Lemonade Inc
NYSE:LMND
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Lemonade Inc
Earnings Call Analysis
Q4-2023 Analysis
Lemonade Inc
The company's story begins with a significant achievement in top-line growth, with in-force premium surging by 20% to reach $747 million. This growth is accompanied by an impressive reduction in the quarterly loss ratio to 77%, a 12-point decrease from the previous year's last quarter, showcasing an enhanced ability to match rates to risks.
Making strides in profitability, the adjusted gross profit has nearly doubled, and the adjusted EBITDA loss has been almost cut in half, reflecting the company's rigorous cost control and operational efficiencies.
The company maintained a strong liquidity position, ending the quarter with $945 million in cash, cash equivalents, and investments, remaining level with the previous quarter and even noting an overall increase from two quarters ago. The forecast indicates a dip in cash levels through 2024, but anticipates a return to positive cash and investments in the first half of 2025, solidifying the financial stability narrative.
To improve profitability, growth was intentionally slowed during 2023 by minimizing sales of underpriced products. However, the company still achieved nearly 20% annual growth. Anticipating further rate approvals, the company will maintain its throttled growth strategy for 2024, especially in its home and car products, which denotes a prudent strategy balancing growth with financial health.
With improved profit potential across its product portfolio, the company plans to accelerate growth in 2024 by doubling its marketing spend to $55 million, anticipating a 3x return on this additional investment. This strategic move outlines a clear plan of action to boost the company's market presence and sales momentum.
The use of a new generative AI stack and other technological innovations is expected to continue improving the loss ratio, aiding the company's pursuit of growing the top line while also enhancing the bottom line in 2024.
Reflecting strong customer acquisition and retention, the customer count increased by 12% to just over 2 million, and the premium per customer rose by 7% to $369 due to both rate increases and a shift to higher priced products. This indicates a growing and increasingly profitable customer footprint.
Revenue grew by 31% compared to the previous year, reaching $116 million, while gross profit soared by 165% to $34 million, and adjusted gross profit climbed by 97%. Such remarkable improvements in key financial metrics depict a company on a clear upward trajectory.
In a testament to cost management, operating expenses (excluding loss and loss adjustment expense) decreased by 5% to $90 million, even with a slight increase in other insurance expenses. The company also optimized its operations by reducing total headcount by 8% amidst a 20% increase in top-line IFP growth, demonstrating effective scaling of operations.
The final quarter of the year saw a net loss of $42 million, which was 35% better than the previous year. The adjusted EBITDA loss of $29 million marks an improvement of 44%. Looking ahead, the company anticipates an in-force premium of up to $791 million and gross earned premium of up to $185 million in the first quarter of 2024. The revenue is projected to be between $111 million and $113 million with an adjusted EBITDA loss of up to $43 million. For the full year of 2024, it forecasts an in-force premium between $938 million and $942 million and an adjusted EBITDA loss between $160 million and $155 million, positioning itself well for ongoing and resilient growth.
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Hello, everyone, and welcome to the Lemonade Fourth Quarter 2023 Financial Results Call, and thank you for standing by. My name is Daisy, and I'll be coordinating your call today. [Operator Instructions] And I would now like to hand the call over to your host, Yael Wissner-Levy from -- the VP of Communications from Lemonade to begin.So, Yael, please go ahead.
Good morning, and welcome to Lemonade's fourth quarter 2023 earnings call. My name is Yael Wissner-Levy and I am the VP, Communications here at Lemonade.Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, our Chief Financial Officer.A letter to shareholders covering the company's fourth quarter 2023 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 3, 2023, our Form 10-Q filed with the SEC on November 3, 2023 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 their 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 will turn the call over to Daniel for some opening remarks. Daniel?
Good morning, and thank you for joining us to discuss Lemonade's Q4 results and to offer some perspective both on the outgoing year and on the year ahead.As you will have seen, Q4 was an excellent quarter, capping off a year of dramatic progress for Lemonade. Our top line grew 20% to $747 million of in-force premium, while our quarterly loss ratio came in at 77%, down 12 points from Q4 '22 and down 19 points from Q4 '21.Since Q4 of last year, our adjusted gross profit has nearly doubled, while our adjusted EBITDA loss nearly halved. As I say, dramatic progress.Moving from the income statement to the cash flow statement, it's noteworthy that we're ending this quarter with a total of $945 million in cash, cash equivalents and investments. That is the very same level we reported at the end of the last quarter, and it is up since our report of 2 quarters ago.While we expect this level to dip somewhat in 2024, we expect our total cash and investments to turn positive again in the first half of 2025, and we expect it to dip by less than 10% before reaching that point.Underpinning our results was a steady stream of improvements in our ability to match rate to risk, as well as in our operational efficiencies, all these mediated by a singular integrated system that improves and is improved by all our customer interactions.In many ways, therefore, 2023 was the year when the plan came together, the year when thesis of Lemonade transitioned from being a hypothesis to being more evidence-based.This isn't a mission accomplished moment, not by a long shot, but the progress in 2023 was tangible and material, and it increases our confidence that we're on track not only to turn cash flow positive next year with plenty of cash in the bank, but to build a large, enduring and profitable business thereafter. We hope our latest results boost your confidence alongside our own.2023's results are all the more noteworthy for the turbulent times in which they materialized. The last couple of years were some of the toughest for both established insurance companies and for up and coming tech companies. As dual citizens, we were buffeted by the storms that afflicted both insurance and technology.As we reflect back on this tumultuous period, we find resonance in the famous words of Nietzsche or Kelly Clarkson, if you prefer, that "What doesn't kill you, makes you stronger." We are quite sure that we are emerging from these shocks the better for having endured them.We are, we believe, leaner and more focused, stronger and more resilient with better unit economics and with fewer competitors than would have been the case had the turbulence never come. As the African proverb says, "Smooth seas never made a skillful sailor."As we look forward to 2024, there's reason for optimism that the worst of these storms may be behind us. Inflation appears to be receding, cost of capital may have peaked and rates are finally catching up with risks.If the headwinds indeed become tailwinds in 2024, that will, of course, be good news. That said, piloting with tailwinds comes with its own set of challenges and to explore these, let me hand over to Shai. Shai?
Thank you, Daniel. In 2023, we intentionally slowed our growth to minimize sales of product in areas where we're underpriced. At nearly 20% annual growth, we outpaced most of the industry, yet for us it was a slowdown compared to previous years and if things goes to plan, to coming years as well. And as more rate updates come into effect, we'll have more products in more areas where we can accelerate our growth.To be clear though, our 77% loss ratio this quarter should not be taken as an indication that our work on rate adequacy is done. We still await significant further rate approvals. And so for much of 2024, we will continue to constrain sales of 2 products with the highest average premium in the largest markets, home and car. In other words, we will continue to throttle growth this year too.That said, the tide has definitely turned. With every passing month, we're seeing more and more opportunities for profitable growth across our portfolio, including home and car, and we will be relaxing these growth constraints accordingly.This is great news, and it's the reason we're projecting to begin to accelerate growth this year. Growth may be a virtue in its own right, but for us, it's a necessity. Our business is still subscale and so we need to continue growing.And so in 2024, we plan to accelerate our growth rate. But beyond being a welcome sign of improving conditions, accelerated growth also presents challenges we want you to be aware of.Specifically, in order to accelerate growth, we are planning to significantly increase our marketing spend in 2024 versus last year, doubling it actually. We believe that will generate about a 3x return on the additional $55 million planned for marketing this year, but it's important to remember that this ROI won't materialize within the same accounting period.In other words, we'll be spending dollars that will positively boost our EBITDA over time, but will be a drag on it in 2024. In the past, that drag translated into a cash flow gap, but our synthetic agent still has largely taken care of that. Thanks to synthetic agents, most gross dollars spent in 2024 won't impact our cash during the year.Nevertheless, as GAAP accounting doesn't always follow the cash, our increased growth spend will be registered as a $55 million expense in 2024's EBITDA. All else being equal, that could have translated into year-over-year EBITDA deterioration, but we believe that not all else will be equal.We expect our loss ratio to continue to improve in 2024 and that our new generative AI stack as well as many other technology innovations currently in the pipeline would allow us to grow faster with minimal impact to our OpEx.We believe these improvements will more than offset our growing marketing expenses during the year. Indeed, growing the top line while improving the bottom line is a tricky balancing act, but we plan to pull it off in 2024.To give a better sense of what 2024 might look like and to share more specifics about the outgoing quarter and year, let me hand it over to Tim. Tim?
Great. Thanks, Shai. I'll review highlights of our Q4 and full year results and provide our expectations for the first quarter and the full year 2024 for the first time, and then we'll take some questions.It was a strong quarter across the board with excellent loss ratio improvement, coupled with rigorous cost control, resulting in strong results exceeding our own expectations.Zooming out, as noted in our shareholder letter, our actual IFP results in 2023 came in nearly $50 million better than our initial expectations shared a year ago, while EBITDA came in nearly $70 million better.Zooming back in, in-force premium IFP grew 20% in Q4 as compared to the prior year to $747 million. Customer count increased by 12% to just over $2 million as compared to the prior year. Premium per customer increased 7% versus the prior year to $369, driven in roughly equal parts by rate increases as well as mix shift to higher priced products.Annual dollar retention or ADR was 87%, up 1 percentage point since this time last year. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases and churn.Gross earned premium in Q4 increased 20% as compared to the prior year to $181 million, in line with IFP growth. Revenue in Q4 increased 31% from the prior year to $116 million. The growth in revenue is driven by the increase in gross earned premium, a slightly lower rate of ceded premium under our quota share reinsurance structure and a near doubling of investment income.Our gross loss ratio was 77% for Q4 as compared to 89% in Q4 2022 and 83% in Q3, 2023. The impact of cats in the fourth quarter was roughly 5 percentage points within the gross loss ratio and nearly all driven by winter storm activity. Absent this total cat impact, the underlying gross loss ratio ex-cat was in line with the prior quarter and roughly 6 percentage points better than the prior year.Prior period development was roughly 1.5 percentage points favorable in the quarter. Notably, prior period development from cats was about 1.5% unfavorable, while non-cat prior period development was about 3% favorable.Given the notable ups and downs of the quarterly loss ratio, it's all the more useful to also consider the rolling 4 quarter view of loss ratio or TTM loss ratio that we included in our shareholder letter to get a feel for the longer term positive trend for loss ratio that we're experiencing.From a product perspective, loss ratios improved across the business with the loss ratios of each of the 4 products we underwrite renters, home, car and pet, all improving between 9 and 18 percentage points year-over-year.Gross profit and adjusted gross profit have shown notable improvement over time, driven by continued premium growth, coupled with loss ratio and investment income improvements. Q4 gross profit increased by 165% to $34 million versus the prior year, while adjusted gross profit increased by 97% over the same period.Zooming out a bit, quarterly gross profit has more than quadrupled in just 2 years, while quarterly adjusted gross profit has nearly tripled. If loss ratio improvement continues as expected, this recent trend of adjusted gross profit growing faster than our top line may well continue for some time.Operating expenses, excluding loss and loss adjustment expense, decreased 5% to $90 million in Q4 as compared to the prior year. Other insurance expense grew 18% in Q4 versus the prior year, a bit less than the growth of earned premium and is primarily in support of our increased investment in rate filing capacity.If I had to summarize the financial performance year-on-year, I would highlight this. Top line up 20%, adjusted gross profit up 97%, operating expenses down 5% and EBITDA loss 44% improved, an impressive combination.We saw a consistent improvement across the other 3 expense lines, sales and marketing, technology development and G&A, all coming in lower than the prior year in absolute terms during a year of notable growth.Total sales and marketing expense declined by $3 million or 10%, primarily due to lower personnel costs related to efficiency gains. Total gross spend in the quarter was $13 million in line with the prior year quarter.In July, we began to use our synthetic agents program, which financed about 50% of our Q3 and Q4 growth spend, and we've upped that ratio to 80% since January 1, 2024.As a reminder, you'll see 100% of our growth spend flow through the P&L as always, while the impact of the new growth mechanism is visible on the cash flow statement and balance sheet, and the net total impact is roughly $15 million at year-end 2023.Staying with the synthetic agents program a moment longer, we're pleased to share that we've extended our agreement with General Catalyst by another year and added $140 million to this program. The agreement that was due to renew at the end of this year is now set to come up for renewal only at the end of 2025.Back to costs, technology development expense decreased 10% to $20 million due primarily to a reduction in personnel related costs, while G&A expense decreased 7% as compared to the prior year to $29 million. Personnel expense and headcount control continued to be a high priority. Total headcount is down about 8% as compared to the prior year at 1,258, while the top line IFP, as noted, grew about 20%.Net loss was $42 million in Q4 or a loss of about $0.61 per share, about 35% better as compared to the $64 million loss or $0.93 per share we reported in the Q4 of 2022. Our adjusted EBITDA loss was $29 million in Q4 as compared to the $52 million adjusted EBITDA loss in the Q4 of 2022, about 44% better.Our total cash, cash equivalents and investments ended the quarter at approximately $945 million, reflecting primarily a use of cash for operations of $119 million since year-end 2022. While total cash, equivalents and investments is down only $92 million in that same period. And as Daniel noted, total cash and investments actually increased by about $3 million since June 30, 2023.Now with these goals and metrics in mind, I'll outline our specific financial expectations for the Q1 and for the full year of 2024. Please note, our approach to guidance this year is measured as always, but it's realistic and it's in line with our own internal expectations.While we certainly delivered excellent results in 2023, particularly when compared to our original guidance for the year, we don't currently expect that same magnitude of overachievement in 2024.While there is always the aspiration for outperformance, especially this early in the year, we would urge listeners caution about assuming that our guidance is overly conservative. It is not.For the first quarter of 2024, we expect in-force premium at March 31 between $789 million and $791 million; Gross earned premium of between $183 million and $185 million; Revenue between $111 million and $113 million; and adjusted EBITDA loss of between $43 million and $41 million.We also expect stock-based compensation expense of approximately $15 million in the quarter, capital expenditures of approximately $2 million in the quarter and a weighted average share count of approximately 70 million shares.Now for the full year of 2024, we expect in-force premium at December 31 of between $938 million and $942 million, gross earned premium between $815 million and $820 million revenue between $505 million and $510 million; and an adjusted EBITDA loss between $160 million and $155 million.Stock-based compensation expense for the full year, we estimate to be approximately $60 million, capital expenditures approximately $10 million and a weighted average share count for the full year of approximately 71 million shares.And finally, I note that we've published a handy deep dive guide to a couple more detailed accounting topics in conjunction with our shareholder letter. You'll find the supplementary information on our Investor Relations website as well. It gives some additional detail on our cash flow, our synthetic agents accounting program and reinsurance. It's worth a read.And with that, I would like to hand things back over to Daniel to answer some questions from our retail investors. Daniel?
Thanks, Tim. We'll now turn to questions submitted and upvoted by our community of engaged and extremely thoughtful shareholders.And the first one comes from Paper Bag, who asks, With car loss ratios improving, how aggressively will Lemonade expand this product? What percentage of IFP is car now? And what might it be in a year?So at year-end 2023, car represents about 15% of our total IFP and we expect it to roughly maintain that share in 2024 and begin to expand significantly in 2025 and beyond. Put differently, car is going from losing share in 2023 to really carrying its own weight and maintaining its share in 2024, to growing its share thereafter.In terms of how aggressively we plan to expand, let me say the following. The first is that you're right, of course, as the loss ratio of car comes down to our target range, we will be seeing opportunities to invest much more aggressively in growing the book. That process has begun. It will step up in 2024, but it won't really hit its stride until 2025.But as I say, it has begun. In fact, in 2023, car actually grew significantly in places where profitability was attractive. Now that wasn't true for our largest markets like California and New Jersey, but outside of those states our book is relatively small, but it grew at 50%, 5-0 percent growth rate in 2023. So where opportunities present, we can grow pretty aggressively.And this foray into growing car has given us data, experience, confidence and time to adjust rates in those other places. So we will be increasing growth investments in 2024. And we're expecting car to account for 10% to 15% of newly written premiums this year. That's still not the breakout we expect car to deliver in due course when the engine is finely tuned and revved up, but we're definitely gearing up towards that.There are this year several exciting technology advancements that should help with cross-selling and with even further refinement of our telemetry and the data science behind that. Those will be released in 2024 and will really enable us to accelerate car growth further in 2025. Given that that's the case, we'd currently project that the share of newly written car premiums next year will probably be double what it is this year. I hope that address your question.The next one comes from [ Darren ], [ Darren S. ], who asked 2 questions that are kind of related, so I'm going to bundle them together.Firstly, he says in Q1 2023, Lemonade had mentioned that generative AI was meaningfully improving cost structure or was expected to over the course of 18 months. And he wants to know now 12 months or so into those 18 months, are there any financial benefits that have been realized, any evidence for how generative AI can help.And he also asked if we could elaborate on how much IFP and customers the current headcount could support, particularly if we had a $10 billion or when we have $10 billion of IFP, how much larger would our employee base needs to be?So Darren, those are really great questions. It's exactly the kinds of things that preoccupy us and that we focus on. Let me start by giving you kind of the rearview mirror what's been achieved so far.Because we've delivered significant operating leverage in recent years, so over the last few years, headcount has grown by 8% compounded annual growth, while IFP has grown by 40% CAGR during the same time. So you can see those dramatic divergence between an 8% headcount expense or payroll expense and 40% top line.I think that speaks volumes about the financial benefits that we've realized and continue to realize. In fact, our payroll expense was down in 2023 year-on-year even though our business grew up to 20%. Again, I think very strong indicators that you're looking for.Giving a little bit more context and color, when we think about the scalability of our employee base, we tend to think about it as split. Roughly half our employees are what we think of as a variable cost. So those are the customer facing teams, the customer support, the claims that you would typically expect to grow more or less in line with customer growth, twice as many customers will usually mean twice as many customer support queries and twice as many claims. So that would naturally, all else being equal, grow more or less in a linear fashion. And then there's everything else, the engineering, the finance, the legal, etcetera, where you wouldn't have that expectation.The really outstanding historical operating leverage that I've mentioned just now was really delivered both by an ever improving -- pretty dramatic improvement in our automation rate, placing very significant downward pressure on the growth of variable headcount, plus a lot of smart expense management and targeted automation initiatives that keep the rest of the organization more or less in a stable size. Marketing and other teams that are using generative AI, coding, teams that are using generative AI, et cetera.Just few months ago, we referenced the fact that some of our brand new generative AI tools were handling 7% of incoming customer service emails. To be clear, that's distinct from the roughly 1/3 of in-app interactions that Maya handles unaided. Emails are much harder. They usually come without contacts. You don't necessarily know which customer you're talking to, which policies they have, unlike the app where all the context is already there. So that's been a harder nut to crack.And anyways, I'm happy to report that just one quarter later that 7% has pretty much tripled, it's roughly 20% as of now. So we're seeing a very notable acceleration. You can see the trajectory that's on. And we think of what we've done so far is really just the early innings, the tip of the iceberg or whatever other metaphor you want.We see no reason why we can't ultimately automate the overwhelming majority of our customer interactions and to deliver them as we do today, with at least the level of customer satisfaction as we generate by human interaction. So we're seeing very similar levels of net promoter score and CSAT and other indicators.Shifting to look forward to kind of how far can this go. Well, in terms of our fixed teams, if you like, what I was referring to as engineering and finance and marketing and others, we do think that that is massively scalable. We think we've got very strong teams well-staffed and conceptually we could double and triple and perhaps even 10x our business without seeing any significant growth in those teams.As we choose to launch new markets and new products, we may have to introduce a bit more headcount. But I think even then what I said is broadly true. We are pretty much staffed to the levels that we see ourselves needing in those departments for the foreseeable future.In terms of the variable, we do expect to have to grow those teams as we grow. But given the massive automation drive, the generative AI and other tools, we do think that this divergence will continue. Our top line will grow significantly faster and that the growth of these teams will be a fraction of the book's growth rate and that's really where the scalability and the financial results come from.So in summary, as all of these kind of anecdotes that I said or statistics or historical successes that we've had, all of those are indicators of the operating leverage, much it's been a focus and will continue to be and how the sustained scalability of our team is a key driver for how we're focusing on our business. And ultimately, it is that that will deliver the EBITDA breakeven point that we've been speaking about in 2026 as we continue to grow our denominator, holding the numerator as close to steady as possible is really the key there and we think we're doing exactly that.Okay. The next question comes from both Darren and Paper Bag, pretty much the same question they asked about, how things are going with Chewy.So talking about our own results in some detail is something we're very comfortable doing. We are far more cautious about disclosing partners' results. They have not made these numbers public. So we're also going to be circumspect. I will say that we are thrilled by a nationwide launch and by the collaboration between the companies. It's very much expanded our reach. We remain very bullish about our ability to continue to leverage that platform.And I will also say that the results have so far been broadly aligned with the modeling that we and our partner Chewy has done. So without getting too specific, this is pretty much in line broad strokes with what we had planned. So beyond the quantity, I also shared that the quality of the book has been very good, really on par with our own book in terms of premiums, in terms of retention, loss rate, bundle rates, et cetera. So all of this reinforces our aspirations for this partnership going forward.Finally, Paper Bag, we've got a duopoly of questions today. And so Paper Bag asks the following. In Q2 2022, 21% of non-car sales were cross-sells or up-sells. In Illinois with car, it reached 36%. What's the current cross-sell, up-sell rate with car and without?Also at Investor Day 3.7% of U.S. customers were multiline, what's the current percentage?Okay. Great focused questions. Let me try and address them. So I'm happy to report that all the metrics that you referenced are up since the numbers that you gave in your questions have all improved. Over the course of 2023, in the past year, about 25% of our non-car sales were cross sales. So in all of our other products combined about a 1/4 of the sales came from existing customers.If I include car, then we get closer to 30% on a nationwide basis, even though car is not available in all that many states. On a nationwide basis we're at 30%. All told, today about 4.5% of our customers have more than one product, and that's up about 20% or by a 1/5 from the number that you quoted from my Investor Day.It's important to note that in Illinois, we have continued to see good progress. So we talk about Illinois because it's the first state where all of our products were available. So it's a great indicator of where this might go on a nationwide basis. At any rate, Illinois has more than 9% of customers. Customers have been with us a couple of years, 2 years or more, not more than 9%, almost 10% of them have more than one product. So that's twice the average that we have elsewhere.So it will take time for us to grow multiline customer across the entire book. But that might be an indicator of where we might go over the course of the next couple of years in places where we have all the products. We do need to allow the book to mature. We do need to continue to expand product availability nationwide, but that gives you some indication.In the near term this year, our focus in growth will be more on pet and renters than on car and homeowners. I mentioned cars percentages in an earlier question. So we'll see the customer growth come mainly from pet and renters rather than from the other products, and that won't be a huge boon to the numbers they ask about in terms of multi-line customers.But as car gets to profitability in different states and as we lean into that, as we've indicated probably later this year and into next year, then we would expect that to also have a pretty significant effect on the multiline customer numbers in 2025 and beyond.And with that, I'll hand the call back to the operator to take some questions from our friends on Wall Street.
[Operator Instructions] Our first question today is from Jason Helfstein from Oppenheimer.
2 questions. Just the first, you talked in the release about using a AI, with third-party agents. Is this going to be something that, like, will be financially material in '24, or it's really more of a test and then it becomes more material in '25 beyond?And the second question, you talked about shifting away, the mix shifted away from home. How much is that is due to learnings from the newest LTV model as opposed to just it's taking longer to get rate increases in certain states?
Hey, Jason. I'm not exactly sure what you meant by that first question. We didn't really talk about AI third-party agents. What we did say -- and I'm not sure if this is what you're asking about. What we said that within home, which touches on your second question, we will be testing selling third-party policies in states where we don't currently offer home. Is that what you were asking about?
Yes. So, yes, that's what I was referring to. Sorry.
Okay. So can you just refine what that first question was regarding that?
Yes. So just is that something that could move the needle in '24? Or is that, like, more of a test and if it works, we'll see the impact in '25 and beyond?
Correct. The latter. The latter. I mean, these things can take off and move quickly. But it is a test. It'll be rolling out just in a few states. So -- and it won't be rolling out until next quarter. So I would not expect it to have a significant impact this year. It's certainly not baked into the number that we have provided in our guidance.It's a test. It could go well. It's the kind of thing that we've done episodically all along. So, earthquake insurance has worked this way. Our term life insurance has worked this way. And in areas where we haven't yet got rate adequacy or other things we're going to test having these alternatives, that we can offer to our customers in order to capture a lot of the pent up demand that we are seeing.And that ties into your second question about rate adequacy from home. So we do find, or have found that it's taken quite a long time to get to rate adequacy in many states. This is not just about LTV 9 coming through that has allowed us to refine, as it does with every generation, to understand with ever greater nuance exactly where and which customers and lifetime values.But frankly, the issues with homeowners insurance in states like California have been so broad based industry wide, as we referenced the largest insurance companies in the nation pulling out of the state. So there'd been much larger forces at play secular shifts, which we've been responding to. And our tools of precision and LTV are doing a fabulous job. But if regulators aren't approving rates that are reflective of those AI insights, then we're not going to sell insurance in those markets until they do.And we're just seeing a time lag. So I think we have a very good understanding of which customers we want, how to select for them, how to price for them. We're waiting for those rates to come online so that we can do exactly that.
[Operator Instructions] Our next question is from Yaron Kinar from Jefferies.
My first question, Tim, it was helpful to hear the update on the loss ratio progression by line. Could you maybe be a little more specific there? I think you gave a range of 9 to 18 point improvement across each of the lines. But can you maybe give us a little more color on to which lines are improving by how much? And if possible, even without catastrophes?
So we haven't been disclosing exact loss ratios every quarter, but wanted to give some color commentary. Significant improvement across all the lines. I would say that car showed the most significant improvement. So it's at the upper end of that range, and obviously, no material cat impact there, typically, so not affecting the number.At the lower end of the range, renter, home, and pet. And home tends to be, the one where the cat impact is most significant. So good progress across the board, 9% to 18%. We'll continue to give that sort of color commentary where it's helpful. But it's not something we disclose every specific numbers every single quarter.
And then, I just want to make sure I'm thinking about, this strategically correctly, the homeowners business. So maybe a little less of an appetite to grow there right now while rates are not quite adequate in all states, but you are still committed to growing in home over time on your own balance sheet in the U.S. Is that correct?
That is. Yes. We are seeing significant progress in our homeowners business. As Tim indicated, rate adequacy, as you know, has been a challenge for the industry. So in the meantime, there will -- I say in the meantime, but there will always be certain business that we don't want to underwrite ourselves. We'll have our own underwriting appetite.We do have our own underwriting appetite. And even in places where we are very profitable, particularly in those, there's always a risk of getting over index on those regions. And therefore, having an avenue through which when we reach our appetite limit, so we can continue to satisfy customer needs, either by writing on our own paper or elsewhere, is something that just makes a lot of solid sense. And, as you know, is widely done throughout the industry. So this is not a substitute for us doing our own. It is an augmentation that we're testing at this point.
Got it. And then one final one, if I may. On AI, so we've seen some press recently for -- about states that they may be scrutinizing the use of AI and insurance a bit more carefully, both on the clean side and then the underwriting side, even the customer acquisition side.And just looking at trying to avoid any discriminatory practices that could arise there or seemingly, discriminatory practices, can you maybe talk about what you're seeing there? How you avoid, maybe these pitfalls and how much buying you're getting from the regulators?
Yes, with pleasure. It's a great question. And we are seeing some of that in in the U.S. Europe is perhaps a step ahead in this regard in passing AI related regulation. And I think it's fair to say that we've been pushing and encouraging and working with the regulators on this from the get go. We have been -- we've had for some years now, an AI fairness officer, an AI ethicist. We have our data science teams trained on these matters. We've got fairly strict protocols.And the old adage about great power, requiring great responsibility, I think, holds true. And if we are, as we claim to be at the cutting edge of bringing in AI to insurance, we also have to be thoughtful about all of those risks that come with it as well. We're quite sure that when it's applied responsibly, the benefits dramatically outweigh the risks, but the risks are not to be ignored.So, yes, we do work with regulators on these things. We feel quite comfortable that we are not only within regulation, but in large measure, setting the standard for how this can be done responsibly, how this can be tested on a nationwide basis, on a per model basis, on a per customer basis. So, yes, I think we're feeling pretty comfortable with that and continue to monitor this space.We recently created it an InsurTech Coalition that is working with regulators to monitor, set the tone and help regulators understand these issues. So, yes, an area of significant focus.
This is all the time we have for questions today. So that will conclude today's call. Thank you everyone for joining. You may now disconnect your lines, and have a lovely day.