Insurance sector 'suffered' amid inflation: Lemonade CEO

Shares of Lemonade (LMND) are dropping sharply as the company, in a letter to shareholders, outlined a potential drop in profits after “extraordinary challenges” in 2023. The company plans to double its growth budget, which amounted to $55 million in the previous year.

Daniel Schreiber, Lemonade CEO, joins Yahoo Finance to discuss the challenges that lie ahead for Lemonade, including rising consumer costs.

Schreiber elaborates on how the business has operated so far, focusing particularly on the impact of AI on operations: "We're really seeing everything getting better. Our loss ratio collapsed by 12% year on year. Our operating expense shrunk year on year. The efficiencies that our AIs are driving, we've been automated through AIs from the get-go, so we're growing revenue 31% and actually shrinking R&D costs, marketing costs, and operating costs because we're using generative AI and other AIs to do a lot of our work for us. All of that emboldens us to continue to invest because every dollar that we invest returns itself about threefold over, and if you're long-term oriented, and we absolutely are, that just makes so much sense."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

BRAD SMITH: Shares of Lemonade plunging this morning after saying 2023 was a year of extraordinary challenges. The insurance company says it's going to focus on growth in the coming year, planning to roughly double its budget, which it warns will hurt profits in the near term. Daniel Schreiber, who is the Lemonade CEO joins us now in studio to discuss more. Thanks so much for taking some of the time here today.

DANIEL SCHREIBER: Good to be with you.

BRAD SMITH: Absolutely. So let's discuss this because the Street sending shares lower, and perhaps just on the announcements that you made around some of the spending plans here to really grow out the business. So what are you going to track up against? What's the barometer to say whether or not some of that spending is working for the company?

DANIEL SCHREIBER: Absolutely. So we're coming off of perhaps our best quarter ever, you know, revenue up by a third, gross profit up three-fold, EBITDA losses halving. So we're really seeing dramatic progress. In terms of our guidance, we did say because of that, we're going to spend more on growth. This is a great opportunity to start growing. We've been growing at an increasing rate.

So we've had 18% a couple of quarters ago, 20, we'll be 21 now, and continuously grow because we do see opportunities for increasing the long term profitability of the business. And insurance is such a huge, vast market that spending now at a roughly CAC to LTV ratio of 3 to 1, every dollar you spend comes back three-fold.

But it does mean that we're going to slightly depress earnings. We're going to continue to improve earnings. Don't get me wrong. EBITDA will increase and get better this year relative to last year, but perhaps at a rate that signals that we're investing in our future rather than just taking the profit now.

SEANA SMITH: I guess in terms of moving the needle, how big of an impact do you see this having on your bottom line in the longer term? And what's more specifically your message to the street? Clearly, there a little bit worried about the spending that's going to be happening here in the coming quarters. But why do you think that this is a strategy that's going to pay off in the long run?

DANIEL SCHREIBER: At a fundamental level, all lights are green. We're really seeing everything getting better. Our loss ratio collapsed by 12% year-on-year. Operating expense shrunk year-on-year. The efficiencies that our AIs are driving. We've been automated through AIs from the get go. So we're growing revenue 31% and actually shrinking R&D costs, marketing costs, and operating costs because we're using generative AI and other AIs to do a lot of our work for us.

So all of that emboldens us to continue to invest because every dollar that we invest returns itself about three-fold over. And if you're long-term-oriented, and we absolutely are, that just makes so much sense. So we're going to continue to do that. We have said that next year, we'll be cash flow-positive. We have said that the following year, we will be EBITDA-positive. We reiterated those. But we have to get through the extra growth before we turn those corners entirely.

BRAD SMITH: As we continue to get more and more reads on inflation and where inflation continues to show up, insurance is one of those areas here. And a lot of consumers perhaps asking why premiums are getting higher, why we're continuing to see that be one of the stickier elements of the services inflation.

From your seat at the helm of Lemonade and all of the services that come forward, why is it getting more expensive? And ultimately, how are you going to look across some of those costs that consumers are still having to pay right now and perhaps bring that down eventually over some time?

DANIEL SCHREIBER: So notwithstanding the great results that we just announced, insurance as a sector has suffered terribly in the last couple of years, largely because of inflation. And most businesses can adjust prices when their costs go up. Insurance companies may not. We're heavily regulated.

You have to apply to the regulator to allow you to raise prices. By the time that comes through, you've incurred a lot of losses. This has been the worst year for combined ratios in the insurance sector for generations. You're seeing some of the largest insurance companies in the nation pulling out of some of its largest markets, California and other places.

So this has been very, very tough. At last, we're seeing inflation come down and rates go up. And that's fabulous news for Lemonade and for our shareholders. And for the sector as a whole, it does translate into higher costs, higher prices for our consumers. But it's really just about matching rate to risk.

BRAD SMITH: How has this also changed where you go about evaluating claims? What's been perhaps the calculus around that as well for customers who come back and say, all right, now I need to tap into what I've been paying for.

DANIEL SCHREIBER: Absolutely. So we monitor everything about that at Lemonade. So the net promoter score is not merely when we sell you a policy 90 seconds through a bot. It's about when we pay your claim in three seconds with a bot. And about half of our claims are paid without any human intervention at all. That not only lowers costs, but it of course delights consumers.

And we're using a lot of technology in order to try and identify fraud and fast track any claim that is legitimate. And as I say, about half of our claims are paid that way. So we're very focused on returning to the consumer the value that they are expecting to get. And I believe Lemonade is without parallel, without equal in terms of net promoter score and customer satisfaction levels in the US today.

SEANA SMITH: Daniel, going back to what you just said a minute ago there, some of the distress that you have seen play out within the sector, is the worst or the biggest challenges safe to say, at least in the short term here, behind, you behind the industry? Is it looking much more positive here from here on out?

DANIEL SCHREIBER: Absolutely yes. One never knows quite what the future holds, but yes, the trends are very, very good. As I say, rates are coming online to the chagrin of consumers. But it's necessary for the industry to be able to continue to service its customers. And we are seeing inflation come down. Natural catastrophes and other things are still obviously loom large and pose a threat.

And more fundamentally, I think, just the power of technology to automate lower costs and predict with greater precision than humans ever could what kind of risk different people represent and then to match rates and risk at a level that's never been able to be done before is incredibly empowering and bodes very, very, very well for the future.

BRAD SMITH: You've got a generative AI mentioned in this earnings report as well, the gen AI framework and how that's handling some of the customer emails. I wonder as you deploy more generative AI or any type of artificial intelligence for the company, how that operationally changes the headcount structure that you have right now.

DANIEL SCHREIBER: Absolutely. And lemonade was really built for this moment. We were founded in 2015, and at the time, we said we were built on top of AI. Nobody knew quite what that was, but today it's very fashionable to say that. We've been doing that from day one.

So for us, these new technologies, newer generations of AI naturally filter into our systems. We were built for this. We've been doing stuff with AI from day one. There's no huge transformation because our platforms were built atop AI from day one. What that means is that we're able to shrink payroll even as we grow our business.

BRAD SMITH: Do you plan to shrink payroll further?

DANIEL SCHREIBER: We have. In 2023, our payroll shrank. That doesn't mean we're letting people go. But as this natural churn, we don't have to rehire people even as our business has been growing very, very fast. As I say, growing by a third this year, our actual payroll shrank.

Our operating expenses shrank not only in customer-facing places of the business, but even in engineering teams where Copilots and other generative AI technologies are allowing one engineer to do so much more than he or she could do just a year or two ago. So we're really harnessing these technologies, I think, like no other insurance company. Certainly in the US.

SEANA SMITH: Daniel Schreiber, always great to have you, especially here in studio. Thanks so much for joining us, CEO of Lemonade.

DANIEL SCHREIBER: Thank you both.