Klarna Group plc Q3 FY2025 earnings call

Daniel's Remarks - Daniel reported another strong quarter with in-force premium growth to $1.16 billion, 42% year-on-year revenue growth, gross margin in the 40s, and gross profit doubling. Car saw 40% growth with CAC-less acquisition from existing customers and improved loss ratio. - Highlighted that while focusing on gross profit dollars, loss ratios can have non-linear relationships with gross profit. ### Shai's Remarks - Discussed LAE ratio, noting investment in automation has paid off with an LAE of 7% on average across all products, better than large carriers. - Mentioned expected further reduction in LAE ratio in parallel with business doubling. ### Tim's Remarks - Detailed financials: revenue up 42%, adjusted EBITDA loss improved, adjusted free cash flow positive for second consecutive quarter, ADR up to 85%, operating expenses analyzed, net loss improved, and full year 2025 guidance raised.

In-force premium grew to $1.16 billion, marking the eighth consecutive quarter of accelerating growth. Revenue was up 42% year-on-year, while in-force premium enjoyed 30% growth. Gross profit more than doubled to $80 million, with gross margin climbing into the 40s. Car saw 40% growth, with over half of that from existing Lemonade customers (CAC-less). Car's loss ratio improved 16% year-on-year to 76%. Company-wide gross loss ratio in Q3 was 62%, and the trailing 12-month gross loss ratio was 67%, both the lowest ever.

Full Year 2025 - Raised guidance for in-force premium, gross earned premium, revenue, and EBITDA loss. ### Q4 2025 - Expected in-force premium at December 31 between $1.218 billion and $1.223 billion. - Gross earned premium expected between $283 million and $286 million. - Revenue expected between $217 million and $222 million. - Adjusted EBITDA loss expected between $16 million and $13 million.

Q: 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?

A: The local platform accelerates product building; processes that used to take weeks now happen in hours. Frees engineering teams to focus on higher impact initiatives as much product work can be handled by product and actuarial teams without engineering.

Q: 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?

A: Jeff and Prashant added for their expertise in AI and brand, which aligns with Lemonade's strategy. Their experience will be invaluable in guiding growth, but there are no specific partnerships to highlight.

Q: 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?

A: The 50% rate has been consistent for a few quarters. CAC-less approach is part of driving customers to multiple policies, with multiply policy rate increasing sequentially.

Q: Looking at the ceding commission revenue line, was there a contingent or profit share tailwind in that ceding commission in the third quarter?

A: Bulk of ceding commission driven by loss ratio. Sliding scale of commissions, with effective ceding commission rate about 28% in the quarter.

Q: You noted about impressive improvements in kind of the contribution ratio efficiency. 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?

A: Score very high on AI use across the board, majority code written by AI, but still just getting started as we see more potential in the future.

Q: Is there anything philosophically to think that you're going to lean more into growth and pushing out like kind of profitability targets?

A: EBITDA profitable in Q4 2026 unchanged. Optimizing gross profit dollars, may let loss ratio rise for higher gross profit in some segments.

Q: 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?

A: Growth spend increased, some inflation, interest expense growth with growth spend, merchant fees seasonal.

Q: 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.

A: Big beat in 3Q, evaluate how much to continue, cautious about retention, IFP captures the entire business.

Q: 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?

A: Q3 results good, overperform, thoughtful about retention, home book clean up continues.

Q: Just one, I think there was like an $11.7 million like tax refund benefit that you all had this quarter. Just any color on what that was and whether there's anything similar we should think about potentially reoccurring in future quarters?

A: Onetime tax credit related to the ERC program, not reoccurring.

Q: Tim, I think I heard you say earlier the leverage that you would be running to max is 6:1. Was that on a gross premium basis? And if so, could you provide that on a net as well?

A: On gross basis, historically talked about gross written premium 6:1. Net basis has a 3:1 due to regulatory surplus, on consolidated global basis for Lemonade Inc.

Q: Is that just on a U.S. entity basis? Or is that including the Cayman captive?

A: On consolidated global basis for Lemonade Inc.