Good day, and welcome to the Lemonade, Inc Third Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Yael Wissner-Levy. Please go ahead.
Good morning, and welcome to Lemonade's Q3 2021 Earnings Call. My name is Yael Wissner-Levy, and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder, Shai Wininger, Co-CEO and Co-Founder, and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company's Q3 2021 financial results is available on our investor relations website, investor.lemonade.com. Before we begin, I would like to remind you that management remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-K filed with the SEC on March 8th, 2021, and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders.
Our letter to shareholders also includes information about our key operating metrics, including 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, who will begin with a few opening remarks. Daniel?
Good morning. I'd like to begin with very exciting news about our current product strategy. Lemonade Car was launched last week, and today, as part of our continued investment in this line, we announced our acquisition of the tech-enabled car insurance company Metromile. We believe the deal will be a significant value unlock to our shareholders and our customers, and we expect this transaction to pay dividends in three important currencies. Firstly, by collapsing time. We're acquiring billions of miles of highly textured driving data, advanced telematics technologies, and deep pricing and underwriting knowledge. Metromile has implemented seasoned proprietary machine learning models that are informed by real-world feedback and iteration at scale. It would candidly take us years to gather this level of insight.
The deal also delivers over $100 million of seasoned in-force premium, 49 state licenses, and a team steeped in every aspect of digital car insurance, all things that can accelerate the growth trajectory of our own car insurance business. Secondly, the deal allows us to flatten risk curves. Not only does the transaction accelerate our growth trajectory and knowledge base, but importantly, it allows us to vault over the riskiest parts of our car ambitions, namely growing Lemonade Car before our data models season. Lastly, this transaction delivers increased efficiencies. Post-transaction close, our strategy is to build a business that preserves a single culture, single tech stack, single brand, unified team, and a single product experience. We believe this strategy yields considerable revenue and cost synergies that will enhance Lemonade's financial profile. Just days ago, we launched Lemonade Car. This was a herculean effort by our team.
The result is a car insurance product built from scratch by the largest team we've assigned to a single product ever. We're incredibly proud of how it worked out and believe it's only gonna get better from here. Injecting all the Metromile mojo into Lemonade Car will lead to a product offering that stands alone in the market. Together, we'll have all the people and tools in place to deliver the market's most seamless and customer-centric car insurance product that is also its most affordable, precise, and fair. That, at any rate, is the plan. Concurrent with these significant developments in our car product and strategy, the rest of our book has happily sustained its growth trajectory. With healthy unit economics and robust customer demand, the overarching theme of 2021 sustained through Q3. We leaned in and sequentially ramped up our investment in growth.
We saw robust premium growth in Q3 with IFP increasing by 84% year-on-year. In fact, in Q3, we drove a record $50 million net change in IFP. This marks the third consecutive record quarter and was a direct result of leaning in, a sequential increase in advertising investment for the period. Across our book of business, we are seeing trends that enhance our customer lifetime value, most notably the increasing prevalence of bundling and the formation of healthy loss ratio trends in our newer business lines, and this gives us confidence to accelerate our investment pace. Additionally, Q3 is typically the quarter where we see tailwinds driven largely by seasonality in renters' moving behavior. We capitalize on this effectively, delivering a record volume of gross new renters business for the period.
While renters growth remains healthy, consistent with our sustained strategy of diversifying our book, we actually drove faster year-on-year growth rates in each of our non-renters lines of business. As a result, the business mix evolution we highlighted in detail last quarter has sustained, with non-renters' share of our overall book of business ticking up to 47% from 44% last quarter. With that, let me hand over to Shai for more updates.
Thank you, Daniel.
On the topic of growth in our advertising budget allocation strategy across the product portfolio, our growth investment dollars will continue to follow the areas of our business that demonstrate the most healthy unit economics. On last quarter's call, we touched on the formation of favorable trends in our European loss ratios. As a result, in the near term, we expect to reallocate marketing dollars from our life business to Europe. While our Europe and life businesses each have relatively small scopes today, we continue to believe that they will achieve meaningful scale in the long term. Beyond our customer acquisition strategy, we're observing positive trends in the growth contribution from our existing customer base. Bundling behavior is growing substantially across the book, with bundles now representing 8% of total IFP compared to 0% prior to launch of Pet in Q3 2020.
This quarter, we recognized a record volume of cross-sales at about $5 million and saw more than 4x increase in the number of customers with policies in multiple lines relative to last year. While the average premium per customer in Q3 2021 was $254, our bundled customers show close to 3x that number. Shifting gears to underwriting profitability across our product portfolio. Our Q3 2021 gross loss ratio was 77%, up from 72% a year ago. I want to provide some color to address this trend. The increase in our loss ratio masks an important underlying trend. Our less mature lines of business are demonstrating meaningfully improved profitability. These gains are driven by a comprehensive strategy and rigorous focus across the organization to improve loss ratio and customer lifetime value.
The improvements we're seeing put us on a clear path to our ultimate destination. In the long term, we expect the loss ratios of all Lemonade product lines to be under 75%. With that, let me hand over to Tim for a bit more detail around our financial results. Tim?
Great. Thanks, Shai. I'll give a bit more color on our Q3 results, as well as expectations for the fourth quarter and the full year of 2021, and then we'll take your questions. We had another strong quarter of growth driven by additions of new customers, as well as a continued increase in premium per customer. In-force premium grew 84% in Q3 as compared to the prior year to $346.7 million. We believe this metric captures the full scope of our top-line growth before the impact of reinsurance, and regardless of the timing of customer acquisition during the quarter. Premium per customer increased 26% versus the prior year to $254. This increase was driven by a combination of increased value of policies over time, as well as mix shift toward higher value homeowners and pet policies.
Roughly 80% of the growth in premium per customer in Q3 was driven by product mix shift, including cross-sales, while the remaining 20% was from increased coverage levels and pricing. Gross earned premium in Q3 increased 86% as compared to the prior year to $79.6 million, roughly in line with the increase in in-force premium. Our gross loss ratio was 77% for Q3 2021, five points higher than 72% in Q3 2020. This was primarily driven by the impact of our rapidly growing new business lines, but was partially offset by a considerable and notable 52-point year-over-year improvement in the loss ratio of our homeowners book. As Shai noted, it's important to understand the impact of mix shift on the overall loss ratio to get a better feel for the underlying improvements in loss ratio on a product level.
Put more simply, each of our products is showing loss ratio improvements, though the overall loss ratio showed a slight increase due to the shift in mix. Operating expenses, excluding loss and loss adjustment expense, increased 98% in Q3 as compared to the prior year. This is primarily driven by a 90% increase in sales and marketing spend as a result of leaning into advertising investment. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth in both current and future product launches, and thus saw increases in each of the other expense lines. Global headcount grew 111% versus the prior year to 969, with a greater growth rate in customer-facing departments and product development teams.
Net loss was $66.4 million in Q3, as compared to the $30.9 million we reported in the third quarter of 2020. While our adjusted EBITDA loss was $51.3 million in Q3, as compared to $27.6 million in the third quarter of 2020. Our total cash equivalents and investments ended the quarter at roughly $1.1 billion, reflecting primarily the net proceeds from our January follow-on offering of approximately $640 million, partially offset by the use of cash for operations of $95 million since year-end 2020. With these goals and metrics in mind, I'll outline our specific financial expectations for the fourth quarter and an updated full year of 2021.
For the fourth quarter, we expect in-force premium at December 31 of between $380 million and $384 million. Gross earned premium of $88 million-$89 million, revenue between $39 million and $40 million, and an adjusted EBITDA loss of between $52 million and $50 million. We also expect stock-based compensation expense of approximately $19 million and capital expenditures of approximately $3 million. This guidance would imply for the full year, in-force premium at December 31 of between $380 million and $384 million. Gross earned premium between $291 million and $292 million. Full year revenue between $126 million and $127 million. An adjusted EBITDA loss between $185 million and $183 million.
For the full year, it would imply stock-based compensation expense of approximately $50 million and capital expenditures of approximately $11 million. Now notably, we've increased our investment pace and thus reduced the low end of our full year EBITDA guidance range by about $13 million. There are two drivers here, primarily. One, conservatism related to marketing efficiency. Two, accelerated spend in support of the launch of Lemonade Car. In order to allow our team sufficient time to learn and ramp up prior to servicing customers, we've staffed up and continue to staff up all of our customer-facing teams prior to launch. In prior iterations of our forecast, these costs were slated for 2022 closer to the onboarding of car customers, and we pulled forward a portion of that planned spend into 2021.
With that, I would like to turn the call back over to Daniel. Daniel?
Thanks, Tim. As is our custom, we're happy to address some investor questions that were entered and upvoted on the Say platform, and I'll turn to some of these right now. The first question comes from Jacob, and Jacob asks, "Will Lemonade adopt the pay-per-mile business model that Metromile is using, and which it is failing at?" Jacob, I don't wanna disclose here specifics about future iterations of the Lemonade Car product. We tend not to pre-announce exact features or timelines. But I do wanna give some context and color and talk about some of the underlying elements of your question. I think the important thing, which I'll return to in a few minutes time as well, is to distinguish between pricing based on proxies and pricing based on precision.
One of the fundamental drivers of how Lemonade thinks about car insurance and how Metromile thinks about car insurance is to increasingly underweight proxies such as credit score and gender, marital status, job history, all things that incumbents rely on exclusively, or nearly exclusively in pricing and underwriting. To use instead continuous data streams which give precise information about how much is driven, how well those miles are being driven, and to use those and overweight those at the expense of proxies. As I say, Lemonade Car has been architected that way based on telematics and on a continuous data feed. The Metromile acquisition for us really leaps that capability forward in very significant ways. What it gives us really world-beating understanding of expected losses per mile driven.
What Metromile has spent the better part of a decade doing and has garnered billions of miles of driving data in support of, is getting pinpoint data on every mile driven and the risks associated with all the elements of the driving. That then allows you, as I say, to be able to predict losses per mile driven at a level of granularity and precision that proxies can never, ever get to. Once you have that understanding and you understand the true expected costs per mile driven, how you package that up to consumers is an important question, but a secondary one. You can package that in different ways. You can package it as Metromile themselves have done on a pay-per-mile basis.
You can package it as Lemonade Car does today, where you get a flat rate per month, but that can change based on your driving patterns. We will experiment and bring to market different capabilities over time. We are customer-centric. We'll use what customers want as our guiding principle in how we package. As I say, the fundamental distinction to draw is between precision pricing and proxy-based pricing, and we're very much gonna lean in on the precision side of the house. Let me take another question from EcoPod. The question is, "Are you in talks with automakers to form a partnership? Tesla data + Lemonade delightful customer experience = the best of both worlds." Thanks for that question.
As I just said to Jacob in a slightly different context, I don't wanna reveal what is or isn't in the works at the moment. I will draw your attention to the fact that Metromile themselves have in the past made announcements about various cooperations with OEMs. But again, I'd like to address the fundamentals of your question. Undoubtedly, the trend worldwide is towards connected cars. Metromile have been implementing an OBD device, a device that plugs into the car, into the engine's computer and adds to it, augments it with GPS and accelerometer and a GSM chip, allowing it to really become a connected car. All of the Metromile customers are effectively driving connected cars already today.
Our own app that launched last week for Lemonade Car does something similar, but it's really a connected driver rather than a connected car using the smartphone rather than the onboard device. We take an approach that is largely agnostic to the data source. Whether the data is coming from the OEM through a connected car or through an OBD device, Metromile style or through the smartphone, as is the case with Lemonade Car, we'll be able to integrate all the different data sources. We're not committed to any one. What we are committed to is using that data or those data to generate ever more precise expected losses per mile driven.
We will, with the acquisition of Metromile, be able to do that in a way that just a couple of days ago wasn't possible to us, gives us multiple sources and multiple years of churning that data and really understanding it deeply. Now, I'd like to layer one other dimension onto this now, again, coming back to this distinction between proxies and precision pricing. The basic capabilities that I discussed using data streams in order to get to precision pricing are at a fundamental level available to everybody. They're becoming more and more available through connected cars. OBD devices have existed for a while. Smartphone tracking capabilities are also technologies that have been developed and deployed in the past. Yet we don't see them adopted in a meaningful way by the car insurance industry.
I think that the fundamental obstacle here that thing that's slowing down adoption is really a classic innovative dilemma. At the most recent Berkshire Hathaway annual general meeting, the leadership of Berkshire, the owners of GEICO, said the following. They said that GEICO clearly missed the bus when it came to telematics. I do ask myself, why would it be that a company as venerable and as sophisticated as GEICO would entirely miss the bus in the words of its own leadership? Why is it that of the 210 million policies, home, car insurance policies in effect in the United States, 95 or over 95 even are not using telematics? Why is it that the 4% or so that do use telematics are really using a muted version of it?
They only allow it to run for about two weeks before discontinuing it, and whatever signals they pick up during that time are meaningfully underweighted. They do not rely on them as heavily as companies like Lemonade or Metromile do, and they do not pass on the implicit savings to the customers at anything like a rate commensurate with the expected loss. I think the answer to that why question is that, ignorance is bliss. If I were running a legacy company with tens of billions of dollars invested in proxy-based pricing, I might well do the same thing. I think it's a rational thing to do because what happens when you move from proxy-based pricing to precision-based pricing, you discover that large groups that you were treating as monolithic are actually made up of very different risks. About two-thirds of drivers drive less than average.
If you were to know that, if you could differentiate your customers, you'd probably have to lower rates for about two-thirds of your book by as much as 30% or 40%, and that would be a devastating hit to a legacy business. What you'll also discover, of course, is that the other third are being subsidized. Having lost that subsidy, you would now have to raise rates. You'd have to hike them for about a third of your book, which would lead to tremendous churn. All in all, adopting these technologies is not good news in the short term for people in the business of protecting a legacy business.
that is also the opportunity of Lemonade and Lemonade Car, and now enjoying a tremendous boost through the acquisition of Metromile to lean in on the technology-based fundamentals of precision pricing and pass on those savings in a way that creates a sustainable and indeed a structural advantage relative to incumbents. The final question I want to take is from Jiwan. Jiwan asks the following. Why should I as an investor continue to hold on to Lemonade stock when the company is not expected to turn positive cash flow for many years to come? Jiwan, we really do appreciate that question. Also appreciate your faith in being a shareholder to date. I wanna concede and say at the outset, we're not of the view that Lemonade as a stock is necessarily right for every investor. In fact, Shai and I have always pa-pa.
Excuse me. We have always placed a big premium on being aligned with our shareholders, being very transparent about how we intend to run the business and seeking shareholders who see value in that particular way of prioritizing. To that end, we wrote a founder's letter, made it into our S-1. It's also available on the homepage of our investor website, investor.lemonade.com. I would encourage you to read it. I'm just gonna quote a couple of sections, briefly. The first one is, we say the following: Lemonade is not everyone's cup of tea, which is why we wanted to outline our approach in the hope that investors who share our thinking will be drawn to Lemonade while those who do not will seek their fortunes elsewhere.
Just acknowledging, Jiwan, that the way we're running the business is right for some investors, but not for all. The ones for whom it is right, I think, are the ones who are really looking at the long term rather than the near term. I'll read one more paragraph. We write, industries like insurance are reinvented once every few centuries. Optimizing for profitability is important. That can wait. We aim to grow fast and capture as much market share, mind share, and as large a geographical footprint as possible. If we were to reverse that, we would have a finely honed business but would risk losing the market. That does not mean our bottom line does not guide us or constrain us. It absolutely should and does.
We do not launch products, open territories or sell policies we believe will be a long-term drain rather than a long-term gain, but the key phrase is long term. Coming back, Jiwan, to just give you a little bit more context. Since we wrote those words, it was 16 months ago that we had our IPO.
In the intervening 16 months, our in-force premium has grown by over 160%. Our gross profit has grown by over 180%. We have moved from being a monoline business doing only homeowners insurance to one that also does pet insurance, life insurance, car insurance, and as of our recent announcement, has acquired Metromile. The bottom line is, we think of the industry that we're in, insurance, as the largest disruptable industry on the planet. We believe that is a huge prize that's worth fighting for, and that there will be disproportionate rewards for whoever attains pole position or first position, as we go through the next few years.
While we could be profitable today, all our products, all our campaigns, all our geographies have positive LTV to CAC, that would be at the expense of great fortunes down the road. We believe that these are the years for growing customers, growing products, growing markets, growing top line, and that really translates into sizable investments that put us cash flow negative. Coming full circle back to your question, why should you hold the stock despite negative cash flow? The answer is, well, it depends, obviously, on you.
If you believe in our thesis, if you believe as we do that there is unlimited opportunity or almost, and there is a limited window of opportunity, and if you believe that the moves we're making, the investments we're making have a good chance of the outsized return, then that would provide an answer to the fundamental question of why hold on to Lemonade. I hope that was some help. With that, let me hand the call back to the operator so we can take some questions from our friends on the street. Thank you.
We will now begin the question-and-answer session. To ask a question, press star then one on a touch-tone phone. If you are using a speakerphone, please prep your handset before pressing the keys. To withdraw your question, please press star then two. The first question comes from Michael Phillips with Morgan Stanley. Please go ahead.
Hey, good morning, guys, and congrats on all the news from last night. Good stuff. I guess first question would be on your comments in the letter about leaning into the quarter. You know we know that seasonality and you talk about that a lot as third quarter means certain things for wanting to maybe ramp up marketing spend. Except that impact or except that phenomenon, I guess, what else led you to see that this was a time to lean in besides the normal seasonality?
Hey, Mike. Thanks. I think it's kind of an overarching theme to kind of scan back over the five or six quarters since we've been public. There's a trend that stands out. A greater level of confidence has led us to increase investment levels and accelerate plans. In a couple of instances, we saw the opposite. Early days, months of the pandemic, we saw the opposite, a great deal of a great lack of confidence, and we dialed back and were quite cautious. That was a very brief period. For the most part, these quarters have been the former. Increase in confidence, better ability to get products in the hands of customers, more assurance in our competitive position.
When we see that, it gives us more confidence to accelerate and adapt. That usually comes and exhibits itself in a P&L dynamic where we spend a little bit more. The bottom line shows that impact in the short term, but the LTV to CAC remains strong, the market position remains strong, and with the pending combination with Metromile, gave us that confidence and then some in what is arguably our most important product launch, certainly our largest addressable market. You see that reflected both in the Q4 numbers, and I think you should also feel it in our posture as we head into next year.
Tim, maybe I should be a little more specific to another question. Like, I guess, you leaned in also, and that all makes a lot of sense, but you leaned in also at a time where you admitted as well as the industry that there's higher customer acquisition costs, higher marketing spend, costs as well. I guess I kind of wanna marry those two things. It was a tougher time because of higher marketing spend, but it's also time to lean in. Help us think about whether that was the right time and how you view those increased or marketing spend dollars that are maybe here to stay for a while, or how long you see those will last.
Well, I would think of it maybe less as a tougher time, but perhaps a little bit more expensive time to acquire customers. There is a case to be made where if customer acquisition cost increases, that feels bad in the short term, but if the lifetime value potential is strong and increasing, that's an impact that impacts everybody in the market. We choose to kind of lean into that knowing what the return is on those investments. We're a little bit conservative in the forward periods.
We've seen this now for a long enough period of time we don't have enough data to say this is a persistent thing that's gonna last for years. We're a little cautious about the coming quarter. You see that reflected in the numbers. In terms of seasonality, I think in the first part of your question, that's still there, but it's a nominal impact. It's softening somewhat because of our much more diverse product base. We still do see that in Q3, but that's been less of a factor. It's really our choice to spend more, acquire more customers, as well to accelerate some of the hiring plans to support the expanding car launch.
Okay. That makes sense. You guys are pretty exact with your wording, so I might be splitting hairs too finely here. If I look at the current letter and your long-term target, loss ratio is less than 75%. I think prior you had said something a little different than that. Again, I may be just splitting here, so I wanna make sure I'm not. You know, prior comments there were in the low 70s, 70%-75%, and today it was less than 75%. Is there a change there that's maybe something to be read from that that's making you maybe think that should be a little bit higher than what it was before? Again, am I just reading too much into that?
No real change there. I would think of it as, you know, our long-term target remains unchanged. As you may recall, we have, you know, a business model structure where we take a 25% flat fee, and the remaining 75% goes for reinsurance and customer claims and loss adjustment expense and all of those things. I would think of that as unchanged. Our long-term target is still there. I think in the short term, I think it's very important to note that while the loss ratio did tick up a little bit in aggregate, each of the product lines has shown, you know, some nice improvement.
It's really a mix shift that is accelerating, that is a little bit ahead of where we thought it might be a year ago, in a good way. Less than half of our business today is made up of our renters book, and that's decreasing, which means the other parts are increasing. That really reflects the market. Homeowners is a very large market, life bigger than that, and car something like three times the homeowners market. You're seeing our book of business and the loss ratio shift to look more like the market each quarter.
Okay, thanks. Last one for me. I'll just do one on Metromile, and then save the other for later, I guess. One is, you know, obviously lots of comments in the letter and comments today on precision of the data and what that's gonna mean for your pricing and customer acquisition and everything else in your margins. I guess, can you comment on how confident you are today with the pricing technological advances of Metromile, given where their underwriting margins have been, loss and loss adjustment expense ratios have been? Does that make you confident with their current pricing algorithms and data they're collecting or any concerns there at all, the things that might need to be tweaked or fixed at all?
Hey, Mike. Our confidence is very high. This is really what we spent the last while diligencing. There's no question that there's been an uptick in severity across the auto insurance space. This has affected Metromile, it's affected everybody else. Progressive and others have spoken about it at some length, and I think the industry as a whole will be taking rate to reflect the increase in the costs of repairing cars in the last few months. There's definitely been a near-term impact that has affected them. We look right through that. What we're looking for is really nothing to do with the near-term loss ratio of Metromile, and it's really about the fundamental capabilities and strategic strengths. There we believe that there is a pronounced advantage that is readily visible.
There's a couple of things that we mentioned in the letter. For one, the very notion that customers report saving something like 47% when switching to Metromile. And at the same time, their loss ratio is within 10 points of Progressive's direct business, suggesting that even if they took a rate increase, there would still be sizable savings for consumers, even as the loss ratio hits its long-term target. We see a structural advantage in the capabilities that they have built, and we're unmoved by the near-term changes that they plan to make anyway in order to bring their loss ratio in line with their long-term targets.
Okay, guys. Thanks so much for your questions. Appreciate it.
Thank you.
The next question comes from Tracy Benguigui with Barclays. Please go ahead.
Thank you. Good morning. Just a follow-up on this past discussion, just on growth outpacing marketplace conditions, that doesn't always turn out well. I think Metromile has 49 state licenses, but it operates in eight states now, with plans to enter five more next year. Does that cadence change in your view?
I think Lemonade in general has been characterized by more emphasis on growth. Certainly if you look at our rollout of our prior products and compare them to Metromile's, we do lean in more aggressively in that regard. I do anticipate that with or without Metromile, we would have been looking for a rapid deployment across the United States, and we see Metromile as an accelerant for that.
Okay. Got it. I also believe that Metromile has commuted their reinsurance program. Is the idea that you would have buy-in on the new program that's starting in January?
You know, during this period between sign and close, as you know, we're, you know, separate independent companies, sort of managing our own businesses, but looking ahead to all of the approvals coming together and the companies coming together. You're correct that they've chosen to go without reinsurance at the moment. I think, like Lemonade, they're thoughtfully assessing the market, would be my guess and my understanding, to see what kind of terms are out there and what's available. We made the choice actually last summer and the year prior to go with terms that we found very attractive, although we could have gone without reinsurance. I would think that Metromile has those options and they'll make those choices.
Once the companies come together, we'll more than likely continue to enjoy the reinsurance structure we have in place, so we have lots of flexibility with that. We expect to get a nice capital surplus benefit from the combination of the companies, something in the order of 30% perhaps or more. The exact number we'll have to determine, but generally when you bring companies together in this way, it can have a benefit from a surplus perspective as well. There's two or three areas we're looking at in this from a perspective reinsurance, capital surplus and other regulatory benefits that make this a great combination for us.
Maybe just a follow-up there because you mentioned surplus. Typically, what you see is that an auto insurance writer could run at a higher premium to surplus. Does that change your equation at all in your view?
A little premature for us to get too specific about what those benefits will be. Yes, you know, we're well aware of some of the both benefits and the incremental costs of Car versus the other product lines. I would recommend maybe staying tuned as we get closer to close. We'll give a little more clarity on some of the more specific benefits.
Got it. Thank you.
The next question comes from Jason Helfstein with Oppenheimer. Please go ahead.
Thanks, two. Just first on Metromile, I mean, you kind of alluded maybe that Metromile wasn't charging enough, but, besides bundling, which you can clearly bring to the table, maybe if you wanna talk about how, you know, how you would run Metromile differently as part of Lemonade. Just second, as you expand to Europe, just are there broader financial implications we should think about, or not expand, but kind of spend more on your expansion in Europe? Are there implications we should think about in the model next year, Dan?
Jason, hi. Good to talk to you. I don't think the right way to think about this is how we would run Metromile differently. We don't intend to run Metromile distinctly at all. We intend to run a single company with a single product. It'll be over time once the combination is complete, it'll be a successor to Lemonade Car that was launched last week. This isn't about changing or fixing or transforming Metromile, it's about strengthening Lemonade Car and leapfrogging us to the vanguard of car insurance.
We alluded to this in the post that I shared yesterday as well, the idea that were Metromile to have access to, you know, 1.4 million customers and a home insurance product that they could bundle with and pet insurance they could bundle with, that would be hugely valuable to them as it is. As I say, our focus is really on how can we inject all of those capabilities into Lemonade Car, and hopefully we've given you a good sense of why we think that that is a game changer and why that is a really important long-term value unlock for our customers and for our shareholders. In terms of your question on the EU, when we give guidance next year, we'll perhaps be able to provide some more color.
You know, I don't think you need to be making any dramatic changes right now. We're just giving you kind of a broad strokes indication that the EU is performing well. While it's been a small part of our business, we do anticipate in the future it growing perhaps at a faster rate than the rest of our business.
Thank you.
The next question comes from Andrew Kligerman with Credit Suisse. Please go ahead.
Hey, thank you very much this morning. I was wondering a little more on the sales and marketing. It was up a little over 90% in the quarter, and you mentioned leaning in as these marketing costs in the industry have gone up. Could you give us a little color on what you're seeing? Like I've heard, you know, advertising on social media is up more than 50%. Could you give a little color on those types of metrics and what you're seeing out there in terms of sales and marketing costs?
Sure. I'll take that one. I think the theme that you're highlighting we have seen certainly upward pressure, whether it's social media or the cost of search terms or other key channels that we rely on. I think the metric you note of 50% is quite dramatic. Our experience has been a fair bit less. I would think of it as something on the order of, you know, 20 or 25%-ish or so maybe half of perhaps what you're seeing in other companies or across the industry. Important to note that we've been able to offset some of that, not all of that, but some of that through just continued improvement in performance.
While this is not something we would wish upon ourselves from a competitive standpoint, our track record is quite strong in this area. These impacts affect us, they affect all competitors. As long as we continue to execute as we have in the past, we'll be able to mitigate this somewhat. As a reminder, we just kind of keep our eye on the lifetime value. The reason the cost of insurance is high is because there's a tremendous potential lifetime value, particularly when you see churn and retention stable as we do, as you see our capabilities in bundling expand as we are seeing today, we can boast we have our first customers with three policies. A couple years ago, that was one policy.
These are all themes and trends which tell us even if customer acquisition costs increase somewhat in the short term, but it's something we're confident we can compete effectively and weather in the long term.
That was very helpful. Then with respect to Metromile, was kind of running through their financials last night and just thinking about their operating losses and the fact that it was over $100 million in operating losses, net operating losses in the first half of the year. If you kind of extrapolate that out, then you're run rate at over $200 million a year. I'm wondering, you know, I get that, you know, you wanna grow and there's tremendous opportunity in that. How long would you expect to see those type losses in the...
I would point you back to a couple of the comments that Daniel just made, and the best way to think about that. Again, you know, during this period of time, we're independent companies operating independently. The goal is one company, one consolidated brand, one consolidated customer experience, and that's the Lemonade Car product. The synergies that we see between the two companies are significant. We have a fairly ambitious growth plan. A big part of that is hiring people that do all the amazing things from a product and a customer standpoint that help us build our company.
Folks that we would plan to hire will as likely or not find those folks at Metromile with tremendous experience and background in a market that we're just entering, and that's really the leapfrogging capability. I would not think of it as taking two companies and putting them together and adding the P&Ls and finding synergies, which is what is a reasonable approach in many acquisitions. This is much more about us seeing the real core value in what Metromile has learned and developed over time, the data they've created, the third generation technology that they've come to, which is something we would just be starting out with in our product launch.
Those are the real values, and so we'll work aggressively to integrate and bring the companies together once we get to the point of close. The cash burn, you know, you've seen how we manage our business historically from a cash and capital perspective, and we'll continue to use that approach and ethos once we bring the companies together.
Okay. Thank you.
The next question comes from Mike Zaremski with Wolfe Research. Please go ahead.
Yeah, thanks. Good morning. Maybe switching gears a little bit to loss expense inflation in the existing book, and maybe you can give us some color on what you're seeing. I think as you guys know, some of your competitors, you know, you guys have more renters, have been talking about kind of high single or double digits rates of inflation in their homeowners portfolios or auto portfolios. Maybe you can give us some color on what you're seeing in your book, in particular on the renters side as well, and whether you'll be raising pricing accordingly.
We've not disclosed any specific plans in terms of price increases or significant changes, though we're always evaluating prices and certainly on a state-by-state basis. We've made appropriate filings and made adjustments where we feel it makes sense. There's certainly some impact of the price creep that you mentioned. I wouldn't note it as dramatic, but it is something that we've seen to some extent, but it's really been overpowered by the overall improvement in the loss ratio overall. You know, when you aggregate the losses and the loss adjustment expense, again, we're seeing nice improvement. It's also a benefit that comes with scale.
As you know, growing at the pace we're growing, we're able to mitigate some of these price impacts and cost impacts through scale. We're still relatively early in that cycle at our current IFP run rate, but I think with the launch into Car and the pending combination with Metromile, that we'll see some more benefit there in terms of faster scale and ability to mitigate some of those price increases.
Okay. As a follow-up on the reinsurance, and I know you have a multi-year program, some of the reinsurers are talking about hopefully raising rates, you know, high single digits to low double digits as well. Should we be contemplating higher reinsurance costs when we think into the future, as well and other offsets that you can kind of levers you can take to potentially offset if there are pricing increases?
We've spoken before about reinsurance. Tim mentioned this in passing earlier as well, which is that we see reinsurance as an option, not as a necessity. We take the kind of reinsurance and the quantum of reinsurance that makes sense from a financial perspective. If prices were to rise significantly, and we've been given no indication of that, then it's entirely possible that we would lower the amount of reinsurance that we take.
We have been gradually stepping it down anyway. You may note that last July we went from 75% to 70% coverage. As our book grows, as it diversifies across products and across geographies, we see that that's a natural and correct thing for us to do. But really for us, more than anything else, reinsurance is about capital optimization. The cost of capital through reinsurance is lower than elsewhere, so we've been relying on it heavily. If the cost benefits change, our structures will change to accommodate that as well. That said, this is, you know, the kind of ebbs and flows that you're talking about come and go with some frequency. We're not up for a major reinsurance renegotiation for quite a while, so I would anticipate absolutely no change in the near term, maybe slight changes in the medium term.
As to the long term, let's take the pulse of industry in 18 months hence, and we'll have greater clarity on what we do.
That's helpful. Lastly, a follow-up, can you offer us any kind of color or views on whether your views on pet insurance has changed, and kind of an update on how that's going as it becomes a bigger portion of your book? You know, one of the pet insurance stocks has done very well, and it seems like there's a lot of demand for pet insurance. Maybe you can kind of give us an update on your views on that line of business. Thanks.
Happy to. We are very happy with our launch of pet insurance. The product has been incredibly well received. It has outperformed our expectations. Customer delight levels are really very, very high. It has formed, in short order, a sizable portion of our business. On any given day, oftentimes 20%-30% of our sales will come from pet insurance. It has provided both an additional on-ramp to Lemonade, so customers that we otherwise might not have gotten at all. Something in the order of two-thirds of our pet insurance customers are ones who have joined us through this additional on-ramp. That has been tremendously valuable to us. It has also provided our first proof of cross-sale. Something like a third of our pet policies are to existing customers.
As we've commented in the past, when a renter adds a pet policy, you see the premiums jump by 300%-400%. This has really been incredibly helpful. It has been transformative of our LTV. It has added, as I say, additional on-ramps, and it's been performing very well. Broadly speaking, pets have also been a boom or enjoyed a boom during the COVID period, and that's reflected itself in the pet insurance space as well. For all those reasons, I'd say that all the lights are green.
Thank you.
The next question comes from Josh Shanker with Bank of America. Please go ahead.
Yeah. Thank you for taking my question. I was curious. I looked at the premium in force for homeowners, which is stable at 30% of the portfolio in this quarter and in the quarter ago. It looks like pricing is up about 20%. That's pricing and expansion of coverage. I assume that's happening in homeowners more than the other lines. To what extent is that? Is homeowners on a policy basis perhaps growing less slow than the rest of the book? Or I should say less quickly than the book overall.
A couple things, Josh. One of the notes we made in the letter and in the script was that the majority of the price impact this quarter is mix. Something on the order of 80% of the premium per customer is a shift in mix, and that's all the policy types. Homeowners and pet is driving that. Not car yet, obviously. It's just out. And that's an increase over time. There was a time when that was about 50/50 because the mix shift was nominal. I would say that our ability to sell more of the higher priced policies, whether it's directly, whether it's bundling for existing customers, all of those are kind of moving in the right direction.
I would not say that homeowners caused a disproportionate impact. We saw it from across the book.
Can we dig into that 20% number a little bit more? I mean, I would think if price goes up by 20%, that's a fairly large raise. I mean, you said price and people buying more coverage. Although, I mean, in my experience, people don't buy that much more coverage on a new policy. 20% feels a little bit like being brought in at a teaser rate. Immediately after, you get a fairly sizable rate increase that might be destructive to persistence.
No. Let me be clear. There was no 20% increase in any pricing or any rate. About 20% of the premium per customer increase was driven by pricing or increased coverage, and that's across the book of business, a relatively modest amount. That includes customers that require more coverage, get more coverage, pay more, a higher premium for that coverage. Price is a very minimal impact. The vast majority is mix and bundling where ADR is increasing and also driving the overall average premium per customer up.
You're saying in that if somebody bought a pet policy from you're including that in the, if they only had a renters initially, and they bought a pet, that's in the 20%?
No, it's an apples to apples comparison. In the 20% where it's driven by increased coverage or increased price, it's an apples to apples comparison. In the 80%, which is driven by mix, that would capture the pet example that you just gave.
I mean, I don't mean to belabor the point. When you say that, 20% is very little of its price, so the majority of the 20% is that people bought a more expensive policy for the same type of policy, but bought more coverage than they did a year ago?
Just let me try and phrase it differently. We've seen premium per customer increase. The premium per customer is up 26% to $254. And we're saying that the overwhelming majority of that has nothing to do with price. That just has to do with people buying more coverage, more products, bundling products. At first approximation, all of that is to do with things other than price.
Ah, so that-
The price-
You're saying 80% of it is due to mix and 20% of it, not a 20%, but 20% is due to pricing and coverage, while 80% is due to mix.
That's right. Overwhelmingly, this has nothing to do with prices. We have not increased our prices in any meaningful way, certainly not by 20%. You could round that down and just focus on the fact that this is to do with people buying more policies, more expensive policies. That's the real driver of this.
All right. I'll leave the question to somebody else. Thank you for the clarification.
Again, if you'd like to ask a question, press star then one to join the queue. The next question comes from Christopher McGratty with KBW. Please go ahead.
Hey, guys. Congrats and thanks for having me out here today. I have two questions, kind of totally unrelated. The first one goes back to Dan, as you were just talking about precision versus proxy pricing and how Metromile has been at that for a long way, and they have all the data there for them. Can you go into a little bit then on, if you can, how they seem to have a little bit struggled to actually get that statutory net loss ratio kind of even anywhere close to the industry average? It kind of has stayed elevated even in, like, during COVID with the LAE loss in that LAE kind of pretty elevated to keep it still over that 100% range.
Hi, Chris. You mentioned two questions. I assume there's another one to come. I'm not-
Yeah. The other one is for later. Yeah.
That's fine. No, the loss ratio has been much lower. If memory serves, they reported something like 70% last quarter, excluding LAE, but it's been in that kind of ballpark, and the LAE is in the teens. So you're talking about a loss historically in the last couple of quarters, the loss ratio all in somewhere in the 80s. So I'm not familiar with a triple-digit loss ratio for their company. They did enjoy a dip during COVID, but their dip was less pronounced than it was for others, and I think that's important. It's actually really telling because, whereas other folks don't monitor how much you drive, they just charge a flat average rate, and then people suddenly stay home and they find themselves overpaying for insurance.
Metromile rates intrinsically went down automatically by virtue of the fact that people drive less, they pay less.
Yeah.
Actually, they were able to weather the COVID transformations I think with greater simplicity and smoothness than others did. I mentioned this earlier, the loss ratio, they're targeted to lower it by another, you know, bunch of points, 10, 15 points perhaps. They do enjoy this tremendous cushion from which to take that. We've seen there's some statistics. I mentioned one earlier, I'll mention another one now. If you look at the people getting quotes at Metromile, not just the ones who selected Metromile and converted and bought it, but just getting quotes. 65% of the people quoting on Metromile will have savings of 20% or more. And for almost half, for 45%, the savings are 30% or more, with a median saving of 60%.
I throw all those stats out to give you a sense that if they, alongside everybody else in the industry, raised rates some in order to compensate for the shortcomings of the loss ratio today, that would be a welcome near-term fix which will do no violence at all to the fundamental strategic advantages that they enjoy.
Absolutely. That makes a lot of sense. And the numbers I was referring to is, you know, from the Yellow Books of looking at where Metromile Insurance Company has run on a yearly basis for the last five years. On the stat level, the net is, yeah, in the hundreds on the loss and LAE combined. That's where I was getting that from.
Okay, thanks.
Yep. On the second question, you mentioned earlier sort of a shift in the ad spend from life to European based on how that's kind of performing relative to each other. How much should we think about that from the life business? I think you mentioned in your letter that that's still sitting about less than 1% of the total in-force premium. Is that what we should kind of expect moving forward as you're kind of shifting resources and allocation of focus into different levels?
It actually is 2%, if I'm not wrong. It you know that kind of doubles from where it was the quarter before. Small numbers, but went from 1% to 2%. We're still learning this industry, so it has been growing and growing, you know, nicely, doubling as, you know, outpacing the rest of the book. We are finding other places where we could invest incremental dollar and see a higher return. Rather than continue to double down on life growth, at least at the moment, and this is something that we review almost in real time. At the moment, we're just finding more attractive places to deploy our incremental dollar, and that's what we intend to do.
While I do expect our life business to continue to grow, I don't think we're gonna be showering it with disproportionate love in the coming quarters. I will also say that it is a product that does very well as a cross-sell. Even though the customer acquisition cost for life policies can be daunting at times and a lot of insurers say that their bread and butter have had a rough time of it. For us, that's not the case. We're able to offer it as an upsell to all of our customer base with no incremental spend. I expect to see an increasing amount of our life policies being sold that way. It's already a sizable portion.
Okay, great. Thanks. That's helpful.
Thank you.
As we have no further questions, this concludes our question and answer session, which also concludes our call. Thank you for attending today's presentation. You may now disconnect.