Good morning, and welcome to the Lemonade, Inc. fourth quarter and full year 2021 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. 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, Vice President of Communications at Lemonade. Please go ahead.
Good morning, and welcome to Lemonade's fourth quarter and full year 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 fourth quarter and full year 2021 financial results is available on our investor relations website, investor.lemonade.com. Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our Form 10-K filed with the SEC on March 8, 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, and thanks for joining us this morning to review our Q4 results, wrap up 2021, and share our plans for the year ahead. 2021 was a very productive year for us, and we ended it materially larger, more diversified, and strategically stronger than ever. The year kicked off with a substantial capital raise that set our business up for years of sustained growth, and indeed, we ended Q4 with 100% revenue growth and with over $1 billion in cash. Simultaneously, we diversified our book by scaling our younger and higher premium products while using our expanded portfolio to increase bundling and upselling across the book. These resulted in our largest ever annual jump in premium per customer.
We also began and completed the development of Lemonade Car, a monumental undertaking, as well as signing a deal to acquire Metromile, and with it, the data, talent, and technology needed to propel Lemonade Car forward. What a difference 12 months can make. Now to 2022. This year we'll shift much of our firepower to the next phase of our growth. Our long-standing two-pronged strategy has been to win with technology and to grow with our customers. That is to build a digital native company on the premise that an insurance company built on a technological foundation will be able to service customers and quantify risk with a degree of precision and at a level of automation unavailable to incumbents.
Secondly, to engage customers when they're young, delight them with a cocktail of a value, values, and fabulous experience, and then grow with them by offering them all the upgrades and coverages that they will naturally grow into as they go through predictable lifecycle events. These two pillars, winning with technology and growing with customers, have guided us since our inception, and our experience to date has only served to strengthen our conviction that in choosing these pillars, we chose well. As we enter 2022, we find ourselves in an enviable position. Having launched Pet, Life, and Car in the past 18 months, we believe we have achieved a critical mass in both our technology and our product portfolio. Of course, we have ambitious plans for new products and new technologies for years to come.
For the first time, both pillars are now sufficiently complete to be built upon. This enables us to shift resources from making technology and products to harnessing our technology and products in new ways. That means leveraging our technology to lower our expense ratio through automation and our loss ratio through machine learning while growing our CAC LTV ratio through cross-selling and bundling. None of this is entirely new. We've been investing in graduation and automation and precision for years, but we're on the cusp of a change in degree that we expect will amount to a change in kind. When we were a monoline business, cross-selling and bundling, perhaps the biggest LTV unlocks, were not really available to us, and our technology investments were largely consumed by building products.
The balance will now shift, and we expect that over the coming quarters and years, this shift will take our business to new levels of efficiency, growth, and profitability. One upshot is that we project that 2022 will be a year of peak losses, with our EBITDA improving in each subsequent year. All good strategies require focused investments in order to achieve true differentiation from the competition. We believe that five years post-launch, our investments have yielded structural differences between us and the rest of the industry and that these set us up very well for the next five years. Take our fellow InsurTechs on the one hand. At first approximation, every other InsurTech company is a single product business offering either car or home or life or pet or renters insurance, whereas Lemonade uniquely offers all five on a unified platform.
While specialization has its advantages, a monoline strategy increases concentration risk, caps LTV, precludes bundling, forcing customers to engage competitors, and generally it means that growth comes almost exclusively from adding customers rather than from growing with them. In a highly competitive market, these strike us as strategic challenges. Incumbents, on the other hand, have complete insurance product suites, but lack the technological foundation needed to massively automate and to move from proxy based pricing to precision pricing. While the wheels of insurance move slowly, we believe our tech offers Lemonade a strategic advantage that will manifest evermore with every turn of the flywheel. We expect this to express itself in loss ratio and expense ratio trend lines already in the second half of this year, and for this advantage to compound in the years that follow. Of course, we wish both our fellow InsurTech and more established competitors well.
There's enough room for everyone. For the reasons I outlined, we are increasingly confirmed in our multiproduct technology first strategy. With that, let me hand over to Shai for some updates on our newest offering, Lemonade Car. Shai.
Thank you, Daniel. In the short time Lemonade Car was available to our customers in the fourth quarter, it brought in three times the sales Lemonade Pet did during the same period following its launch in Illinois. We're also seeing encouraging bundling dynamics with the majority of Lemonade Car customers bundling with at least one other Lemonade policy. I'm also happy to report that customers are loving Lemonade Car, and we're tracking outstanding NPS for the product across our customer experience and claims. We believe that Lemonade Car is the most delightful, seamless, fair, and precise offering on the market. As a reminder, we use telematics to model driving behavior and reward safe drivers with better rates. We also monitor the CO₂ emitted by our customers' cars based on their year, model, and driving behavior, and plant trees to help absorb that CO₂ over time.
Turning to our acquisition of Metromile. We're working closely with regulators towards closing the transaction and still expect to do so in the second quarter. In the subsequent quarters, we'll focus on integrating Metromile's teams, systems, and processes, and also develop and launch a pay per mile car product on Lemonade infrastructure that is compelling both for new and existing customers. As we've shared previously, we're confident this deal will collapse time, flatten risk, and increase efficiencies for Lemonade Car. Shifting gears. I'd like to share some thoughts on our loss ratio. Our Q4 2021 loss ratio was 96%, up from 77% in the third quarter of 2021. A meaningful driver of this increase was a handful of older large losses for which in retrospect, we under-reserved.
We have a strong record of cautious reserving, but reserving is an imprecise science, and so adverse developments do happen every now and then. Notably, there was no spike in our accident year loss ratio during the same period, suggesting no underlying deterioration in the book. Nevertheless, we're seeing this mix with U.S. based renters comprising less than half of the book today compared to about two-thirds a year ago. The lines of business that have captured that share, home and pet, demonstrate higher loss ratios than our more mature, stable renters book. We have projects across all of our newer product lines to address underwriting profitability, and these are yielding steady improvements in loss ratio growth, meaning that our aggregate loss ratio has climbed even as our product-specific loss ratios.
In time, the one should catch up with the other, and we expect loss ratios of all Lemonade products to be below 75% in due course. In the short term, though, our newer products will likely be above this target even as they trend downwards. This is a natural and temporary cost of scaling new businesses. With that, over to you, Tim.
I'll give a bit more color on our Q4 results as well as expectations for the first quarter and the full year 2022. 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 78% in Q4 as compared to the prior year to $380 million. We believe that 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 25% versus the prior year to $266. This increase was driven by a combination of increased value of policies over time, as well as a continuing mix shift toward higher value homeowners and pet policies. As in the prior quarter, about 80% of the growth in premium per customer in Q4 was driven by this mix shift, including cross sales and the remaining 20% from increased coverage.
Levels and pricing. Gross earned premium in Q4 increased 79% as compared to the prior year to $89 million, roughly in line approach. The growth rate is more in line with the. Our loss ratio in Q4 was 23 points higher than 73% in Q4 a year ago. This is primarily driven by prior period adverse development. Operating expenses increased 89% in Q4 as compared to the prior, driven by increased advertising spend in support of growth, increased personnel expense related to our recent car, the Metromile acquisition. We also continued to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches, and thus saw increases in each of the other expense lines. Global headcount grew about 97% versus the prior year to 1,119.
With a greater growth rate as in past quarters in customer-facing departments and product development teams. Our net loss was $70 million in Q4 as compared to the $34 million, while our Adjusted EBITDA loss was $51 million in Q4 as compared to $30 million in the fourth 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 $145 million since year-end 2020. Full year 2022. For the first quarter of 2022, we expect in-force premium at March 31 of $405 million-$410 million.
Gross earned premium of $92 million-$94 million, revenue between $41 million and $43 million, and an adjusted EBITDA loss of between $70 million and $65 million. We also expect stock-based compensation expense of approximately $20 million and capital expenditures of approximately $2 million. For the full year of 2022, please note that we expect the Metromile transaction will close during Q2, and that our total annual IFP will grow approximately 70% during 2022. The guidance that follows, however, excludes the expected impact of the closing of the Metromile acquisition. In-force premium at December 31 of between $530 million and $540 million. Gross earned premium between $423 million and $427 million. Revenue between $202 million and $205 million.
An adjusted EBITDA loss between $290 million and $275 million. We also expect stock-based compensation expense of approximately $80 million and capital expenditures of approximately $10 million. As Daniel noted, we currently expect that 2022 will be our peak year of EBITDA losses. With that, I'd like to turn the call back over to Daniel. Daniel?
Thanks, Tim. As is our practice, we will now turn to questions most upvoted by our shareholders through the same platform. The first one comes from Darren. Darren asked about, insiders buying stock while the stock is low, and whether or not we have any plans for, company buybacks of shares. Well, Darren, the market overall has clearly been very volatile these last few months, and growth tech companies across all sectors have seen their shares hit very hard. Lemonade's declines in that sense are fairly typical. Clearly all of this has much more to do with macroeconomic trends like inflation and rate hikes and geopolitical concerns like what's happening in, Russia and the Ukraine than with the performance of these growth stocks, per se or of Lemonade in particular.
We didn't know that this particular constellation was coming, but we knew that sooner or later that something like this would. We addressed this prospectively in our founder letter, which we published in our IPO prospectus, and I'd like to read the germane section from that, because I think it applies here as well. Creation, not share price maximization. We are not interested in our share price on a day to day, week to week or month to month basis. On these timescales, share prices fluctuate for a myriad of reasons, some correlated with long-term value creation, others uncorrelated. Short term price flutters are noise, and we will not credit them as a signal. That's what we wrote then. We stand by that still today.
In terms of long-term value creation, we will continue to work very hard to build Lemonade into a very large. It is what we're working towards and believe in. I won't speak about individuals buying or selling plans or patterns. In terms of a company buyback, we have no current plans to initiate any kind of stock buyback. We have many excellent investment opportunities for our cash. We believe there's tremendous opportunity to grow our customer base and optimize in ways that I've outlined. Stock buybacks tend to be more for companies that have excess cash and less investment opportunities of their own. I hope that addresses that question. The second question, profitability will come. Again, a great question. Let me put our cash situation in perspective.
Over the past six years, since we founded the company, we've raised about $1.5 billion, all told, of which $1.1 billion remains in the bank. In fact, the acquisition of Metromile brings with it not only great licenses and IFP and talented people and technology in the coming months. We remain in a strong cash position, and we certainly have access to more cash were we to need it. For the reasons that I outlined earlier, investment in foundational products and foundational technologies is drawing to a close. We have built the largest TAM products, and we have launched them. Infrastructure that we need for our next. We're probably six to nine months away from our peak losses.
We expect to see our losses decline with every successive year and our EBITDA margin to be on a steady path of improvement in the years to come. That will chart a clear and steady path to profitability. The next question comes from Thaddeus together with a Paper Bag again, actually. That is close and how quickly will Lemonade Car be available in 49 states? Well, we're working closely with regulators, as we said, to close the transaction. We do expect. I'm not sure when we'll hit 49 states. By the way, I'm not sure why the question is about 49 states. We tend to think of the U.S. as having 50 states plus Washington, D.C., so we tend to think of it as 51 jurisdictions.
Be that as it may, we do expect that we're about a year away from Lemonade customers, and we'll continue to expand rapidly after that as well to people who are not yet Lemonade customers. As the formulation of the question raised by Paper Bag anticipates, we absolutely will monitor our performance in terms of CAC to LTV as we chart the rollout. That will provide an important roadmap, guardrails if you like, for our nationwide rollout, and we'll continue to monitor. So far we're happy with the performance of Lemonade Car in Illinois. We've got a major year for Lemonade Car with the Metromile deal closing. We'll see how all of that shakes out in the coming months.
As I say, we remain pretty bullish on our ability to roll out reasonably quickly over the course of the next 12-18 months or so. Final question is again from Darren. Darren asks if there's a quantifiable way to prove that our technology advantage exists since in practice in terms of bottom line, we are still seeing OpEx that has been growing. That's a great question, Darren, and certainly the GAAP accounting metrics and disclosures that we make do make it hard to tease out the puts and takes of our technology investment. Because in general, the costs of these investments hit our financials immediately whereas the benefits materialize over time, and it makes it hard to see the one for the other.
Internally, we do track very closely the impact of every feature that we build and release. We do A/B testing, and we've got a series of other dashboards that allow us to track these things. We do have a high degree of confidence that our tech will deliver transformative impact and in many ways is already doing so. In terms of what's public, I can reiterate some of the things that we've disclosed in the past. For example, you saw our renters business for the first few years of the company's life. Renters was the overwhelmingly dominant part of our business. We did have some homeowners, but over 90% of our customers were renters, and you saw that loss ratio trajectory drop from 300% down to us reporting 69% at the time of our IPO.
You saw record drops in loss ratio, the likes of which traditional insurance companies have not delivered in the past. That is a standout case of seeing just us use the data feedback loops to very, very rapidly bring down loss ratio. About two-thirds of our customers have really no interaction with customer support. It's entirely self-served, and that is, I believe pretty revolutionary and outstanding and, you know, attaches a zero cost to serve to those customers. We've spoken about AI Jim in different forums. I believe we disclosed a couple of years ago that our AI Jim bot handles the first notice of loss for about 96% of claims and handles them start to finish in about a third of claims.
You do see about a third of our claims handled without any human intervention and almost all our claims handled with some bot involvement. That obviously is a big driver of efficiency. We've also disclosed that in terms of ongoing customer support, what we call CXAI, about a third of all customer inquiries are handled this way, again, without human intervention. That's been true even as we roll out new products and the CXAI has been able to adapt to the new needs of our customers in a pretty remarkable way. All told, our customer-facing technologies, whether it's AI Maya or AI Jim or CXAI, they do tend to deliver a superior experience that oftentimes is literally zero. Those are all, I think, indicative of the kind of transformation we're trying to bring about.
More broadly, for the reasons that I outlined, and that I think will become clearer in the quarters and years ahead. Our biggest investments as a percentage of our revenue at least are largely behind us or soon will be. That our peak losses is going to be, we expect in the coming quarters. That, as I intimated in my earlier comments, I do expect to be able to display trend lines for both expense ratios and loss ratios that begin to evidence the force and the power of what we've been building and for those to manifest towards the end of this year. From this year onwards, I think it will reflect itself also in steadily improving EBITDA margins, charting a steady and fairly clear path to profitability. Hopefully, that answers your question.
With that, we will turn to address some of the questions from our friends on Wall Street. Operator, please open the mic for our first question. Thank you.
We will now begin the question- and- answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Michael Phillips of Morgan Stanley. Please go ahead.
Okay, thank you. Good morning, everybody. First question. Daniel, as you think about kind of the long-term vision for how you look at the Lemonade Car, what's the mix of pay-per-mile versus traditional car insurance there?
At all. Traditional car insurance uses broad proxies to bundle a diverse group of people and to charge them as if they were uniform. Our products, whether they're pay-per-mile or not, are telematics-based constantly, not just during a trial period or pre-purchase, but are based on continuous monitoring of where you drive, how much you drive, how you drive, and using that to be able to deliver to you a better match of risk and rate in a way that traditional insurance policies cannot. Even the 4% of policies in the U.S. that already use telematics tend to have it turned off after a couple of weeks. Insurers tend to underweight that signal because it would cannibalize the rest of their business.
I think in all cases, what we're offering is something that is pretty highly differentiated from existing, incumbent-based policies, is selection, and a great deal of opportunity for the opposite of that as people who are cautious drivers rate that's reflective of that and will be unattractive to people who, because we will identify that and charge accordingly. The difference between pay-per-mile version of that and non-pay-per-mile is really more to do with the comfort and convenience of how the customer wants to be billed, whether they prefer their rates to match their driving on a monthly basis and retroactive, which is what pay-per-mile tends to be, or whether they'd rather get to a point where they're being charged something that is commensurate with their usage but is predictable upfront, and they know what they're gonna be charged.
It's really much more to do with that aspect of the user experience. The underlying precision technology will be uniform across our product offerings and highly differentiated from what's out there today.
Of your answer. What I was trying to get at, I understand you're gonna be different in terms of traditional. I should have said pay-per-mile versus non-pay-per-mile, I guess. Because I feel like your customer base is more conducive to using pay-per-mile type auto insurance than other insurance companies might have. I'm not sure if that's something you wanna go with or not, but I was kinda getting at how much pay-per-mile versus non-pay-per-mile. I should have said it that way. Do you see your auto book? I know you're gonna be more, if that makes sense.
Yeah, of course, it makes sense. Sorry, I was answering a question you didn't ask, but that this is a customer choice. We want to offer them as many places as we can as quickly as we can, and customers will choose. We are working on more creative amalgams and ways to bridge the two user experiences which we'll roll out and disclose kind of in the fullness of time. As in all things in our products, we are really looking for the customer to have the best possible. That's an approximation. We're indifferent. We will make sure that we match rate and risk in each of the model, and therefore, customers will make the choice.
Okay. That's helpful. Thank you. Thanks for clarification. Second question would be on your pressure that you've talked about on the loss ratio, which makes sense, you know, your pet, your home, higher traditional loss ratios in general, but they're also growing. Some pressure there. Let's take that same analogy to how you think about what that might look like in the early phases of Lemonade Car. I guess as a side comment, you know, it's no surprise that there are some companies that have new rollout products that wanna grow quickly and have significant pressure on the loss ratio. Let's take that to you guys.
If we look at the first couple years of Lemonade Car, are we talking about a point or two pressure, or is it more like that 75%-ish goes into the 85%-90s%, when we look back a year or two from today and how much pressure does Lemonade Car produce on the loss ratio?
That's a fair question. I don't know that we can tie it down with that level of precision. Our car product has been in market for such a short period of time, and the data that we have is, you know, hasn't even gone through a single renewal cycle. We do know that loss ratios change very dramatically in the first few months, and we just haven't been there. We are data-driven, and the data just isn't all in for us to be able to say anything with precision. We will be having the book that Metromile has. We've got a better grasp of what they're doing. They've been doing this for 10 years and for many billions of miles.
We have a better sense of their loss ratios, which in recent quarters has been somewhere in the 70s%. With LAE, it's made it into the low 90s% trending, I think, in a good direction. Well, I should add one other perspective, which is that the entire industry in car from, you know, Progressive on down have been seeing a lot of pressure due to inflation. These are unusual times and for us, unpredictable times just because it's early in the game.
I think that over time, this is a place where we expect frankly to shine and to be able to outperform incumbents, just because of the answer that I gave to the question you never asked, which is about precise pricing and the ability to monitor and to adapt prices with much greater speed and precision. I do think that we'll be in a very strong place to get to a good loss ratio for Car, remembering that the pressures on a new launch are not merely the ones that you spoke about, which is growth oftentimes inversely correlates with loss ratio. First year policies are always higher. Even companies like Progressive have been doing this for decades and are perceived as being the industry leaders. They don't break out their first year policies, but if they did, you'd see much higher rates there as well. You just have to take all of that into account.
Okay. Thank you. Yeah, that's why I kind of said, is it a point or two or is it more like 10 or 20 points? Let's hope it's not the other. Last quick one, quick question, sorry. How do you classify large losses for you guys? Can you give any details of kind of what those were, when you say large losses that contributed to the adverse development?
Yeah. There was a bit more adverse development in the quarter, which is not unexpected generally, but it's not something we see very often. I think looking back over eight or 10 quarters, there may have been one other quarter with that kind of development. We've also had quite a few quarters with the favorable development. In this particular quarter, the adverse development was, a majority was driven within home area, and within home, larger losses, I would think of. We don't have a sort of a hard number that we disclose, but I would think of, you know, an entire loss of a home. That could be a $1 million sort of a claim. You know, that would certainly be squarely in that large loss category.
Given our rate of growth in premium, you know, one or two large losses of that nature can clearly move the loss ratio pretty significantly. That was the primary cause in the quarter.
It sounds like it's a couple almost entire losses of houses is what you're saying? A few of those.
Yeah. That was the most-
Yeah.
Significant driver. Other lesser impacts, but that was the majority of the impact in the quarter.
Okay. Thanks. I'll get off your line. Thank you guys for your help.
Thank you.
The next question comes from Jason Helfstein of Oppenheimer. Please go ahead.
Good morning, everybody. Actually, that last bit was helpful for our model. As we're thinking about 2022 and kind of bridging to your EBITDA guidance, you know, how should we think about like the impact from loss ratio versus marketing efficiency? I think we've seen sales and marketing improve as a percent of gross earned premium, both this year, last year, or whatever, 2020 and 2021. Just maybe help us understand a little bit about that. And then, you know, when we think about pay per mile, I think if you've looked at, you know, the legacy operators and the one you're buying, they generally don't operate in bigger states. I don't think it's available in New York or has it been available in California.
How do you think about that and what do you think is the impediment to you being able to offer kind of pay per mile more broadly than it's offered today? Thanks.
I'll take the first one first, the question on marketing improvements. You are correct. We have seen historically quite significant marketing efficiency improvements on the order of doubling of efficiency over the past two to three years. Those have really ceased during 2021. I think we saw with many customers or companies that are reliant in some way on online acquisitions have seen prices actually increase. While our marketing efficiency is not currently showing those dramatic gains we saw in the earlier years, when we were really optimizing and building that capability, things are not deteriorating much. The second half of last year, we saw some increases in overall pricing similar to other companies in this market.
Our modeling going forward and our guidance expects that the current rates of efficiency will continue. We're not modeling any tremendous gains and improvements. Our marching orders internally to our growth team is we expect to see continuous gains and improvements, but we're not modeling that into the guidance until we start to see any of those impacts in the real data. Then on the growth part.
Yeah, I'll come to that one. Let me just add one tail comment to Tim's comment, which is in terms of the marketing efficiencies for new customer acquisition. Tim addressed that and spoke both historically and forward-looking. The other area that we referenced in our letter as well is that we do expect to see close to 1.5 million customers. As we see with newer products, we've already seen this with Car and elsewhere, the opportunity to cross-sell and unlock a tremendous amount of LTV is extraordinary. We do see big jumps there. We reported the largest jump in premium, beat that record again and again because of that behavior.
While I think your question was focused on to whom we can sell more products without the associated CAC. We will see the CAC LTV as best we can model and expect. In terms of the telematics question, I think I take issue with your premise or at least with elements of it. Metromile's largest state is California, and California has restrictions on tracking mileage and behavior tracking and charging. You do see that there are ways to implement telematics that are just fine with the state of California. As I say, indeed, a large portion of the Metromile business is California-based. New York in recent months has actually become much more open to that.
I think that the trend line, like you said, like New York, like California are regarded largely because it's perceived as increasing fairness. Charging people a rate that's commensurate with their driving rather than using credit score or gender or other or profession or marital status, all things that are traditionally used in the insurance world, which I think regulators correctly understand are less fair than the telematics approach.
Thank you.
The next question comes from Josh Shanker of Bank of America. Please go ahead.
Yeah, hi there. Just doing some quick math. The loss ratio went up by about 19% from 3Q 2021, and you said most of this favorable development. On 90 million of premium, that's about $17 million of losses. You said $1 million-$2 million homes. There's still a huge gap in the favorable development between losing just $1 million-$2 million homes. The second part of my question is, of course, you tout your AI claims management as the best in class. How do you lose a whole home in the quarter and not put up something for it?
A couple answers to a couple of your questions there. The bridge that you did of roughly 20 points, a little, a bit more than half of that, between half and two thirds is really caused by this adverse development and the remainder caused by mix shift. As we've seen in past quarters, as renters as a proportion of the book declines, it's now less than 50%. That is continuing to have an impact as it has in prior quarters, and pushing the loss ratio would have been up versus the prior year and the prior quarter. In terms of the large losses, my answer was that can drive large loss impact. Specifically, we can correct that. In the same way we can see the opposite happen. This is pretty standard, but it had a greater impact in this quarter than we've seen in many of the prior quarters.
Yeah. I'll just add, Josh, in Q3 we saw some major CAT, and what generally just happens there comes in later. Oftentimes the claims aren't even recorded. This isn't the kind of claim that the AI handles anyway. This is handled by humans, by professionals. And oftentimes it's we tend, as Tim already intimated, to be conservative. We've had many, many more quarters of positive development than adverse development. When you have a relatively small book, a few homes can swing things one way or another, particularly in cat season, and that's what happened to us this time.
If I'm not wrong, saying that half the increase in the loss ratio was due to attritional increases because your business mix has gone up. Maybe the new loss ratio for Lemonade is not much around as close to the low-to-mid 80%?
I think that would only be true if we weren't seeing and planning for improvements in the overall loss ratio for the newer products. As we saw an improvement in loss ratio to well below our current overall loss ratio, we'll expect to see for our newer products. Home is relatively, it's not new in terms of time. Pet, certainly, which is now a fairly significant part of our book heading towards 20%. It was currently, but we don't expect those loss ratios, those current loss ratios have been fully optimized. Over time, we expect the net overall of the book to be around that 75% or so level.
Thank you for the answers.
The next question comes from Yaron Kinar of Jefferies. Please go ahead.
Thank you. Good morning. First question on the 2022 growth guidance for insurance premiums in force. Clearly still differentiated and in very strong growth there. Nonetheless, I think it's nearly half of the growth rate we've seen achieved over the last couple of years. And that's even as you're seeing traction and increases in premiums per customer. On slow down there, is it more from the customer side, more from the premium per customer side, and why that is?
Hi, Yaron. Let me make a start, and Tim, feel free to butt in if there's anything you want to add. The way we think about our performance in this year is slightly different, and it's really all around the Metromile acquisition. When we spoke about the Metromile acquisition on the day that we announced it, and I think in all our communications since, including this morning, we've spoken about it as being something that will flatten risk and collapse time, but not as a new bolt-on business. We've never thought about it as a standalone business or something that is additive in terms of its business, it's replacement. It's true in terms of our expenses, largely.
A lot of the investment that we would be making right now in terms of state launches and feature build-out and talent hire and marketing spend, we won't do some of those things because we will do them through the vehicle of Metromile once we acquire it, or we will effectively hire the Metromile people and acquire the Metromile technology, et cetera. In our operational plans, we don't think of Metromile as being a bolt-on or an addition, but being organic and being part of our Car launch plans. I say that because that gives you our perspective on the year based on the guidance that we're providing, and this year was a 78% year growth. It's very much in line with the kind of growth that we saw in 2021.
We'll see a similar rate of growth in 2022, albeit with substituting some of the things that we would have built in-house and some of the investments that we would have made on our own with investments that we are acquiring and markets and products. I think 2022 will be very similar in terms of its top line and other metrics of growth to 2021.
Only thing I would add is that in terms of our addressable market and our view of long-term growth, we've never been more bullish. I think with renters, I think it's fair to say that our market share, particularly in new renters to the market, has gone from you know, zero to fairly significant over the past few years.
When you layer on Home, Pet, Car and Life and Beyond, those are extremely large markets, many multiples of the size of the renters market. We're just sort of scratching the surface on those. Our growth rate is something we're quite focused on, but balanced growth, optimized growth, integrating Metromile, getting car moving out, those are almost as equally important as what the overall growth rate is. The TAM is something that is-
My second question regarding your comments on 2022 Metromile, or is it really for the existing book of business that you have?
I think it's fair to say it largely holds true with Metromile, with a couple of exceptions. Obviously, with the integration of two companies, there will be a step change that will create a different that sort of step change. I would expect to see a consistent pattern with what we've seen in prior years. That is true, I think, for peak losses as well. With Metromile, there will be some bit of cost and investment that comes with it, but as importantly, a significant amount of in-force premium. They reported just shy of $115 million as of the last quarter. We expect a substantial proportion of that as well as some cash. Despite that step change, there's lots of
You know, there's benefits that come with it. The other note, I think, is if you look at our pattern of investment over the course of prior years, you'll see a fairly consistent pattern with Q3 as the most substantial investment quarter. Just more modest impact in Q2 and Q4. While we're not guiding to the specific quarters of this year, I would expect that pattern to persist. It's somewhat mitigated because more of our book of business is less seasonal, and more so as we move into car. The seasonal impact tends to be driven more by our renters and homeowners. It's a good view of what you might expect to see. You'd find by your pattern of investment over the course of the quarters.
Got it. That's super helpful. Then maybe one last very quick numbers question. Could you offer the distribution of in.
That's not in the disclosed materials. I think our prior numbers sort of reiterate what we said previously. Pet heading to 50%, and homeowners making up the difference. Cars, you know, are clearly nascent at this point. Metromile will move that needle considerably at $100 million+ .
Thank you very much.
The next question will come from Andrew Kligerman of Credit Suisse. Please go ahead.
Hey, thanks for taking the question. Good morning. I just want to get a better understanding on sales and marketing. It looked like sequentially you went from $42 million in sales and marketing expense to $37 million, while revenue went up from $36 million to $41 million. We say it was a good move. Could you give a little color around that decline?
Yeah. There's a couple things happening there. It's a typical seasonal impact. Again, because of the scope of the home and renters book, we do see significant growth, but less so in the fourth quarter than in the third quarter. That's a pattern I think that will persist as home and renters is a majority of the book. We did see a leveling of growth cost increases. In terms of how many dollars we deployed to grow the customer base, we keep a close eye on the ratio of lifetime value to the acquisition cost and new premium coming in relative to the acquisition cost.
We do limit our spend such that if it goes way beyond what we think is economical to providing long-term value, we'll not spend too much money beyond that line. But we did see consistent kind of marketing gains. We're seeing a greater number of dollars of premium coming in per customer. Even though the number of customers added was very much in line with the pattern of the prior period, we added more customers in the quarter, in the fourth quarter in the prior year, and added significantly more dollars per customer. It's a combination of those three things that's driving it.
Got it. Maybe just in general, the customer acquisition cost for new business, what were you seeing sequentially in the fourth quarter and maybe the beginning of this year, in terms of customer acquisition cost, ad spending, you know?
Fairly consistent. We did see some increases, excuse me, over the course of Q2, Q3, heading into Q4, but fairly persistent at those levels, so not a dramatic change. We're reallocating to some extent because we're seeing good progress in the growth of the pet product. That has a somewhat different dynamic. We're also taking into account which channels are more and less effective. There's a constant reallocation that's happening. Overall, I think we saw sort of a consistent view. We've always spoken for a number of quarters of a ratio between two and three in terms of the lifetime value that we drive.
That's not a hard limit, but in some ways that's kind of managed by us in terms of how much capital we're willing to deploy on growth. Over time, as Daniel mentioned, I think it's important to note that there's a real, or certainly a growing potential there with our ability to cross-sell and bundle where the cost of that incremental IFP is significantly lower, in some cases zero. That's where we'll start to see what I think is a declining reliance on direct customer acquisition and an improving balance between growing existing customers and bringing in new customers.
Very, very helpful. Lastly, I just wanted a little bit more clarity around the prior year development. Did I understand it right in that, you know, the homeowners claims because they were larger, you mentioned $1 million, Tim, that's why there was just sort of a timing issue with that. Just maybe a little color on why these prior year developments came about very short tail type of business.
I should clarify, not necessarily prior year, but prior period development.
Prior period.
It's the nature of, you know, both our book of business and the insurance generally, where a small number of large claims can have much greater volatility. You don't see the risk of this as being nearly as significant in reinsurance because you get a large number of relatively small claims, and the puts and takes tend to even themselves out. You can still see either adverse or favorable development, but there's a greater probability, just sort of law of large numbers, that that's mitigated somewhat. With home, and particularly with the relatively smaller proportion still of our book of business being home, just a small number of claims can have a significant impact on the overall loss ratio. It's sort of a, you know, a quantity versus impact issue.
Makes sense. Thanks so much.
Our next question comes from Katie Sakys of Autonomous Research. Please go ahead.
Good morning. This is Katie Sakys on for Ryan Tunis. I've got a question on share-based comp and how broadly it'll be used next year. Is the guided $80 million for executive compensation only, or is it intended to be used to recruit talent?
Our stock-based compensation includes all equity issued at the company, both historically, which is the most significant part of it, as well as for new hires, not just executives. Every Lemonade employee across the business at every level of responsibility has equity. We have a pretty significant refresh program that we have in place to continue to have retention impact on those employees. That's across the entire company. We will be and plan to be competitive with the market. It is part of compensation for employees, and that's something we have factored in.
There is an impact that is just a reality of having a historically volatile stock price, and I think you'll see this across other companies that had a higher price a year or two ago. We live with those expenses until all of that equity is vested. It's not just the new grants that impact that number. That we expect would normalize over time.
Got it. Thank you so much.
This concludes our question- and answer session. The conference has now also concluded. Thank you for attending today's presentation, and you may now disconnect.