Lemonade, Inc. Q3 FY2025 earnings call

• Daniel Schreiber reported a strong Q3 with in-force premium at $1.16 billion, revenue up 42% y-o-y, and gross profit doubling to $80 million.
• Shai Wininger discussed LAE ratio improvement due to AI, with LAE at 7% avg across products, cut in half in 3 years despite claim volume growing 2.5x.
• Tim Bixby covered financials: in-force premium up 30% y-o-y to $1.16B; revenue $195M, up 42%; gross profit doubled; adjusted EBITDA loss improved; adjusted free cash flow positive; raised full-year 2025 guidance for various metrics.

Lemonade's in-force premium grew to $1.16 billion, marking the eighth consecutive quarter of accelerating growth. Revenue was up 42% year-on-year, with in-force premium enjoying 30% growth. Gross margin climbed into the 40s, and gross profit more than doubled to $80 million. The car segment saw 40% growth, with over half of new car customers coming 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 trailing 12-month gross loss ratio was 67%, both the lowest ever.

• Raised full-year 2025 guidance for in-force premium, gross earned premium, revenue, and EBITDA loss.
• Expect positive adjusted EBITDA for Q4 2026 remains unchanged.
• Q4 2025 in-force premium expected to be 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 adjusted EBITDA loss between $16 million and $13 million.

• Factors affecting forward-looking statements, including those in the letter to shareholders and Risk Factors section of Form 10-K.
• Non-GAAP measures used, with differences from GAAP.
• One-time tax credit related to ERC program not expected to reoccur.

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: Timothy Bixby said the 50% rate has been consistent for a few quarters, and the CAC-less approach is part of driving customers to multiple policies. Daniel Schreiber added these customers have better loss behaviors, higher retention, and are profitable.

Q: 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 and pushing out like kind of profitability targets? 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?

A: Daniel Schreiber said AI is used across the board, scoring high on the 1-10 scale, and they're just getting started. On growth vs profitability, they aim to maximize gross profit dollars, with EBITDA profitability expected in Q4 2026 unchanged. Tim Bixby noted expense tick up was quarter-to-quarter, with growth spend, tech personnel costs, interest expense, and seasonal merchant fees as factors but overall single-digit expense growth with 30%+ top line growth expected.

Q: 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?

A: Timothy Bixby said when there's a big beat in a quarter, they evaluate continuation and adjustments, being cautious about retention while capturing beat in gross earned premium and revenue. Daniel Schreiber added Q4 IFP guide is between 29%-30% growth, not a significant slowdown.

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: Timothy Bixby said it was a one-time tax credit related to the ERC program, not expected to reoccur.

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: Timothy Bixby said it's on a gross basis historically, with a 3:1 net regulatory surplus requirement depending on reinsurance structure, all on a consolidated basis.