Lemonade, Inc. (LMND) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Lemonade, Inc. Fourth Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Yael Wissner-Levy, Vice President of Communications. Please go ahead.

Good morning, and welcome to Lemonade's fourth quarter 2020 earnings call. My name is Yael Wissner-Levy and I am the Vice President of Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO; and Co-Founder; Shai Wininger, President, COO and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's fourth quarter 2020 financial results is available on our Investor Relations website, 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 these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our final perspective filed with the SEC on January 14, 2021 pursuing to rule 4Q before and our 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 use each to monitor and manage our business. With that, I'll turn the call over to Daniel, who will begin with a few opening remarks. Daniel?

Good morning. Our fourth quarter saw continued progress along our key performance indicators evidencing both quantitative and qualitative advances. As compared to Q4, 2019 we saw our in force premium grow by 87%, our adjusted gross profit by 86%, and losses per dollar of gross earned premium roughly halved. Tim will elaborate on all our numbers shortly, but as strong as these metrics be, the qualitative changes run deeper than the numbers suggest. The main thing I would like to highlight is that we’ve fully transitioned from a monoline business as we were at our IPO a short few months ago to offering three highly differentiated products that span property insurance for homes, to health insurance for pets, to life insurance for humans. During this transition we've learned several things of note. The first is that our brand and technology are highly extensible. If there was any question about whether these could extend to higher value and higher-complexity products, there really no longer is they do. The second is that our customers want to buy multiple products from Lemonade. About half of our pet policies and half of our life policies have been bought by existing Lemonade customers with far-reaching implications for lifetime value and dollar retention. The third is that new products create new on-ramps to Lemonade. In the fourth quarter, more than 40% of our sales and new product sales were not renters policies, demonstrating that our high-value products are not only destinations for upsells, but destinations in their own right. They are entry points to Lemonade and this expanded our total available market while lowering our customer acquisition costs. In general, our customer journey has progressed from a relatively linear roadmap where customers join as young renters and graduate to become homeowners to a far more multidimensional map with an array of on-ramps and intersections. This is great news for both customer acquisition costs and lifetime value of our customers. It’s a level of symbiosis that we theorized about, that we aspired to, and it's heartening to see it play out even better in practice than the theory had projected. All these learnings have embolden us to continue down this road indeed to double down on it, and we plan to keep launching products until we have catered to the totality of our customers’ needs. I’d say we plan to, but in truth, we're beyond just planning. We haven't shared this before, but we actually have more people working on our next major, yet to be announced product today than we have working on our homeowners or our renters or our pet or our life products. I look forward to the day in the not too distant future when I will be able to share the reason for my excitement with a little less cloak and dagger. In the meantime, a few more points worth highlighting. One is that our 2020 annual loss ratio was 71% as compared to 79% in the prior year. We've now seen an incredibly healthy loss ratio for the year as well as healthy loss ratios across all four quarters and all four seasons affording confidence that even as we grow fast we are growing profitably. Of course, we will see occasional spikes in our loss ratio. Though our reinsurance will mute the impact of these on the bottom line and in this context I want to say a few words about the Texas freeze in Q1. When Q3 saw unprecedented wildfires and hurricanes, we took pride in the fact that our cautious underwriting meant that the impact of these catastrophes on our book of business was disproportionately light. Now hurricanes and wildfires do follow a probability distribution, and that allowed us to manage our exposures there. The Texas freeze that happened this month was different. It was a black swan event; few models predicted this unique weather pattern and none predicted the massive loss of power that the freeze engendered nor the massive loss of drinking water that the loss of power triggered. These compounding catastrophes came without warning and impacted the entire state; the state where a quarter of our customers live. For these reasons, it quickly became the largest catastrophe we as a company have ever contended with, and it tested both our people and our financial model in important ways. I'm happy to tell you that both held up exceedingly well. We will provide a lot more color in detail when we report our Q1 results. But I will share that we saw many thousands of claims in a space of just a few days and that our team worked night and day and successfully remained incredibly responsive and helpful despite the extraordinary surge. Being there for our customers in such trying circumstances is exactly the promise of Lemonade, and I'm proud that we were able to live up to this promise. As for our financial model, it's too weathered the storm very well. While our gross loss ratio will spike in Q1, our reinsurance structures are playing their designated role and as our guidance for Q1 indicates, we do not expect the Texas freeze to have a material adverse impact on our financials in 2021, and with that let me hand over to Shai for some product updates. Shai over to you.

Thank you Daniel. Last time we spoke, I mentioned that unlike previous products Lemonade Life will be launching gradually before actively marketing it to new customers. I'm happy to report that so far, the stage launch is looking good, although numbers are modest, this is by design. Sales are in line with our expectations while conversion rates are ahead. We're dedicating the first half of the year to learn, improve, and optimize Lemonade Life and as anxious as we are to accelerate its growth, we remain true to our customer-centric principles and will only start scaling it once we're satisfied it provides a magical experience that's fast, transparent, and easy to understand. On other fronts, we're happy with the rate in which our non-renters products are growing with homeowners and pet representing more than 40% of our new business in the last quarter. This is in addition to the very strong cross sales of these products to existing Lemonade customers. Cross sales are an important part of our strategy because they fundamentally change the unit economics for the better. For example, the renter who also buys pet coverage generates a 4X increase in premium and dramatically improves the LTV to CAC ratio as the second purchase comes at nearly zero cost. New products also help us grow our geographical footprint, and I'm happy to report that Lemonade is now available with at least one product in all 50 U.S. states and as Daniel mentioned we are working intensely on our next product. We're not yet ready to name it, but I do want to share everyone's excitement about this major project which may well be the most significant launch we've ever done. And with that, let me hand over to Tim for a bit more detail around our financial results and outlook. Tim?

Great. Thanks Shai. I will give a bit more color on our Q4 results as well as expectations for the first quarter in the full year 2021 and then we'll take your 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 87% in Q4 as compared to Q4 in the prior year to $213 million. We believe that 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 20% versus the prior year to $213. This increase was driven by a combination of increased value of policies over time as well as mix shift towards higher value homeowner and now pet policies. Again roughly two-thirds of the growth in premium per customer in Q4 was driven by product mix shift including cross sales and the remaining one-third from increased coverage levels and pricing. Gross earned premium in Q4 increased 92% as compared to the prior year to $50 million in line with the increase in-force premium. Our gross loss ratio was 73% for Q4 in line with 73% in the fourth quarter of 2019 while our full year 2020 gross loss ratio was 71% versus 79% for the full year 2019. We continue to expect our gross loss ratio will vary over time within a target range for annual loss ratios of below 75% with occasional short-term results slightly outside this range. Operating expenses excluding loss and loss adjustment expense increased just 10% in Q4 as compared to the prior year with sales and marketing expense again lower slightly as compared to the prior year due to continued improvement in our marketing efficiency. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches and thus saw increases in each of the other expense lines. Our global head count roughly doubled versus the prior year to 567 with a greater growth rate in customer facing departments and our product development teams. We continue to operate primarily under a work from home structure. It's worth noting that our Tel Aviv office has made good progress in getting many of our team members back to the office and we anticipate that most of our team members will return to our other offices before year end. Net loss was $33.9 million in Q4 as compared to the $32.7 million we reported in the fourth quarter of 2019 with a notably larger customer and in force premium base while adjusted EBITDA loss was $29.7 million in Q4 as compared to $31.4 million in the fourth quarter of 2019. Our cash, cash equivalence and total investments balance ended the quarter at $578 million reflecting primarily the net proceeds from our July public offering of approximately $335 million partially offset by the use of cash for operations of $91.7 million since year end 2019. As a reminder, we closed a successful secondary offering in January generating additional total net proceeds approximately $640 million and this is of course Q1, 2021 event not yet reflected in the financials. With these goals and metrics in mind, I will now outline our specific financial expectations for the first quarter and for the full year 2021. For the first quarter we expect enforced premium at March 31 of between $241 million and $246 million. Gross earned premium between 53.5 million and 54.5 million. Revenue between $21.5 million and $22.5 million and an adjusted EBITDA loss of between $43 million and $40 million. We expect stock-based compensation expense of approximately $5 million and capital expenditures of approximately $2 million in a quarter. And for the full year 2021, we expect in force premium at December 31 between $372 million and $378 million. Gross earned premium between $270 million and $275 million. Revenue between $114 million and $117 million and adjusted EBITDA loss between $173 million and $163 million. Stock-based compensation expense of approximately $25 million and capital expenditures of approximately $8 million in the year. As a reminder please note that GAAP accounting rules are such that seated premiums are excluded from GAAP revenue as a result of the change in our reinsurance structure effective last July 1 to a significant proportional reinsurance structure. Our year-over-year revenue and gross margin comparisons are not directly comparable. Accordingly, we publish in force premium and gross earned premium as metrics that we believe are useful to analysts and investors because each captures the overall growth trajectory of the business before the impact of reinsurance. Thanks so much for joining our third quarterly review as a public company. We do appreciate your interest and support and with that I would like to turn the call back over to Daniel to address some questions from our shareholders. Daniel?

Thanks Tim. It's been a great pleasure for us to be able to engage with our retail investors through podcasts, YouTube, Twitter, other social media channels and what we found is a community that is highly engaged, highly inquisitive and highly supportive. We've engaged with smart people who really do sweat the details and are strategic and long term in their thinking. These are investors after our own heart and we feel privileged that so many of them are also our customers and they often act as strong advocates for our products and indeed for our company. Our investor community has also been a source of great ideas for us and it's in response to a couple of Tweets that came at us from retail investors that we signed on with say technologies so that these investors no less than our friendly Wall Street analysts will be able to ask us questions on these calls. And this quarter and the first quarter that we're trying this we received close to 100 questions and the same investor community helped us prioritize them by upvoting the one that seemed most pressing to them. Looking at the five to seven most upvoted questions and we see three central themes that I will try and address. The first is one of global expansion. Neil F asked the most upvoted question which focused on our plans for the EU and questions by [Indiscernible] about the Asia-Pacific and by Jordan about the UK were also very popular. So that's kind of one bucket if you like. The second theme is about new products. Jason asked about our future product plans while Neil asked about the changes in claim with car OEMs most notably Tesla entering the space and the third most upvoted question was from Emil and it asked what we think of crypto and when we plan a whether we plan to invest in Bitcoin. So let me address these three sets of questions in turn. The first as I said was about global expansion. In our shareholder letter last quarter we wrote the following sentence. While we are steadily enlarging our European footprint it should be noted that our investments are lopsided in the direction of the U.S. by design and will remain that way for the next while. Okay. So let me explain and add a little bit of color to that. We think of our market as global. We don't expend too much thought about which state or which country our sales occurring. Our machine is trained to invest its incremental dollar in whichever channel offers the highest ROI at any given moment. So it takes into account using machine learning models likely churn, expected claims, projected up sells and it derives from these predictive lifetime value which then compares to the anticipated customer acquisition cost in that channel. This results in optimal and increasingly improving LTV to CAC ratios and it also dictates a ranking of products and campaigns that are being promoted based on the ROI for the incremental dollar spend. The machine does not take into account whether the most profitable available business using that formula is in New Jersey or in Washington D.C. Or in France. At the moment um this formula tends to find more opportunities, more compelling opportunities in the U.S. than the EU and so long as that is the case our growth will skew left. So while we continue to grow in Europe that is not at the moment where most of our profitable opportunities lie and therefore not where our growth is most pronounced. I do expect that the same calculus will yield different answers over time and as markets mature and as efficiencies get developed, we might find ourselves skewing more to the right in that regards. In terms of expanding into new markets like the UK or Asia, I'd say a couple of things. The first is that we have an expansive vision for Lemonade. We think that our cocktail, value proposition of great value strong values and delightful product is a cocktail that enjoys universal appeal and therefore it's a question of when not if with regard those new geographies. The second thing I'd say is that in deciding when to launch more markets and in which order to sequence them we follow much the same algorithm as we use to determine where to invest our incremental dollar. We are very ambitious for Lemonade, but we try to temper that with the discipline of ensuring that we invest our energies whether we'll be most impactful and that really drives the prioritization in the roadmap. I hope that gives some insight into how we think about our global expansion and prioritization of different geographies in terms of growth and in terms of launch but I'm afraid I'm not going to announce here today which countries we plan to launch when. I'm sure Neil and Jordan that you'd appreciate those specifics but I trust you value even more by not tipping our hands to our competitors so I hope this will be a satisfactory answer to your question; which brings me to the question on new products. We have been very busy with new products, continue to be. For the first four years of our existence we had only homeowners’ products and in our fifth year we saw a profusional product. We launched pets. We launched Life and as I intimated we have more in the oven. Much as I did though when talking about global expansion here too I'm happy to talk about our guiding principles while remaining intentionally vague or almost evasive about the specifics. So as with new geographies our ambition for new products is expansive. We want to cater to all our customers’ needs and to become attractive to an ever-growing universal customers and new products are really an essential component in achieving this. In our S1 prospectus for IPO we included an illustration of our prototypical Lemonade customer. We showed a young woman who joins at age 25 and all she has is a bike and some personal belongings and then we showed how we could grow with her as she goes through predictable life cycle events as she collects pets and human dependence and she adds valuables and vehicles and homes and our product roadmap is developing in the service of this strategic vision of ours. And in terms of car insurance in general and the Tesla related question in particular let me say the following. The entire mobility space is going through unparalleled dislocations. Ride sharing is increasingly competing with car ownership while autonomous vehicles promise to transform the nature of how risk is allocated in the car industry. If a Tesla crashes while on autopilot that could arguably be characterized as a faulty product issue rather than a faulty driver issue and they therefore may be better handled under rubric of product warranty than car insurance. So this is one of the many revolutions and transformations of the digital age and these kinds of transformations put incumbents on their back foot and they create tremendous opportunities for innovation for companies that don't have a legacy business to protect. So we follow these dislocations with keen interests but for now that's all I'm going to say on this topic. Thank you for that question. Finally let me address Emil's question about crypto and Bitcoin. So crypto and DFi decentralized finance in general are very interesting technologies and enable really very novel businesses and business models. To-date we haven't seen compelling applications for blockchain or crypto currencies at Lemonade but it's a fast-moving space and we're entirely open and even excited at the prospect of that changing and in terms of our investments our most high conviction investment is in LMND and we plan to deploy as much of our cash into our own business as we can profitably do. Of course, in the meantime we will invest the cash that we don't need right now but we certainly don't plan to make sizable investments and efforts as volatile as Bitcoin. The opportunities in front of us are massive and we want to keep our powder dry and dependably available. Hopefully Emil that makes sense to you. And with that I would not now like to turn the call back over to the operator who can perhaps rejoin the call with Q&A instructions as we'll be happy to now take questions from our friends on the street as well. Thank you.

We will now begin the question and answer session. [Operator Instructions] Our first question is from Mike Zaremski from Credit Suisse. Please go ahead.

Good morning everybody. First question, I'm curious about the exciting new product launch later this year. Does the 2021 guidance contemplate that product launch, and also kind of curious if the 21 guide contemplates whether you think there will be any potential changes to the reinsurance program, maybe as a result of this kind of black swan Texas event?

Yes. Hi Mike, Tim here. So I will take each of those in turn. So the way we are approaching the guidance and our planning is similar to how we have in the past with new efforts, and so in the guidance for the full year, you'll see essentially all or nearly all of the investment and expense that we plan to make to both drive the current business, drive new growth, as well as build new products, those products that are already in the market and those products that we plan to bring to the market. On the top line, we do not load in 100% of what we believe the opportunity is in terms of premium and growth. So, we're a little conservative on the top line and also conservative on the bottom line. In terms of new products not yet announced, the impact on the year rounds to essentially zero. So, I think what we're telling the world in terms of our focused investment is we're leaning in, we've raised additional capital. We feel that we can accelerate some things since we've really accelerated the cost and the investment in the hiring and the people efforts, but because we don't yet really have clarity around launch dates or impact, we've not built in much from a top line perspective, but that's kind of how we approach the guidance. And from a reinsurance perspective, the Texas situation while it's done for the people on the ground it's still very much in progress in terms of the accounting and the processing of what the ultimate impact will be. These things while the exact circumstances that happened in Texas are not perfectly modeled or perfectly expected, these things are expected and it's part of how the re-insurers go about placing their business and it's really a long-term relationship with us. So currently, we have no expectation that this Texas occurrence will dramatically change our long-term view of the value reinsurance and what we ultimately pay. Our reinsurance partners are really focused on growth and long-term profit and all the things that I think we've delivered really strong performance thus far and I expect that to continue.

It's helpful. My final follow-up is a stat you put into the shareholder letter that I thought was very positive. You talked about 10% retention rate improvement. I was hoping maybe you can unpack that or give us a little more color that's a lot of improvement. Do you think that's for the entire existing portfolio or you think it's for kind of new business you’re writing that has more cross sell and graduation rates in it?

Yes. So that's an important metric that we're tracking internally, and as always we strive to share more publicly as we get better data. So we've clearly been focused on retention insurance since the very beginning of the company. Now that we're larger and we have more data, our dollar retention is really a better indicator of the long-term sort of health and growth of the value of the business and the value of our customers. So, we obviously are focused very closely on dollar retention, and that's where we've seen that improvement. We're not yet to the point where we want to bring that hard metric publicly because we just want to have our arms around that data as it evolves, but we did want to give that indication of what we're seeing internally is exactly what we expect to see is as the book matures and as we see some of the benefit of what we call sort of seasoning a larger proportion of the book ages and their key metrics can improve, we are seeing that in dollar retention, and then hopefully before too long, we'll be able to share more concrete data on that but wanted to at least share that data information.

Thank you.

The next question is from Mike Phillips from Morgan Stanley. Please go ahead.

Thanks. Good morning everybody. You talked in your letter and you said kind of a similar comment in prior conversations about the product mix and the shift in new business and here you talked about 40% is new, which is homeowners and pet, and you gave the quote in your letter up from prior quarters, I guess I was wondering if you'd be willing or you haven't been in pet very long, so I'm curious how much of that new business mix is surely from pets versus homeowners and if it is something you be willing to share?

Yes. I think of it as a combination of both. I think if we look out over the course of the coming quarters, we can see the point coming where less than a majority of our business will be renters, and having started out as primarily renters from a dollar perspective certainly if not from a customer count perspective as well, that day is coming. Now homeowners is larger. It's more mature. We've got more data and have made somewhat more progress, but the pet results in just six months have been pretty significant, and so I'm not going to share a hard number, but it's definitely a combination of the two in terms of the balance maybe going forward we can share a little bit more of that, but we're definitely seeing impact from both of those.

Okay, not to pull you on the spot, just curious I guess the philosophy behind when you give your customer count, do you think it will ever be a day when you give the customer count split by product line?

Probably not. It's certainly something we could do and the reason for that is I mean but the reason I think because we'll have so many customers we already are seeing this dynamic where customers have multiple policies and so is someone a pet customer or a home customer that's something we're factoring in as we get a better feel for that but that's just the dynamic that we want to make sure people understand is that the cross-sell benefit and the up sell benefit but that's something we'll keep in mind.

Okay. Thanks.

Sorry hey Daniel. I just want to interject with another point which is tangential to your question and we got some questions over social media today from the paperback investor and others about the fact that while we saw very robust growth in Q4, we didn't see the same proportion of growth in our customer account and I thought this was a good place just to address that. So you're right we don't break down the customers by product. I just wanted to make the broader point which is we don't guide for customer account in general. So what we are optimizing for is growth and profitability of our entire book of business. The top-line metric that we use is in force premium which is really multiplication of how many customers we have times premium per customer and what our machines are optimizing for is the output of that multiplication. So if we were just optimizing for customer count we would just sell renters all day long. If we were just optimizing for premium per customer we would only sell homeowners all day long. It's really the multiplication of the two which produces the best return on investment and the more markets we have the more products we have the more able we are to play the arbitrage of seeing where can we get the best return on the dollar invested and we kind of love all our children, all our geographies, all our products equally but the way we allocate dollars to them is based on that formula so that the machines are constantly looking to optimize for that and the outcome of that is that in Q4 that we're reporting on now Q4, 2020 we actually spent fewer dollars on marketing than we did during the Q4 of 2019 even though we sold a lot more. In fact we mentioned this in the letter that our efficiencies increased 88% 2020 versus 2019 and that's really how it's by solving for how do we get the most bang for the buck and what we're optimizing for is growth of our business in dollar terms and not in policy count or in customer account which is why that's also what we guide for. So just get that in there. Thanks Mike.

Okay. No. Thank you. That's helpful. Last question for now is on Texas and I appreciate your earlier comments Daniel on that and follow the complexity of what's involved there but I guess as you look at that now it feels like one of the first times you guys have been under pressure from a pretty major cat and I guess are there any and without going into the guidance and the EBITDA and the loss ratios that could come out of this thing but just in general are there any lessons that you have learned yet so far on that? It's kind of one of the first almost strains to your system if you will lessons don't adjust your availability or accessibility or anything else in your systems that maybe have been tested for the first time in something else to magnitude?

Yes there are some interesting lessons and while this is certainly the first of its magnitude it's not the first that we've faced over the five years. We've had a couple of quarters with a pretty significant impact but there was this one was unique and one of the things that we saw was essentially a year's worth of claims in a week for a given set of folks. So it was one really a test of our ability to muster the team to basically redirect and expand the available hours of the team quickly to keep the close rate significant and high. Our net promoter score in normal times is something we're very proud of and it's there for a reason. It's a key focus of the business and we are able to as best we can tell thus far maintain those very high net promoter scores even through the course of the duress of the Texas event both for customer support and for claims. We've been able to close a very significant proportion of these claims very quickly and that's really what we're there for our customers. We will see what the ultimate impact shapes up to be but the guidance for the full year and for the first quarter takes into account everything we know and the patterns we're seeing and how we see evolving over the coming days. The team has drilled for this and tested for this. You never quite know until what happens and if you could sort of read our internal messaging in slack you'd see that while it was put a real strain on the system we sort of passed that test with flying colors.

Okay. Thank you Tim. Appreciate it.

The next question is from Matt Carletti from JMP. Please go ahead.

Thanks. Good morning. Daniel I just want to circle back to the commentary you just had on kind of the machines and new customers versus premium per customer. I know I'm trying to simplify a very complex issue here but how does time fit into that? How would you look at those potential kind of 25 year old today that might only be looking for renters but has a lot of long-term potential to move up that kind of graduation hill and add a lot of products be that new customer growth versus somebody that might be renters today but they're also they'll add on pet today as well but maybe not go much further than that.

Yes. Hi Matt. It's great question and it gives me an opportunity to layer a little bit more of the sophistication of the system on top of my earlier comments. So before I kind of said we optimized for ROI and I left it at that dollars spent towards dollars sold but actually the machine is doing something far more sophisticated than that and it's really in line with I think the premise of your question which is not all dollars sold are born equal. Two customers can come in and both of them spend a hundred dollars and one will have a lifetime value of $50,000 because they're going to stay for a long time and increase their premiums and one can actually have a negative lifetime value because they're going to make a big claim and churn in six months and the more able, we are to predict the lifetime value the more efficiently we can deploy our cash against the appropriate or spend the CAC the customer acquisition cost in a way that optimizes the CAC LTV ratio and our data science team has been continuously improving our ability to project lifetime value of a customer based on all the parameters that make a difference. So projecting churn, projecting up sells, projecting claims and using all of those um together. So it's not simply that we say oh renters versus homeowners we're becoming increasingly nuanced and sophisticated in the machine's ability not only to say France versus New Jersey or homeowners versus renters but to get down to a much greater level of granularity and focus as your question implies focus on lifetime value rather than on something as crude as geography or product. So all of that is happening and it's part of the systems that are learning the whole time that we're getting better and better and better at that.

Okay great and then just one follow-up if I can on loss ratio. You had some discussion in the letter about how on the surface it looks like there's just a little bit of improvement year-over-year but when you peel it back there's a new business penalty on the new business and the lines you had in place a year ago actually have improved performance quite well and I think that the quote was I might quote you wrong but it's something along the lines of, you're completely comfortable with the new business penalty. How should we read that on the outside? Do we read that as loss ratios in a good place expect it largely flat going forward with maybe a little improvement but not leaps and bounds as you go into some of these new products? Would that be a fair takeaway?

So maybe I will say a couple of things and then Tim if you want to come in feel free. The main thrust of the passage that you're referring to is we are very long term in our thinking. We want to build a huge company over time and be extremely profitable and we think that we are today in a window of opportunity to create really a generational company which is what we're very focused on. Launching new products is something we're getting pretty good at and we've spoken at some length about the results of the launches for the last six months and we've already hinted at launches to come. Those come with a near-term cost and a long-term profit and part of the currency that we spend it in is you'll see that an EBITDA so part of what we're spending this year is as I said earlier we've got more people working on new products than on any of our existing product but part of it is also going to be in near time hit to loss ratio. So you do expect when you launch new products to see that new product penalty and so long as we can see that the underlying data of aging cohorts suggest that the underlying profitability of the business is very strong. We won't be put off by the masking of that underlying profitability because of the near-term penalty that you pay with new products. We can optimize for the long term not for the short term. So that's the class of it. We're comfortable doing that we think that's where you build long term sustainable value and we want our investor base to understand that is the calculus that we'll be employing and get comfortable with it as well. That said we do plan and anticipate that we will stay within our long-term guidance notwithstanding that calculus. So Tim made a comment earlier about wanting to stay on a long-term annual, multi-year annual average beneath 75. We think we'll be able to do that notwithstanding the commentary that I just gave. So and yes we will be suffering higher loss ratios because of that penalty and but not to the extent that it would deviate from our long-term plans. Tim anything to add to that?

No, that was great.

Thank you.

The next question is from Ralph Schackart from William Blair. Please go ahead.

Good morning. Thanks for taking the question. On the call you talked about launching new products. Maybe if you can just get a sense how much easier is it for you to launch this incremental new product especially with your growing brand awareness both from the perspective to drive the incremental adoption or perhaps faster adoption with the new products maybe just to bolt down to that as you add these incremental new products you talk a little bit about LTV to CAC, but just in perspective and how you think about that LTV to CAC ratio projected in the future. Thank you.

As I said in my comments, we're gaining confidence in doing exactly that. So had you asked me that question six months ago I think would have been a little bit more tentative but we have now got a lot of data on pet which is I'm going very-very well. We're really thrilled with all of the aspects of that the growth, the profitability, the customer satisfaction, the adoption rates and the dynamics between existing customers and new products so the cross-sell dynamics the fact that it creates new on-ramps, the total impact that that has on our LTV to CAC across the board. So we are gaining confidence that not only are we able as I kind of wrote in the beginning of the shareholder letter to walk and chew gum we can do this from an operational point of view but also that the financial impact of doing that is in line or ahead of what we had hoped and expected and Shai made comments suggesting that although Life is still early days that the early indications are that that will follow hopefully a similar trajectory. So we do feel both operationally and in terms of our financial model that this is something we should be doubling down on and indeed it's exactly what we are doing. Tim do you want to address the LTV to CAC posture?

Yes. From the LTV to CAC standpoint I think it's we're seeing what we had hoped to see and so recently currently in the short term we believe our data tells us we're comfortably above two between two and three in terms of LTV to CAC and we gave indications that we'd like to see it above three and we think we have a path to see that well above three and that would be a step change but one that is doable and we're seeing evidence that notwithstanding the new business penalty that Daniel just walked through we're seeing the indication that these things are true that the two key levers are marketing efficiency. We've seen significant improvement in that over the course of the past 12 to 18 months. And then the other lever is retention and the likelihood that a customer becomes a longer term customer if they have more than one policy which we're seeing to be true and borne out by the data that a customer that's a little bit older and a little bit wealthier is likely to be a longer term retained customer and we're seeing that borne out by the data. In fact if you look at the average age of different segments of our customers our overall customer average looks around 30. But if you parse that out and start to look at new business whether it's in life insurance or pet insurance or segregated homeowners insurance for example you see that number several years higher and we know that that correlates to greater wealth and greater need for insurance and so that's what tells us that we are on track to move the LTV to CAC from above two to above free and we'll continue to share that but the underlying data is very supportive of that.

Great. That's helpful. Thanks Daniel. Thanks Tim.

The next question is from Ron Josey from JMP Securities. Please go ahead.

Great. Thanks for taking the question. I have to please first Shai you mentioned just a month in on Life and you're doing a stage event for stage launch for the product. Please provide more details here on what you're looking for is Life rolls out nationally and are you really starting looking at Lemonade existing million customers? Are there any similarities lessons for the pet launch into Life and then the second question is just on growing awareness. I think in the letter we talked about just broader build a bigger overall brand awareness. So Daniel can you talk a little bit more about how your marketing strategy evolves I'm assuming you go more national but then to Matt's question earlier you talked about going really after the LTV. So maybe talk a little bit more about how you're thinking about brand marketing and just overall marketing overall. Thank you.

Ron, good morning. Thanks for that. I'll try and tackle both. So Shai spoke a little bit about Life but he was also careful to say that it's really going to be a few months until we put a pedal to the metal on Life and this is a complex product that we're doing in partnership with another carrier. We don't have, we don't own a life insurance carrier. So these are complex partnerships and we want to take our time and make sure that all the integrations and all of the data set that we're using in the entirety of the customer flow is up to the standards that we hold ourselves to as you know with insurance in general you can't always beta test to these kinds of things. They're highly regulated products. You can't pretend to sell insurance you have to test it in the market and as we said from the very beginning we did something of a cautious launch of life insurance we have not promoted this we have not put marketing dollars behind it. We're using these months to make sure that the user experience is delightful and the entirety of the technology stack is operating as we would expect it to and what I also intimated is that so far so good in fact we've been pleasantly surprised that notwithstanding the fact that we really haven't put any marketing dollars behind us we've been very focused on customer experience and the technology notwithstanding all of that we are seeing conversion rates that are very strong and interest rates that are very strong. Albeit it's small and little data at this point. So we are seeing similar dynamics to pet in the sense that we are seeing about half of the business come from existing customers and about half from newcomers and we're seeing strong premiums per customer, strong conversion rates but I think Ron with your permission we'll leave it there because we want to share real data once we have real volumes and once we've been able to scale this a bit more and we're still a few months from doing that and we want to manage our own expectations and yours and always prioritize the customer experience before the growth. So we're going to spend the next couple of months getting that tied down to our satisfaction before we invest on that. In terms of the marketing we have evolved. We continue to evolve. So that part of the theme of today's announcement and core has been about how we've really moved from being monoline to multi-line and that begins to morph the message about the company from offering a product to offering insurance more broadly. So rather than saying insurance for renters or insurance for homeowners we're getting tantalizingly close to the point where we can just talk about whatever your insurance needs are we're going to address them we're not quite there yet but that's the arc of the journey that we're going through. So that allows us to shift a little bit of both the media that we use and the messages that we use and maybe I'll leave it at that just in kind of broad strokes but the specifics of things that we're still rolling out. So I'm going to pause there.

Understood. Thank you Daniel.

The next question is from Ross Sandler from Barclays. Please go ahead.

Hi guys. Two questions. So if non-renters is a third of the business today where could that be in five years? And then the second question is usually when a subscription business is seeing higher LTV and better retention they would lean in more heavily on marketing and you guys are kind of doing the opposite. You've seen all this efficiency and you're talking about the three to one LTV to CAC but so when should we expect you to lean back in is the question and I guess long term what's the right way to think about marketing as a percent of IFP or GEP whichever ratio you guys are thinking about internally? Thanks a lot.

This question is a proportion of the business if you think about the overall market in the U.S., the renter's proportion is relatively the smaller portion less than 10% of the total market. I think we'll skew renters for a fair bit just because of the origin of the business but I think over the period you're referring to multiple years three, four, five, six years or so we should continue the shift we're seeing now it's keeping more towards the overall market size. The home market is 10 or 20 times the size of the rental market. The Life market is probably a 100% or honey fast in these newer products to have to continue and there is also the dynamic where you we're tapping naturally you've got renters becoming homeowners and so it's both us acquiring the business as well as the shift within the business as our customers age and season ourselves day-to-day as we're optimizing how much we spend how much we invest. We've made a general commitment to not go out and acquire unprofitable business. When you dig into the details on that overall you've got pieces of that that's much more efficient, much less efficient and the less efficient areas are important for testing and gathering new data, you spend more now and I think the guidance for next year suggests tells you that we're leaning in versus kind of reaping the benefits and not growing quite as fast. So that is something we balance. I don't know Daniel if you want to add anything on the willingness to invest at a greater pace but that's usually the guideline we have been following is the underlying profitability of each of those customers.

The next question [Indiscernible].

Just maybe can you dissect that last comment to that EBITDA guidance maybe help us understand how much leaning into marketing versus pricing policy versus other product changes and how much of that is driven by your desire to just continue to increase the mix of homeowners versus other things. So I know you just kind of commented maybe if there's any more elaboration and the second question if we look at the incremental IFP dollars quarter-to-quarter and we divide that by net ad it was up 72% year-over-year and an acceleration from the 40% in third quarter. So maybe dissect this a bit I mean how much of this the function of again kind of pet versus homeowner versus rental and just we wanted to attack that a little bit. Thank you.

Yes. I think the best data to point you to is the impact that drive increase in premium per customer. That really captures the story and what's going on there is year-on-year 20% increase in premium per customer that's been stable and improving actually typically if nothing else all else is equal you'd expect that to decline somewhat but because we're launching new products because they're at a higher price point and because they're working quite well we're seeing a upward pressure on the premium per customer number. In terms of the relative impacts two-thirds of that increase is driven by the shift in the mix of the products. There is a greater proportion of that mixture that's driven by home than by pet but the pet component is significant. It's probably three times as much of that driven by home than pet. So it definitely is driven by if you think about the price points the homeowner's price point is two or more times what the pet price point is. So there's some logic to that. So I'd expect these to continue. There is no guarantee that premium per customer increases forever but the dynamic is clearly positive and clearly upward pressure on that and that's really when you enter the market as we did in an unload area that we can make profitable the renters market and then launch new products as we have and encourage customers, enable customers to graduate as we have it creates this metric it's just a great way to capture the business. So I think when Daniel noted customer accounts interesting but it's really the combination of customer account and the mix shift and the premium customer. That drives reinforced premium and that's how we're managing the business. So I would expect more of the same over the coming year. Life is a wild card only because it's new and the data is very is nascent but the early indications are quite good. We've checked the box in that as with pet, we're able to sell to new customers as well as cross-sell existing customers. Life we're seeing the same thing. New customers buying this product as well as existing customers. So that's a great early indication. We will report more in the coming quarters.

The next question is from Arvind Ramnani from Piper Sandler. Please go ahead.

Thanks for taking my question and congrats on a good quarter. One of the things indicated was pet insurance achieved marketing efficiency in just six months versus years for your home products. Now how much of this is because of the specific product type versus your broader scale or your brand or data insights that you have? What I'm really trying to understand here is should we expect this quick improvement in marketing efficiency in other products you're planning to launch or versus just specific to pet insurance.

I think it's a little both that Lemonade was a different company on the day we launched pet insurance than we were when we launched Lemonade to be sure. An extraordinary level of progress in terms of the data we collect and our knowledge and our understanding of that data and our capabilities. Our people, our folks, our growth marketing teams all of those much more depth four years in but on the other hand that is a tricky business. There have been pet insurance companies around for a very long time. Some of them are very good. We brought a Lemonade approach to pat and the way we talk about pets and the way we talk about the service we provide is dramatically different. Anybody who's been through the workflow of us versus our competitors has hopefully seen that as a distinct difference and that's why I think we've been able to succeed in that with both new customers as well as cross-selling customers. So I think for next products for Life and subsequent products I think we'll see some of that benefit that we saw in pet but not necessarily all. You get all of it when you design a product that's fundamentally different and when Shai talks about optimizing Life what we're really saying is we want to guarantee that it's fundamentally different than other experiences in the market and in launching a new product after Life that's the fundamental question. It worked with pet and our expectation is that we'll bring new products when we're able to say that it's fundamentally different and we'll see the marketing efficiency come with that.

Perfect. And just a quick follow-up question when I just compared this year versus last year you had your hands full I mean you're not withstanding a pandemic. There is product launches that you got under your belt kind of a nice kind of scaling of the business and all means like a very-very successful 2020 but if you look at like 21 or the next I know one to two years what are some of the big sort of priorities that you have for the overall business?

The way that I would think about I think 2020 was an interesting test of a number of things. Some unexpected negatives and some extraordinary positives and I think we'd be remiss if we didn't really thank the people who drove that. It wasn't the people on this call it was 600 people and change around the world who delivered that along with the capital support of our investors but those are the folks who really deserve the credit for what we were able to accomplish in 2020 and I would point you back to Daniel and Shai's comments about what are those 600 people doing. We've got the largest internal team today working on things that are new things that we have not yet launched and that's what is exciting for the business is not did we have a great year although that is pretty exciting and we do a little bit of backpacking. It's what's coming next. So if you kind of walk our virtual halls I think the focus is on great job but what's coming next. I think we have to wrap it there given the time but thank you so much Arvind.

This concludes the question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.