Thanks everybody. Hope everybody got some lunch, enjoyed the session with Steve. We are excited now to move on with Lemonade. We have Tim Bixby, CFO of Lemonade. How are you doing? Thanks for coming.
You bet.
So look, I actually want to start with a kind of a different question. You are preparing to move on from being CFO. Maybe talk about how leadership is changing, some strategic framing, because we are excited for you and excited to meet who is next.
Sure, happy to. While I am moving on, I am not moving on very far. I have been Lemonade's first CFO. I have been CFO with Lemonade for nine years, and change, nine and a half years. I have been asked to join the board of directors, which I have graciously accepted, starting January 1st. At that point, I will hand the reins of CFO over to Nick Stead, who is currently our SVP of Finance. Superstar player internally at Lemonade for many years. While it is a change of name, I do not expect a tremendous change of philosophy or strategy. Candidly, I will say it is a bit of an upgrade. Nick has done terrific work, and this has been in the works for quite some time. That said, one of the most notable things about Lemonade is the lack of change, in a good way.
Meaning our approach, our strategy, our philosophy, our go-to-market vision and story is really unchanged today, 2026, versus our founding in 2015. That is awfully rare in any sector, technology, data, AI, financial services. That is a rare thing, in a market and a decade that has been tumultuous in maybe a dozen different ways. Lemonade's metrics, Lemonade's performance, Lemonade's strategy has been awfully stable and consistent and up and to the right during that period.
So look, I do not know how familiar everybody is in the room with the business. Why do not you start by going through some of that evolution over time and where you are today versus where you started?
Sure. Lemonade sells insurance to consumers. That is a thing that's been around for a few centuries if not longer. The average American insurance company, the average of the top 10, the biggest of the big, the winners, is a little over 100 years old. Lemonade is not 100 years old. We're about 10 years old. We formed the company with two thoughts in mind. More than two, but two key thoughts in mind. We will leverage and employ and use the current technology that's available. By current, in 2015, we were kind of thinking more about 2025 and 2026 than 2015, to be honest. But the world of data, machine learning, and AI, our founders at the founding of Lemonade knew it was coming.
They didn't know when, they didn't know what day, they didn't know what happened in the last two weeks, when that was going to happen. But they knew it was coming, and they wanted to build a company that would be enabled and ready to leverage sort of a tsunami of technology development in a way that would enable us, Lemonade, to deliver a unique thing, which is delightful insurance. A consumer experience, a product, a user experience that's delightful. That was not something and really hasn't been something historically that was important or prevalent in insurance. If we poll the audience today and asked how many people love their insurance company, not too many hands would go up. That's not a thing that was really sought after. If you got a group of 100 Lemonade customers in a room, you'd get a fundamentally different result.
It's not because we're great people, although I think we do have a bunch of great people. It's because we've used technology to deliver amazing things. A policy in three or four or five minutes, not a quote, but a policy. Multiple products. We started out as a one-product company. We now have five: car insurance, pet insurance, homeowners, term life, and renters. Many of our claims, more than half are paid out in real time, in seconds. That is unheard of in insurance. I just filed a claim with a very large premium insurance company that is not Lemonade. I think it took six months start to finish. They're one of the best, and I had a good experience.
More than half of our claims are paid out in three or four or five seconds using machine learning, AI, data, and technology to give a delightful customer experience, create an NPS, a Net Promoter Score, that's off the chart, 50, 60, 70, depending on how and when we're measuring it. That's also unheard of in the insurance business. We can also do the normal things insurance companies need to do. You need to grow. You need to grow profitably. We are on track. Within a few weeks, we're going to start the fourth quarter. We expect the fourth quarter to be an EBITDA positive quarter for the first time. That's an important milestone. More importantly, we first talked about that quarter four years ago. We said somewhere around the end of 2026, this model works. We've got visibility. Everything is on track.
End of 2026 and here we are. It's a few weeks away. Q4 is not over yet. It ain't over till it's over, b ut things are really on track. And maybe I'll throw it back to you, but we are now building a set of customers that are beginning to know us as an insurance company as compared to a product company. When we first started, people knew us as a renters company, and then it was maybe a pet company, and then there's a couple of car customers, and now we have autonomous with Tesla. But over time, all the pieces are coming together, both in the U.S. and in Europe, and customers are now beginning to appreciate us as an insurance company. That's the vision.
10 years from now, 20 years from now, we'll be up against, as we are today, Allstate, and State Farm, and Chubb, and the best of the best.
Well, congrats. It's tough to be a CFO and forecast four years in the future, but congrats on getting there. Can you talk about some of the challenges over time you've had in terms of growth? For example, I'd love to be a Lemonade auto customer, but I live in New York, so I haven't been able to find you guys.
Sure. There's a couple of challenges that we face as all insurance companies do. Regulation is a fact of life. insurance is regulated state by state in the U.S. We appreciate and have great relationships with our regulator partners, but we don't manage their schedule, and we don't set their deadlines. They do that. We are at the mercy of a process that has that sort of third-party component to it. We don't yet have all products available in all states. That's a handicap. We're awfully close. We're close to 50. We have 50 states in our life insurance policy, close to 50 in pet and renters. Homeowners and car insurance, it will take longer. They're newer, and we're launching those over time. That's not an obstacle to our growth, but ultimately, we want to be all products in 50 states. That's a challenge.
On the other side of that challenge is regulators have a difficult job that's getting much more difficult. In the last couple of weeks, it's going to get much more difficult at a faster pace. I think that Lemonade has been relatively successful in building a relationship where we're seen as perhaps more of a partner or an input or a resource for regulators, because of our unique experience with AI and our deep understanding of how it works and what it can do, what it can't do, and what the risks are. There's lots of smart people on the planet dealing with these questions, but we've been doing nothing but preparing for this moment for 10 years.
I think we now can have conversations with regulators that are relatively positive about where things are headed, how risks might evolve, and how we might work together, in addition to the normal, like getting rates and forms approved and getting a license and all of those realities of the business.
Maybe talk about some of the challenges your competition has had in certain geos in the U.S., how insurance is changing a little bit around how you're starting to see problems come up with homeowners finding insurance in tough states like Florida, coastal areas. It seems like insurance companies have pulled back from higher risk coverage. Maybe talk a little bit about how the industry is moving.
A couple thoughts on the industry, maybe from a consumer perspective and then from a company perspective. From a consumer perspective, you're very right in that certain territories, certain regions, certain risks are getting more difficult to underwrite and more difficult to predict how underwriting will evolve. We have sort of the good fortune of being very small, and so things that impact the industry at large tend to impact us less, because we aren't the industry. That's not the case if you're a $20-billion or a $50-billion or $100- billion insurer, things that impact the industry, by definition, impact you. What happens in Florida impacts you. What happens in California impacts you. We've chosen not to underwrite, for example, in Florida for homeowners insurance, yet. Someday we'll be doing everything everywhere, most likely. But we've chosen not to do that.
We're cautious about what risks we take and where we take them. From a company perspective, competitively, we candidly don't spend a great deal of time thinking about or worrying about the competition and what they've done and how we're going to react to it. We're not ignorant of it, but we rarely change course or strategy as a result of what a competitor has done. There's a couple of reasons for that. One is we believe that the movement, the momentum is toward a world of more data, more technology, more AI enablement, providing a better product, a better customer experience. We believe that we're among the best at doing that and getting better every day, even though we're not yet at scale. One of the things you'll hear Daniel or Shai, our founders, say frequently is if today you said, I'll trade you fairly.
I'll give you Progressive's data and system or Geico's data and system, a mazing, super profitable, successful companies, the answer would be no. I wouldn't trade our data, our system, our capabilities for any other on the planet, not because today they're not strong, but because what we see and feel of where the market is going 5, 10, 15, 25 years out is only in one direction. What we have is one system that's enabled for data and machine learning and AI that gets a little bit better every day. That's unique, I think, to a small set of companies, notably in insurance, where typically, historically, once a certain size or scale or scope is achieved, things start to get a little harder. You acquire a new system, you buy another company . It tends to get a little harder, not easier.
For Lemonade, we're still at that stage where every incremental thing we do, every added customer, added product, added claim, we get a little bit better. Because, again, we have one system built from scratch that enables 100% of the process and the customer life cycle of the business. It gets a little bit easier each time, with each incremental turn, not a little bit harder.
Management's framed 30%+ growth as a long-term ambition, n ot as a ceiling. As the revenue base gets larger, what gives you confidence that Lemonade can continue compounding at that suggested rate?
30% is a good number for a few reasons. It is a level of our own choosing. We could grow 20% or we could grow 40%, but what you would see would be fundamentally different. We have made some commitments, and we are doing more than one thing at a time. There is capital intensity in insurance. Every insurance company has to provide a certain amount of surplus that they set aside for a rainy day and is subject to regulators' requirements. That is in addition to everything else that we do. We have employees, and we spend on growth to acquire customers and all the normal things that would flow through the P&L. But the obstacle to faster growth is not market size or addressable market. That, again, at a 1- point something, we are between $1 billion and $2 billion run rate of premium currently.
At our last Investor Day a year and a half ago, we provided a line of sight of how we think we might get to $10 billion. They are very large numbers when you start from zero, but in the realm of insurance, they are still relatively small numbers. We could grow faster. At some point, I did a bit of modeling on this verbally on the last earnings call. At some point, things break down from a capital surplus perspective, meaning if we were to grow 40%, somewhere in the high 40% range, then we would need more capital to support that from a surplus perspective. We could do that. We can raise capital. But it becomes more difficult to grow that fast and to generate it from your own profit, and that is just more of a math issue than a Lemonade issue.
But 30%, if you are trying to track us for many quarters in a row, I think you saw it go from the mid-20% range to the low 30% range, a little bit faster each quarter. Last quarter, another 0.5 point, so that can't go on forever, I don't think. But every quarter we have grown a little bit faster. But we want to balance that with profitability. All the customers we acquire in a given quarter, we expect to be profitable. We do not acquire unprofitable business. But the company is still unprofitable, because we expense all that growth spending up front. That is unlike most insurance companies that have a somewhat different model. We committed to EBITDA breakeven in Q4. We are on track. I expect we are on track to achieve that.
If we were to grow at a slower pace today, which we have chosen not to do, and I do not recommend, we would be arguably profitable, breakeven or better today. So there is that interchange between growth and profitability that we think is important. We have indicated publicly that we expect GAAP breakeven to follow roughly a year after EBITDA breakeven. That is still the case. We can do two or three things at once.
You've talked about expecting IFP growth to begin outpacing growth spend in 2027. Can you unpack why that's happening, and cohort maturation, cross-selling, brand awareness, all those things are going into that?
Sure. There's a natural dynamic where acquiring a profitable cohort of customers in a month or a quarter or whatever period you look at, we've seen, in the way that we do it and the type of customers we acquire, those cohorts stacking over time. That's why you see this consistent progress toward, with that consistent bottom-line improvement quarter after quarter, even though we're growing at pretty high rates. What I think you'll continue to see is that sort of cohort stacking dynamic over time. I've forgotten the second part of your question. If you'd refresh me, then I'll make sure I'm tracking.
I was asking about how quickly that can translate to operating leverage. And can you unpack why it's happening?
There's a couple things we're quite early in the process of, and by early, I mean it's not where I think it can be. One of those is very few of our customers have more than one policy. Most of our customers have a single policy. From a quantity perspective, that's renters because that's the lowest priced policy. Europe now has a large number of single policy customers at a lower premium rate. From a premium perspective, pet insurance is now our largest, because it's grown significantly and it's a much higher price point than our renters product. Over time, that current rate of having multiple policies, that's about 5%. That should be about 30% or better if we were to just match what's best in class. That is one aspect of where we would expect that evolution.
The cost of acquiring a customer of premium from an existing customer is lower than a new customer. In some cases it's free, which is the best way to acquire new premium. But in many cases, we are spending something greater than zero to add on that second or maybe third or even fourth policy to an existing customer. Second piece to think about is our retention rate. We, like every subscription business, like every insurance company, have a certain pace of cancellations. We over-index on young new buyers of insurance by choice, by design. Lots of our customers are first-time buyers of insurance. If you have a renters policy, maybe a pet insurance policy, it's very common that's your first purchase of insurance. That's good news for most of those customers, because Lemonade has defined their experience, and we think that's great for long-term retention.
On the other hand, renters are transient, and they change their minds, and they get boyfriends and girlfriends, and they move back with mom and dad, and they move to a state where we don't have coverage, and so their churn or their retention tends to be a little more challenging than a second or third-year customer or a homeowners customer or a car insurance customer. There's a number of different trends that are evolving, but they're evolving slowly as our customer base grows, as the multi-policy rate increases, and as our customers age. All of those drive greater lifetime value and we think will drive more and more premium growth that we pay either nothing for or a lower amount for.
You've maintained a fairly consistent LTV/ CAC over time. You kind of talked about it just now. It's not zero cost to go find somebody else to sell, I'm sorry, a second policy to the same person. But what would cause you to lean more aggressively into acquisition?
LTV/ CAC, lifetime value as compared to our customer acquisition cost, is really the watchword of the growth business. We've got a team, a very sophisticated team with ever-changing and improving models that have been able to accomplish what is really a challenge, which is over a period of years where we have roughly tripled or perhaps quadrupled the amount of dollars that we've spent on acquiring new customers, they've maintained that LTV/ CAC at right around 3x. Not exactly 3x. It's 2x range , 3x range . We had periods where it was 4x range when we were spending a fair bit less. But at a high level broad brush, it's been right around that 3x level, which means those are expected to be very profitable customers over time. And they continue to do it at a higher rate, at a higher absolute spend over time.
And that's a really tough thing to do. And if you look out over the history of insurance, you rarely see insurance companies doing all these things at once. Growing at a high rate, maintaining an LTV/ CAC ratio that's healthy and stable, and improving profitability and loss ratio, which sort of go hand in hand. Doing one of those is hard. Doing all of those at the same time is harder still.
What's the best way for investors to judge how well cross-sell is going? What are the things that we should look for? We can look at the size of each of your business lines, but we don't know how much of that's coming from selling through to existing customers.
A couple things. We've disclosed it anecdotally in various quarters, and we've talked about the 5% number. It was 3% something and went to 4%, now it's 5%, and it's a little bit above 5%. We do speak about it. It's not a hard number that's in the filings, and maybe that will change at some point. We'll leave it to the new guy to make that choice. We talk about retention. We measure Annual Dollar Retention. That captures all the aspects, the real financial aspects of the value of customers, not just the quantity of customers. That's been about 85%. That's a good number, but it's not a best-in-class number. It's a little understated over the last year, because we've actually trimmed our homeowners business a little bit because we didn't like the profit profile.
We've been able to grow at 30%+ rates and actually pull back our homeowners business a little bit, which is a good thing. It's healthy for profitability. Our growth rate would have been higher otherwise, so we're able to do those things at the same time. We're past that. The homeowners business is in a good place, and we expect to be able to grow it, not quite at the rates we're growing other parts of the business, but grow it versus let it decline or keep it flat. That will enable that ADR number to normalize. It's an annual measure, so it takes a few quarters. That I think will edge back into the high 80% range.
That should really be in the 90% range, and I think I would look to that metric, not only absolute number, but the trajectory of that number will be another good indicator. That number when we're cross-selling more effectively. Good news we tend to share with the market, and we'll continue to do that. But you'll see that ADR number normalize and start to grow. That'll be another indicator that cross-selling is working pretty well.
I want to see if there are any questions in the room. Renter, as you talked about earlier, is an important customer acquisition tool. But it is becoming smaller as share of premium. How do you balance maximizing the standalone profitability of renter while also continuing to build that business as an acquisition engine?
The renters product is just a great market entry tool. It is profitable on its own. It is really difficult for large incumbent players to be in that business profitably. 10 years ago, that was even more true, and we found that to be a terrific entry point. It was an unloved, hard-to-make-money aspect of the business, and we kind of jumped all over it. We are able to make money with those customers . Our base price can be something like $60 a year, and we can make money. $100 a year. Our average is between $100- $200 a year for that product. And those customers we expect to be profitable. More interestingly, again, because many of those customers are first-time buyers, they are just out of the gate getting into the working world. They are renting their first apartment, renting their first home.
They are a renter in a house, whatever it is. Those customers tend to be digitally savvy. They are younger by definition, typically. And over time, they will do more things. They will get married and have kids and have pets and have cars and all of those things. And if we can be established as this is how insurance should work, we think that those folks can grow with us for a very long time. It is almost like a profitable or a breakeven at worst lead base for us to sell in all the other products that we provide. If you look at our current customer base today, and it is mostly renters by number, not by premium, something like two-thirds of our existing customers have a pet and do not have pet insurance with us. And often do not have pet insurance at all. That is a real strong base that we are actively selling into.
About two-thirds have cars, and those folks do have car insurance, obviously because it is required. But those are a little tougher sells. But we are also getting something like half of our new business in cars coming from existing customers. So we are really nailing all of these different paths, whether it is rent to pet, rent to car, rent to your first home. All of these different paths can work pretty nicely for us.
Staying on the car insurance theme for a second. car insurance grew 60%, I believe it was, in the second quarter. But it's still early, somewhat, in geographic rollout. What are the most important sort of gating mechanisms that are keeping you from growing faster in car insurance?
Car insurance is growing very quickly. We're in the teens now in terms of its share of our total premium. But it is growing as fast or in some periods faster than our pet insurance product. The distinction there is car insurance is just an enormous market everywhere. $350-ish billion in the U.S. That's just many multiples of what the renters TAM and the pet insurance TAM is. We can grow very rapidly in multiple products. At our last Investor Day, we talked about what does Lemonade look like in one scenario, about $10 billion. We indicated that car insurance might be 30%, maybe 35% of the total book of business. So it's not a majority at that point, which is, $10 billion is a pretty big number versus where we are today, but it's not a majority.
Over the very long term, car insurance and homeowners should be the biggest. I think car insurance is where we have the most distinct advantage because of telematics and the sheer amount of data that we collect around every mile driven by every one of our car insurance customers. So that is where our real advantage, I think, lies versus our other products and versus the rest of the market. It's very early in that process. That said, even though we're in a fewer number of states, we're getting close to 50% population coverage in the U.S. because the states we are in are the larger population states. So getting close to 50% coverage. We're in five states now with our new autonomous Tesla partnership product, which is a very small number in absolute terms.
We get a lot of questions like, what's that premium doing? A very small number in absolute terms, but boy, the growth trajectory of that, as we know anything related to AI, is growing rapidly. There's going to be a tipping point. It's a product that's priced 50% below human-driven miles, software-driven miles. We're insuring a driver. Sometimes the drivers are human, sometimes it's software. The data supports at least a 50% lower frequency of claim for car insurance. There are many other studies in the market that suggest that's actually greater than 50%, better than 50%. If you want to think about today versus the future, that's really where the future's coming. We don't know any better than anyone else when that sort of hockey stick turns.
But it will come in the coming decade. Lemonade, I think, will be at the forefront. We'll be a first mover. We'll have the most data, and we'll be ready to really ramp it up when the market is there.
We're coming up to time here, but was there anything else you wanted to leave the group with in terms of how to think about sort of the next three to five years for Lemonade?
Sure. I think maybe a couple points. One, a thing that's appreciated and maybe one that's a little less appreciated. I do think while the quarterly results are important and these short-term milestones are important and we communicate them and we tend to achieve them. We've had 24 quarters in a row of pretty consistent results relative to our guidance and market expectations. That's a good thing. I would expect that sort of resilience visibility, predictability to continue. In a market that is a macro market where unpredictability tends to increase, not decrease, and our understanding of risk, generally in the market, and this is not just AI, but obviously AI is a big piece of it, I think agility in financial services and most importantly or specifically in insurance will be the most important asset.
Capital is important, technology is important, but agility, I think, will become and continue to be the most important and Lemonade is arguably the most agile tech-enabled insurance company on the planet. We're not the biggest. We're among the fastest-growing, but that agility, I think, is the key thing I would highlight for those who are thinking out three to five years, because it's tougher to draw certain lines out three to five years than it was maybe 10 or 20 years ago in this type of a market.
One thing that I think that is appreciated that in a period of time of great tumult, pandemics and wars and inflation and a number of shocks that we have seen in the last 10 years that were perhaps more intense than the decades before, Lemonade's performance and growth and strategy, as I started out at the beginning with, are relatively unchanged and super stable and up and to the right. I think 24 quarters into being a public company, we are now at the point where we can kind of say, okay, this is not luck at this point.
We are really on the right track in a couple of ways. The underappreciated thing, I think, is perhaps the thing we did most at the very earliest stage of the business was we said we are going to build a single technology platform from scratch in-house and we are not going to use any third-party software to run our systems. Now, we use third-party stuff like every company does to do things that aren't critical to the business and general ledger and things like that. But the fundamental building block of technology that drives the most important operations of the business including pricing and underwriting and customer experience, we have built all of that from scratch, by a team that is in-house. That team is now super AI-enabled today versus where they were a year ago or two years ago which is common to many companies.
But that decision to have one platform built in-house, I think, made 10 years ago is still relatively unappreciated. Our biggest, best, most adept competitors, Geico and Progressive and USAA and others, tend to have scores of systems if not hundreds. Boy, when you throw a new AI model at a company today and say you got to figure this out by next week, I would much rather have one system to do that with than 600 systems. I think over time that will be a mantra we will return to and try to reinforce why that makes our business so strong and so resilient.
Tim, thank you for coming. Good luck in your next post and appreciate it.
Thanks very much.