Lemonade Inc

NYSE:LMND

Earnings Call Analysis

Strong Quarterly Performance Reflecting Growth

Lemonade, a technology-driven insurance company, delivered impressive results in Q3 2024, marked by a 24% increase in in-force premiums (IFP), reaching $889 million. Customer growth also surged, with a 17% increase, bringing the total to 2.3 million. Notably, revenue climbed 19% year-on-year to $137 million, primarily fueled by the increase in gross earned premiums, which rose 23% to $213 million. This strong performance underscores the company's effective growth strategies and customer acquisition efforts.

Improving Profit Margins and Loss Ratios

The company's gross loss ratio improved significantly, reported at 73%, down from 83% in Q3 2023. The improvement has been attributed to strategic measures, including better risk assessment across their portfolio and rate adjustments, particularly in California. The ex-cat loss ratio stood at 68%, indicative of Lemonade's ability to manage risk effectively. Overall, the trailing 12-month loss ratio was recorded at 77%, an 11-point improvement year-on-year.

Increased Investment in Growth Strategies

Lemonade significantly ramped up its growth acquisition spending in Q3, with total growth initiatives costing $40 million, which is three times the amount spent in the same period last year. This investment, while contributing to a net loss of $68 million for the quarter ($0.95 per share), is viewed as vital for future growth. Management emphasized that despite these expenses, operating costs excluding growth spend remained stable due to efficiency improvements.

Guidance for Future Performance

Looking ahead to Q4 and the full year, Lemonade has increased its revenue and gross earned premium guidance. For Q4, the company anticipates IFP to range between $940 million and $944 million, gross earned premium of $222 million to $225 million, and revenue expected between $144 million and $146 million. Additionally, the adjusted EBITDA loss is projected to be between $29 million and $25 million, reflecting continued investment in growth alongside operational efficiencies.

Cash Position and Future Profitability Outlook

Ending Q3 2024, Lemonade reported total cash and investments of approximately $979 million, marking a $48 million increase from the prior quarter. This solid cash position is critical as the company moves towards full-year guidance, which estimates a net cash flow and positive operating cash flow next year. Management reiterated confidence in achieving EBITDA positivity by the end of 2026, driven by sustained operational efficiencies and strategic investments in technology.

Innovative Technology Driving Efficiency

Central to Lemonade's growth narrative is its technology infrastructure, which enables operational efficiency and customer satisfaction. The company has implemented artificial intelligence across its business model, enhancing processes from underwriting to customer engagement. AI is expected to lead to further efficiencies and cost savings, supporting the expansion of Lemonade's customer base without a corresponding increase in expenses.

Plans for Geographic and Product Expansion

Lemonade is not only focusing on its current products but is also gearing up for geographic expansion of its auto insurance offerings, set to launch in several new states in 2025. This move aims to capture more of the market and leverage cross-selling opportunities with existing customers. Expectations are high for this growth area, which currently represents around 15% of the overall business mix but is anticipated to rise as the company improves its loss ratios and enhances customer retention strategies.

Earnings Call Transcript 2024-Q3

[Operator]

Hello, and welcome to the Lemonade Q3 2024 Earnings Call. My name is Maxine, and I'll be coordinating today's call. [Operator Instructions] I will now hand over to Yael Wissner-Levy, VP of Communications to begin. Please go ahead when you're ready.

[Yael Wissner-Levy, executive]

Good morning, and welcome to Lemonade's Third Quarter 2024 Earnings Call. My name is Yael Wissner-Levy, and I'm the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Timothy Bixby, our Chief Financial Officer. A letter to shareholders covering the company's third quarter 2024 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 2023 Form 10-Q filed with the SEC on May 1, 2024 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 performance indicators, including customers, in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex cat and net loss ratio and a definition of each metric, why each is useful to investors and how we use each to monitor and manage our business. With that, I'll turn the call over to Daniel for some opening remarks. Daniel?

[Daniel Schreiber, executive]

Good morning, and thank you for joining us to discuss our third quarter results 2024. Before turning to those, I want to remind you that we'll be holding an Investor Day on November 19, both in person at our New York headquarters and online. We certainly hope you will be able to join us. We will be providing detailed updates of our vision, our AI capabilities, our ambitious plans and how we hope to realize them. In the meantime, let me turn to our third quarter results, which I'm happy to report continued to demonstrate strong progression across the board.



We saw accelerating top line growth with in-force premium growing by 24%, and we were cash flow positive. Our net cash flow increased by $48 million, our strongest cash flow quarter inception to date. Free cash flow was $14 million positive, but we think that net cash flow better tracks our business than free cash flow does as it incorporates the impact of our synthetic agents program, which is core to our operating model.



The bottom line is that we ended the quarter with $979 million in cash and investments, a growing balance and one we expect to grow continuously hence forth, accepting next quarter, as we have said before. The third quarter saw elevated cat or catastrophic-related losses across the industry alongside tragic loss of life. Our thoughts and our team's efforts were with those impacted by those events. As has been the case in recent quarters, our business, however, proved highly resilient. Notwithstanding the weather, we delivered a 73% gross loss ratio, our strongest result in 4 years. This wasn't a one-off.



For the fourth consecutive quarter, we saw double-digit improvements in the loss ratio compared to the same quarter 1 year prior, and our loss ratio is now back where we like to see it, comfortably within our target range. How have we done it? It's the very things we've talked about for several quarters now, diversification of the portfolio and intense and sustained efforts in matching rate to risk across the portfolio and across the U.S. All this enabled us to deliver notably expanded gross margins in Q3.



Taken together, accelerating top line growth and expanding gross margins yielded $37 million in gross profit, which represents a 71% year-over-year growth. Accelerating top line growth, even more dramatic gross profit growth and our best ever cash flow quarter all rendered this a fabulous quarter. We look forward to continuing these trends into 2025 and beyond. With that, I'd like to hand over to Shai to tell you more about our recent efficiency improvements unlocked via technology. Shai?

[Shai Wininger, executive]

Thanks, Daniel. As we've spoken about in recent quarters, technology powers our entire business, and this is continuing to play out in our financial performance. Let me briefly touch on recent gains on the automation front. Automation has proven to be an extremely powerful lever that has powered the strong cash flow performance Daniel mentioned. For example, for the 11th consecutive quarter, we've been able to deliver improvement in IFP per employee as we've delivered strong top line growth while the team has been more or less stable.



At more than $700,000 in IFP per employee, growing at more than 30% multiyear CAGR, we're fast approaching best-in-class levels displayed by some of the noninsurance big tech companies who have realized scale. Zooming out to the operating expense base, when excluding growth spend, of which 80% is financed by our partner via the Synthetic Agents program, Operating expenses were stable year-over-year. I believe the impact we're seeing is only the beginning. And as we continue to implement new AI capabilities on a daily basis, many more efficiency improvement opportunities are still ahead of us. And now let me hand over the call to Tim, who will cover our financial results. Tim?

[Timothy Bixby, executive]

Great. Thanks, Shai. I'll review highlights of our Q3 results and provide our expectations for Q4 and the full year, and then we'll take some questions. Overall, it was again a terrific quarter with results very much in line with or better than expectations and continued notable loss ratio improvement across the board. In-force premium grew 24% to $889 million, while customer count increased by 17% to $2.3 million. Premium per customer increased 6% versus the prior year to $384, driven primarily by rate increases.



Annual dollar retention or ADR was 87% up 2 percentage points since this time last year and down slightly versus 88% in the prior quarter. This slight sequential decline is as expected, given our efforts to reduce less profitable portions of our home book in the second half of this year. Gross earned premium in Q3 increased 23% as compared to the prior year to $213 million, in line with IFP growth. Revenue in Q3 increased 19% from the prior year to $137 million.





This growth in revenue was driven primarily by the increase in gross earned premium, a slightly higher effective ceding commission rate under our quota share reinsurance, and a 27% increase in investment income. Our gross loss ratio was 73% for Q3 as compared to 83% in Q3 2023 and 79% in Q2 this year. Excluding the total impact of cats in Q3, which was roughly 5 percentage points, our gross loss ratio ex-cat was 68% Cat impact in the quarter was driven primarily by named storms and hurricanes and was about 5 points better than the prior year and 12 points better sequentially.



Total prior period development had a roughly 3% favorable impact, about 1% of that from cat and about 2% non-cat. Trailing 12 months or TTM loss ratio was about 77% or 11 points better year-on-year and 2 points better sequentially. All of these insurance metrics and more are included in our new insurance supplement that you'll find at the end of our shareholder letter this quarter and going forward. Gross profit increased 71% as compared to the prior year, driven primarily by premium growth and significant loss ratio improvement, while adjusted gross profit increased 55% driven by premium growth and loss ratio improvement.



Operating expenses, excluding loss and loss adjustment expense, increased 27% to $125 million in Q3 as compared to the prior year. The increase of $26 million year-on-year was driven predominantly by an increase in growth acquisition spending within sales and marketing of approximately $27 million, offset by fixed cost savings. Absent the growth spend increase, operating expenses were roughly unchanged year-on-year. Other insurance expense grew 31% in Q3 versus the prior year, slightly ahead of the growth of earned premium. Total sales and marketing expense, as noted, increased by $27 million. primarily due to increased growth spend, partially offset by lower personnel-related costs driven by efficiency gains.



Total growth spend in the quarter was $40 million, roughly triple the $13 million in the prior year. We continue to utilize our synthetic agents growth funding program and have financed 80% of our growth spend since the start of the year. As a reminder, you'll see 100% of our growth spend flow through the P&L as always, while the impact of the synthetic agents mechanism is visible on the cash flow statement and the balance sheet, and the net financing to date is about $67 million as of September 30. Technology development expense was flat year-on-year at $22 million due primarily to continuing cost efficiencies.



G&A expense declined 15% as compared to the prior year to $31 million, primarily due to lower personnel and insurance expenses and one-time impacts in both quarters. Absent these nonrecurring impacts, the G&A decline was somewhat less, but still meaningful at approximately 7% better. Personnel expense and headcount control continue to be a high priority. Total headcount is down about 7% as compared to the prior year at 1,216, while the top line IFP again grew fully 24%. Including outsourced personnel expense, which has been part of our strategy for several years, this expense improvement rate is similar. Our net loss was a loss of $68 million in Q3 or $0.95 per share, a 10% decline as compared to the third quarter of 2023, and this change again driven primarily by our increased growth spend.



Our adjusted EBITDA loss was $49 million in Q3 versus $40 million in the prior year. Our total cash, cash equivalents and investments ended the quarter up significantly at approximately $979 million. up $48 million versus the prior quarter, showing a continuing positive net cash flow trend. With these metrics in mind, I'll outline our specific financial expectations for the fourth quarter and the full year. We are increasing our full year expectations for both revenue and gross earned premium, while our other guidance metrics remain unchanged as compared to our prior guidance.



As has been the case in some prior years, there is a notable seasonal difference in our expected results in Q3 versus Q4. Specifically, Q3 is typically our highest growth spend quarter of the year, which drives up sales and marketing spend and also typically a higher expected loss ratio as compared to Q4. Our loss ratio experience, especially for cat in the third quarter this year was quite favorable as compared to our expectations, and this drove over performance in Q3, which doesn't necessarily recur in Q4.



Our fourth quarter guidance, therefore, incorporates our typical view for expected results. From a gross spend perspective, we expect to invest roughly $35 million in Q4, which is nearly 3x the growth spend from Q4 in the prior year to generate profitable customers with a healthy lifetime value. We noted last quarter that we also expected to remove approximately $25 million of homeowners IFP or in-force premium from our book, in the second half of 2024, roughly 2/3 of that in Q3. And this effort serves to somewhat dampen growth in the immediate term while concurrently boosting cash flow and profitability in the medium term and further reducing cat volatility, and we are on track with those prior estimates.



Importantly, though our IFP guidance for the year reflects these plans, it also remains unchanged. We expect that additional growth and marketing efficiencies will continue to offset the impact of these nonrenewals. For the fourth quarter of 2024, we expect in-force premium at December 31 of between $940 million and $944 million, gross earned premium of $222 million to $225 million, revenue of $144 million to $146 million, and adjusted EBITDA loss of between $29 million and $25 million, stock-based compensation expense of approximately $16 million, capital expenditures of approximately $3 million and a weighted average share count for the quarter of approximately 72 million shares.



And for the full year 2024, we expect, again, in-force premium at the end of the year of $940 million to 94 gross earned premium of between $823 million and $826 million, revenue of between $522 million and $524 million, adjusted EBITDA loss between $155 million and $151 million, stock-based compensation expense of approximately $64 million, capital expenditures of approximately $10 million and a weighted average share count of approximately 71 million shares for the full year. And with that, I would like to hand things back over to Shai to answer some questions from our retail investors.

[Shai Wininger, executive]

Thanks, Tim. We'll now turn to our shareholders' questions submitted through the safe platform. Timothy asks, what is the expansion plan for Lemonade Auto Insurance? Thanks for the question, Timothy. The organization has rallied around car in a remarkable way in order to position ourselves for rapid growth. 2025 will see us roll out car in several additional states. We'll prioritize those with the most attractive LTV dynamics and regulatory environments that facilitate timely rate approvals. Importantly, we expect the unlock on car growth to come from multiple directions, cross-selling to our existing customer base as well as acquiring new customers.



In the next question, Ben asked, what is the time line for access to Lemonade insurance services in all 50 states? Thanks, Ben. We already sell some of our products in all 50 states and are currently already available for the overwhelming majority of the U.S. population when it comes to our more mature products. As for car, 2025 marks a year of notable geographic expansion. We expect to continue this in 2026 and launch more states where we can grow our car product profitably.



Paperbag wanted to know about our view on insurers who outsource work such as data science and AI and whether that is a risk to our business model. Thanks for the question, Paperbag. Legacy insurers have been outsourcing data science and AI work for over a decade. Yet despite these costly efforts, consumers haven't really noticed major changes in experience or insurance pricing. I believe there are many reasons for this lack of progress, such as the challenge of changing century-old processes and culture in organizations that are highly conservative by design. Anyone who worked for a large corporation knows how resistant to change and risk averse these organizations can become. Implementing AI and automation is even harder because these are advancements that threaten job security and demand new skills from seasoned employees.



Insurers weren't founded as tech companies, and so they rely on traditional vendors to provide essential systems. And since no single system runs an entire insurance company end-to-end, they're forced to work with dozens, if not more, of third-party providers. Creating a seamless AI-powered experience that delivers personalized customer interactions, improves efficiency and drives better underwriting and pricing require a unified full stack system with AI at its core. Unlike traditional insurers, the Lemonade platform was designed, built and maintained in-house, and I believe this is our secret weapon. Blender, our insurance operating system, integrates everything, from customer interactions on our app, websites or phone to advertising attribution, customer segmentation, LTV modeling, pricing, underwriting, claims and more. I believe this level of control coupled with a team passionate about progress and change gives us an unfair advantage and a defensible moat that's hard to replicate. And with that, let me turn the call back to the operator for more questions from our friends from the street.

[Operator]

[Operator Instructions]. Our first question today comes from Jack Matten from BMO.

.

[Francis Matten, analyst]

One on the cash flow outlook, it was good to see the positive operating cash flow this quarter. I guess, can you talk about how much you expect cash flow to ramp up and improve next year? And if we exclude the synthetic agent financing benefit, is there a time when Lemonade expects to be consistently cash flow positive just on an operating cash flow basis?

[Timothy Bixby, executive]

Sure. So we're at the point now where this quarter, we generated significant cash flow on all the different measures, operating cash flow, free cash flow and net cash flow. Heading into next year, we will expect to see net cash flow consistently positive from here on out. And exiting next year, we expect operating cash flow to be wholly positive from there on out. EBITDA will follow likewise in '26 by year-end.

[Francis Matten, analyst]

And then just on the guidance for this upcoming quarter, for adjusted EBITDA, you've maintained the full year guide even though you beat by a little bit in the third quarter. I guess anything notable driving, I guess, like a slightly lower implied guide for the fourth quarter? I think it seems you might be guiding for higher growth spend. I'm not sure if that was it or if there's anything else flowing into that.

[Timothy Bixby, executive]

Yes, there's a couple of notable things in the second half generally for us and for the sector and then a couple of specific things. So generally, we have the seasonally strongest growth quarter in Q3 versus Q4. We're accelerating our growth spend and likewise, our growth significantly this year versus the prior year, spending roughly 3x more in Q3. Q4 tends to be a slightly lighter growth spend and growth quarter than Q3. But because we're continuing to ramp spend, that decline will be very modest.



We'll spend slightly less in Q4 than Q3, something on the order of $35 million versus $40 million. So that drives the sort of top line dynamic, which does flow through the P&L. Also notable is the loss ratio expectation and the CAT impact. So Q3 is typically the highest CAT impact quarter. This Q3 turned out to be not the case, and that was really a source of much of our overperformance in Q3 versus our expectations. Q4, again, because it's the forecast and not actual, we do have our typical conservative assumptions on loss ratio there. So the net of all that led us to the point to say we are confident the second half looks fundamentally unchanged with some modest timing differences shifting from Q4 to Q3.

[Francis Matten, analyst]

That's helpful. And then last one, just quickly on the delta between the net and gross loss ratio was a little bit higher, I think, around 8 points this quarter. I know last quarter, it's kind of gone the other way. Anything notable driving the delta this quarter? And is there kind of like a normal run rate between those 2 metrics that you would expect going forward?

[Timothy Bixby, executive]

Yes. It was a little wider than usual. And then on occasion, it's been narrower than usual. I think we've had a few quarters that would have been identical or within a point or normal is somewhere in between. This quarter, there were a couple of notable items. So our quota share applies to some of our business, but not all of our business. So there were -- most of the CAT in this quarter was related to named storms, hurricanes and so that is excluded from our quota share agreements. Though our experience was good, the numbers were low, it's excluded from quota share. So we bore more of that impact, and that drives the difference between gross and net on the order of about 4 points.





Another notable item that you'll see detailed in the footnotes of our letter and in our 10-Q that's coming out shortly, we did have a large loss in our auto business from pre-acquisition Metromile that impacted our gross loss ratio by about 2 points on a gross basis. So we had a really nice result, 73% without that onetime adjustment for a pre-acquisition claim, that would have been 2 points better. And again, that flows through also about 2 points to the net loss ratio. The rest is [ Uli ]. So 73 points gross, 81 net and the difference is those 3 items. I'd expect the difference to be in the low single digits more consistently, 3 or maybe 4 points typically, but it does vary from that.

[Operator]

The next question comes from Jason Helfstein from Oppenheimer.

[Jason Helfstein, analyst]

Two questions. One, are we seeing any advancements on the technical AI side, whether it's chips or cloud capability you're able to buy that could have any further impact on the business, let's say, in the next 12 to 18 months? And then secondly, I appreciate the expanded disclosure at the end of the release. If we think about the IFP breakdown and we kind of look at like the percentages and the trends, if we're thinking out over the next 12 months, I don't want to get ahead of your Analyst Day, but how do you think about the mix changing over the next 12 months?

[Daniel Schreiber, executive]

Jason, let me take the first one and hand it over to Tim for the second of those. The answer to your question is yes. So -- and I will kind of tease or do a promo because a lot of the Investor Day will show a lot of our AI capabilities behind the scenes. So you'll see -- hopefully in person there, but you'll see a lot of the machinery behind the scenes, how we are harnessing all of the advancements in AI. I know it's a very topical thing to be saying. As you know, we've been talking like this since 2015 when we founded the company. So we've really built ourselves on top of an AI infrastructure. And what we're feeling at the moment is that we're running, we're sprinting, we always have, but we're sprinting on a conveyor belt where the ground beneath us is moving pretty fast as well. And the 2 combine in powerful ways, if you look back at the last couple of years and just at the financial metrics, and you see more or less 50% top line growth over the last couple of years. And if you actually look at our OpEx over the same time frame, it's shrunk, not grown, same for headcount.





So it's highly extraordinary to grow our company 50% and spend less rather than more in so doing. It's not that we're using less, and we're not sacrificing quality or anything else, the customer satisfaction is great. So it's not that we're using less intelligence to get the job done. It's just more and more of it is not human intelligence. And looking forward, as the capabilities of the underlying AIs continue to advance, yes, we are well set to harness those. And let me kind of leave the rest for Investor Day because we'll show you a lot of the metrics and the technologies that underpin that. Tim?

[Timothy Bixby, executive]

And maybe a comment or two on mix and mix shift. So I'll start at a somewhat higher level, so from a market standpoint, our coverage now is quite broad across both the U.S. and in Europe. From a population standpoint, we're covering anywhere between 60% and 90% of the U.S. population in all of our products with the exception of car and car is growing fairly significantly. We're covering 50% of the population of Europe. We're starting to see really good growth there. So the mix will continue to move in the direction it has. Today's mix is a lagging indicator. So our mix actually increased for pet from this year Q3 versus the prior year. But again, that's a lagging indicator of where growth was coming from, and we expect that to shift and has begun to shift based on the new sales that are coming in and our growth efforts that are shifting towards car.





So I think over time, if you look at the next year or the next 3 years, you'll see that trend continue and likely accelerate where car today represents something like 15% of our business. That will start to move upwards over time and represent a larger and larger part of the business. Part of what gives us real confidence there is the progress in the loss ratio. We gave some real detail in the supplement that we'd encourage you all to take a look at. Our car loss ratio has come down quite dramatically as rate approvals have come online. And even the loss ratio reported now this quarter would have been something like 10 points better given if you adjust for this onetime adjustment that we made. So all systems are go for car. We will do a much deeper dive at Investor Day, and we look forward to doing that.

[Operator]

The next question comes from Katie Sakys from Autonomous.

[Katie Sakys, analyst]

I wanted to start first with some of the re-underwriting actions you guys have been taking in the home owners line. To what extent did the cat load this quarter benefit from those early re-underwriting actions? And maybe if it's too early to start seeing an impact there, to what extent would you guys expect your full year cat load next year to reflect the shift in exposure there?

[Timothy Bixby, executive]

So I don't have an exact number for you. It was probably fairly nominal in this quarter exactly, but over time, we'll start to see that play out more significantly. We expected or do continue to expect about $25 million or so of IFP to come off the books by year-end. Most of it or about 2/3 of it or so already in Q3 and then the balance in Q4. So that impact, I expect will grow over the coming quarters. One note, I think, that we have shared in the letter that's worth noting is what our business would have looked like, what our loss ratio would have looked like this quarter, something like 40% or so worse had we not been pursuing these efforts over time. And it's not just the home immediate-term home non-renewals, it's a much broader effort to both underwrite and re-underwrite in areas where we are confident and that we're seeing across the whole book, including home.

[Katie Sakys, analyst]

Great. And then maybe shifting to car a little bit. Thanks again for all the additional detail in the supplement this quarter. I was wondering if you could offer us any additional color on the nature of the improvement to the car gross loss ratio. How much of that is coming from shifts in frequency versus exposure? And then what does the cat exposure profile for the car product look like relative to the home owners product?

[Timothy Bixby, executive]

The cat exposure, I'll take that first, is minimal. It's not 0, but it's far less of a concern or a risk than it is for the home business, and that really is a difference in storms really in the nature of storms and how they affect the car business. The real driver of the loss ratio improvement is rate, rate across the board and certainly rate in California, which was amplified by the size of the California business and the scope of that rate increase, 50% or so rate increase. So that is more or less as expected as that rolls through the renewals of the California book and the car book in general.

[Operator]

The next question comes from Tommy McJoynt from KBW.

[Thomas Mcjoynt-Griffith, analyst]

When you bridge the gap from this year having negative $150 million of EBITDA roughly in the guidance to positive EBITDA in 2026, can you either quantify or even just rank order the main line drivers of what's driving that improvement over that 2-year span, looking at things like improving loss ratios or using less quota share reinsurance or just growing premiums, kind of rank order or quantify those drivers, please?

[Shai Wininger, executive]

Tommy, let me kind of give us some broad strokes and then Tim do backfill with any details that you think I've missed. But in broad strokes, we're seeing an incredibly steady driver over the last few years, and we think it's the same drivers that will continue over the next couple of years. If you look at our EBITDA as a fraction of gross earned premium, what some people would call an EBITDA margin, if you like. And you look back 4, 5 years and you say, what was our EBITDA losses per dollar of gross earned premium, it stood at 50-something cents. And then it's been improving at a rate of 10% per year. So then it was $0.40-something. This year, it's $0.20-something cents, we'll be in the teens next year, in the single digits the year after. And as I've said, before the end of that year, we expect to cross over from 0 and go into positive territory.





So the first thing to point out is that this has been a very steady, predictable line that you can draw. Our path to profitability can literally be drawn on a graph and has been pretty consistent for some time. In fact, our statement that we expect to be EBITDA positive towards the end of '26 dates back 3 or 4 years. I think it was 2021 when we first said that. So this has been a very consistent and almost bankable march towards profitability with cash flow positivity already on the way, as we had said and EBITDA profitability to follow. But the underlying most natural or obvious or simple kind of way to answer your question is that we're seeing tremendous operational efficiency. This was our hypothesis for years that when you build a company on technology, you can scale without increasing expenses, and it has shifted from being a credible hypothesis to a really proven result.





You look back, as I said earlier, over the last couple of years, and you see that our expenses have not budged, our headcount has not budged. Our gross profit has doubled, and our top line has grown by 50%. We expect that dynamic to continue. We think we're going to be able to continue to grow our business without growing our expense line or at least growing it at a far, far more moderate pace. And that dynamic should lead us not merely, has led us to cash flow positivity, will lead us to EBITDA profitability will then lead us to net profitability. And I do believe before not too long to massive profitability. I think it's that same basic kind of physics, if you like, of growing a top line at a profitable gross profit -- profitable gross margin while holding expense line pretty stable. Tim, anything you want to add to that?

[Timothy Bixby, executive]

Just 2 notes, and it follows the exact same track. One is a couple of years ago, when we were looking out and thinking about resources and then people and fixed costs tend to move together. We're looking at and expecting the growth rate similar to what we had started to see, which is in the 10%, 15%, 20% range. Now we look out and we've seen actually a decline in overhead expenses for quite some time, almost 2 years at this point. Now fixed costs will not decline forever. They will grow, but they will grow. We expect at a much, much more modest pace. And that, when you draw that line out a couple of years and grow those expenses at a 2% or 4% or 6% rate versus a 15% rate, it's just an extraordinary difference. And that's what we're seeing right now, and that's the key driver.



From a top line perspective, I would look at gross profit. What has gross profit done over the past 3 years, this year alone, growing 70%. So it doesn't -- you roll that out 2 or 3 years. You continue to see that significant leverage because loss ratio has improved so much and there's still room for that to improve. Those two dynamics, coupled together cut that EBITDA burn quite consistently over the next 24 months.

[Thomas Mcjoynt-Griffith, analyst]

And then to give us an update on the success of cross-selling, do you have any update on the number of policies per customer and how that has trended over the past couple of years?

[Timothy Bixby, executive]

Yes. So a couple of metrics there. It's actually a fairly consistent metric. There's a couple of areas where when we look at our longer-term modeling and think about what can go even more right. We have a lot of things that are going right today. We expect that retention can and will improve over time, but we don't assume or model that it will improve. But we have a lot of opportunity for retention that comes in the form of multi-policy and upsells. All of those come together, something like 4.6% or so of our customers today are multi-policy customers. That's a relatively low number, but it's stable. So when we're growing the business at 25% or 30%, that number is staying stable. That's in absolute terms, that's a significant increase.

And in those states where we have all the policies available for those customers who have multiple policies, all the dynamics are much stronger. Retention is better. The willingness to buy that third policy is higher, loss expectation, the risk profile tends to be better. All the metrics are better for that type of customer.

[Operator]

[Operator Instructions] Our next question comes from Andrew Stein from FT Partners.

[Unknown Analyst]

You mentioned in the letter that the diversification across geographies, products, partner placements and then the targeted non-renewals are behind the gross loss ratio improvement. So I was just wondering if you could dimension the impact of each of those areas. And then where does the most opportunity lie looking forward?

[Timothy Bixby, executive]

So I don't have an exact number for each of those that we've disclosed. I think there's no silver bullet there. I think home is certainly the most significant impact, which is why we've mentioned it just in absolute terms, $25 million out of the book in 6 months is a very focused and notable impact. But that's something we have done on a consistent basis with at a lower rate over time, and we'll continue to do that where we see business that with better information and a more accurate understanding of the risk of the customer starts to look highly unprofitable, we'll continue to make those efforts.



Part of the impact in the quarter, I think, is the -- our exposure in the home business is pretty fairly low risk. So when you're not in Florida in the home business, most of the large cats affected pretty specific areas. These are the kinds of things we're a little cautious about, and we do that elsewhere. So we have had a fairly light California cat impact this year, but we are very thoughtful about those risks as well. So each of those areas, I think, has contributed to some extent to the improved loss ratio.

[Shai Wininger, executive]

I'll just add, Andrew to that. Yes. Just to say, as Tim said, I too don't have top of mind the exact division between the different factors. But I will point out that our loss ratio improved everywhere. So this wasn't one thing, one magic bullet. We saw and we've disclosed this every single product in all of our geographies saw improvements. So this has been a lot of effort across the board, across the geography, across our product base, across the company, and we're really seeing no holdout. Nothing is bad. Everything is getting better, as I say, both Europe and the U.S. and home and renters and pet and really across the board.



I'll just underline as well, Tim mentioned this in passing in his comments, but the loss ratio overall improved really quite dramatically. We're talking about 10 points year-on-year, 11 points and then another 10 points from the year before, 20 points over the course of the last couple of years, which is rather stunning, I think, by most standards. But if you take a look at our car loss ratio, it has dropped very beautifully, very dramatically and yet it's understated. About 10 points of the loss ratio as reported from a single claim that was resolved years later in an elongated lawsuit that predates our acquisition of Metromile.





You take that out as I think it's not an unreasonable thing to do, although it's not what accounting practices have us do. And you see suddenly our car loss ratio in the 80-ish mark and you compare that to where it was a quarter or two ago, and you realize the trajectory that we're on. And I think that ties back also to Tommy's question earlier about cross-selling. While these have been relatively stable, as car loss ratio gets to where we want it to be, we'll start unleashing the power of cross-selling car to our existing customers much more, and that will impact the annual dollar retention and cross-sells and multiproduct lines and all those things have been relatively stable. We're approaching the point where we can unleash a lot of those capabilities.

[Unknown Analyst]

Got it. And yes, that was going to be my next question, just expanding on how the upsell process and the experience there is going for moving renters policyholders to auto.

[Shai Wininger, executive]

Sure. And we'll talk about this at some length. So this is my second promo for the Investor Day. We will show some really interesting stats, and I don't want to gum that. So I'll leave some of the fun and sexy stuff for a couple of weeks from now. But we're doing a lot. And we haven't wanted. We've kind of been up until fairly recently proactively withholding those kind of cross-sells, no point cross-selling a product that wasn't itself profitable. That's not the way we do things. As car now arrives at its destination or is nearing it, we're starting to do a lot of trial and error, and we will share some of the numbers behind that just a couple of weeks from now.

[Operator]

The next question comes from Charlie Rogers from Jefferies.

[Unknown Analyst]

So I think you guys were mentioning earlier that embedded in the guide for the fourth quarter, there is conservative CAT estimates there. I was wondering if you guys could maybe elaborate or talk a little bit about what your expectation for losses related to Hurricane Milton might be within that?

[Timothy Bixby, executive]

Yes. Our experience with all the CATs to date, including Milton, have been quite nominal. Obviously, they can develop more over time. Milton is the most recent one. But we're not concerned about that developing into anything material at this point. We're far enough past that that's not too troubling. Q4 is a tricky one generally because the loss ratios tend to be a fair amount better than the other -- almost all three of the other three quarters, notably better Historically, they have been. We've had one or two exceptions with freeze storms, and so we're somewhat cautious. There's an opportunity to have just another great quarter for sure. And then we've also built in an assumption that will be highly likely to happen, which is the pace of our growth spend to set us up for continuing accelerated growth. If you look at our growth rate through the quarters of this year, you've seen that year-on-year growth rate that's up each quarter consistently through the course of the year. And so we're able to do that at the same time as we see loss ratios make great improvement. So that combination is something that's led to a great year-to-date period and the Q4 numbers, we hope will come in as expected or better.

[Unknown Analyst]

Okay. Great. And then could you maybe just give cat and PYD on a net basis?

[Timothy Bixby, executive]

Yes. So the CAT impact on a gross basis was about 6%. On a net basis, that would have been about 11%. And then prior period development was about 3% on a gross basis, that would have been about 1% for both of those favorable on a net basis.

[Unknown Analyst]

And that was PPD, not PYD, correct?

[Timothy Bixby, executive]

That's right. Prior year development is not something that's something that shows up in the Q. That will be year-to-date about $6 million of favorable development, although that's a year-to-date figure. So the development in the quarter was slightly unfavorable, about $2 million unfavorable in the quarter for prior year's development.

[Unknown Analyst]

Okay. Great. And then I guess last one, if I could. Thanks again for the additional disclosures in the insurance portion of the supplement. But is there any way that you could help dimension within, I believe, what's called home multi-peril in there, the kind of difference between renters, condo and I guess, what would be potentially considered traditional homeowners just in terms of like potentially premium per customer policy, loss ratio? Just I guess, any color in there would be helpful.

[Timothy Bixby, executive]

The new disclosures we hope will be super helpful, and we'll continue to evaluate that. I can share some of the metrics we've shared in the past. We do sort of group home and condo together, and that tends to run a price per customer in the sort of $1,500 range, whereas the renter is probably $170 range. So those are notable differences. But that's not something we're necessarily going to break out and disclose every quarter, but just from an order of magnitude basis, that should give you a feel for the distinction.

[Operator]

Our next question comes from Matt Smith from Holter Ferguson Financial.

[Matt Smith, analyst]

Congrats on a great quarter, everyone. Looking through the letter, it seems like the near-term priorities are really around kind of limiting exposure to home and as you said, leaning in on car. But thinking longer term, will home kind of remain a shrinking piece of the business? Or is there some plan to kind of reaccelerate growth in that area once the LTV dynamics improve?

[Shai Wininger, executive]

Matt, good to hear your voice. Home is important. It's an important part of every consumer's purchase and insurance needs, and we do aim to cater to our customers 360 degrees. That said, there are many areas in home where we don't have a distinct advantage and where the volatility and the exposure doesn't make sense for us. We have prided ourselves on being a capital-light company with low volatility, and we've not always been able to hold true to that, and that's largely been because of exposure to home. So we have, over the course of the last few years, worked hard to do a number of things. In the past, we relied on reinsurance to offload a lot of that. We've certainly been diversifying geographically and otherwise. And we hinted a couple of quarters ago that we're also looking at placing homeowners policies on third-party paper where necessary.





So our prioritization is really the customer centricity, making sure that we cater to all of our customers' needs. If it makes sense to write that home policy on our paper, we do that. If it makes sense to write it on our paper and reinsure it, we'll do that. If it makes sense to use a partner's paper as we've done, for example, for earthquake insurance since our very inception, we will do that as well. So we're playing with those tools. I do think it would be fair to say, though, that while we will I think, always cater to the customers' needs and offer homeowners insurance in a way that best suits our business model and plays to our competitive advantage. Our competitive advantage will be and has been more pronounced in other products. So in car insurance, I think we've got an extraordinary competitive advantage.





We will elaborate on that at some length in a couple of weeks' time in our Investor Day. We've demonstrated, I think, very ably in pet insurance and renters insurance. I think in homeowners insurance, where it is so exposed to the weather, that does mute some of the capabilities that we bring to bear on other products. And for that reason, while we will continue to offer it, I don't want to overstate the competitive advantage that we enjoy in that sector. One other thing to add, sorry, Matt, it shouldn't be enough just was. Sorry, just one last thought, which is we've launched homeowners insurance in France. We've launched homeowners insurance in the U.K. Those are growing well. CAT exposure in those places is 1/10 or less of what you see across the U.S. So in areas where it makes financial sense, we're expanding on our own paper and in areas where it affords, I think, unreasonable exposure, we're shrinking the footprint at least when we write on our own paper.

[Operator]

Thank you. That does conclude our Q&A session. Thank you all for joining. You may now disconnect your lines.