Good day and welcome to the Lemonade, Inc Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. 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. Please go ahead.

Good morning, and welcome to Lemonade's Third Quarter 2021 Earnings Call. My name Yael Wissner-Levy, and I'm the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder, Shai Wininger, Co-CEO and Co-Founder, and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the Company's third quarter 2021 financial result 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 8th, 2021 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 include information about our key operating metrics, including the 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. I'd like to begin with very exciting news about our current product strategy. Lemonade's call was launched last week, and today as part of our continued investment in this line, we announced our acquisition of the tech-enabled conference Company Metro Mile. We believe the deal will be a significant value unlock to our shareholders and our customers. And we expect this transaction to pay dividends in 3 important currencies. Firstly by collapsing time, we're acquiring billions of miles of highly textured driving data, advanced automatic technologies, and deep pricing, and knowledge. Metromile has implemented seasoned proprietary machine learning models that are informed by real world feedback and iteration at scale. It would candidly take us years to gather this level of insight. The deal also delivers over $100 million of seasoned in-force premium, 49 states licenses, and a team in every aspect of digital car insurance; all things that can accelerate the growth trajectory of our own car insurance business. Secondly, the deal allows us to flatten risk curves. Not only does the transaction accelerate our growth trajectory and knowledge base, but importantly, it allows us to volt over the riskiest parts of our core ambitions, namely growing Lemonade Car before our data models season. Lastly, this transaction delivers increased efficiencies. Post transaction close, our strategy is to build a business that preserves a single contrast, single-tech stock, single-brand, unified team, and a single-product experience. We believe the strategy yields considerable revenue and cost synergies that will enhance Lemonade's financial profile. Just days ago, we launched Lemonade's Car. This was a herculean effort by our team. The results of the current trends product built from scratch by the largest team we've assigned to a single product ever. We're incredibly proud of how it works out, and believe it's…

Thank you, Daniel. On the topic of growth and our advertising budget location strategy across the product portfolio, our growth investment dollars will continue to follow the areas of our business that demonstrate the most healthy unit economics. On last quarter's call, we touched on the formation of favorable trend in our European loss ratios. As a result, in the near-term, we expect to reallocate marketing dollars from our Life business to Europe. While our Europe and Life businesses each have relatively small scopes today, we continue to believe that they will achieve meaningful scale in the long-term. Beyond our customer acquisition strategy, we're 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 launch of Pet in Q3 '20. This quarter, we recognized a record volume of cross sales at about $5 million and saw more than 4x increase in the number of customers with policies in multiple lines relative to last year. And while the average premium per customer in Q3 '21 was $254, our bundled customers show close to 3x that number. Shifting gears to underwriting profitability across our product portfolio. Our Q3 '21 gross loss ratio was 77% up from 72% a year ago. I want to provide some color to address this trend. The increase in our loss ratio masks an important underlying trend. Our less mature lines of business are demonstrating meaningfully improved profitability. These gains are driven by a comprehensive strategy and rigorous focus across organization to improve loss ratio and customer lifetime value. The improvements we're seeing put us on a clear path to our ultimate destination. In the long term, we expect the loss ratios of all Lemonade product lines to be under 75%. And with that, let me hand over to Tim for a bit more detail around our financial results. Tim.

Great. Thanks, Shai. I'll give a bit more color on our Q3 results as well as expectations for the fourth quarter and 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 the continued increase in premium per customer. In-force premium grew 84% in Q3 as compared to the prior year to $346.7 million. We believe 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 26% versus the prior year to $254. This increase was driven by a combination of increased value of policies over time, as well as mix shift toward higher-value homeowner and pet policies. Roughly 80% of the growth in premium per customer in Q3 was driven by product mix shift, including cross-sales. While the remaining 20% was from increased coverage levels and pricing. Gross earned premium in Q3 increased 86% as compared to the prior year to $79.6 million, roughly in line with the increase in in-force premium. Our gross loss ratio was 77% for Q3, 5 point higher than 72% in Q3 2020. And this was primarily driven by the impact of our rapidly growing new business lines, but was partially offset by considerable and notable 52 point year-over-year improvement in the loss ratio of our homeowners book. As Shai noted, it's important to understand the impact of mix shift on the overall loss ratio to get a better feel for the underlying improvements in loss ratio on a product level. Put more simply, each of our products is showing loss ratio improvements, though the overall loss ratio showed a slight due to the shift in mix. Operating expenses,…

Thanks Tim. As is our custom, we are happy to address investor questions that were entered and uploaded on the same platform and I will turn to some of these right now. The first question comes from Jacob. And Jacob asks, will Lemonade adopt the paper mild business model that Metromile is using and which it is failing at? Jacob, I don't want to disclose here specifics about future iterations of Lemonade Car product. We tend not to preannounce exact features or timelines, but I do want to give some context and color and talk about some of the underlying elements of your question. I think the important thing, which I'll return to in a few minutes time as well, is to distinguish between pricing based on proxies and pricing based on precision. One of the fundamental drivers of how Lemonade thinks about car insurance and how Metromile thinks about car insurance, is to increasingly underweight proxies such as credit score and agenda, marital status, job history, all things that incumbents rely on exclusively -- or nearly exclusively in pricing and underwriting and to use instead data streams which give precise information about how much is driven, how well those miles are being driven, and to use those, and to those and at the expense of proxies. And as I say, Lemonade Cars been architected that way based on telematics and on a data feed. The Metromile acquisition for us really jumped that capability that capability forward in very significant ways. And what it gives is really world-beating understanding of expected losses per mile driven. So what Metromile has spent the better part of a decade doing and has garnered billions of miles of driving data in support of, is getting pinpoint data on every mile driven and the risks…

We will now begin the question-and-answer session. And the first question comes from Michael Philips with Morgan Stanley. Please go ahead.

Hey, good morning, guys and congrats on all the news from what's new. Good stuff. I guess, first question would be on your comments in the letter about leaning in in the quarter. And we know that seasonality and you talk about that a lot of third quarter means certain things for wanting to maybe ramp up marketing spend. But x that impact or x that phenomenon I guess, what else lead you to see that this was a time to lean in besides the normal seasonality?

Hey, Mike. Thanks. I would think of giving kind of an overarching theme. If you kind of scan back over the 5 or 6 quarters since we've been public, there's a trend that stands out. A greater level of confidence has led us to increase investment levels and accelerate plans. And then a couple of instances we saw the opposite, early days, months of the pandemic we saw the opposite a great deal of -- great lack of confidence; and we dialed back and we're quite cautious. That was a very brief period. For the most part, these quarters have been the former. increasing confidence, better ability to get products in the hands of customers, more assurance in our competitive position. And when we see that it gives us more confidence to accelerate and advance. And that usually comes, and exhibits itself in a P&L dynamic, where we spend a little bit more -- the bottom line shows that impact in the short-term but the LTV, the CAC remains strong. The market position remains strong and with the pending combination with Metromile gave us that confidence and then some in what is arguably our most important product launch, certainly our largest addressable market. And so you see that reflected both in the Q4 numbers, and I think you should also feel it in our posture as we head into next year.

Tim, maybe I should be a little more be specific to the question. I guess, you leaned in also and then sense, but also the time where you admitted as well as the industry that there's higher customer acquisition costs, higher marketing spend costs as well. So I guess kind of want to marry those two things. It was a tougher time because of higher marketing spend, but its all time to lean in. So help us think about whether that was at the right time and how you view those increased or marketing spend dollars that are maybe here to stay for a while or how long do you see this last?

Well, I would think of it maybe less as a tougher time, but perhaps a little bit more expensive time to acquire customers. So there is a case to be made where if customer acquisition cost increases, that feels bad in the short-term, but it's a lifetime value potential is strong and increasing, that's an impact that impact everybody in the market. So it's not just more challenging for us or more expensive for us, it's a market-wide phenomenon. And so we choose to kind of lean into that knowing what the return is on those investments. And we're a little bit conservative in the forward period. So we've seen this now for a long period of time that we don't have enough data to say this is a persistent things in the last few years, but we're a little cautious about the coming quarter. And so you see that reflect in the numbers. In terms of seasonality, I think in the first part of your question, that's still there, but it's a nominal impact. It's softening somewhat because of our much more diverse product base. We still do see that in Q3, but that's been less of a factor and it's really our choice to spend more acquire more customers, as well to accelerate some of the hiring plans to support the expanding car launch.

Okay. That makes sense. You guys are pretty exact with your wording. So I might be slicing news too finely here, but if I look at the current letter and your long-term target, loss ratio less than 75%. I think prior you had said something a little different, then again, I might be just slicing here, so I want to make sure I'm not. Prior comments there, we're in the low 70s, 70 to 75, and today it was less than 75. So is there a change there that's maybe some delivery that's making you maybe -- I think that should be a little bit higher than what it was before or again, I might just reading too much into that?

No real change there. I would think of it as a -- our long-term target remains unchanged. As you may recall, we have a business model structure where we take a 25% flat fee and the remaining 75% goes for reinsurance and customer claims and expense and all of those things. So I would think that that is unchanged; our long-term target is still there. And I think in the short-term, I think its very important to note that while the loss ratio did tick up a little bit in aggregate, each of the product lines has shown some nice improvement and it's really a mix shift that is accelerating. There's a little bit ahead of where we thought it might be a year-ago, in a good way. Less than half of our business today is made up of our renter's book. And that's the decreasing, which means the other parts are increasing and that really reflects the market. Homeowners is a very large market, Life bigger than that, and Car something like 3 times the homeowners market. And so you're seeing our book of business and the loss ratio shift to look more like the market each quarter.

Okay. Thanks. Last one for me. And I'll just do one on Metromile and then save all that for later, I guess. One is obviously lots of comments the weather incumbents today on preciseness of the data and what that's going to mean for your pricing and customer acquisition, everything else in your margins. I guess, can you comment on how confident you are today with the pricing, technological advances of Metromile, given where their underwriting margins have been loss and loss adjustment expense ratio have been. Does that make you confident with their current price, and algorithms, and data they're collecting or any concerns there at all, the things that might need to be tweaked or fixed at all?

Hey Mike. Our confidence is very high. This is really what we spent the last while diligencing. So there's no question there's been an uptick in severity across the auto insurance space. This has affected Metromile, it's affected anybody else. Progressive and others have spoken better at some length and I think the industry as a whole will be taking rate to reflect the increase in the cost of repairing costs in the last few months. So there's definitely being a near term impact that has affected them. But we look right through that. What we're looking through has really nothing to do with the near term loss ratio of Metromile. And it's really about the fundamental capabilities and strategic strengths. And there we believe that there is a pronounced advantage that is readily visible. So there's a couple of things that we mentioned in the last half. For 1, it's very customers report savings, something like 47% when switching to Metromile. And at the same time, the loss ratio is within 10 points of progressive's direct business, suggest to you that even if they took a rate increase, there will still be sizeable savings for consumers even as a loss ratio hits its long-term targets. So we feel a structural advantage in the capability that they have built. And where I'm moved by the near-term changes that they tend to make anyway, in order to bring the loss ratio in line with our long-term targets.

Okay, guys. Thanks very much for your questions.

Thank you.

The next question comes from Tracy Ben Gig-E with Barclays. Please go ahead.

Thank you. Good morning. Just a follow-up on this past discussion just on growth, outpacing marketplace conditions that doesn't always turn out well. I think Metromile has 49 state licenses, but it operates in 8 states now with plans to enter 5 more next year. Does that cadence change in your view?

I think Lemonade in general has been characterized by more emphasis on growth. Certainly, if you look at our rollout of our prior products and compare them to Metromile, we do lean in more aggressively in that regard. So I do anticipate that with or without Metromile, we would have been looking for a rapid deployment across the U.S. And we've seen Metromile as an accelerant for that.

Okay. Got it. I also believe that Metromile their reinsurance program. Is the idea that you would have buy-in on the new program that's starting in January?

So during this period between sign and close, as you know, we're separate, independent companies sort of managing our own businesses but looking ahead to all of the approvals coming together and the companies coming together. It is -- You're correct that they've chosen to go without reinsurance at the moment. But I think like Lemonade, they're thoughtfully assessing the market, would be my guess, and my understanding to see what kind of terms are out there and what's available. We made the choice actually last summer and the year prior to go with terms that we found very attractive, although we could've gone without reinsurance. And so I would think that Metromile had those options and they'll make those choices. Once the companies come together, we'll more than likely continue to enjoy the structure we have in place, so we have lots of flexibility with that. And we do get a nice -- or we expect to get a nice capital surplus benefit from the combination of the Company's, something in the order of 30% perhaps or more. The exact number will have to determine but generally when you bring Companies together and this way, it can have a benefit from a surplus view as well. So there's 2 or 3 areas in this from a perspective reinsurance, capital surplus, and other regulatory benefits that look -- that make us a great combination for us.

Need just a follow-up there because you mentioned surplus. Typically what we see is that an auto insurance rider could run at a higher premium to the surplus. Does that change your equation at all in your deal?

A little premature for us to get too specific about what those benefits will be, but yes. We're well aware of some of the benefits and the incremental costs of Car versus the other product lines but I would recommend maybe staying tuned as we get closer to close. We'll give a more -- a little more clarity on some of the more specific benefits.

Got it thank you.

The next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Thanks . Just first on Metromile, you kind of alluded maybe Metromile wasn't charging it up. Besides bundling, which you can clearly bring to the table, maybe if you want to talk about how you would run Metromile differently as part of Lemonade? And then just second, as you expand to Europe, just -- are there broader financial implications we should think about -- or not expand, but kind of spend more on your expansion in Europe. Are there implications we