Lemonade Q2 2025 Earnings Call Transcript

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Provided by Quartr
August 5, 2025

Key Takeaways

  • Positive Sentiment: Lemonade delivered 29% year-over-year in-force premium growth and improved its gross loss ratio to 67% (70% trailing-twelve-month), driving over 100% gross profit growth, a 39% margin, and $25 million in adjusted free cash flow.
  • Positive Sentiment: The Lemonade Cars segment surpassed $150 million of in-force premium with growth ahead of plan, cutting its car gross loss ratio to 82% (13 points better year-over-year) through product enhancements and geographic expansion.
  • Positive Sentiment: European operations ended Q2 with $43 million in-force premium—over 200% growth and an eighth straight quarter of triple-digit acceleration—while lowering the gross loss ratio to 83%, powered by the AI-first LOCO platform.
  • Positive Sentiment: Lemonade voluntarily cut its quota-share reinsurance from 55% to 20%, reflecting stronger loss ratios and retaining more premium with no material change in capital planning thanks to its captive reinsurer structure.
  • Neutral Sentiment: Growth spending rose to $50 million in Q2 (versus $26 million a year ago), with 80% funded by synthetic agents (leaving $124 million outstanding) and a renewed $200 million facility for 2026 to fuel capital-light customer acquisition.
AI Generated. May Contain Errors.
Earnings Conference Call
Lemonade Q2 2025
00:00 / 00:00

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Operator

morning, and welcome to Lemonade's Second Quarter twenty twenty five Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co Founder Shai Winninger, President and Co Founder Tim Bixby, Chief Financial Officer and Nick Stead, SVP Finance. A letter to shareholders covering the company's second quarter twenty twenty five 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 Form 10 ks filed with the SEC on 02/26/2025, and our other filings with the SEC.

Operator

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 twelve 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Good morning and thank you for joining us to discuss Lemonade's results for the 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, this brings our trailing twelve 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 one year ago, our IP was growing at 22%, and our trailing twelve month gross loss ratio was 79%.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

And while neither metric was too shabby, twelve 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 $25,000,000 more than a tenfold increase relative to the 2024.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

In recent quarters, we have been highlighting Lemonade Cars progress, and in Q2, we continue to see that momentum build. Through the first half of the year, Cars growth has significantly exceeded our original financial plan. It has now crossed $150,000,000 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 improvement relative to last year.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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 a 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 Shay for an update on our European business. Shay?

Shai Wininger
Shai Wininger
President & Co-Founder at Lemonade

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'll find these helpful. We first launched Lemonade in Europe, in Germany in 2019, and now service over 250,000 customers across four key European markets, The UK, Netherlands, France and Germany, and two products renters and homeowners.

Shai Wininger
Shai Wininger
President & Co-Founder at Lemonade

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 $43,000,000 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.

Shai Wininger
Shai Wininger
President & Co-Founder at Lemonade

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.

Shai Wininger
Shai Wininger
President & Co-Founder at Lemonade

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

Tim Bixby
Tim Bixby
CFO at Lemonade

Great. Thanks, Shay. 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

In force premium grew 29% to just above $1,000,000,000 while customer count increased by 24% to 2,700,000 Premium per customer increased 4% versus the prior year to $4.00 $2 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 $252,000,000 in line with IFP growth. Revenue in Q2 increased 35% from the prior year to $164,000,000 The growth in revenue was driven by the increase in gross earned premium, slightly higher effective ceding commission rate under our quota share reinsurance and a 16% increase in investment income.

Tim Bixby
Tim Bixby
CFO at Lemonade

Our gross loss ratio was 67% for Q2 as compared to 79% in Q2 twenty twenty four and ninety four percent in Q2 twenty twenty three. Excluding the total impact of cats in Q2, roughly seven 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, period development was in line with gross including non cat and cat breakdown.

Tim Bixby
Tim Bixby
CFO at Lemonade

Prior year development, which is reported on a net basis was about $2,200,000 favorable in the quarter and about $12,600,000 favorable year to date. Trailing twelve months or TTM loss ratio was about 70% or nine 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 $129,000,000 in Q2 as compared to the prior year, driven primarily by an increase in growth spend and the impact of the $12,000,000 one time benefit from a tax refund.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 $23,000,000 or 62%, primarily due to increase in growth spend of approximately $24,000,000 Total growth spend in the quarter was $50,000,000 roughly double the $26,000,000 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 and 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 $124,000,000 as of June 30.

Tim Bixby
Tim Bixby
CFO at Lemonade

Technology development expense was up just 6% year on year to $22,000,000 while G and A expense decreased 13% as compared to the prior year to $22,000,000 primarily due to a one time tax refund of about $12,000,000 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 twelve seventy four while the top line FP grew fully 29%. Net loss was $44,000,000 in Q2 or a loss of about $0.60 per share as compared to a net loss of $57,000,000 or $0.81 per share in the prior year. Our adjusted EBITDA loss was $41,000,000 in Q2 versus $43,000,000 in the prior year. Our total cash, cash equivalents and investments ended the quarter at approximately $1,030,000,000 up $11,000,000 versus year end twenty twenty four.

Tim Bixby
Tim Bixby
CFO at Lemonade

And 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 $47,000,000 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 $173,000,000 for the full year. This expected quarterly spend pattern is similar to prior years. For the 2025, we expect in force premium at September 30 of between 1,144,000,000.000 and $1,147,000,000 gross earned premium of $267,000,000 to $269,000,000 revenue between 183,000,000 and $186,000,000 and an adjusted EBITDA loss of between $37,000,000 and $34,000,000 Stock based compensation expense, we expect to be approximately $17,000,000 and a weighted average share count of approximately 74,000,000 shares.

Tim Bixby
Tim Bixby
CFO at Lemonade

And for the full year, we expect in force premium at December 31 of between $1,213,000,000 and $1,218,000,000 gross earned premium between 1,036,000,000.000 and $1,039,000,000 revenue between $710,000,000 and $715,000,000 and an adjusted EBITDA loss between 140,000,000 and $135,000,000 Stock based compensation for the full year, we expect to be approximately $61,000,000 and a weighted average share count for the full year of approximately 74,000,000 shares. And finally, 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 and L in a roughly linear fashion. By Q3 twenty twenty six, we expect to be seeding roughly 20% of premium and in the 2025, we expect to see roughly 45% due to those transition dynamics.

Tim Bixby
Tim Bixby
CFO at Lemonade

Second, a reduction in our quota share program does increase 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

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

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

Thanks, Paper Bag. The synthetic agent program has worked precisely as intended when we launched it nearly two years ago and has enabled us to drive growth acceleration in a capital light manner. In 2023, we deployed $55,000,000 on growth. In 2025, we expect to more than triple our total growth spend to a $170,000,000 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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

The IRR on our growth spend is around 50% without the synthetic agent, and that doubles to roughly a 100% with the partnership in place. There is a model live on our investor relations site posted alongside the materials from our twenty twenty four 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 $124,000,000 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 $200,000,000 of capital available to fund growth investment in 2026. At each renewal, we evaluate all strategic options available to us and will continue to do so.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

But in the near and medium term, we expect to continue to expand this partnership. Emmanuel O 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 US car insurance market, a vast market opportunity relative to our current scale. That has been increasing with two 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 2026 such that our 50% coverage metric is notably increased.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

As we look to the state launch roadmap 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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

Emmanuel also asks, 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 model? Model? 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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

We have been AI native since day one. Relative to new upstarts, that ten years in market gives us a real data edge. Thousands of AB tests, 10,000,000 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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

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 two 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.

Nicholas Stead
Nicholas Stead
SVP - Finance at Lemonade

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

Operator

And our first question comes from Jason Helfstein from Oppenheimer. Jason, please go ahead. Your line is open.

Jason Helfstein
MD & Head - Internet at Oppenheimer & Co. Inc.

Thanks. Just a few questions around 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 launch. 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.

Jason Helfstein
MD & Head - Internet at Oppenheimer & Co. Inc.

Does this reflect some kind of step function in you think you 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?

Jason Helfstein
MD & Head - Internet at Oppenheimer & Co. Inc.

And then I guess, like 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? You.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Jason. Good morning. It is a significant change. It's been, I guess, the only constant here that we've been every couple of years stepping down amount of quota share reinsurance into IPO from 75% down to 55% now to 20%. So in that sense, it's a continuation.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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, 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 when you see when a cat hits, for example, like the one that hit in q one 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Quotashay, in theory, will produce very similar growth and net loss ratio because you seed x percent of premiums and you seed 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 this 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

The policies that we have in place that are helping us protect against risk concentration are not being materially changed. Quotashear 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 certain percentage of our premiums. There's kind of a rule of thumb of three to one, 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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 twelve month loss ratio, you know, 67% this past quarter, trailing twelve month, which I think is the more dependable metric if you like, less less volatile, less given to the vicissitudes of a particular event, 70% trailing twelve 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

We reported a $25,000,000 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 onboard less or to utilize less quota share reinsurance. And, of course, quota share partners have been stellar. They've been amazing. They've been with us from the get go.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

They are the, you know, 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 the gains that I outlined before, predominantly capital efficiency, but you are sacrificing some of your EBITDA.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

And you really wanna use or we really wanna use as little of that as we need given our capital requirements. So that more than anything else has 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?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yeah. Just a couple of points on the second part of your question, Jason. One note is that, you know, before you even get to our reinsurance structure, we 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 and 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

Our experience in the California fire cat of q one 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 that's a layer that sort of underpins our reinsurance. Then we layer on reinsurance, of course. The the bulk of the reinsurance structure at renewal remained unchanged. The quota share change in terms of its seed ratio was notable.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 FAC 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 things. We included a a pretty straightforward example of what a a thousand dollars 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 and l item items line items, I would urge you to kind of look at that in the 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 four quarters as the change in the seating ratio comes more into play.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 I IFP and premium, and that's as a because of a you're combining two elements there. You're combining the 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 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

And again, you should see those dynamics in the example that we shared.

Jason Helfstein
MD & Head - Internet at Oppenheimer & Co. Inc.

Thank you.

Operator

The next question comes from Tommy McJoint from KBW. Tommy, please go ahead. Your line is open.

Tommy McJoynt
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Hey. Good morning, guys. Thanks for taking Maybe my to simplify the previous question and response. Tim, I think a couple of years ago, you guys put out a a slide, an illustrated 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?

Tim Bixby
Tim Bixby
CFO at Lemonade

Sure. I 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 the crux of the question, I think?

Tommy McJoynt
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

That's right.

Tim Bixby
Tim Bixby
CFO at Lemonade

So you're correct. It sort of traced 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 the capital surplus benefit. Since then, a few things have happened. Our volatility has decreased.

Tim Bixby
Tim Bixby
CFO at Lemonade

Our trailing twelve 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, two 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 in whole, through our captive reinsure our captive structures. So net net, we've talked about a six to one 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, our, that ratio target for us is unchanged.

Tommy McJoynt
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Okay. Got it. Thanks for clarifying that. And then I think you made the the comment that the insurance entities are you know, have gone from a phase of of sort of losing, you know, negative net income driving losses and sort of capital decreasing to a period of of capital generation themselves because of the improvement in the loss ratio. When I look and I 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.

Tommy McJoynt
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

So can you just talk about sort of what capital has trended at the holding company level, you know, 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?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yeah. There is some there is some complexity when you look at each of the parts in isolation. You're you're correct that the, particularly, LIC, the lemonade entity, is profitable and generating surplus. At a consolidated level, the 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 forecast forecasting to be required based on our growth plans, and then what remains, basically, after satisfying all of those obligations.

Tim Bixby
Tim Bixby
CFO at Lemonade

And that cushion has been more or less steady for quite some time. We've noted the level of around $200,000,000. 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 cap or excess surplus being generated at the insurance companies.

Tim Bixby
Tim Bixby
CFO at Lemonade

But the the big picture is we've got more than sufficient capital to 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.

Tommy McJoynt
Director - Equity Research at Keefe, Bruyette & Woods (KBW)

Thanks.

Operator

The next question comes from Jack Matson from BMO. Jack, please go ahead. Your line is open.

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

Hey, good morning. Just a question on the car loss ratios. I'm wondering if you could 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? Any thoughts you have on loss trends that you're seeing in terms of either frequency or severity in the car insurance line?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yeah. So there there is actually a a fairly notable difference that we've been pleased to see unfolding, where it is typical in 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 as I made, 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 it is earlier early, and so those that that continues to develop, but that's a really encouraging sign that we're both, you know, choosing risks effectively. And as you see, the overall loss ratio coming down, but also that renewal is a is a great early indicator that that we're we're doing this well.

Tim Bixby
Tim Bixby
CFO at Lemonade

From a severity and frequency standpoint, generally across the business, we're seeing and particularly in q two, 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 the favorable trends have been winning out, and getting getting that trailing twelve months number down to, 70%, which is the headline number, I would say.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

Got it. Thank you. And just one on your outlook. It looks like the ISP guidance for the full year doesn't imply much of an acceleration versus the 29% growth this quarter. If 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.

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

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?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yes. I think there's certainly the potential for that. You've seen a couple of quarters, particularly second quarter where we're 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

There is some seasonality in terms of growth and, you know, high grow higher growth in q three versus q four. There's some churn dynamics that I think went, moved our way nicely in q two that we don't necessarily expect to replicate, although we we could see upside there. And we continue to, move forward with a project we've called sort of clean the book in our home book, which, provides a headwind, but a good headwind. It it aids our move towards profitability. We take advantage of an ability to nonrenew certain business that no longer fits our underwriting guidelines.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 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 seven consecutive quarters of top line growth. We'll endeavor to continue that record.

Tim Bixby
Tim Bixby
CFO at Lemonade

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.

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

Thank you.

Operator

The next question comes from Andrew Anderson at Jefferies. Andrew, please go ahead. Your line is open.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

Hey, good morning. Just wanted to go back to the car loss ratios. And I think you're 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.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

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?

Tim Bixby
Tim Bixby
CFO at Lemonade

That that breakdown is not something we've sort of disclosed publicly. So I I think I would probably point you to our some of the stats we shared about q two 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, would expect to continue as well.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

Okay. And then on the ad spend in the quarter 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?

Tim Bixby
Tim Bixby
CFO at Lemonade

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 the total year target and goal is right on track, but we see 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 wanna kinda get get the the visibility out there as more of a halo for going to the second half of the year, and that is some of the dynamic. So I think versus the beginning of the year, we've upped the total spend by quite modestly, and and the the rest has been timing shift.

Tim Bixby
Tim Bixby
CFO at Lemonade

I think we had in q two, 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 you know, when you're 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 kinda push that edge in q three, which is which is typically a strong quarter of growth. The loss ratio trend is important, and so we kind of watch how that tracks.

Tim Bixby
Tim Bixby
CFO at Lemonade

But we feel like we have a great foundation for continuance of these car trends in the second half.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

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?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yes. You know, we we can grow a great deal and still be a tiny drop in the in the car ocean. So we don't ignore the competitive dynamics. We 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 there's obviously a a limit to that.

Tim Bixby
Tim Bixby
CFO at Lemonade

But the competitive dynamics of the market tend to be secondary to what we see, in terms of what our LTV models tell us about what are what are good risks, and where the marketing efficiency is strong. So we feel like all systems are go going into the second half.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

Thank you.

Operator

And the next question comes from Katie Sakis from Autonomous. Katie, please go ahead.

Katie Sakys
Senior Research Associate at Autonomous Research

Hi, good morning. 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 both the reported gross loss ratio as well as the trailing twelve 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, reading the shareholder letter, it's the language on expectations for 2026 seem a little bit different, for positive adjusted EBITDA before the end of full year '26.

Katie Sakys
Senior Research Associate at Autonomous Research

And I think on on the last call, you guys had perhaps phrased it as positive EBITDA by 4Q twenty six. Is there anything to read into the shift language there?

Tim Bixby
Tim Bixby
CFO at Lemonade

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

Tim Bixby
Tim Bixby
CFO at Lemonade

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 it's not exactly linear. And part of that is driven by our increasing growth spend, which increases the you know, adds cost to the cost structure. And when you grow at a faster pace, that premium that you bring in doesn't necessarily well, it doesn't, drop to the bottom line in real time. It drops over the 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

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 the coming quarters. So the bottom line guidance for this year, you're 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, for quite some time.

Katie Sakys
Senior Research Associate at Autonomous Research

Got it. And then perhaps as a follow-up, in kind of thinking about the 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 seventies gross loss ratio might, you know, materially come down into something below 70%?

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Never say never Do wanna

Tim Bixby
Tim Bixby
CFO at Lemonade

take that one?

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Yeah.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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 gonna look like already now and as we scale, 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, you know, 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.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

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.

Katie Sakys
Senior Research Associate at Autonomous Research

Super helpful. Thank you.

Operator

We have a follow-up from Jack at BMO. Jack, please go ahead.

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

Hey, thanks for taking the follow-up. Just one, I think there was, like an $11,700,000, 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?

Tim Bixby
Tim Bixby
CFO at Lemonade

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

Jack Matten
Jack Matten
VP - Equity Research at BMO Capital Markets

Got it. Good. Thank you.

Operator

We also have a follow-up from Andrew at Jefferies. Andrew, please go ahead.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

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

Tim Bixby
Tim Bixby
CFO at Lemonade

So, again, we don't, necessarily guide to that. That's just more of a broad strokes of what our targets are yet on a on a gross gross basis. Historically, we've talked about, gross written premium, in that six to one ratio. There's also a dynamic in the regulatory surplus, that requires a three to one on a net basis, which comes into play depending on how the quota share reinsurance is structured and and other sort of accounting dynamics. But, again, I would think of those as substantially unchanged.

Tim Bixby
Tim Bixby
CFO at Lemonade

Six to one on a gross basis, if you directly translate that to net, you get something like four to one versus three to one. But more or less, I would think of it all as unchanged.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

Is that just on a US entity basis, or is that including the Cayman captive?

Tim Bixby
Tim Bixby
CFO at Lemonade

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 gonna get different numbers. Everything that we communicate is I would think of it as on a consolidated, global basis for eliminating.

Andrew Andersen
Andrew Andersen
VP - Equity Research at Jefferies Financial Group

Okay. Thank you.

Tim Bixby
Tim Bixby
CFO at Lemonade

We

Operator

have a follow-up from Katie at Autonomous. Katie, please go ahead.

Katie Sakys
Senior Research Associate at Autonomous Research

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 on that process?

Katie Sakys
Senior Research Associate at Autonomous Research

I guess, I'm really trying to get at is, you know, when can we expect to see that ADR level increase, north of 84% again?

Tim Bixby
Tim Bixby
CFO at Lemonade

Yeah. So I 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 the same, in each of those three 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 zero in the beginning of the following year, but I think the pace will certainly begin to diminish based on what we know now.

Tim Bixby
Tim Bixby
CFO at Lemonade

This is obviously something you look at as 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 but it is a 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 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.

Tim Bixby
Tim Bixby
CFO at Lemonade

So I'd expect that to to be more visible as we come out of the back half of this year in the ADR number.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

Maybe just to state the obvious, Katie, but in addition to dampening 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 numbers that we reported would indicate because we've also got this counteraction of non renewing parts 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 insights retroactively wherever we can as well, and that's what you're seeing happening here.

Daniel Schreiber
Daniel Schreiber
Co-Founder, Chairman & CEO at Lemonade

The fruits of that have already manifested several times. Our loss ratio is testament to that. Our q one loss ratio during the wildfires in California were very strong evidence of why this is all a price worth paying, but we do pay it for we do pay for it in a couple of currencies, ADR being one and top line metrics being another.

Katie Sakys
Senior Research Associate at Autonomous Research

Thank you.

Operator

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

Executives
    • Daniel Schreiber
      Daniel Schreiber
      Co-Founder, Chairman & CEO
    • Shai Wininger
      Shai Wininger
      President & Co-Founder
    • Tim Bixby
      Tim Bixby
      CFO
    • Nicholas Stead
      Nicholas Stead
      SVP - Finance
Analysts
    • Jason Helfstein
      MD & Head - Internet at Oppenheimer & Co. Inc.
    • Tommy McJoynt
      Director - Equity Research at Keefe, Bruyette & Woods (KBW)
    • Jack Matten
      VP - Equity Research at BMO Capital Markets
    • Andrew Andersen
      VP - Equity Research at Jefferies Financial Group
    • Katie Sakys
      Senior Research Associate at Autonomous Research
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