Lemonade (LMND) Q2 2026 earnings call transcript

Good morning and welcome to Lemonade 2nd Quarter 2026 earnings call. Joining us in our call today, we have Daniel Schreiber, CEO and co-founder, Shai Winninger, President and Co-Founder, Tim Bixby, Chief Financial Officer, and Nick Stead, SVP Finance. A letter to shareholders tapering the company's 2nd Quarter 2026 financial results is available on our investor relations website at lemonade. com slash investor.

I would like to remind you that management some marks made on this talk 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 scored-looking statements as a result of various important factors, including those discussed in the risk-factors section of our most recent form, 10k, filed with SEC and our more recent 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-GAP financial measures on today's call, including adjusted EBITDA, adjusted free cash flow, and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Our conciliations of our non-GAP financial measures to the most directly comparable GAP financial measures are included in our letter to shareholders.

Our letter to shareholders also includes information about our key performance indicators, including number of customers, and force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio, ex-cat, trailing 12-month loss ratio, 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.

Good morning. I'm happy to report on another excellent quarter marked by accelerating growth, strong underwriting performance, and continued progress towards profitability. Inforce premium reached $1.43 billion, growing about 32.5% year over year, and extending our streak of accelerating growth to 11 consecutive quarters. Revenue grew even faster, increasing 79% to $294 million, and gross profit increased 76% year over year to a record $113 million.

As a result, adjusted EBITDA loss improved 54% to $19 million, and we remain on track to deliver our first positive adjusted EBITDA quarter in Q4 this year, followed by a positive adjusted EBITDA full year 2027. Against that backdrop, we remain confident in our outlook and our reiterating our guidance across IFP and EBITDA while raising our guidance for both gross and premium and revenue.

During the quarter, we also completed our annual reinsurance renewal, as well as the extension of our synthetic agents program with important upgrades to each. As it relates to reinsurance, the renewed program modestly increases the share of premiums that we retain while meaningfully strengthening catastrophe protection, including named storm coverage that was largely absent under the expiring structure. The agreement related to our synthetic agents extension provides a quarter of a billion dollars in growth financing at roughly 9.8% cost, and applies to growth spend in 27 and 28. We have a lot of improvement in our cost of capital materially lowering expected interest expense on a go-forward basis.

With the financing of our growth investment improving, let me turn to that spend and its efficiency. Over the past several years, we've substantially increased our growth investments while holding the LTV to CAD ratio stable at roughly 3X, no mean feat. Some of you have noted that this growth spent outpaced the corresponding growth in in-force premium. The concern, as I understand it, is that this gap signals declining efficiency, that each incremental growth dollar is buying less premium than once it did.

It doesn't, and I'd like to walk you through why. With our direct-to-consumer distribution and predictive LTV models allocating that spend, we ratchet spending up and down and shifted from one product to geography to another in real time in pursuit of those sterling 3X returns. In 2023, as inflationary pressures shrank the opportunities for profitable spend, those controls naturally reduced our growth investments to about $55 million.

We implemented rate changes to counter inflation, and as those came online, we added about $15 million of incremental growth spend each year. Now, a similar dollar addition to a growing base produces a lower growth rate, so spend growth decelerates by construction.

On the premium side, the dynamic pushes the other way. Growth spent as a flow, it's expensed and reset each year. The premium it buys is a stock, cohorts stay on the books, layered on top of every cohort before them. So while spend growth decelerates, the premiums those dollars created keeps compounding, boosted further by accelerating cross-sell, the bottom line is this. The observation is accurate, but it doesn't point to any underlying degradation in our efficiency.

It's a mathematical artifact of our spending slowdown in response to inflation and our subsequent catch-up spending. Beginning in 2027 and beyond, we expect IFB growth to outpace spend growth, a key driver of operating leverage and profitability.

And before I hand over we're done this morning's other announcement. At year end, after more than nine years as our CFO, Tim Bixby will pass that button on to Nick's dead, our senior vice president of finance, and Tim will step up to lemonade's board of directors. This transition was years in the making, instigated and paced by Tim himself, and today almost all of our financial functions already report to Nick.

So expect this handover to look like everything else Tim has engineered here. The capital raises the IPO six years of beat and raise, which is to say planned, disciplined and seamless. Congratulations to both Nick and Tim.

With that, I'll hand over to Shai who will cover a couple of key insights across the business over to you, Shai.

Thanks, Daniel. First, I wanted to update on our LAE ratio. That is the cost of handling claims. This is a key metric when looking at insurance carrier efficiency with an industry average of around 9%. In the second quarter, we delivered our best ever LAE ratio result of 5%. This improvement is a continuation of a multi-year trend made by the growing use of our lemonade OS technology, which drives AI across the claims operation.

It is notable that the gains have been broad-based with record low LAE ratios in the quarter across each of our products. Beyond boosting our profitability and pricing power, the LAE ratio is a way to compare our efficiency versus other insurance. And what these numbers show today is that our competitors spend almost twice as much as we do on handling claims, and we're not done here by enemies.

Next, I wanted to touch on our expansion efforts. In the past hundred days, we launched 14 additional state product combinations, which included both a meaningful push towards nationwide availability for renters product, as well as the launch of our autonomous car product in Colorado and Indiana.

That's made possible by continued investment in our proprietary technology platform, which reduces the effort required to launch new products and enter new markets.

We believe that nationwide availability in renters will unlock a much broader partnership opportunity with potential partners for whom that is a key requirement. On the roadmap, we expect to see more geographical expansion. Most notably, with regards to our car product. We have several state launches expected in the near term, and before the end of 2027, I believe our car product will be available to the majority of drivers in the United States.

And with that, I'll hand it off to Tim, who will cover our financial performance in a bit more detail. Tim?

Thanks, Shy. Let's start with Q2 results, which were excellent. Inforest premium grew more than 32% year-on-year to $1.43 billion, driven by customer growth of 23% and premium per customer growth of 8%. We added about 166,000 new customers in Q2, more than 12% greater than the roughly 148,000 in the prior year quarter.

Within our reported gross loss ratio of 60%, our favorable prior period development of 7% was driven primarily by our homeowners, multi-paral and car products.

Total cat impact in the quarter was 3%, excluding cat prior period development. And on a net basis, we saw five points of favorable prior period development, of which two points were related to cat. Prior year development, which we report on a net basis, was $12 million favorable in Q2 and $16 million favorable year-to-date.

Gross profit increased 76% to $113 million, while adjusted gross profit increased 74% to $114 million. For a gross margin and an adjusted gross margin of 38 and 39% respectively, these metrics use revenue as their denominator. Our adjusted gross profit as compared to gross earned premium was 34% in Q2, up 8 points from 26% in the prior year.

Revenue grew 79% to $294 million, while our adjusted EBITDA loss improved to a loss of just $19 million. Notably, revenue grew nearly 50% points faster than IFP, due to dynamics related to our sustained trend of increased premium retention, at reinsurance renewals in recent years.

Importantly, adjusted free cash flow was positive for the fifth consecutive quarter at $19 million, and has been positive eight of the last nine quarters, while operating cash flow was negative $3 million, following a common seasonal pattern.

We ended the quarter with roughly $1.2 billion in cash and investments, of which about $330 million is required to be held as regulatory surplus.

Annual dollar retention, or ADR, remained stable sequentially at 85%, continuing to reflect the impact of our prior clean the book actions within our homeowners product line. And as a reminder, ADR is measured relative to the prior year's IFP, so while those portfolio actions are now largely behind us, they will continue to impact the reported ADR metric for the next couple of quarters before rolling out of the comparison period.

Operating expenses, excluding loss and loss adjustment expense increased by $53 million, or 41% to $182 million in Q2 as compared to the prior year.

And now I'll hand it off to Nick, who will walk us down the P&L and break down those expense lines a bit. Nick?

Thanks, Tim. Let's do that. Other insurance expense increased year over year by $5 million, or 25% in Q2, as compared to a 32% growth rate of gross earned premium. This includes certain expenses that are variable in nature, and so typically grows at rates not materially different to that of the top line. Total sales and marketing expense increased by $18 million or 30%, primarily due to increased growth spend as compared to the prior year.

In Q2, growth spend was $64 million, up 30% or $15 million as compared to the prior year. Importantly, as we continued to ramp growth spend, marketing efficiency levels remained stable and strong in the second quarter, with an LTV to CAC ratio above three times, in line with prior year.

Technology development expense was up by $8 million or 34% year on year to $30 million. The growth was driven in roughly equal parts by the SBC impact of recent equity awards to our executives, which were not reflected in the prior year quarter, growth in personnel-related expense, and higher software costs supporting our expanding AI capabilities.

GNA expense increased 85% as compared to the prior year to $48 million. The year on year increase in GNA was driven primarily by a one-time tax refund benefit in the prior year period, the SBC impact of recent multi-year executive equity awards in the current period, and growth in interest expense.

Excluding those items, the year-over-year growth rate of GNA expense was 2%. Headcount increased slightly by 65 or about 5% year-over-year to 1,339 in Q2. The increase is attributable to net hiring in our product and engineering teams, and we expect that most of the year's net hiring activity is behind us.

Net loss was $43 million in Q2 or $0.56 per share, as compared to a net loss of $44 million or $0.60 per share in the prior year. Excluding the one-time benefit related to the tax refund I had mentioned from the prior year, the current period net loss result represents a 22% year-over-year improvement.

Adjusted EBITDA loss was $19 million in Q2, dramatically improved, as compared to a $41 million result in the prior year. Our detailed guidance for Q3 in the updated full year of 2026 is included in our shareholder letter and represents 33% Q3 and full year IFP growth, roughly 69% Q3 revenue growth and 65% full year revenue growth, and unchanged a positive full quarter of adjusted EBITDA in the fourth quarter.

Based on our third quarter and full year guidance, implied fourth quarter adjusted EBITDA is approximately $8 million. With that, I would like to pass it over to Shai to answer some questions from our retail investors.

Thanks, Nick. We now turn to our shareholders' questions. We received the question about our IFP growth rate acceleration streak, when it might end, and what factors could extend? 11 consecutive quarters of IFP growth rate acceleration is a remarkable run by any measure, but especially for us as it's roughly a quarter of our life as a company. What is most notable about that streak, though, is that it has never been at the expense of profitability.

LTV to cash ratios remain healthy and strong at roughly 3X, and adjusted EBITDA break even is precisely on track as compared to prior expectations. Our third quarter and full year guide contemplates the next point of IFP growth up to 33%, but we haven't given precise expectations for 2027 just yet.

We have many growth drivers, but perhaps it's helpful to think through the lens of LTV to cash. When unit economics improve, we're able to invest more aggressively in growth. We see opportunities on both sides of the equation. We seek to increase LTV through sustained momentum in cross-sales, which can drive gains in retention, and we seek to improve cash efficiency through a more granular AI-driven pricing, which can provide a tailwind to conversion rates.

We continue to focus on these key drivers that we believe can drive sustainable, profitable growth. We received the question around our new car insurance business, specifically the share of customers acquired via marketing versus cross-setting.

We continue to deliver excellent growth in our car business, 60% year over year in the second quarter. We are seeing strength across both of these channels. In the quarter, we saw both the highest ever period of new business to car and the highest ever period of car sales to existing laminate customers. In recent periods, car sales typically represent between 40 to 50% of new to laminate car sales.

We also received an interesting question around our adapting to new AI models as they come out. One of our core advantages is that we're model agnostic. We're not tied to any one frontier model provider. We continuously benchmarked the latest models against one another to identify the best combination of capability and cost for each specific use case. When a new model is released, our teams typically begin evaluating it immediately.

Where we see performance advantage, moving from evaluation to implementation can happen in a matter of hours. The benefit isn't usually one dramatic step change. It's the cumulative effect of incremental improvements. To name a few, those improvements increase automation rates. They reduce human intervention, improve customer experience and lower cost to serve. I believe our systems ability to run multiple models at the same time, while constantly evaluating them in real life, is an advantage that helps drive the improvements in efficiency and operating leverage you've seen over the past several years.

With that, I'll pass it over to the moderator and we will take some questions from the street.

Jason, hi, good to hear from you. These are exciting times. There's a lot to be excited about. If I had to pick one, I think I would say car where we're just seeing kind of all the pistons going or the, all the quips around car kind of write themselves, but we really are seeing a lot of acceleration, a lot of improvement.

There are a lot of changes and implementation and launches being planned and worked on. And we'll elaborate on those during our invest today, but there's a lot of reason for ongoing optimism in the sense of in this. Huge market where we are really just absolutely tiny and have so much headroom. We have advantages that we can sustain and can compound.

And vaguely related to that, I'd add a second one, which is a little bit more vague, but. There is a strong sense in the team, and I think it's reflected in our results quarter now, which is that the winds that are back. And the machine is doing what it's meant to be doing these 10 years of hard work at building the technology that we've built.

Is throwing off results, throwing off growth, throwing off gross profit. Compounding on a regular basis, all the data infrastructures, the AI infrastructures, some of which I mentioned a couple of minutes ago. The brand work that we've built, the team that we've built that this machine is really functioning very, very well. And it's just a pleasure to from my vantage point to sit back to some extent and watch it compound and keep doing what it's doing 11 quarters in a row of acceleration. And we think there's a lot more where that came from going forward.

I'll touch on the gross margin question briefly and then see if Tim or Nick want to add more, but my comment is less by way of a direct answer and more by way of a kind of challenging the premise or kind of a little. The metric that we focus on and we do encourage investors to focus on as well as gross profit.

Because there will be times when we can increase our profitability through shrinking gross margins and times when we cannot. And we're just talking about car and I've spoken about this repeatedly on prior calls, which is that you see some incredible elasticity of demand and core products like car. And our ability to actually shrink gross margins over time, that is to say to price more aggressively than our competitors because we have a structural advantage that manifests in an entirely different cost structure. Open parentheses have a look at what we just announced in terms of LAE spending something in the ballpark of half as much of our customers premiums in order to give a better experience in claims.

Kind of close parentheses, but that kind of structural advantage allows us to produce a pricing advantage that will allow us to continue to grow and take markets. It will not manifest necessarily as an advantage play and gross margin, but it will manifest in growing gross profit, which is the more important of the two metrics if you follow my line of thinking. And with that, let me just see if Tim or Nick want to come in as well.

Yeah, Daniel has it exactly right. And I think from a, if you kind of translate that to a modeling perspective, the growth drivers for gross profit are clearly the top line growth.

The gross loss ratio, and that is really advantaged by the loss adjustment expense improvement that you've seen. And we have a nice deep dive in the materials today and we've updated you from time to time on that and that's something we expect to continue.

In addition to that, the top line growth accelerating also is an upward pressure on that gross profit. So while we would not expect to see such dramatic loss ratio impact as used historically, something like 30 points of gross loss ratio improvement over time as expected and as planned, but result of lots of hard work over time. You'll now see the gross loss ratio move around as much more of an output than an input, but the gross profit I would expect to grow, you know, materially in line with top line growth. And even makeshift doesn't hurt us, makeshift tends to help us again with the loss ratio or the loss adjustment expense looking nice, not only in aggregate, but also if you isolate by product, we see that same dynamic.

So even as makeshift will still see that nice benefit. So I think we've given you enough breadcrumbs today and we'll continue to do so to kind of model out that that gross profit will certainly update in the next quarter and that investor day give a little more detail, but all the trends are quite quite good there.

And so I'm told that I misspoke Jason I hope I was understood nonetheless, but just talking about LAE, we are at 5% the industry is at around 9 and I was saying that. And they spend about twice as much of their customers premiums than we do of our customers premiums on the bureaucracy of handling claims and that that we tend to believe is probably indicative of a broader trend beyond claims as well. But if I misspoke.

I hope I've clarified that.

Thanks Tommy. I would expect no material change in the near term as to those relative growth rates. I think customer growth will continue to be the primary driver of IFP growth, but I also would expect. The year over year growth rates of premium per customer to gradually and modestly increase as has been the recent trend.

Hi, Tommy. No, not materially. It's much the same. Our focus is on direct to consumer. We do have an agents program as well, but that is relatively niche and the overwhelming majority of ourselves are direct to consumer. We're fine with people using their agents to do something on their behalf. We're actually overly weighted by agentic processes, basically the way the training data that Claude or or Gemini or open AI chatbots. It contain or the materials that they're trained on on materials that we're very proud of. It's the customer feedback it's the pricing that we have it's the response times that we offer our customers. So if you do what we have done multiple times, which is see how often those agentic bots or processes will recommend lemonade or will end up choosing lemonade, you'll see that we're comfortably overweighted.

So from that point of view, we feel quite comfortable with the emerging technologies and see no need to adjust our strategy.

There's an interesting analog, maybe worth mentioning. When you think about our direct consumer efforts and where that is some at times different in Europe, for example, a pretty significant amount of business goes goes or originates through price comparison websites.

And so one of the key learnings in our early time as we built and grew that business was was figuring that out. How do we bring our direct consumer advantages to a process where there's a third party in the mix? Even if just a peripherally or just at the start. And so this is not entirely new to us. Obviously, AI and gentic is a different realm, but it's something with which we have some real experience.

The ultimate goal, of course, is to get that consumer into a lemonade ceiling experience as quickly as possible, and whether that's through a price comparison website to a small agent testing area where we have some work happening.

Through AI agentic, those are all things with which we have some real experience.

Ryan, thanks. I'll just comment on the first part in the handover to Nick for the second part of your question. But yes, all of that you highlighted a few things that we're proud of and that are, I think, quite an outlier in terms of the industry. So getting to an OAE of 5% across a book, 7% in our car business, our car business is just a couple hundred million dollars inside the industry is, you know, several hundred billion dollars inside. So we're talking about something that is a pro mill of the industry and yet we are lapping the industry at large in terms of the efficiency metrics. That's something that I think is indicative of a structural difference that we've been talking about for a while and that now is manifest in the P&L really almost on every line.

So definitely those kinds of metrics and I'm glad Ryan that you're highlighting them. Those kind of metrics are exactly the things that drive our growth. We speak about on multiple occasions how we have a bunch of machine learning algorithms, essentially AI, some 50 of them that work in concert concert in order to allocate our spend.

And really what they're doing is taking all of that information and figuring out what does our cost to serve. What kind of customers are we acquiring? How long will they stay for? What claims behaviors will they have? You throw all of that into the mix and outcomes, a lifetime value of the customer. And the way we hunt for those three fold ratios of LTV to CAC is by scouring and competing campaigns, products, geographies against each other and almost an algo trading kind of structure in order to keep finding that growth. And you'll see in the comments in our letter and in our earlier comments that when inflation shrank that pool, our growth shrank down and now that we're in a much better place, that is an enabler of growth.

So the premise of your question is absolutely right. The better we get at each of those metrics, that automation, that precision at new products or new territories of obviously the more growth you can expect to see.

And Ryan, maybe I can jump in on the second piece of the question around forward expectations for expense growth. And I might take that by line item. I'll start with other insurance expense. That's the line item where we typically see less benefit from leverage. Those are certain line items that are somewhat more variable and so increase more or less in line with premium.

Sales and marketing expense typically grows in line with the pace of growth spend. And you're right to mention that that insight in the letter where we outlined that in 2027. We expect the growth rate of growth spend to continue to decline below the growth rate of IFP for the year and beyond. And so that's an increasing driver of leverage. And then for both G and A and R and tech development expense, we see more significant benefit from leverage. And so I would expect the sequential growth rates for those line items to be quite low.

I'd perhaps note the year over year growth rates of the upcoming couple of quarters may be somewhat noisy due to the impact of that recent multi-year equity award to our executives that we have mentioned. So perhaps it's helpful to model those growth rates sequentially from the Q2 baseline. Not withstanding many of those drivers. I just mentioned that these are more or less in line with the way we have been thinking about expenses and the way you can see that is in the reiteration of our adjusted EBITDA guide for the year and a positive fourth quarter.

Yeah. Happy to take that one. We are impacted by an industry wide that cost inflationary trend. And from our view, that is the primary driver of the modest increase in our pet loss ratio, both sequentially and year over year. We are actively taking rates through the system to offset that impact. I'd say not withstanding the significant rate that is being taken by both us and our competitors, the growth rate of the broader pet insurance market continues to outpace those of the other lines of business where we operate.

Yeah, that's exactly right. So we've seen a trend in the quarter that was not too dissimilar from a few prior quarters, which is both the home business and the car business primarily had some favorable development.

Somewhat different causes car growing significantly and significantly improved loss ratio over time. It's not uncommon to be somewhat more conservative and reserving as your business changes rapidly and our business in car has certainly changed.

Absolutely for the better, but also in terms of its growth rate in terms of its diversity across states and a lot of that has come together to enable us to reanalyze as prior reserves and continue to release homes a little different home. It's not so much the growth rate. We've actually just kind of edged past our clean the book efforts in home. And so we've done a couple things there. One is to really look at from a macro perspective business that today we wouldn't write and that's that's really been a year and a half or so in the making and really past that that point. That said, the remaining business was still somewhat conservatively reserved in light of new data and our current understanding of the book and that enabled us to release those reserves.

By definition, our forward expectation is today's reserves are exactly right. And we'll kind of see how the subsequent quarters play out, but those were consistent trends.

Okay, and recognizing it's early, but you had mentioned at the top of the college, the autonomous product, car products are live in a couple of states. What have you learned maybe about the frequency or severity of this product relative to the traditional auto book?

Off Lee early. And so that's not something we've put any real data out on. And so we'll kind of have to stick with what we've disclosed so far. The good news there is that the trends are positive. We've seen a nice reception from those customers who qualify for that product. And I think if you look out across the market, as we do and see the data that's released, not from lemonade, but across the market.

The frequency numbers without question are significantly or not significantly are notably lower 50% number that we've quoted is really our number data driven through the data that we've analyzed as we put that product together. But the public numbers we're seeing are that amount of savings or greater. So we're quite optimistic about where that product will have. It's a, you know, it's a multi year adoption rate and we'll see how that plays out. And that's probably as much as we can. We can say at this point.