Lemonade : Q1 2024 Earnings Conference Call Letter to Shareholders

Shareholder Letter

Q1 2024

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Dear Shareholders,

Our first quarter results were excellent, and we're pleased to note that we now expect cash flow breakeven by year-end 2024.

Here's a quick look at our operating metrics for Q1:

• Top line: At $794 million, in-force premium (IFP) grew 22% year on year, while total revenue grew 25%.
• Loss Ratio: At 79%, gross loss ratio showed an 8 point year on year improvement.
• Gross Profit: Climbed 110% year on year, while Gross Profit Margin improved by 12 points to 29%.
• Operating Expense: Increased just 2% year on year.
• Bottom line: At ($34) million, Adjusted EBITDA loss improved 33% year on year, while Net Loss at ($47) million, improved 28%.

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The Power of Tech

In her blog post titled "How AI Is Revolutionizing the Financial Industry," Adena Friedman, President and CEO of Nasdaq, wrote that "in the financial industry, artificial intelligence is not just a tool; it's a strategic imperative. Companies that leverage AI to optimize operations, mitigate risks, and deliver superior customer experiences will emerge as leaders in the digital economy."

We agree with that premise entirely, and always have. In our 2020 IPO prospectus, we described technology as the primary and most critical pillar of our strategy, speaking of our ambition to "leverage technology in everything we do." Indeed we believe that AI has the potential to completely redefine what good looks like in insurance.

This was our founding thesis, and we're increasingly seeing results that back it up. One clear example: our loss adjustment expense ratio, or LAE ratio. LAE ratio - defined as loss adjustment expenses divided by gross earned premium

• measures the operational overhead of managing claims. Since LAE is generally unaffected by growth spend and underwriting results, it is an excellent measure of operational efficiency, and so is a particularly helpful way to benchmark Lemonade's efficiency to the industry.

An LAE ratio of ~10%1 is typical of leading insurers with tens of billions in premium. Despite our relatively small size, Lemonade's LAE ratio, at 7.6% in Q1, is notably better than that benchmark, showcasing how technology can dramatically drive efficiency even before the benefits of scale kicks in. Indeed, we have nearly halved this ratio in just two years.

• Per Capital IQ S&P.

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The unlock of this performance has been our continuous and broad deployment of AI and other technologies across customer interactions, which has driven a material reduction in the cost of managing each claim, while delighting customers.

Our pet business is a great place to see this in action. With its high frequency/ low severity claim dynamic, the pet line of business enjoys an accelerated feedback loop - operating in 'dog years' if you like - allowing our tech to iterate rapidly.

As a result, we've seen a step change improvement in efficiency. In the past two years, inline with the rapid growth of the book, we saw a near doubling of the number of claims submitted - but a less than 15% increase in claims support team headcount. The chart shows how our cost per claim has declined by nearly 60% since Q4'21:

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This playbook - the relentless pursuit of automation at every stage, enabled by a range of AIs - is actively being applied in all our lines of business, and all parts of the company. Case in point: our headcount shrank 11% year on year, even as our total book surged by 22%. This speaks volumes for the widespread impact of technology throughout the company.

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Cash Flow Breakeven and Acceleration & Beyond

Previously, we indicated our expectation that net cash flow breakeven would occur during the first half of 2025. We are pleased to note that our expectations have improved due to (a) sustained strength in our underlying unit economics, (b) impact of technology on various expense categories, and

(c) working capital benefits of our reinsurance structure.

Our expected net cash flow breakeven date has therefore accelerated to year-end2024, such that by Q1 2025, we expect to be generating positive net cash flow on a consistent basis.

Net cash flow breakeven, while an important milestone, is certainly not our final destination. We are increasingly focused on what comes next. Once generating positive cash flow, we expect to benefit from an increasing cash and investments balance, with growing investment income contribution. This will enable us to lean in and reinvest in cash-flow generative, capital-light growth with maximum confidence.

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Q1 2024 Results, KPIs and Non-GAAP Financial Measures

In Force Premium

IFP, defined as the aggregate annualized premium for customers as of the period end date, increased by 22% to $794.2 million as compared to the first quarter of 2023.

Customers

Customer count increased by 13% to 2,095,275 as compared to the first quarter of 2023.

Premium per Customer

Premium per customer, defined as in force premium divided by customers, was $379 at the end of the first quarter, up 8% from the first quarter of 2023.

Annual Dollar Retention

ADR, defined as the percentage of IFP retained over a twelve month period, inclusive of changes in policy value, changes in number of policies, changes in policy type, and churn, was 88% at the end of the first quarter, an increase of 1 percentage point from first quarter of 2023.

Gross Earned Premium

First quarter gross earned premium of $187.9 million increased by $33.7 million or 22% as compared to the first quarter of 2023, primarily due to the increase of IFP earned during the quarter.

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Revenue

First quarter revenue of $119.1 million increased by $23.9 million or 25% as compared to the first quarter of 2023, primarily due to the increase of gross earned premium, ceding commission income and net investment income.

Gross Profit

First quarter gross profit of $34.7 million increased by $18.2 million or 110% as compared to the first quarter of 2023, primarily due to higher earned premium and improved loss ratio in the first quarter this year.

Adjusted Gross Profit

First quarter adjusted gross profit of $36.7 million increased by $16.1 million or 78% as compared to the first quarter of 2023, primarily due to higher earned premium and improved loss ratio in the first quarter.

Adjusted gross profit is a non-GAAP metric. Reconciliations of GAAP to non- GAAP financial measures, as well as definitions for the non-GAAP financial measures included in this letter and the reasons for their use, are presented at the end of this letter.

Operating Expense

Total operating expense, excluding net loss and loss adjustment expense, of $98.4 million increased by $2.1 million or 2% as compared to the first quarter of 2023. The increase was primarily driven by higher growth spend for customer acquisition, offset by lower employee related costs. Growth acquisition spend, part of sales and marketing expense, was $19.8 million in the quarter.

Net Loss

Net loss in the first quarter was ($47.3) million, or ($0.67) per share, as compared to ($65.8) million, or ($0.95) per share, in the first quarter of 2023.

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Adjusted EBITDA

Adjusted EBITDA loss of ($33.9) million improved by $16.9, or 33%, as compared to an Adjusted EBITDA loss of ($50.8) million in the first quarter of 2023, primarily due to higher revenue in the first quarter.

Adjusted EBITDA is a non-GAAP metric. Reconciliations of GAAP to non- GAAP financial measures, as well as definitions for the non-GAAP financial measures included in this letter and the reasons for their use, are presented at the end of this letter.

Cash & Investments

The Company's cash, cash equivalents, and investments totaled approximately $927 million at March 31, 2024.

As of March 31, 2024, approximately $186 million is carried by our insurance subsidiaries as regulatory surplus.

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