Lemonade, Inc. Q3 2021 Earnings Conference Call Letter to Shareholders

Shareholder Letter

Q3 2021

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Dear Shareholders,

Let's begin with the most exciting news - Lemonade Car was launched last week, and today, as part of our continued investment in our car business, we announce the acquisition of Metromile.

While we have been at the forefront of using big data and AI in home and pet insurance, Metromile has been trailblazing a parallel path for car insurance. Metromile's car-mounted precision sensors took over 400 million road trips, covering billions of miles and sending real-time data streams to the Metromile cloud. These were mapped onto behaviors (how much someone drives, when, where, and how) and cross referenced with actual claims data, yielding precise predictions for losses per mile driven. These algorithms hold the promise of propelling Lemonade Car from a newcomer in the car insurance space to its vanguard.

We believe today's deal will be a significant value unlock for our shareholders and customers, and expect this transaction to pay dividends in three important currencies: collapsing time, flattening risk, and increasing efficiency. You can read more about our strategic rationale for pursuing this transaction in a blog post from ourco-CEO,Daniel Schreiber, or in the investor presentationthat accompanies this letter.

Launching Lemonade Car was a Herculean effort by our team - the result is a car insurance product built from scratch in 2021 by the largest team we've ever assigned to a single project. You can read more about our product in a blog post from ourco-CEO,Shai Wininger, and we're incredibly proud of what we have built. We also believe that as a result of the Metromile acquisition, things will only get better from here. We expect that injecting all the Metromile capabilities into Lemonade Car will lead to a product offering that stands alone in the market: we'll have all the people and tools in place to deliver the most seamless and customer-centric car insurance product, that is also the most affordable, precise, and fair. That's our plan.

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Concurrent with these significant developments in our car product and strategy, across the rest of our book of business, an overarching theme of 2021 happily sustained through Q3: we leaned in and sequentially ramped up our investment in growth. We saw robust IFP growth in Q3, with IFP increasing by 84% year-over-year. We concluded Q3 21 with IFP of $347 million, and about 1.4 million customers. We'd like to highlight a few key trends that are forming across the book.

Growth, Business Mix & Bundling

In Q3 21, we drove a record $50 million sequential increase in IFP. This marks the third consecutive record quarter and was a direct result of leaning in: a sequential increase in advertising investment in the period. Across our book of business, we are seeing trends that enhance customer lifetime value - most notably, the increasing prevalence of bundling and improving loss ratios in our newer business lines - and this gives us confidence to accelerate our investment pace.

Additionally, Q3 is typically the quarter where we see tailwinds driven by seasonality in renter moving behavior. We capitalized on this effectively, delivering a record volume of gross new renters business in the period - this reflected a sequential increase > 25% relative to Q2 21.

While renters growth remains healthy, consistent with our sustained strategy to diversify the book so long as unit economics are attractive, we actually drove faster YoY growth rates in each of our non-renters lines of business. As a result, the business mix evolution we highlighted in detail last quarter has sustained, with non-renters' share of our overall book of business ticking up to 47% from 44% last quarter. Our pet line of business added 2% to its share, now up to 15%, life's share has increased to 2%, and homeowners' share is stable at 30%.

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As always, looking forward, our growth investment strategy will continue to allocate dollars primarily to the areas of our business that demonstrate the most healthy unit economics. In last quarter's letter, we touched on the formation of favorable trends in our European loss ratios. As a result, in the near term, we expect to re-allocate marketing dollars from our life business to Europe. While our Europe & life businesses each have relatively small scopes today, we continue to believe that they will achieve a Lemonade-style growth curve with meaningful scale in the long term.

While our growth was robust in the quarter, in line with industry-wide increases in media costs, we experienced a 26% YoY decline in marketing efficiency as measured by the change in IFP driven by advertising spend. This industry-wide phenomenon impacted us less than most, as our conversion rates improved during the period across our various product lines. Hence, we were able to hit our IFP growth targets at compelling LTV to CAC ratios in spite of this headwind.

Distinct from our new customer acquisition strategy, we are observing positive trends in the growth contribution from our existing customer base. Bundling behavior is growing substantially across the book, with bundles now representing 8% of total IFP, compared to 0% prior to the launch of pet insurance in Q3 20. In Q3 21, we recognized a record volume of cross sales at ~$5 million, and saw a > 4x increase in the number of customers with policies in multiple lines of business relative to Q3 20. While the average premium per customer across our book of business was $254 at Q3 21, the premium per customer of our bundled customers is ~3x higher.

Loss Ratio

Our Q3 21 gross loss ratio was 77%, up from 72% a year ago, notwithstanding the fact that our newer products are demonstrating improving loss ratios.

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