Lemonade : Q4 2024 Earnings Conference Call Letter to Shareholders

Published: 2025-02-25 17:08:11 ET LMND

Shareholder Letter

Q4 2024

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Dear Shareholders,

Our fourth quarter saw accelerating topline growth, expense stability, significantly narrowing Adj. EBITDA losses, and $27 million of Adjusted Free Cash Flow ("Adj. FCF")1. By any standard, it was our best quarter ever.

Here's a look at the key metrics:

We enjoyed meeting with so many current and prospective investors at our Investor Day in November. If you weren't able to tune in, fear not, you can catch up online- we detailed our future strategy, plans to 10x the business in the years to come, groundbreaking AI demos and case studies, a deep dive into Synthetic Agent economics, and milestones on our path to profit.

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We hope you'll read on as we have much to cover - including 2024 in review & key drivers of financial performance, strong momentum in our pet business, an update on the CA wildfires, and our outlook for 2025. Let's dive in.

Predictability

Our financial performance in 2024 exemplified the strength and predictability of our operating model.

In February 2024, we set initial full-year guidance, with IFP forecasted to grow to $938 - $942 million, alongside Adj. EBITDA loss of ($160 - $155) million. We delivered on that guidance with notable precision, ending 2024 with IFP of $944 million, representing 26% year on year growth, and an Adj. EBITDA loss of ($150) million, 13% year on year improvement. This notwithstanding significant macroeconomic and industry challenges, including elevated inflation, and one of the most active catastrophe (CAT) seasons in recent memory.

Key Drivers of 2024 Financial Performance

The key drivers of our performance are accelerating growth, underwriting excellence, and expense management. These are underpinned by our proprietary technology, powered by advanced AIs, encapsulated in three core propositions shared at our investor day:

Growth acceleration

Since the launch of our Synthetic Agents program in July 2023, we have notably ramped up our growth investment pace. During 2024, we more than doubled growth investment, from $55 million in 2023 to $122 million in 2024. Alongside this acceleration, we remained laser focused on marketing efficiency: channel diversification and brand investment have expanded our reach, while our LTV AI model, which predicts lifetime value for each potential customer, allows us to allocate each dollar of investment with pinpoint precision.

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As a result, we delivered sustained profitable growth, scaling our ad spend dramatically while maintaining an LTV / CAC ratio above 3:1, and a triple digit CAC IRR. The upshot: five consecutive quarters of IFP growth acceleration.

Growth is the gift that keeps on giving. Faster growth compounds the power of our technology via accelerated flywheel cycles, but equally important, growth drives scale, and as we maintain relative stability in expenses, propels us to profitability.

Underwriting excellence

We are pleased to share that on a TTM basis, we have realized gross loss ratios consistent with our long term target range, a significant milestone reflecting both the maturation of our underwriting precision and operational efficiencies. This is a clear testament to our LTV model, that unlocks granular segmentation in underwriting. The accuracy delivered by AI is supported by regulatory rate approvals that see us entering 2025 with rate adequacy across the majority of our portfolio. This combination has delivered sustained improvement, placing our underwriting results right where they need to be to power our financial goals.

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Disciplined expense management

In the past couple of years, we have seen continued, dramatic operating leverage. Though growth investment increased notably in 2024, it's important to highlight that 80% of that investment is financed by our Synthetic Agent partner, such that the unfavorable short-term cash impact of growth investment acceleration is substantially eliminated.

In 2024, excluding growth spend, we saw stability in expenses: $332 million reflects an increase of just 2% compared to 2023, a decline in inflation-adjusted terms. We delivered this alongside 26% growth in the topline. Indeed, this dynamic is a core pillar of our financial strategy: grow the business and scale the operation.

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The upshot

Accelerating growth, underwriting excellence, and stability in expenses are not just interesting progress metrics - they are the drivers propelling us towards profitability.

Topline growth acceleration alongside loss ratio reduction unlocked dramatic gross profit growth rates.

Rapid Gross Profit growth, paired with stability in operating expenses yielded cash flow positivity in 2024, and charts a clear trajectory to sustainable P&L profitability. Excluding growth investment, we're already there, with Q4 2024 being our first quarter ever generating positive Adj. EBITDA ex growth spend.

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Product Spotlight: Pet Insurance

Our pet insurance business serves as an accelerated example of our model at work, with its high-frequency nature enabling our AI models to learn fast, optimize underwriting, and deliver a delightfully slick, tech-enabled customer experience.

Pet is firing on all cylinders:

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Our pet business has realized simultaneous improvement on multiple fronts, achieving industry-leading growth, hitting target loss ratios, and driving significant efficiency gains.

Pet insurance is a rapidly expanding market (26% multi-year CAGR) with low market penetration (4% in 2024), an attractive combination that reinforces our bullish outlook.

CA Wildfires: It's Why We're Here

Our hearts go out to the families and communities affected by the devastating January wildfires in California. We will share a comprehensive overview of the events and their impact in our Q1 2025 letter to shareholders, but wanted to provide an initial overview based on activity to date.

Our current estimate of the impact of the CA wildfires on our Q1 2025 results is approximately $45 million in gross losses, and an Adj. EBITDA impact of approximately $20 million.

If not for the diversity of our CA book of business across home, renters, pet & car coverage, and initiatives to manage CAT exposure, specifically underwriting revisions, the financial impact of these wildfire events might have been 5x greater.

Our CAT team's mission is to utilize the best technology in the business to respond with unparalleled velocity and empathy to our impacted customers. We are proud

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that for customer support and claims interactions related to the wildfire events, we have seen CSAT scores of 4.98 out of 5 and an NPS of 91 - a clear testament to our unwavering commitment to our customers.

Powered by AI and aerial imagery capabilities, we were able to settle hundreds of claims within an hour of submission, even while fires were still active and evacuation orders remained in place. This seamless collaboration of humans and machines - working together to care for people at their time of greatest need - is the essence of Lemonade's promise.

Following is a handful of quotes from our customers:

Jesse was a GOD send. Thank you for making this process smooth and seamless and helping us through this traumatic experience with empathy and humanity. Lemonade will ALWAYS be our preferred insurance carrier."

Couldn't really ask for more: very quick and easy and already settled with the cash in my account. One never wants to be in this experience but it is great and noteworthy that dealing with insurance was easy, not a stress."

Never in my life imagined an insurance company paying out the policy within days of the loss and zero hassle. We are so grateful!"

Having our home burn down was a profoundly awful experience. There is so much on our plate right now, and working with Vivian was truly a blessing. I can't thank her enough or speak highly enough of her."

Synthetic Agents

We recently completed the second extension and expansion of our financing relationship with General Catalyst, our Synthetic Agents partner. The agreement has been extended through December 2026, and an incremental $200 million will be made available to Lemonade to fund growth investment. Our net outstanding balance under the program at year-end 2024 is $83 million. All other material

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Disclaimer

Lemonade Inc. published this content on February 25, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on February 25, 2025 at 22:07:31.025.