Q4 2025 Earnings Call Transcript

Hello, everybody, and welcome to the Lemonade Q4 2025 Earnings Call. My name is Elliot, and I'll be coordinating your call today. [Operator Instructions] I'd now like to hand over to the Lemonade team. Please go ahead.

Good morning, and welcome to Lemonade's Fourth Quarter 2025 Earnings Call. Joining us on our call today, we have Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President Co-Founder; and Tim Bixby, Chief Financial Officer. The letter to shareholders covering the company's fourth quarter 2025 financial results is available on our Investor Relations website at lemonade.com/investor. I would like to remind you that management's remarks made 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 most recent Form 10-K filed with the 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-GAAP 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. Reconciliations of our 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 a number of customers, in force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio at CAT, trailing 12-month loss ratio and net loss ratio and a definition of each metric, why each of result to investors and how each to monitor and manage our business.

With that, I'll turn the call over to Daniel for some opening remarks.

Good morning, and thank you for joining us to review Lemonade's results for Q4 2025. By any measure, this was our strongest quarter ever and it capped a year of excellent financial execution and operating performance. In the fourth quarter, in force premium grew to $1.24 billion, up 31% year-over-year, and this extended our streak of accelerating growth to 9 consecutive quarters. Revenue grew even faster, up 53% reflecting both growth and improving economics across the business. Indeed, I'm pleased to share that this growth translated directly into profitability metrics.

Gross profit increased 73% in year-over-year to a record $111 million. And if I zoom out to take in a 3-year perspective, our gross profit has been compounding at an annual compounded growth rate in the triple digits. As a result, adjusted EBITDA loss narrowed to just $5 million in the quarter, placing us on the brink of breakeven, and this represented a $19 million improvement year-over-year. Indeed, we generated $37 million in positive adjusted free cash flow in the fourth quarter, capping a strong year of cash generation. 2025 was our second consecutive year where we saw our cash reserves as well.

Somewhat unusually, insurance is a business that tends to turn cash flow positive before GAAP accounting positive. The one almost inevitably follows the other. This then is as good a spot as I need to reiterate a long-standing expectation that we will be EBITDA profitable in Q4 of this year and EBITDA positive for the full year of 2027. We continue to be highly focused on growth and accelerating growth because it's a gift that keeps on giving. Faster growth, drives better data and further sharpens our segmentation and pricing capabilities.

This powers improving underwriting performance and rapid gross profit growth and we can swiftly redeploy gross profit, thus generated into profitable growth investments with compelling unit economics and so the cycle continues. It's energizing to see the flywheel continue to compound even as we scale. What's particularly encouraging is that all this progress is broad-based. Pet, car and [ Europe ] are all coming into their owner's powerful growth drivers, each combining hyper growth with improving underwriting performance.

In our shareholder letter, we highlight critical initiatives we are investing in this year to leverage the latest AI technology to further enhance our go-to-market operations, pricing and cross-selling capabilities. We believe that these initiatives can drive durable competitive advantage in pricing and unit economics that support our ability to sustain an industry-leading gross profit growth profile for years to come. One last thing I wanted to take a moment to draw your attention to our upcoming Investor Day. This event is scheduled to take place in November of this year in New York and online specifics will follow, and we certainly hope you'll be able to join us for significant updates on our vision AI capabilities and ambitious plans.

And with that, I'll hand over to Shai. Shai?

Thanks, Daniel. Key vector for us is autonomous insurance and specifically eliminate autonomous car which we announced and launched a few weeks ago, starting with Tesla. As physical objects such as vehicles increasingly shift from being controlled by humans to being operated by AI, insurance needs to evolve as well. Historically, the industry has priced auto insurance using proxies, credit scores, marital status, education and other similar features.

We always believe that telematics is a much more precise tool than this brand proxy, measuring the driving itself rather than something broadly correlated that when a car isn't driven by human, these proxies [ blue ] touch with reality altogether. Lemonade autonomous car is price based on 3 modes. When the car is parked, when it's driven by a human and when it's driven by AI. By integrating directly with the car's onboard computer, we can tell which long that car is in at any given moment.

Distinguishing between various kinds of risk and pricing each accordingly. When the car is driving itself and doing so more safely than the human, the price reflects that. Where system accounts for the vehicle software version as well as for the quality and precision of the hardware sensors and computational units. If the car becomes better and safer with software updates or hardware upgrades our pricing will automatically respond and continue to drop.

As of this moment, autonomously driven miles using Tesla's [ FSD ], [ pulp ] priced at about 50% of the equivalent human-driven miles. So we expect this to get better over time. We believe this represents a fundamental shift for the industry. As autonomous driving becomes safer and more widely adopted, prices should fall transparently and dynamically.

With that, I'll hand it off to Tim who will cover our financial performance and outlook. Tim?

Thanks, Shai. Let's start with our 2 floor scorecard. In force premium grew 31% year-on-year to $1.24 billion driven by customer growth of 23% in premium customer growth of about 7%. We added about 550,000 new customers in 2025, 35% more than the prior year within our reported gross loss ratio of 52%, our favorable prior period development of 9% was driven entirely by non-CAT prior period development primarily from our home and car products.

Prior year development, which we report on a net basis, was $11 million favorable in Q4 and about $30 million favorable for the full year. Gross profit increased 73% to $111 million, while adjusted gross profit increased 69% to $112 million. For a gross margin of 48% and an adjusted gross margin of about 49%. These metrics use revenue as the denominator.

As a reminder, adjusted gross profit as compared to gross [ funding ] premium was 39% in Q4, up 10 points from 29% in the prior year. Revenue grew 53% to $228 million, while our adjusted EBITDA loss improved to a loss of just $5 million. Notably, revenue grew more than 20 percentage points faster than IFP, a dynamic we expect to continue. Importantly, adjusted free cash flow was positive for the third consecutive quarter, at $37 million and has been positive 6 of the last 7 quarters, while operating cash flow was $21 million.

We ended the quarter with roughly $1.1 billion in cash investments of which about $250 million is required to be held as regulatory surplus. Annual dollar retention or ADR remained stable as we continued our clean the book efforts in our home business at 85%, flat versus the prior quarter. Operating expenses, excluding loss and loss adjustment expense, increased by $30 million or 24% to $154 million in Q4 as compared to the prior year. Let's break those expense lines down a bit.

Our other insurance expense grew by just $1 million or 6% in Q4 versus the prior year as compared with 31% growth rate of our top line IFP. Total sales and marketing expense increased by $17 million or 35% due primarily to increased growth spend versus the prior year. In Q4, gross spend was $53 million, up 48% as compared to the prior year. Importantly, as we continue to ramp growth spend, our marketing efficiency levels remained stable and strong in the fourth quarter with an LTV to CAC ratio above 3x in line with prior year.

We expect Q1 gross spend to be at a similar level as Q4 and expect a total gross spend of about $225 million for the year. Technology development expense was up 14% year-on-year, $25 million while G&A expense increased 29% as compared to the prior year to $43 million. The year-on-year increase in G&A expense of roughly $10 million was made up primarily of 3 items: an increase in noncash stock compensation expense of about $2 million, an increase in interest expense of roughly $1 million, and an increase in bad debt expense of approximately $5 million. Our head count increased slightly by about 4% to 1,282 in Q4 as compared to the prior year.

Our net loss was $22 million in Q4 or a loss of $0.29 per share as compared to a net loss of $30 million or $0.42 per share in the prior year. Our adjusted EBITDA loss was $5 million in Q4, dramatically improved versus a $24 million EBITDA loss in the prior year. Our detailed guidance for Q1 and the full year of 2026 is included in our shareholder letter and represents 32% Q1 and full year top line growth year-on-year. Roughly 60% full year revenue growth and, of course, positive full quarter EBITDA expected in Q4. And with that, I'd like to pass back to Shai to answer some questions from our retail investors.

Thanks, Tim. We now turn to our shareholders' questions submitted through the Say platform. There were a couple of questions from Paper Bag about our loss ratio and recent autonomous car insurance launch. . As we have explained on a few occasions before, perhaps in more detail during our most recent Investor Day, we don't think of loss ratio as a stand-alone target, but whether it's one metric or lever to optimize our quest for maximizing gross profit. sometimes maximum gross profit is achieved by lowering loss ratios, sometimes by raising them.

Our pricing strategy is solving for maximum gross profit in absolute terms rather than any ratio. During our total [ car ] product with our telematics infrastructure, we're able to evaluate and price the risk associated with every driven mile accurately. In the case of Tesla [ FSC, ] the data we have shows that miles driven with it are more than 50% safer than when driven by a human. This allows us to drop rates and become more attractive to customers versus peers which is, in turn, lowering the customer acquisition costs and helps us win and retain more business.

Responding to your question about our 30% growth, I would think about this autonomous car insurance launch as a first step of a much broader strategy and direction that will materialize over time. Indeed, it could take years before we see a step change in autonomous car ownership. And with that said, we believe it is critical to begin now with building the best product for that future with the best experience pricing, underwriting and coverage. In the near term, as we highlighted in our shareholders letter, our growth drivers are increasingly diversified such as we are not reliant on any one segment or product line to drive growth above 30%.

That in car are both seeing IFP growth in 50s and Europe in the triple digits for example. In another question, we were asked how soon car will expand to remaining U.S. states. We launched new states as soon as we can from a regulatory perspective, but only after we are confident that we can competitively and profitably price risk in each state. Our improving car results, both top and bottom line, speak for that discipline.

Launching the state requires thoughtful preparation for marketing, pricing, product, tech, legal and finance perspective with our local platform and the agenetic automations we're constantly layering into it, we're becoming very effective in this process, collapsing stages that used to take months and to days. I believe we now have the most enhanced regulatory and compliance process in the market, and we're only getting started. That said, states we've already launched represent roughly 50% of the U.S. car insurance market, a TAM measured in many tens of billions, and car is available to about 50% of our existing customers.

We've been launching multiple car states since the beginning of 2025 and expect to continue to launch new states with our autonomous product throughout 2026. By 2027, I expect [indiscernible] car products to be available to the overwhelming majority of the U.S. population. In another question, with AI simplifying the insurance industry what will keep Lemonade in an advantaged position over incumbents who might be willing and ready to modernize their software stack? How does Lemonade continue to differentiate and stay ahead. This is a question we get a lot, and I think that and should come down to structural and cultural differences that are mainly impossible to overcome.

Lemonade was built as an AI-first organization 10 years ago. Every team member was hired into that environment. People who didn't thrive in a tech-first fast-paced culture like ours moved on. Today, I estimate more than 95% of our team operates with an AI-first mindset.

Our product and tech organizations are at the core of the company, which makes us product led, customer-centric tech organization. In many ways, the AI explosion is the moment Lemonade was built for. We built a data infrastructure from day 1. We collect every signal, and we have been doing so for a decade. We have a highly rated app that customers love and actively used which keeps them connected and allows us to continuously optimize pricing for the safest customers.

Now compare that to traditional insurance. Digital company built on the foundation of people, not technology. They treat tech as a cost center, not their core. They rely on third-party vendors that are themselves built on legacy systems which leaves insurers with hundreds of these connected systems, they need to run their business.

It's very hard for an organization like that to compete with a full stack tech-first company like Lemonade. In fact, in the history of all tech resolutions, you can probably count on the fingers of one hand, there are companies that dominated prior to the tech revolution and still were there in a dominant position when the [indiscernible]. It would be naive to expect the incumbents will be in this place forever. Of course, they are already talking about increasing investment in AI, ensuring a case study here and there.

But by the time they make meaningful progress, we believe we'll always be several steps ahead. In the next question, [ Cybergate ] asked how does Lemonade think about AI reducing uncertainty while creating new risk categories? I have to say [indiscernible] that a shrinking TAM does not keep us up at night. Even if AI compresses pockets of TAM the resulting market opportunity remains essentially limitless relative to our client size.

But with that said, I agree with the premise of your question. We are already seeing this in our existing suite of products with the expansion of autonomous driving. I think it's true that AI will continue to redefine the insurance industry with regards to the types of risks and products that are relevant over time, perhaps in ways that aren't immediately obvious today. With that, I'll pass it over to the moderator, and we'll take some questions from...

[Operator Instructions] First question comes from Jason Helfstein with Oppenheimer.

So when we look at the numbers, we can clearly see an improvement in marketing efficiency. You obviously talk about it. We can see it kind of like a contribution margin. When I think about what that kind of implies to '26, it would like -- it looks like the EBITDA guide would be particularly conservative unless you plan to make other OpEx investments or essentially kind of like lean into potentially pricing for growth.

So maybe talk about how you are thinking about that, i.e., reinvesting marketing efficiencies into growth or just that it's conservative and maybe tie that you made 3 points in the earnings letter that you plan to lean more into cross-selling. And kind of what made pricing and improved pricing accuracy. So maybe just like take those 3 comments, and I don't know if you want to link that back to like the first question if it's connected. Thank you.

So I'll take a shot at -- a subset of that, Jason, and then maybe my partners will jump in. Daniel join me here, and we've also asked Nick Stead, our SVP of Finance, to join us to perhaps answer a few questions. If I kind of think zoom out and think about '26 generally from a growth perspective, actually Q4 was a pretty good proxy for how we're thinking about it. So you saw a couple of things happening really coming together in Q4. Certainly, the underwriting or loss ratio side of the business came in very nicely, but from a growth perspective, which is really the core of the focus right now, which is how do we grow effectively?

How do we maintain an LTV to CAC that we are comfortable with, number one, and excited about improving over time, number two. And how do we lean into that over time. So we saw that come together nicely in Q4 where we were able to see free up a little more spending free up a little more capital to invest because we saw nice underwriting results. And we plowed that back into additional growth.

So you see overperformance on the top line versus our guidance. That's because we deployed a little more growth spend than anticipated, and that's a good thing. So that's a backward-looking view. If you take a forward-looking view into '26, we're guiding to our very strong track record of being able to maintain a solid LTV to CAC of [ 3 ] or better.

What we do see here and there in certain pockets and certain channels and certain products and certain geos is overperformance, and that's when we're able to lean in. So I think what you see embedded in the guidance is some of that continued good news, but we have not changed our philosophy of taking everything good that's happening in the most recent period in extrapolating that forward. So I think you're right. There's probably a similar potential to overperform.

We think growing a little bit faster each quarter is important. And we grow at a pace of our own choosing. We're guiding to 30% plus Obviously, the market will enable us to do more. It's essentially an endless market.

But I think at this point of the year, we're 6 weeks in. We like what we're seeing in January and February to date. And so that guidance reflects real optimism not being able to spend more significantly more in '26 than in '25, that's a continuing trend and to potentially see that growth rate accelerate.

Yes, I agree with everything. I'd say, Jason, thanks for your question. There isn't designed buffer or conservatism built into the number. We're guiding as best we can as we always do.

We do always look for opportunities to surprise ourselves and you and everybody, but our guiding strategy is to go into pretty much what we have line of sight to. And what I think may be making the difference that you're kind of pointing to is captured in some of the things you referenced, which is -- we are investing quite a lot of R&D work this year. So we highlighted 3 areas of investment. There are others that we didn't detail and even though as we just touched on in passing, but we are undergoing very significant investments really that compound one another.

We've seen 2026 as a year of multiple engineering efforts quite aside from the fact that there's kind of ground beneath our feet is moving because the models keep getting better and better every day we wake up to a more powerful brain at the very core of what we're doing. But beyond that, Shai mentioned local platform that is going to look very different by the end of '26 and it is at the beginning of the year. And we spoke about our cross-selling platform, our pricing machines, they're calling it in the revenue machine, all big initiatives that should collapse time, increased precision and also lower expenses, but perhaps some of the delta that you're pointing to and that you're assuming is conservatism is actually going to be spent on those initiatives.

It's Nick. I just want to sort of jump in on your question around expenses in 2026. You can think about operating expenses as being broken as it 2 chunks. There's growth spend and then the remainder of operating expenses. Growth spend will continue to increase in 2026 as it has in '25 and '24. The remainder of the expense base should generally remain stable or closer to stable, growing in the single digits as compared to the top line, which is growing above 30%.

We now turn to John Barnidge with Piper Sandler.

My question is about adjusted EBITDA profitable in '27. How do you think about the target for premiums to surplus at that time and do you think you can operate at greater leverage given some of the operational scale you've begun to achieve?

Yes. So from an EBITDA, maybe -- 2 questions in there, perhaps from an EBITDA perspective, we do expect Q4 this year, '26 to be fully positive as well as the full year of '27, which would be the first full year of EBITDA positivity. While we've not indicated growth rates beyond '26, we have been consistent in our communication that a 30%-plus growth rate is our goal and an accelerating growth rate each quarter is also our goal. And so I would expect that ambition to continue into '27 and beyond, given the immense size of the market that we're in and the markets that we can potentially be in.

From a surplus leverage perspective, we noted that we have about $250 million currently that's held as required for surplus that's relatively quite capital-light. We take advantage of captive structure and we have reinsurance in place and other structures that in combination, enable us to keep that surplus satisfactory for all regulatory requirements, but also to a minimum so that we can deploy capital in all the ways we choose to grow the business. We expect that to continue. All of our forecast modeling tells us that we have more than ample surplus to support very ambitious growth rates even beyond our current growth rate and with ample cushion left over.

And I think you can take real confidence, our forecasted breakeven point for EBITDA has essentially been unchanged for almost 4 years at this point. And so our visibility is quite good. Our leverage enables us to continue to be capital light, and we are more than efficiently capitalized to grow and really ambitious paces through '27 and beyond.

We now turn to Tommy McJoynt with KBW.

Thomas Mcjoynt-Griffith: The first one here is, obviously, there's been a lot of headlines around some advancements in ChatGPT and sort of the integration of carriers with that distribution model. Do you guys have any plans to allow tools like ChatGPT to actually bind policies for Lemonade or would the preferred route be to use ChatGPT as a search tool that ultimately leads to Lemonade where they could bind the policy?

I'm sorry. I am sorry. Tommy, let me start over. Can you hear me okay now?

Thomas Mcjoynt-Griffith: Okay.

I gave you a wonderful answer, but it was all lost because I was on mute. What I was saying was that we use AI in many, many aspects of our marketing. At the moment, it's not in the most front-end aspect of our marketing, but everything other than the skin deep kind of chat interface which ChatGPT is integrated with some players, obviously, from the skin on in it is all AI. When it comes to that kind of automotive layer, we generally love our own AI for that.

My [ does ] has done a great job talking with customers offering them an incredible experience. That isn't to say that we would never use something like a ChatGPT interface, but it's not something we've launched yet and if we decide to do that. You'll be the first to know.

Thomas Mcjoynt-Griffith: Okay. Understood. And then switching gears, as you guys have rolled out this autonomous vehicle insurance product on the car side, that's obviously introduces a variable level of premium that's charged to customers on either a 6-month basis or a monthly basis. Is it your vision that over the long term, most car insurance will move to a variable level of pricing rather than a fixed 6-month term premium?

Yes and no. We today have both models. We have models that you can pay per mile. And we have others where it's fixed and it's kind of customers' choice.

We don't have all actions in all the markets right now, but that is where we see this going in several states of that already. And this is really the choice, the style choice. Do you want coming under the early days of mobile, where you could pay by minute or by plans and family plans and other things, we bought buckets and roll over months and all that kind of stuff. We think there's plenty of ways to do pricing around it.

The big difference between what we're doing and everybody else is that we know the cost per mile. We are making predictions. So I spoke about this in his comments earlier. We are making predictions based on a plethora of data that comes to us in real-time, very high granularity from really high fidelity machinery that allows us to know that when you're driving, where you drive, how much you drive, how are you driving if it's you driving over car?

All of that means that we can price per mile with tremendous precision. And if you then prefer to buy a bulk and have a fixed price, that's fine. We can use all of that information in order to price it to you as a fixed price, which will correct episodically and other people prefer to pay per mile and we offer that as well. Both of them are fueled by the same AI engine and data [indiscernible].

[Operator Instructions] We now turn to Jack Matten with BMO.

Just a follow-up on the strategic initiatives. And you talked about in the letter, including the enhanced cross-sell platform. Just wondering if you could unpack a little bit more. I know it references it car and home.

And over the past year, so I think you de-emphasized home insurance growth a little bit. So just wondering how you view that line of business as particle amidst overall mix longer term?

That was a good tidbit that we put in the shareholder letter to give feel for the kinds of things that not in a year when we are really continuing to focus on growth on autonomous car, on really nice financial results. We're also continuing to invest in further reaching capabilities that we think over time will continue to not only help us maintain our advantages, whether AI enabled or otherwise, but actually to expand those advantages versus incumbents. And those 3 areas we noted are really the core -- well, there's a lot of interesting activity going on in terms of investment in future stuff.

Cross-selling continues to be important. More than 5% of our customers have multiple policies at this point. That's a really important metric. Almost 20% of our in force premium, however, is coming from customers with multiple policies.

So cross-sell, our ability to cross-sell, which is a really efficient way to increase IFP and accelerate growth without quite as much of a growth spend investment is important. And then the other 2 pieces really pillars of the -- our underwriting capability, which is pricing constantly focusing on being able to de-average pricing -- price on a car driver's behavior and not under credit score and also to optimize how we allocate growth spend. So those are really 3 of the real key areas we're continuing to invest both with current resources and actually we'll grow those resources to some extent, over '26. All of that's embedded in the guidance.

All of that, we expect to deliver significant future ROI. Yet when you peel it all apart, our overhead expense even with those incremental investments is growing very modestly in the low single digits from an operating expense standpoint and almost our entire growth and expenses on growth expense to acquire new customers. That's a theme you've seen now for several years running, and that will continue. We expect well into '26, '27 and beyond.

Got it. And then just on the Tesla [ FSD ] initiative. I appreciate the color you gave earlier on this, but I just wonder if you could unpack the opportunity you see for Lemonade and how much you think it can eventually contribute the share of your business? And then just given Tesla also has its own insurance offering.

Can you just talk about how Lemonade's position is offering from a competitive standpoint?

We love talking about Lemonade, but we will shy away a bit from talking about Tesla and their plans and their goals. They're a terrific partner and setting a standard in so many ways, but we'll let them speak for their goals and aspirations. From our view, we want to be where our customers are and where our customers are going. We've had a pay per mile product in place for years.

It's not right for every customer, but it enables us to do what we're best at, which is take deep levels of granular data and use that to price a customer most effectively. And often that's to give the customer a better price. An autonomous vehicle, autonomous driving is fall into that category without question, pricing the driver of the car, and that's whether that driver is a human driver or an AI driver or no driver at all. The risk is still there.

And we are best placed in the market to be, I think, we think, to be a partner to Tesla, but also to be -- to kind of lay the groundwork as this part of the car market evolves. We think it helps us accelerate things that change more quickly, play to our best strength, which is agility and a data-driven platform. And so we're really optimistic about it. We don't -- a little premature for us to say the impact on the financial and forecast model is.

And as Daniel said, when it's the right time, we will certainly do that, and you'll be the first to know.

Ladies and gentlemen, we have no further questions. So this concludes our Q&A and today's conference call. We like to thank you for your participation. You may now disconnect your lines.