Lemonade Aktie

All right. Good morning, everybody. We're happy to have Dan Schreiber, the CEO of Lemonade with us here today. And Dan, thank you for taking the time. It's an exciting time to talk about the business.

Yes. Good morning.

Yes. So if we can get it started, the broader market is seeing a softening trend in personal lines and then the industry is seeing notably slower growth. But your business mix is obviously fairly different from other larger carriers. And in fact, this would be your 10th consecutive quarter of accelerating growth, right? So if we think about the business going forward, can you help us think about how you can win in an increasingly challenging market environment?

Good to be with everyone. We've got some formidable competitors at the best of times, right? So we're up against some companies that have been doing this for decades, if not centuries, and have the advantages of scale that we lack. And so we always approach the challenge in the spirit of your question, which is how can we win against all of this impressive and seasoned business. And our answer to that is a pretty simple formula, which is we don't play the same game that everybody else plays.

We are a tech-first company, and that allows us to do things in our own lane. And our basic hypothesis is that technology can yield cost advantage. Cost advantage yields price advantage, price advantage yields strong growth. So yes, you see that now across our P&L. I'll give you a couple of indicators of that, but that is really how we aim to continue to win, which is to say, in the last 3, 3.5 years or so, we have seen our business almost triple. Our revenue almost tripled. We've added close to 1.5 million customers. Our gross profit has done much better. We're more than 10x the gross profit.

And yet our headcount is smaller today than it was 3 or so years ago. So you're seeing the kind that drives efficiency like nothing else, and there are a lot of metrics within insurance, we might come back to LAE and others that give you an insight into just how efficiently Lemonade is operating. And that when you pass some of those cost advantages on to the customer, you win in good cycles and you win in bad cycles. In some ways, you win even more in tough cycles when people become more price sensitive and the competition becomes fiercer, your advantage is more pronounced as the old Warren Buffett about when the tide goes out, you see who's got a swim suit on.

No, that's very helpful. Speaking of price sensitivity, right, personal auto is probably the hallmark of that perhaps. Now going back to your prior Investor Day, you laid out a very ambitious goal of 10x the business going forward. And a big part of that is the car business, the personal auto business. This is playing well so far. And if we think about the near-term aspiration for the auto business, can you maybe help us think about what aspect of that business is where you think the opportunity lays for you? And what are the aspects you kind of have to be a little bit more careful about so far?

Sure. So if I said earlier in broad strokes about our business that the anchor of our strategy is our structural advantage in technology, and that yields the downstream benefits that I described, you see a perfect illustration of that in our auto business, in our car business. The rest of the industry prices people based on things that make people squirm in their chair, credit score, gender, marital status, education level. These are the state-of-the-art of the incumbency for how to decide what kind of driver you are.

And at Lemonade, we use signals. We use telematics. We actually have through your phone, usually, we've got incredibly sensitive, not only GPS, but accelerometer and a bunch of other sensors driving in your car monitoring how you're driving. And well over 90% of our customers have that enabled all of the time. So we have a continuous stream of data. We've collected over 1 trillion data points already. And suddenly, we can pierce through all of the proxies that are used. And the name of the game in insurance is always about de-averaging, taking groups that look monolithic to your competitors and you see the nuances within them.

So take young drivers as for instance. Young drivers on average are bad drivers, but averages is a curse word in insurance. You want to deaverage at every opportunity. So young drivers go to insurance companies, they get a high rate. They come to Lemonade, and it will depend on how they drive. So a lot of young drivers who don't have a credit score to speak of yet and don't have a driving history to speak of yet and are not of the right age group of the [ Robinsons ] to use the progressive kind of target audience, they are disadvantaged profoundly by the traditional methods of underwriting and Lemonade is able to give them prices that are unmatched by the others. 2/3, my example was on young drivers, but zooming out across the age groups, 2/3 of drivers are better risk than average. 2/3, they drive fewer miles, they drive better. But traditional methods can't capture who is average and who is better than average. We're able to give 20%, 30% savings to those 2/3.

And then you ask people, is Lemonade better priced or not. It will depend on which 1/3 you fall into. There will be some people who will say, those guys gave me such a high rate. I'm sticking with GEICO and good ridden that's absolutely -- the system is working as designed. And then others will find that we're giving them 20%, 30% discounts. Remember that GEICO built a $50 billion business on the promise of saving you 15%. This is such a price elastic business, such a price-sensitive business. that small cost advantage passed on as price advantage can deliver very rapid growth. Our car business today is -- our new sales are growing at over 100% year-on-year. So we are seeing that take off in that business.

And this is certainly an exciting subject to talk about on your next Investor Day later this year.

Thanks for the plug. Yes, November in New York.

Exactly. So maybe staying on that car topic a little bit, right? On the Investor Day, at the time, telematics was a competitive advantage you talked about in the auto business. More recently, the conversation feels like it's shifting more towards the autonomous side of things. And you started a Tesla autonomous insurance products, and then that's been expanding into various states. Can you tell us maybe about -- well, first, about the thoughts behind the product in terms of how to guardrail the risks, right? And then -- but also maybe just the need of being a first mover there and then where we're going from the autonomous products for this whole vehicle business going forward?

So for the benefit of those who aren't familiar, we launched a product that says, if you use Tesla FSD in the 3 states where it's available now and the list keeps growing, per mile for those miles that you let FSD drive, we will reduce your premiums by half. That's a pretty dramatic saving. I was talking about 15%. This will reduce the cost per mile driven by half. And that's really a data-driven conclusion. [ FSD ] is a better driver than you or me. It's a safer driver than [ UME ].

The data backs that up, and we're able to do some things that the rest of the industry can't do. We can price per mile those kind of proxies that I spoke about earlier have no idea how many miles you drive. They're looking at your credit score. That's a very crude measure. 4 million people will give you the correct average answer, but it doesn't give you the kind of precision. We are down at the atom of being able to price per driver per mile. So once you build something at that level of precision and granularity, you can always amalgamate it into all different kinds of products. And one of them is the FSD product that we just launched.

So I think it is an expression of a profound structural advantage in our ability to go to micro pricing of per mile per driver and our ability to see who the driver is through the machinery and not through the legal form that was -- the contract that was signed at the time they bought the policy. So this isn't just about named driver. This is about AI seeing AI. We see you. We see that FSD has taken over. We see how it drives. We know which version of FSD you have and whether you updated the firmware and whether yours is one of the newer Teslas with a better, faster machinery because the sensors improved over time or not and to get that kind of granularity.

And if you can do that, I think that just gives you a great test case or an example of just how profoundly different the whole flow downstream from the policy is at Lemonade versus everyone else. So yes, I don't know if I'd say that we had to be first. We are the only ones who are able to do this. It was almost inevitable that we would be first. So we have the full stack that allows us to offer this. It's in line with our brand. It's aligned with our technological capabilities. So it was natural that will be for us and today, it's the only.

Do you feel that competitors will be fast followers? Or you think there's maybe going to take a while for them to even get there? Just curious your thoughts.

My best guess is that you will see some -- I don't have any insight. This is a full year speculation. My best guess is that they will scramble to get something that sounds similar. So they might start giving discount for cars with FSD. But I think getting to the kind of granularity that I described is beyond their systems and will take them a very long time.

So basically, from fee per month to fee per mile is really not the easiest thing to do.

No. The billing systems aren't supported. They don't have the telematics. The haven't integrated the APIs with the OEMs, I think they've got a journey ahead would be my best guess.

Okay. I really appreciate that. So maybe on the autonomous, right, how big do you think this opportunity is for you and for the industry? I think from our perspective, even for some very aggressive assumptions, right, L3 or better autonomous vehicles will be around, call it, 15% of the total cars by 2035. How should we think about the size of the opportunity for Lemonade at this point?

I think that's probably right. For a long time, the dominant mode of transportation is not going to be autonomous driving. It is clearly going to be the fastest-growing segment. So you're going from 0% to 15% of a $350 billion insurance market, that's great for Lemonade. Because we're small in general, there's a broader point here. If you're the CEO of a $50 billion, $60 billion, $70 billion, $80 billion insurance company, you are massively invested in the status quo. You actually don't want telematics, forget FSD.

Telematics is not good for your business because these X-ray glasses that allow you to see that 2/3 of your customers are overpaying is something you'd rather not know. What are you going to do? Reduce prices for 2/3 of your customers? Is that going to do a lot of good for your tenure CEO of whatever company it is? No, that's going to be quite damaging to it. And then you have to raise prices for 1/3 of your customers and have them churn out. None of this is good for somebody who has to protect a traditional business. We have the advantage of being very small. Car is our most recent product. Earlier products launched and have done very well.

Renters, we've grown to a dominant position in the market. Pet launched only 4 years ago and has grown to $0.5 billion and growing very, very fast. Now the #1 most searched pet insurance in the United States. cars behind all of those because it's our most recent product. But that same trajectory should allow us to do something very significant in a market that is 20, 30x bigger than the pet or renters market. So I think we'll be able to do this for a very long time. And for us, because we're so small, coming back to your question, growth -- rapid, rapid growth can happen in places that may look small if you're running Progressive today. But for us, we will yield that 10x and 10x again. very dramatically. So if we are dominant in niches, young drivers for the reasons I said, autonomous driving for the reason I said, and we have other business beyond that can allow us to continue to grow. We mentioned 10 quarters of accelerating growth, car accelerating faster still. I think we've got a lot of headway ahead of us there.

So even if, let's say, you do the 10x, there's still quite a bit of opportunity for you just simply because the areas you are in is where you really can compete much better than everybody else essentially.

No doubt. And when we 10x our business, we will be barely noticeable. State Farm will still loom over us almost 10:1. So we could 10x again before we become truly one of the larger players on the field. This is such a huge sector, 11% of GDP. It's got so much headroom. And that is true just in the United States. We're not just in the United States. We are in Germany and Holland and France and the U.K., and we're growing very rapidly in Europe. We're seeing triple-digits growth in Europe as well. So the footprint, the TAM that's available to us means that from our modest beginnings in place today, we consider the market opportunity to be infinite as far as our planning matters or the next few years matter.

And very global as well.

It is global. Absolutely.

So actually, that would be a great segue into the other parts of the business, right? So when we go back to the 10x the business part, the other aspects of that would be fairly robust growth through, let's call it, home, pet renters, European business there as well. So can you maybe help us think about the trajectories in various businesses there? Obviously, renters originally was a very big business for you, still is important. So just curious on how you think about the various aspects of the business.

Yes, definitely. So renters was our original product. It's been overtaken by pet. So we're seeing this layering effect as we add more products. One of the things that's worth mentioning as well is that it's not just new products, it's the interrelation between them. I'll come back to them in a second in terms of cross-sell and all that. But -- so pet is very fast growing, 50%, 60% annual growth. The market itself is growing, but we're growing faster than the market. So that's a great -- a really great product.

And it's a gift that keeps giving. We think there's a lot of legs to run and run and run in terms of pet insurance. Just crossed, as I say, $0.5 billion there. So that's a fabulous plank of the business. But ultimately, it's a smaller TAM. It's not like home, it's not like car, which is where -- between them, you've got about $0.5 trillion in the United States alone. Pet and renters are still somewhere around the $10 billion mark plus/minus. Different orders of magnitude, no doubt. But that's growing very fast. Europe, again, a relatively recent addition. We launched it significantly after we launched in the United States. It's doing better age adjusted than America was for us.

So growing faster, better profitability. It's got a lot of dynamics. We learned a lot of lessons from our initial launches here, and we're seeing those markets do well. And even within Europe, we're seeing progress. We launched in sequence Germany, Holland, France, the U.K. and how well we're doing in each market tracks the same thing. Germany, not so great. Holland better, France, better still. U.K. is on fire. So we're just seeing very rapid progression as we learn and as our systems get smarter and smarter and smarter. So Europe, we're seeing triple-digit growth in Europe now several years in a row as well.

Renters, the dollars are growing, but as the denominator grows for reasons that I touched on in terms of the TAM, we're seeing the percentage growth rates and its ability to swing the entirety of the business becomes harder and harder. So we're seeing growth in the teens. We expect that to continue. But renters is really important. The majority of our customers are still renters, just not the majority of our dollars. And it's so important because it's feeding a feeder for the cross-sell of so many products. So I don't know if we should come back to that separately, but it's a strategic role. We've got over 2 million renters, and that's hugely powerful for us as we think about further expansion and cross-selling.

So maybe -- yes, let's maybe focus on that a little bit, right? Renters, you use that as sort of almost as a hook, so to speak, some of the other areas of the business. But if we were to think about just future of the renters business, is it -- from your perspective, is it just a key for cross-selling going forward? Or is there a way to say you still have a lot more room to kind of organically grow that business and then compounding the cross-selling going forward?

It's definitely the latter. It's growing very fast. Among first-time buyers of insurance, and this is strategically important, people stepping onto the conveyor belt of life, buying their first policy. There isn't good data, but as best I can tell, Lemonade is the #1 brand. You stop a 20-year-old in your office and say to them, what insurance do you have? The chance of them answering Lemonade is higher than for any other brand out there. I put it to you that nothing is more predictive of future market share than market share among first-time buyers of insurance. It's also very highly differentiated from how the rest of the sector works. You watch television for 5 minutes, and you'll see 3 different ads, all saying, I switched and I saved.

All of insurance is about moving from one basket to another, we're picking the fruit from the tree. We're out there getting first-time buyers of insurance, onboarding them to Lemonade and then growing with them. So I think renters will continue to grow. We will cement and grow our position among first-time buyers of insurance. So it's a growth engine. It is a highly profitable product. It is a product where our tech advantage, that formula that I said, tech, it gives you cost advantage, gives you price advantage, gives you growth advantage is at its purest because the premiums are so small, so much of what you're paying is for the overhead. The risks are so modest.

And if you're super efficient, that's where you'll see it the most because there's least denominator to compete with there. So we continue to be massively advantaged there. We pay our claims in a matter of seconds. Our cost to settle claims is marginal, really drops to -- the marginal cost drops almost 0 because most of our claims get paid without any human intervention at all. All of our policies are sold that way. It takes you 90 seconds to buy an insurance policy from Lemonade from the comfort of your pajamas at any time of day or night, anywhere in the world.

To get a Starbucks takes late at Starbucks takes about twice as long. So you do see that a lot of these dynamics that I'm talking about are manifested most powerfully in renters. And then yes, it creates a huge stream of customers to whom you can upsell. It's kind of [indiscernible] in that sense because they were acquired for very low [ CAC ], which paid for itself very quickly. And then you have an installed base to which you can upsell the other products.

And then those renters eventually evolves into homeowner insurance customers. And then maybe just between the renters and the home business, right, like obviously, homeowners is a more competitive business than renters just given the environment. How do you, one, maybe maintain an underwriting discipline so that you can compete against the other bigger homeowner insurance companies. But also on the claims point you're pointing out, when you can settle claims very fast, how do you guardrail against fraud and things of that nature? Can you maybe help us with the process itself?

So I'll start with the guardrails. The way we deploy AI, this has been true for a while. It becomes more and more true with every passing day, but is in places where AI outperforms humans. So your question has a premise nestled in it that we need guardrails that are human in the nature. I reject the premise. What we're seeing about 90% of the time that we get a customer complaint, it's about something that a human did, not what an AI did. We only allow AI to step into places where it outperforms humans and not only in terms of the rigor of its decision-making, but it's empathy. We deal with deeply human situations. Oftentimes, it's the worst day of your life. We had to deal with people -- many thousands of people in the L.A. fires.

We -- your most beloved pet who is a household member has just been diagnosed with an awful disease. Your household burgled, your neighbor is suing you for something that you think might bankrupt you. These are really tough situations that we're handling. And there was an assumption that, oh, you need a human in the loop to exude empathy to handle it. It's just not true. It's just not true. LLMs can understand these nuances and respond with empathy that outperforms humans. And if I'm paying your claim in 3 seconds, you don't demo the fact that you didn't have 3 months of a relationship with a claims adjuster, you're pretty happy. Our costs drop and your satisfaction goes through the roof. So of course, we have guardrails. Of course, we rigorously test all these things. We sandbox every technology before we let it loose. But our experience is that once it passes those internal guardrails, it actually outperforms humans at a fraction of the cost.

So it's really about thoughtful deployment of AI, not blanket.

100%.

On top of that, with a very quick claim settlement, you essentially have very high customer satisfaction that helps you maintain and cross-sell. That's right. No, that's -- it's actually quite interesting because just like in auto where your advantage younger customers and then they eventually become renters and eventually become homeowners is quite an interesting flywheel you have here. Exactly right.

And quite distinct from the way the incumbency thinks about these things, yes.

For sure. Yes. So maybe on that cross-selling point, right, you -- when we think about from renter pets to home and cars, how do you think about bundling -- because there's obviously another competitive point that a lot of your competitors, the bigger competitors will use bundling to their advantage, right? But also at the same time, there's quite a bit of synergy in the business products you just described. So is there a way to think about bundling? Or how do you think about that process going forward and versus competition as well?

First of all, you're absolutely right. This is an area of focus. I'll give you some numbers, but about 1/3 of our policies are sold to existing customers. So if we just hold a pet or a rental policy or home policy, the chances are 1 in 3 that it's [indiscernible] and going to an existing customer. So we're already seeing quite a lot of that. In car, it's been higher. It's been about half of our policies are being sold to existing customers. That's a stunning competitive advantage because Progressive GEICO, these incredible companies, they're all car first. They bear the full CAC, and it's an expensive acquisition cost. The most expensive Google AdWords are around car insurance. So you're spending a lot of money upfront.

If we can get half of our customers [indiscernible], that's a structural advantage, and we pass those savings on to our customer and that feeds the machine that I spoke about earlier. And yet, even though it's about 1/3 already if you look at our total IFP, almost 20% of our IFP is bundled IFP -- premiums, sorry. So it's getting there. And yet, we're behind. we're behind and the incumbents are better placed to do bundling, particularly of home and car. Car insurance for us is still unavailable to most Americans. We're approaching 50%, but we're still in our rollout. And it doesn't perfectly map where we have homeowners available, which is also being rolled out. So I think a lot of headroom for us to grow as we do more and more of our rollout as we get better overlap of all of our products availability. There are some states where all of our products are available, and we see that impact, but most states we're not there yet. So I think a lot of place for us to grow.

So essentially, in that flywheel because your CAR is really not the starting point, your LTV to CAC should be notably higher. And then as bundling expand, that should be a very healthy LTV to CAC going forward.

Absolutely.

Okay. Perfect. Really appreciate that. So maybe that actually segue nicely into how we think about financial targets, right? Obviously, I'm presuming you're going to talk about it at the 2026 Investor Day. But on the prior Investor Day, you laid out a road map to profitability, right? You're looking at net income positive exiting 2027. So based on where we are today, I think the way for the math to work, I think it's fair to say that we'll have to look for notable expense management, right, from a G&A, sales and marketing and such. Can you maybe help us think about that path currently going into GAAP income profitable 2027? How should we think about just that process from here on to, call it, the next 1.5 years?

Yes. So if you look at our financials, to date and the projections that we gave at our last Investor Day in '24, the Investor Day before that in '22, and generally look at all the guidance, we've given guidance over 20x since our IPO. It is with notable precision. We've yet to miss guidance. We're well ahead of what we told investors in 2022. We're also ahead of what we told investors only 18 months ago. So I do think that our ability to predict our business is surprising given how young and fast-growing our business is. So there is something almost mechanical. We've built a machine that is cranking and it's cranking in ways that are reasonably predictable.

Maybe one of the most clean ways of looking at that is if you look at our EBITDA margin, you'll see really just not quite straight but almost straight line up into the right which intersects at 0 in Q4 of this year, which is why we've guided already 4 years ago that in Q4 of this year, we will be EBITDA positive. And you see all of the breadcrumbs along the way. It just happens to intersect there and then it continues on. And if you draw that line forward about a year later, I don't know exactly, but about a year later, you'll find that we cross over the elements that EBITDA is missing, which is stock-based compensation and interest payments and then you get to net profitability.

But I don't want to present it as an inevitability, but it is fairly predictable, fairly mechanical. We've already hit and we're actually a year ahead of when we said we would cash flow positive. This is our third year of being cash flow positive, somewhat unusually insurance is cash flow positive before EBITDA positive. But I feel reasonably confident as much as one can be in a given set of circumstances that the predictions or guidance that we gave, including getting to net profit sometime around late '27, maybe early '28, but roughly a year after EBITDA positive is on course.

And I think part of that, I kind of want to emphasize you've been consistently outperforming your guidance as well. So right, like it's been a very strong trajectory so far. One thing I think like you touched on earlier is really about the AI capabilities. And obviously, you're a technology-first company. And then -- but as we think about the evolution of AI going forward, do you see competitors kind of catching up? What are the areas where you think you have the best long-term potential where maybe competitors probably just can't catch up?

We founded everybody every session that everybody will hear today, AI will be sprinkled all over the place.

It wouldn't be a financial conference without it.

Yes which wasn't true just a few years ago, but yes. You've been following us long enough to know that we've been talking about this 10 years ago as well. Nothing that we discovered in November of '23 -- '22. So this was the founding thesis of Lemonade. And the reason is because even before LLMs, insurance is an extraordinary sector because it's one of the only truly [indiscernible] products. There is nothing physical that's being manufactured. It's a statistics, it's probability theory that is being monetized.

It's the ability to ingest data and use it to make predictions about the future that lies at the very core of what insurance is about. That is what you're monetizing. The ability to look at past patterns and predict future patterns as a result of that. And up until the modern era, insurance companies were the best in the world at that. They were home to the best statisticians. They had the best data sets. But in the last 20 years, clearly, it's Google, it's Silicon Valley, it's high-tech companies that were engineered with modern big data infrastructures and machine learning capabilities. Lemonade was engineered that way.

We are an engineering-based company founded by 2 tech founders, and we are really bringing Silicon Valley into insurance. That is a structural advantage that is today manifest, I think, in every line in our P&L. We touched on some of the ways in which it's manifesting. Had we believed then that instead of that, we could just transform existing behemoth, that would have been a much more profitable thing to do. If you take $100 billion of business instead of starting from scratch and eking out your growth and you just transform $100 billion of business using technology, that will produce much better return on investment. We didn't believe it's possible.

The structural difficulties, the innovative dilemma that [indiscernible] and [indiscernible] traditional insurance companies is well studied, well understood and very real. Allianz, one of the largest insurance companies in the world spends about $3 billion a year on IT. The industry as a whole spends absolutely staggering amounts of that. Since our founding, I think the industry has spent something close to $1 trillion on IT. We've spent less than $0.5 billion, and yet our technology is far superior to what those $1 trillion have generated over that intervening time. So I don't expect a turnaround anytime soon.

In fact, what's happening now, the acceleration that we're seeing with AI means that the frontier is moving so fast that if you're not riding that wave, if you're not at the frontier, no matter what press releases you issue and what efforts you spin up, you're getting further from the frontier rather than closing the gap. And I think there's no question that today and for the foreseeable future that the incumbents will be moving faster than the frontier is moving. So actually, the frontier is moving away from them rather than closing the gap. That's my best assessment based on what we're seeing so far.

That's pretty interesting. So we'll see what happens, right? Maybe we're close to time. If anybody have any questions, if not, I can keep going. I do have one last one. So obviously, a big part of the personal line business is distribution, right? And then one thing we talk about all the time is technology and evolution of AI. Do you foresee an environment where in the future, maybe personal line distribution will be significantly changed by AI to the point where maybe the distribution side is perhaps much less relevant where carriers will just directly go to customers or what have you. Just curious if you have any thoughts on the distribution side and how that could evolve because of AI.

It's quite possible. We are seeing very early innings of people buying through agents. And when you say insurance, you have to explain what kind of agents you mean? I don't mean the traditional broker. I'm talking about AI agents. At Lemonade, we talk about agents and agents -- so we're seeing early innings of that. And you can imagine a machine-to-machine purchase in that situation. We're fine with that. The cost advantage that we spoke about earlier means that already today, if you ask an LLM about your different insurance needs, Lemonade will be featured in a way that is disproportionate to our size.

Some markets like in the U.K., which are price comparison driven, we're already seeing a much more algo trading style environment where the human contact is far less important and the machine-to-machine is driving a lot of it, and we're doing very well. I mentioned earlier the U.K., our fastest-growing market. So I think we're well prepared for that eventuality. I don't know how fast we move into that future. People have been able to buy insurance on a website for a long time and yet a lot of them still go to the high street agent. So we'll see how fast human behavior adapts, but the capabilities surely are there.

Just given your AI native architecture, you'll be there regardless of whether or not the industry is there.

That's safe to bet.

Perfect. Really appreciate your time. We're at time. So thank you. Thank you Thanks. Really appreciate it.

Thank you.

Well, thank you, everybody. I'm Paul Newsome. I cover the insurtechs, among other things for Piper Sandler. Very happy to have the CEO of Lemonade, Daniel Schreiber here to chat about Lemonade and technology and all the fun things that we have there.

I apologize in advance, I have -- getting over a cold. So I'm going to rely on you to [indiscernible] also speaking. But maybe we could talk -- begin some of the conversation with a fairly broad question.

We're here at a fintech exchange conference. How do you see insurance fitting into the fintech ecosphere? And how do you see the opportunities just a big picture perspective as it fits in broadly...

Good morning. And I wish you a speedy recovery.

Thank you very much. I'm on my way I just had...

Speed recovery. Good morning, everyone. Great to be with you. I think insurance is the most disruptible industry on the planet, but I'll use your question as a way to kind of highlight that. So you've got kind of banking and lending and those kind of more traditional financial services, and you've got insurance as somewhat distinct -- but actually, they're pretty similar in size.

If you look at the contribution to GDP, they both hover a few decimal points of the side of 3%. If you look at the Fortune 100, you'll find that there are actually twice as many insurance companies as there are banks on the Fortune 100. But they're sizable, huge kind of industries. And yet, one has seen so much more innovation than the other.

So I'll give you a few measures of that. But last year, something like $115 billion was invested in fintech, about $5 billion in insurance. So you're talking about an over 20-fold, 20x outspending by one sector over the other. If you look at the market caps of fintech companies on public traded exchanges versus insurtechs, you're talking again at an over 20x if you look at penetration rates, new bank and Stripe and Revolut and you're talking about hundreds of millions of customers, you're talking about single-digit million customers of insurance, all of which is to say you've got these 2 behemoth sectors, one of which has seen tremendous amount of innovation, one of which has seen rounds down to 0.

And you see this in the incumbent responses as well. So banks and major financial institutions outspend insurance companies about 3:1 on IT. There's a competition going on, and they've had to invest, and we see major innovations, open banking for traditional banks, over 50% of their interactions are now app-based. And you can transfer it with insurance, where it's still broker-based going into your local State Farm agent and on the high street, it's really kind of remarkable how distinct they are.

So I think when -- if you look at all the amazing value that's been created in banking and you contrast it with the value that's waiting to be made on insurance, that should give you a cause for pause and ask yourself whether the alpha isn't really on the other side of the fence there.

So if it continues to evolve in the way we think it's going to, does that imply a larger role for insurance than as technology becomes improving or is it becomes a smaller? Well, you hear insurance folks talk about how different types of technology will sort of eliminate risks. But I'm curious as to whether or not you think that what's happening from a technology perspective will make the biggest industry bigger or smaller, current looks of it?

I hope it makes it smaller. And the reason I say that is insurance premiums are a direct correlator of risk and exposure. So to the extent that technology can help us mitigate risk, we should be paying less premiums. We see that today with our car insurance, our auto insurance, where we use telemetry.

All of our customers do that. We even have amazingly high connections to Tesla. And if you're driving with FSD, which is safer than any member of your household, we will give you like 50% discount per mile driven. So assuming we've get to much safer technologies and in the case of auto, it's lives are at stake, not just dollars, it is true that the cost of repair goes up a bit because these are computers on wheels rather than just mechanical machines, but the frequency drops pretty precipitously.

So I would like to see it's contract. It doesn't matter. We're talking about multitrillion dollar sector. These are 11% of GDP is insurance today. So you've really got such a huge sector. And at the same time, you see -- I'm wishful thinking saying it would be great if it went down, but cyber exposure and other things like that keep going up. So there's an offsetting going on there.

Yes. I'm a long time said that the size of the insurance is equal to the size of the claims. As long as there are lawyers and inflation, we're all going to be in business for a long time.

You're right. Yes.

One of the things that I've struggled with as an outsider looking into the industry is sort of the competitive moat of technology. And I think part of that has to do with the fact that as an outsider, it's just very difficult to tell if company A has come with better technology than thee company B. Obviously, your company has been sort of a leader in trying to use artificial intelligence and other technology. Can you talk a little bit about just sort of how as an outsider, we can see that competition other than obviously the results over time?

Sure. It's a challenge. We founded the company in 2015, and our first -- my first slide deck to my Board was about artificial intelligence. Playfully said kind of artificial intelligence, not artificial delays, and that was kind of the founding deck.

So we didn't discover AI in November 2023. This is -- or '22. This is what we've been doing since the founding of the company. And suddenly, everybody, of course, is talking about AI. It's like pixie dust that you sprinkle on your earnings and there's loads of press releases coming out, and it makes it genuinely difficult. Is it AI or is it DS?

I have some theories.

Yes. I think there are lane to pierce through and have a look, and I'll try and unwrap it for you a little bit. Insurance accounting is convoluted and it makes it difficult, and they do not offer the kind of metrics that we use to track automation rates. But there are 2 or 3 things that it's very hard to obfuscate.

One is what we call the scaling quotient. And what I mean by that is the following. And since ChatGPT came out as -- take that as a kind of good point of 3.5 years, our business has grown considerably. We're talking about almost threefold the revenue now than we had then. We've added not quite, but close to 1.5 million customers. Our gross profit has more than tenfold increased over the course of 3 and a bit years. And yet, our headcount today is smaller than it was then.

To be able to scale your business like that, see almost 3x the revenue and add millions of customers and shrink your headcount, that's an incredible Telltale sign, and it has not been replicated by any of the incumbents. They're not growing at the rates that we're growing. We've now had since GPT 10 consecutive quarters of accelerating growth, not just growth, but accelerating growth. So we're growing very rapidly.

But no change to our operating expenses net of marketing, no change to our headcount over 3 years. That is mind-blowing. It's very rare outside of the insurance space. It's nonexistent in insurance. So that would be one measure that I think is helpful.

Another one which is usually disclosed by incumbents and allows maybe the only true apples-to-apples metric is something known in the industry as LAE, stands for loss adjustment expense. And that is basically a measure of every dollar premium I take in, how much do I spend or waste on the bureaucracy of managing claims, not on paying your claim, but in the overhead, which is why it's such a helpful measure of efficiency. The more I have to spend on bureaucracy, the less efficient I am.

Now [ obviously ], there's an advantage to scale. We're at $1.5 billion roughly to round it there for a second. GEICO Progressive, State Farm, you're talking about anywhere between $50 billion and closer to $100 billion. So they loom over us 50-fold bigger than we are. And yet their LAE ratio stands hovers at around 10% 1 point below, 1 point above. That seems to be kind of best-in-class. They're spending something like $0.11 on the dollar on the bureaucracy of handling claims. We're at [ $0.6 ].

And that halved over those same 3 years. We have almost threefold more claims today with a smaller claims team than we had 3 years ago. So we're just seeing this explosion of business with no explosion -- correlating explosion of costs. And we've already guided that we think as we double our business again, that might drop from 6 down to 3 or 4. So we've just got this new reality where our variable costs have become fixed costs. And as we continue to scale our business, the profitability just grows as a direct result of that. And that gives you a clear snapshot of us versus incumbents who are 50x bigger and yet twice as inefficient, if you like.

There are other places that are harder to measure, for example, the precision with which you underwrite claims. Loss ratio is not a helpful measure, although we've seen 10 consecutive quarters of improving loss ratios, but I don't actually point to that. You can get there just by raising prices. So I don't think that tells you that you're using AI.

But here's a nice snippet. We have about $0.5 billion book of pet insurance. And in the last year, the sector, the industry took a lot of rate. They kept raising prices. So you saw something like 27% increase in prices across the industry. Our rate increases were less than half of that. We were at 12%. So we took much less rate.

We outgrew the industry 3:1. We grew -- they were growing at like 17%, we grew at 50-something percent, 55% if memory serves. So we took less rate. We grew 3x faster and our loss ratios were better. That does tell you about the precision of the pricing. That's not just lazy raising rates. That is modest raising rates in precise places so that the loss ratio doesn't move and yet your growth means that you're being priced very, very competitively.

So I think there are -- if you look for Telltale signs and you don't just look at the press release, you try to pierce through, you think there are numbers to be found all over the place. I'll say one other thing that it's -- we are a young and fast-growing insurance company. We are outspent clearly on IT or technology by the incumbency. And that is a very poor indicator of anything at all.

State Farm, which is the largest P&C insurance company in the U.S., spend something like $3 billion a year on their IT. Gartner estimates that this year, the whole sector will spend something like $0.25 trillion. Just in the U.S., I think since we were founded in 2015, our competitors have spent something like $1 trillion on IT. We spent less than $0.5 billion. So we have, call it, $500 million. We're being outspent pretty dramatically at 2,000 fold or whatever it is.

And yet, our technology is better than any incumbent technology by a mile. This isn't something that you can just throw dollars at. If your business model is one where you have human beings selling and being an agent and a broker on the high street, your data collection is appalling, your ability to harness data is appalling. I saw an interesting study from 2019 that the #1 cause of loss for some of the incumbents was other garbage in, garbage out, that kind of problem doesn't get solved by just throwing dollars at it.

Yes. The kind of related to that, one thing I -- everyone notice is that the industry is large and there's an enormous range of performance, particularly in personal lines. Could you talk a little bit about how broadly you might compare to some of these companies that are spending a ton of money that are doing much better, right? I mean it's one thing to compare yourself to State Farm or generic regional insurer, which clearly has green screens and programming that I probably did when I was a young guy, and we can tell the stories of that versus like a Progressive or GEICO, which managed to have very low expense ratios overall.

As an outsider, why should we think, hey, Lemonade has really gotten ahead of even some of the better ones as well? Is there something we could point to? Or maybe that's just going to be the subset will be those handful of folks who really won't be just Lemonade at the end of the conversation.

Progressive from an outsider's perspective as well, but my sense is that they are leading the pack. I'm not sure I'd put GEICO in the same breath. At last year's AGM, Berkshire Hathaway, who owns GEICO, spoke about this. Ajit Jain, the Vice Chairman, who runs Insurance, said that GEICO is doing very poorly on technology. They've got this wonderful honesty kind of policy at Berkshire, so it's easy to get a visibility.

And he said, GEICO has 500 and then he paused and corrected himself and he said, actually over 600 disparate systems that don't talk to one another. Lemonade has one. And it wasn't bought. It was built. We're an engineering -- culture engineering team. We built it in-house. We control everything. It's the same system that will allocate the marketing dollars and acquire the customers, and we'll use 50 different machine learning models to make predictions about every single person hitting our website, what is the likelihood to claim to convert to churn, to cross-sell.

We're going to amalgamate all of that and produce a lifetime value prediction on every single person hitting our website in real time, the likes of which doesn't exist by any of these systems. We'll then allocate dollars based on a kind of an algo trading system of which campaign is generating the best return on marginal dollars spent.

Then an AI will sell you the insurance once you click on that link and you come through, we've got an AI Maya, and she will use all of that information in real time to make the best offering to you to give you the right defaults to offer you the right add-ons, when you have a support question before or post purchase, that will be handled by AI.

And finally, when you make a claim, the majority of our claims are handled without a single human being in the loop at any point, millions of claims. And some people blown the lack of the human contact, not our customers. If I can pay a claim in 2 or 3 seconds, which we do all day long, you're not building the lack of the human -- please wait for your call is important to us and it will be answered and all of that.

So I think these things speak for themselves. You look at NPS as one metric, and you'll see that notwithstanding the fact that we are a cost leader, we are a service leader as well. Technology lets you do that. You can -- with a 3-second claim, you're happy and my cost just crush, which is why the LAV is where it is.

And honestly, when you start thinking about the incumbency in general, and I'm not picking on names, GEICO happens to speak about these things kind of...

Please do.

There are structural reasons why it's very difficult to get rid of those green screens or to transform your business. And they start with -- I know quite a lot of the CEOs of the largest insurance companies, it starts with them having the wrong investor base. Their investor base wants a 5% dividend and total stability and what's needed is massive transformation.

They have the wrong management team. They were groomed for business preservation, not for business transformation. Their systems date back to the '80s and instead of having a black box, they have a black hole, and they just throw billions of dollars into it. They have a distribution network that means they don't -- they'd love to move to an app-based distribution, but it would sacrifice all of their current channel conflict would be unmanageable.

So they are deeply encumbered. And the reason we founded Lemonade is because we don't know of a solution to their innovative dilemma. If I thought I could just sell them, shovel them pick axis and tell them, hey, just bolt this on top of what you have, we would have done that. I think their job is much harder than ours. Starting from scratch as a tech company is very helpful.

And remember that insurance is the most disruptive, I said earlier for financial reasons, but think about it from an AI perspective, it is an ephemeral product that is all about statistics. That's what insurance is. I am monetizing probability theory. Everything else is distribution. It's at its core, it's about ingesting data, having high-quality data being a data leader using machine learning to find the multivariate correlates and being able to price accordingly and then serve customers at the lowest cost to serve. One of those maps on to loss ratio, one maps on to expense ratio.

It has long-term issue.

Of course. So I think that the fact that everybody else is so encumbered with these old systems and these other issues that we've discussed makes it very, very difficult to drag themselves into the 21st century.

Your thoughts on distribution. Obviously, a hot topic with the brokers [indiscernible] and maybe you could talk about what you see as the technology changes, especially recently in distribution. And obviously, you have a direct channel, but I'll let you talk to.

Yeah, I'll be fine, okay. From our point of view, actually, distribution surprising me very little in terms of the AI ramifications. I was just kind of saying that the 2 core metrics in insurance are loss ratio and expense ratio, loss ratio is about precision of pricing, expense ratio is about cost to serve.

You combine the 2 and it's called rather unimaginatively the combined ratio, and that's what that's about. And LLM and Agentic AI maps onto one and machine learning and deep learning maps onto the other, which is why it's so disruptible. The distribution piece, as consumers move more and more to LLMs in order to recommend their insurance or even send their agents to buy the policy for them, we're just fine with that.

If you now ask your LLM of choice about pet insurance or renters insurance or clients, Lemonade will be over-indexed quite significantly. And the reason for that is that consumers going back to things we said earlier, we tend to be a cost leader because we use technology to get to the best cost. We tend to have the highest NPS because of that same reason, technology is the common denominator to both of those.

LLMs scour all the sources out there, ingest that and then we'll play it back to you when you ask them who's good at insurance. So we're actually finding that we are punching considerably above our weight on LLMs. And to the extent that distribution becomes increasingly headless, where it's your agent talking to my agents, we're fine with that as well.

We're not relying on human agents or what we call agents. We're very comfortable with the machine to machine. Everything that we do is MCP or API-based. In some places like in the U.K., which tends to be price comparison website-based distribution rather than anything else, we have the equivalent of algo trading going on there, where we can bid for every lead that comes in very effectively.

So being a cost leader has got to be an advantage in the current scheme, but even more so when all of the Geckos and cockney accents get displaced by just agents talking to each other and looking at the core facts. That's an advantage to us rather than a disadvantage.

So the key issue is to be essentially distribution neutral.

Carriers that. I think the key issue is to be a cost leader and to offer the best product and the best service because -- not because you're living on thinner margins, but because your underlying cost structure is automated through AI and that costs less than humans, and that will then flow through in all the distribution methods.

Makes sense. Getting towards the end, I should ask at least a few numbers questions. Fourth quarter positive EBITDA, very focused. Any thoughts about mechanically how that's going to emerge over the course of the year and the sustainability of that over time? And is it just more of the same? Or is there something else that we should be thinking about in the next year or two?

I think the simplest way to think about our business model is to kind of think about something that's [ Yay-shaped, ] where the top is tracking gross profit growth. Gross profit is much more helpful than revenue or premium because it incorporates the quality of the revenue. If you've got a bad loss ratio, then you don't get much gross profit. But track gross profit dollars, not margins because oftentimes higher loss ratios will yield more dollars given the price elasticity of demand.

So track gross profit dollars. This last quarter, we announced results, which reflected 159% growth year-on-year of our gross profit dollars. So this is just a rocket ship. And then track our underlying expenses. Because if that continues, where we have underlying expenses net of marketing spend, but all of our OpEx basically stand still and gross profit keeps surging, you just know that, that translates into profitability.

And if you look at our EBITDA margin over the last several years, it's a straight up into the right line. We announced about 4 years ago that we're going to be profitable -- EBITDA profitable in Q4 of this year. That's still what we're saying because the machine is operating in a highly predictable way. We just can calculate the rate of growth and how many gross profit dollars are needed to drop through to the bottom line. And this is our third year of cash flow positive.

It's not like we've been burning cash along the way, but the GAAP accounting follows for whatever reason, we'll get to EBITDA profitable, and that will keep -- as far as we can tell, that will continue forever in a day. So we're not expecting any near-term reversals on that.

Is there a terminal value to what point you get to true scale and...

Is the one of the exciting things. Insurance, the prize at the end of the rainbow is stunning, right? The dominant insurance companies around the world today date back the young ones to the 18th century. You've got the Lloyds and the AXA. AXA is over 200 years old. Lloyd's is 300 years old. Aviva in the U.K., 330 years old, and they grow to be $100 billion, $150 billion a year.

So that is where our sights are set. We're not planning to slow down anytime soon. We're going to, as best we can, continue to compound. We are in all 50 states. Rather unusually, we also operate in Europe and in the U.K. for some reason, the Atlantic seems to be a barrier for most insurance companies, but we're operating all over the place.

And we see tremendous opportunity, which we hope will compound for many years to come. We could 10x our business, and we would still barely be noticeable to our competitors. We'd have to 10x again before they really start paying attention. That's a nice position to be in.

It's a big business.

Yes.

Well, I want to thank you guys for. Thank you, Dan, for being here. Appreciate it very much.

Thanks.

Hello, everyone. Thank you for joining us and welcome to Lemonade's Q1 2026 earnings call.

Operator Instructions]

I will now hand the conference over to Lemonade to begin the call. Please go ahead.

Good morning, and welcome to Lemonade's First Quarter 2026 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bitsy, Chief Financial Officer; and Nick Stead, SVP Finance. A letter to shareholders covering the company's first quarter 2026 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the SEC and our more recent 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 number of customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat, trailing 12-month loss ratio 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.

Good morning, and thanks for joining us to review Lemonade's results for Q1 '26. This was another excellent quarter, marked by continued acceleration in growth, strong underwriting performance and clear operating leverage across the business. In the first quarter, in-force premium reached $1.33 billion, growing 32% year-over-year. This extends our streak of accelerating growth to 10 consecutive quarters. Revenue grew even faster, up 71%, boosted by a recent reinsurance transition and the result in higher premium retention.

Underwriting performance continues to be very strong, and it is the combination of accelerating growth and strong underwriting results that led to 159% growth in our gross profit. We also saw solid cash flow from operations, generating $17 million in adjusted free cash flow, a $48 million improvement year-over-year. On the bottom line, adjusted EBITDA loss narrowed 64% year-over-year, reflecting continued progress towards profitability, and we reiterate our long-standing expectation that Q4 this year will be EBITDA positive as will the full year of 2027.

We often note 2 specific drivers that power our financial performance, grow the business and scale the operation. I'll share a couple of comments on each of those. As it relates to growth acceleration, strength in marketing efficiency has been a consistent tailwind for us. Conventional wisdom suggests that increased growth spend comes at the expense of efficiency, yet we continue to see the opposite.

Since Q1 2023, we've grown our spend by roughly 200% while maintaining an LTV to CAC ratio of above 3. This is enabled by our proprietary LTV AI that dynamically allocates capital to maximize returns and is supported by the diversity of channels, products and geographies, which we enjoy. At the same time, increased bundling activity is boosting customer lifetime value, which enables us to scale growth investments while preserving strong unit economics. The second notable driver of our performance is leverage across our expense base. In the first quarter, we surpassed $1 million of IFP per employee, representing a nearly 3x improvement over the past 4 years. This progress reflects the growing impact of our AI and automation tools, which are enabling us to scale efficiently.

The impact of 10 years of investment in AI infused into our single proprietary and vertically integrated system is now visible throughout our business and on pretty much every line of our P&L. Against that backdrop, we expect recent trends to continue and are raising our full year guidance for both top and bottom lines and looking forward to continuing to deliver increased growth and increased profitability throughout 2026 and beyond. With that, let me hand over to Shai. Shai?

Thanks, Daniel. I'm going to spend a few minutes discussing PE, which is now our largest line of business and recently reached a notable milestone, $500 million of IFP, becoming the first product in our portfolio to reach that milestone. In less than 6 years from launch, we become the most searched pet insurance brand in the U.S. and the fourth largest carrier, competing against incumbents with decades of operating history. As it relates to growth, a couple of drivers to highlight. We have a notable cross-sell advantage versus many pet insurers with over 3 million customers to whom we can sell directly CAC free. In fact, 85 million of current pet IFP was sourced from our existing customer base. We also benefit from high conversion rates due to delightful AI-powered customer experiences.

Lastly, our distribution strategy is diversified across direct-to-consumer channels and partnerships, which has allowed us to scale spend quickly without reliance on any one channel. At the same time, we have a structural expense advantage versus peers. Our AI-powered automation engine enables excellent expense efficiency when it comes to claims management. Unlike many of our other lines of business, Pet is a high-frequency, low-severity product, which means that a vast majority of customer claims are excellent candidates for our end-to-end automation. With that, I will lead off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with Q1 results, which were excellent. In-force premium grew 32% year-on-year to $1.33 billion, driven by customer growth of 23% and premium per customer growth of 7%. We added 158,000 new customers in Q1, 37% more than the roughly 115,000 in the prior year. Within our reported gross loss ratio of 62%, our favorable prior period development of 3% was driven primarily by our homeowners, multi-peril and car products.

Total cat impact in the quarter was 5%, primarily due to winter storm activity, and this excluded cat prior period development. Prior year development, which we report on a net basis, was $4 million favorable in Q1. Gross profit increased 159% to $100 million, while adjusted gross profit increased 119% to $101 million for a gross margin and adjusted gross margin, both of 39%. These metrics use revenue as their denominator.

Adjusted gross profit as compared to gross earned premium was 33% in Q1, up 13 points from 20% in the prior year. It's worth noting that the prior year results include the impact of significant California wildfires as well as a California fare plan assessment, all reported in Q1 last year. Revenue rose 71% to $258 million, while our adjusted EBITDA loss improved to a loss of just $17 million.

Notably, revenue grew roughly 40 percentage points faster than IFP, a dynamic we expect to continue through at least midyear. Importantly, adjusted free cash flow was positive for the fourth consecutive quarter at $17 million and has been positive 7 of the 8 last quarters, while operating cash flow was negative $1 million, following a common seasonal pattern. We ended the quarter with roughly $1.1 billion in cash and investments, of which about $290 million is required to be held as regulatory surplus. Annual dollar retention or ADR remained stable sequentially, primarily due to the continuing impact of our clean the book efforts in our home business at 85%, flat versus the prior quarter.

Operating expenses, excluding loss and loss adjustment expense, increased by $32 million or 25% to $159 million in Q1 as compared to the prior year. Now let's break down those expense lines a little bit. Other insurance expense decreased by $2 million or 8% in Q1 versus the prior year versus a 32% growth rate of IFP. The prior year period included the $7 million California Fare plan expense assessment.

And absent this fee, the annual increase in this line item would have been about 26%, a bit less than our top line growth rate of 32% Total sales and marketing expense increased by about $23 million or 53% due to increased growth spend versus the prior year. In Q1, gross spend was $54 million, up 43% as compared to the prior year. Importantly, as we continue to ramp growth spend, marketing efficiency levels remained stable and strong in the first quarter with an LTV to CAC ratio above 3x, in line with the prior year. We expect Q2 gross spend to step up about 12% versus Q1 and expect total gross spend of about $235 million for the full year 2026.

Technology development expense was up 22% year-on-year to $27 million, and G&A expense increased 18% as compared to the prior year to $42 million. Notably, G&A improved sequentially and was down by about $1 million versus the prior quarter. The year-on-year increase in G&A was driven primarily by an increase in stock compensation and interest expense. Our expected stock compensation expense for the year is expected to be approximately $95 million. This is somewhat higher than our previous guidance, primarily due to a multiyear equity grants given to our 2 founders.

Headcount increased slightly by about 2% to 1,291 in Q1 as compared to the prior year. Our net loss was a loss of $36 million in Q1 or $0.47 per share as compared to a net loss of $62 million or $0.86 per share in the prior year. Adjusted EBITDA loss was $17 million in Q1, dramatically improved versus our EBITDA loss of $47 million in the prior year.

Our detailed guidance for Q2 and our updated full year 2026 guidance are both included in our shareholder letter, and that new guidance represents a 32% top line growth rate in Q2 and a 33% full year top line growth rate. Roughly 77% revenue growth is implied by our Q2 guidance and roughly 63% full year revenue growth implied by that guidance. And unchanged, we do expect a positive full quarter of EBITDA in Q4 this year. With that, I'd like to pass back over to Shai to answer some questions from our retail investors. Shai?

Thanks, Tim. We now turn to our shareholders' questions. We'll start with Paperbag, who asked why ADR hasn't improved faster. So just to level set, ADR or annual dollar retention is a training metric. It compares the IFP generated by a specific cohort a year ago and measures how many dollars we are able to retain from that same group 12 months later.

Over the past year, ADR has been held back by a targeted nonrenewal initiative in our homeowners line focused on reducing cat-exposed business. That deliberate move created a temporary headwind for ADR while improving the overall health of our business and has largely wrapped up by the end of 2025.

Looking ahead, that headwind should start to fade as those cohorts roll off the base used to calculate ADR. It's also worth noting that if you exclude homeowners, ADR actually improved over 300 basis points year-over-year. Paperbag also asked about multiline customers currently about 5% of total, asking when we'll see that tick upwards. It's a great question, Paperbag. And actually, if you look at the dollars rather than customer count, you can already see the impact of cross-sell showing up quite clearly in our financials. As of the end of Q1, 18% of total IFP is bundled. Importantly, cross-sold business is largely acquired with little to no CAC, which is a meaningful driver of the improvement you're seeing in our overall profitability.

With improving performance and growing data, we now have greater confidence in the impact of cross-sells on new customer LTV. Higher LTV gives our growth team more room to operate, so they can increase allowable CAC and lean further into growth while still maintaining our 3:1 LTV to CAC ratio. We've seen a strong momentum here over the past few quarters, and we feel good about continued acceleration, especially as we expand KAR into more states. 19B asked for an update on our efforts to build an excellent shareholder base with strong institutional ownership.

Our Investor Relations efforts are producing excellent results. In the past couple of years, we've seen institutional ownership, excluding SoftBank, increased by more than 50%. A handful of our top 20 shareholders are net new institutions who initiated the position in the past year or so. This work is ongoing, but we are encouraged by the recent momentum. NDK asked what prevents a competitor who launched tomorrow with unlimited compute and the latest models from being where we are in a couple of years. That's a thoughtful question.

Thanks, Andy. Well, our differentiation doesn't stem from access to AI tools, but rather from a decade of compounding execution around an AI-first architecture, unique organizational structure and successful navigation through complex and expensive regulatory environments in multiple geographies. We've spent the last 10 years building, training and integrating our technology and h-g models into every layer of the business, turning real-world data into continuously improving underwriting, pricing and claim loops now show up in superior growth and efficiency metrics. Importantly, commercial AI models as advanced as they may be, can't price insurance on their own.

Underwriting and pricing depend on statistical models trained on large data sets built over time, and that's where our advantage is most pronounced. A new entrant would start from 0 on data, regulatory approvals, brand trust and production- validated models. These are things that only accrue with time. Meanwhile, our head start means that our systems keep learning and accelerating. So even with equal technology, the distance continues to widen. In short, you can launch with cutting-edge AI, but you can't fast forward the decade of compounding data integration and operational learning that defines our advantage. With that, I'll pass it over to the moderator, and we will take some questions from the Street.

Your first question comes from the line of Jason Helfstein from Oppenheimer.

So I'll ask 2. Just talk a bit about the AV insurance. When could that begin to kind of impact the financials? And I guess, how are you thinking about the initial margin impact on that business? Just so any color there as we all begin to think about that? And then just, Tim, when do we reach normalized or peak levels with the reinsurance transition?

Jason, Daniel here. So I assume that by AV, you mean autonomous because a lot of our cars are AVs already, and that's nothing. Yes. So this is something that's very exciting, really, I think, a dramatic demonstration of the kind of capabilities that we bring, and it shows our differentiation, I think, at its maximal effect, which is that we are able to price every mile driven per driver, and we recognize AI as a driver and therefore, we can price it accordingly. This launched and has been very well received.

We're seeing our conversion rate for these policies almost twice as good as our average conversion rate, something like a 70% increase in conversion for such customers. But it has launched in only a couple of places so far. So the rollout will be throughout the year to all of our markets. But at the moment, it is still relatively modest in terms of the impact on our financials as reported at the moment. As the year rolls out, you'll see this being expanded to more and more states, and we will gather steam as it goes, and we'll update you throughout.

Yes. And on the reinsurance question, Jason, you're right on the transition or the shift in the rate of business that we are retaining continues to shift in our favor where we're retaining more business over time. We renewed our reinsurance last about 9 months ago in July. And so that retention rate has increased consistently quarter-over-quarter since that time. Q1, the seed rate was about right around 30% versus the peak last year of 55%. Q2, that will ebb further. We'll retain more. The ceding rate will be something like 25%. And then we'll normalize in Q3 at right around that 20% rate that we announced when we renewed last year.

So it phases in over 4 quarters. That assumes no change in our reinsurance. At July 1, that's our renewal date. We're well into that process now as is typical each year for renewal. We've not yet determined what that will be. That's something we do share with the market once we get to final terms that we like. We have some optionality there. As we have for quite some time, we can confidently retain more business. So the likeliest outcome there is perhaps no change or perhaps a greater rate of retention. It's unlikely that we would see it at a higher rate, and we'll share that update not too far out post the July 1 renewal date.

Your next question comes from the line of Andrew Anderson from Jefferies.

You've highlighted operating leverage from automation. Where specifically are you seeing some savings today? And how much of that is being reinvested versus dropping through? I'm just kind of taking a look at some of the operating expense line items that are still growing.

Yes. So we kind of think about expenses in really 3 buckets, and this has been really consistent over time. There's truly variable costs, and there's a few of those, things like premium taxes and processing fees and that -- those tend to vary quite in line with the growth rate of the business. So if we're growing 31% or 32%, then you'll see those expenses kind of grow in line with that. That's a relatively small bucket. The largest bucket is our fixed cost, and that's things like salaries and overhead and legal and finance and compliance and all of those things that every insurance company has.

And those scale consistently really, really well over time. I'd point you to the shareholder letter where for some time, we've shared a chart, which the highlight today, I think, was a headcount decline over 3 years, where the premium has more than doubled or tripled over the same time. So that's where we really see scale. The expenses that are increasing tend to fall into the discretionary bucket. They're at our choosing.

So the most clear one is growth spend, where we choose and determine our growth rate. We work hard to push that up each quarter. You've seen the results of that with growth rates increasing sequentially quarter after quarter. And that's the result of 2 things. Our investing more, maintaining our LTV to CAC ratio, maintaining that marketing efficiency, coupled with really an unlimited TAM, total addressable market. And so those come together and you kind of see that every quarter. We do choose to invest in other things that have either short-term or medium-term payback, and we continue to do those as well, but those are really at our discretion.

So over time, you'll see a similar trend, I would expect, where you'll see great leverage, continued growth. Our guidance implies a 32% Q2 growth rate, 33% for the full year. And I expect continued scale across all of those expense lines.

And Andrew, maybe if I can jump in. I think one place in particular, you can really see the impact of AI-powered automation at scale is in the cost of adjudicating claims, and that's our LAE ratio, which is currently at 6%, which we consider levels that are roughly -- that are best-in-class today and materially improved over time.

And which acquisition channels are contributing the most to incremental growth today, whether that be direct or cross sales? And maybe how does agency factor into distribution, if you can size that at all?

Yes. So I'll take that and then maybe Nick jump in. So the short answer is all of the channels, meaning every month, every quarter, we've been successful at expanding into new channels. That doesn't mean the existing channels are going away, but there tends to be a broadening or a deepening of the number of channels. And so the concentration in the top 5 or so channels today is much less than it was 2 or 3 years ago. So that long tail is getting longer. And that's really the result of an amazing growth marketing team that through human intelligence and really intense AI automation have been able to do that quarter-over-quarter.

Our partners are strong and continuing to get stronger. it's the minority of growth. The vast majority of our sales come from our direct-to-consumer efforts, and that will -- I expect that will continue for quite some time. But the indirect or the partner referral that continues to be strong, whether it's homesite or Chewy or real estate management or landlords. We've got a really long set of folks who drive lots of strong sales for us. Nick, anything you want to add on the agent front?

I was just going to note that we're seeing real strength across channels to your question, Andrew. and that is both new business to Lemonade as well as cross-sells to existing customers. As it relates to new business, we saw our highest ever new sales volume in the first quarter, and we've been able to sustain really strong efficiency metrics on our growth spend. And at the same time, on cross-sales, we saw a near doubling year-over-year of cross-sales to existing Lemonade customers. And those are trends we really hope to sustain strength across our various channels that have enabled our growth acceleration curve until now.

Your next question comes from the line of Tommy McJoynt from KBW.

Yes, I had suspected that all of the effectively free advertising and brand building that Lemonade benefited from with the media's attention on the autonomous vehicle announcement in the first quarter that, that might allow Lemonade to actually dial down its need for growth spend while still exceeding the 30% in-force premium growth. Can you talk about why that wasn't the case? Does sort of mainstream media coverage of Lemonade help with attracting customers?

Tommy, Daniel here. That coverage is fabulous for us in terms of general perception. I think it draws attention to the widening gap between us and everybody else. The rest of the industry pricing based on gender and credit scores and marathon status. And on the other end of the spectrum, you have us partnering with Tesla to price per mile and per version of the AI that's driving.

So definitely, that captures the imagination. I think it drives home the unique elements that Lemonade has and the differentiation from the industry. So that drives attention and brand building, but that was never about getting clicks and sales instantaneously. This is the kind of long-tail investment in brand that builds over time. We see our organic sales growing. We see our conversion rates growing. We see the trust scores and brand recognition growing. You'll have noticed in Shai's comments that in pet, for example, we are now the #1 most searched brand.

So we are definitely seeing the cumulative effect of all the coverage of Lemonade and our differentiation in our tech-centric offering. But we had no -- the expectation implicit in your question was never shared by us.

Okay. That all makes sense. And switching over to the stock-based comp. I saw for the full year, the guide for stock-based comp was raised by $20 million. To clarify, is that an incremental? Or is that just a switch from cash comp to stock-based comp? And is that new $95 million a fair base level to assume in the out years as well?

Yes. So I would think of that as a step-up that will be a new roughly base level. I would note that those are unique grants and are multiyear in nature. All of that info is disclosed and out there. But big picture, there's a performance-based aspect to a subset of those grants. -- and that focuses on the next 2 years and requires significant value increase in order for those to become vested and drive value. In addition, there's a long-term multiyear grant that you've seen at other thoughtful companies, particularly for the founders to kind of drive a long-term vest. Our standard vesting for new employees is 4 years. These grants are have an 8-year view with a thoughtful vesting pattern.

So I think of this as a onetime for a multiyear view. If you think about our stock-based comp kind of zoom out a little bit and look over, say, the last 5 years or so, which gives a better picture and takes away some of the noise of stock volatility and things like that and look at our actual effective burn rate or dilution rate, which is really the thing that financially we're concerned about, it's right on target with best-in-class. It's sort of a 2-ish percent number, 1 point something to 2-point something over that very long-term period. That's really the focus number for us, and we expect over time that, that will continue to be the case. Founder grants are unique things, and so you'll see some volatility in the short term due to that.

And also, I maybe wanted to add, notwithstanding the increase in our expectation for expense within the calendar year, we're seeing stock-based comp scale very nicely as a percentage of any metric you'd like to index against, whether that be in-force premium, revenue or gross profit. Those levels are improving and from our view, healthy relative to benchmarks.

Your next question comes from the line of Mike Zaremski from BMO.

My first question is a follow-up on Lemonaid's, I think probably best-in-class loss adjustment expense ratio. Does it have something to do with -- on an NAIC statutory basis, we've always seen that Lemonade's claims, we call it denial rates, so claims closed with no payment has been materially higher than the peer average or industry averages. Does that have something to do with kind of why the LAE ratio is so much better than others?

So the short answer to that is no. the more thoughtful answer is that Lemonaid is -- has some unique aspects to the business. We have a very large number of relatively low premium policies because of the nature of our renters business. That has changed and diminished over time. So the renters book of business in terms of premium is now under 30% of the business in the high 20s. It used to be 90-something long, long ago. So the book of business is nicely diversified.

That said, if you just count the policies, you're going to get a very large number of renters. And so that can skew rejection rates because you can get a lot of claims, which are thoughtful claims, but not necessarily a covered claim, claims below the deductible for example, claims that are not covered by the policy. And that's not uncommon when you have a customer base who in a certain subset can be newer to insurance. It might be their first policy or it might be the first time filing a claim. And so that will definitely skew the numbers. If you isolate the part of our business that makes us look more like a more established incumbent, if you took just homeowners and car and pet, for example, you'd see a different number that looks much more in line. And I think our NPS scores and our customer satisfaction scores, which I would put up against any insurance company on the planet, show that over the arc of the total business, Lemonade almost every time as best we can, does the right thing and pays every valid claim effectively.

And let me just also to note, Mike, sorry, LAE ratios cost to manage claims over earned premium and claims without payment generally don't have costs attached to them. So I wanted to offer that as well. But I want to take the opportunity to share that fully aligned to Tim's points around product mix and how that has certain nuances within our LAE ratio. But we're actually seeing favorable trends in LAE over time across all of our lines of business. And that's especially true in CAR, where we've seen notable improvement in recent periods and our CAR LAE ratio is, at this stage, not materially different than the overall Lemonade result of 6%. So we're encouraged to see that momentum across lines.

That's thoughtful. My follow-up is just kind of also benchmarking kind of looking at Lemonade's gross combined ratio, about 138% this quarter, improving materially year-over-year. If I benchmark Lemonade to the industry and maybe Anders business mix is a bit different. I think the industry is running 90%-ish, so lower. I'm curious, does Lemonade have a goal to kind of lower that gross combined ratio materially over time towards the industry average? Or will there always be kind of a material gap?

Yes, you're exactly right. The improvements have been dramatic. a little color, something like a 60-point improvement, I think, which is significant. And obviously, you're really seeing it in the expense ratio for sure. The loss ratio, we reported a gross loss ratio of 52%, this quarter at 62%. So we're right where we need to be with loss ratio. Expense ratio continues to show dramatic improvement. Two things to note. Because of the nature of reinsurance, depending on the way you calculate combined ratio, there's a couple of different ways, but reinsurance certainly has an impact on that where the growth and the net will differ. But anyway life, we're seeing significant improvement. we're right on track is breakeven. You'll see that in Q4 for the full quarter for the first quarter, we've noted that for several years now. That's the point where b.ll.Asy10,'ades quite close.

So we're right on track for that. And that's not the fact that the vast majority of our business, we're expensing the cost of acquiring that business upfront. So that's a headwind for us. It's a good news, bad news for our business. We love it because we're able to acquire customers, we have to expense that upfront. So given that it's a handicap, it's a nuance of our business you're seeing these really dramatic improvements quarter-over-quarter. So we feel like it's right on track. We now move to your next question, which comes from the line of Bob Wong from Morgan Stanley.

First question is on the growth of the car business. I just -- I know you addressed it a little bit, but I just want to maybe double-click on that a little bit more. Obviously, Pet is now one of the bigger business here. And if we go back to the Investor Day thinking about it, you were talking about car eventually being the biggest driver for 10x your business going forward. Just given the current competitive environment, can you maybe just talk about your competitive positioning versus the industry and where you are in the car business today and how we should think about that growth engine going forward?

Bob, yes, I think a lot of what I would encourage you to think about going forward is really a straight-line continuation of what we've seen in the last year or 2. So we shared, if you go back a year, car was growing at something memory was about 9%. contrast that with the 60% of this quarter. If you went back a year more, you'll probably be in negative growth territory.

So not only are we reaching fast growth rates and rates of acceleration, but we're seeing very rapid acceleration from negative to positive to 60%. We don't intend to slow down too much thereafter. And the IFP component of car in our book is still modest, but its portion of our sales in the last quarter is already pretty significant, something like 1/3 of our sales in the last quarter came from car. So because we have a larger base, it will take time for it to capture its fair share, but it's catching up pretty dramatically.

So definitely significant. The other thing I would point out, and I touched on this in earlier responses, we think we have an offering that is highly differentiated and structurally advantaged relative to the incumbency. We are, to the best of our knowledge, unlike any incumbent in that over 90% of our customers have continuous telemetry on. And that just really gives us x-ray goggles into which risks we have, how we should be pricing them rather than using broad strokes proxies that are meant to, in some way or fashion, mirror driving behavior like where you live and your gender or age, education level, we're pacing through all of those, de-averaging those really big monolithic groups and being able to price every individual per se as they drive depending on a per mile basis oftentimes and adding AI into that mix as another driver. So I do think that this is a structural advantage that will allow us to continue to compound that business and the messages that you're recalling from our last Investor Day are ones that we would stand behind absolutely today as well.

Okay. Really appreciate that. Second question is on autonomous, not specifically for your business, but really just how you think about the growth trend of autonomous vehicles for the industry going forward, right, right? So right now, if we think about autonomous, the L3 or better autonomous vehicle penetration rate is still very insignificant. As we think about just the autonomous vehicle technology advances as well as penetration rate going forward, can you maybe help us think about the potential size of that market and the growth opportunities there for the industry, but also for Lemonade. Just curious your thought on that.

I'll share a couple of thoughts and then invite my colleagues to add if they feel I missed anything. Cars have very long ownership cycles, and therefore, newer technologies do take a while to penetrate into the installed base. But there's got to be little doubt that various degrees of autonomy is the future, and it is going to be growing much faster than the rest of the industry. And Tesla may be leading the way, but every major car manufacturer is adding these capabilities. And they aren't entirely binary. They have everything from various forms of adaptive cruise control all the way up to full self-driving of the likes of Tesla.

And we can see into each of those different gradations and we can price them accordingly. So if you widen the aperture a bit, you start seeing all different ways in which cars are adding safety features and degrees of autonomy and those are absolutely things that we are focused on and pricing into our policies. So I think if you are a $50 billion, $60 billion, $70 billion insurance company with dominant market share, this may seem insignificant. but our market share is maybe 0.1% of what a Progressive or GEICO is right now.

We have maybe less than 1 per market share, which is to say we can see in this emerging sector, a very promising growth opportunity. We don't limit ourselves to it, but I think you will see autonomy impacting our financials much more significantly than perhaps on the incumbency with a very, very large installed base.

Yes. I think you're exactly right. This is this is an area where I'd love us to have a better crystal ball than you do, but I fear we may not. What we do know is 2 things. One, the numbers today are small. And as Daniel noted, small numbers can have a really significant impact on a company the size of Lemonade. -- if you're a $1 billion player versus a $50 billion player, that plays to our advantage. Two, the name of the game here when you have an uncertain growth curve, and this like many other technology advancements, this adoption rate will be very, very slow and then all of a sudden, it will be very, very fast. And the point of that bend in the curve is quite difficult to predict.

Lemonade and our depth and level of agility is such that we love that. fast, quick, thoughtful adaptation is really what we were built to do. And so when that curve comes, whether it's a year from now or 6 years from now or something in between, we'll be ready and we'll be more as adept as any player in the market to react to it. And we'll have several years of autonomous experience behind us rather than still to build. So we love these curves, and we're looking forward to it coming.

There are no further questions at this time, and we've reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

I'm really thrilled to have Lemonade here with us. Tim Bixby is their CFO. Tim, thank you. Welcome.

Good morning.

Maybe start at the top, just Lemonade has kind of one of the early insurtechs and really set out to fundamentally rethink insurance. And as the company has scaled, as you kind of sit back and reflect, what aspects of the original vision have proven the most durable and where in kind of the -- as you've gone along and you had to maybe adapt the most?

Sure. Yes. Good morning, everybody. I think one of the most striking things about Lemonade, and there's a few striking things about Lemonade is the consistency of the original vision. So from the original whiteboard or napkin concept in 2015, where our 2 founders, Daniel Schreiber and Shai Wininger got together and started the kickoff to today, really, the change has been almost nominal in terms of the original vision, strategy, go-to-market approach, AI first from day 1. Our first policy was sold by AI Maya. Our first claim was managed by AI Jim. And this was in 2016.

Lemonade was founded the year that OpenAI was founded. So a lot of water under the bridge since then, but we were built really for this day. And this day, meaning '21, '22, '23 up to what we're seeing day by day now from an AI perspective. But fundamentally unchanged and what the core premise of that is insurance can be done fundamentally differently from a user perspective, from a consumer experience perspective, if enabled by the latest and greatest technology, whether that's the LLM from last week or machine learning from 2015 and everything in between.

Perfect. And I mean, you obviously mentioned AI there a few times and going back 10 years ago, I know you guys were -- before it was really an everyday word. So you've been kind of preparing for the AI world and some of the rapid advances we're seeing more recently for a long time. What's your view or anything more you can add to the headlines around insurance via GPT has kind of been the last few weeks or SaaSpocalypse, kind of a lot of the theaters in the market.

Yes. this cycle is similar to the ones I've seen before and then, of course, different and fundamentally different in a couple of ways. But a lot of similarities to cycles we've seen historically where the fancy new thing comes and it gets very exciting and then it will be immediate disruption. And I think the selling insurance via LLM or GPT or cloud or what have you is interesting. But the experience is poor. And whether that experience will be poor a week from now or a month from now or a year from now, we don't know, but we don't need to know.

Lemonade has had the highest standards of customer experience at heart in our DNA from day 1. And using an LLM to sell insurance will be no different. If and when we get there, we'll be at the front of the line. We talk to these folks all day every day, but the consumer experience will drive it.

Yes. Great. You guys made a pretty exciting announcement recently related to Tesla and auto insurance product for FSD. Maybe can you talk about that a little bit? And then more broadly, kind of what is at top of mind for Lemonade as you think about kind of the autonomous vehicle wave that's coming?

Sure, sure. I think the most notable thing from my view about the Tesla announcement that was not sort of the flashy part. It's nice to have a big announcement with a big partner and a company like Tesla that has lots of folks who love it and then lots of other folks as well. And so that's always good from a PR perspective and I kind of plant the flag perspective. But from my view, under the covers, I think what I would take away from it, if I were kind of looking at the company from the outside is the pace and the speed and the agility with which we're able to do these things.

And so whether autonomous and assisted and supervised and there's some different flavors of driving that are coming to fruition here, whether the acceleration and the pace of adoption is faster or slower in between, it doesn't matter. It doesn't matter for us because we'll constantly be at the forefront. There's probably a tipping point before too long where this is kind of a rule of thumb where if once 10% of the miles are fully autonomous or supervised, that creates sort of a dynamic where there's likely to be seismic market shifts. Today, we're at 0.1% and then fully autonomous is [indiscernible]. And so it's going to -- we're going to have a little bit of time to think that through.

Lemonade was a pioneer in paper mile, which feels low tech now, but we've been in that for many years where a customer who drives less and is therefore a much fundamentally lower risk. There's not -- they're not no risk, but a lower risk. We have a pricing model that's been adaptable to that paper mile model for years. And so autonomous is one more -- it's a major step change beyond the paper mile approach, but that's one of the reasons we were able to put something together with the Tesla folks, with our product team in just a matter of months. Our employees are friends, some of our employees have worked at Tesla. And so these things are just natural when you're AI first and data first, and there'll be many more to come.

Cool. Great. Maybe if we shift to your -- as we think Lemonade going forward, the recent shareholder letter talked a little bit about some investment areas where I think the way you guys termed it was like medium-term ROI. Can you expand a little bit there, kind of what you're thinking about, what we might expect to see?

Sure. I think another striking thing about Lemonade perhaps is the visibility and the predictability of the model. So even though in an era with an insurance that has been really one of the most tumultuous the last 6 or 8 years in history, even in that era, Lemonade's key metrics have been sort of up and to the right in an almost surprisingly linear fashion, while the outside world and the macro world have been quite a bit more volatile. We set out a target to prove that we can do several things at the same time, dramatically improve our underwriting, go from a relatively immature insurance company to a mature insurance company, show loss ratios that consistently improve quarter over quarter-over-quarter with a new customer base and significant growth and doing all of that without moving the sort of the goal line of EBITDA positive.

So we planted that flag. I think it was as much as almost 4 years ago at this point, and it hasn't moved. And part of that is by our own choice, but part of it is the visibility and the predictability of our model and our ability to grow at a pace of our own choosing. Importantly, the market is not our limitation. We could grow faster. The insurance market, the addressable market is enormous by every -- almost every measure. But we spend money to acquire each new customer typically. Sometimes it's a cross-sell, but we spend that money upfront and it burdens the P&L, and we want to be able to show that we would hit that breakeven point. Despite that, under the covers, we're continuing to invest.

And so to your specific question, there are things that we can see in -- under the covers, in the numbers, in the analytics that are tougher to see externally where we can invest in areas where we know they'll have positive ROI in the medium term, but perhaps not in year and some of that is built into the guidance. Nevertheless, we're going to grow at a faster rate than last year. We expect loss ratios in line or better than industry best. Our loss adjustment expense, a key measure of the efficiency of the underlying machine is something like 6% in Q4. Industry norms are 9%, ours used to be 15%. So we can do more than 2 or 3 things at once.

Yes. Can you maybe expand on that a little bit because maybe people don't know Lemonade as well, like it's been pretty impressive kind of your -- how your expenses have gone, how your headcount has gone versus your premium over the past few years. Maybe talk a little bit about that and how you've really used technology to scale the business.

Yes. I think that's -- I've been with Lemonade 9 -- almost 9 years now. And I think one of the most pleasantly surprising things that I started to see in the numbers several years ago is when this dynamic broke, right? And the traditional dynamic in insurance is you're going to add a certain amount of business or add a certain number of customers and you're going to add a good slug of costs and maybe there's some efficiency gains. And what we started to see in the numbers about 3 years ago was headcount increases falling to 0, netting to roughly 0 and our top line accelerating, our ability to continue to grow the business.

And so after a few quarters of convincing ourselves that the change has come, that's really the underlying benefit of our approach and our single system. We have a single -- one data stack, one technical system that supports and drives the entire business. And the reason that dynamic started to occur, a big part of it is we were able to take big chunks of cost out of the system, not just become more efficient, but just eliminate entire cost. So for example, in our pet insurance business, which is a really interesting -- has some really interesting unique dynamics. One is frequency. So the frequency in a normal line might be 2% or 3% or 5% of your customers have a claim in a given year.

With pet, it's something like 100% or 120%. There's just a constant flow, which we actually like. It enables the flywheel to move faster. It builds our data advantage and it expands our data advantage faster. And so something like 50% or 60% of our claims in pet, we were able to take to 0, close them, pay them in real time, money in the bank account within a few seconds. And so it's not just getting more efficient. It's literally pulling pieces of cost out of the P&L. And so that's -- it's part of what drives that LAE improvement. And when you're able to get to these sort of efficiency gains that are visible and sustainable and we're so subscale. We're $1 billion plus insurance company at $10 billion or $100 billion, then you're starting to get to some real scale and those are the folks we compete with. But when you start to see this at our scale, that's what really tells you the model is really working well.

Yes. Yes. You touched on it there, just kind of the more data and the feedback loops. And if I kind of tie a couple of things together, like on one side, with kind of what's going on with AI and so forth, there are a lot more AI tools available to competitors today kind of easily attainable than -- I mean, you guys had to build it from scratch 10 years ago. So when you kind of take that on one side and say, like does that hurt your kind of competitive advantage or the moat that you've built around the business.

But on the flip side, like how important is all those new product lines you've added, the new geographies you've added and that -- really just that data and that feedback loop like how do you think about those 2 things?

Yes. It's -- the common question is, can you build Lemonade overnight over a weekend now, and it took us years to put together. And I think the underlying advantage is not for Lemonade sort of a silver bullet. It's kind of the culmination or the combination of all these different pieces. And so if you just took an extreme example, let's say, you took the Lemonade's front end and you gave it to a large incumbent for free. AI feels free even though you have to pay for it. But let's say you could code that thing up and hand it off to one of our competitors.

The question is what do you do with that capability? It's not getting the capabilities, what do you do with the capability. The real value of the Lemonade system is built under the hood on our proprietary data. We all share publicly available data, and that's been true for a very long time. And so if AI enables some of those sort of external facing pieces to be easier to build or easier to code, then that may very well be. But our fundamental advantage, we think, is actually expanding, not shrinking because of the pace of the sort of acceleration here. If we're all accelerating at a similar speed, whoever started first, this is -- you heard Daniel published this in the last couple of days.

If you started earlier and you're all accelerating at the same speed, your advantage is going to widen, is not going to narrow. It's kind of like it's a little bit of the -- it's a different version of the innovator's dilemma where for decades, to be an amazing insurance company, you had to be a bit of a Sumo wrestler, right? You had to be really big and really smart and have a lot of reserves, and that was how that system was built over decades and decades. And we're playing in a different game. And so we're not trying to Sumo wrestle the Sumo wrestler. We're doing the biathlon and we have a rifle and some skis and -- and next week, the sport is going to change again and whoever is most agile, and that's really where our advantage lies, not mastering today's model release, but knowing that we're going to be best fitted to master 3 releases from now in 6 or 12 or 18 months.

Yes. That makes sense. Along those lines of constantly expanding, growing, I think a lot of people think of Lemonade as a U.S. company, but Europe is kind of stealthily getting on the map and growing and you have a number of countries there products. Can you just spend a couple of minutes talking about kind of the strategy there and kind of maybe how the regulatory environment there is welcomes that...

Yes. So one of the -- again, going back to day 1, one of the strategic pillars of Lemonade was we can go where the market is. We don't bring in 1,000 agents, and we don't build big buildings and put our name on them. And so it became clear to us that we could launch Texas, for example, with no employees in Texas or we could launch Michigan with no employees in Michigan. And so we kind of planted the flag in Europe, and we said we're going to do this because we can. If you had asked me in my prior life before Lemonade, I probably would have strongly recommended against it for all the normal reasons, risk and capital and all those things. And that was really the reason we did it because we could.

And for a while, for a few years, it was under the covers. And now it's really -- Europe has come into its own. It's got some really interesting dynamics from a pricing perspective. There's no pricing regulation, price comparison websites drive a lot of the business. At first, we didn't like that because we didn't have an advantage. The direct-to-consumer model was really our fundamental advantage. We had to learn it. We had to become part of it. We failed a bit, and then we started to succeed quite a bit. And so Europe someday can be -- it should be half the business, right? The relative market size is 50-50.

We're following the game plan from the U.S. We've gone from 1 product to 2 products. We think car insurance will be great in Europe. We don't have it yet. We think pet insurance likewise will be great to add. More than half our business in Europe is from the U.K., which is our newest territory. More than half the business is from home insurance versus renters insurance. That's the newer product. So it's -- again, we're seeing this pattern that we saw in maybe 2016, 2017, 2018 in the U.S., and we have a nimble team. And it's actually -- it's interesting when you think about the sort of LLM question, can GPT sell insurance.

In some ways, Europe was a bit of a test case, right? We had to figure out price comparison engines a little distant from our customer experience. We figured out we had to mail it. Now obviously, AI and the LLMs are going to be a step change beyond those websites. But maybe that was a bit of a dry run that prepped us.

Good point. Okay. Great. I mean CFO is here, so let's put a financial hat on. Can you talk a little bit about the virtual agents and the kind of the growth financing arrangement that you put in place? It is pretty unique, but it seems to be working very well. You've renewed it, so on, like it's, I think, a big -- something people might gloss over, but is pretty unique.

Yes. It's -- so we have a synthetic agents program we call it. We really -- we developed it. When I say we developed it, we have partners who are thinking along the same line. General Catalyst is our partner in this. Others in the market do it. It's a bit rare outside of tech and software, and it's a little more common in private companies than public companies. And we found it to be a bit of a sleeper to put it mildly, which is -- it's one of the few financing mechanisms I've ever seen or experience that does everything you want it to do and none of the bad things that you don't want it to do.

And with all due respect to all the bankers and lenders in the world, there's always a trade-off, cost and covenants and all that stuff. And there's so much flexibility built into this program, and it gives us downside flexibility, but it also enables us to make decisions going forward. So we can grow at the pace of our choosing. We've been able to replicate the benefit of agents where we're competing against big incumbents with large installed agent bases. Now those can be a liability and can be cumbersome to manage and train and pay. But the nice thing about them is you can -- it stretches out your customer acquisition cost over a very long period of time, essentially the lifetime of the customer.

So we were able to do that, replicate that. There's a cost, right? So the partner makes a healthy return, but it's debt like. It's got all the advantages of debt where we're able to get the balance sheet benefit, lessen the cash flow burden, but also maintain our flexibility. There's no covenants. There's no limitations. There's no decisions we make that we can't -- couldn't make otherwise because of the debt -- a traditional debt structure. So it's just been ideal for our business and the kind of customer cohorts that we acquire, and it's just -- it was a good -- it's been a great fit.

Great. Before we open it up for questions in the last few minutes, maybe I'll ask you this kind of one forward-looking kind of look -- as you look out 5 to 10 years, I guess, look out 10, Lemonade is kind of 10 years old now. So let's look out 10 years, like what -- how do you, one, see where Lemonade is; but two, just the broader insurance landscape, at least in your personal lines sort of universe, particularly with AI coming of age and those sorts of things.

So I think in broad strokes, we have what we need. We don't have to -- there's another continent or 2 out there that we're not in, and that's always an opportunity. There's other products that we could launch, but we don't need to, but we likely will over time. But we have the core capabilities. We have the core products. We'll go -- we're in 50 states with a couple of products, but we're not in 50 states with all products. We'll continue that geographic expansion.

I think from a 5- or 10-year view, we have always believed that there's room in the insurance world for a single -- at least a single digital leader, the Spotify of insurance, the Uber of insurance, the Netflix of insurance. And that doesn't mean that sort of indicates a winner take most dynamic, which I don't think is how insurance plays out. But there's no one in the market that's ahead of us. 4 years ago, I would say that same sentence kind of waiting for the shoe to drop and the companies to flood in, and we've still not seen that. Our real direct competition is really ourselves, right, to maintain our standards, to adapt to these new technologies, to accelerate growth, to do all the things we've been able to do.

So I think in the same way that people love and use Spotify and would panic if you took it away from them, I think Lemonade will occupy a place like that in financial services and insurance 5 or 10 years from now.

Great. We got a couple of minutes left if there's any questions in the room.

[indiscernible].

Yes. So I think maybe you're getting at the long-term view of employment and compensation and some of those economic issues that are starting pretty starting to come pretty fast. I'll just assume that might be where you're going. So we are highly cognizant of the benefits of AI to businesses and cost structures and all those things. And we are even more cognizant of the broader pressures that we expect or might expect developing on consumers.

In the short term, consumers -- we're providing a service and a product that's of utmost importance to a consumer, whether they're wealthy or not wealthy or employed or unemployed or it's a critical need. And so while recession-proof might be an exaggeration, there's a bit of truth to that. People will pull down their discretionary spending, but they want to make sure their bike is covered and their pet is covered in their home, their most important asset is covered. And so I think that, that will be a short-term and a medium-term dynamic.

But in the long term, we have to have customers, and they have to have -- be healthy customers that have -- that own valuable things. And so it's in all of our incentives as leaders of businesses to think about these things. And so I don't -- I have no more magic vision than the next guy. I do -- the leader of Lemonade, Daniel Schreiber, has actually done quite a bit of thinking along these lines and outside of work is kind of a key thought leader in how these economic structures play out. And so it is a top of mind thing for us. And it's top of mind for me and probably you, anyone has kids and grandkids, and it's critically important. But from a Lemonade's perspective, we'll be at the front of the line, but we do have a greater responsibility, I think.

Great. We are at time. So thank you, Tim.

Thank you. Thanks.

Thank you. Appreciate it.

Hello, everybody, and welcome to the Lemonade Q4 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions]

I'd now like to hand over to the Lemonade team. Please go ahead.

Good morning, and welcome to Lemonade's Fourth Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's fourth quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor.

I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the SEC and our more recent 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 number of customers, In force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat, trailing 12-month loss ratio 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.

Good morning, and thank you for joining us to review Lemonade's results for Q4 2025. By any measure, this was our strongest quarter ever, and it capped a year of excellent financial execution and operating performance. In the fourth quarter, In force premium grew to $1.24 billion, up 31% year-over-year, and this extended our streak of accelerating growth to 9 consecutive quarters. Revenue grew even faster, up 53%, reflecting both growth and improving economics across the business. Indeed, I'm pleased to share that this growth translated directly into profitability metrics.

Gross profit increased 73% year-over-year to a record $111 million. And if I zoom out to take a 3-year perspective, our gross profit has been compounding at an annual compounded growth rate in the triple digits. As a result, adjusted EBITDA loss narrowed to just $5 million in the quarter, placing us on the brink of breakeven, and this represented a $19 million improvement year-over-year. Indeed, we generated $37 million in positive adjusted free cash flow in the fourth quarter, capping a strong year of cash generation. 2025 was our second consecutive year where we saw our cash reserves swell.

Somewhat unusually, insurance is a business that tends to turn cash flow positive before GAAP accounting positive, though the one almost inevitably follows the other. This then is as good a spot as any to reiterate, our long-standing expectation that we will be EBITDA profitable in Q4 of this year and EBITDA positive for the full year of 2027.

We continue to be highly focused on growth and accelerating growth because it's a gift that keeps on giving. Faster growth drives better data and further sharpens our segmentation and pricing capabilities. This powers improving underwriting performance and rapid gross profit growth, and we can swiftly redeploy gross profit thus generated into profitable growth investments with compelling unit economics, and so the cycle continues. It's energizing to see the flywheel continue to compound even as we scale.

What's particularly encouraging is that all this progress is broad-based. Pet, Car and Europe are all coming into their own as powerful growth drivers, each combining hyper growth with improving underwriting performance.

In our shareholder letter, we highlight critical initiatives we are investing in this year to leverage the latest AI technologies to further enhance our go-to-market operations, pricing and cross-selling capabilities. We believe that these initiatives can drive durable competitive advantage in pricing and unit economics that support our ability to sustain an industry-leading gross profit growth profile for years to come.

One last thing I wanted to take a moment to draw your attention to our upcoming Investor Day. This event is scheduled to take place in November of this year in New York and online. Specifics will follow, and we certainly hope you'll be able to join us for significant updates on our vision, AI capabilities and ambitious plans.

And with that, I'll hand over to Shai. Shai?

Thanks, Daniel. A key vector for us is autonomous insurance and specifically Lemonade Autonomous Car, which we announced and launched a few weeks ago, starting with Teslas. As physical objects such as vehicles increasingly shift from being controlled by humans to being operated by AI, insurance needs to evolve as well. Historically, the industry has priced auto insurance using proxies, credit scores, marital status, education and other similar features. We always believe that telematics is a much more precise tool than these blunt proxy, measuring the driving itself rather than something broadly correlated. But when a car isn't driven by a human, these proxies lose touch with reality altogether.

Lemonade Autonomous Car is priced based on 3 modes: when a car is parked, when it's driven by a human and when it's driven by AI. By integrating directly with the car's onboard computer, we can tell which mode that car is in at any given moment, distinguishing between various kinds of risk and pricing each accordingly. When the car is driving itself and doing so more safely than a human, the price reflects that. Our system accounts for the vehicle software version as well as for the quality and precision of the hardware sensors and computational units. As the car becomes better and safer with software updates or hardware upgrades, our pricing will automatically respond and continue to drop.

As of this moment, autonomously driven miles using Tesla's FSD are priced at about 50% of the equivalent human-driven mile, and we expect this to get better over time. We believe this represents a fundamental shift for the industry. As autonomous driving becomes safer and more widely adopted, prices should fall transparently and dynamically.

With that, I'll hand it off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our Q4 scorecard. In force premium grew 31% year-on-year to $1.24 billion, driven by customer growth of 23% and premium per customer growth of about 7%. We added about 550,000 new customers in 2025, 35% more than the prior year. Within our reported gross loss ratio of 52%, our favorable prior period development of 9% was driven entirely by non-CAT prior period development, primarily from our home and car products. Prior year development, which we report on a net basis, was $11 million favorable in Q4 and about $30 million favorable for the full year. Gross profit increased 73% to $111 million, while adjusted gross profit increased 69% to $112 million for a gross margin of 48% and an adjusted gross margin of about 49%. These metrics use revenue as their denominator. As a reminder, adjusted gross profit as compared to gross earned premium was 39% in Q4, up 10 points from 29% in the prior year.

Revenue grew 53% to $228 million, while our adjusted EBITDA loss improved to a loss of just $5 million. Notably, revenue grew more than 20 percentage points faster than IFP, a dynamic we expect to continue. Importantly, adjusted free cash flow was positive for the third consecutive quarter at $37 million and has been positive 6 of the last 7 quarters, while operating cash flow was $21 million. We ended the quarter with roughly $1.1 billion in cash and investments of which about $250 million is required to be held as regulatory surplus.

Annual dollar retention, or ADR, remained stable as we continued our clean the book efforts in our home business at 85%, flat versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $30 million or 24% to $154 million in Q4 as compared to the prior year. Let's break those expense lines down a bit.

Our other insurance expense grew by just $1 million or 6% in Q4 versus the prior year as compared to a 31% growth rate of our top line IFP. Total sales and marketing expense increased by $17 million or 35% due primarily to increased growth spend versus the prior year. In Q4, growth spend was $53 million, up 48% as compared to the prior year. Importantly, as we continue to ramp growth spend, our marketing efficiency levels remained stable and strong in the fourth quarter with an LTV to CAC ratio above 3x, in line with prior year.

We expect Q1 growth spend to be at a similar level as Q4 and expect a total growth spend of about $225 million for the year. Technology development expense was up 14% year-on-year, $25 million, while G&A expense increased 29% as compared to the prior year to $43 million. The year-on-year increase in G&A expense of roughly $10 million was made up primarily of 3 items: an increase in noncash stock compensation expense of about $2 million, an increase in interest expense of roughly $1 million and an increase in bad debt expense of approximately $5 million.

Our headcount increased slightly by about 4% to 1,282 in Q4 as compared to the prior year. Our net loss was $22 million in Q4 or a loss of $0.29 per share as compared to a net loss of $30 million or $0.42 per share in the prior year. Our adjusted EBITDA loss was $5 million in Q4, dramatically improved versus a $24 million EBITDA loss in the prior year. Our detailed guidance for Q1 and the full year of 2026 is included in our shareholder letter and represents 32% Q1 and full year top line growth year-on-year, roughly 60% full year revenue growth and of course, positive full quarter EBITDA expected in Q4.

And with that, I'd like to pass back to Shai to answer some questions from our retail investors. Shai?

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. There were a couple of questions from Paper Bag about our loss ratio and recent autonomous car insurance launch. Thanks, Paper Bag. As we have explained on a few occasions before, perhaps in more detail during our most recent Investor Day, we don't think of loss ratio as a stand-alone target, but rather as one metric or lever to optimize our quest for maximizing gross profit. Sometimes maximal gross profit is achieved by lowering loss ratios, sometimes by raising them. Our pricing strategy is solving for maximum gross profit in absolute dollar terms rather than any ratio.

Turning to our autonomous car product. With our telematics infrastructure, we're able to evaluate and price the risk associated with every driven mile accurately. In the case of Tesla FSD, the data we have shows that miles driven with it are more than 50% safer than when driven by human. This allows us to drop rates and become more attractive to customers versus peers, which is, in turn, lowering our customer acquisition costs and helps us win and retain more business.

Responding to your question about our 30% growth, I would think about this autonomous car insurance launch as a first step of a much broader strategy and direction that will materialize over time. Indeed, it could take years before we see a step change in autonomous car ownership. And with that said, we believe it is critical to begin now with building the best product for that future with the best experience pricing, underwriting and coverage.

In the near term, as we highlighted in our shareholders' letter, our growth drivers are increasingly diversified such as we are not reliant on any one segment or product line to drive growth above 30%. Pet and Car are both seeing IFP growth in the 50s and Europe in the triple digits, for example.

In another question, we were asked how soon car will expand to remaining U.S. states. We launched new states as soon as we can from a regulatory perspective, but only after we are confident that we can competitively and profitably price risk in each state. Our improving car results, both top and bottom line, speak for that discipline. Launching a state requires thoughtful preparation from marketing, pricing, product, tech, legal and finance perspectives. With our local platform and the agentic automations we're constantly layering into it, we're becoming very effective in this process, collapsing stages that used to take months into days. I believe we now have the most advanced regulatory and compliance process in the market, and we're only getting started. That said, states we've already launched represent roughly 50% of the U.S. car insurance market, a TAM measured in many tens of billions, and car is available to about 50% of our existing customers.

We've been launching multiple car states since the beginning of 2025 and expect to continue to launch new states with our autonomous car product throughout 2026. By 2027, I expect Lemonade car product to be available to the overwhelming majority of the U.S. population.

In another question, Charwak asked, with AI simplifying the insurance industry, what will keep Lemonade in an advantaged position over incumbents who might be willing and ready to modernize their software stack? How does Lemonade continue to differentiate and stay ahead? This is a question we get a lot, and I think the answer comes down to structural and cultural differences that are nearly impossible to overcome.

Lemonade was built as an AI-first organization 10 years ago. Every team member was hired into that environment. People who didn't thrive in a tech-first, fast-paced culture like ours moved on. Today, I estimate more than 95% of our team operates with an AI-first mindset. Our product and tech organizations are at the core of the company, which makes us product-led, customer-centric tech organization. In many ways, the AI explosion is the moment Lemonade was built for. We built the data infrastructure from day 1. We collect every signal, and we have been doing so for a decade. We have a highly rated app that customers love and actively use, which keeps them connected and allows us to continuously optimize pricing for the safest customers.

Now compare that to traditional insurers. These are companies built on the foundations of people, not technology. They treat tech as a cost center, not their core. They rely on third-party vendors that are themselves built on legacy systems, which leaves insurers with hundreds of disconnected systems they need to run their business. It's very hard for an organization like that to compete with a full stack tech-first company like Lemonade. In fact, in the history of all tech revolutions, you can probably count on the fingers of one hand, the companies that dominated prior to the tech revolution and still were there in a dominant position when the dust settled. It would be naive to expect that incumbents will be in this place forever. Of course, they're already talking about increasing investment in AI and sharing a case study here and there. But by the time they make meaningful progress, we believe we'll always be several steps ahead.

In the next question, CyberCat asked, how does Lemonade think about AI reducing uncertainty while creating new risk categories? I have to say, CyberCat, that a shrinking TAM does not keep us up at night. Even if AI compresses pockets of TAM, the resulting market opportunity remains essentially limitless relative to our client size. But with that said, I agree with the premise of your question. We are already seeing this in our existing suite of products with the expansion of autonomous driving. I think it's true that AI will continue to redefine the insurance industry with regards to the types of risks and products that are relevant over time, perhaps in ways that aren't immediately obvious today.

With that, I'll pass it over to the moderator, and we'll take some questions from...

[Operator Instructions] First question comes from Jason Helfstein with Oppenheimer.

So when we look at the numbers, we can clearly see an improvement in marketing efficiency. You obviously talk about it. We can see it kind of like a contribution margin. When I think about what that kind of implies to '26, it would like -- it looks like the EBITDA guide would be particularly conservative unless you plan to make other OpEx investments or essentially kind of like lean into potentially pricing for growth. So maybe talk about how you're thinking about that, i.e., reinvesting marketing efficiency into growth or just that it's conservative. And maybe tie that you made 3 points in the earnings letter that you plan to lean more into cross-selling and kind of automated pricing and improved pricing accuracy. So maybe just like we'll take those 3 comments, and I don't know if you want to link that back to like the first question, if it's connected?

So I'll take a shot at a subset of that, Jason, and then maybe my partners will jump in. Daniel has joined me here. And we've also asked Nick Stead, our SVP of Finance, to join us to perhaps answer a few questions. If I kind of think -- zoom out and think about '26 generally from a growth perspective, actually, Q4 was a pretty good proxy for how we're thinking about it. So you saw a couple of things happening really coming together in Q4. Certainly, the underwriting or loss ratio side of the business came in very nicely. But from a growth perspective, which is really the core of the focus right now, which is how do we grow effectively? How do we maintain an LTV to CAC that we are comfortable with, number one, and excited about improving over time, number two. And how do we lean into that over time.

And so we saw that come together nicely in Q4, where we were able to see -- free up a little more spending, free up a little more capital to invest because we saw nice underwriting results, and we plow that back into additional growth. So you see overperformance on the top line versus our guidance. That's because we deployed a little more growth spend than anticipated, and that's a good thing. So that's a backward-looking view. If you take a forward-looking view into '26, we're guiding to our very strong track record of being able to maintain a solid LTV to CAC of 3 or better.

What we do see here and there in certain pockets and certain channels and certain products and certain geos is overperformance, and that's when we're able to lean in. So I think what you see embedded in the guidance is some of that continued goodness, but we have not changed our philosophy of taking everything good that's happening in the most recent period and extrapolating that forward. So I think you're right. There's probably a similar potential to overperform. We think growing a little bit faster each quarter is important, and we grow at a pace of our own choosing. We're guiding to 30% plus. Obviously, we -- the market will enable us to do more. It's essentially an endless market. But I think at this point of the year, we're 6 weeks in. We like what we're seeing in January and February to date. And so that guidance reflects real optimism about being able to spend more, significantly more in '26 than in '25. That's a continuing trend and to potentially see that growth rate accelerate.

Yes. I agree with everything. The only thing I'd say, Jason, thanks for your question. There isn't designed buffer or conservatism built into the number. We're guiding as best we can as we always do. We do always look for opportunities to surprise ourselves and you and everybody, but our guiding strategy is to guide to pretty much what we have line of sight to. And what I think may be making the difference that you're kind of pointing to is captured in some of the things you referenced, which is we are investing in quite a lot of R&D work this year. So we highlighted 3 areas of investment. There are others that we didn't detail and even those we just touched on in passing, but we are undergoing very significant investments really that compound one another.

We see 2026 as a year of multiple engineering efforts quite aside from the fact that the kind of ground beneath our feet is moving because the models keep getting better and better every day we wake up to a more powerful brain at the very core of what we're doing. But beyond that, Shai mentioned the local platform that is going to look very different by the end of '26 than it is at the beginning of the year. And we spoke about our cross-selling platform, our pricing machine as we're calling it and our revenue machine, all big initiatives that should collapse time, increase precision and ultimately lower expenses. But perhaps some of the delta that you're pointing to and that you're assuming is conservatism is actually going to be spent on those initiatives.

Jason, it's Nick. I just wanted to jump in. On your question around expenses in 2026, you can think about operating expenses as being broken into 2 chunks. There's growth spend and then the remainder of operating expenses. Growth spend will continue to increase in 2026 as it has in '25 and '24. The remainder of the expense base should generally remain stable or closer to stable, growing in the single digits as compared to the top line, which is growing above 30%.

We now turn to John Barnidge with Piper Sandler.

My question is about adjusted EBITDA profitable in '27. How do you think about the target for premiums to surplus at that time? And do you think you can operate at greater leverage given some of the operational scale you've begun to achieve?

Yes. So from an EBITDA, maybe two questions in there perhaps. From an EBITDA perspective, we do expect Q4 this year, '26 to be fully positive as well as the full year of '27, which would be the first full year of EBITDA positivity. While we've not indicated growth rates beyond '26, we have been consistent in our communication that a 30% plus growth rate is our goal and an accelerating growth rate each quarter is also our goal. And so I would expect that ambition to continue into '27 and beyond given the immense size of the market that we're in and the markets that we can potentially be in.

From a surplus leverage perspective, we noted that we have about $250 million currently that's held as required for surplus. That's relatively quite capital light. We take advantage of a captive structure and we have reinsurance in place and other structures that, in combination, enable us to keep that surplus satisfactory for all regulatory requirements, but also to a minimum so that we can deploy capital in all the ways we choose to grow the business. We expect that to continue.

All of our forecast modeling tells us that we have more than ample surplus to support very ambitious growth rates even beyond our current growth rate and with ample cushion left over. And I think you can take real confidence, our forecasted breakeven points for EBITDA has essentially been unchanged for almost 4 years at this point. And so our visibility is quite good. Our leverage enables us to continue to be capital light, and we are more than sufficiently capitalized to grow at really ambitious paces through '27 and beyond.

We now turn to Tommy McJoynt with KBW.

The first one here is, obviously, there's been a lot of headlines around some advancements in ChatGPT and sort of the integration of carriers with that distribution model. Do you guys have any plans to allow tools like ChatGPT to actually bind policies for Lemonade? Or would the preferred route be to use ChatGPT as a search tool that ultimately leads to Lemonade where they could bind a policy?

I am so sorry. Tommy, let me start over. Can you hear me okay now?

All good. Yes.

Okay. I gave you a wonderful answer, but it was all lost because I was on mute. What I was saying was that we use AI in many, many aspects of our marketing. At the moment, not on the most front-end aspect of our marketing, but everything other than the skin deep kind of chat interface which ChatGPT has integrated with some players, obviously, from the skin on and it's all AI. When it comes to that kind of outermost layer, we generally love our own AI for that. Maya does and has done a great job chatting with customers, offering them an incredible experience. That isn't to say that we would never use something like a ChatGPT interface, but it's not something we've launched yet. And if we decide to do that, you'll be the first to know.

Okay. Understood. And then switching gears, as you guys have rolled out this autonomous vehicle insurance product on the car side, that obviously introduces a variable level of premium that's charged to customers on either a 6-month basis or a monthly basis. Is it your vision that over the long term, most car insurance will move to a variable level of pricing rather than a fixed 6-month term premium?

Yes and no. We today have both models. We have models where you can pay per mile. And we have others where it's fixed, and it's kind of customers' choice. And we don't have all of the options in all of the markets right now, but that is where we see this going and several states are there already. And this is really a choice, a style choice. Do you want -- you can remember the early days of mobile where you could pay by minute or buy plans and family plans and other things where you bought buckets and rollover months and all that kind of stuff. We think there's plenty of ways to do pricing around it. The big difference between what we're doing and everybody else is that we know the cost per mile. We are making predictions. Shai spoke about this in his comments earlier.

We are making predictions based on a plethora of data that come to us in real time at very high granularity from really high fidelity machinery that allows us to know that when you're driving, where you drive, how much you drive, how you drive and if it's you driving or the car, all of that means that we can price per mile with tremendous precision. If you then prefer to buy a bulk and have a fixed price, that's fine. We can use all of that information in order to price it for you as a fixed price, which will correct episodically and other people prefer to pay per mile, and we offer that as well. Both of them are fueled by the same AI engine and data set underneath.

[Operator Instructions] We now turn to Jack Matten with BMO.

Just a follow-up on the strategic initiatives and you talked about it in the letter, including the enhanced cross-sell platform. Just wondering if you could unpack that a little bit more. I know it references of car and home. And over the past year or so, I think you deemphasized home insurance growth a little bit. So just wondering how you view that line of business as part of Lemonade's overall mix longer term?

Sure. So that was a good tidbit that we put in the shareholder letter to give a feel for the kinds of things that not in a year when we are really continuing to focus on growth, on autonomous car, on really nice financial results, we're also continuing to invest in further reaching capabilities that we think over time will continue to not only help us maintain our advantages, whether AI-enabled or otherwise, but actually to expand those advantages versus incumbents. And those three areas we noted are really the core of what is a lot of interesting activity going on in terms of investment in future stuff.

Cross-selling continues to be important. More than 5% of our customers have multiple policies at this point. That's a really important metric. Almost 20% of our In force premium, however, is coming from customers with multiple policies. So cross-sell -- our ability to cross-sell, which is a really efficient way to increase IFP and accelerate growth without quite as much of a growth spend investment is important. And then the other two pieces really pillars of the -- our underwriting capability, which is pricing, constantly focusing on being able to deaverage pricing -- price on a car driver's behavior and not on their credit score and also to optimize how we allocate growth spend. So those are really three of the real key areas we're continuing to invest both with current resources and actually we will grow those resources to some extent over '26.

All of that's embedded in the guidance. All of that, we expect to deliver significant future ROI. Yet when you peel it all apart, our overhead expense, even with those incremental investments, is growing very modestly in the low single digits from an operating expense standpoint and almost our entire growth and expenses on -- growth expense to acquire new customers. That's a theme you've seen now for several years running, and that will continue, we expect well into '26, '27 and beyond.

Got it. And just one on the Tesla FSD initiative. I appreciate the color you gave earlier on this. But just wondering if you could unpack the opportunity you see for Lemonade and how much you think it eventually contributes to the share of your business? And then just given Tesla also has its own insurance offering, can you talk about how Lemonade is positioning its offering from a competitive standpoint?

We love talking about Lemonade, but we will shy away a bit from talking about Tesla and their plans and their goals. They're a terrific partner and setting a standard in so many ways, but we'll let them speak for their goals and aspirations. From our view, we want to be where our customers are and where our customers are going. We've had a pay-per-mile product in place for years. It's not right for every customer, but it enables us to do what we're best at, which is take deep levels of granular data and use that to price a customer most effectively. And often, that's to give the customer a better price, an autonomous vehicle, autonomous driving falls into that category without question.

Pricing the driver of the car, and that's where that driver is a human driver or an AI driver or no driver at all. The risk is still there, and we are best placed in the market to be -- I think -- we think, to be a partner to Tesla, but also to be a -- to kind of lay the groundwork as this part of the car market evolves. We think it helps us accelerate things that change more quickly play to our best strength, which is agility and a data-driven platform. And so we're really optimistic about it. We don't -- a little premature for us to say the impact on the financial and forecast model is. And as Daniel said, when it's the right time, we will certainly do that, and you'll be the first to know.

Ladies and gentlemen, we have no further questions. So this concludes our Q&A and today's conference call. We'd like to thank you for your participation. You may now disconnect your lines.

Good morning, and thank you all for attending the Lemonade Q3 2025 Earnings Call. My name is Brika, and I'll be your moderator for today.

[Operator Instructions]

I will now hand over to the Lemonade team to begin.

Good morning, and welcome to Lemonade's Third Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's third quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor.

I would like to remind you that management's remarks made on this call may contain forward-looking statements. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our letter to shareholders and the Risk Factors section of our Form 10-K filed with the SEC on February 26, 2025. 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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 certain performance metrics, 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.

Good morning, and thank you for joining us to review Lemonade's results for Q3 '25. I'm happy to report another very strong quarter. Our in-force premium grew to $1.16 billion, marking our eighth consecutive quarter of accelerating growth. Our revenue was up 42% year-on-year, while our in-force premium enjoyed 30% growth, growth rates we were not expecting before 2026. Happily, our strong top line metrics were matched by our profitability KPIs. Our gross margin climbed into the 40s, while our gross profit more than doubled to $18 million, propelling us steadily and predictably towards EBITDA profitability in Q4 of next year.

All our products and regions contributed to this dynamic of accelerating top line and improving profitability, though it is worth spotlighting car, which saw 40% growth with more than half of that coming from existing Lemonade customers essentially CAC-less acquisition. That's transformative to car's unit economics as is the 16% year-on-year improvement in car's loss ratio, which came in at a lovely 76%.

Staying with loss ratios, our company-wide gross loss ratio in Q3 was 62% and our trailing 12-month loss ratio was 67%, both our lowest ever. If nothing unexpected happens in the coming weeks, I anticipate that we will set a new record once more this quarter, Q4. Against this backdrop, it's worth remembering that while declining loss ratios and expanding gross margins are a thrill, they are not per se what we are solving for.

As I explained at some length during our Investor Day 1 year ago, the metric we are looking to maximize is gross profit dollars. Loss ratios always affect gross profit but not always as a simple counter movement, whereby lower loss ratios yield higher gross profit. In reality, the relationship is non-onotomic, meaning that often a higher loss ratio will yield higher gross profit. The underlying mechanics are obvious when you think about it. Given the incredible price sensitivity in insurance, each percentage reduction in price can often yield outsized returns in terms of conversion and retention.

Lower prices worsen gross margins and loss ratio, yes, but the attendant boost in revenue often more than makes up for that. This means that for some parts of our business, certain products, certain channels, certain segments, a higher loss ratio and slimmer gross margins will actually translate into higher gross profit. Given the choice, we will always privilege dollars over percentages, which is why when we see an opportunity to trade higher loss ratios and slimmer gross margins for higher absolute gross profit dollars, we will take that trade 10 times out of 10. And indeed, as noteworthy as our loss ratio progression has been in these past 2 years, during that time, our gross profit has surged by 261%.

The full significance of this comes into sharp relief when paired with the fact that during the same time, our underlying expenses increased by single digits. This means that we've essentially transformed our variable expense into fixed costs. That's extraordinary. It's the hallmark of an AI-first company, and it is the reason why our gross profit trend line charts our path to profit and beyond.

And with that, I'll hand it over to Shai.

Thanks, Daniel. I wanted to shed some light on something that captures one of the ways AI shows up in our results, the LAE ratio. For those less familiar with our industry, LAE or loss adjustment expense measures the cost of handling claims as a percentage of premiums. It's a simple but powerful indicator of operational efficiency, and it is one of the few metrics that truly allows apples-to-apples comparison of the underlying efficiency of different insurance companies. It should be noted, though, that this metric is influenced by economies of scale. And so the larger the insurer, the more they are expected to have a good LAE ratio. For reference, large carriers typically report around 9% LAE. In other words, they spend about 9% of their premium dollars to handle claims on top of the claim payment itself.

I'm happy to report that our investment in automation has been paying off. And despite our relatively small size in comparison to the largest U.S. carriers, we reached a superior level of efficiency with an LAE of 7% on average across all of our products. In fact, in the past 3 years alone, we've cut our LAE ratio in half and the number of Lemonade claims adjusters actually declined, all this despite our claim volume growing 2.5-fold.

Using blender, our AI-powered insurance operating system, claim adjusters are able to handle 3x the claim volume they could before, all while providing our customers with a more transparent and instant experience. But having the best-in-class LAE is not where we stop. We wanted to take this further and expect to cut the LAE ratio in half yet again in parallel with our next doubling of the business.

With that, I hand it off to Tim, who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our Q3 scorecard. In-force premium grew 30% year-on-year to $1.16 billion, driven by customer growth of 24% and premium per customer growth of about 5%. We added a record 176,000-plus net new customers in the quarter. Gross loss ratio was 62%, an improvement of 11 points year-on-year and 5 points sequentially, while trailing 12 months gross loss ratio improved 3 points sequentially to 67%.

Prior period development was 5% favorable, driven by 2% unfavorable CAT prior period development and 7% favorable non-CAT prior period development. Total CAT in the quarter, excluding the cat prior period development was 4% -- favorable prior period development was driven primarily by home, car and EU operation, while the unfavorable CAT development was related primarily to the California wildfires in Q1. And on a net basis, prior period development was similar with non-CAT about 6% favorable and CAT 4% unfavorable for a net impact of about 2% favorable.

Prior year development, which we report on a net basis, was $6.3 million favorable in Q3 and $18.9 million favorable year-to-date. Gross profit more than doubled to $80 million as did adjusted gross profit to $81 million for a gross margin of 41% and an adjusted gross margin of 42%. These metrics use revenue as their denominator.

Adjusted gross profit as compared to gross earned premium was 29% in Q3, up 11 points from 18% in the prior year. Revenue grew 42% to $195 million, while our adjusted EBITDA loss improved by about 50% in the year to a loss of $26 million. And it's worth highlighting that revenue grew fully 12 percentage points faster than IFP, a dynamic we expect to continue through at least Q2 next year, primarily due to the recent increase in retained business through our quota share reinsurance structure renewed July 1.

Our Q4 revenue guidance, in fact, implies a roughly 49% year-on-year growth rate at the high end of the guidance range. Importantly, adjusted free cash flow was positive for the second consecutive quarter at $18 million, while operating cash flow was positive $4 million. And we ended the quarter with just under $1.1 billion in cash and investments, of which $278 million is held as regulatory surplus.

Annual dollar retention, or ADR, began to improve again as expected and was up 1 point to 85% versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $17 million or 13% to $141 million in Q3 as compared to the prior year. And let's break those expense lines down a bit. Other insurance expense grew by $4 million or 22% in Q3 versus the prior year versus a 30% growth rate of in-force premium. Total sales and marketing expense increased by $6 million or about 12% due to increased growth spend versus the prior year.

In Q3, that growth spend was about $46 million, up 16% as compared to the prior year. We expect Q4 growth spend to be at a roughly similar level, which would put us at a total growth spend of about $180 million for the year. We continue to see both ROI strength and diversity across growth channels, where we've been able to maintain our LTV to CAC ratio above 3:1 across products, across channels and across geographies.

Technology development expense was up 13% year-on-year to $25 million, primarily due to increases in personnel expense, while G&A expense increased 11% as compared to the prior year to $35 million, primarily due to an increase in interest expense. Headcount decreased sequentially from 1,274 in Q2 to 1,259 in Q3 and was up about 3.5% versus the prior year and essentially flat versus 24 months ago. Our net loss was $38 million in Q3 or a loss of $0.51 per share as compared to a net loss of $68 million or $0.95 per share in the prior year.

Our adjusted EBITDA loss was $26 million in Q3, significantly improved versus $49 million EBITDA loss in the prior year. We're well positioned to continue to fund this growth to expand across geographies and continue to diversify our customer mix. With over $1 billion of cash investments, efficient capital surplus management and positive adjusted free cash flow, we're well positioned to fund our growth strategy without need for additional capital.

Given strong year-to-date performance, we are raising our full year 2025 guidance across in force premium, gross earned premium, revenue and EBITDA loss. Our expectation for positive adjusted EBITDA for the full quarter of Q4 2026 remains unchanged. And with the recent change in our quota share ceding ratio, we expect our ceding rate to continue to decline in Q4 to roughly 40%. Our Q3 results show continued execution on and ahead of our targets, 30% premium growth, double-digit loss ratio improvement, a doubling of gross profit, revenue growth well outpacing premium growth, recurring positive cash flow and a strengthening balance sheet. We are delivering a unique combination of growth and profitability improvement and are doing both at scale with real discipline.

Let's talk through our Q4 expectations, and then we'll take some questions. For the fourth quarter, we expect in force premium at December 31 of between $1.218 billion and $1.223 billion, gross earned premium between $283 million and $286 million, revenue between $217 million and $222 million and an adjusted EBITDA loss between $16 million and $13 million. We expect stock-based compensation expense of approximately $18 million and a weighted average share count of approximately 75 million shares for the quarter.

And this implies for the full year, gross earned premium of between $1.044 billion and $1.047 billion, revenue between $727 million and $732 million, and adjusted EBITDA loss between $130 million and $127 million, stock-based compensation expense of approximately $61 million and a weighted average share count for the full year of approximately 74 million shares.

And with that, I would like to pass over to Shai to answer some questions from our retail investors.

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. Paper Bag asked, with the Local and L2 announcement, what tangible things will be accelerated as the number of car states we plan to launch in 2025 and beyond changed? Are there any new products planned to be coming out faster? And will we see further operating leverage in our engineering teams?

Thanks, Paper Bag. The local platform represents a major leap forward in how we build and evolve our insurance products. And yes, it's already accelerating a lot of what we do. For those who aren't familiar, Local is what we call our next-generation LLM first no-code insurance product builder. And it effectively gives our teams a new way to configure, design, test and launch complete insurance products and experiences without needing to write or deploy code. Local is being built in a modular way. It is already deployed and delivering value in some parts of the business, even though much work remains before local is complete. And based on the rollout so far, processes that used to take weeks can now happen in hours.

And yes, it accelerates our operating leverage by freeing our engineering teams to focus on higher impact initiatives since much of the product improvements and tests we're doing can be handled directly by our product and actuarial teams with no engineering involved.

Paper Bag also asked, what is the reason or rationale for the recent board seat nominations of PayPal's CMO and Meta's VP of AI Product and are there potential partnerships with either company in the works? Paper Bag, the rationale for the additions of Jeff and Prashant to our Board is that both of their areas of expertise, AI and brand are central to Lemonade's strategy.

Jeff and Prashant each bring exceptional experience that aligns directly with where we are headed as a company. Prashant is Meta's VP of AI Products, prior to which he was Meta's VP of Generative AI, giving him a unique insight into how cutting-edge AI can be deployed at scale. Jeff is CMO at PayPal and Venmo and was previously Global Head of Marketing at Airbnb. So he has shaped some of the world's most loved and enduring consumer brands. As we continue to leverage AI to deliver delightful customer experiences and ultimately transform the insurance industry, their experience and perspectives will be invaluable in helping guide our next phase of growth. There are no specific partnerships with either company to highlight at this time. Our rationale is strategic expertise and not corporate collaboration.

There are several questions about the future of FSD and how we are positioning our car insurance product in that shifting landscape.

So I'll share some thoughts responsive to that general theme. This is an area we pay close attention to. The time line for widespread autonomy is uncertain. It could take longer than the optimists predict or accelerate faster than most expect, and we're building with that range of scenarios in mind. Whenever autonomy reaches its tipping point, we believe we are well positioned to capture what many incumbents might see as a threat. The shift toward autonomy plays to our strengths. The future of car insurance is increasingly about pricing per mile driven and distinguishing between human and system-driven miles. Our system is built around usage-based pricing, real-time data and flexible coverage, precisely the infrastructure needed for that future. And we don't have any legacy systems or traditional business models holding us back.

Lastly, there were a number of questions about our Tesla integration.

We recently announced a direct integration with Tesla's API, which with proper customer consent allows us to pull driving data straight from the vehicle. This gives us access to a much richer and more precise array of data than what's possible through a phone app or plug-in device. Things like seatbelt usage and more accurate trip insights, for example. It's the kind of granular telemetry that becomes critical as cars get smarter and more autonomous, data that not only sharpens our pricing and underwriting precision today but also positions us to learn directly from the evolution of FSD systems over time.

As for ensuring FSD miles at near 0 cost, we aren't able to share material updates on that at the moment but promise to do so when we can. What we can say is that integrations like these are early building blocks for the future where usage-based and system-driven pricing becomes the norm and where our platform is already designed to adopt.

And with that, I'll pass it over to the moderator, and we will take some questions from the Street.

We.

[Operator Instructions] We have the first question from Tommy McJoynt with Keefe, Bruyette, & Woods.

You noted about half of new car customers were existing Lemonade customers and thus were effectively CAC-less. How does that level compare to prior periods? And is the plan for the majority of new car customers for the foreseeable future to be CAC-less?

I would say that, that 50% rate has been consistent, plus or minus for a few quarters now. So it's a good number. It's a stable number. The CAC-less approach is without question, part of our focused, driving customers to multiple policies. We've seen growth in the multiply policy rate above 5%. It has increased sequentially every quarter for quite some time. But I would think of that 50% plus or minus number is a good stable number that we expect can continue.

Just to add to that, in addition to these customers being CAC-less, they are remarkable in other ways. They tend to have much better loss behaviors, loss patterns. So they are less costly not only to acquire but to service. They tend to have higher retention rates. There's a lot to love about these cross-sold customers. We -- in the letter we refer to them or in my comments refer to them as CAC-less, it would be more accurate to almost think about it as negative CAC. These are customers that tend to be profitable in whatever line of business we acquire them through and then they add a car policy on to that. So it's really an important part of the business.

I will just add that while 50% or as we said, over half of our customers coming this way is a big deal. It's a core plank of our strategy, always has been. That part grows more organically, whereas the one that we target is less organic, and we have dials that we can dial that up or down. So the more you find us spending on acquisition, the more that will affect those ratios over time.

Got it. And then switching over, looking at the ceding commission revenue line, was there a contingent or profit share tailwind in that ceding commission in the third quarter? It looks like it was a higher percentage of ceded premium than it had been running at.

The bulk of that ceding commission is driven by loss ratio and because the loss ratios came in quite nicely, a record low in the quarter. As you know, there's a sliding scale of commissions. So the commission varies somewhat up and down based on the loss ratio. There's a cap and a floor, a high and a low. So at some point, you cap out when your loss ratios get really, really good. So that was the main driver in the quarter. And probably worth a reminder, the ceding commission that you see on the face of the P&L is about 4 points different than the actual ceding commission, and that's an accounting nuance.

I think you'll see an effective ceding commission rate of about 28% in the quarter. But on a P&L basis, because of the accounting nuance, you see about 24%. So you're exactly right, a couple of points better both year-on-year and sequentially.

Your next question comes from Jason Helfstein with Oppenheimer.

I'm going to try to sneak in like 2 and then a quick housekeeper. So obviously, we're seeing like impressive improvements in kind of the contribution ratio efficiency. No doubt you are finding ways to use AI to make the business more efficient. That being said, where would you rate yourself on like at a 10, this would be us using all of the AI tools out there that we could and where you are? That's question number one.

Question number two, again, you've got the business dialed in now between kind of growth and marginal contribution improvements. Is there anything philosophically to think that you're going to lean more into growth because of the way the business is and the metrics are playing out?

And then lastly, Tim, just expenses were up on a year-over-year basis and sequentially in the third quarter, like OpEx, i.e., technology and G&A more than we've seen in a while. Just is there just anything to call out from an expense standpoint in the quarter?

Jason, -- so the AI is now -- the impact of our AI deployments, I think, is now reflected on pretty much every line in our P&L. So you're quite right. We see it almost anywhere you look. We spotlighted the LAE as a way to really provide apples-to-apples comparison and that way you can see how dramatically different it is from the incumbency. You could look at the fact that we've OpEx -- sorry, our gross profit has gone up tenfold in the last 3 years, whereas our headcount hasn't moved, has actually moderately declined. So there are a lot of indications of something pretty dramatic happening in terms of the AI, and we see that in terms of all the efficiencies.

And if you look at the life cycle within kind of the customer engagement with Lemonade, you'll see AI everywhere. It starts with how and where we deploy the marketing dollars that attract you as a customer. So as you know, about 90% of those dollars that Tim referenced earlier that we deploy to acquire customers, about 90% of them are guided by AI, some 50 different machine learning models that optimize how we spend, where we spend based on LTV to CAC predictions of every customer, every segment, every advertising campaign.

Then when you come to us, our recommendation of products and also some other settings and cross-sells during the purchase process is AI-driven. And then later, when you engage with us and ask customer support or claims, and you'll see again the majority of our claims being settled without human intervention by AI. So by one measure, I would say that we score very high on your 1 to 10 scale. We really do use AI across the board. The majority of our code, software engineering is now written by AI. So we're really seeing this everywhere.

At the same time, I think if you take a zoomed out perspective and you kind of judge today by where we will be a year, 2 years, 3 years from today, I think you'd rate us as a. I think we're just getting started. And there is so much more that we see that we can do. We're scrambling to do it all. As we are doing that, the ground beneath us is shifting because models are becoming so much smarter, so much faster. So I think both we have done a lot and we have done very little, one measured against what the industry knows and the other one measured against the potential that we see coming over the course of the next few years.

Another word about your second question. Can you -- Tim, do you have that?

Yes, it was about just philosophically now that everything seems to be kind of working would you consider leaning into more growth and pushing out like kind of profitability targets and then there would be housekeeping expense.

Okay. So yes and no, and we tried to touch on this in our earlier comments. We see ourselves turning EBITDA profitable in Q4 of next year. That's not moving. I don't anticipate any change in that. That's been our expectation for some 3 years, and it's becoming increasingly obvious, I think, to people outside the company and why we're so confident of that. So that particular profitability metric is unlikely to change. But there are other metrics that talk to profitability, such as gross margins, which we see as more pliable. So what we are optimizing for is gross profit dollars.

And in pursuit of maximizing gross profit dollars, there will be segments where we will let loss ratio rise because the elasticity of demand is such that, that will spike demand and retention in a way that offsets the margin becoming a little bit more constrained. So depending on which -- pick your metric, and I'll give you a better answer, the gross profit dollars, we expect to maximize, and we don't expect to take our foot off the pedal there at all. And the ultimate EBITDA breakeven is locked in for Q4 of next year, and we're not anticipating that changing.

Great. And then a couple of notes on the expense side. You're right that the tick up in this quarter was a little higher than is typical. We do see it vary quarter-to-quarter. I don't see that as a step change or an ongoing change. But particularly in the quarter, growth spend, obviously, is a notable year-on-year increase, and we break that out. We're spending a bit more for tech personnel, and you see the offsets from that in efficiencies elsewhere but that's a dynamic where if you isolate that line, over time, you can see some increase there year-on-year. Some of it is just purely inflation. The team size doesn't grow dramatically but the cost goes up modestly.

In G&A, our interest expense growth, and that grows with our growth spend more or less because we're -- as you know, we're financing about 80% of that growth spend. So from an expense standpoint, it jumps out. But from an overall cash flow benefit standpoint, obviously, that's a terrific benefit to our -- the IRR measures of the company as a whole. A little bit of noise in our merchant fees, which can be seasonal, meaning they can move a little bit more or less than the premium in the quarter. So a number of little things, but the big picture is unchanged, single-digit expense growth and 30% plus top line growth, and you see that in the chart that we published, and that's what we expect going forward.

Your next question comes from Katie Sakys with Autonomous Research.

A couple from me. I guess, first, it sounds like there's a bit more growth scheduled for 4Q than previously messaged the last time you hosted a call. So I guess I'm just trying to reconcile the change in the IFP guide for the full year '25 given the magnitude of 3Q results relative to previous guidance. It doesn't sound like you're messaging necessarily a pull forward in growth into 3Q from 4Q, but it kind of does seem like the full year guide implies a bit of a sequential deceleration next quarter back down below the 30% growth rate. So I'm just looking for some additional color there on the change in the full year guide when 3Q IFP netted out relative to the previous guide.

Sure. Katie, your math is right. So when we have a big beat on a key metric in a quarter, then obviously, we evaluate how much of that we expect to continue forward and how much we want to make certain adjustments on the top line, that IFP number captures the entire business, not just the additional sales or the new sales or the growth rate. So while our growth spend has increased and our new sales, we expect to increase as well, we're cautious about retention. Our Q3 results were actually quite good, and we're able to overperform but we're somewhat thoughtful about that top line going into Q4 because that captures the entire business.

The opposite is true on the other line items. So in gross earned premium and revenue, we captured not only the beat in Q3 but additional increase in Q4. So there's a little nuance there between the metrics, that's what's going on.

Okay. Yes. No, that makes total sense. It's just -- I mean, ADR, like to your credit, improved versus last quarter, showing upward progress there. I understand, obviously, some of that is coming from the lapping of nonrenewals on home from last year. But I mean, it looks like you guys are doing well in terms of retention versus maybe we were at the start of this year. So I'm just curious about the conservatism, like you were able to exceed the 30% IFP growth rate this quarter. So what in the financial plan is potentially looking a little bit less positive as we end up the year, especially as retention continues to improve?

I would think of it as all quite positive if you're looking for our view and how we see things rolling out, particularly in the fourth quarter where we're a month plus in. We have pretty good visibility. I'd remind that we continue to be really thoughtful about our home book of business. The underlying numbers actually look quite good, the loss ratio and the other metrics. But we continue to work through what we've called our clean the book exercise. That continues unchanged. Actually, it will have a level of impact in the second half that's similar to the first half.

But that continues, and that's part of our plan. So we're growing at a 30% rate despite that sort of pruning of our customer base. So all your questions are fair, but I think we're quite optimistic I just want to be thoughtful about the parts we know about and the parts we don't yet know about, which is the remainder of the quarter.

And maybe, Katie, sorry, just for the benefit of people listening on who haven't done the math as you have, our guide does anticipate a 30% next quarter at the high end of the guide. We've guided at something between 29% and 30% growth for Q4. So we're certainly not anticipating or guiding to any considerable reversal or slowdown as guided.

Okay. And then if I could just sneak in one more. I can appreciate that the trailing 12-month gross loss ratio is trending well below the 73% target you guys have previously messaged. Just kind of thinking about that in the context of the changes to the quota share structure and ongoing maximization of gross profit dollars. Is 73% gross loss ratio still the right target for the business at this point? Or do you eventually see a pathway to taking that target down lower?

It's a great question, Katie. And to be honest, we've tried to be responsive to questions such as this one and provide a target loss ratio. But I do want to give you an insight into how we think about this, which is that there isn't a target per se. Loss ratio is an input, not an output. It's a lever which we use to optimize the business. It's not necessarily evident that the business is optimal. So because we are as efficient as we are and our other cost structures are declining as they are, we are in a position to be price leaders, a thesis that we developed at some length almost a year ago during our Analyst Day on November 20 of last year, which is to say, we think that there is a structural advantage that Lemonade enjoys where in a price-sensitive market like ours, but oftentimes a 1 percentage move on price will yield a fivefold increase in conversion or other metrics.

It may make sense for us to continuously refine within certain markets and certain segments get to very competitive price points. And that will put pressure on gross loss ratio. But just to give you a hypothetical, I spoke earlier about the CAC-less acquisition of great customers in the car business. Why do we need to optimize to a 73% or any other particular number for these customers where there is no cost to acquire the customer and almost no cost to service the customers. You can envisage a situation where we could lower prices so dramatically where we would be profitable with a 90% loss ratio. The math here and the degrees of freedom that we have is pretty dramatic and something that will be very, very hard for the incumbency to replicate.

So we are using the data to guide us in terms of what is optimizing gross profit. At times, that will mean selling a lot more with thinner margins, at times not. Some of our products are more price elastic, some are less, some campaigns are more elastic, some are less. So it will aggregate into a loss ratio that we will report on a quarterly basis. But we're thinking about loss ratio less and less as one big aggregate number with a target more and more as fine-tuning of optimization of by product, by campaign, by region, and that will result in different loss ratios, different product lines but always in the service of maximizing gross profit.

I hope that gives you -- I hope that helps give you an insight into how we are approaching the question that you're asking.

We now have Zachary Gunn with FT Partners.

So I also just wanted to follow up on the gross loss ratio, so down 5 points overall, up 13 points in Europe. So can you just talk a little bit about what drove that decrease in Europe? Is it benefits of scale? Was it product mix? And then just I'll get my follow-up on that topic as well. I think previously, you've talked about U.K. being really strong in Europe from a growth perspective, maybe Germany being a little bit weaker. Any updates there within the European market of what you're seeing?

Sure, Zachary. Let me start it off and then Tim, please come in with anything that you feel I missed. Our European business is doing spectacularly well. We put a spotlight on it a couple of quarters ago, I think, but it really is. We're seeing something like 170% growth in our European business this quarter. We're seeing our customer base doubling year-on-year and a very healthy loss ratio. I think we mentioned in the last quarter, if memory serves, that when our American business was at this -- or the size, this dimension, its loss ratio was 30 points worse than we are in Europe today. So things that are moving along the same trajectory as our U.S. business. But to some extent, we've learned lessons and built systems and to some extent, the nature of the European business allows us to do things faster.

And let me just unpack that last sentence for you, which is in the U.S., as you know, regulators across the 50 states have varying requirements. But by and large, there are systems, hoops, loops that we have to jump through before we can affect price changes, not so in Europe. In Europe, there are other regulatory constraints but we have freedom or much more freedom to price and to change prices dynamically, which means that when we pick up signals in terms of pricing inaccuracies, there isn't the time lag that we have in the U.S., we're able to course correct instantly. And our systems are set up to do just that.

So we are seeing that our business there is much more responsive to any signal that we pick up. And I think that as much as anything else, we've got a fabulous team. We've got lessons learned and some scar tissue from where we missed steps in the past but that more than anything else has just allowed us to move at a pace that we just can't in the U.S.

Tim, anything you wanted to add to that?

Yes. Just general good news across the board, I think, and particularly from a loss ratio perspective, we're starting to see some mix benefit. So as the U.K. grows and in particular, the renters book in the U.K., that sports a nice effectively low loss ratio, that starts to show up in the total. So that's part of the driver. Some of it is prior period impact, also favorable in the quarter, and that's good news. That just means when you have a younger book of business and you're more thoughtful in your reserving, you can at times have a favorable release of prior period. We saw a bit of that in our French book, which is a smaller book of business.

With the U.K. heading in aggregate above the 50% level, that bodes well. But we're also seeing nice improvements in other territories as well. We've gone from having really no home business in Europe to having a really nice and effective home product now in 3 of the 4 territories. So Europe is really hitting on all cylinders. It's still a relatively small portion of the book but it's become material, and you'll likely hear more about it from us as we go forward.

Your next question comes from the line of Andrew Andersen with Jefferies.

Just looking at pet, it's been growing pretty well and the loss ratios seem pretty stable there. I was wondering if you could just touch on kind of the competitive environment you're seeing with pet, maybe how you feel your pricing is relative to some of the industry? And if you could maybe touch on what you're seeing in terms of loss trends there.

Yes. Again, I feel like a broken record. The things I said about the EU are also true in pet, super stable and predictable loss ratios at this point, a little bit of seasonality. The partnership with Chewy continues to hum along. about almost 5% of the business now has been driven through that partnership. From a competitive standpoint, we've done in 4 or 5 years. I think what it took pet-only providers that are really, really strong players in the market, 10 or 12 years to do. So we really like what we're seeing from a pet perspective. From a pricing perspective, I would think of it as similar to our other products where while we don't aim to be -- to underprice the product or to be price anything as a loss leader, we will often be, if not the most -- the least price, a super competitive price. So we do lose business if it doesn't satisfy our LTV model requirements but we're typically quite competitive with the strongest players.

And I just want to go back to some of the LAE comments and the potential for improvement in that ratio over time. I'm just trying to think about how you are managing kind of maintaining a similar customer service level but also taking into consideration, I imagine at some point over time, there will be a pivot back towards some more homeowners and auto will be a different or a higher mix of the book. So how do you kind of manage through the different customer service levels and the changing needs there, but also using automation efforts?

Andrew, you'll note in the letter, we break down the LAE by product. And you'll see that there's a uniformly down to the right shape to all of the curves, all of the products, including the more complex ones that you're asking about. So we are seeing that we're able to use AI across the board, across the product line to great effect and to achieve dramatic improvements in terms of automation. The very nice thing about using AI to do this work is that it's never at the cost of customer service. It is to the delight of customers. The overwhelming majority of complaints that we get, I think well over 90% for that things that humans do rather than AI does.

So when we deploy AI to do these things, it's not the old thing that you used to get when you dialed United Airlines and you have to repeat yourself 7 times to be understood and press 1 and press 3 and press 5 and you knew you were interacting with a machine. These are very high level -- we only deploy the technology once it reaches very high levels of customer satisfaction. And once it does that, it usually exceeds or in the areas that we agree to let it go live, it exceeds what humans do because it's much faster. The error rate is often lower. So we're seeing it able to handle ever more complex things.

Jason asked me earlier about kind of our scale of 1 to 10, and I think that would apply here as well, which is you can see how much we've done. And at the same time, we just think that there is a whole lot more that we can do. We really do see a blue ocean in front of us of areas that we can improve. So we're fairly bullish on kind of if you zoom out on the prospects of AGI within the next few years, which really means that machines will be able to do every activity, every intellectual activity that humans do today.

And therefore, the idea that some of these products are more complex and require humans today is both true and transient. I think in the coming years, you will find that we'll be able to deploy systems to take care of all of our customers' needs, lowering our costs and raising the level of customer delight.

And I think add a thought, sorry to interrupt. I think there's a note or 2 in the letter that's kind of elegant around this concept of shifting variable cost to fixed cost. And so if you think from a customer satisfaction standpoint or a customer experience standpoint, very specifically, in the older world, even if you automated responses or interactions with customers, you had to have a human evaluating and improving those responses. So they weren't -- so they were constantly improving and getting better. And that human evaluating those responses became a variable expense. They had to review and think and make judgments even though they weren't actually responding to every request with the tools -- with the AI tools we now have at hand, even that review process with a human intervention can be automated such that an improvement in the response can filter out to our entire customer base in real time.

And so this concept of constantly looking for variable expenses that we can convert to fixed expenses is really -- it sounds simple but I think in the world of AI, it really helps to kind of sharpen the focus on how these things actually turn into things you can see on the P&L.

[Operator Instructions] We have Jack Matten with BMO Capital Markets.

This is Charlie on for Jack. I'm sorry, we joined late, so apologies if you addressed this. But we saw Shai tweeted this morning that Lemonade plans to start lowering rates. Can you elaborate more on the timing and magnitude of when you may plan to file for these rate cuts and which lines of business are you talking about specifically?

Charlie, yes, we've addressed this both in my opening comments and in answer to previous questions. So I'll keep my comments brief. I didn't see Shai tweet what was alleged. So I think what Shai said is that -- or certainly what he meant -- the point that we're trying to get across is that there is a sense in which we -- and there was a question about this, we've achieved everything that we said we were going to achieve in terms of loss ratios and they're at record lows, and we're anticipating them potentially going even lower this coming quarter. And yet, we don't always see -- this is a moment to kind of take a victory lap and we're thrilled with it and it's excellent but we don't always see lower as better. That's what we were saying. And there are times when you can optimize gross profit with higher loss ratios as well.

And it can be counterintuitive because you think lower means more profit but it also means taking a hit in terms of conversion and retention and therefore, growth. And the smart thing as far as we're concerned is to optimize not for a particular loss ratio number but to optimize for gross profit. It's what we do. And all that means is that different loss ratios for different products, different campaigns, different regions over time. There's nothing dramatic. We're not signaling any findings that are imminent or we're not guiding to a new target loss ratio or anything like that. We think the loss ratio, in fact, will continue to improve in the near term, just saying that it's important for our investors to be aligned with us about what metrics are important ultimately. And we think gross profit is the one that we're solving for and loss ratio is an input to it. I hope that clarifies that.

Yes. Sorry about that. And I guess for my second question, I know you've already adjusted your main quota share program to retain 80% of top line. Are there any other changes regarding your broader reinsurance program that you're thinking about heading into the new year given the expectation for reinsurance costs to continue to moderate?

Yes. I would say we're right on track with our typical approach to reinsurance, which is we're constantly thinking thoughtfully about what we might change or improve. But structurally, that renewal comes in July. We have the opportunity to add or subtract things during the course of the year, which we do almost never but we certainly have that opportunity.

So we're constantly looking at those ways that we might help manage both the benefits of reinsurance from a volatility standpoint as well as managing capital surplus, and that really is the driver there. But we are in a great position with the renewal that came through July 1. We're heading towards a point by midyear next year where we'll be ceding just about 20% of our premiums and losses to our quota share partners. As you know, it takes a while to flow through the book once you get to a renewal as the business renews over the course of the year. The impact of that will be such that in Q4, our effective overall seed rate might look more like around 40%. So you're seeing, as expected, that decline as we move closer and closer to the next renewal.

In the early part of the year next year, we'll start to get more serious with our partners as we have in the past and think through what that next renewal might look like.

If I could just sneak in one more. Any color on the competitive environment in pet? It feels like we've been hearing more public insurance carriers talking about that business more and more.

Nothing notable. I think we're still finding -- it's funny when you kind of look at the market from a competitive standpoint, you hear about either Google algorithms changing or competitors getting more aggressive and these things definitely happen from time to time. But if we look at our Q2 results, our Q3 results, our view into our guidance for Q4, it's really steady as she goes. Even frequency and severity of claims in the quarter was not notable, and that's good news for that book of business because it is -- continues to grow in terms of its share of our overall business. So while we kind of track the competitors, it's not top of the list of the things we think about. The things we are doing are working. They're working well. And pet as it has been for quite some time, is a key pillar that enables us to grow at 30% plus.

Our final question from the phone lines comes from [ Luke Nelson ] with Cantor Fitzgerald.

I just have a couple of brief questions this morning. My first question being with card, it's roughly around 15% of IFP today. Where do you guys kind of see that mix trending long term? So is 25% the right ceiling? And are there limits on auto exposure we should be thinking about?

So best indicator, I think, is to kind of think back a bit to our recent Investor Day, which is about a year ago now. So it's not quite so recent but we sketch out a plan and a vision to track and drive growth at the company from $1 billion of premium to $10 billion. And what we sketched out at that time was a CAR component of that of around 40%. I would think of that as sort of a thematic share but a pretty good one. It could be more, could be less. The TAM for car is in just the U.S., not to mention Europe, which we don't have a car product in yet. But in just the U.S., it's just an enormous potential market and even just our own customer base is an enormous market for us.

So there's really no restriction from a TAM perspective. It's about us optimizing the LTV to CAC, really driving that cross-sell dynamic because that's what helps us with retention. The gross loss ratio improvement was terrific. So if you think about a mid-teens ratio today and a 40% CAR share at $10 billion, your number is not far off. 20%, low 20s is certainly within reason in the coming couple of years. We -- the nice thing about Lemonade is the mix of business is quite diverse. And so that number can ebb higher or lower, and we'll still be well able to track to our growth rate targets overall but I think CAR will end up in that range that you're thinking about.

Got you. That makes sense. And then just my last question is a 2-parter, and you might have touched on it previously, but I noticed retention increased to 83% but ceding commission increased as well despite the reduction in reinsurance. So can you kind of walk us through that dynamic? And where do you expect retention to trend over the next few quarters?

Sorry, if you could -- I think I misheard your question. Was it around ceding rate? Or was it around retention?

Right. So yes, my question was, I noticed retention increased to 83%, but at the same time, ceding commission income also increased. So can you just kind of walk through the dynamic between the 2? And where do you expect retention to trend over the next few quarters?

Yes. So a couple of metrics just to pull apart there. So we disclosed a retention metric, which is a customer metric. So ADR is annual dollar retention. And just as a reminder, that's the dollars from any given cohort of business, 1 year later, how much have you retained. And that number has tracked upward nicely from the 70s to the high 80s over many, many quarters consistently. It dialed back a couple of points over the past few quarters because of our home effort to clean the book, and we had some nonrenewals there that camped that number down. We've now seen that reverse as we expected. It went from 80 -- up 1 point this quarter sequentially. So it feels like we might be back on track to have that number increase. That's customer retention, stable and improving.

From a ceding commission standpoint, that's a bit of a -- that's a different part of the business, and that's really related to the premium we share and the losses we share with our quota share partners. And so that, I'd kind of send you back to our earlier comments about the quota share renewal. So at July 1 this past year, we were ceding -- or June 30, we're ceding about 55% of our book of business. That has shifted such that it will move from 55% to about 20% over the 12 months from Q3 to Q2 that we're in right now.

The commission we earn on that is a variable rate commission, and that's -- you'll see that pretty clearly outlined in our 10-Q disclosures that we'll file today, so you can kind of dig into the nuances there but we continue to get a mid-20% roughly ceding commission on all the premium that we see to that partner. And so we'll see fewer dollars. That's a good thing but we'll continue to earn a healthy commission rate on all those dollars that we see for our partners.

Thank you. I can confirm that does conclude our question-and-answer session here. And I'd like to conclude the call. Thank you all for your participation. You may now disconnect, and please enjoy the rest of your day.

Good morning or good afternoon, and welcome to today's Lemonade Q2 2025 Earnings Call. My name is Adam, and I'll be your operator for today. [Operator Instructions] I will now hand over to the Lemonade team to begin.

Good morning, and welcome to Lemonade's Second Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; Tim Bixby, Chief Financial Officer; and Nick Stead, SVP Finance. A letter to shareholders covering the company's second quarter 2025 financial results is available on our Investor Relations website at lemonaade.com/investor.

I would like to remind you that management's remarks made 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 February 26, 2025, 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, including adjusted EBITDA, adjusted free cash flow and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of our 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, trailing 12-month loss ratio 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.

Good morning, and thank you for joining us to discuss Lemonade's results for the second quarter of 2025. And it's a pleasure to report that really across all of our key metrics, our financial performance in the quarter was excellent. On the top line, we delivered our seventh consecutive quarter of IFP growth acceleration with 29% year-on-year growth. And concurrently, our gross loss ratio for the second quarter was 67%, 12 points improved relative to Q2 of last year. And this brings our trailing 12-month gross loss ratio to 70%, our best results ever and squarely within the healthy range of our business model.

It is worth noting that just 1 year ago, our IFP was growing at 22% and our trailing 12-month gross loss ratio was 79%. And while neither metric was too shabby, 12 months on both have improved dramatically. This, I believe, is a clear testament to our ability to leverage AI to pinpoint target risks with accuracy and deliver profitable growth concurrently. As a result of these dynamics, our gross profit grew by over 100% in the second quarter, and our gross margin at 39% is among the highest we've ever recorded. And what's more, the growth of our top line eclipsed any growth in our underlying expense structure. And as a result, we saw strong adjusted free cash flow generation of $25 million, more than a tenfold increase relative to the second quarter of 2024.

In recent quarters, we have been highlighting Lemonade Car' progress. And in Q2, we continue to see that momentum build. Through the first half of the year, car' growth has significantly exceeded our original financial plan. It has now crossed $150 million of in force premium and continuing to grow. Product enhancements have fueled conversion rate gains and geographic expansion has been another tailwind. Concurrent with that it's important to note that our car gross loss ratio has improved dramatically, with Q2 result of 82%, marking a 13-point improvement relative to last year.

Switching gears, we recently announced the renewal of our reinsurance program at similar terms to the expiring program with one important exception, which is that we reduced the scope of our quota share program from 55% to 20%. It is worth underscoring this decision was solely of our making. The confidence to make such a move directly stems from our multiyear track record of improving loss ratios as key products and geographies have become more mature and predictable.

In his remarks a bit later on this call, Tim will walk you through a couple of important related nuances on the capital efficiency and accounting. But before that, let me hand off to Shai for an update on our European business. Shai?

Thanks, Daniel. Before I get to Europe, I wanted to highlight a couple of updates to our new Investor Relations website, which can be valuable for those new to the Lemonade story. This morning, we've added an investor presentation as well as a handy spreadsheet with key financial metrics. We hope you will find these helpful.

We first launched Lemonade in Europe, in Germany in 2019, and now service over 250,000 customers across 4 key European markets: the U.K., Netherlands, France, and Germany; and 2 products, renters and homeowners. Europe is of growing importance for a few reasons. It yields a diversification benefit to our growth with notably lower CAT exposure and a flexible regulatory environment. In the past few quarters, we've really seen our European business come into its own and is now a meaningful driver of growth for the organization. We concluded Q2 with $43 million Europe IFP, which represents over 200% growth, our eighth consecutive quarter of triple-digit growth and our fourth consecutive quarter of growth rate acceleration.

I'm pleased to report that the story in Europe is very similar to what Daniel highlighted in our car business. Growth acceleration has been paired with improvement in underwriting performance. We saw an 83% gross loss ratio in the second quarter, 15% improved relative to last year and roughly 20 points better than where our U.S. business was at a similar scale. This performance is powered by structural cost advantages driven by our AI platform. One great example of this is a technology we call LoCo, our LLM-first no-code insurance application builder. With LoCo, we can rapidly build new products, launch new regions, iterate on pricing and underwriting, and experiment with various dynamic experiences all in hours instead of weeks and without touching any code.

LoCo is a powerful platform that enables us to manage our multi-continent insurance company with unmatched efficiency. Where our competitors have large local teams on the ground in the regions they operate and with each region having its own specific legacy infrastructure, our proprietary technology enables us to expand our geographical footprint with unmatched velocity and limited incremental overhead.

We are clearly in the early innings of our European journey at Lemonade, but believe Europe is positioned to remain a key engine of rapid profitable growth for years to come.

With that, I'll hand it off to Tim, who will cover our financial performance and outlook.

Great. Thanks, Shai. I'll review highlights of our Q2 results and provide our expectations for Q3 and the full year 2025, and then we'll take some questions. In short, our Q2 financial results were exemplary across the board.

We remain very much on track with our ambitious goals for positive EBITDA by the end of next year, loss ratio tracking to target, consistently accelerating top line growth with little change in fixed overhead expenses and favorable cash flow dynamics.

In force premium grew 29% to just above $1 billion, while customer count increased by 24% to 2.7 million. Premium per customer increased 4% versus the prior year to $402, driven primarily by rate increases. Annual dollar retention or ADR was 84%, flat as compared to the prior quarter, and continuing to show modest downward pressure as a result of our continuing effort to improve the profitability of our home book through targeted non-renewals. We expect ADR to normalize and resume improvement over the coming quarters.

Gross earned premium in Q2 increased 26% as compared to the prior year to $252 million, in line with IFP growth. Revenue in Q2 increased 35% from the prior year to $164 million. The growth in revenue was driven by the increase in gross earned premium, a slightly higher effective ceding commission rate under our quota share reinsurance and a 16% increase in investment income.

Our gross loss ratio was 67% for Q2 as compared to 79% in Q2 2024 and 94% in Q2 2023. Excluding the total impact of CATs in Q2, roughly 7 percentage points, our gross loss ratio ex-CAT was 60%. Total gross prior period development had a roughly 3% favorable impact, 5% from non-CAT, offset by 2% unfavorable from CAT. We saw this favorable prior period development across all products, with the exception of Pet, with the largest impact in our homeowners multi-peril business. On a net basis, prior period development was in line with gross, including non-CAT and CAT breakdown.

Prior year development, which is reported on a net basis, was about $2.2 million favorable in the quarter and about $12.6 million favorable year-to-date. Trailing 12 months or TTM loss ratio was about 70% or 9 points better year-on-year. All of these insurance metrics and more are included in our insurance supplement that you'll find at the end of our shareholder letter.

Gross profit increased 109% as compared to the prior year, while adjusted gross profit increased 96%, both driven primarily by premium growth and significant loss ratio improvement. Operating expenses, excluding loss and loss adjustment expense, increased 21% to $129 million in Q2 as compared to the prior year, driven primarily by an increase in gross spend and the impact of the $12 million onetime benefit from a tax refund.

Other insurance expense grew 14% in Q2 versus the prior year at roughly half the growth rate of earned premium. Total sales and marketing expense increased by $23 million or 62%, primarily due to increase in growth spend of approximately $24 million. Total growth spend in the quarter was $50 million, roughly double the $26 million in the prior year quarter.

We continue to utilize our synthetic agents growth funding program and have continued to finance 80% of our growth spend. As a reminder, you'll see 100% of our growth spend flow through the P&L, while the impact of the growth mechanism is visible on the cash flow statement and the balance sheet. And our net financing to date is about $124 million as of June 30. Technology development expense was up just 6% year-on-year to $22 million, while G&A expense decreased 13% as compared to the prior year to $22 million, primarily due to a onetime tax refund of about $12 million.

Personnel expense and headcount control continue to be a high priority. Total headcount is up slightly about 5% as compared to the prior year at 1,274, while the top line FP grew fully 29%. Net loss was $44 million in Q2 or a loss of about $0.60 per share as compared to a net loss of $57 million or $0.81 per share in the prior year. Our adjusted EBITDA loss was $41 million in Q2 versus $43 million in the prior year. Our total cash, cash equivalents, and investments ended the quarter at approximately $1.03 billion, up $11 million versus year-end 2024.

With these metrics in mind, I'll outline our specific financial expectations for the third quarter and the full year. From a gross spend perspective, we expect to invest roughly $47 million in Q3 to generate profitable customers with a healthy lifetime value. We expect Q4 spend at a level similar to the Q1 rate and thus totaling roughly $173 million for the full year. This expected quarterly spend pattern is similar to prior years.

For the third quarter of 2025, we expect in force premium at September 30 of between $1.144 billion and $1.147 billion, gross earned premium of $267 million to $269 million, revenue between $183 million and $186 million, and an adjusted EBITDA loss of between $37 million and $34 million. Stock-based compensation expense, we expect to be approximately $17 million and a weighted average share count of approximately 74 million shares.

For the full year, we expect in force premium at December 31 of between $1.213 billion and $1.218 billion, gross earned premium between $1.036 billion and $1.039 billion, revenue between $710 million and $715 million, and an adjusted EBITDA loss between $140 million and $135 million. Stock-based compensation for the full year, we expect to be approximately $61 million and a weighted average share count for the full year of approximately 74 million shares.

Finally, I wanted to make a couple of comments on the reinsurance transition as a follow-up to Daniel's earlier remarks. First, the transition from 55% to 20% quota share does not happen overnight. Each program is risk attaching, which means it covers policies written between July 2025 and June 2026, such that we expect the transition to unfold over several quarters on our P&L in a roughly linear fashion. By Q3 2026, we expect to be ceding roughly 20% of premium. And in the second half of 2025, we expect to cede roughly 45% due to those transition dynamics. Second, a reduction in our quota share program does increase our revenue retention but has no impact on IFP. As a result, we are about to enter a period during which revenue growth rates are expected to outpace IFP growth rates. And finally, all else equal, less quota share increases regulatory capital needs. However, with an improved loss ratio and the expanded use of our wholly owned captive, we are able to offset these pressures such that there is no material change in our capital planning. We have included a slide within the insurance supplement to our Q2 shareholder letter that covers some of these dynamics in a bit more detail.

With that, I would like to pass over to Nick to answer some questions for our retail investors. Nick?

Thanks, Tim. We'll now turn to our shareholders' questions submitted through the Say platform. Paper Bag asked, what is your plan with synthetic agents going forward? Will you continue using synthetic agent funding in 2026 and beyond or stop at the end of 2025?

Great question. Thanks, Paper Bag. The synthetic agents program has worked precisely as intended when we launched it nearly 2 years ago and has enabled us to drive growth acceleration in a capital-light manner. In 2023, we deployed $55 million on growth. In 2025, we expect to more than triple our total growth spend to $170 million now with an 80% advance from our synthetic agents. And while we do pay our synthetic agent a 16% IRR, the impact on our unit economics is transformational. The IRR on our growth spend is around 50% without the synthetic agent, and that doubles to roughly 100% with the partnership in place. There is a model live on our Investor Relations site posted alongside the materials from our 2024 Investor Day that covers these mechanics in more detail.

The net impact of inflows and outflows to and from the synthetic agent leaves us with $124 million outstanding on the balance sheet at the end of the second quarter. We have already announced the 2026 renewal of our synthetic agent agreement with another $200 million of capital available to fund growth investment in 2026. At each renewal, we evaluate all strategic options available to us and we'll continue to do so. But in the near and medium term, we expect to continue to expand this partnership.

Emmanuel asked, what is the largest impediment right now, stopping Lemonade from releasing Car to more states?

We are currently live with our Car product in 10 states and address roughly 50% of the U.S. car insurance market, a vast market opportunity relative to our current scale. That has been increasing with 2 state launches, Colorado and Indiana, in the past few months. We have plans to continue to increase our nationwide coverage and expect to launch multiple additional states through the end of 2026, such that our 50% coverage metric is notably increased.

As we look to the state launch road map, several factors guide us. We evaluate the market opportunity, existing Lemonade customer penetration, and the regulatory landscape. Also, new state launches typically involve higher loss ratios as getting a new state online requires rate adjustments post launch and naturally brings a new business penalty impact. So we manage that strategically as well.

I should note that at most other insurance companies, it takes considerable internal resources to launch a new state. But with LoCo, as Shai covered earlier in his remarks, we have substantially reduced the amount of work required by our insurance and product teams to do so, allowing our teams to shift to more impactful initiatives while maintaining our targeted pace of state launches.

Emmanuel also asked, does the team believe that even with all of the developments in AI that they are ahead of other AI-first companies in terms of the effectiveness and efficiency of the models?

Well, the short answer is yes, we do think so. And you're right, Emmanuel, to focus on AI-first companies as we believe the gap between us and incumbent insurers who are built on legacy systems is very likely to expand as AI development accelerates. We have been AI native since day 1. Relative to new upstarts, that 10 years in market gives us a real data edge, thousands of A/B tests, 10 million driving trips, millions of customer interactions and claims.

When it comes to data, there's really no shortcut to that type of depth and scale. By the time generative AI really accelerated in 2023 and onwards, we already had AI embedded across the tech stack with terabytes of proprietary data flowing through the system. We stand apart from incumbents with a single AI system that connects every aspect of the business and from upstarts with the depth and breadth of proprietary data that feeds it.

So we believe we're really the only full stack multiline insurance company with the tech stack and data to fully capture AI's potential. And this is playing out in our business outcomes. Our proprietary telematics pricing model now outperforms the off-the-shelf product that many competitors rely on. And over the last 2 years, our overall gross loss ratio improved by 27 points, while IFP grew by nearly 60% during the same period, clear evidence that our AI flywheel advantage is compounding. For additional reading on this, I suggest you check out Daniel's recent Lemonade Turns 10 blog post and the investor presentation just posted to our Investor Relations site this morning to learn more about how AI drives our business performance.

With that, I'll pass it over to the moderator, and Daniel and Tim will take some questions from the Street.

[Operator Instructions] And our first question comes from Jason Helfstein from Oppenheimer.

Just a few questions around the reinsurance and the reinsurance change because I know a lot of clients have some questions there. So obviously, you're holding more risk, but there is no free lunch. Maybe just talk a little more about the structures you have in place, the way you can manage risk and if there's ways to -- how you manage -- just the different ways that you can now manage the risk. And then there's like a follow-up to that, does this reflect some kind of step function in the company's ability to manage risk? So like why now, I guess, is the question, right? So first is, structurally, how you plan on managing it going forward as this evolves? Two, why now? And then I guess the third is you did say revenue will outpace IFP, especially through this transition. But how should we think about gross profit relative to IFP growth?

Jason, it is a significant change. It's been -- I guess the only constant here that we've been, every couple of years, stepping down the amount of quota share reinsurance since IPO from 75% down to 55%, now to 20%. So in that sense, it's a continuation. But nevertheless, a drop from 55% to 20% is significant, and I think worth spending another few minutes on.

The first thing that I'd highlight though, and then I will hand over to Tim to add a bit more color on some of these points, but quota share for us was not predominantly about risk management at all. We can use reinsurance to serve different goals. We have actually other policies in place that do manage risk concentration.

So you see when a CAT hits, for example, like the one that hit in Q1 in the California fires, and you saw that our gross loss ratio was much worse than our net loss ratio. That wasn't the quota share that was helping. Quota share, in theory, will produce very similar gross and net loss ratios because you cede X percent of premiums and you cede the same X percent of claims. At first approximation, the gross and the net should be similar. If anything, because some CAT events are excluded from the quota share agreement, you might see slightly worse net than gross loss ratios in quota share. In fact, we saw significantly better net loss ratios, and that was because of other policies that we have in place about risk concentration covering losses beyond a certain dollar amount or too many losses in a particular quadrant or something like that.

So we have various policies. Those continue. The policies that we have in place that are helping us protect against risk concentration are not being materially changed. Quota share was in place, as I say, not predominantly as a tool of risk management, but much more so as a tool for capital management. The regulators require that we set aside a certain percentage of our premiums. There's kind of a rule of thumb of 3:1. But when the insurance entities are fast growing and loss-making, it can be more cumbersome still. And once you cede those premiums to quota share partners, it is really their capital rather than yours and their cost of capital are lower. So we saw quota share predominantly as a tool for managing that aspect of our business, remaining capital-light through quota share.

As the last few quarters came in and we have consistently lowered and stabilized our trailing 12-month loss ratio, I mean 67% this past quarter, trailing 12 months, which I think is the more dependable metric, if you like, less volatile, less given to the vicissitudes of a particular event. 70% trailing 12-month loss ratio is simply fantastic and perfectly aligned with our long-term goals. And what that has meant is that our insurance entities have moved from being loss-making to profit-making. Rather than consuming capital, they are generating capital. And that is something that changed over the course of the last few quarters as we indeed became cash flow positive, we reported a $25 million adjusted cash flow this past quarter, a tenfold increase year-on-year. It is that more than anything else that's allowing us to take on board less or to utilize less quota share reinsurance. And of course, our quota share partners have been stellar. They've been amazing. They've been with us from the get-go. They are the biggest and most trusted names in the industry. But as you say, no free lunches.

When you engage in quota share reinsurance, you are really margin stacking. You are giving up part of your business. You're getting the gains that I outlined before, predominantly capital efficiency, but you are sacrificing some of your EBITDA. And you really want to use, or we really want to use as little of that as we need given our capital requirements. So that more than anything else is what's changed. We've moved from being businesses that are draining cash to those that are generating cash. Low loss ratios have changed the capital requirements significantly in those entities, and that is what is allowing us to be less dependent on quota share, and we made those adjustments. Tim, anything you want to add?

Yes. Just a couple of points on the second part of your question, Jason. One of note is that before we even get to our reinsurance structure, we do take advantage of one of our assets, which is our ability to grow at a very healthy clip, but be very selective about the risks that we take in the business that we write. And so in some ways, we enforce our own level of reinsurance by writing in certain areas of risk and not writing in others. Our risk in Florida, for example, is quite limited relative to a typical incumbent. Our experience in the California fire CAT of Q1 was -- before we even got to reinsurance -- relatively limited because we're choosy about the level of risk we take in terms of high-value homes. And so that's a layer that sort of underpins our reinsurance. Then we layer on reinsurance, of course.

The bulk of the reinsurance structure at renewal remains unchanged. The quota share change in terms of its cede ratio was notable. Everything else is more or less in place and continuing. So we have protection against concentrated losses. We have protection against single large losses in our PPR and our FC coverage, and those continue and were renewed at similar structural impact as in the past.

With regard to the impact on gross profit and revenue, a couple of things. We included a pretty straightforward example of what $1,000 of premium would look like under the old structure and now under the new structure and how it flows through each of the key P&L items -- line items. I would urge you to kind of look at that in the back of the shareholder letter today. And I think that will be helpful to sort of navigate how the model is expected to evolve, particularly over the coming 4 quarters as the change in the ceding ratio comes more into play.

At a very high level, the impact on revenue is greater than the impact on gross profit. Gross profit for many quarters has grown at a very healthy clip, well ahead of the top line growth of IFP and premium, and that's because of -- you're combining 2 elements there. You're combining the benefit of growth as well as the benefit of significant loss ratio improvement. And so those dynamics will continue, but our loss ratio now that it's nicely in our target range, those shifts will be somewhat less than they have been over the past few years, and that's good news. Revenue, on the other hand, will be a little more -- will grow at a faster pace, again, as the reinsurance change rolls in. And again, you should see those dynamics in the example that we shared.

The next question comes from Tommy McJoynt from KBW.

Maybe to simplify the previous question in response, Tim, I think a couple of years ago, you guys put out a slide, an illustrative slide showing the premium leverage that you could write at. Do you have an update on what sort of premium leverage on a gross basis you can write at and then how that changes under this new reinsurance structure?

Sure. I think you're referring to some comments we've made from time to time regarding the capital surplus requirements relative to the premium we can write. Is that the crux of the question, I think?

That's right.

So you're correct to sort of trace the history a bit. When we shifted to a more material quota share reinsurance structure several years ago, one of the primary benefits, as Daniel noted, was a capital surplus benefit. Since then, a few things have happened. Our volatility has decreased. Our trailing 12 months loss ratio has come very much in line with our long-term targets. Our book is much more diverse. And we've put in place a couple of structural aids to captive reinsurers that are wholly owned or partially owned that we can now leverage. And the net of all that is our capital planning is substantially unchanged. How much of that capital surplus benefit we get from quota share versus our own captive entities has shifted somewhat. And so some of the surplus benefit that we give up as a result of the quota share shift, we get to retain more profit, we're able to replace that essentially in whole through our captive reinsurer or captive structures.

So net-net, we've talked about a 6:1 target ratio in the past. Historically, we've been above and below that ratio depending on how the loss ratio and the premium growth and some other factors that impact that ratio have changed. But over the coming several year outlook, that ratio target for us is unchanged.

And then I think you made the comment that the insurance entities are -- have gone from a phase of sort of losing negative net income driving losses and sort of capital decreasing to a period of capital generation themselves because of the improvement in the loss ratio. When I look and I sort of reconcile that comment to the consolidated bottom line metrics, whether it be adjusted net income or adjusted EBITDA, that may imply some pretty sizable losses still at the holding company level. So can you just talk about sort of what capital has trended at the holding company level apart from the insurance entities, just as we think about the need for potential more capital at the insurance entities to come from the holding company?

Yes, there is some complexity when you look at each of the parts in isolation. You're correct that the -- particularly LIC, the Lemonade entity is profitable and generating surplus. At a consolidated level is how we kind of manage the overall capital availability. And we've talked historically of apparent capital cushion, which is basically a consolidated level, how much capital remains once we fund the growth plan, once we set aside the required level of capital that we are required today and that we are forecasting to be required based on our growth plans and then what remains basically after satisfying all of those obligations. And that cushion has been more or less steady for quite some time. We've noted a level of around $200 million. That varies up and down, and that continues to be the level of cushion that we're comfortable with. And so at times, the parent company must fund the reinsurance companies. Currently, it's the opposite where there's excess surplus being generated at the insurance companies. But the big picture is we've got more than sufficient capital to satisfy all of those needs with cushion left over for opportunities that arise, for weather events that are unpredictable and all the risks that we understand can come our way.

The next question comes from Jack Matten from BMO.

Just a question on the car loss ratios. And I'm wondering if you can just discuss some of the -- just the drivers of the improvement. Is there any like mix change we should be thinking about with renewal versus new business? And any thoughts you have on loss trends that you're seeing in terms of either frequency or severity in the car insurance line?

Yes. So there is actually a fairly notable difference that we've been pleased to see unfolding where it is typical in the insurance realm for renewal business to be at a more favorable unit economics than the initial policy. And in car, especially for us at Lemonade, we're seeing a much more notable difference, something on the order of 20 percentage points of loss ratio improvement from the first policy to the renewal policy. It is early, and so those -- that continues to develop, but that's a really encouraging sign that we're both choosing risks effectively. And as you see, the overall loss ratio coming down, but also that renewal is a great early indicator that we're doing this well.

From a severity and a frequency standpoint, generally across the business, we're seeing -- and particularly in Q2, we saw a consistent theme of reduced frequency, but somewhat increased severity; and severity tends to come in the form of inflation of different sorts, whether it's expected inflation or existing inflation. But the net, as you see in the overall loss ratio trend is that the favorable trends have been winning out and getting that trailing 12 months number down to 70%, which is the headline number, I would say.

Maybe I'll just add that it's not a mix change that is driving this. We're seeing both our new and our renewal business improving significantly. So it's really across the board.

And just on your outlook, it looks like the IFP guidance for the full year doesn't imply much of an acceleration versus the 29% growth this quarter. I guess any reason you wouldn't expect further acceleration this year given I think we're starting to lap some of the home non-renewals in the back half of the year? I mean it looks like you're maintaining the outlook for your growth spend this year as well. So just any color on the moving pieces there.

Yes. I think there's certainly the potential for that. You've seen a couple of quarters, particularly the second quarter, where we were able to accelerate things, things came together nicely. A couple of headwinds that we assume will come our way to varying degrees in the second half. There is some seasonality in terms of growth and higher growth in Q3 versus Q4. There's some churn dynamics that I think moved our way nicely in Q2 that we don't necessarily expect to replicate, although we could see upside there.

We continue to move forward with the project. We've called sort of clean the book in our home book, which provides a headwind, but a good headwind. It aids our move towards profitability. We take advantage of an ability to non-renew certain business that no longer fits our underwriting guidelines. And one place you'll see that in our metrics is in our annual dollar retention metrics, which have been flat for a couple of quarters now. We estimate that there's roughly a 4% drag on that metric because of our home efforts to move more aggressively to profitability.

So we're kind of balancing top line and the path to profitability. Notwithstanding any of that, we've seen 7 consecutive quarters of top line growth. We'll endeavor to continue that record. It gets a little tougher as we get towards our target cruising growth range of 30% plus, but we'll certainly aim to do that in the second half.

The next question comes from Andrew Andersen at Jefferies.

Just wanted to go back to the car loss ratios. And I think you were saying you see a 20-percentage point improvement from the first policy to the renewal. I think in the past you've also mentioned that you were not expecting any type of new business penalty. And I think that was specific to cross-sells. So maybe you can just kind of level set for us what your -- maybe how much of the car book and how much of your car growth you're thinking of will be from the cross-sells with no new business penalty versus some that is seeing a little bit higher first policy loss ratio.

That breakdown is not something we've sort of disclosed publicly. So I think I would probably point you to our -- some of the stats we shared about Q2 and going forward that we expect to grow the whole car business at a faster pace than the total, and we expect to continue to increase our growth spend for car. Generally, about half of growth overall has come from cross sales. That's not 100% specific to car, but a significant amount of that is cross-sell to car. And so that rough ratio, I would expect to continue as well.

Okay. And then on the ad spend in the quarter, it was just a little bit higher than the guide, and you're keeping the full year guidance. Could you maybe just talk about some of the increased opportunities you saw this quarter that led to the higher ad spend? And maybe just touch on how you're seeing the competitive market for auto in the second half of the year?

Yes. Some of the gross spend is timing shift, and this is not uncommon where we'll see greater opportunity or we'll adjust the timing from one quarter to another where the total year target and goal is right on track, but we see a greater opportunity, and so we'll move from one quarter to another. We're spending more on brand spend and some of that tends to be a little bit more front-loaded because you want to kind of get the visibility out there. At the beginning of the year, we've upped the total spend but quite modestly and the rest has been timing shift.

I think in Q2, certainly, we saw some nice upside from certain channels where the -- if you look at the efficiency of the car spend, we were able to significantly increase it on a sequential basis on a year-on-year basis. The efficiency of the car spend, the number of dollars that each dollar of spend brought in was stable. And that's a nice -- when you're doubling or tripling or more of the spend and the efficiency remains stable, that's a great sign. And so we'll continue to kind of push that edge in Q3, which is typically a strong quarter of growth. The loss ratio trend is important. And so we kind of watch how that tracks. But we feels like we have a great foundation for continuance of these car trends in the second half.

And just on the competitive market because it feels like a lot of the industry is reaching a pretty good profitability level and is starting to pivot to growth. What do you -- it seems like your conversion rates are still strong, but maybe how are you just thinking about the competitive market?

Yes. We can grow a great deal and still be a tiny drop in the car ocean. So we don't ignore the competitive dynamics. We tend to want to, where we can, give the benefit of our unit economics improvements or loss ratio improvements back to the customer so that our pricing is attractive. There's obviously, a limit to that. But the competitive dynamics of the market tend to be secondary to what we see in terms of what our LTV models tell us that what are good risks and where the marketing efficiency is strong. So we feel like all systems are go going into the second half.

[Operator Instructions] And the next question comes from Katie Sakys from Autonomous.

I wanted to circle back to the updates and guidance, specifically the full year 2025 EBITDA guide. I guess I was a little surprised to see that that remained unchanged relative to last quarter, especially considering the progress that you guys have been making on both the reported gross loss ratio as well as the trailing 12-month gross loss ratio. So kind of a question there for you guys on whether you're expecting any increasing volatility in the back half of the year that might be informing your stable outlook on full year EBITDA? And then sort of adjacent to that, in reading the shareholder letter, the language on expectations for 2026 seem a little bit different for positive adjusted EBITDA before the end of full year '26. And I think on the last call, you guys had perhaps phrased it as positive EBITDA by 4Q '26. Is there anything to read into the shift in language there?

Yes. On the EBITDA breakeven, no change. Before the end of 2026, we expect EBITDA to be positive. So that's not a change. We have not indicated we expect the full quarter to be positive, although that's certainly possible, but we've indicated no change and expect that before the end of '26.

One dynamic to probably highlight is when you look at the expected EBITDA of this year and then flow that into next year and then roll heading towards breakeven, you will see a dynamic where it's not exactly linear. And part of that is driven by our increasing growth spend, which increases the -- adds cost to the cost structure. And when you grow at a faster pace, that premium that you bring in doesn't necessarily or doesn't drop to the bottom line in real time. It drops over the early lifetime of that customer. And so as you accelerate growth, you see a dynamic where the bottom line doesn't change a whole lot, but the top line increases. And that's one of the things, I think, that helps us indicate that we're derisking that bottom line trajectory. Every bit of incremental growth kind of adds to that lifetime value and that cash flow that we expect to spool out over the coming quarters.

So the bottom line guidance for this year, you're correct, is unchanged, but it's really that dynamic of flow-through from the top line to the bottom line, which has been the case for quite some time.

Got it. And then perhaps as a follow-up, in kind of thinking about the shifts that you guys have made to the quota share program and expectations for longer-term profitability, is there a point at which your target for a low 70s gross loss ratio might materially come down into something below 70%?

Never say never.

Do you want to take that one?

Yes, sorry. My mic was on mute. I apologize. Katie, what I was saying is never say never, but that's not our inbound kind of bias, if you like. We aim to continue to drive our prices down, killer pricing as a key differentiator, which will drive greater conversion, lower acquisition costs, higher retention dynamics. Because our cost structure is so advantaged, you already see in this quarter what happened to our LAE, which is already perhaps one of the very best in the industry when we are so subscale, gives you an indication of what our cost structure is going to look like already now. And as we scale, our ability to accelerate growth while decreasing our underlying operating expenses, all of these are very strong indicators of our long-term ability to operate at a far, far lower cost structure than our competitors. And then you get a choice, which is do you then price similar to competition and increase your margins, or do you lower prices and accelerate growth? And for reasons that I elaborated at some length during our recent Investor Day, our bias is towards lowering prices, getting the conversion and the growth and the retention that that brings until we get to a sizable scale.

So I would not guide or set the expectation that our loss ratio will continue down the trajectory that it has for many, many quarters. We've achieved healthy loss ratios. And at some point, lowering loss ratios more than that just means that we're not being as price competitive as we could be.

We have a follow-up from Jack at BMO.

Just one, I think there was like an $11.7 million like tax refund benefit that you all had this quarter. Just any color on what that was and whether there's anything similar we should think about potentially reoccurring in future quarters?

Yes. That's a onetime tax credit related to the ERC program. So that's not something we'd expect to reoccur.

We also have a follow-up from Andrew at Jefferies.

Tim, I think I heard you say earlier the leverage that you would be running to max is 6:1. Was that on a gross premium basis? And if so, could you provide that on a net as well?

So again, we don't necessarily guide to that. That's just more of broad strokes of what our targets are. Yes, on a gross basis, historically, we've talked about gross written premium in that 6:1 ratio. There's also a dynamic in the regulatory surplus that requires a 3:1 on a net basis, which comes into play depending on how the quota share reinsurance is structured and other sort of accounting dynamics. But again, I would think of those as substantially unchanged. 6:1 on a gross basis, if you directly translate that to net, you get something like 4:1 versus 3:1, but more or less, I would think of it all as unchanged.

Is that just on a U.S. entity basis? Or is that including the Cayman captive?

All of that is on a consolidated basis. If you isolate the Cayman, the ratios are dramatically different. And that's part of sort of the benefit of these different structures that is that all the regulators understand and analyze each other's requirements and approve of them such that this is a pretty common structure. But if you isolate any of the entities and do some math, you're going to get different numbers. Everything that we communicate is, I would think of it as on a consolidated global basis for Lemonade Inc.

We have a follow-up from Katie at Autonomous.

Yes. One more question for me on the nonrenewal program and sort of the efforts to remix the homeowners book. Could you guys give us an update on where exactly in that process you currently sit? How much more remixing needs to be done or how much more of the book is still subject to nonrenewal? And has the change in the quota share structure sort of extended the potential timeline on that process? I guess what I'm really trying to get at is when can we expect to see that ADR level increase north of 84% again?

Yes. So I would think of the impact as being fairly steady. If you look at the back half of last year, the first half of this year, and the expected second half of this year, the run rate impact is more or less the same in each of those 3 segments. I would expect by the end of this year, we would be past the most significant part of it. I would not expect it to necessarily go to 0 in the beginning of the following year. But I think the pace will certainly begin to diminish based on what we know now. This is obviously, something you look at as the book evolves, but I think it will start to dissipate as you get out of the back half of this year. And that is not the only impact on the ADR number, but it is a more notable impact in this period. So I would expect the ADR to have the opposite dynamic where it would continue to be stable and then start to tick upwards based on all of the other dynamics in ADR, customer retention and other improved dynamics. We noted the car loss ratio at renewal. I mean those are the kinds of things that push that number up. So I'd expect that to be more visible as we come out of the back half of this year in the ADR number.

Maybe just to state the obvious, Katie, but in addition to dampening our annual dollar retention numbers, this program also dampens our top line. Our revenue and our in force premium, we are really growing faster than the number that we reported would indicate because we've also got this counter action of nonrenewing part of the book, cleaning the book. So as Tim said, we'll get through the bulk of that by the end of this year. And then there will be, I think, something of an unleash not only of annual dollar retention metrics, but also a bit of a tailwind to our top line metrics as well. And of course, we're doing all of this in service of our bottom line metrics, which is we've always been pretty disciplined as our data comes in and we get smarter about what we should and should not be underwriting, we decide to apply our new kind of insight retroactively wherever we can as well, and that's what you're seeing happening here. The fruits of that have already manifested several times. Our loss ratio is testament to that. Our Q1 loss ratio during the wildfires in California were very strong evidence of why this is all a price worth paying, but we do pay for it in a couple of currencies, ADR being one and top line metrics being another.

We have no further questions. This will conclude today's Q&A session and thus conclude today's call. Thank you very much for your attendance. You may now disconnect your lines.