Lemonade, Inc. Q1 2022 Earnings Conference Call Letter to Shareholders

Shareholder Letter

Q1 2022

Dear Shareholders,

We're happy to report that the year kicked off with a strong first quarter. Notwithstanding the turbulent market forces and macroeconomic environment, both our top line and our bottom line came in ahead of expectations. In force premium (IFP) stood at $419 million, while our EBITDA for the quarter was $(57) million, driven by continued, steady improvements in LTV/CAC and increasing bundle rates.

Growing With Our Customers

Speaking of bundling, this quarter saw an exciting milestone: the first full quarter in which all Lemonade products (renters/home, life, pet, and car) were available in a market. While this mega-bundle is currently available only in Illinois and Tennessee, these markets offer a peek into how meaningfulgrowing with our customerscan become as we roll out these products nationwide.

The early data are encouraging. After only one complete quarter, we saw 40% higher bundle rates in Illinois versus the rest of the Lemonade market in the US. The average dual-product-customer outspent the average single-product-customers 3:1, for triple-product-customers the ratio was 7:1, while for customers with all four products it was 9:1. Consequently,Annual Dollar Retention (ADR) in Illinois rose to 90% in Q1(vs. 82% for Lemonade overall).

Where the building blocks are in place, this increase in premium per customer occurs organically. With the passage of time our customers go through predictable lifecycle events: moving, buying a home, getting a car, starting a family - all with dramatic implications for their insurance spend, and no corresponding marketing spend on our end. This dynamic not only boosts our bottom line, it is also the fastest contributor to our top line: while total premiums from single-product-customers grew 61% relative to Q1 2021, premiums from customers with two Lemonade products grew at a pace of 140%, andpremiums from customers with 3 products jumped 390%during the same time (we had no 4-product customer last year).

Growing with our customershas long been a central plank in our strategy, and, in the memorable words of Colonel 'Hannibal' Smith, we "love it when a plan comes together."

Win With Technology

IfGrow With Customershas always been one plank of our strategy,Win With Technologyhas always been the other, holding the promise of best in class cost-to-serve, and risk quantification. Here, too, we are in the early stages of harvesting the fruits of our labors, and leading indicators are encouraging.

When it comes to loss ratios, our internal dashboards show increasingly profitable cohorts with every successive month. We're now on ourfifth generation of machine learned models, and these do a bang up job of predicting the lifetime loss ratio of each new customer, as well as their likelihood to chuor cross sell, and combining these into a Lifetime Value (LTV) assessment. Notwithstanding our 90% loss ratio for the quarter, our dashboards show thatthe business we generated in Q1 is expected to have a loss ratio comfortably within our 75% target.

Loss ratios are lagging indicators, and improvements in pricing, underwriting and segmentations take time to get approved, and yet more time to 'eain.' This lag between action and results is a structural nuisance in insurance (which is why we use predictive machine learning models, rather than backward looking loss ratios in our day-to-day management), though inflation has introduced an additional cost to this passage of time. As has been reported by all insurers, loss ratios in Q1 were hurt by inflation, as claims are instantly adjusted for inflation, while premium rates take months to adjust. Happily, we have filed100 applications for rate changesover the past year, and expect to see rates move back in line with risk as we receive regulatory approvals.

Based on the foregoing we reiterate our expectation of a multi-year average loss ratio within our 75% target, and remind our shareholders that while lossratios spike from time to time, we have reinsurance in place to help insulate us from such bumps. Indeed, this quarter we're reporting a 23% Gross Profit Margin and better than expected EBITDA, notwithstanding the heightened loss ratio.

Steady As She Goes

This is our eighth quarterly earnings since our IPO, and the intervening two years have been marked by pandemic, war, and inflation. Thankfully, our business has proven resilient: we have met or exceeded guidance every quarter, and both the scope of our business (IFP), and our cash and investments, stand roughly 3x larger today than 24 months ago.

This dependability increases our confidence in our forecasts for the future, specifically that peak losses are months away, and that the dynamics outlined

above -growing with customers, andwinning with technology- will propel us down the path to profitability in the years that follow.

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Lemonade Inc. published this content on 09 May 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 09 May 2022 20:34:02 UTC.