Lemonade Inc. (LMND) Q1 2022 Earnings Call Transcript

Lemonade Inc.  (NYSE: LMND) Q1 2022 earnings call dated May. 10, 2022

Corporate Participants:

Yael Wissner-Levy — Head of Content and Communications

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Shai Wininger — Co-Chief Executive Officer

Tim Bixby — Chief Financial Officer

Analysts:

Michael Phillips — Morgan Stanley — Analyst

Matt Carletti — JMP — Analyst

Yaron Kinar — Jefferies — Analyst

Jed Kelly — Oppenheimer — Analyst

Andrew Kligerman — Credit Suisse — Analyst

Tracy Benguigui — Barclays — Analyst

Presentation:

Operator

Good morning, and welcome to the Lemonade, Inc. First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Yael Wissner-Levy, VP, Communications. Please go ahead.

Yael Wissner-Levy — Head of Content and Communications

Good morning, and welcome to Lemonade’s First Quarter 2022 Earnings Call. My name is Yael Wissner-Levy, and I’m the VP of Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, Co-CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, Chief Financial Officer. A letter to shareholders covering the company’s first quarter 2022 financial results is available on our Investor Relations website, investor.lemonade.com.

Before we begin, I’d 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 1, 2022, and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them.

We will be referring to certain non-GAAP financial measures on today’s call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key operating metrics, including 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, who will begin with a few opening remarks. Daniel?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Thank you, Yael, and thank you to everybody for joining us this morning to review our Q1 results and to allow us to update you on our expectations from the remainder of Q2 and indeed the remaining of 2022.

I’m very happy to say that the year kicked off with a very strong first quarter. Both our top line and our bottom line came in ahead of expectations as in force premium, or IFP, stood at $419 million while our adjusted EBITDA loss for the quarter came in at $57 million. This quarter, we also hit a big milestone for the company as it was the first full quarter in which Lemonade offered the full suite of insurance products that is renters/home, life, pet and car in one market. For the first time, a customer could mega-bundle or get all four Lemonade policies that meet their insurance needs in one app with bundled discounts and with the ease Lemonade is known for. So far, this mega-bundle is available in Illinois and Tennessee alone. And I think these markets offer an early peek into how meaningful growing with our customers can become as we roll out these products nationwide.

Growing with our customers has long been a central tank of our strategy and the early dynamics we see in both Illinois and Tennessee reinforce that. For example, in one quarter alone, we saw bundle rates in Illinois climbed 40% versus the rest of the country. To the extent that this is indicative of things to come, it is very significant. Customers with two Lemonade products outspent the average single product customer 3:1. For customers with three Lemonade products, the ratio was 7:1. When we get to customers with all four products in these two markets, that ratio jumped to 9:1. Indeed, annual dollar retention, or ADR, in Illinois jumped during Q1 to 90%. So while it’s early days and small numbers, Illinois serves as an encouraging case study. As has been our strategy since day 1, we want to be there for our customers as they go through predictable life cycle events, moving, buying a home, getting a car, starting a family, all of these are events with dramatic growth implications for insurance spend and with little corresponding marketing spend on our part.

This dynamic not only boosts our bottom line, it is also the fastest contributor to our top line. While total premiums from single product customers grew at a rate of 61% relative to Q1 2021, premiums for customers with two Lemonade products grew at a pace of 140% and premiums for customers with three products jumped 390% during that same period. So I will touch on the second plank of our strategy, winning the technology in a minute. But before that, I’d like to say a word about two changes at our Board of Directors.

The first is that we recently announced that Caryn Seidman-Becker will step down from our Board of Directors effective at the conclusion of the annual meeting in June. Caryn’s company, CLEAR, recently IPO-ed and Caryn was also appointed to the Board of Home Depot. As a result of concerns regarding overboarding, which means serving on too many public boards, and just to avoid any questions around good governance, Caryn will depart from our Board. I’d like to take this opportunity to thank Caryn for the extraordinary contribution she has made to our company over her four-year tenure at Lemonade. She has left an indelible mark on the company and has provided incisive and actionable counsel for Shai and I at key junctures.

In an unrelated change, Joel Cutler has today tendered his resignation from the Lemonade Board. Joel has recently learned of a serious health issue and he will be undergoing major surgery later this week. Joel has served on our Board since November 2016, and it would be hard to overstate the impact he has had on Lemonade’s nor the esteem and affection Shai and I hold for him. On behalf of all your friends at Lemonade, Joel, we want to wish you a speedy and complete recovery.

We are kicking off a search for two new Board members, and we’ll, of course, update you as those searches conclude.

And with that, let me hand over to Shai for some more color on our loss ratio. Shai, over to you.

Shai Wininger — Co-Chief Executive Officer

Thank you, Daniel. Last quarter, I spoke about measures we’ve taken to address underwriting profitability in our quest to achieve loss ratios of all our new products within the 75% target. We’ve always believed that building a technology-powered insurance company is the way to achieve best-in-class customer experience, efficiency and prediction of risk. When it comes to loss ratios, our internal dashboards show increasingly profitable cohorts with every month that passes. We’re now using our fifth generation of machine-learning LTV prediction models, and these provide an ever-improving estimate of the loss ratio of each new customer as well as their likelihood to churn or cross-sell. The combination of these factors supports our real-time view of customer lifetime value. Despite a 90% gross loss ratio for the quarter, these efforts show that the business we generated in Q1 is expected to have a lifetime loss ratio comfortably within our 75% gross loss ratio target.

As we’ve spoken about before, loss ratios are lagging indicators and changes in pricing, underwriting and segmentation take time to develop and then get approved through regulatory filings and yet more time to earn in. This lag between action and results is a structural reality of insurance, which is why we use predictive machine-learning models rather than backward-looking loss ratios in our day-to-day management.

As much of the broader insurance industry has reported, Q1 loss ratios were more significantly impacted by inflation as claims have quickly adjusted for inflation, while rates can take months to adjust. We’ve been working hard to combat this with corrective measures, and in the past year, have filed about 100 applications for rate changes. As regulatory approvals come in, we look forward to bringing rates back in line with risk.

So while our target multiyear average loss ratio below 75% remains unchanged, it’s important to remind our shareholders that while loss ratios spike from time to time, we have reinsurance in place to help insulate us from such bumps. Indeed, this quarter, we’re reporting a 23% gross profit margin and a better-than-expected EBITDA, notwithstanding the heightened loss ratio.

And now over to you, Tim.

Tim Bixby — Chief Financial Officer

Great. Thanks, Shai. I’ll give a bit more color on our Q1 results as well as expectations for the second quarter and the full year, and then we’ll take your questions.

We had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer. In force premium grew 66% in Q1 as compared to the prior year to $419 million. We believe that this metric captures the full scope of our top line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Premium per customer increased 22% versus the prior year to $279, and this increase was driven by a combination of increased value of policies over time as well as a continuing mix shift toward higher-value homeowner and pet policies. As in the prior quarter, the majority of the growth in premium per customer in Q1 was driven by product mix shift, including cross sales and the remaining 20% from increased coverage levels and pricing.

Gross earned premium in Q1 increased 71% as compared to the prior year to $96 million, roughly in line with the increase in in force premium. Revenue in Q1 increased 89% from the prior year to $44 million, and our gross loss ratio was 90% for Q1 ’21 as compared to 96% in the preceding quarter. Operating expenses, excluding loss and loss adjustment expense, increased 68% in Q1 as compared to the prior year. This is primarily driven by increased technology-related personnel expense, stock-based compensation expense and legal and professional fees, partially offset by the impact of increased sales and marketing efficiency. We also continue to add new Lemonade team members in all areas of the company in support of customer and premium growth and to support geographic product expansion, and thus, saw increases in each of the other expense lines.

Global head count grew 76% versus the prior year to 1,162 with a greater growth rate in product development and underwriting teams. Notably, headcount growth was just 20% when compared to six months ago as we are seeing more efficiency gains in personnel expense in recent quarters. Our net loss was $74.8 million in Q1 or $1.21 per share as compared to the $49 million loss we reported in the first quarter of 2021.

While our adjusted EBITDA loss was $57.4 million in Q1 as compared to $41.3 million in the first quarter of 2021.

Our total cash, cash equivalents and investments ended the quarter at $1 billion, reflecting primarily a use of cash for operations of $39 million during the first quarter.

Now with these goals and metrics in mind, I’ll outline our specific financial expectations for the second quarter and an updated full year 2022. For the second quarter of 2022, we expect in force premium at June 30 of between $445 million and $450 million; gross earned premium of $103 million to $105 million; revenue between $46 million and $48 million; an adjusted EBITDA loss between $70 million and $65 million; stock-based compensation expense of approximately $15 million; and capital expenditures of approximately $4 million.

And for the full year 2022, please note that we expect the Metromile transaction will close during Q2 and that our annual in force premium is expected to grow approximately 70% during 2022. The guidance that follows, however, excludes the expected impact of the closing of the Metromile acquisition.

At year-end, we expect in force premium of between $535 million and $545 million; gross earned premium between $426 million to $430 million; revenue between $205 million and $208 million; and adjusted EBITDA loss of between $280 million and $265 million, and stock-based compensation expense of approximately $60 million; and capital expenditures of approximately $14 million. And as we noted last quarter, we do continue to expect that 2022 will be our year of peak EBITDA losses.

With that, I would like to turn the call back over to Daniel. Daniel?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Thanks, Tim. As is our practice, we’ll now turn to questions most upvoted by our shareholders on the same platform. And the first one is from the Paper Bag Investor also by Darren Q. And it is, why has there been no or little insider buying even as the market cap of Lemonade has dropped?

I’ll say that — state the obvious that stocks have clearly taken a spectacular tumble in recent months. Lemonade has dropped about 50% year-to-date. And this is fairly typical of what’s really happened across the tech growth in the sector. I’d like to believe for that reason that it says more about macroeconomic trends and cycles of investor sentiment than about Lemonade specifically.

But turning to the specifics of the question, I understand and often see the interest that people have in insider buying and selling. I have to say honestly, for myself, I take little to no interest in it. I have not once — as best I can recall, I have not once asked Lemonade’s officers or Board members or even my partner, Shai, who with him I discuss everything, not once have we discussed whether or why he is buying or selling or they are buying or selling shares, literally not once. People buy and sell shares for many reasons. And I’ve never found this to be a helpful gauge of anybody’s commitment or faith in Lemonade.

In any event, since the question is asked not about the actions of the company for whom I’m authorized to speak by those individuals who work here for whom I cannot, let me just answer for myself. I have an incredibly high level of conviction in the long-term prospects of Lemonade and its shares. And indeed, the majority of our family’s wealth is in a single stock, LMND. So I expect that to be true for many years to come, and I expect you would hear similar sentiments from all insiders. And I do hope that, that addresses the concern that underlines the question.

The second question is a compound question by [Indecipherable] and it reads as follows: what are some of the indicators that you track to analyze the AI engine efficacy? How do you tackle inflationary environments where premiums are charging today’s currency and claims must be paid in tomorrow’s? And how do you guard against financial implications of rare events?

Okay. So that’s obviously several questions, and let me work through them from last to first. So we guard against rare events through reinsurance. That’s been a massive — a way in which we’ve really avoided the worst surprises along the years and continue to. Beyond that, as we launch new geographies and new products, that diversification actually is very protective as well. Rare events that hit homeowners in California don’t usually hurt pet owners in California and don’t hurt home owners across the U.S., let alone in Europe. So being diversified geographically and product-wise is a great protection against those rare events as well. So I think dampens the impact.

And the second question was really about inflation and that too was touched on earlier. But let me take the opportunity to add some color of the broad kind of — examples of the broad actions that we’re taking. So for example, on homeowners, we are filing for rate increases. We’re filing for base rate increases really across the U.S.A., and we’re doing that for home, condo and renters, indeed for pet as well. And we expect to have new rates filed for that 90-plus percent of our book of business across those products, home, condo, renters and pet, before the quarter is out.

In addition, for homeowners, we’ve implemented an automatic update to our assessment of the costs that would be associated with the repair or rebuilding of each home. So that any inflation in the cost of construction or materials should be captured in correspondingly higher limits that the system will automatically assess and by extension, automatically higher rates. Now this will apply both to new policies and to existing policies when they renew. We expect to have that entirely operational before the end of this quarter as well.

Finally, for car, we think we’re in pretty good shape. Car definitely as a sector within the insurance industry has been terribly hit, perhaps worse hit by inflation. But since we are new to this business, we don’t have older filings that need updating. In fact, all of our filings are very much current and were submitted with full awareness of these inflationary pressures. So we don’t anticipate having to take further rate in car in the near term, but we will keep our finger on the pulse there clearly.

Finally, turning to the AI question. Well, in accordance with best practices, we use multiple metrics for measuring machine-learned models and predictions. For example, for binary decisions, such as classifiers, we typically use our methodology known as AUC, which stands for area under the curve, and use the Gini score for ordering challenges like rank ordering risks.

Now we use AI throughout our organization, throughout our business from marketing efficiency, optimization to underwriting, to fraud detection, to claims handling, et cetera. So in many areas of our business, the AI acts autonomously. But in several areas, like fraud detection or underwriting declamations or claim rejections, the AI makes recommendations or flag things, which humans then review and make a decision on. And in those instances, the human decisions establish a ground truth and that serves both as a benchmark for the AI efficacy, but also as a training set to make it continuously improve. I hope that fully answers that question.

Another question comes again from the Paper Bag Investor, and it asks about whether Lemonade would release loss ratios on a by-product basis in order to enable a better assessment of the AI impact on our underwriting.

I think that’s a very fair question. It’s one that we do discuss from time to time, and I saw, Paper Bag, you also posted a question about the Investor Day in which we would share more information about AI, and I see these as related questions. So I do expect we will hold an Analyst Day before too long with a view to sharing a lot more information, both about our AI and about our by-product loss ratios and perhaps cohort loss ratios. But there is a real trade-off. And that’s something that we have to always bear in mind because information that helps our investors can also help our competitors, which in turn hurts our investors. Lemonade is closely watched by the rest of the industry. And while our detailed filings are public by law, our detailed results are not and that makes it harder for competitors to know which aspects of our business to copy because absent those results, it’s hard for them to close that learning loop.

We do share selected numbers and insights when we think they are germane to you, to our investors. We did that in the last quarter, for example. And in general, I’ll say that we anticipated this tension between wanting to be more transparent, but also wanting to protect areas of our business where we think there is some exposure. We addressed this in our founder’s letter, and let me perhaps just wrap up here by reading the relevant paragraph.

It reads as follows: we are transparent except when we are not. We will explain why we zig or zag and be forthright about our past mistakes and future plans except when revealing that information might hurt the business and its disclosure is not required by law. By this position, we continue that we are transparent and defaults to sharing more rather than less, but we know that transparency is subject to diminishing returns and at some point, negative returns. We try to be guided by that.

Okay. And the final question comes from Antonio P. and has asked for an update on the Metromile acquisition and integration.

Antonio, very happy to share that almost all of the preconditions to closing the Metromile deal have been met. Metromile shareholders approved the deal with a 95% majority. What we need now really is approval from insurance regulators, specifically in Delaware, where Metromile is domiciled and then the transaction will close. Estimate all along has been that we’ll be able to do that in this quarter, in Q2, and I’m still hopeful that, that will happen. It would not be a shock if it slips into early Q3, but our best estimate remains as it was, Q2. And the proprietary work has really gone very, very well. The teams have gotten to know each other, and we have every reason — we need to believe that integration will be hugely successful and very, very speedy.

With that, let me hand the call over to the operator, so we can take some questions from our friends on The Street. Thank you.

Questions and Answers:

Operator

[Operator Instructions] The first question is from Michael Phillips with Morgan Stanley.

Michael Phillips — Morgan Stanley — Analyst

Thanks for all the comments on the loss ratio that everybody provided. What I didn’t hear, maybe if you have it, if you want to share, was there any impact? Obviously, we’re comparing to last year where there’s pretty big impacts. But any impact on any kind of storms or catastrophic losses that would impact the 90%?

Tim Bixby — Chief Financial Officer

So no, what I would call — term as significant cats or notable cats, but there is every quarter a baseline level of cat, so nothing along the lines of Uri or similar that we saw a year ago. So I would categorize it as sort of a typical relatively quiet quarter from a cat perspective.

Michael Phillips — Morgan Stanley — Analyst

Okay. And then, Tim, you mentioned in your comments kind of an impact on loss ratio from the mix shift. And you said that last quarter, too. Last quarter, you said that there was — with your renters — this quarter, you said how much of it was — how much of your business is now renters, I think last quarter, you said it was less than half. Can you talk about that? And how much of the shift of homeowners then impacted the loss ratio this quarter, too? Can you talk about the shift to homeowners from renters and the impact on the loss ratio?

Tim Bixby — Chief Financial Officer

Yes. I would think of the mix shift as continuing its pace of the last several quarters. We don’t give an exact breakdown currently. But as we did mention, we recently crossed over from having renters above 50% to below 50%. It continues to decline as a share of the total, but relatively slowly.

Contributor to the loss ratio in the quarter, it was certainly primarily the mix shift, if you discontinued greater mix shift. But also fair to say that the inflation impact are starting to be visible in the numbers that affects home more than pet or renters, but it will ultimately potentially affect all of the product lines. So primarily mix shift; to a lesser extent, some of the inflation impacts.

Operator

The next question is from Matt Carletti of JMP.

Matt Carletti — JMP — Analyst

Daniel, you gave some helpful stats on some of the bundling take-up, particularly in Illinois, I think, where you have four products live. I was hoping you could help us understand kind of the cadence by which we might get more states to look like Illinois, kind of how the rollout will be in terms of getting more kind of three and four product states? Maybe where we might stand by the end of the year?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Well, I think we’ll see with the closing of Metromiles here a sudden kind of jump in those states. So we are planning our launches of the Lemonade car product and so as not to overlap too much with what’s already in existence and that we expect to inherit pretty quickly. So I think you’ll see something of a step function change once the Metromile deal closes.

Matt Carletti — JMP — Analyst

Okay. Great. And then just one other one. I think you alluded to with kind of commentary on the market and Tim as well, just with kind of ’22 being peak EBITDA losses. I was hoping you could update us maybe on a little more longer-term view of Lemonade’s path to profitability, particularly given kind of the recent changes in at least the market demands.

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Sure. Let me kind of give you a few high-level comments and then if Tim has anything to add, I’ll turn to him. It’s an opportune time to remind you and all of our shareholders that, as a matter of policy, Lemonade does not and never has sold products or maintained campaigns or invested in territories that we don’t believe to be marginally profitable. So even though we are reporting losses at a company-wide level, the places that we are investing dollars in terms of promoting products, growing territories or acquiring customers are all ones where we think the CAC to LTV is incredibly compelling. It’s been hovering at or around 3:1 ratio. It can be misleading because you look at our losses and it looks like we’d be selling dollars for $0.90, but that’s just not the case. The reason it is skewed the way it is, is because the costs are borne all upfront since we tend to be predominantly acquiring customers through direct-to-consumer advertising.

So we take the CAC hit right at the beginning. That is then compounded by the fact that year one loss ratios are the highest. So all of our year one customers have the full brunt of the acquisition plus the worst loss ratios, but we are able to model out the lifetime loss ratios, and we have every confidence and reason to believe and the historical data has proven that our models are doing this pretty well. Every reason to believe that they will return something in the order of a 3x return on every dollar that we’re spending. But since we’re growing fast, an increasing portion of our — not increasing, a substantial portion of our business is still first year customers. And even though they will be profitable over their lifetime, they’re not profitable in the same accounting period and that is the predominant dynamic that’s driving losses.

The reason I’m delaying on this is because as our denominator grows, as our book grows the percentage — even though we’re adding more and more customers, the percentage of year one customers declined and that happens naturally just through arithmetic. And that is why we’re able to forecast peak losses pretty soon as those dynamics of CAC to LTV and historical investments that we made in products and customers start giving that return on investment that we’ve long since spoken about.

And I’d say all of that by way of answering your question, which is that this isn’t a major strategic shift. This is something that we have planned and anticipated and work towards really forever. This is, as I said, the arithmetic doing what it does, which is that older cohorts are showing they’re more profitable and contributing to the underlying part of the business and newer cohorts or a smaller percentage, and this thing works its way out.

So we are continuing pretty much along the same strategy that we’ve been along — all along. We continue to believe that these upfront investments will yield a longer-term return on investment than some of the ways in which traditional insurance operators work with — of doing an entirely agent-based distribution and then you’ve got less upfront expenses, but you’ve got a partner for life. So that’s really the way we view the path towards profitability. It will emerge. As we turn this corner, we hit peak losses in the not-too-distant future, and then you will see these effects compounding all the way down to profitability. The next question is from Yaron Kinar of Jefferies.

Yaron Kinar — Jefferies — Analyst

So my first question, probably a continuation of the last question and answer. Can you maybe give us a little more color or data around the split between new and renewal customers? Like what does that look like? How has that been trending?

Tim Bixby — Chief Financial Officer

So I think our focus has shifted somewhat to expanding our existing customers now that we have the ability to bundle and upsell and cross-sell at a greater level than we have in the past. So if you look at one of the metrics we publish is net added customers, you’ll see that vary quarter-to-quarter and it’s, to kind of repeat, I think what we’ve said in the past, it’s more of an output than input. And so gradually, over time, we’re seeing more of our increase in premium coming from existing customers. We look at annual dollar retention as a key metric. For example, each customer that we add is spending more and staying with us longer. It’s still under 100%, but making strong improvement. And as Daniel noted, in Illinois, where we’ve got the broadest portfolio available, we’re seeing even higher results there, inching up to 90%.

So in terms of the breakdown, I mean, you can see it in the number of customers, net number of customers you’ve added. But I would say there’s no change in the last several quarters’ approach, which is we want to consistently increase the amount of premium coming from existing customers.

Now that said, we’re expanding into states we’re not in, the combination with Metromile that will enable us to do that more effectively with car product. So you’ll continue to see a balance. But the focus is really more on lifetime value, and that’s increasing the retention of existing customers and increasing the dollar premium potential value of new customers. And we’re seeing that. The more recent cohorts, as Shai noted, look quite strong. And so when you see the amount of ad dollars we’re continuing to put to work, that’s because we can see that cohort activity with a stronger result. It’s — the publicly published numbers are a bit of a lagging indicator. And in our dashboards, we can see the monthly and quarterly updates look very promising.

Yaron Kinar — Jefferies — Analyst

Okay. And second question, probably further down this path. Can you maybe talk about the spread between the loss ratios of new and renewal customers? I don’t know if you can quantify it or at least give us some direction. Is it improving? Is it deteriorating, staying stable? And then maybe as a follow-up to that, with each renewal, do you continue to see an improvement in the loss ratio or does that [Indecipherable] over two three four renewals?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Yes, so we do see steady improvement over time when you look at the same cohort as it ages. In our earlier comments, we spoke about lifetime loss ratio and that’s really what we have in mind. So we don’t measure the value of our customer by the loss ratio in the first few months, but really by the projected loss ratio over their lifetime. And we do see a fairly steady drop in loss ratio of cohorts that have been with us for three and four years. You’ll see across the book a drop of oftentimes 15 or more percent from year one to year two and something not altogether different from year two to year three. It does vary by product. We don’t have enough years of cohorts, for example, in pet, yet alone in car, but certainly that has been the dynamic in homeowners.

Yaron Kinar — Jefferies — Analyst

Got it. One last one, if I could, really quick. You talked a little bit about some of the data that you were observing in Illinois as you launched Lemonade Car. Was the data similar in Tennessee? Was Tennessee just later in the onboarding of Car? I was just surprised not to see equivalent data from it.

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Yes. It’s just the launch of Tennessee was much more recent, that’s all. So we’re not seeing any significant differences. It’s only a few weeks of Tennessee, and we’ve got a full quarter of Illinois. So that’s just more substantial. But there’s nothing in Tennessee that contradicts or diverges from what we’ve seen in Illinois.

Operator

The next question is from Jason Helfstein of Oppenheimer.

Jed Kelly — Oppenheimer — Analyst

This is Jed on for Jason. How does the expansion of auto impact your outlook for the next two years? And then where is the outsized impact on the P&L?

Tim Bixby — Chief Financial Officer

So a couple of thoughts, and then I’ll let Daniel jump in, if he likes. So car is similar in some ways and different in others. So we are — historically, we’ve said that we’re agnostic between the types of premium we get. That’s probably a bit of an exaggeration. We really do like a customer who has all the product types. And so we do — we’re seeing the value of that. We’re seeing the specific impact in Illinois. That is important to us that more policies per customer that, that trend continue.

From a cost perspective, we’ve built a significant amount of the cost to support the car product. So we’ve got a product development team that’s in place. We’ve got a customer experience and claim support infrastructure in place, and the premium flow is still in its early stages. And so a lot of that investment has been made. Loss ratios will show some pressure, certainly, versus renters, which is a much more mature product and a quite different product. But I think the challenges of car may look more like home and pet in terms of our ability to launch a new product, experience a period of time where we have less data. And we’re — we’ve shown a track record of being able to optimize fairly quickly. If you look at the track record of pet over the last two years, of home over the last three years, there’s been a consistent result, challenging early periods, consistent optimization and now heading toward what ultimately is our target LTV and target loss ratios.

So we’ve got the infrastructure in place with car. I think the Metromile combination will fill a gap that we had with other products, which is a quick sort of a jump start to the experience, the data, $100 million-plus of in force premium. So that will be different for our car launch. We’ll be able to come to market with a bit more data intelligence around a pay-as-you-go or a pay-per-mile product in addition to a more traditionally priced product. And ultimately, we view — the primary goal is maximizing premium per customer, and that really means making car work for as many of our customers as it’s appropriate for.

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Maybe I’ll just add two or three quick thoughts. One is we’ve spoken about this before, but by our estimates, our existing customers are already spending over $1 billion on car insurance. They just haven’t had the opportunity of spending it with Lemonade. And indeed, the majority of our sales so far of Lemonade Car in Tennessee and in Illinois have gone to existing customers where our cost of acquisition was 0.

So if that dynamic can scale, if we can continue to grow that book in part by acquiring new customers and generating new on-ramps to Lemonade by people who are searching for insurance [Indecipherable] we can offer, complement that with offering it to existing customers, I think that will change the dynamics and the economics of our business pretty materially. It changes retention and dollar retention, in particular, in powerful ways as Illinois has demonstrated. Just think about the fact that today, we’re selling homeowners insurance with one hand tied behind our back because people do expect to bundle home and car and we can’t do that. So we’re effectively sending away our customers to our competitors who then offer them a bundled discount. And to date, we’ve not been able to contend with that head on.

As we roll out car, we will. So I think you’ll get the boost — the obvious boost of selling car, the less obvious boost of selling car without as much of a CAC spend, as you might imagine, because of the cross-sell dynamic that I referenced. And thirdly, a boost to our homeowners’ insurance because we’ll be able to retain those customers and attract them by offering them something that until now we weren’t able to.

The final thing I would just add is that in home and in pet, as Tim referenced, we’ve had a learning curve by generating our own data. We’ve got multiple billions of miles of data coming to us from Metromile and a highly differentiated product, our car product already launched and this will just be compounded by all the capabilities that Metromile bring is a highly differentiated product. This is not the same car insurance product that’s available on the market today. And I think the advantages in terms of data from the telematics that we’ve spoken about in the past should compound over time pretty quickly.

Operator

The next question is from Andrew Kligerman of Credit Suisse.

Andrew Kligerman — Credit Suisse — Analyst

First, I want to touch on expenses. So tech and development was $16.9 million, up from $7.1 million year-over-year. G&A, $28.2 million versus $14.1 million year-over-year. And I think Tim was touching on head count being up 76%. Could you give a little color on — in tech and development, where the spend is greatest, what products, where the focus is there. And same thing on G&A.

Tim Bixby — Chief Financial Officer

Sure. And I think important to note a couple of things about the expense flow. You’re correct in the year-on-year comparison and I think that’s helpful. I would note also that it’s helpful to look at the sequential comparison as well, and we’ll put the Q out later today, and you can see most of it in our letter published yesterday and what you’ll see, there’s really two primary expense line drivers. It’s people and its marketing, advertising, customer acquisition costs, and then we’ve kind of touched on the customer acquisition costs. The year-on-year comparison for people is fairly significant growth. But if you look at quarter-on-quarter or year-to-date, we’ve really seen a break in the sequential pattern. We’ve continued to hire great folks, but the net adds over time versus our sequential history has slowed rapidly. And that’s a good thing. And what that means is we ramped up significantly over the course of 2021, particularly for the build and launch of car. So we have to front-load expenses.

Car was the most significant launch we’ve ever conducted, but that’s where you’re seeing the bulk of that increase in R&D and product expenses, it’s what you see in the technology line. Those are the folks building that product. And so it’s front-loaded. And now we are at a point where we built that infrastructure that will continue to grow over time, but at a much more modest pace as the premium increases. So important to look at the sequential growth. And the headcount, I think we gave the number, I would compare that to Q4, and you’ll see the hard data that supports what I’m saying.

From a G&A perspective, a couple of things. One, in the expense lines, those, of course, include the stock-based compensation, and that has spiked up on a year-to-year basis primarily because of a higher historical stock price in past equity grants. So backing out that stock-based compensation, it is a real expense, but backing it out from a cash perspective, it will give you a more apples-to-apples cash expense comparison.

And then finally, within the G&A line, we did have somewhat higher expenses in the professional services and legal area, which are not head count-driven. And so that bumped up expenses in this quarter more notably than in the prior quarter. And probably, we’ll see some benefit in the next quarter — next couple of quarters, as I would expect that not to be at quite that level. So a little bit higher in Q1 than the surrounding quarters in the G&A line.

Andrew Kligerman — Credit Suisse — Analyst

Very helpful, Tim. And do you anticipate any big deltas in your G&A or tech and development once you bring Metromile versus where your expenses are now and versus where Metromile’s expenses are? Or do you think both entities’ expenses might be somewhat steady state?

Tim Bixby — Chief Financial Officer

So I would think of it in a couple of stages. You can see our expenses for Q1, you’ll be able to see Metromile’s when they publish their figures, which is either just happened or any moment. I think they’re on the same schedule as we are, same quarterly schedule. And so you’ll see the current run rate. And so that’s sort of Stage 1.

Stage two is at the point where we bring the companies together, and we expect that to happen before the end of the quarter. We’re still optimistic that we’re on track for that. So likely third quarter would be the first quarter you’d see a consolidation of the 2. I would expect a step-up certainly when we bring the two companies together effective as of the date they come together on a pro forma basis. And then you’ll start to see, as we bring the companies together and we’re able to take out redundant costs. Metromile, for example, has all the required infrastructure cost of being a public company as do we until those are fixed sort of — not fixed, but those are overhead costs that over time, will dissipate as we bring the companies together.

In addition, we have a hiring pace in our expense line, in our guidance, in our going-forward plan, a significant proportion of that planned hiring that’s in our model will likely come from Metromile. We know it will come from Metromile. And so you’ll see somewhat gradually over a quarter or two as we bring the companies together more formally, you’ll start to see us come toward a run rate. That is more of a go-forward run rate. So it will be less than just combining the two companies together, significantly less, but obviously, more so than Lemonade stand-alone.

Andrew Kligerman — Credit Suisse — Analyst

That was helpful. And just one more on the gross loss ratio of 90%. And I know somebody was asking a little bit about it earlier, but would it be possible for you to break out the underlying loss ratio, what the cat piece was and what the prior year development piece of that was?

Tim Bixby — Chief Financial Officer

So the stat filings will be out shortly. But at a high level, the prior period development rounded to 0, so no material development there. And then the cat piece, as I mentioned, was in line with prior periods without a significant cat and so that tends to be in the single digits. But really — but I think most importantly — and we touched on this a little bit but maybe I’d come back to this, the inflation impact is significant. It’s hard in these early months where it’s shifting pretty quickly, it’s hard to pinpoint it exactly. We don’t obviously guide to it. But if you just look at some of the metrics that are out there of today versus a year ago, you’re seeing effective inflation rates and all the key components that go into home rebuilding and home repairs, things like that, of 5% or 10% or 15% or more. And so it’s significant in that loss ratio.

Now we’re not taking comfort that everything is fine, we just need to catch up with inflation, but that’s — it’s significant. I think probably also worth noting what we’ve done about it. We’ve taken a significant — continue to take significant steps in terms of rates and filings, which we had done historically on a consistent basis, but ramped up in conjunction with the new inflation data we’ve gotten over the past year. Something close to 100% of our home and pet business will be subject to new rate filings in the coming months. That will get us, while it’s difficult to compensate for 100% of the inflation impact because it’s a bit of a moving target, we think we’ll be in good shape from both a specific rate adjustment standpoint as well as automatic rate adjustments where it’s allowable by law. We’ll have both of those components. We’ll continue to put those components in place.

Car is a little bit — car is new for us, right? We’re in one state, we’ll be rolling out in a number of states. So in some ways, it’s easier for us to adjust as we go as we roll out new states. So it’s something that’s clearly top of our radar list. Any time you see inflation rates of 20% or more, it’s obviously a serious thing. We’ve taken that into account and you’ll see it’s a bit of a lagging indicator, but you’ll see the effects of these filings take place over the coming couple of months and quarters.

Andrew Kligerman — Credit Suisse — Analyst

No doubt, tough inflation. Maybe if I could just sneak one last one. So what is it about your dashboard that tells you that you can get to that 75%? Is it the bundling? Is it renewals? Is it something else that’s in that dashboard telling you a 90% this quarter can go to a 75%?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Andrew, thanks for that question. The comment that I made was that the business that we acquired in the quarter was showing a lifetime loss ratio of under 75%. Of course, our actual book loss ratio includes sales from three and four years ago. So we do carryforwards. That part of the business, it takes time to earn into these newer rates. But just to be precise, that’s what Shai was talking about, was newly acquired customers in their lifetime loss ratio.

Now that is derived from machine learning models. So we now have several years and over 1.5 million customers as a training set for those machine learning models, and they are now able to predict with an increasing and pretty impressive rate of precision what — how likely a customer is to claim, how likely they are to churn, how likely they are to buy more products. And we use that in order to optimize our marketing campaigns that really generates for us a lifetime value as I think I’ve got a few years of history to test these models again. So we have — our confidence in them has grown pretty significantly over the recent months as we see that they are just very good at telling us what these customers — or how these customers will behave a year and two and three down in the road. And it is those machine-learned models and predictions that we were referring to and saying that newly acquired business, according to these machine learning models, will be profitable business and their loss ratio will be sub-75%.

Operator

The next question is a follow-up from Michael Phillips with Morgan Stanley.

Michael Phillips — Morgan Stanley — Analyst

Your new homeowners customers, can you tell us either maybe specifically or just broadly, are those coming from graduations from renters or are they coming from purely new customers?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

I mean it’s not purely new customers at all. We see in our condo business, which is typically the most common up-sell. So renters oftentimes will move from a rental to a condo and then from a condo to a homeowner. We’ve seen a steady increase in the percentage of our condo business that comes from graduation. I haven’t checked in the last couple of weeks, but it was just shy of 20% last time I looked at it, which is about double what the percentage was at our IPO a couple of years ago. So that has been a steady up into the right increase. If memory serves across a book of homeowners, it’s close to 15%. I may be off by a percentage point or two but that is, broadly speaking, where the — how the percentages break down.

Michael Phillips — Morgan Stanley — Analyst

The 15% again, the 15% was purely new. That’s still like 85% is graduation, 15% is fairly new is what you meant?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

No, no, I’m saying if you look at the totality of our homeowners book, and you ask how many of the people who are today a homeowner, either condo or homeowners, about — something about ballpark 15% of them started life with us as renters and then graduated. That number is increasing quarter-on-quarter. I believe every quarter since we launched pretty much we’ve seen that number increasing. And condo is ahead of homeowners and that’s closer to 20%.

Michael Phillips — Morgan Stanley — Analyst

Okay. The reason I ask is I think of you guys as being a homeowners insurance company by first going after the renters and then pleasing and delighting them, as you say, so that when they do mature and go through life stages, they then stay with you as they become homeowner as compared to specifically targeting your marketing towards homeowners customers. And so that’s how I think of you and make sure that’s still accurate as the way you kind of go about getting the homeowners business.

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Yes, it is accurate. It is still the case that something close to 90% of our customers are joining us as first-time buyers of insurance. Oftentimes, the on-ramps that we spoke about, renters, the thesis that you just laid out for renters is now repeating itself with other products as well. So pet affords another on-ramp and people come looking for pets and will add to his other products, but in broad strokes, yes.

Operator

Next question is from Tracy Benguigui of Barclays.

Tracy Benguigui — Barclays — Analyst

Apologies I had to join this call late, was on another earnings call. So if my question was already asked, my apologies. Could you quantify the rate increases you’re seeking in your 100 filings and if you’re getting any pushback for it by regulators as they’re trying to protect their constituents who are also facing higher inflationary pressure?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

The question was not asked, so thank you for that. It varies tremendously from product to product and state to state. So it wouldn’t be responsible for me to give you kind of a blanket answer for that, it really is a matrix of three or four by 50, and we try to do this with a tremendous precision. And in fact, even that, in large measure, understates things because rather than just doing kind of crude base rate increases, we do use all the data that we gather in order to become more and more refined in our segmentation. And even as we raise rates in California for a particular product, we might be decreasing it for some customers, increasing it for other customers. So it is a fairly complex matrix.

And yes, of course, we do get pushback. There are places where it’s harder and easier or slower or faster to get rate approved. I think the state of California has earned a special place in the hearts of insurers nationwide for being a place that it’s been tricky, particularly for homeowners, to take a rate commensurate with the risk, and we’ve seen an outflow of a lot of insurance companies from that state for that reason. So I’m not sure it’s actually protecting consumers. It’s actually making it harder for them to get insured. But yes, in some states and for some products, it’s harder than in other areas.

Tracy Benguigui — Barclays — Analyst

Okay. And are you including an inflation guard in your homeowner policies to complement rate increases? I think that you can implement right away.

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

Yes. So we do have an inflation guard approved in most states for our homeowners products. So we do have that capability. But we’re doing something beyond that. We’re doing a couple of things beyond that. So one is we are doing broad base rate increases. I spoke about the subtleties of segmentation. But when it comes to just keeping — tracking inflation, and then we can do kind of base rate increases in order to keep track with inflation. In some parts of our business, it’s very necessary. Tim spoke about some of these numbers before. But to add some color, the National Association of Homebuilders say that rates for construction have risen 10% in five months, 20% in 12 months and over 30% over the last 24 months.

So some areas like car, like home are suffering hyperinflation, not just the inflation that we read about in the papers. And so we are taking broad measures to keep up with inflation. But beyond that, actually built into our system — I referenced this earlier, built into our system is the ability to adapt — or update, rather, [Indecipherable] which is the construction replacement cost in a homeowners’ policy, to update that every time that policy is renewed. So we have access to a fairly broad and deep and current databases so that we can gauge with increasing accuracy more than we ever had before, how much would it actually cost to affect that replacement or repair and for both new products, new customers and on renewal, we are using the latest and greatest estimates. So inflation does flow that way as the limits increase because the costs have increased the rate tax to that pretty accurately.

And if in the past, we were a little bit more tolerant in our underwriting guidelines, allowing people to select a replacement cost that is lower than what our databases are suggesting, we gave a 20% wiggle room in the past. New underwriting guidelines are tightening that up as well. And we won’t be ensuring homeowners where their ratio is less than 100%. So we’ll be trusting these data sets and insisting on the implementation, and that should keep us continuously adapting to inflation as well.

Tracy Benguigui — Barclays — Analyst

Is there any shift to move to actual cash value from replacement cost?

Daniel Schreiber — Co-Founder, Chief Executive Officer, and Chairman of Board of Directors

No. Our policies are replacement cost is what our customers expect. We pride ourselves on that. There’s no talk of changing that.

Operator

[Operator Closing Remarks]