Lemonade, Inc. (LMND) Earnings

Management highlights

### Overall Financial & Growth Performance - Q2 2026 in-force premium (IFP) hit $1.43 billion, growing 32.5% year-over-year and extending an 11-quarter streak of accelerating growth. Revenue grew 79% YoY to $294 million, gross profit grew 76% YoY to a record $113 million, and adjusted EBITDA loss improved 54% YoY to $19 million. - Adjusted free cash flow was positive for the 5th consecutive quarter at $19 million, and the company ended the quarter with $1.2 billion in total cash and investments. - Annual dollar retention (ADR) remained stable sequentially at 85%, still impacted by prior homeowners portfolio cleanup actions that will roll off the comparison base over the next two quarters. ### Operational Efficiency & Technology - The company delivered a record low 5% LAE (claims handling cost) ratio across all products, far below the industry average of 9%, driven by AI automation across LemonadeOS. Competitors spend roughly twice as much of premium on claims handling as Lemonade. - The company maintains a model-agnostic approach to AI, continuously benchmarking new models to find the best combination of cost and capability for each use case, with implementation of beneficial new models possible in hours. Cumulative incremental AI improvements boost automation, reduce labor, improve customer experience, and lower serving costs. ### Strategic Updates & Operational Milestones - Completed annual reinsurance renewal that modestly increases the share of premium Lemonade retains, while materially strengthening catastrophe protection (including added named storm coverage not included in the prior agreement). - Extended the synthetic agents growth financing program, securing $250 million in growth financing for 2027 and 2028 at a 9.8% cost of capital, a more than 6 percentage point improvement in cost of capital that lowers future expected interest expense. - Growth spend efficiency remains stable, with a consistent LTV:CAC ratio of ~3x. The observed gap between past growth spend and IFP growth is a mathematical artifact of 2023 inflation-driven spend cuts and subsequent catch-up spending, not declining efficiency. - Launched 14 new state-product combinations in the past 100 days, expanding renters insurance toward nationwide availability and launching autonomous car insurance in Colorado and Indiana. Car insurance is on track to be available to a majority of U.S. drivers by the end of 2027. - Announced a planned CFO transition: Tim Bixby will move to the Board of Directors at year-end 2026, and current SVP Finance Nick Stead will take over as CFO; the transition is long-planned and expected to be seamless.

Guidance

- The company reaffirms prior guidance of achieving the first positive adjusted EBITDA quarter in Q4 2026, with positive adjusted EBITDA for full year 2027. Implied Q4 2026 adjusted EBITDA is ~$8 million. - Raised full year 2026 guidance for gross premium and revenue, while reiterating guidance for IFP and adjusted EBITDA. - Full year 2026 and Q3 2026 IFP growth is guided to 33% YoY. Q3 2026 revenue growth is guided to ~69% YoY, and full year 2026 revenue growth is guided to ~65% YoY. - Starting in 2027 and beyond, management expects IFP growth to outpace growth spend growth, which will drive increasing operating leverage and profitability.

Segment performance

Lemonade does not break out formal segment financials with absolute revenue and contribution share for individual product lines in this call. Key product-specific performance notes are: 1) Car insurance: 60% year-over-year in-force premium (IFP) growth in Q2 2026, delivered favorable prior period reserve development, recorded a 7% loss adjustment expense (LAE) ratio, and 40-50% of new car customers are new to Lemonade (the remainder are cross-sold to existing customers). 2) Homeowners insurance: Delivered favorable prior period reserve development following completed portfolio cleanup actions, which have left remaining reserves conservatively positioned. 3) Pet insurance: Experienced a modest year-over-year and sequential increase in gross loss ratio, driven by industry-wide veterinary cost inflation.

Risks & headwinds

Management did not explicitly outline material new risks or operational failures during this earnings call. The only potential headwinds discussed are industry-wide factors, including: 1) Ongoing veterinary cost inflation pushing up pet insurance loss ratios; 2) The lagged impact of prior homeowners portfolio cleanup actions on reported annual dollar retention for the next two quarters.

Analyst Q&A

• Q: What is management most excited about currently, and can gross and contribution margins maintain their current improvement path as the company expands products and geographies for 2028 modeling? /

  A: Management identifies car insurance as the most exciting opportunity, as it is accelerating rapidly in the large U.S. auto market where Lemonade still has massive room for growth. The entire business is also performing very consistently, with 10 years of technology investment now compounding to deliver sustained growth and gross profit gains. Management notes it focuses on gross profit rather than gross margin: Lemonade's structural cost advantage (e.g. 5% LAE vs 9% industry average) allows the company to price aggressively to gain share, which can grow total gross profit even if it does not expand gross margin. Gross profit is expected to grow materially in line with top-line growth, even with mix shifts across products.

• Q: Will IFP growth inputs shift, with customer count growth decelerating and premium per customer growth accelerating, and has AI changed your direct-to-consumer focused distribution strategy? /

  A: No material shift in growth drivers is expected in the near term: customer growth will remain the primary driver of IFP growth, though premium per customer growth will likely see gradual modest increases. The direct-to-consumer focused distribution strategy has not changed materially; the agent program remains niche, with the vast majority of sales direct. Management is comfortable with AI recommendation agents, as Lemonade's strong pricing and customer experience mean it is frequently overweighted in AI recommendations, with no need for strategic changes.

• Q: Can you discuss how operating expense growth will translate to operating leverage in 2027, and what is driving the modest increase in pet insurance gross loss ratio? /

  A: Other insurance expense grows roughly in line with premium, so it sees limited leverage. Sales and marketing spend growth will decline below IFP growth starting in 2027, driving incremental leverage. G&A and technology development expenses will see significant operating leverage, with low sequential growth expected from the Q2 baseline. The modest pet insurance loss ratio increase is driven by industry-wide veterinary cost inflation, and the company is actively raising rates to offset this impact; the pet insurance market continues to grow faster than other lines despite this pressure.