Hello, and welcome to the Lemonade Q2 2023 Earnings Call. My name is Alex. I'll be coordinating the call today. [Operator Instructions] I'll now hand it over to your host, Yael Wissner-Levy from Lemonade. Please go ahead.

Good morning, and welcome to Lemonade's second quarter 2023 earnings call. My name is Yael Wissner-Levy, and I am the VP of 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, our Chief Financial Officer. A letter to shareholders covering the company's second 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 May 5, 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'll turn the call over to Daniel for some opening remarks. Daniel?

Good morning, and thank you for joining us to discuss Lemonade's Q2 results and our updated outlook for the year. The second quarter bested our expectations on both top and bottom lines despite the outsized weather events, which dampened results across the entire industry. Tim will provide all the details shortly, though. The headline is that our in-force premium grew 50% year-on-year, while our operating expense grew only 9% and our net loss decreased. Premium is growing more than five times faster than expenses, highlights the scalability of our business. As we continue to grow, we expect this dynamic to drive our progress towards profitability. The importance of achieving scale was the driving force behind a major piece of news in Q2, the launch of our synthetic agents program with a long-time investor General Catalyst. We believe this program is something of a game changer and have written about it at length on our blog and we cover its mechanics in the back of the shareholder letter published yesterday. I do encourage you to study this program as it is not quite like anything we've seen before, and we believe its impact on our business will be material in 2024 and beyond. Let me explain it briefly. To date, our direct-to-consumer business model has served us extremely well and with no plans to change it, but it does have one downside, customer acquisition costs, known by the acronym CAC are borne upfront, and it takes us about 24 months to recoup that initial outlay. To be clear, our expenditure on CAC is money well spent because over their lifetime with us, our customers typically repay their CAC three times over even accounting for the time value of money. But because it takes time to recoup the initial outlay, rapid growth…

Great. Thanks, Daniel. I'll review highlights of our Q2 results and provide our expectations for the third quarter and the full year, and then we'll take some questions. It was a strong quarter across the board, with continued loss ratio progress despite cat headwinds, really nice marketing efficiencies and impressive expense control. In-force premium or IFP, grew 50% in Q2 as compared to the prior year to $687 million. Absent the impact of the Metromile acquisition, organic annual growth was approximately 28%. Our customer count increased by 21% to $1.9 million as compared to the prior year. Premium per customer increased 24% versus the prior year to $360. This increase was driven primarily by both volume growth and mix shift, including the impact of the addition of Metromile's pay-per-mile customers and, to a lesser extent, increased price and coverage. Annual dollar retention or ADR was flat as compared to the prior quarter and improved by 4 percentage points to 87% versus the prior year. We measure ADR on an annual cohort basis as a reminder, and this includes the impact of changes in policy value, additional policy purchases and churn. It's worth noting that our ADR may decline somewhat in coming quarters as we recently passed the 1-year anniversary of the Metromile acquisition on July 28. This will add in a base of customers with slightly higher churn rates than the rest of our book. I expect this headwind to ADR driven by the change in product mix will dissipate over subsequent quarters. Our gross earned premium in Q2 increased 53% as compared to the prior year to $164 million, roughly in line with the increase in in-force premium. Revenue in Q2 increased 109% from the prior year to $105 million. The growth in revenue was driven by the increase…

Thanks, Tim. We'll now turn to our shareholders' questions submitted through the safe platform. In the first question, paper bag asked about our plan to reach profitability between the years 2025 and 2027 as we laid out in last year's Investor Day. He asked for a time line update for when we think profitability would most likely occur? Well, paper bag, based on what we know today, we see little bit changes in our multiyear breakeven timing. When we shared long-term financial scenarios in November 22, it was before our synthetic agents funding and before a notable improvement in our EBITDA. So we plan to work that into our long-term planning and give a more updated view shortly. In the second question, Patrick K. wanted to know about our Giveback program, citing that the Lemonade Twitter feed has demonstrated the left leaning bias for the company and noting that I twitted back that this is unintentional. He asks how the company will show political neutrality going forward? Well, Patrick, this is a topic that has always been top of mind for us since we started the company. Lemonade Zeno [ph] was founded as a public benefit corporation and integrated social impact into the core of its DNA. That means that we may be vocal about topics like gun control and climate change, which can be considered political, but we stay above the fray when it comes to party politics. Beyond doing the right thing, we believe that taking a stand is important for our business and brand even when it comes at the cost of not being everyone's cup of tea. As I once role [ph] as part of our branding strategy, we'd rather be loved by some than ignored by all. We believe that being bold and having an…

Thank you. [Operator Instructions] Our first question for today comes from Yaron Kinar from Jefferies. Your line is now open. Please go ahead.

Thank you. Good morning. My first question or a couple of questions are on the reinsurance program. Is there a loss corridor in the new reinsurance structure? And also, maybe you can touch on the fact that you're now retaining the hurricane risk through the affiliated entity at Bermuda. How should we think about, let's say, losses - cat [ph] losses this quarter - net losses this quarter and that track cat losses in 3Q when you had in, if they were applied with the new reinsurance program or gone up, they have been the same.

Sure. So just – thank, Yaron. This is Tim. A couple of comments on the new reinsurance structure. So in terms of a loss quarter, no, there's not a traditional - traditionally defined loss quarter. There is a sliding scale commission. So it's somewhat more nuanced in our prior structure, which was a fixed static commission rate with some potential upside. So it's somewhat different. But overall, I would sort of point out the quota share ceding proportion is the same. The players are the same, so substantially unchanged. With the acceptance that you noted, we are retaining more of the cat risk. So hurricane, for example, main hurricanes is fully excluded. If you roll back historically, our losses have been not zero but quite low for named hurricanes and that's more a result of how we underwrite and where we're present. So no real homeowners presence in Florida and then fairly conservative underwriting in other areas where we are active with homeowners. In terms of other storms, obviously, in the last 2 years, we've had fairly significant and quite unique storms that were not main hurricanes and so our existing - or our previous reinsurance did exactly as designed, which was protect us against the most unpredictable events and those kind of perform as they should have mitigated a significant amount of those losses. That's why we're able to hit - achieve an EBITDA result, for example, in this quarter despite a fairly elevated gross loss ratio. We're not designing for the things that you know have happened in the past, really thinking more broadly. And so we are taking on more risk. We'll use our new captive structures that we've put in place. Those are recent ads. That enables us to continue to be sort of capital light in our approach, but we will take on a bit more volatility risk than we would have had previously. But given the hurricane history and that exclusion, we're quite comfortable with that.

Got it. Thank you. And then my second question, on the synthetic agent, given that it now lowers your upfront cash burn or would potentially do so. Do you see yourself updating your growth targets near term and longer term? And maybe taking them up?

Hey, Yaron. Yes, I think we will. We now have the flexibility certainly from a financing point of view, from a capital structure point of view to do a lot more degrees of freedom have significantly expanded. When we gave our last kind of in-depth analysis back in November during our Investor Day, we spoke about a 20% to 25% growth rate on a multiyear kind of CAGR basis as being optimal. You grow much slower and we don't get to scale, grow much faster and the capital that's required along the way would be too excessive. So there was a path to profitability with the money in the bag. That path remains available to us. But now actually, we've got quite a wide corridor on one end of that, to the right of that, we can now expand significantly without meaningfully impacting our cash reserves. So at least from a financial point of view, from a capital requirements point of view, there are new degrees of freedom. As we mentioned earlier, we will be constrained by other things. We still only want to grow profitably. So getting rates approved and being able to grow in places where we see the kind of LTV to cat that we want is a precondition to accelerating our growth rates. But as those rates come online, as our products continue their downward march in terms of the underlying loss ratio, we do hope to be able to pick up our growth rate. The one astrix [ph] I will underline is our guidance for this year remains as we - well, we upgraded a little bit, but it remains largely as we've spoken about in the past because we don't anticipate all those conditions coming through in the next two quarters. So we do think that the next two quarters will still be quarters where we slowed down our growth and focus on implementing those rates, earning into them. And we are hopeful that at some point in 2024, if things go to plan than earlier in the year and if they take a little bit longer, they'll take a little bit longer, that during 2024, we will be able to reaccelerate growth.

Thank you, understood.

Yaron, if I might. Sorry, Yaron, if I might. I was just checking my notes here. I skipped over one of your questions, which I think is worth clarifying, which was around the reinsurance. If you look at Q2, which was notable for its combination of cats, a very large quantity of relatively small events that aggregated to a significant number for that kind of event, we would expect to continue to be covered under the new structure. So not exactly the same, but substantially unchanged given what we saw in Q2.

Got it. But the commit [ph] sliding commission structure wouldn't have impacted the net results?

It would have in isolation, but again, on a sort of a macro view over the course of the year would not have a significant impact.

Got it. And then a quick numbers question on PYD or prior period development. Did you have any in the quarter?

Yes, but fairly modest. The vast majority of the impact was in period.

Okay. Do you have the number by any chance?

Let me double check that, and I'll add that in a moment. We'll go on to the next question. Thanks.

Thank you. Our next question comes from Josh Shanker of Bank of America. Your line is now open. Please go ahead.

Yeah. Good morning. Following up a little bit about the conversation with Yaron on growth. You've spoken in the past by conserving cash until the capital markets are more willing to embrace limited ambitious plans. But you materially exceeded the growth guidance in 2Q '23, and this is before the capital light [ph] agents program was put in place. Did Lemonade grow more quickly than desired? And how much control do you have for raining in the growth in the back half of the year before the rates that you're really desiring pushes through?

Yes, this has been sort of a continuing theme for a couple of quarters now when we're by choice, choosing lower growth rates, lower spend rates to conserve capital. And what you see when you're in large and established growth channels is that when you dial back spend by definition, reducing your less efficient or less productive spend than what you're left with is the more efficient. And so sometimes it's difficult to predict how much more efficient you will become. And so some of the upside you've seen versus our own guidance, particularly in Q1 and Q2 has really been as a result of that. So Q1 - or sorry, Q2, for example, if we just compare Q2 to the prior year, you saw something like a 75% increase in the efficiency dollar for dollar versus a year ago. Now we can't take credit for all of that. We're spending fewer dollars if we were to spend the exact same number of dollars as a year ago, I would expect that efficiency difference would not be so significant. It would likely be favorable, we consistently get better over time in increments, but it would probably not be so dramatic as you saw. So going forward into the rest of the year, we have a guidance that lays out a sort of a mid-teens growth rate for the year in terms of ISP because we're updating guidance quarter by quarter, we do try and capture some of that overperformance or underperformance, which we haven't had, but the variance in what our guidance is. So I wouldn't expect - we don't expect to sort of see that dramatic an overperformance versus our guidance, but you could see some portion of that repeat. Coming back to Yaron's question real quickly on the prior period development, just over 1% or so, 1.3 or so percent was prior period development and the remainder was otherwise.

I - 1.3% [ph] favorable or unfavourable?

Unfavorable.

Okay. And then so coming back to the growth question. I mean if I subtract the 4Q guidance from the 3Q guidance, the guidance basically implies almost no growth in 4Q. You have the 30% rate coming through in homeowners and 23% in California, if I layer that - I mean it does suggest that there's almost no policy count growth. Your anticipation is that you can shut it down, I guess. Is that - am I reading the numbers correctly when I think that way?

Josh, Daniel here. Yes, yes, we'll - what growth we're going to do in the next 6 months will be largely skewed on Q3. It is the moving season, it's when every dollar goes further. So we are taking our dollars spent and we're going to skew them towards Q3 in general. We've spoken about this in prior years. Q4 gets busy for a couple of reasons. One of them is, as I said, the moving season tapers off, but also just the shopping season, the holiday season means that ad words become more costly. So we'll definitely skew this towards a Q3 spend. Do we expect policy count growth in Q4, we do, but I think the broad strength of your analysis holds.

Thank you very much.

Thank you. Our next question comes from Bob Wang [ph] of Morgan Stanley. Your line is now open. Please go ahead. Q – Unidentified Analyst: Hi, good morning. One quick question regarding just your commentary around AI, right? As maybe not generative AI, but AI broadly, I think in the past, you talked about machine learning, which is a much lower form of AI, so to speak, if at all, would get you to about a sub-75% loss ratio. Just as we see the continued development of AI and the continued more efficient data analytics, especially on the cloud, which is much more scalable. Can you maybe help us think about what would be the path to achieve that sub 75% loss ratio for you just given the technological implementation going forward? And how do you plan the next 2 years in the 5 years in terms of data infrastructure as well as your AI impetration?

Hey, Bob. So I think our AIs are pretty much where we need them to be. Our analysis was shared what LTV-6 did back in November where 6 graduated to LTV-8, it's worth just delineating Shai's comments were about generative AI, which is - we spoke about it in our Investor Day, but it certainly exploded over the course of the last few months. Our machine learning AIs are mature and they're much more focused in on risk assessment. So every customer that comes into Lemonade, we have about 50 different machine learning models, making predictions about likelihood to claim, severity of a claim, likelihood to channel, likelihood to upsell, et cetera, et cetera. So we have a pretty robust infrastructure now making fairly specific and detailed predictions. And as we audit them, we are finding them to be holding true. So we our confidence in relying on these models is growing with every timing of the cycle. The big hurdle today for us in terms of loss ratio does not lie in the domain of machine learning or AI. It's about getting regulatory approvals, and once those have been received, implementing that. So particularly in an inflation heavy environment, let's start with - before you even get to regulatory hurdles. The fact that you price a policy today and you don't get to amend it for another year other than in car where you get one opportunity midyear means that if inflation has been significant 10% as a year ago, we had let alone the 15% or 20% that you saw in the field of car and home repairs, it means that you price today and then you're fielding a claim 6 months from now, which may be 10% higher than the price when you set it, and you…

It's a fair question. I'd draw your attention to a couple of things. One is have a look at our - the loss ratios by product and the high cat impact of this past quarter perhaps masks some of the dramatic improvements that we shared in our last - just draw your attention, look what happened to homeowners ex cat dropping from like 110 to the 60s over the course of the last few months when you neutralize cat. As Tim said, we have to pay for cats. This isn't an effort to sidestep our responsibility for paying for cats, but it does demonstrate a fundamental improvement. And indeed, if you look at some of the best players in the industry and the loss ratios are some of the best known names, I won't name names, but everybody in this call knows who they are. And you look at what their loss ratios were for this last quarter, you'll see that we came in significantly better than some of the best-known names in the industry suggesting a competitive advantage. So no doubt, while we are in a high inflation environment, you will see the whole industry as well as us suffer the brunt of that. That is true. But you can also see when you look kind of beneath the headline is that there is a competitive advantage emerging. And as the inflation received, I think the competitive advantage remains, it is already an evidence if you know where to look. And as times normalize, it will become more and more pronounced. And in the long term, that is how this industry has won by being superior at selecting risks and pricing them. And I think that the technology and infrastructure that we're building affords us that advantage agreed that when there's a storm howling outside, it's hard to see that. But as the storm passed us by, I think, will become increasingly obvious. Q – Unidentified Analyst: Thank you. That's very helpful.

Thank you. Our next question comes from Jason Helfstein of Oppenheimer. Your line is now open. Please go ahead.

Thank you. I want to go back when you originally kind of came up with the long-term plan, whether it's - when you guys came public, et cetera. I mean look, I think regardless of your views about climate change, it does seem that storms are just seem like it's more frequent, right, whether depending on how you categorize the weather, et cetera, et cetera. Do you feel that as a result of that, like if we're like we're starting again, you'd say we need to have a bigger business to kind of absorb the risk because it's all about kind of spreading it out. And then just how that - again, that may have been some of the catalysts in some of the recent announcements, just how you think about that now if you reflect back 5 or 7 years? Thank you.

I'll take a back at that and then Tim come in with anything that I've omitted. Jason, that's a great question. I think that rather than suggesting a different course of action, it reconfirms us in a multi-product, multi-geography strategy. So, yes, we saw some pretty severe outcomes this quarter. Of course, we're not just a homeowners business. That's a sizable minority of our business. It's a fraction of our business, about a quarter of our business. And the rest of our business is performing very, very well. And we shared, again, our per product loss ratios, you see what's happening in our pet business, which is now almost as large as our homeowners business. You see what's happening in our renters business, which is larger than our homeowners business. So our multi-product and multi-geography is already mitigating the worst of those risks. Indeed, the fact that we are able to report the EBITDA that we reported a beat on the bottom line and a beat on the top line, notwithstanding a 94% gross loss ratio, I think, speaks volumes to the structures that we put in place, including reinsurance. It's - I don't want to oversell this, but if we didn't tell you our loss ratio, and we just sold you our financials, our P&L, you wouldn't know that this was a particularly severe loss quarter. So there are structures in place that allow us to buffer ourselves from the last worst of these storms and to be able to deliver a strong EBITDA and strong top line notwithstanding. So coming full cycle, I agree with your underlying premise, which is that major catastrophes are becoming more frequent, certainly, that has been our experience. Ultimately, insurance gets a handle on that through pricing. Once you understand risks, you can price for them, there is a time lag in doing that. We discuss the regulatory and other time lags that will allow it to course correct. In the meantime, I will tell you, part of our slowing down, and we laid this out in our earlier comments and in the letter, is to focus on the areas that are less cash exposed. So Tim already mentioned that we are - have been for these many years, very cautious about wildfire exposure and hurricane exposure. We understood those risks, and we're pretty conservative. We have been able to write around those. As these other risks become more palpable to us, we are sidestepping them as well. We have written stuff prior that we are now paying for. But if you were to look at ourselves these many quarters, you'll see that our new sales in exposed areas are really de minimis. So we are taking course corrective actions. We are filing for the price rate that we need. We are diversifying our portfolio geographically and by product. And I think all of that translates into a healthier business as time passes up by. Tim, anything I omitted there?

I would just add one thought, which is, again, if you sort of look in broad brush at several years since going public, probably one of the larger surprises is in this period of more what feels like in the short term, more frequent intensity of more volatile storms, we've weathered that test nicely. We've seen elevated results, but they have not been too far out of line from much larger and much larger incumbents. I think if we've seen - it would have been more reasonable, I think, in this period with newer products and a much smaller base of premium to actually see more of a loss ratio challenge than we've seen. So I think that's good news. And then on the expense ratio side, I think if you just look at the consistent improvement in consistently declining losses relative to our premium line, really solid improvement there, too. So I think that's been a - we didn't set out for the last 3 years to be a test of this rigor, but I think we've weathered that test very well.

And then just like a technology question. So now that large language models and machine learning is becoming more accessible to other companies without some of the hard work that companies like yourself did as early kind of, call it, pioneers, do you think that as a competitive threat because those technologies technically were not available and are going to become more available if your competitors choose to use them for the next kind of upstart competitor, et cetera? Thanks.

We're too troubled by - we're not too troubled by large competitive access to technology. It's been something that's been true forever. Certainly, there are things that are about large language models in the transition of the past year, so that are new for all of us. But having built our platform from day one in anticipation of just such data advantages only, I think, amplifies the advantages that we believe we have in place.

Yes, just, hi, Jason. Well - okay, I start to finish. I was just going to say, if you look back at something I commented on that at the time, but went back to Hathway held our AGM a few months ago. Ajit, the Vice Chair of Berkshire Hathaway spoke about GEICO and he said that, we have some 500 systems and then he corrected himself. He said it's actually over 600 systems that don't talk to each other. Those kinds of legacy challenges are - I don't want to say insurmountable, but they certainly make it very, very difficult to overcome the kind of challenges that Shai referenced in his comments, which is these are novel and powerful technologies, but applying them seamlessly and integrating into the operations of the company is an entirely nontrivial matter. So just reinforcing what Tim says. I think at a headline it sounds like everybody would be able to deploy these technologies, having now in can put a lot of effort into these models and trained our own models. We rest easy that Tim's comments are exactly right. This is not a major threat to us.

Thank you.

Thank you. Our next question comes from Mike Zaremski from BMO. Your line is now open. Please go ahead.

Hey, good morning. Thanks for taking my question. First question is just a numbers question on the catastrophe losses on a gross basis, we're calculating it was around 21 points. Is that similar on a net basis?

Yes, it is.

Okay. Okay. And my follow-up, you - Tim mentioned that in the prepared remarks that Metromile's churn rate is slightly higher than the rest of the portfolio. I was looking - I think Metromile's annual customer retention rate it said it was around 60% annually back when I disclosed in 2022. Is that kind of - is Metromile's annual retention rate kind of still around that level?

Yes. So we don't disclose that specifically, and some - a couple of things have changed, obviously, since we took over the book are - how we deal with customers, renewals and marketing of course is more in the realm of eliminate approach than the Metromile approach. The retention rate is somewhat better under the period of time when they've been part of eliminated since previously. And what's been interesting is the actual premium run rate has continued even though the customer base has declined, we've not been proactively increasing that customer base. And therefore, the churn has outpaced the growth and therefore, the customer count has declined. The premium level has been fairly steady. It has declined, but at a much more modest rate than we had originally assumed when we acquired the business.

That's helpful. Thank you.

Thank you. Our next question comes from Matt Smith of Halter Ferguson Financial. Your line is now open. Please go ahead.

Hi, thanks. I wanted to stick on the Metromile theme a little bit. One of the notes you made in the letter was that the auto loss ratio, we haven't really made a lot of progress on. And it would just strike me that you probably have more kind of textured and personalized data for those customers. So I'm wondering what's the plan to kind of get that loss ratio in mind going forward?

Matt, good to talk to you. Thanks for the question. Yes, we have a good amount of clarity there. The bulk of a welding majority of our car business is the paper mile Metromile business and the overwhelming majority of their premiums are in California. So we've got a book here that is very geographically concentrated and there's a waiting rate approvals there, which I hope will be coming in the not-too-distant future. That would be a big unlock for that loss ratio. But with such a concentration, we're very dependent on a single approval cycle in order to get the rates back in line with the risks.

So are you seeing - I mean it struck me that you're not trying to grow that piece of the business until you get the loss ratios kind of in line? Are you just trying to prove that out in the California market first and then kind of expand and try to have more bundling and other geographies?

We do have it in a number of states. So we are selling car in close to a dozen states. But in terms of just fixing the existing loss ratio, which is where the bulk of the results come from, you were referring earlier to the comment that said we - from our letter that said that car hasn't improved dramatically. I was just explaining why our historical book hasn't improved dramatically. In terms of new sales, we are making those absolutely in the areas where we feel our rates are adequate. That just happens to account for a small part of the book.

Okay. And then if I could just switch over to the synthetic agents. You mentioned, again, the LTV to CAC ratio over 3 in your opening comment. I'm just curious, given kind of what you're modeling versus what your realized results have been. Is that - what confidence do you have in that ratio kind of holding over time given the increase in cat events that we've seen recently?

It's been surprisingly perhaps constant. So we've been through as a company, as an industry, as an economy some multi years [ph] but we've seen that overall being fairly stable, fairly constant, slightly improving over time. So I hesitate to say too much about the future, but the optimism we suggest that this is an area that we can continue to improve upon as our retention rates continue to improve as our cross-sell rates continue to improve as our new rates come online, I think there is room for optimism on that regard. We - I'll put it in the invar side, I see no headwinds that we're aware of.

Okay. Thanks so much.

Sure. Thank you.

Thank you. Our next question comes from Yaron Kinar from Jefferies. Your line is now open. Please go ahead.

Thanks for taking my follow up. On the [Technical Difficulty] appreciate you provided the - loss ratios by line. But for homeowners, you offered the total number with CAC [ph] for the loss ratio?

Yes. We chose that carefully. We haven't disclosed the home rate at somewhat more elevated and you can probably back into it by the share of business, but we've not disclosed every line item. I just wanted to show where making good progress. And so we'll hopefully share more over time. And Yaron, I'm glad you came back in, so I can correct my earlier misstatement to you and to Josh on the prior period development. So I said it was unfavorable is actually favorable by 1 percentage point. So I just wanted to correct that for the record and for the transcript.

Got it. Thank you. And for both....

Yaron, unfortunately, your audio broke up a little bit for us. Can you just repeat that, please?

Yes. Can you maybe tell us where the capability came from?

Nothing notable. It was only - only one point. So I wouldn't highlight any specific category. It was fairly material.

Got it. Okay. And then maybe going back to the synthetic agent. Just want to make sure I'm so about the accounting correctly. Does the call associated with the agency, do they go above the line into marketing? Or do they go below the line and to the - on our debt payment/

So just to sort of think about the mechanics a little bit, the expense that we spend to actually acquire customers will be unchanged and that will continue to flow through the sales and marketing expense line as in the past as current and that will not change. The incremental expense, which is the return earned by General Catalyst the provider, the 16% IRR will show up as an interest expense, so that will be excluded from EBITDA, but in the interest expense line on the P&L.

Okay. Thank you.

Thank you. Our next question comes from Tommy McJoynt of Stifel. Your line is now open. Please go ahead.

Hey, guys. Thanks for taking my questions. I wanted to go back a little bit to the new captives that you guys are introducing. I guess, just do you see them as strictly a form of capital efficiency? Or is there an opportunity for true risk transfer, where there's third-party capital behind it?

I think we have optionality with the Cayman captive, that's really wholly integrated, and we will basically retain all that risk on a consolidated basis. So that's really a capital-driven structure. With the Bermuda transformer, there are opportunities and structures that exist there that are not available to us otherwise, where over time, there could be interaction with third parties. That's not something that we've instituted yet, but there are opportunities there where there could be third-party involvement. And so stay tuned as we roll those out over the coming quarters, and we'll provide more clarity when that becomes more operational.

Okay. Got it. And then other question, just on the synthetic agent, understanding that the cadence of the deploying customer acquisition spend might be lumpy and potentially pushed out a couple of quarters. Is it fair to assume that the full maximum of the $150 million financing liability would be on the balance sheet by the end of next year, just I guess, given your trajectory of marketing spend?

So I think it's certainly possible, but I won't - because we're not giving guidance beyond the current year, I won't say that, that is our expectation, but it's certainly within the realm of reason and again, coming back to our earlier comments, the driver of our decision there is primarily rates coming online, loss ratio improvement, the underlying sort of LTV to CAC of each of the product lines. And so if we see that improvement continue or perhaps accelerate, and obviously, we can move to growth up higher and that would make it more likely that we have that full amount by year-end. So it's certainly possible, but not certain.

Okay. Got it. And then just my last question. This is obviously your first kind of form of leverage that you're putting on the balance sheet. Do you expect the rating agencies to treat this financing any differently than, I guess, what would be traditional debt on the balance sheet?

Well, they - I can't speak for rating agencies as a regulator. But yes, I would expect to take into account the true terms of the structure. There's essentially no recourse other than the cash flows that result from the acquired cohorts, which is significantly different is distinct from traditional debt. That said, it is a unique structure. We're not - we're one of a fairly relatively small number of companies that are employing something like this that has these unique aspects. We're hopeful, though that, that - those distinctions will be recognized.

Got it. Makes sense. Thank you.

Thank you. We currently have no further questions for today. So that concludes today's conference call. Thank you all for joining. You may now disconnect your lines.+