Lemonade Inc. (LMND) Q3 2020 Earnings Call Transcript

Lemonade Inc. (NYSE: LMND) Q3 2020 earnings call dated Nov. 11, 2020

Corporate Participants:

Yael Wissner-Levy — Vice President, Communications

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

Shai Wininger — Co-Founder, President, Secretary, Treasurer, Chief Operating Officer and Chief Technology Officer

Tim Bixby — Chief Financial Officer

Analysts:

Michael Phillips — Morgan Stanley — Analyst

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Ron Josey — JMP Securities — Analyst

Ross Sandler — Barclays — Analyst

Matthew Carletti — JMP Securities — Analyst

Heath Terry — Goldman Sachs — Analyst

Michael Zaremski — Credit Suisse — Analyst

Arvind Ramnani — Piper Sandler — Analyst

Presentation:

Operator

Good day, and welcome to the Lemonade, Inc. Q3 2020 Earnings Conference Call. [Operator Instructions]

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

Yael Wissner-Levy — Vice President, Communications

Good morning, and welcome to Lemonade’s third quarter 2020 earnings call. My name is Yael Wissner-Levy, and I am the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger COO and Co-Founder; John Peters, Lemonade’s Chief Underwriting Officer; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company’s third quarter 2020 financial results is available on our Investor Relations website, investor.lemonade.com.

Before we begin, I would like to remind you that management’s remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Risk Factors section of our Form 10-Q for the three months ended June 30, 2020 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

Good morning. I’m happy to report that our third quarter returned strong results along all key performance indicators. Despite concerns that the pandemic might disrupt migratory patterns and with them our seasonably strongest quarter, we in fact, saw a robust growth and sustained improvements across our unit economics. Year-on-year, our in-force premium or IFP doubled. Our adjusted gross profits jumped 138%, while our losses per dollar of gross earned premium halved. Tim will elaborate on all our numbers shortly.

Perhaps the most noteworthy thing that happened this quarter though is something that didn’t happen. The dog that didn’t bark by a phrase from Sherlock Holmes. In Q3, we had a major non-event, which is easily missed and which I’d like to highlight. Wildfire season in the Western United States started early this year and the fires in Q3 alone made this year California’s most destructive fire season ever. Hurricane season was equally ferocious. The National Hurricane Center named storms alphabetically, starting with A. By mid-September, they had literally run out of the letters and they had to start over this time with the Greek alphabet. That has never happened so early.

These unprecedented disasters hit the most popular state in the union, which are also home to the majority of Lemonade’s customers. Against this devastating backdrop, we see the significance of the dog that didn’t bark. Our loss ratio for Q3 remained perfectly healthy. In fact, at 72%, it was more than 7% lower than the corresponding quarter last year. As a reminder, below 75% loss ratio, our re-insurance make money. A 25% take is safe even without reliance on reinsurance, and this typically leftover money will get back.

If our annual gross loss ratio occasionally top 75%, that would also be okay, and our economics would be largely unchanged because our reinsurance would finance most of those excess losses. But the fact that our loss ratio didn’t spike even as catastrophe did is a non-event of note. To put it into perspective, the industry is forecasting that home insurance companies will put the bill for about $10 billion of catastrophic or cat losses for Q3.

If our underwriting was nearly industry average, based on our market share, we could have expected cat losses of about $17 million and a gross loss ratio of about 100%. Our actual cat losses though were some 75% lower than our pro rata would have predicted, and our loss ratio declined year-on-year. This I believe is testament to our cautious approach to underwriting in the wildfire zones and hurricane-prone parts of the country, and it shows that we’re not growing by loading up on tail risks.

Speaking of tails and dogs and barking, the second thing of note this quarter was our launch of pet health insurance. It’s our first foray into an insurance sector beyond homeowners, and it’s off to a rolling start. About 40% of pet policies were sold to first-time Lemonade customers. These newcomers alone delivered about nine times more IFP than we generated from newcomer to Lemonade in the three months following our initial launch four years ago. And we did that at a rate of marketing efficiency that it took us three years to achieve with our renters products.

Not only has pet insurance provided an additional on ramp to Lemonade, but about 5% of the income is added on rent to the homeowners’ policy within their first quarter with us. And as compelling as the metrics look for newcomers, they were better yet for existing customers who comprise the majority of our pet insurance buyers. Each of these added an average of $450 to their premium, an almost four-fold jump in their medium premiums without us incurring any cost at all to acquire the incremental premiums.

Pets maybe our first step beyond homeowners insurance, but as you all soon hear, it won’t be our last. Our experience three months post-launch affirms our strategy of acquiring customers young when the needs are modest and ensuring they get a fabulous experience with Lemonade so that as they progress through predictable lifecycle events, their insurance needs grow often by orders of magnitude and they do that growing with us.

This significant up-sell and cross-sell phenomena continues to gain steam within our homeowners business too. About 12% of our condo policyholders in Q3 started as renters at Lemonade and then graduated to become homeowners with Lemonade. In fact, while our overall IFP doubled year-on-year in the third quarter, our IFP from customers graduating from renting to owning grew by over 300% during the same three months. That’s significant. The premiums of these graduates grew six-fold on average from $150 before their graduation to $900 after, again, with no incremental cost to acquire the incremental premium. We believe these trends both within the homeowners and between product lines have tremendous runway. We hope to give them a further boost by adding more products.

And on that note, let me hand over to Shai to update you on what’s coming next. Shai?

Shai Wininger — Co-Founder, President, Secretary, Treasurer, Chief Operating Officer and Chief Technology Officer

Thank you, Daniel. In the insurance industry, there is an invisible boundary between P&C insurance and life insurance. The regulatory frameworks for the two are quite distinct, and insurance companies tend to settle into one domain or the other. We understand their considerations, but we strive to prioritize product launches based on customer needs rather than regulatory frameworks, which is why in recent months, we established the Lemonade Life Insurance Agency, and why we plan to bring the Lemonade experience to the term life market in the coming months.

Beyond giving you a heads up about the forthcoming product launch, I’d like to use this announcement to highlight how we think about product and initiatives and their associated risks and returns. It is noteworthy that we’re placing a bet on term life even though we’re not certain it will be a winner. Teams we respect at other tech-enabled insurance companies have struggled to make the economics of digital acquisition work with term life policies, and we offer no guarantee that we can do better.

So why are we launching term life? Because there are important differences between us and them. Differences that make this a smart bet despite the uncertainty. For one, the downside is modest because we’ll be leveraging technologies and systems already in place. We will not be underwriting those policies ourselves and we’ll have a captive audience of million customers to whom we can market for free. This is something we’re excited about. Our technology platform, user experience and incredible customer service can be leveraged for product we built from scratch as well as for ones that others underwrite.

For another, the same me to we events that trigger graduation from renting to homeownership are often triggers for buying one’s first life insurance policy too. The average age for buying the first home in the U.S. is about 33, which is also about the average age when college grads have their first child, and is also about the average age of Lemonade customers.

Finally, while the cost of this bet is not high, the potential price is big. According to researchandmarkets.com, the global term life insurance market stands at about $800 billion this year, and is expected to grow more than 10% compounded annually to over $2 trillion by the end of the decade. As we wrote in our S1 Founders’ letter, we prefer to make decisions under conditions of uncertainty and to abandon bad debts as soon as the data reveal them to be so. That translates into greater volatility, but also to better aggregate returns. It’s a trade we’re comfortable making.

And with that, let me hand over to Tim for a bit more detail around our financial results and outlook. Tim?

Tim Bixby — Chief Financial Officer

Great. Thanks, Shai. I’ll give a bit more color on our Q3 results so as expectations for the fourth quarter and the full year 2020, 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 premiums grew 99% in Q3 as compared to Q3 in the prior year to $188.9 million. 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 19% versus the prior year to $200 million. This increase was driven by a combination of increased value of policies over time as well as mix shift toward higher value homeowner and now pet policies. Roughly two-thirds of the growth in premium per customer in Q3 was driven by this product mix shift, and the remaining one-third from increased coverage levels.

Gross earned premium in Q3 increased 104% as compared with the prior year to $42.9 million in line with the increase in in-force premium. Our gross loss ratio was 72% for Q3, despite significant cat activity in the quarter, representing an improvement from 78% in the third quarter of 2019. We continued to expect our gross loss ratio will vary over time within a target range for annual loss ratios, but below 75% with occasional short-term results slightly outside this range. It’s notable that the average gross loss ratio in the P&C sector overall in recent years is approximately 82%, and for the top 20 players about 72%. Even in a tougher cat quarter, our gross loss ratio remained highly competitive.

Operating expenses excluding loss and loss adjustment expense increased just 11% in Q3 as compared to the prior year with sales and marketing expense again actually lower by nearly 25% as compared to the prior year due to continued improvement in our marketing efficiency. Also to note, certain G&A expenses increased, as expected, related primarily to public company expenses like corporate insurance and professional services.

We also continued to hire new Lemonade team members in all areas of the company in support of customer and premium growth and new product launches, and thus saw increases in each of the other expense lines. Global headcount roughly doubled versus the prior year to 459 people with a greater growth rate in customer-facing departments and product development teams.

Net loss was $30.9 million in Q3, slightly better than the $31.1 million loss we reported in the third quarter of 2019, with a notably larger customer in in-force premium base, while adjusted EBITDA loss was $27.6 million in Q3 as compared to $30.4 million in the third quarter of 2019. Our cash, cash equivalents and total investments balance ended the quarter at $597.4 million, reflecting primarily the net proceeds from our July public offering of approximately $335 million, partially offset by the use of cash for operations $71 million since year end 2019.

With these goals and metrics in mind, I’ll now outline our specific financial expectations for the fourth quarter and the full year of 2020. For the fourth quarter of 2020, we expect in-force premium at December 31 of between $200 million and $205 million. Gross earned premium of $46 million to $48 million. GAAP revenue of between $18 million and $19 million. And an adjusted EBITDA loss of between $34 million and $32 million. We expect stock-based compensation expense of approximately $3 million and capital expenditures approximately $1 million.

For the full year 2020, we expect again in-force premium at December 31 of between $200 million and $205 million. Gross earned premium between $154 million and $157 million. GAAP revenue of $91 million to $93 million. And an adjusted EBITDA loss of between $103 million and $100 million. We also expect stock-based compensation expense for the full year of approximately $11 million and capital expenditures of approximately $4 million.

And as a reminder, please note that GAAP accounting rules are such that ceded premiums are excluded from GAAP revenue. As a result, as we’ve noted of this change in our reinsurance structure that was effective on July 1 to a significant proportional reinsurance structure, our year-over-year revenue and gross margin comparisons are not comparable. Accordingly, we published in-force premium and gross earned premium as metrics that we believe are useful to analysts and investors because each captures the overall growth trajectory of the business before the impact of reinsurance.

Thanks so much for joining our second quarterly review as a public company. We do appreciate your interest and support. With that, I would now like to turn the call back over to the operator who can perhaps rejoin the call with Q&A instructions, and we’ll be happy to take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And today’s first question comes from Ismael Dabo with Morgan Stanley. Please go ahead.

Michael Phillips — Morgan Stanley — Analyst

Hey, thanks. Good morning, everybody. It’s Mike Phillips actually. I appreciate the time, and congrats on a nice quarter. I guess, I’m going to start off with the top-line and customers. Last quarter you had guided to what could be a tough quarter this quarter because of seasonality, maybe people are not moving as much as they typically would. And so can we drill into the new customers, the growth there. Not the in-force premium, but the actual new customers. Where did you see that coming? Did you see the headwind you expected or they’re offset by something else or within headwind that did not show? So kind of just drilling down into where the new customers came from, I guess?

Tim Bixby — Chief Financial Officer

Hey, Mike. Sure. So the customer growth came in remarkably as expected, but as expected in a more normal year. We have been cautious in Q2, heading into Q3 about what some of the cyclical changes might be this year. And the reality is, we just really haven’t seen them. We’re seeing seasonal patterns repeat. A significant part of the reason I think that the numbers came in quite strong this quarter is because of the things that we had a little more concern about earlier in the year are not happening to a great extent. So we’re continuing to add customers at a very healthy pace.

Important to note that we do focus even more so than customers on dollars. So premium growth is paramount. So sometimes the ebb and flow of the customer count can be slightly offcycle with that. But we are really happy with both the customer count growth and the premium growth. And I think you’ll see sort of in the guidance and in some of the comments we make today that we’re really seeing the year come together from a seasonality standpoint, very much in line with what we’ve seen in prior years.

Michael Phillips — Morgan Stanley — Analyst

Okay. Thanks, Tim. You talked about the cat numbers. Your net loss ratio was actually really strong, obviously. How much of the 6% cat number that you talked about flow into gross, on the gross side? How much of that was — what was your cat net loss ratio? And then if you could talk about what was underlying the really strong — I guess, we backup something from the cat, I don’t know how much the 6% was on a net basis. But what was behind the really strong underwriting results from a net basis?

Tim Bixby — Chief Financial Officer

Yeah, I would think — I don’t have a disclosable number today. We’ll have the statutory filings out shortly for specific cat numbers. But generally, I can say that we saw roughly 10 points of impact from cat in the quarter. A normal quarter does have some cat impact. So not all of that was incremental from the more significant activity, probably something like half or roughly half of that impact I think would be out of the norm.

One thing to note, if you’re looking at the net loss ratio versus the gross loss ratio, there are some nuances because of our reinsurance transition that happened on July 1. And so we’ll continue to kind of share that overall gross loss ratio. That 72% number is really the apples-to-apples comparison. And so if you back out the cat and you think about where we were last quarter at 67%, pretty much right in line and also even with the cat activity in line with where we were in Q1. So we’re really pleased with how our underwriting enabled us to really weather what I think was a pretty significant test this quarter and bringing the loss ratio, both on the gross and net basis that I think shows really strong performance.

Michael Phillips — Morgan Stanley — Analyst

Okay. Quickly, just one quick follow-up there. When you said 10%, did you mean the net is 63% would have been 53% without the cat?

Tim Bixby — Chief Financial Officer

I’m focused on the growth. But yeah, think of it on a gross basis.

Michael Phillips — Morgan Stanley — Analyst

Okay. And then I guess last one, and I’ll circle back. On your comments on the sales and marketing spend, and Tim you mentioned, while there are some efficiencies there that you’re getting, so the dollar amounts were more lower. Were there any proactive reasons to lower because of what you’ve thought might happened in the quarter with people not moving? So did you pull back any proactively on sales and marketing because of concerns in the quarter?

Tim Bixby — Chief Financial Officer

So we don’t really pullback in anticipation of things we’re not sure whether they’re going to happen. We’re managing this in real time. And so when we see the ability to spend, we spend. And I think when you see the quarter in aggregate, it’s hard to see that sort of the ebbs and flows of how we manage the gross spending on a day-to-day basis. But we saw, again, really consistent patterns with what we’ve seen in prior quarters — sorry, prior years. And that’s really kind of an arc over the course of Q3. Q4 is a seasonally tighter quarter generally. That’s what we’ve seen for few years now. That’s I think reflected in the guidance. But I think just doing a year-on-year comparison on what we’re spending for marketing and what we’re bringing in, it’s pretty — I was going to say extraordinary, but as a CFO it’s inappropriate to say that. But still a doubling of our efficiency, more than doubling of efficiency year-on-year. It’s just been a really significant improvement over the past four quarters.

Michael Phillips — Morgan Stanley — Analyst

Okay, thanks. Last one real quick, I guess, and then I’ll jump off. In your comments on lifetime value, you talked about the IFP and how that grew 300%, over 300% in the quarter compared to last quarter from the graduation to homeowners. In your comments on the condo, it went to 12%, 12% of condos have graduated from renters. So I guess, I just wanted to touch upon the wording here on the lifetime piece. The 300%, is that graduating from — to condos or can you make a distinction between condos versus homeowners in that 300% or is that to condo versus homeowners, which one is that?

Tim Bixby — Chief Financial Officer

Sure, sure. Those are…

Michael Phillips — Morgan Stanley — Analyst

You’re talking about the 12% in the condo, that’s why I’m asking.

Tim Bixby — Chief Financial Officer

Yeah. Two very different metrics, but on the same topic. So the condo percentage is condos alone at 12%. And if you think back it’s something we’ve talked about for about a year, that’s a nice steady upward march. The 300% we looked at all of our homeowner graduation. So whether condo or home combined, and we saw an uptick congratulation rate three times higher than a year early. So good progress, but those are two different metrics.

Michael Phillips — Morgan Stanley — Analyst

Yeah, sure. Okay. Thanks, Tim. I appreciate it. Congrats guys.

Tim Bixby — Chief Financial Officer

Yeah. Thank you.

Operator

And our next question today comes from Jason Helfstein with Oppenheimer & Company. Please go ahead.

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Thanks. Kind of two questions. The first, maybe just broadly, why life insurance versus car insurance because I think just — that’s just a question people will have, do you think about vertical expansion? And then the second, kind of with the launch of the life, how do you think that will impact reported marketing efficiency? And to the extent that you lean into that, is there a way to — would you be able to kind of separate out the impact over the next 18 months so we can understand kind of the efficiency in the legacy business versus the investments in new business, etc.? Thanks.

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

Jason, good morning. Daniel here. Let me take the first part of your question. It’s not life instead of car. It’s, as we’ve spoken at different times, our aspirations are pretty expansive here. We’re looking to build really one of the — the hubris behind what we’re doing is that we want to build an iconic insurance company for the 21st century and that it’s going to be customer-centric and cater in the fullness of time to all of our customers’ needs and grow with them as those needs grow in turn.

Three months ago, we launched life. We’ve announced today that within three — sorry, we launched pet. We’ve announced today that within three months we will launch life. And so you see that we are at a fairly steady clip launching new products. And you can assume that before we’re done, we will launch all the products that our customers need. So it’s really just a question of sequencing rather than a question why one rather than the other.

As Shai mentioned specifically around life, there is a goodness of fit to other things that we talk about. So Tim just gave some numbers to Mike about graduation. And we do see that this kind of me to we lifecycle events when people go from being individuals to being families to having responsibilities that often coincides with buying a home, with having a kid, with establishing a family. Those things are on largely events that happen in close proximity one to the other and you do see that the buying habits of life and home overlap a great deal. So we do feel like there is a goodness of fit the right stage in life. But as I said, like in earlier comment, this isn’t one product instead of the other. It’s just one before the other. Tim?

Tim Bixby — Chief Financial Officer

Yeah. And maybe from a marketing efficiency or unit economics standpoint, at this point, pre-launch — you shouldn’t expect any dramatic shift in how we think about what we invest in marketing versus the dollars we acquire. We’ll think of the customers holistically, and I think we’ll probably see something that looks like pet to some extent to some extent where we’ll have customers who buy life only as their first product and then hopefully branch into other Lemonade products and vice versa. We’re nearing 1 million customers before too long. And we anticipate that some percentage of those existing customers will also have life insurance needs.

And so it’s common when we launch new products that the — our internal key performance metrics and indicators start at a certain place and then intend to improve over time. It’s kind of the nature of anything that’s new. So I would expect that to be the same for us. But we have in the past optimized reasonably quickly. Pet actually got to a place quite a bit more quickly than our renters launch several years ago. And so this is something we’re pretty good at. I wouldn’t expect dramatically different unit economics due to the life lunch.

Jason Helfstein — Oppenheimer & Co. Inc. — Analyst

Thank you.

Operator

And our next question today comes from Ron Josey at JMP Securities. Please go ahead.

Ron Josey — JMP Securities — Analyst

Great. Thanks for taking the question. Daniel, I wanted to drill down a little bit more on life insurance. And in the letter you talked about launching it based on customer needs versus the regulatory framework. So maybe a follow-up to Jason’s questions in terms of sequencing. Just talk to us about what your research is telling you with the launch of life? Why life comes first? And then what your research is telling you in terms of what your users are asking for? And then you mentioned a few times, and Shai, you mentioned about abandoning bad debts based on data. Just talk to us about KPIs and timelines you’ve set to make these decisions as we do see newer verticals launch, which seems to be a cadence of every quarter now? Thank you.

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

Ron, Hi. Thanks for that. And yeah, we did elaborate on this a little bit in the shareholders letter as well where we — I think the subhead of the paragraph about life talks about that sometimes launching a product is the best market research. And what I — what we mean by that is that there is data out there about term life insurance. I gave some indication about why we think the age and stage triggers that results in the purchase of home insurance, it could also be good for life insurance. But honestly, we are approaching life insurance a little bit more cautiously. The data out there is mixed. The market is clearly vast, hundreds of billions of dollars going to trillions of dollars and overwhelming majority of our homeowners customers do pay somebody term life insurance and we just assume, have them pay it to us, and those are very sizable premiums.

So the time is definitely worth going for. And as Tim mentioned, we will have I think by the time we launch this, a million customers that we can market to internally, which also speaks to Jason’s question about cost of acquisition and some of those other dynamics in the whole symbiotic story is coming together nicely. That said, we are being a little bit cautious on life simply because we’ve seen others struggle in this arena and fast, it’s new, and we like pleasing these kinds of bets. But there are wheel and caps, a glass ceiling on how much you can trust or glean from market research. So we do speak to customers. We get inbound inquiries from customers. We read all the research that’s readable and yet — and my honest answer to you is that we really don’t know if this is going to play out. At what kind of speed it would play out. What kind of adoption. And we’re cautious about declaring victory before earning the right to do so.

The one other thing runs [Indecipherable] one more piece. One of the really nice things about this launch and some of the other things that we’re doing as well is that these are bets, we do regard them as bets rather than certainties, but they’re not that the company moves. The risk that we’re taking actually very modest because we are leveraging everything I’ve already done; all of the technologies, all of the branding, all of the use experience, all of the support staff, the licenses and the installed base. So it’s really a question of getting leverage of using all the things that we’ve already paid for, for more and more and more products.

Life is very much being launched in that way. It’s an exciting thing for us to be able to start to use everything that we’ve built for renters and homeowners and just layer on top of it some new products. So it is a bet, but it is a modus anti with tremendous upside. We like those kinds of things. The expected return, the expected value of that kind of branch is pretty compelling.

Ron Josey — JMP Securities — Analyst

That’s great. Thank you, Daniel.

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

Thanks, Ron.

Operator

And our next question today comes from Ross Sandler of Barclays. Please go ahead.

Ross Sandler — Barclays — Analyst

Hey guys. Just two questions. So it looks like we’re generating the highest gross profit per customer yet in company history, so congrats on that. Can you just talk about how retention and CAC trended versus your 3Q plan? And if LTV to CAC continues to improve, should we expect you to lean back in and crank up the marketing a bit more in the future? And then the second question is, as a California resident, yeah, fire season was pretty rough out here. Can you just remind us how the partnership with Palomar works? Are you guys underwriting renters and homeowners in California or are they doing it on your behalf? Just remind us how the California arrangement works. Thank you.

Tim Bixby — Chief Financial Officer

Sure. So California is essentially all us for this purpose. We do have earthquake coverage that’s available to Palomar. But the vast majority of the coverage and the things that we’ve been talking about today, that’s all Lemonade. So we’re exposed. But clearly by the — really strong performance in the loss ratio we’re exposed at a very limited level.

Your other questions, I think maybe hit retention first. So retention is stable and modestly up is how I would term it. So if you look at the year one and year two retention levels that we’ve disclosed very specifically since we’ve gone public, those are steady and stable. Dollar retention and internal sort of longer term numbers that we could do internally is starting to look somewhat more positive. That takes a while to filter through the system. But I think the headline there is, nothing deteriorating and really kind of a year of uncertainty. So I think that’s definitely part of our confidence in our spending and how we’re guiding and how we’re heading into the fourth quarter and into next year.

On your marketing question, I think the way you put it is exactly right. Leaning in is exactly how we think about it. So if you look over the past two quarters or really three quarters if you include pre-public where we’ve seen cost savings or EBITDA improvement, we’ve tended to reinvest with the exception of kind of April where things were really uncertain. That’s been the mode of operation. I expect to continue that in Q4. It’s a little more seasonally light. but regardless of that, I think we’ll continue to lean in.

We’re not giving guidance for next year at this point. But I think the best guide for our future approach is what we’ve done in the past. And for many quarters in a row now, we’ve hedged toward more investment. More investment, meaning, when we have more confidence, we spend a little more. And as long as those — our CAC ratios are steady or showing some improvement, we’ll continue to do that.

Operator

Thank you. Our next question today comes from Matt Carletti with JMP. Please go ahead.

Matthew Carletti — JMP Securities — Analyst

Hey, thanks. Good morning. I was hoping to touch on pet insurance quickly. Clearly off to a good start, just hoping you could comment a little bit on kind of lessons learned. I mean, it seems like things are going well, what has surprised you? And then kind of how can you take those lessons and apply it to whether it be going in the life insurance or whatever else might be ahead of us?

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

So hi, Matt. Daniel here. It’s been three months, and the first three months have been a very positive surprise. And one of the things that you know with insurance you can’t really beta test products. We were just talking about this in the context of life. Sometimes you do the market research live and you learn the lessons post-launch rather than pre-launch. So we did try to do our diligence beforehand. But one never really knows until you go out there and in terms of the customer.

And we were very excited about the pet insurance product. It is unlike some of the other categories we have, home and rent and life for that matter where penetration is very high. Pet is a woefully underpenetrated market, something like 99% of customers of pet — parents in the U.S. don’t have pet insurance, and it is fast growing. So it’s small, but fast growing. And it’s a real opportunity for us to enter a space that is really kind of vacant, some kind of Blue Ocean and going there and rethink from scratch what pet insurance should look like, what it should cover, what the experience should be, what the response time should be and to bring some of our thinking of Lemonade to everything from the ground up, rewrite the policy from scratch and the coverage do it all in-house work with regulators, build the technology, etc.

And so it was a source of great pride. I think it’s one of our finer moments really launching this product. We used everything that we’d learn through the preceding five years and poured it into the design and the user experience and the customer support and the underwriting, everything really came together beautifully. The nice thing for us is not only that all that seems to be rewarded, we’re seeing just a lot of interest, fast sales, tremendous marketing efficiencies beyond our expectations. Not that we knew exactly what to expect, but at least internally, we have a consensus that this is not what we expected. It is a lot better. But the really nice thing is to see the lifecycle story come together just like graduation to be able to see that 40% of the people buying this treated pet insurance as a new on-ramp. These are people who weren’t Lemonade customers and now we have an entirely new set of tools to acquire new set of customers, who otherwise we wouldn’t have got to. And once we got to those customers through an avenue that was unavailable to us just a quarter ago, 5% of them within a matter of weeks added a homeowners or renters policy.

So we really think that the force of the cross-sell of the different products being able to serve as new points of entry both to the company and then one to the other. And the dynamics for existing customers that actually comprise the majority of our pet policy owners, but even more dramatic, so seeing them increase their premium, the median increase in premium was 400% or just shy of 400%. So all in all feel very, very good about the way pet played out. And we just hope that it both continued the growth trajectory that it’s on and that we can replicate it with products to come.

Matthew Carletti — JMP Securities — Analyst

Great. If I could, just a quick clarification, just with the life insurance launch. Just want to confirm, when you say you will be underwriting it that you’re just purely acting in an agency capability, won’t be retaining any risk, but obviously controlling customer experience and marketing and all those sorts of things?

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

That’s exactly right. The user experience will be very much a Lemonade experience, but the underlying policy will be on somebody else’s paper. To the consumer this will be largely a transparent issue. But yeah, it’s exactly what you just described.

Matthew Carletti — JMP Securities — Analyst

All right, great. Thanks for the answers, and best of luck.

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

Thank you.

Operator

And our next question today comes from Heath Terry at Goldman Sachs. Please go ahead.

Heath Terry — Goldman Sachs — Analyst

Great. Thank you. Daniel, I’d like to dig a little bit further into graduation. To the extent that the urban exodus wasn’t a negative for the renters business, could it have been a positive for your homeowners business? Did you see any signs of Lemonade renters, customers in cities moving out to become Lemonade homeowners customers?

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

Hey, Heath. Good morning. I don’t have any data to support or debunker thesis. So I really can’t — I don’t know, Tim, if he knew something that I don’t. But I couldn’t confirm or deny that. I just don’t know.

Heath Terry — Goldman Sachs — Analyst

Got you. And then on the life insurance side of things, just to the extent that you’re — that you’ve gone in this direction of opening up your customer base to other insurers, is this something that you could see yourself quickly doing on a commissioned agency basis in other areas of P&C categories, maintaining a Lemonade — kind of the Lemonade experience, but you’re using this type of model to just very quickly add auto and all of those to the categories in a much faster — at a much faster pace than maybe you might have otherwise?

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

Thanks, Heath. And let me share with you how we think about these things. This is actually not our first time doing this. Somebody mentioned on the call earlier about Palomar. So for example, our earthquake insurance in California and elsewhere is not written on our paper, albeit through our platform, through our technology, and for consumer it will give a very seamless and integrated experience. But we have already been doing that.

So in some categories, we feel there is not a great fit between the kinds of risk that we want to retain or the kind of user experience that those involve. So for example, term life insurance is a product with very thankfully, very rare claims experience. The claims happened and sell them. And when they happen, it’s after the passing of the policyholder. So unlike the high frequency claims or pet and home and renters, this is one with low frequency, very low need to interact and to control the claims experience. There’s also very little doubt and litigation about the claims experience because life policies are resolved with the death certificates. So there is very little room for arguments there.

So perhaps that made a lot of sense to partner with somebody where the underlying risk was borne by them, but we control all of the user experience. We can offer the kind of level of experience that we want. I’m not sure that that will apply across the board. And it’s really — the answer to your question about car insurance, other insurance has already been answered by asking a question, how can we give the consumer the best experience that we want them to have and that they come to associate with a Lemonade brand.

And oftentimes, beyond sizable the case with pet insurance is we do it all ourselves. The existing infrastructure or the dependencies on incumbents and incumbents will experience to an extent that we don’t feel comfortable with. And that’s really the prism through which or the litmus test through which we decide what to do ourselves and went to Palomar.

Heath Terry — Goldman Sachs — Analyst

Great. Thanks, Daniel.

Operator

And our next question today comes from Mike Zaremski with Credit Suisse. Please go ahead.

Michael Zaremski — Credit Suisse — Analyst

Hey, good morning. I’m curious if there were any changes in the ways your new customers has got nice policy growth better than expected I think? Any changes in the ways your customers were acquired? I think there is some third-parties that showed that the app downloads of Lemonade might have been down a little bit and you can tell me if that’s incorrect, and maybe you saw a migration to the desktop?

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

Yeah. So kind of a two-part question. So the short answer is, no. No real change. Obviously, there is an immense amount of change, sort of by hour or by day. But if you look at it over the course of the month or the quarter, a consistent team of optimizing key channels and finding the best return were pretty agnostic in terms of geography. So it’s less about what states or what regions or even what countries for that matter. We kind of go where the return is, and that was substantially unchanged.

On the app download question, it’s a great question, because it can indicate something that’s actually not happening. And so the way that our system works, from time-to-time it changes in terms of what proportion of customers choose to download the app or need to download the app. And that actually has shifted around reasonably significantly over the past few quarters as we made some different changes.

So it does not really indicate in a linear way the growth. I think you saw that this quarter, but it actually appeared that downloads were somewhat less, but this is an intentional move that we made to kind of optimize how the customer experience works. And so it’s an interesting indicator, but it’s not a great measure of the overall growth trajectory we’re seeing. And our guidance really is the best view I think of what we expect that to be over the coming quarter. And you may see that the download number shift around a bit. But those are the intentional moves.

Michael Zaremski — Credit Suisse — Analyst

Okay. Interesting. I guess, just lastly. Can you just tell us who is — will be underwriting the life insurance policies?

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

That’s not something that’s disclosed at this point.

Michael Zaremski — Credit Suisse — Analyst

Okay. Thank you.

Operator

And our next question today comes from Arvind Ramnani with Piper Sandler. Please go ahead.

Arvind Ramnani — Piper Sandler — Analyst

Thanks. Congrats on adding this life insurance. You’ve certainly made it clear that you’re going to chase a much broader range of products. How should we think about timeline for the auto insurance policy? Is it more of a near-term or a longer term priority?

Tim Bixby — Chief Financial Officer

So we don’t — our practice is not to disclose timing until we disclose time. And so I think you saw that practice with the launch of pet. We’ll let you know. If folks know today our plans, upcoming plans for Europe and for life, auto is clearly a market that’s important to our customers and critical to the long-term vision, and we want to provide everything that our customers need. And unlike other types of coverage, everybody who drives has auto insurance. And so it’s kind of a known quantity in terms of the potential market for us. So while we’re not communicating specific timeline today, I think it’s fair to say that it’s as important to us as we believe it is to our customers.

Arvind Ramnani — Piper Sandler — Analyst

Great, great. And something that the — kind of the life insurance policy you feel kind of I think more sort of as an agent in that. Can you just maybe talk about some of the rationale for that? And as you look to add additional products, what goes into figuring out agency versus kind of owning the policy itself?

Tim Bixby — Chief Financial Officer

Yeah. So it’s — and maybe Daniel can jump in on this too, but it’s a combination of things. So one is speed. Products take time to build. Some products take longer than others, but they all take time to build, particularly at the level of customer engagement and customer delight that is our standard. And so we factor that in. We have an overall book of business that we’re trying to build and build in a smart way with a solid and principal loss ratio. So that is something we want to be comfortable with before we enter.

And then we look at the potential partner structure. And if we believe there is a way to get quality products to our customers at a level that we think is A+ then we’ll consider working as partners. There is a time factor also from a regulatory standpoint to launch something that’s underwritten by us as opposed to the partners. So obviously, it’s much quicker to leverage a partner in that instance. So those are really the factors that we’ve thought about in the life calculus. Over time, our platform is built so that we can adjust. But at the moment, this is really a good mix for us. So Palomar was really our test case at a very modest level. Life will be, we hope and plan will be more significant. And then we’ll think in a very pretty similar way as we launch additional products.

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

The only thing I would add…

Arvind Ramnani — Piper Sandler — Analyst

Yeah, go ahead. Sorry.

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

Just to add that, particularly with life there is one other consideration that you should be aware of which is that insurance company. We are in two insurance companies in Europe and in the United States and they are P&C insurance carriers. And actually to write life policies on your own paper, we would have to stand up another insurance carrier and capitalize it independently. So there were those considerations in addition to the other ones.

So we do think that the real differentiation that we can bring in life is not going to be, as I said, in claims. In some of these products, the claims experiences massive differentiation. In some of them, it’s underwriting. But these are very long lead items for underwriting as well. So we think the big differentiation here is going to be user experience. I mean, I think you’ll get a sense of this when we launch the product, you will understand why, and we can achieve all of that without standing up an insurance carrier. So that’s one other thing to bear in mind. Sorry, I interrupted you. Probably you wanted to come in with something else.

Arvind Ramnani — Piper Sandler — Analyst

No, that’s super helpful. Just the last question from me. Just in terms of customer acquisition we’ve seen a nice improvement. Can you maybe talk a little bit about what drove that negative efficiency in customer acquisition?

Tim Bixby — Chief Financial Officer

It’s not really a silver bullet answer. We’ve got a bigger smarter team than we had a year ago, and that was also true a year ago versus the prior year. Seasonality factors in pretty significantly. If you look at the amount of growth that we generated in IFP in Q3 versus year-to-date, it’s actually almost identical to what we saw a year ago. Now the ins and outs are very — can be different there. But again, it’s over the course of the quarter, it came in quite in line with prior quarters. We’re getting a little bit better at each of the little pieces. So if you look at our creative today versus a year ago, it’s better. If you look at the customer fit and the reaction from customers, they’ve always been super strong, but we’re just getting a little bit better every day. And if you add those up over time that has shown in combination to just show — enable us to show steady improvement.

There’s a lot of data behind what we’re doing. And so we’re not only getting better at what the customer sees and feels and reads, but we are getting better about what the top of the funnel looks like. How to recognize folks, who are the right folks to bring through the funnel and that just helps with every step of it. Helps with better conversion, better ratios of policies to the top of the funnel and it tends to feed on itself. There’s probably better word of mouth. There is more people heading to a million customers before too long. There’s a lot of folks who’ve now heard of Lemonade compared to a year ago or compared to two years ago. Now in absolute terms, it’s a tiny number, but relatively that’s probably also becoming a stronger driver of our ability to acquire customers.

And then do the last thing I would add is, we’ve becoming quite recognized by others. So not just customers, not just — we had a great opinion of ourselves as you would expect. But if you look at whether it’s J.D. Power or whether it’s Clearsurance or whether other customer reviews, whether it’s at the app store, really, really consistent improvement over time. Good measures, good metrics, top of the market, and I think it’s really a combination of all of those things.

Arvind Ramnani — Piper Sandler — Analyst

Great. That’s terrific color. Thanks again for answering the questions.

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

Great. Thank you. So looks like we’ve answered all the questions. So I think we’ll wrap it up here. Great to have everyone participating. Excellent questions. And we’ll wrap it up here and say thank you very much and we’ll see you in the quarter.

Operator

[Operator Closing Remarks]