LMND - NYSE

Hello and welcome everyone to the Lemonade Q3 2024 Earnings Call. My name is Maxine and I'll be coordinating today’s call. [Operator Instructions] I will now hand you over to Yael Wissner-Levy, VP, Communications to begin. Please go ahead when you are ready.

Good morning and welcome to Lemonade’s third quarter 2024 earnings call. My name is Yael Wissner-Levy, and I’m the VP, Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, President and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company's third quarter 2024 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 2023 Form 10-Q filed with the SEC on May 1, 2024 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 direct comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including customers, in-force premiums, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex CAT and net loss ratio. And the 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 for some opening remarks. Daniel?

Good morning and thank you for joining us to discuss our third quarter results 2024. Before turning to those, I want to remind you that we'll be holding an Investor Day on November 19, both in person at our New York headquarters and online. We certainly hope you'll be able to join us. We'll be providing detailed updates of our vision, our AI capabilities, our ambitious plans and how we hope to realize them. In the meantime, let me turn to our third quarter results which I'm happy to report continued to demonstrate strong progression across the board. We saw accelerating top line growth with in force premium growing by 24% and we were cash flow positive. Our net cash flow increased by $48 million, our strongest cash flow quarter inception to date. Free cash flow was $14 million positive that we think that net cash flow better tracks our business than free cash flow does as it incorporates the impact of our synthetic agents program which is core to our operating model. The bottom line is that we ended the quarter with $979 million in cash and investments, a growing balance and one we expect to grow continuously henceforth accepting next quarter as we've said before. The third quarter saw elevated cat or catastrophic related losses across the industry alongside tragic loss of life. Our thoughts and our team's efforts or with those impacted by those events. As has been the case in recent quarters our business however proved highly resilient. Notwithstanding the weather, we delivered a 73% gross loss ratio, our strongest result in four years. This wasn't a one off. For the fourth consecutive quarter, we saw double-digit improvements in the loss ratio compared to the same quarter one year prior and our loss ratio is now back where we like to see it, comfortably within our target range. How have we done it? It's the very things we've talked about for several quarters now. Diversification of the portfolio and intense and sustained efforts in matching rate to risk across our portfolio and across the U.S. All these enabled us to deliver notably expanded gross margins in Q3. Taken together, accelerating top line growth and expanding gross margins yielded $37 million in gross profit which represents a 71% year-over-year growth. Accelerating top line growth even more dramatic gross profit growth and our best ever cash flow quarter all rendered this a fabulous quarter. We look forward to continuing these trends into 2025 and beyond. With that, I'd like to hand over to Shai to tell you more about our recent efficiency improvements unlocked via technology. Shai?

Thanks, Daniel. As we've spoken about in recent quarters, technology powers our entire business and this is continuing to play out in our financial performance. Let me briefly touch on recent gains on the automation front. Automation has proven to be an extremely powerful lever that has powered the strong cash flow performance Daniel mentioned. For example, for the 11th consecutive quarter we've been able to deliver improvement in IFP per employee as we've delivered strong top line growth while the team has been more or less stable. At more than $700,000 in IFP per employee growing at more than 30% multiyear CAGR, we're fast approaching best-in-class levels displayed by some of the non insurance big tech companies who have realized scale zooming out to the operating expense space. When excluding growth spend of which 80% is financed by our partner via the synthetic agents program, operating expenses were stable year-over-year. I believe the impact we're seeing is only the beginning, and as we continue to implement new AI capabilities on a daily basis, many more efficiency improvement opportunities are still ahead of us. And now let me hand over the call to Tim who will cover our financial results. Tim?

Great. Thanks, Shai. I'll review highlights of our Q3 results and provide our expectations for Q4 and the full year and then we'll take some questions. Overall, it was again a terrific quarter with results very much in line with or better than expectations and continued notable loss ratio improvement across the board. In-force premium grew 24% to $889 million while customer count increased by 17% to $2.3 million. Premium per customer increased 6% versus the prior year to $384, driven primarily by rate increases. Annual dollar retention or ADR was 87%, up 2 percentage points since this time last year and down slightly versus 88% in the prior quarter. This slight sequential decline is as expected given our efforts to reduce less profitable portions of our home book. In the second half of this year, gross earned premium in Q3 increased 23% as compared to the prior year to $213 million in line with IFP growth. Revenue in Q3 increased 19% from the prior year to $137 million. This growth in revenue was driven primarily by the increase in gross earned premium, a slightly higher effective ceding commission rate under our quota share reinsurance and a 27% increase in investment income. Our gross loss ratio was 73% for Q3 as compared to 83% in Q3 2023 and 79% in Q2 this year. Excluding the total impact of CATs in Q3, which was roughly 5 percentage points, our gross loss ratio ex-CAT was 68%. CAT impact in the quarter was driven primarily by named storms and hurricanes and was about 5 points better than the prior year and 12 points better sequentially. Total prior period development had a roughly 3% favorable impact, about 1% of that from CAT and about 2% non-CAT. Trailing 12 months or TTM loss ratio was about 77% or 11 points better year-on-year and 2 points better sequentially. All of these insurance metrics and more are included in our new insurance supplement that you'll find at the end of our shareholder letter this quarter and going forward. Gross profit increased 71% as compared to the prior year driven primarily by premium growth and significant loss ratio improvement, while adjusted gross profit increased 55% driven by premium growth and loss ratio improvement. Operating expenses excluding loss and loss adjustment expense increased 27% to $125 million in Q3 as compared to the prior year. The increase of $26 million year-on-year was driven predominantly by an increase in growth acquisition spending within sales and marketing of approximately $27 million, offset by fixed cost savings. Absent the growth spend increase, operating expenses were roughly unchanged year-on-year. Other Insurance expense grew 31% in Q3 versus the prior year, slightly ahead of the growth of earned premium. Total sales and marketing expense, as noted, increased by $27 million primarily due to increased growth spent, partially offset by lower personnel related costs driven by efficiency gains. Total growth spent in the quarter was $40 million, roughly triple the $13 million in the prior year. We continue to utilize our synthetic agent’s growth funding program and have financed 80% of our growth spend since the start of the year. As a reminder, you'll see 100% of our growth spend flow through the P&L as always. While the impact of the synthetic agent’s mechanism is visible on the cash flow statement and the balance sheet and the net financing to date is about $67 million as of September 30th. Technology development expense was flat year-on-year at $22 million due primarily to continuing cost efficiencies. G&A expense declined 15% as compared to the prior year to $31 million primarily due to lower personnel and insurance expenses and one time impacts in both quarters. Absent these non-recurring impacts, the G&A decline was somewhat less but still meaningful at approximately 7% better. Personnel expense and headcount control continue to be a high priority. Total headcount is down about 7% as compared to the prior year at 1216, while the top line IFP again grew fully 24% including outsourced personnel expense which has been part of our strategy for several years this expense improvement rate is similar. Our net loss was a loss of $68 million in Q3 or $0.95 per share, a 10% decline as compared to the third quarter of 2023 and this change again driven primarily by our increased growth spend. Our adjusted EBITDA loss was $49 million in Q3 versus $40 million in the prior year. Our total cash, cash equivalents and investments ended the quarter up significantly at approximately $979 million, up $48 million versus the prior quarter, showing a continuing positive net cash flow trend. With these metrics in mind, I'll outline our specific financial expectations for the fourth quarter and the full year. We are increasing our full year expectations for both revenue and gross earned premium, while our other guidance metrics remain unchanged as compared to our prior guidance. As has been the case in some prior years, there is a notable seasonal difference in our expected results in Q3 versus Q4. Specifically, Q3 is typically our highest growth spend quarter of the year, which drives up sales and marketing spend and also typically a higher expected loss ratio as compared to Q4. Our loss ratio experience, especially for CAT in the third quarter this year was quite favorable as compared to our expectations and this drove over performance in Q3, which doesn't necessarily recur in Q4. Our fourth quarter guidance therefore incorporates our typical view for expected results. From a gross spend perspective we expect to invest roughly $35 million in Q4, which is nearly three times the growth spend from Q4 in the prior year, to generate profitable customers with a healthy lifetime value. We noted last quarter that we also expected to remove approximately $25 million of homeowners IFP or enforced premium from our book, excuse me, in the second half of 2024, roughly 2/3 of that in Q3, and this effort serves to somewhat dampen growth in the immediate term while concurrently boosting cash flow and profitability in the medium term, and further reducing CAT volatility and we are on track with those prior estimates. Importantly, though our IFP guidance for the year reflects these plans, it also remains unchanged. We expect that additional growth and marketing efficiencies will continue to offset the impact of these non-renewals. For the fourth quarter of 2024, we expect in-force premium at December 31st between $940 million and $944 million. Gross earned premium of $222 million to $225 million, revenue of $144 million to $146 million, an adjusted EBITDA loss of between $29 million and $25 million, stock based compensation expense of approximately $16 million, capital expenditures of approximately $3 million and a weighted average share count for the quarter of approximately 72 million shares. And for the full year 2024, we expect again enforced premium at the end of the year of $940 to $944, gross earned premium of between $823 million and $826 million, revenue between $522 million and $524 million, adjusted EBITDA loss between $155 million and $151 million, stock based compensation expense of approximately $64 million, capital expenditures of approximately $10 million and a weighted average share count of approximately 71 million shares for the full year. And with that I would like to hand things back over to Shai to answer some questions from our retail investors.

Thanks Tim. We'll now turn to our shareholders questions submitted through the SAY platform. Timothy asks what is the expansion plan for Lemonade Auto Insurance? Thanks for the question Timothy.

The organization has rallied around car in a remarkable way in order to position ourselves for rapid growth. 2025 will see us roll out car in several additional states. We'll prioritize those with the most attractive LTV dynamics and regulatory environments that facilitate timely rate approvals. Importantly, we expect the unlock on car growth to come from multiple directions cross selling to our existing customer base as well as acquiring new customers.

In the next question, Ben asked what is the timeline for access to Lemonade Insurance services in all 50 states?

Thanks Ben. We already sell some of our products in all 50 states and are currently already available for the overwhelming majority of the U.S. population when it comes to our more mature products. As for car, 2025 marks a year of notable geographic expansion. We expect to continue this in 2026 and launch more states where we can grow our car product profitably.

Paperback [ph] wanted to know about our view on insurers who outsource work such as data science and AI, and whether that is a risk to our business model.

Thanks for the question Paperback. Legacy insurers have been outsourcing data science and AI work for over a decade, yet despite these costly efforts, consumers haven't really noticed major changes in experience or insurance pricing. I believe there are many reasons for this lack of progress, such as the challenge of changing century old processes and culture in organizations that are highly conservative by design. Anyone who worked for a large corporation knows how resistant to change and risk averse these organizations can become. Implementing AI and automation is even harder because these are advancements that threaten job security and demand new skills from seasoned employees. Insurers weren't founded as tech companies and so they rely on traditional vendors to provide essential systems. And since no single system runs an entire insurance company end to end, they're forced to work with dozens if not more of third party providers creating a seamless AI powered experience that delivers personalized customer interactions, improves efficiency and drives better underwriting and pricing require then a unified full stack system with AI at its core. Unlike traditional insurers, the Lemonade platform was designed, built and maintained in house and I believe this is our secret weapon. Blender, our insurance operating system, integrates everything from customer interactions on our app, website or phone to advertising attribution, customer segmentation, LTV modeling, pricing, underwriting claims and more. I believe this level of control, coupled with a team passionate about progress and change gives us an unfair advantage and a defensible mode that's hard to replicate. And with that, let me turn the call back to the operator for more questions from our friends from the street.

Thank you [Operator Instructions] Our first question today comes from Jack Matten from BMO. Please go ahead, Jack. Your line is now open.

Hey, good morning. Thanks for taking my question. One on the cash flow outlook, it was good to see the positive operating cash flow this quarter, I guess. Can you talk about how much you expect cash flow to ramp up and improve next year if we exclude the synthetic agent financing benefit? Is there a time when Lemonade expects to be consistently cash flow positive just on an operating cash flow basis?

Sure. So we're at the point now where this quarter we generate significant cash flow on all the different measures. Operating cash flow, free cash flow, net cash flow heading into next year, we will expect to see net cash flow consistently positive from here on out and exiting next year, we expect operating cash flow to be wholly positive from there on out. EBITDA will follow likewise in 2026 by year end.

Got it, thank you. And then just in the guidance for this upcoming quarter for adjusted EBITDA, you maintain the full year guide even though you beat by a little bit in the third quarter. I guess, anything notable driving I guess like a slightly lower implied guide for the fourth quarter, I think it seems you might be guiding for higher growth spend not sure if that was it or if there's anything else going into that.

Yes, there's a couple notable things in the second half generally for us and for the sector and then and then a couple of specific things. So generally we have the seasonally strongest growth quarter in Q3 versus Q4. We're accelerating our growth spend and our likewise our growth significantly this year versus the prior year spending roughly 3 times more in Q3. Q4 tends to be a slightly lighter growth spend and growth quarter than Q3. But because we're continuing to ramp spend, that decline will be very modest. We'll spend slightly less in Q4 than Q3, something on the order of $35 million versus $40 million. So that drives the sort of top line dynamic which does flow through the P&L. Also notable is the loss ratio expectation and the cat impact. So Q3 is notably or typically the highest cat impact quarter. This Q3 turned out to be not the case and that was really a source of much of our over performance Q3 versus our expectations. Q4 again because it's a forecast and not actuals we do have our typical conservative assumptions on loss ratio there. So the net of all that led us to the point to say we are confident the second half looks fundamentally unchanged with some modest timing differences shifting from Q4 to Q3.

That's helpful, thank you. And then last one, just quickly on the delta between the net and gross loss ratio, little bit higher. I think around eight points this quarter. I know last quarter it's kind of gone the other way. Is anything notable driving the delta this quarter? And is there kind of like a normal run rate between those two metrics that you would expect going forward?

Yes, it was a little wider than usual and then on occasion it's been narrower than usual. I think you've had a few quarters wouldn't have been identical or within a point or two. Normal is somewhere in between. This quarter there were a couple of notable items. So our quota share applies to some of our business but not all of our business. So there were most of the cat in this quarter was related to named storms, hurricanes. And so that is excluded from our quota share agreements. Though our experience was good, the numbers were low. It's excluded from quota share. So we bore more of that impact. And that drives the difference between gross and net on the order of about 4 points. Another notable item that you'll see detailed in the footnotes of our letter and in our 10-Q [ph] that's coming out shortly. We did have a large loss in our auto business from pre-acquisition metro mile that impacted our gross loss ratio by about two points on a gross basis. So we had a really nice result. 73% without that onetime adjustment for a pre-acquisition claim, that would have been two points better. And again that flows through also about two points to the net loss ratio. The rest is yearly. So 73 points gross, 81 net. And the difference is those three items. I'd expect the difference to be in the low single digits more consistently. Three or maybe four points typically, but it does vary from that.

Great. Thank you very much.

Thank you. The next question comes from Jason Helfstein from Oppenheimer. Please go ahead, Jason. Your line is now open.

Hey, everybody. Thanks. Two questions. One, are we seeing any advancements on the technical AI side, whether it's, chips or cloud capabilities you're able to buy that could have any further impact on the business, let's say, in the next 12 to 18 months? And then secondly, appreciate the expanded disclosure at the end of the release. If we think about the IFP breakdown and we kind of look at, like, the percentages and the trends, if we're thinking out over the next 12 months. I don't want to get ahead of your analyst day, but how do you think about the mix changing over the next 12 months? Thank you.

Hey, Jason, good morning. Let me take the first one and hand it over to Tim for the second of those. The answer to your question is yes. So. And I will kind of tease or do a promo because a lot of the investor day will show a lot of our AI capabilities behind the scenes. You'll see hopefully in person there, but you'll see a lot of the machinery behind the scenes, how we are harnessing all of the advancements in AI. I know it's a very topical thing to be saying. As you know, we've been talking like this since 2015 when we founded the company. So we've really built ourselves atop of an AI infrastructure. And what we're feeling at the moment is that we're running, we're sprinting, we always have. But we're sprinting on a conveyor belt where the ground beneath us is moving pretty fast as well and the two combine in powerful ways. If you look back at the last couple of years and adjusted the financial metrics and you see more or less 50% top line growth over the last couple of years. And if you actually look at our OpEx over the same timeframe, it's shrunk, not grown, same for headcount. So it's highly extraordinary to grow a company 50% and spend less rather than more in so doing. It's not that we're using less and we're not sacrificing quality or anything else. The customer satisfaction is great. So it's not that we're using less intelligence to get the job done, it's just more and more of it is not human intelligence. And looking forward as the capabilities of the underlying AIs continue to advance, yes, we are well set to harness those. And let me kind of leave the rest for Investor day because we'll show you a lot of the metrics and the technologies that underpin that. Tim?

And maybe a comment or two on mix and mix shift. So I'll start at a somewhat higher level. So from a market standpoint, our coverage now is quite broad across both the U.S. and Europe. And from a population standpoint, we're covering anywhere between 60% and 90% of the U.S. population in all of our products, with exceptions car. And car is growing fairly significantly. We're covering 50% of the population of Europe. We're starting to see really good growth there. So the mix will continue to move in the direction it has. Today's mix is a lagging indicator. So our mix actually increased for PET from this year Q3 versus the prior year. But again, that's a lagging indicator of where growth was coming from and where we expect that to shift and has begun to shift based on the new sales that are coming in and our growth efforts that are shifting towards car. So I think over time, if you look at the next year or the next three years, you'll see that trend continue and likely accelerate, where car today represents something like 15% of our business that will start to move upwards over time and represent a larger and larger part of the business. Part of what gives us real confidence there is progress in the loss ratio. We gave some real detail in the supplement that we encourage you all to take a look at. Our car loss ratio has come down quite dramatically as rate approvals have come online and even the loss ratio reported now this quarter would have been something like 10 points better given if you adjust for this one-time adjustment that we made. So all systems are go for car. We will do a much deeper dive at Investor Day and we look forward to doing that.

Thank you.

Thank you. The next question comes from Katie Sakis [ph] from Autonomous. Please go ahead, Katie. Your line is now open.

Thank you. Good morning. I wanted to start first with some of the re-underwriting actions you guys have been taking in the homeowners line. To what extent did the cat load this quarter benefit from, those early re-underwriting actions and maybe if it's too early to start seeing an impact there, to what extent would you guys expect your full year cat load next year to, reflect the shift in exposure there?

So, I don't have an exact number for you. It was probably fairly nominal in the, in this quarter exactly but over time we'll start to see that play out more significantly. We expected or do continue to expect about $25 million or so of IFP to come off the books by year end. Most of it or about two thirds of it or so already in Q3 and then the balance in Q4. So that impact, I expect, will grow over the coming quarters. One note I think that we have shared in a letter that's worth noting is what our business would have looked like, what our loss ratio would have looked like this quarter. Something like 40% or so worse had we not been pursuing these efforts over time. And it's not just the home immediate term. Home non-renewals it's a much broader effort to both underwrite and re underwrite in areas where we are confident and that we're seeing across the whole book, including home.

Great. Thank you. And then maybe shifting to car a little bit. Thanks again for all the additional detail on the supplement this quarter. I was wondering if you could offer us any additional color on the nature of the improvement to the car gross loss ratio, how much of that is coming from shifts in frequency versus exposure. And then what does the cat exposure profile for the car product look like relative to the homeowner's product?

The cat exposure I'll take the first is minimal. It's not zero, but it's, it's far less of a concern or a risk than it is for the home business. And that really is a difference in storms, really in the nature of storms and how they affect the car business. The real driver of the loss ratio improvement is rate, rate across the board and certainly rate in California, which was amplified by the size of the California business and the, and the scope of that rate increase 50% or so rate increase. So that is, more or less as expected as that rolls through the renewals of the California book and the car book in general.

Got it. Thank you.

Thank you.

Thank you. The next question comes from Tommy McJoynt from KBW. Please go ahead Tommy. Your line is now open.

Hey, good morning guys. Thanks for taking my questions. When you bridge the gap from this year having negative 150 million of EBITDA roughly in the guidance to positive EBITDA in 2026, can you either quantify or even just rank order the main line drivers of what's driving that improvement over that two year span, Looking at things like improving loss ratios or using less quota share reinsurance or just growing premiums kind of rank order or quantify those drivers please.

Tommy, good morning. Let me give some broad strokes and then Tim, do a backfill with any details that you think I've missed. But in broad strokes we're seeing an incredibly steady driver over the last few years and we think is the same drivers that will continue over the next couple of years. If you look at our EBITDA as a fraction of gross earned premium, something you know, what some people would call an EBITDA margin if you like, and you look back four or five years and you say what was our EBITDA losses per dollar of gross earned premium? It stood at 50 something cents and then it's been improving at a rate of 10% per year. So then it was 40 something cents this year it's 20 something cents. We'll be in the teens next year in the single digits the year after. And as I've said before the end of that year we expect to cross over from zero and go into positive territory. So the first thing to point out is that this has been a very steady, predictable line that you can draw a path to profitability can literally be drawn on a graph and has been pretty consistent for some time. In fact, a statement that we explored to be EBITDA positive towards the end of 2026 dates back three or four years. I think it was 2021 when we first said that. So this has been a very consistent and almost bankable march towards profitability with cash flow positivity already on the way, as we had said, and EBITDA profitability to follow. But the underlying most natural or obvious or simple kind of way to answer your question is that we're seeing tremendous operational. This was our hypothesis for years that when you build a company on technology, you can scale without using expenses. And it has shifted from being a credible hypothesis to a really proven result. You look back, as I said earlier, over the last couple of years and you see that our expenses have not budged, our headcount has not budged, our gross profit has trebled and our top line has grown by 50%. We expect that dynamic to continue. We think we're going to be able to continue to grow our business without growing our expense line or at least growing it at a far more, far more moderate pace. And that dynamic should lead us not merely has led us to cash flow positivity, will lead us to EBITDA profitability will then lead us to net profitability and I do believe before not too long, to massive profitability. I think it's that same basic physics, if you like, of growing a top line at a profitable gross profit, profitable gross margin while holding expense line pretty stable. Tim, anything you want to add to that?

Just two notes and it follows the exact same track. One is, a couple years ago when we were looking out and thinking about resources and people and people in fixed costs tend to move together, we're looking at and expecting, the growth rate similar to what we had started to see, which is in the 10%, 15%, 20% range. Now we look out and we've seen actually a decline in overhead expenses for quite some time, almost two years at this point. Now fixed costs will not decline forever. They will grow, but they will grow, we expect at a much, much more modest pace. And that when you draw that line out a couple of years and grow those expenses at a 2% or 4% or 6% rate versus a 15% rate, it's just an extraordinary difference. And that's what we're seeing right now. And that's the key driver. From a top line perspective, I would look at gross profit. What has gross profit done over the past three years? This year alone growing 70%. So it doesn't you roll that out two or three years, you continue to see that significant leverage because loss ratio has improved so much and there's still room for that to improve. Those two dynamics coupled together cut that EBITDA burn quite consistently over the next 24 months.

Got it. Thanks for those comments. And then to give us an update on the success of cross selling, do you have any update on the number of policies per customer and how that has trended over the past couple of years?

Yes, so a couple of metrics there. It's actually a fairly consistent metric. There's a couple of areas where when we look out at our longer term modeling and think about what can go even more right, we have a lot of things that are going right to. We expect that retention can and will improve over time, but we don't assume or model that it will improve. But we have a lot of opportunity for retention that comes in the form of multi policy and upsells. All of those come together something like 4.6% or so of our customers today are multi policy customers. That's a relatively low number, but it's stable. So when we're growing the business at 25% or 30%, that number is staying stable. In absolute terms, that's a significant increase. And in those states where we have all the policies available for those customers who have multiple policies, all the dynamics are much stronger. Retention is better, the willingness to buy that third policy is higher. Loss expectation, the risk profile tends to be better. All the metrics are better for that type of customer.

Thank you. [Operator Instructions] Our next question comes from Andrew Stein from FT Partners. Please go ahead Andrew. Your line is now open.

Hey, good morning and nice quarter. You mentioned in the letter that the diversification across geographies, products, partner placements, and then the targeted non-renewals are behind the gross loss ratio improvements. I was just wondering if you could dimension the impact of each of those areas and then where does the most opportunity lie looking forward?

So I, I don't have exact number for each of those that we've disclosed. I think there's no silver bullet there. I think home is certainly the most significant impact, which is why we've mentioned it just in absolute terms. $25 million out of the book in six months is a very focused and notable impact. But that's something we have done on a consistent basis at a lower rate over time. And we'll continue to do that. Where we see business that with better information and a more accurate understanding of the risk of the customer, starts to look highly unprofitable, we'll continue to make those efforts. Part of the impact in the quarter, I think is the, our exposure in the home business is pretty fairly low risk. So when you're not in Florida, in the home business, most of the large cats affected pretty specific areas. These are the kinds of things we're a little cautious about and we do that elsewhere. So we've had a fairly light California cat impact this year. But we are very thoughtful about those risks as well. So each of those areas, I think has contributed to some extent to the improved loss ratio.

Got it.

I'll just add Andrew. Just to say, as Tim said, I too don't have top of mind the exact division between the different factors. But I will point out that our loss ratio improved everywhere. So this wasn't one thing and one magic bullet. We saw and we've disclosed this every single product and all of our geographies saw improvements. So this has been a lot of effort across the board, across the geography, across our product base, across the company and we're really seeing no holdouts, nothing is bad, everything's getting better. As I say, both Europe and the U.S. and home and renters and pet and car really across the board. I'll just underline as well Tim mentioned this in passing in his comments but the loss ratio overall improved really quite dramatically. We're talking about 10 points year-on-year, 11 points and then another 10 points from the year before, 20 points over the course of the last couple of years which is rather stunning I think by most standards. But if you take a look at our car loss ratio, it has dropped very, very beautifully, very dramatically and yet it's understated about 10 points of the loss ratio as reported from a single claim that was resolved years later in an elongated lawsuit that predates Acquisition of Metromile. You take that out as I think is not an unreasonable thing to do, although it's not what accounting practices have us do and you see suddenly our car loss ratio in the 80ish mark and you compare that to where it was a quarter or two ago and you realize the trajectory that we're on. And I think that ties back also to Tommy's question earlier about cross selling. While these have been relatively stable as car loss ratio gets to where we want it to be, we'll start unleashing the power of cross selling car to our existing customers much more and that will impact then annual dollar retention and cross sales and multi product lines and all those things have been relatively stable. We're approaching the point but we can unleash a lot of those capabilities.

Got it, thank you. And yes, that was going to be my next question. Just expanding on how the upsell process and the experience there is going for moving renters, policyholders to auto. Thank you.

Sure. We'll talk about this at some length. So this is my second promo for the investor day. We will so some really interesting stats and I don't want to [Indiscernible] that, so I'll leave some of the fun and sexy stuff for a couple of weeks from now. But we're doing a lot. And we haven't wanted we've kind of been up until fairly recently proactively withholding those kind of cross sells. No point cross selling a product that wasn't itself profitable. That's not the way we do things. As car now arrives at its destination or is nearing it and we're starting to do a lot of trial and error and we will share some of the numbers behind that just a couple of weeks from now.

Great, thanks. Looking forward to it.

Thank you. The next question comes from Charlie Rodgers from Jefferies. Please go ahead, Charlie. Your line is now open.

Hi, good morning and thanks for taking the questions. So I think you guys were mentioning earlier that embedded in the guide for the fourth quarter, there is some, there is conservative cat estimates there. I was wondering if you guys could maybe elaborate or talk a little bit about what your expectation for losses related to Hurricane Milton might be within that.

Yes, our experience with all the cats to date, including Milton, have been quite nominal. Obviously they can develop more over time. Milton's the most recent one. But we are not, we're not concerned about that developing anything material at this point. We're far enough past it. That's not too troubling. Q4 is a tricky one generally because the loss ratios tend to be a fair amount better than the other. Almost all three of the other three quarters notably better. Historically they have been. We've had one or two exceptions with freeze storms and so we're somewhat cautious. There's an opportunity to have just another great quarter for sure. And then we've also built in an assumption that will be highly likely to happen, which is the pace of our growth spend to set us up for continuing accelerated growth. If you look at our growth rate through the quarters of this year, you've seen that growth year-on-year growth rate nudge up each quarter consistently through the course of the year. And so we're able to do that at the same time as we see loss ratios make great improvement. So that combination is something that's led to a great year-to-date period and the Q4 numbers we hope will come in as expected or better.

Okay, great, thanks. And then could you maybe just give cat and PYD on a net basis?

Yes. So the cat impact on a gross basis was about 6%. On a net basis that would have been about 11%. And then prior period development was about 3% on a gross basis that would have been about 1% favorable. Those favorable on a net basis.

And that was PPD, not PYD, correct?

That's right. Prior year development is not something, that's something that shows up in the queue. That will be year-to-date, about $6 million of favorable development, although that's a year-to-date figure. So the development in the quarter was slightly unfavorable. About $2 million unfavorable in the quarter for prior year's development.

Okay, great. Thanks for the color there. And then I guess last one if I could. Thanks again for the additional disclosures in the insurance portion of the supplement. But is there any way that you could help dimension within, I believe what's called home multi payroll in there, the kind of difference between renters, condo and I guess what would be potentially considered traditional homeowners just in terms of potentially premium per customer policy loss ratio. Just I guess any color in there would be helpful.

The new disclosures we hope will be super helpful and we'll continue to evaluate that. I can’t share some of the metrics we've shared in the past. We do sort of group home and condo together and that tends to run a price per customer in the sort of $1,500 range, whereas a renter is probably $170 range. So those are notable differences. But that's not something we're necessarily going to break out and disclose every quarter. But just from an order of magnitude basis. That should give you a feel for the distinction.

Okay, great. Thanks again for the answers.

Thank you. [Operator Instructions] Our next question comes from Matt Smith from Halter Ferguson Financial. Please go ahead, Matt. Your line is now open.

Hi. Thanks and congrats on a great quarter, everyone. Looking through the letter, it seems like the near term priorities are really around kind of limiting exposure to home and as you said, leaning in on car but thinking longer term, will home kind of remain a shrinking piece of the business or is there some plan to kind of re accelerate growth in that area once the LPD dynamics improve?

Matt, good morning. Good to hear your voice. Home is important. It's an important part of every consumer's purchase and insurance needs and we do aim to cater to our customers 360 degrees. That said, there are many areas in home where we don't have a distinct advantage and where the volatility and the exposure doesn't make sense for us. We have prided ourselves on being a capital light company with low volatility and we've not always been able to hold true to that and that's largely been because of exposure to home. So we have, over the course of the last few years worked hard to do a number of things. In the past we relied on reinsurance to offload a lot of that. We've certainly been diversifying geographically and otherwise. And we hinted a couple of quarters ago that we're also looking at placing homeowners policies on third party paper where necessary. So our prioritization is really the customer centricity making sure that we cater to all of our customer’s needs. If it makes sense to write that home policy on our paper, we do that. It makes sense to write it on our paper and reinsure it. We'll do that if it makes sense to use a partner's paper as we've done, for example, for earthquake insurance since our very inception, we will do that as well. So we're playing with those tools. I do think it would be fair to say though that while we will, I think, always cater to the customer's needs and offer homeowners insurance in a way that best suits our business model and place our competitive advantage, our competitive advantage will be and has been more pronounced than other products. So in car insurance I think we've got an extraordinary competitive advantage. We will elaborate on that at some length in a couple of weeks’ time in our investor day. We've demonstrated that I think very ably in pet insurance and renters insurance. I think in homeowners insurance, where it is so exposed to the weather that does mute some of the capabilities that we bring to bear on other products. And for that reason, while we will continue to offer it, I don't want to overstate the competitive advantage that we enjoy in that sector. One other thing to add. Sorry Matt, it shouldn't be an after, but it just was. So just one last thought, which is we've launched homeowners insurance in France. We've launched homeowners insurance in the U.K. Those are growing. Well, cat exposure in those places is a tenth or less of what you see across the U.S. So in areas where it makes financial sense, we're expanding on our own paper. And in areas where it affords, I think, unreasonable exposure, we're shrinking the footprint, at least when we write on our own paper.

Thanks for the color and looking forward to seeing you guys in a few weeks.

Thanks Matt.