% to 70% is better than industry average. Gross loss ratio, you don't want it to go to zero, you don't want it to decline forever if that means something's wrong with your business.

You're giving up growth, there's other opportunities you're not taking advantage of. But in that 60% to 70% range we think is very strong performance. It will vary as we build the book, as we launch new products, as we launch new geos. But we don't expect it to vary dramatically outside of that range. So, I would think of it as we are kind of at that target within a few percentage points.

I'd just add (multiple speakers) a brief comment. I just wanted to build on what Tim said as well. So, this isn't -- as Tim said, this isn't about the pandemic. This is our 10th consecutive quarter of declining loss ratios. So this is really something that has been a very strong trend. We've halved our loss ratio over the quarter the last two years. So, this is something systemic.

One thing to point out is it's not price. While we have implemented some price changes recently, it takes a while to earn into that. And I think it would be fair to round that down to zero in terms of how much of a loss ratio is a fact of price changes, which is pretty striking because most companies that improve their loss ratios will do it by raising prices and that's really not what's going on here.

And we do have a sense -- and I think this is one that is being appreciated in this industry in recent years all the more -- but that you are really not in the business of underwriting or insuring property so much as people. And you really want to get into a sense of understanding what kind of risks people represent.

And there it comes back to the fundamentals of Lemonade, acquiring about 100 times more data than broker based businesses. And then having a closed loop system that can use those data in ways that are unavailable to more traditional incumbents. So, using that data in terms of who you target in a marketing campaign, how you onboard, how you handle claims, customer support inquiries.

And having that single advantage point which is customer centric so that data collected in any one interaction can inform every other interaction. And I think really if you want to look and ask what is the fundamental propellant of our precipitous and steady decline in loss ratio, it is exactly that. It is that digital infrastructure and the AI that we've implemented and how that creates a closed loop system that reinforces itself with every turn of the flywheel, if you like.

And the other thing I'd just say, that -- you know this of course, but loss ratios are lagging indicators. And changes that you take today in terms of any of your practices, pricing like we discussed, underwriting or anything else, will take time to flow through to earn into the book.

And in addition to that being generically true, I go back to a comment I made earlier about churn, which is loss ratios of first year cohorts are historically worse than second year cohorts, than third year cohorts and that is true at an industry-wide level as well. So, maturing cohorts also give us some wind in our sales.

So, these have been steady progressions and structural reasons that have driven the loss ratio. And the final thing I'd stay at the risk of saying too much here, but that loss ratio decline, that steady decline over the course of years now has been all the more extraordinary not merely because it has been so sustained and so dramatic, but that it has come at a time of a 400% compounded annual growth rate.

And that really does fly in the face of insurance orthodoxy which preaches that you can't grow fast and get better dramatically concurrently. The two are -- live in tension one with each other. And I think that makes sense when you are a broker based business, human intensive because rapid growth can overwhelm humans, too much data leads to people cutting corners and being overwhelmed.

Of course when you're built on an AI infrastructure it's the other way around. Those torrents of data don't inhibit the improved performance and getting smarter. They are preconditioned to it. So, hopefully that all helps you understand the loss ratio.

No, that does and it's really helpful. And if I just may, a quick one on pet. What allowed the Company to lower the entry-level price for pet insurance? I seem to recall when you announced the product last month it was $12 and then you noted in yesterday's release and on the call today that it had gone down to $10. And then also just curious what if any impact the bundling discount offers for pets could have on the loss ratio. Then I'm done, I promise.

So, maybe I will kick it off and then Tim can come in with some more. I'll say two or three things. The first one is that while our expense ratio today looks high because we are spending a lot on customer acquisition, the fundamentals of our business actually lead to a very light marginal cost preferred.

The biggest and best and most efficient insurance companies in America have about a ratio of 400 customers to 1 employee. So, it's about a 400 to 1 ratio. And even among the top 5 that drops off pretty quickly and you get to like 150 to 1. And Lemonade is over 2,000 to 1.

So, the digital infrastructure that we just spoke about in terms of helping with loss ratios certainly helps with expense ratio in terms of automation, streamlining. If you're paying your claims and a third of them without any human intervention at all and you are onboarding customers, pretty much 100% of them, algorithmically, you can understand how that all translates into an ability to price more aggressively.

And indeed the same is true with our renters insurance. Entry-level buys of rental insurance from Lemonade will typically see something on the order of 50%, 5-0% savings compared to incumbents. And in the early days people said, oh, we're selling dollars for $0.90. We are selling at a loss that's unsustainable. But I think our loss ratio at 67% shows that's not the case, that we're able to drive efficiencies and do things at a cost point -- at a price point and a cost structure that is unfamiliar to industry at large.

So, a lot of that I think spills over (inaudible) to the renters it will flow over into pet insurance. But the one other thing that I wanted to say is why experimentalists? And we do see new products that we launch and new geographies that we launch. We may have unattractive loss ratios in the early days and that's the commission see that we pay now.

Thankfully it's not like September 2016 when we launched our initial product because then we had no denominator and all our tuition was all -- all of our business was -- the tuition today we've got a very sizable business and growing fast. And so, I don't think you'll see pet or other new products hit it even if we got the pricing wrong.

But my point is we are okay with launching new products using our best data best gas. We are smart people doing best work. But also understand that until we've generated the kind of data sets that we need, there will be some errors and we will improve pretty quickly after that.

And we tend to think about the first year of new products as a year where we want to onboard as many customers as possible in order to generate those data sets and then in the second year to start implementing all the learnings and really just hit our target loss ratio in the third year. And we've seen that with renters, we're seeing that in homeowners. And it wouldn't be a shock to me if we saw something similar with pet as well.

[Jerome Kinner], Goldman Sachs.

Heath asked my questions, but I will follow up on pets to maybe try to understand what impact the bundling of pet and renters could have on the loss ratio considering there's a 10% discount you're offering.

I would say it's too early to say. I wouldn't expect it to be dramatic, so our -- the trends we've seen and the fact that we're in the target range is something that we expect to continue. We'll obviously get better data as we go. The response to pet has actually been quite positive, quite strong.

And I would think of maybe the whole business in aggregate in the way we think about expenses and losses and the combined ratio aspect, which is more of a traditional insurance view, is we've got improvements coming everywhere. And so, to the extent we are managing and growing the business we've got more than just the loss ratio levers to pull, but I wouldn't expect it to cause dramatic shifts.

Generally people who have more than one type of policy are better risks. They have more coverage, they're thinking more thoughtfully about what they protect. And so, again, as with much of our business, there's -- for every potential negative impact there is likely one or more likely positive impacts. And I think we see that in bundling, we see that with pet and it's something we see pretty consistently across the whole business.

And then one last one on my end. When you talk about your loss ratios being better than industry average, is that for renters specifically or is that the industry average overall -- (multiple speakers)?

I think there's an overall P&C average that is in the low 70s range. That's where we were last quarter. And so, I was just generally referring to a pretty general market metric. So, it's not something we -- it's something we notice but it's not something we manage ourselves by. But (technical difficulty) notable that in just three years in the market we are on par with billion-dollar large incumbents that have been around for decades.

Got it. And do you have any sense where the renter's industry average is on the loss ratio?

I'm not going to quote that. You can probably get as good a metric as I can give you, and it's somewhat higher than homeowners as it is for us. But we are seeing continued improvement in both the renter's and the homeowner's loss ratio over time.

There are no further questions at this time. I would now like to turn the call back over to the Lemonade team for final remarks.

Thanks, everyone, for tuning in this morning. From the entire Lemonade team, wishing you the rest of a good morning. You can find a letter to shareholders on our website at investor.lemonade.com and we look forward to staying in touch. Have a great morning.

This concludes the Lemonade second-quarter 2020 earnings conference call. We thank you for your participation. You may now disconnect.