Hello, everyone, and welcome to the Lemonade Fourth Quarter 2023 Financial Results Call and thank you for standing-by. My name is Daisy, and I'll be coordinating the call today. [Operator Instructions] And I’d now like to hand call over to our host, Yael Wissner-Levy from the VP of Communications from Lemonade to begin. So, Yael, please go ahead.

Good morning, and welcome to Lemonade's fourth quarter 2023 earnings call. My name is Yael Wissner-Levy and I’m the VP Communications here at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's fourth quarter 2023 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 Form 10-K filed with the SEC on March 3, 2023, our Form 10-Q filed with the SEC on November 3, 2023 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 their 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 performance indicators, including customers' in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex-CAT and net loss ratio, and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business. With that, I will turn the call over to Daniel for some opening remarks. Daniel?

Good morning, and thank you for joining us to discuss Lemonade's Q4 results and to offer some perspective both on the outgoing year and on the year ahead. As you will have seen, Q4 was an excellent quarter, capping off a year of dramatic progress for Lemonade. Our top line grew 20% to $747 million of in-force premium, while our quarterly loss ratio came in at 77%, down 12 points from Q4 ‘22 and down 19 points from Q4 ‘21. Since Q4 of last year, our adjusted gross profit has nearly doubled, while our adjusted EBITDA loss nearly halved. As I say, dramatic progress. Moving from the income statement to the cash flow statement, it's noteworthy that we're ending this quarter with a total of $945 million in cash, cash equivalents and investments. That is the very same level we reported at the end of the last quarter, and it is up since our report of two quarters ago. While we expect this level to dip somewhat in 2024, we expect our total cash in investments to turn positive again in the first half of 2025 and we expected to dip by less than 10% before reaching that point. Underpinning our results was a steady stream of improvements in our ability to match rate to risk as well as in our operational efficiencies, all these mediated by a singular integrated system that improves and is improved by all our customer interactions. In many ways, therefore, 2023 was the year when the plan came together. The year when the thesis of Lemonade transitioned from being a hypothesis to being more evidence-based. This isn't a mission accomplished moment, not by a long shot, but the progress in 2023 was tangible and material, and it increases our confidence that we're on track not…

Thank you, Daniel. In 2023, we intentionally slowed our growth to minimize sales of products in areas where we're underpriced. At nearly 20% annual growth, we outpaced most of the industry, yet for us it was a slowdown compared to previous years, and if things goes to plan to coming years as well. And as more rate updates come into effect, we'll have more products in more areas where we can accelerate our growth. To be clear though, our 77 loss ratio this quarter should not be taken as an indication that our work on rate adequacy is done. We still await significant further rate approvals. And so for much of 2024, we will continue to constrain sales of two products with the highest average premium and the largest markets, Home and Car. In other words, we will continue to throttle growth this year too. That said, the tide has definitely turned. With every passing months, we are seeing more and more opportunities for profitable growth across our portfolio, including Home and Car, and we will be relaxing these growth constraints accordingly. This is great news. And it's the reason we're projecting to begin to accelerate growth this year. Growth may be a virtue in its own right, but for us it's a necessity. Our business is still subscale and so we need to continue growing. And so in 2024, we plan to accelerate our growth rate, but beyond being a welcome sign of improving conditions accelerated growth also presents challenges we want you to be aware of. Specifically in order to accelerate growth, we are planning to significantly increase our marketing spend in 2024 versus last year, doubling it actually. We believe that we will generate about a 3x return on the additional 55 million planned for marketing this…

Great. Thanks, Shai. I'll review highlights of our Q4 and full year results and provide our expectations for the first quarter and the full year 2024 for the first time, and then we'll take some questions. It was a strong quarter across the board with excellent loss ratio improvement coupled with rigorous cost control, resulting in strong results exceeding our own expectations. Zooming out as noted in our shareholder letter, our actual IFP results in 2023 came in nearly $50 million better than our initial expectations shared a year ago, while EBITDA came in nearly $70 million better. Zooming back in, in-force premium IFP grew 20% in Q4 as compared to the prior year to $747 million. Customer count increased by 12% to just over $2 million as compared to the prior year. Premium per customer increased 7% versus the prior year to $369, driven in roughly equal parts by rate increases as well as mix shift to higher price products. Annual dollar retention, or ADR was 87%, up 1 percentage point since this time last year. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases and churn. Gross earned premium in Q4 increased 20%, as compared to the prior year to $181 million in line with IFP growth. Revenue in Q4 increased 31% from the prior year to $116 million. The growth in revenue is driven by the increase in gross earned premium, a slightly lower rate of seeded premium under our quarter share reinsurance structure, and a near doubling of investment income. Our gross loss ratio was 77% for Q4, as compared to 89% in Q4 2022 and 83% in Q3 2023. The impact of CATs in the fourth quarter was roughly 5 percentage points within the…

Thanks, Tim. We'll now turn to question submitted and upvoted by our community of engaged and extremely thoughtful shareholders. And the first one comes from, paper bag who asks, with car loss ratios improving, how aggressively will Lemonade expand this product? What percentage of IFP is car now, and what might it be in a year? So at year's end 2023, Car represents about 15% of our total IFP, and we expect it to roughly maintain that share in 2024 and begin to expand significantly in 2025 and beyond. Put differently, Car is going from losing share in 2023 to really carrying its own weight and maintaining its share in 2024 to growing its share thereafter. In terms of how aggressively we plan to expand, let me say the following. The first is that you're right, of course, as the loss ratio of Car comes down to our target range, we will be seeing opportunities to invest much more aggressively in growing the book, that process has begun and it will step up in 2024, but it won't really hit its stride until 2025. But as I say, it has begun. In fact, in 2023, Car actually grew significantly in places where profitability was attractive. Now, that wasn't true for our largest markets like California and New Jersey, but outside of those states, our book is relatively small, but it grew at 50% -- 50% growth rate in 2023. So where opportunities present, we can grow pretty aggressively. And this foray into growing Car has given us data, experience, confidence, and time to adjust rates in those other places. So we will be increasing growth investment in 2024 and we're expecting Car to account for 10% to 15% of newly written premiums this year, that's still not the breakout we…

Thank you. [Operator Instructions] Our first question today is from Jason Hilton from Oppenheimer. Jason, please go ahead. Your line is open.

Thanks. Two questions. Just the first, you talked in the release about using AI with third-party agents. Is this going to be something that like, will be financially material in ‘24 or it's really more of a test and then it becomes more material in ‘25 and beyond? And the second question, you talked about shifting away, the mix shifted away from home. How much is that due to learnings from the newest LTV model as opposed to just it's taking longer to get rate increases in certain states? Thank you.

Hey, Jason. Good morning. I'm not exactly sure what you mean by that first question. We didn't mention about AI third-party agents. What we did said -- I'm not sure if this is what you're asking about, but we said that within home, which touches on your second question, we will be testing selling third-party policies in states where we don't currently offer home. Is that what you were asking about?

Yeah. So yeah, that's what I was referring to, sorry.

Okay. So can you just refine what that first question was regarding that?

Yeah. So is that something that could move the needle in ‘24 or that like more of a test and if it works we'll see the impact in ’25?

Got it. The latter, I mean, these things can take off and move quickly, but it is a test. It will be rolling out just in a few states, and it won't be rolling out until next quarter. So I would not expect it to have a significant impact this year. It's certainly not baked into the numbers that we have provided in our guidance. It's a test that could go well. It's the kind of thing that we've done episodically all along. So earthquake insurance has worked this way. Our term life insurance has worked this way. And in areas where we haven't yet got rate adequacy or other things we're going to test having these alternatives that we can offer to our customers in order to capture a lot of the pent-up demands that we are seeing. And that ties into your second question about rate adequacy from home. So we do find or have found that it's taken quite a long time to get to rate adequacy in many states. This is not just about LTV 9 coming through that has allowed us to refine as it does with every generation to understand with ever greater nuance exactly where and which customers and lifetime values. But frankly, the issues with homeowners insurance in states like California have been so broad-based industry-wide as we reference the largest insurance companies in the nation pulling out of the state. So there have been much larger forces at play, secular shifts, which we've been responding to. And our tools of precision and LTV are doing a fabulous job. But if regulators aren't approving rates that are reflective of those AI insights, then we're not going to sell insurance in those markets until they do. And we're just seeing a time lag, so I think we have a very good understanding of which customers we want, how to select for them, how to price for them. We're waiting for those rates to come online so that we can do exactly that.

Thank you.

Thank you. [Operator Instructions] Our next question is from Yaron Kinar from Jefferies. Yaron, please go ahead. Your line is open.

Thank you, and good morning, everybody. My first question, Tim, it was helpful to hear the updates on the loss ratio progression by line. Can you maybe be a little more specific there? I think you gave a range of 9 to 18 point improvement across each of the lines, but can maybe give us a little more color onto which lines are improving by how much, and if possible, even without catastrophes?

So we haven't been disclosing exact loss ratios every quarter, but wanted to give to some color commentary, significant improvement across all the lines. I would say that Car showed the most significant improvement, so it was at the upper end of that range, and obviously no material CAT impact there typically, so not affecting the number at the lower end of the range, Renter, Home and Pet. And Home tends to be the one where the CAT impact is most significant. So good progress across the board, 9% to 18%, we'll continue to give that sort of color commentary where it's helpful, but it's not something we disclose specific numbers every single quarter.

Okay. Thanks. And then I just want to make sure I'm thinking about this strategically correctly, the homeowner's business. So maybe a little less of an appetite to grow there right now while rates are not quite adequate in all states, but you are still committed to growing in home over time on your own balance sheet in the U.S., is that correct?

That is. Hi, Yaron. Good morning. Yes. We are seeing significant progress in our homeowners business. As Tim indicated, rate adequacy as you know has been a challenge for the industry. So in the meantime, I say in the meantime, but there will always be certain business that we don't want to underwrite ourselves. We'll have our own underwriting appetite. We do have our own underwriting appetite. And even in places where we are very profitable, particularly in those, there's always the risk of getting over-indexed on those regions. And therefore, having an avenue through which when we reach our appetite limits that we can continue to satisfy customer needs, either by writing our own paper or elsewhere, is something that just makes a lot of solid sense and, as you know, is widely done throughout the industry. So this is not a substitute for us doing our own. It is an augmentation that we're testing at this point.

Got it. And then one final one, if I may, on AI, so I've seen some press recently about states that may be scrutinizing the use of AI and insurance a bit more carefully, both on the claims side and the underwriting side, I think even the customer acquisition side, and just looking at trying to avoid any discriminatory practices that could arise there or seemingly discriminatory practices. Can you maybe talk about what you're seeing there, how you avoid maybe these pitfalls, and how much buying you're getting from the regulators?

Yeah, with pleasure. It's a great question. And we are seeing some of that in the U.S., Europe is perhaps a step ahead in this regard in passing AI-related regulation. And I think it's fair to say that we've been pushing and encouraging and working with regulators on this from the get-go. We've had for some years now, an AI fairness officer, an AI ethicist. We have our data science teams trained on these matters. We've got fairly strict protocols. The old adage about great power requiring great responsibility I think holds true. And if we are, as we claim to be, at the cutting edge of bringing an AI to insurance, we also have to be thoughtful about all of those risks that come with it as well. We're quite sure that when it's applied responsibly, the benefits dramatically outweigh the risks, but the risks are not to be ignored. So, yes, we do work with regulators on these things. We feel quite comfortable that we are not only within regulation, but in large measure setting the standards for how this can be done responsibly, how this can be tested on a nationwide basis, on a per model basis, on a per customer basis. So yeah, I think we're feeling pretty comfortable with that and continue to monitor this space. We recently created an InsurTech coalition that is working with regulators in order to set the tone and help regulators underhand these issues. So yeah, an area of significant focus.

Thank you.

Thank you. This is all the time we have for questions today. So that will conclude today's call. Thank you everyone for joining. You may now disconnect your lines and have a lovely day.