Good morning, and thank you all for attending the Lemonade Q3 2025 Earnings Call. My name is Brika, and I'll be your moderator for today. I will now hand over to the Lemonade team to begin.

Good morning, and welcome to Lemonade's Third Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's third quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made on this call may contain forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our letter to shareholders and the Risk Factors section of our Form 10-K filed with the SEC on February 26, 2025. 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 certain performance metrics, 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 for some opening remarks.

Good morning, and thank you for joining us to review Lemonade's results for Q3 '25. I'm happy to report another very strong quarter. Our in-force premium grew to $1.16 billion, marking our eighth consecutive quarter of accelerating growth. Our revenue was up 42% year-on-year, while our in-force premium enjoyed 30% growth, growth rates we were not expecting before 2026. Happily, our strong top line metrics were matched by our profitability KPIs. Our gross margin climbed into the 40s, while our gross profit more than doubled to $80 million, propelling us steadily and predictably towards EBITDA profitability in Q4 of next year. All our products and regions contributed to this dynamic of accelerating top line and improving profitability, though it is worth spotlighting car, which saw 40% growth with more than half of that coming from existing Lemonade customers essentially CAC-less acquisition. That's transformative to car's unit economics as is the 16% year-on-year improvement in car's loss ratio, which came in at a lovely 76%. Staying with loss ratios, our company-wide gross loss ratio in Q3 was 62% and our trailing 12-month loss ratio was 67%, both our lowest ever. If nothing unexpected happens in the coming weeks, I anticipate that we will set a new record once more this quarter, Q4. Against this backdrop, it's worth remembering that while declining loss ratios and expanding gross margins are a thrill, they are not per se what we are solving for. As I explained at some length during our Investor Day 1 year ago, the metric we are looking to maximize is gross profit dollars. Loss ratios always affect gross profit but not always as a simple counter movement, whereby lower loss ratios yield higher gross profit. In reality, the relationship is non-onotomic, meaning that often a higher loss ratio will yield…

Thanks, Daniel. I wanted to shed some light on something that captures one of the ways AI shows up in our results, the LAE ratio. For those less familiar with our industry, LAE or loss adjustment expense measures the cost of handling claims as a percentage of premiums. It's a simple but powerful indicator of operational efficiency, and it is one of the few metrics that truly allows apples-to-apples comparison of the underlying efficiency of different insurance companies. It should be noted, though, that this metric is influenced by economies of scale. And so the larger the insurer, the more they are expected to have a good LAE ratio. For reference, large carriers typically report around 9% LAE. I'm happy to report that our investment in automation has been paying off. And despite our relatively small size in comparison to the largest U.S. carriers, we reached a superior level of efficiency with an LAE of 7% on average across all of our products. In fact, in the past 3 years alone, we've cut our LAE ratio in half and the number of Lemonade claims adjusters actually declined, all this despite our claim volume growing 2.5-fold. Using blender, our AI-powered insurance operating system, claim adjusters are able to handle 3x the claim volume they could before, all while providing our customers with a more transparent and instant experience. But having the best-in-class LAE is not where we stop. We wanted to take this further and expect to cut the LAE ratio in half yet again in parallel with our next doubling of the business. With that, I hand it off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our Q3 scorecard. In-force premium grew 30% year-on-year to $1.16 billion, driven by customer growth of 24% and premium per customer growth of about 5%. We added a record 176,000-plus net new customers in the quarter. Gross loss ratio was 62%, an improvement of 11 points year-on-year and 5 points sequentially, while trailing 12 months gross loss ratio improved 3 points sequentially to 67%. Prior period development was 5% favorable, driven by 2% unfavorable CAT prior period development and 7% favorable non-CAT prior period development. Total CAT in the quarter, excluding the cat prior period development was 4% -- favorable prior period development was driven primarily by home, car and EU operation, while the unfavorable CAT development was related primarily to the California wildfires in Q1. And on a net basis, prior period development was similar with non-CAT about 6% favorable and CAT 4% unfavorable for a net impact of about 2% favorable. Prior year development, which we report on a net basis, was $6.3 million favorable in Q3 and $18.9 million favorable year-to-date. Gross profit more than doubled to **$80 million** as did adjusted gross profit to $81 million for a gross margin of 41% and an adjusted gross margin of 42%. These metrics use revenue as their denominator. Adjusted gross profit as compared to gross earned premium was 29% in Q3, up 11 points from 18% in the prior year. Revenue grew 42% to $195 million, while our adjusted EBITDA loss improved by about 50% in the year to a loss of $26 million. And it's worth highlighting that revenue grew fully 12 percentage points faster than IFP, a dynamic we expect to continue through at least Q2 next year, primarily due to the recent increase in retained business through our quota share…

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. Paper Bag asked, 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? Thanks, Paper Bag. The local platform represents a major leap forward in how we build and evolve our insurance products. And yes, it's already accelerating a lot of what we do. For those who aren't familiar, Local is what we call our next-generation LLM first no-code insurance product builder. And it effectively gives our teams a new way to configure, design, test and launch complete insurance products and experiences without needing to write or deploy code. Local is being built in a modular way. It is already deployed and delivering value in some parts of the business, even though much work remains before local is complete. And based on the rollout so far, processes that used to take weeks can now happen in hours. And yes, it accelerates our operating leverage by freeing our engineering teams to focus on higher impact initiatives since much of the product improvements and tests we're doing can be handled directly by our product and actuarial teams with no engineering involved. Paper Bag also asked, 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? Paper Bag, the rationale for the additions of Jeff and Prashant to our Board is that both of their areas of expertise, AI and brand are central to Lemonade's strategy. Jeff and…

[Operator Instructions] We have the first question from Tommy McJoynt with Keefe, Bruyette, & Woods.

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?

I would say that, that 50% rate has been consistent, plus or minus for a few quarters now. So it's a good number. It's a stable number. The CAC-less approach is without question, part of our focused, driving customers to multiple policies. We've seen growth in the multiply policy rate above 5%. It has increased sequentially every quarter for quite some time. But I would think of that 50% plus or minus number is a good stable number that we expect can continue.

Just to add to that, in addition to these customers being CAC-less, they are remarkable in other ways. They tend to have much better loss behaviors, loss patterns. So they are less costly not only to acquire but to service. They tend to have higher retention rates. There's a lot to love about these cross-sold customers. We -- in the letter we refer to them or in my comments refer to them as CAC-less, it would be more accurate to almost think about it as negative CAC. These are customers that tend to be profitable in whatever line of business we acquire them through and then they add a car policy on to that. So it's really an important part of the business. I will just add that while 50% or as we said, over half of our customers coming this way is a big deal. It's a core plank of our strategy, always has been. That part grows more organically, whereas the one that we target is less organic, and we have dials that we can dial that up or down. So the more you find us spending on acquisition, the more that will affect those ratios over time.

Got it. And then switching over, looking at the ceding commission revenue line, was there a contingent or profit share tailwind in that ceding commission in the third quarter? It looks like it was a higher percentage of ceded premium than it had been running at.

The bulk of that ceding commission is driven by loss ratio and because the loss ratios came in quite nicely, a record low in the quarter. As you know, there's a sliding scale of commissions. So the commission varies somewhat up and down based on the loss ratio. There's a cap and a floor, a high and a low. So at some point, you cap out when your loss ratios get really, really good. So that was the main driver in the quarter. And probably worth a reminder, the ceding commission that you see on the face of the P&L is about 4 points different than the actual ceding commission, and that's an accounting nuance. I think you'll see an effective ceding commission rate of about 28% in the quarter. But on a P&L basis, because of the accounting nuance, you see about 24%. So you're exactly right, a couple of points better both year-on-year and sequentially.

Your next question comes from Jason Helfstein with Oppenheimer.

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?

Jason, -- so the AI is now -- the impact of our AI deployments, I think, is now reflected on pretty much every line in our P&L. So you're quite right. We see it almost anywhere you look. We spotlighted the LAE as a way to really provide apples-to-apples comparison and that way you can see how dramatically different it is from the incumbency. You could look at the fact that we've OpEx -- sorry, our gross profit has gone up tenfold in the last 3 years, whereas our headcount hasn't moved, has actually moderately declined. So there are a lot of indications of something pretty dramatic happening in terms of the AI, and we see that in terms of all the efficiencies. And if you look at the life cycle within kind of the customer engagement with Lemonade, you'll see AI everywhere. It starts with how and where we deploy the marketing dollars that attract you as a customer. So as you know, about 90% of those dollars that Tim referenced earlier that we deploy to acquire customers, about 90% of them are guided by AI, some 50 different machine learning models that optimize how we spend, where we spend based on LTV to CAC predictions of every customer, every segment, every advertising campaign. Then when you come to us, our recommendation of products and also some other settings and cross-sells during the purchase process is AI-driven. And then later, when you engage with us and ask customer support or claims, and you'll see again the majority of our claims being settled without human intervention by AI. So by one measure, I would say that we score very high on your 1 to 10 scale. We really do use AI across the board. The majority of our code, software engineering is now written by AI. So we're really seeing this everywhere. At the same time, I think if you take a zoomed out perspective and you kind of judge today by where we will be a year, 2 years, 3 years from today, I think you'd rate us as a. I think we're just getting started. And there is so much more that we see that we can do. We're scrambling to do it all. As we are doing that, the ground beneath us is shifting because models are becoming so much smarter, so much faster. So I think both we have done a lot and we have done very little, one measured against what the industry knows and the other one measured against the potential that we see coming over the course of the next few years. Another word about your second question. Can you -- Tim, do you have that?

Yes, it was about just philosophically now that everything seems to be kind of working would you consider leaning into more growth and pushing out like kind of profitability targets and then there would be housekeeping expense.

Okay. So yes and no, and we tried to touch on this in our earlier comments. We see ourselves turning EBITDA profitable in Q4 of next year. That's not moving. I don't anticipate any change in that. That's been our expectation for some 3 years, and it's becoming increasingly obvious, I think, to people outside the company and why we're so confident of that. So that particular profitability metric is unlikely to change. But there are other metrics that talk to profitability, such as gross margins, which we see as more pliable. So what we are optimizing for is gross profit dollars. And in pursuit of maximizing gross profit dollars, there will be segments where we will let loss ratio rise because the elasticity of demand is such that, that will spike demand and retention in a way that offsets the margin becoming a little bit more constrained. So depending on which -- pick your metric, and I'll give you a better answer, the gross profit dollars, we expect to maximize, and we don't expect to take our foot off the pedal there at all. And the ultimate EBITDA breakeven is locked in for Q4 of next year, and we're not anticipating that changing.

Great. And then a couple of notes on the expense side. You're right that the tick up in this quarter was a little higher than is typical. We do see it vary quarter-to-quarter. I don't see that as a step change or an ongoing change. But particularly in the quarter, growth spend, obviously, is a notable year-on-year increase, and we break that out. We're spending a bit more for tech personnel, and you see the offsets from that in efficiencies elsewhere but that's a dynamic where if you isolate that line, over time, you can see some increase there year-on-year. Some of it is just purely inflation. The team size doesn't grow dramatically but the cost goes up modestly. In G&A, our interest expense growth, and that grows with our growth spend more or less because we're -- as you know, we're financing about 80% of that growth spend. So from an expense standpoint, it jumps out. But from an overall cash flow benefit standpoint, obviously, that's a terrific benefit to our -- the IRR measures of the company as a whole. A little bit of noise in our merchant fees, which can be seasonal, meaning they can move a little bit more or less than the premium in the quarter. So a number of little things, but the big picture is unchanged, single-digit expense growth and 30% plus top line growth, and you see that in the chart that we published, and that's what we expect going forward.

Your next question comes from Katie Sakys with Autonomous Research.

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.

Sure. Katie, your math is right. So when we have a big beat on a key metric in a quarter, then obviously, we evaluate how much of that we expect to continue forward and how much we want to make certain adjustments on the top line, that IFP number captures the entire business, not just the additional sales or the new sales or the growth rate. So while our growth spend has increased and our new sales, we expect to increase as well, we're cautious about retention. Our Q3 results were actually quite good, and we're able to overperform but we're somewhat thoughtful about that top line going into Q4 because that captures the entire business. The opposite is true on the other line items. So in gross earned premium and revenue, we captured not only the beat in Q3 but additional increase in Q4. So there's a little nuance there between the metrics, that's what's going on.

Okay. Yes. No, that makes total sense. It's just -- I mean, 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?

I would think of it as all quite positive if you're looking for our view and how we see things rolling out, particularly in the fourth quarter where we're a month plus in. We have pretty good visibility. I'd remind that we continue to be really thoughtful about our home book of business. The underlying numbers actually look quite good, the loss ratio and the other metrics. But we continue to work through what we've called our clean the book exercise. That continues unchanged. Actually, it will have a level of impact in the second half that's similar to the first half. But that continues, and that's part of our plan. So we're growing at a 30% rate despite that sort of pruning of our customer base. So all your questions are fair, but I think we're quite optimistic I just want to be thoughtful about the parts we know about and the parts we don't yet know about, which is the remainder of the quarter.

And maybe, Katie, sorry, just for the benefit of people listening on who haven't done the math as you have, our guide does anticipate a 30% next quarter at the high end of the guide. We've guided at something between 29% and 30% growth for Q4. So we're certainly not anticipating or guiding to any considerable reversal or slowdown as guided.

Okay. And then if I could just sneak in one more. I can appreciate that the trailing 12-month gross loss ratio is trending well below the 73% target you guys have previously messaged. Just kind of thinking about that in the context of the changes to the quota share structure and ongoing maximization of gross profit dollars. Is 73% gross loss ratio still the right target for the business at this point? Or do you eventually see a pathway to taking that target down lower?

Never say never.

Do you want to take that one?

Yes, sorry. My mic was on mute. I apologize. Katie, what I was saying is never say never, but that's not our inbound kind of bias, if you like. We aim to continue to drive our prices down, killer pricing as a key differentiator, which will drive greater conversion, lower acquisition costs, higher retention dynamics. Because our cost structure is so advantaged, you already see in this quarter what happened to our LAE, which is already perhaps one of the very best in the industry when we are so subscale, gives you an indication of what our cost structure is going to look like already now. And as we scale, our ability to accelerate growth while decreasing our underlying operating expenses, all of these are very strong indicators of our long-term ability to operate at a far, far lower cost structure than our competitors. And then you get a choice, which is do you then price similar to competition and increase your margins, or do you lower prices and accelerate growth? And for reasons that I elaborated at some length during our recent Investor Day, our bias is towards lowering prices, getting the conversion and the growth and the retention that brings until we get to a sizable scale. So I would not guide or set the expectation that our loss ratio will continue down the trajectory that it has for many, many quarters. We've achieved healthy loss ratios. And at some point, lowering loss ratios more than that just means that we're not being as price competitive as we could be. So we are using the data to guide us in terms of what is optimizing gross profit. At times, that will mean selling a lot more with thinner margins, at times not. Some of our products are more price elastic, some are less, some campaigns are more elastic, some are less. So it will aggregate into a loss ratio that we will report on a quarterly basis. But we're thinking about loss ratio less and less as one big aggregate number with a target more and more as fine-tuning of optimization of by product, by campaign, by region, and that will result in different loss ratios, different product lines but always in the service of maximizing gross profit. I hope that gives you -- I hope that helps give you an insight into how we are approaching the question that you're asking.

We have a follow-up from Jack at BMO.

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?

Yes. That's a onetime tax credit related to the ERC program. So that's not something we'd expect to reoccur.

We also have a follow-up from Andrew at Jefferies.

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?

So again, we don't necessarily guide to that. That's just more of broad strokes of what our targets are. Yes, on a gross basis, historically, we've talked about gross written premium in that 6:1 ratio. There's also a dynamic in the regulatory surplus that requires a 3:1 on a net basis, which comes into play depending on how the quota share reinsurance is structured and other sort of accounting dynamics. But again, I would think of those as substantially unchanged.

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

All of that is on a consolidated basis. If you isolate the Cayman, the ratios are dramatically different. And that's part of sort of the benefit of these different structures that is that all the regulators understand and analyze each other's requirements and approve of them such that this is a pretty common structure. But if you isolate any of the entities and do some math, you're going to get different numbers. Everything that we communicate is, I would think of it as on a consolidated global basis for Lemonade Inc.

We have a follow-up from Katie at Autonomous.

Yes. One more question for me on the nonrenewal program and sort of the efforts to remix the homeowners book. Could you guys give us an update on where exactly in that process you currently sit? How much more remixing needs to be done or how much more of the book is still subject to nonrenewal? And has the change in the quota share structure sort of extended the potential time line on that process? I guess what I'm really trying to get at is when can we expect to see that ADR level increase north of 84% again?

Yes. So I would think of the impact as being fairly steady. If you look at the back half of last year, the first half of this year, and the expected second half of this year, the run rate impact is more or less the same in each of those 3 segments. I would expect by the end of this year, we would be past the most significant part of it. I would not expect it to necessarily go to 0 in the beginning of the following year. But I think the pace will certainly begin to diminish based on what we know now. This is obviously, something you look at as the book evolves, but I think it will start to dissipate as you get out of the back half of this year. And that is not the only impact on the ADR number, but it is a more notable impact in this period. So I would expect the ADR to have the opposite dynamic where it would continue to be stable and then start to tick upwards based on all of the other dynamics in ADR, customer retention and other improved dynamics. We noted the car loss ratio at renewal. I mean those are the kinds of things that push that number up. So I'd expect that to be more visible as we come out of the back half of this year in the ADR number.

Maybe just to state the obvious, Katie, but in addition to dampening our annual dollar retention numbers, this program also dampens our top line. Our revenue and our in force premium, we are really growing faster than the number that we reported would indicate because we've also got this counter action of nonrenewing part of the book, cleaning the book. So as Tim said, we'll get through the bulk of that by the end of this year. And then there will be, I think, something of an unleash not only of annual dollar retention metrics, but also a bit of a tailwind to our top line metrics as well. And of course, we're doing all of this in service of our bottom line metrics, which is we've always been pretty disciplined as our data comes in and we get smarter about what we should and should not be underwriting, we decide to apply our new kind of insight retroactively wherever we can as well, and that's what you're seeing happening here. The fruits of that have already manifested several times. Our loss ratio is testament to that. Our Q1 loss ratio during the wildfires in California were very strong evidence of why this is all a price worth paying, but we do pay for it in a couple of currencies, ADR being one and top line metrics being another.

We have no further questions. This will conclude today's Q&A session and thus conclude today's call. Thank you all for joining. You may now disconnect your lines.