Lemonade, Inc. (NYSE:LMND) Q3 2023 Earnings Call Transcript

Lemonade, Inc. (NYSE:LMND) Q3 2023 Earnings Call Transcript November 2, 2023

Operator: Hello, everyone, and welcome to the Lemonade Q3 2023 Earnings Call. My name is Charlie and I’ll be coordinating the call today. You will have the opportunity to ask questions at the end of the presentation. [Operator Instructions] I will now hand over to our host Yael Wissner-Levy, the VP of Communications at Lemonade to begin. Yael, please go ahead.

Yael Wissner-Levy: Good morning, and welcome to Lemonade’s third quarter 2023 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, Co-CEO and Co-Founder; Shai Wininger, Co-CEO and Co-Founder; and Tim Bixby, our Chief Financial Officer. A letter to shareholders covering the company’s third quarter 2023 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-K filed with the SEC on March 3, 2023, our Form 10-Q filed with the SEC on August 4, 2023 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 their 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 performance indicators, including customers’ in-force premium, premium per customer, annual dollar retention, gross earned premium, gross loss ratio, gross loss ratio ex-cat and net loss ratio and 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 will turn the call over to Daniel for some opening remarks. Daniel?

Daniel Schreiber: Good morning, and thank you for joining us to discuss Lemonade’s Q3 results and our updated outlook for the full year. We are very pleased by this quarter’s results, topline, bottom line and the intervening line. Starting at the top, we saw continued growth with in-force premium growing 18% year-on-year, boosted by strong marketing efficiencies and rising prices. At the same time, we also saw our gross loss ratio improved 11 percentage points, both quarter-on-quarter and year-on-year to 83%, continuing the trend we had seen in recent quarters and which was so rudely interrupted in Q2. Our operating expense similarly declined by 11%, since our third quarter of last year. As a result of all this, our gross profit increased 170% year-on-year and our adjusted EBITDA loss contracted by 39%.

We are, as I say, pleased with the results this quarter. In other news this month, we expect to pass the 2 million customer mark. The comparison of our business today to our business when we hit the 1 million customer mark is instructive. Today with double the number of customers, we have 3.5 times as much gross earned premium, as our premium per customer jumped by 17% in the intervening years. At the same time, net loss as a percentage of gross earned premium roughly halved. Taken together, these improvements show strong progression of the business in recent years and this sketch it will best part to profitability. This month we also marked the anniversary of our first Investor Day. In our shareholder letter, you’ll find significant updates to the projections and models we shared a year ago and I do encourage you to peruse it.

One notable highlight, we expect to become cash flow positive by end of year 2025 and to reach that point with hundreds of millions of unencumbered dollars in the bank. We expect it to become adjusted EBITDA positive by year-end 2026. Towards that end, we anticipate accelerating our pace of growth considerably in 2024. We previously communicated the reasons for our slowdown this year and as inflation subsides and rates come on line, we can see our path clear to reengaging our clusters in 2024. In our Investor Day, we spoke of 25% compounded annual growth rate as our target growth rate and we anticipate our growth rates in 2024 we will be at or around this target. Continuous and strong growth are key to fully harnessing the benefits of automation and it deemed to combined impact of both automation and growth are key to our profitability.

To expand on our generative AI efforts and the contribution to our automation, let me hand over to Shai. Shai?

Shai Wininger: Thank you, Daniel. Before I get to some of the exciting work we’ve been doing with generative AI, I wanted to say a few words about our Israel-based team members. The horrors of the attacks of October 7 are hard to overstate. In the days since have been challenging for many of our team members and especially so for our Israel-based team. I want to acknowledge the extraordinary resilience and strength of our Israeli team and send them our collective appreciation and wishes. I also wanted to assure our investors that throughout this period of unprecedented heartbreak and upheaval in Israel, Lemonade has continued to operate without interruption. It helps that the overwhelming majority of our team is based outside of Israel, in the U.S. and Europe.

Thanks to the resilience of our distributed team and the level of automation we already have in our operations, our productivity remained high and our business continued to operate. Speaking of automation, I’d like to provide some more color on the advances we’ve made implementing generative AI into business processes across our organization. It’s been an exciting few months working on multiple initiatives with our dedicated generative AI squads and preliminary impact is already reflected in our shrinking expense ratio. For example, we’ve recently introduced large language models into our customer support process, where our generative AI-powered automation handles customer emails from start to finish. This initiative is just a few weeks old and is already handling more than 7% of our incoming customer service emails.

This of course is on top of request handled by AI Maya in our mobile and web apps and AI Maya now handles a third of all customer interactions on these platforms. This is just the tip of the iceberg. There are dozens more initiatives in progress and we believe the percentage of generative AI-handled processes, such as answering customer ticket, will increase substantially. We’re focusing our efforts on automating manual intensive work such as underwriting property inspections by leveraging the latest generative AI image analysis technology. We’re now able to substitute human involvement in many underwriting processes with systems powered by generative AI. For example, we recently introduced a self-inspection feature that guides customers through a house tour and automatically analyzes captured images to reduce both risk and cost.

Using the new generative AI vision capabilities, we’re able to determine construction quality, materials, finishes and levels of this repair. We can even read labels on water heaters and other equipment to determine their age and level of risk. These are just some examples, and we’re working on dozens more with new capabilities going live every few days. What allows us to move so fast in incorporating these new technologies is the fact that our system was built from start to finish by Lemonade. We have zero reliance on third party providers and in the last few years, have built a modular and expensive platform that can seamlessly and easily integrate with new technologies like generative AI. As Daniel mentioned, our shareholder letter this quarter is worth close read.

One statistic from the letter that’s worth highlighting is that in just two years our gross earned premium more than doubled, while our operating expenses only grew by 19%. This speaks volumes about our growing efficiency and bodes well for the coming years. As we expand the scope and depth of our automation efforts, we expect to accelerate our top-line growth while improving our bottom line. AI and automation play a starring role in enabling this dynamic and hence in charting our path to profitability and beyond. And with that, I’ll turn things over to Tim.

Tim Bixby: Great. Thanks, Shai. I’ll review highlights of our Q3 results and provide our expectations for the fourth quarter and the full year and then we’ll take some questions. It was a strong quarter across the board with excellent loss ratio improvement coupled with rigorous cost control, resulting in strong results exceeding our own expectations. In-Force Premium or IFP grew 18% in Q3 as compared to the prior year to $719 million. As a reminder, the third quarter is the first quarter where our year-on-year comparisons include Metromile impact in both the current and the prior year results as the acquisition closed in July of 2022. Customer count increased by 12% to just shy of $2 million as compared to the prior year, premium per customer increased 6% versus prior year to $362 driven in roughly equal parts by rate increases and mix shift to higher priced products.

Annual Dollar Retention or ADR was 85%. We measure ADR on an annual cohort basis and include the impact of changes in policy value, additional policy purchases and churn. There was some modest downward pressure on ADR this quarter from the addition of former Metromile customers in the current quarter metric calculation for the first time. Gross earned premium in Q3 increased 27%, as compared to the prior year to $173 million a bit faster than IFP growth, due to the partial quarter impact of Metromile results in Q3 of 2022. Revenue in Q3 increased 55% from the prior year to $115 million. The growth in revenue was driven by the increase in Gross Earned Premium as well as a 169% increase in investment income and a decline in the proportion of premium ceded to reinsurers.

Our gross loss ratio was 83% for Q3, as compared to 94% in both Q3, 2022 and in Q2 of 2023. The impact of CATs in aggregate in Q3 was roughly 10% points within the gross loss ratio. About equal to the average quarterly CAT impact over the last couple of years, absent the total CAT impact the underlying gross loss ratio ex-CAT, with in line with the prior quarter and nearly 15% points better than the prior year. Prior period development was roughly 3.8% favorable impact in the quarter primarily due to pet [ph] reserve adjustments. Operating expenses excluding loss and loss adjustment expense decreased a 11% to $98 million in Q3, as compared to the prior year. A bit of detail on the unique entries in the quarter both one-off expenses related to the Metromile acquisition.

We had a notable non-recurring expense in the quarter related to a successful sublet of excess office space in San Francisco, a lease acquired in conjunction with the Metromile acquisition. I’d consider the sublease of the space as a positive outcome in a very difficult West Coast real estate market. The current prevailing rents are well below the market peak of 2019 and as a result we have written down approximately $3.7 million in the quarter in relation to this transaction. We’ve also reserve $3 million for other potential liabilities related to Metromile operations pre-acquisition based on facts known now that were not apparent at the time of the acquisition. These expenses are included in G&A expense they impact our net operating loss, and earnings per share and have been excluded from our adjusted EBITDA calculation.

Given the unique nature in relation to activities pre-acquisition. The San Francisco office lease was our only material excess real estate obligation. We’re comfortable with our other existing lease obligations relative to our space needs in all of our physical locations. Other insurance expense grew 25% in Q3 versus the prior year, a bit ahead of the growth of earned premium primarily in support of our aggressive investments in our rate filing capacity. Total sales and marketing expense declined by $11 million or 32% primarily due to lower growth acquisition spending to acquire new customers. Total growth spend in the quarter was $12.6 million, down from $23 million in the prior year quarter. Growth spend was about 15% more efficient in Q3 versus a year ago, in part due to lower absolute spend, but also due to better results in certain marketing channels.

In July, we began to draw down on our loan facility. Our synthetic agents program and financed about 50% of our Q3 growth spend. As a reminder, you’ll see a 100% of our growth spend flow through the P&L as always. While the impact of the new financing mechanism, is visible on the cash flow statement in the balance sheet. Technology development expense increased just 2% close to flat versus the prior year. G&A expense decreased 9% as compared to the prior year. Personnel expense and headcount, continued to be quite stable despite continued growth in customers and premium, total head count is actually down about 5%, as compared to the prior year at 1,304. Net loss was $62 million in Q3 or a loss of $0.88 per share as compared to the $91 million loss we reported in the third quarter of 2022 or a loss of $1.37 per share.

While adjusted EBITDA loss was $40 million in Q3, as compared to $66 million of adjusted EBITDA loss in the third quarter of 2022. Our total cash, cash equivalents and investments, ended the quarter at approximately $945 million, reflecting primarily a use of cash for operations of $103 million since year end 2022, and worth noting that that total cash and equivalents and investments balance was essentially unchanged versus the prior quarter. With these goals and metrics in mind, I’ll outline our specific financial expectations for the fourth quarter and the full year. For the fourth quarter we expect in-force premium at December 31, between $726 million and $729 million. Gross earned premium between $174 million and $176 million. Revenue between $107 million and $109 million and adjusted EBITDA loss between $44 million and $42 million.

Stock-based compensation of approximately $16 million, CapEx of approximately $3 million and a weighted average share count of approximately 70 million shares. And for the full year this would result in in-Force premium again at $726 million to $729 million, Gross Earned Premium between $665 million $667 million, revenue between $421 million $423 million. Adjusted EBITDA loss between $188 million and $186 million. Stock-based compensation of approximately $62 million, capital expenditures of approximately $10 million and again weighted average share count for the full year of approximately 70 million shares. All in all, a really strong quarter. It’s worth summarizing the main headlines, cash flow positive expected by year end 2025. Adjusted EBITDA positive following by year end 2026.

Continued progress on loss ratio, rate filings and approvals earning in with more to come. Impressive efficiency and nearly flat headcount. We can look back to almost two years ago when we first spoke about our expected peak loss quarter happening in Q3, 2022. Now a year out from that date, not only was that quarter indeed our peak loss quarter, but just one year later, our adjusted EBITDA loss has shrunk by nearly 40%. Taken together, our results give us confidence that we are on the path to creating a sizable, defensible and profitable business and we hope you see them similarly. With that, I’d like to hand things back over to Shai to answer some questions for our retail investors.

A – Shai Wininger: Thanks, Tim. We’ll now turn to our shareholders’ questions submitted through the safe [ph] platform and by the way, I also saw some recurrent questions on Twitter, specifically from Neil and tried to address many of those questions in the letter, our comments this morning and again in the following answers. We didn’t asked the most upwards question about when meaningful profitability is expected. The letter in our comments earlier in the call, answer that clearly. So I’m going to use the time to get to additional upward questions. Matthew asked about the Lemonade stock, specifically what steps are being taken to raise the value and maintain the stock? Matthew, we get this question quite often. And we understand why?

The share price is not at a place we’d like it to be. So as mentioned in previous calls, we’re not focused on the short-term performance of the stock, but look towards the long-term and encourage our investors to do the same. We have high conviction in the long-term prospects for Lemonade and the value we can create for shareholders quarter-after-quarter, we are delivering underlying improvements that are meaningful and significant, to our business. And as we head closer to profitability, we are optimistic that, the true value of Lemonade will be reflected, more fully in our stock price over time. Our next couple of questions were around Lemonade car, Darren asked what is hindering the process of Lemonade car. And Paper Bag [ph] too ask for a similar update?

As with any of our products, we’re only interested in growing profitably, expanding our book of business with healthy sales that, is contingent upon our loss ratio getting to where we want it to be. As we increase rates to keep up with rising inflation. As a reminder, the increase in car repair and parts costs had led to an industry wide challenge. Today, I’m happy to report that California approved a 51% rate increase, for our car product. This is especially significant as approximately 50% of our car premium come from California. These new rates earn in we expect, to become rate adequacy. We believe that this can yield a healthy loss ratio, allowing us to grow car faster in the coming years. Paper bag also asks about cost cutting measures, citing other insurance companies taking measures to cut operating expenses.

I appreciate the question here, and it’s important to note that we apply great scrutiny to every single initiative we’re working on into the resources at our disposal. That has allowed us to steadily iterate as needed rather than undertake sudden and drastic changes. Over the last two years Gross Earned Premium grew six times faster than operating expenses. This quarter alone, exemplifies the ability to grow while cost cutting. With IFP growing 18% year-on-year, gross loss ratio improving by 11 percentage points to 83% and operating expenses declining by 11%. And you can see that in our head count as well. We’ll end 2023 with roughly the same number of full-time employees as the start even as our business will have grown considerably. And with that, let me hand the call over to the operator, so we can take some questions from our friends on the street.

Operator: [Operator Instructions] Our first question comes from Matt Smith of Halter Ferguson. Matt, your line is open. Please go ahead.

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Q&A Session

Matt Smith: Hi. Thanks and congrats guys on a great quarter. And please note about our support and prayers to the team in Israel. I know it’s been a very chaotic, little bit of time, so just wanted to let you know that we’re supporting as well. I wanted to touch on your LTV to CAT ratio, you mentioned pretty significant improvement getting to greater than four in recent quarters, it looks like this is related in part to the more efficient marketing spend that Tim touched on. But can you give some additional color on what things AI is picking up on to drive that LTV component of that equation, higher?

Daniel Schreiber: Yes, I think, I think you kind of hit on the two key drivers there. One is, yes, when you’re spending somewhat less over time you tend to spend it on the more productive channels with higher ROIs. So there is that aspect and probably worth kind of reminding of our pace of spending, pace growth as we highlighted in the letter, we’ve been growing sort of in the mid to upper teens over the course of this year by choice, by design, we can really set our own growth pace by the amount of growth spend we deploy. And with the addition of our synthetic agents program, our improving loss ratios we’re now getting to the point, as we’ve talked about for a few quarters where we’re much more comfortable leaning in and upping that gross spend over time.

And so we gave a little indication of that in the letter that we see as we head into 2024 that all those pieces are now coming together where we will have the ability to spend more to keep the ROI strong and return to growth rates that look more like our long-term target in the mid ’20s or above. The balance of the impact is definitely more efficiency, there are some highlights in the letter around our LTV to CAC or LTV6, LTV7, LTV8 models that are now continue to evolve consistently and what that enables us to do is be much more granular around the channels that are working, the channels that are not working and adapt and adjust more quickly and so it’s really a combination of those two things that give us the uptick in marketing, marketing efficiency, about a 15% improvement this quarter in marketing efficiency dollar for dollar versus the prior year.

Shai Wininger: Matt, sorry. I’ll take your follow-up in a second. Two quick comments from you. First of all, really appreciate your comments of support. Thanks very much. To underlying one of the things that Tim said and then to add one dimension further. So, definitely this is one of our lower spend quarters and the systems are very good at cherry picking. So the incremental dollar will be spent as close as possible incremental LTV to CAC, the fewer dollars we spend, the greater the LTV to CAC ratio at cut off. If we kept spending we would be getting the next slightly less efficient customer and to further down the curve, if you follow my meaning. So I just want to, we think that the systems that we have in place are incredibly powerful to allow us to do that, but you don’t extrapolate necessarily that if we doubled or tripled spend, we would see exactly the same LTV to CAC, a byproduct of that kind of efficient and highly targeted spend of dollars is what I just said.

The second thing to bear in mind, which also may or may not to play out the same in the coming quarters is at a macro level, the insurance industry has suffered a great deal, we referenced somewhat in our letter. We’ve seen some of the largest players either totally exit large markets or certainly stopped spending in them and we have seen a precipitous decline in competitors deploying dollars in order to acquire acquisitions. So the last quarter also had, perhaps some unusual dynamic time will tell where customers were there for the taking and I don’t know how much that will – and sustain itself as others eventually dust themselves off and start spending dollars again. So, couple of things to bear in mind, and I’m sorry, you had a follow-on question as well.

Matt Smith: Yes, you actually touched on kind of what I was getting at my follow-up is just the sustainability of that ratio. So I mean it sounds like the longer term, you might expect something closer to the historical levels of LTV to CAC of three that may be a fair statement had been picks up, if you kind of get through this unusual period that you’re seeing?

Daniel Schreiber: I think we’ve been reasonably good at getting sharpening our pencil, systems getting better. The more markets we deploy the more products, we launched the more optionality, the system has in order to cherry pick. So I do hope that we’ll be able to continue to improve, but yes, my comments were aimed at saying don’t draw a straight line from where we are this last quarter. Certainly for our internal planning purposes, we’d want to see that materialize before we bank on it.

Matt Smith: Great, thanks and congrats again.

Operator: [Operator Instructions] Our next question comes from Tommy McJoynt of KBW. Tommy, your line is open. Please go ahead.

Tommy McJoynt: Hi, good morning guys. Thanks for taking my questions. Can you help bridge what changed in terms of the timing of the cash flow and EBITDA turning profitable bit sooner than you expected. Just what were the inputs exactly that drove that change?

Daniel Schreiber: Yes. So maybe a comment on the short-term cash flow perhaps part of your question, but perhaps not but worth noting that in the short term our cash flow in the quarter was pretty interesting essentially zero change quarter-to-quarter, naturally a timing impact due to our new reinsurance structure and you can kind of see the different pieces on the balance sheet that should normalize somewhat over time but a notable cash flow benefit for the current quarter. In terms of the longer-term view a couple of things have changed in the really comparison point is probably our Investor Day from a year ago where we really got into a fair amount of detail on our different modeling scenarios and assumptions. One thing, two things have really changed fundamentally, one is enough time has passed and enough rate has earned in and enough rates have been approved or we just have much more clarity on how that loss ratio is likely to play out.

There are certain aspects of loss ratio that you can’t know, in terms of weather, but the pieces that we can know, the dollars earned in, the dollar is expected to earn in the rate approvals, we just have four, almost five more quarters of data much more clarity around that, and that’s a key driver. Second thing of note is if you look at our cost lines and our headcount reporting that we do quarter-to-quarter you can see the real impact of automation and leverage and scale in the model. And this is something we’ve known and planned for many years but has not been really evident externally until the last three or four quarters where you can really see it in those ratios. Premium growing at a very healthy clip. Operating expenses growing at a much slower pace and in some cases, some operating expense lines flat or even down.

And so those are the two primary drivers. There’s a little bit of benefit from the Synthetic Agents program we put in place, that obviously has a cash flow benefit where you’re spreading out cash flow over somewhat longer period of time. And that’s really the combination of those enabled us to solidify our models with much more granularity, much more confidence for more quarters of hard data versus projections, and it gives us an expected cash cushion in the trough years roughly double what it was when we looked at it a year ago. So all around good stuff.

Tommy McJoynt: Thanks. And then my second question, is with the large rate increase improved in auto in California. Can you talk about the trajectory of how you see that book of business, the auto book of business diversifying over time? Obviously there’s a lot of concentration in California now and you’re continuing to rollout new states, but you got a big premium bump in California. So can you just talk through the – how you see the diversification on a geographic basis, playing out going forward in auto?

Shai Wininger: Yes, I would think of it as an opportunistic approach. Obviously, the California rate approval and our concentration in that state is a pretty dramatic change in our ability to grow generally in car. It’s also notable that we can see a loss ratio, even before that rate increase, continuing to improve, higher than our target, but certainly continuing to improve. And so, I think in the same way that we’re able to pick and choose among marketing channels. This will enable us to pick and choose among not only states, but also regions and you can get quite granular in terms of where and how we grow with five products car, is not the only game in town and will be fairly thoughtful about how we grow the renters book, the home book, the pet book continues to really perform nicely in terms of marketing efficiency, in terms of growth and certainly in terms of loss ratio.

So car certainly looks a little, our ability to grow within car that date has come much closer with these recent changes, but we’ll continue, to really looking to build out all our products.

Tommy McJoynt: Thanks. And then just my last question, just from a modeling perspective, do you guys have an expectation for what you’re kind of annual cat load would be like a percentage or probably a percentage basis, the dollars talk with how much you guys are growing. Not sure if you guys, I’m just kind of the baseline number that you guys think of?

Tim Bixby: Yes. So – we don’t guide to that by design, but we certainly think and model it, probably the best way to think about it is to look back over the last eight, maybe nine quarters and you’ll see an average cat load of roughly, between 9.5% and 10.5%. There’s obviously a spike in Q2 of this year which skews that number, but actually not a whole lot when you’re looking over the course of a couple of years or so. So that, I would think of that as sort of a normalized cat load obviously that may change somewhat as the mix of business grows over time, but that’s been relatively consistent. So, if you’re looking at the course of a year, that’s a pretty reasonable number. Obviously quarter-to-quarter will have fluctuations, and they won’t always be as expected.

Q2 and Q3, this year are notable examples where if you were just looking at weather patterns, historically you’ve probably swapped two quarters in some ways, but over the course of the year. That’s a reasonable assumption. Right.

Tommy McJoynt: Makes sense. Thanks, Tim.

Operator: Thank you. Our next question comes from Jason Helstein of Oppenheimer. Jason, your line is open. Please proceed.

Jason Helstein: Hi, guys. So just before last question, just want to send our support to everyone in Israel are dealing with the current situations, thinking of everybody. Just two questions. And they kind of both tied to cat. So just Tim, can you clarify, like what was the Cat impact this quarter. Just want to make sure we heard it right. And then to the extent that it sounds like this was a light quarter for cat, the extent of fourth quarter comes in light. Do you think about like reinvesting that back in the business either in growth or other areas? Just how – like how would you think about it, if the next, let’s say, four quarters just happened to be meaningfully less cat. And what we’ve kind of gone through. Does that change how you think about where those dollars go? Thanks.

Tim Bixby: Sure. Yes. Great, great question in terms of the impact in the quarter, it was roughly 10 points from all cat combined in the quarter. And it was a little skewed, slightly skewed more to what we call a major storm, not a named storm, but a major storm versus just general cat maybe a 60-40 split, but 10 points in aggregate in line with the historical average for a couple of years quarterly average as I noted. And about half what it was in Q2, Q3 is – from a hurricane and a home product perspective a seasonally higher expected quarter that actually came in somewhat better. We saw that in the numbers. Q4 that seasonal impact diminishes somewhat. If we were to see a reputation of Q3 and Q4, where the expected pattern is a little bit better.

Yes, you would – we would see that flow through in terms of our choice or our ability to redeploy that that upside or that incremental margin or cash flow. It’s a little tricky, you don’t know as you go through a quarter, you don’t know until you know right, you can have a cat on the last day of the quarter or the first day of the quarter and they can have a similar impact, but I would say from a macro view, if we had several quarters in a row as in your example sure that’s a benefit. I mean, one of the things we’re striving towards is visibility into long-term cash flow, our cash flow cushion and growing faster helps that. And so, we’re balancing all of those things. And if we see some upside as a benefit in the coming quarters that enables us to nudge that growth and that’s been up a bit, which gets to scale faster.

So it’s a little bit of a, I would call it sort of a virtuous cycle and we’d love to see that pattern evolved. I don’t know that it would be – every single dollar you pushed back in, but certainly it would give us the ability, to be more thoughtful and lean in, a bit more on growth. We’re already planning to do that based on, what we know now, but that could certainly help a bit.

Shai Wininger: Hi, Jason.

Jason Helstein: And then just one follow-up.

Shai Wininger: Sorry about that. Just two things first of all, thank you too for your kind warm wishes. They are warmly received as well, a couple of funny kind of comments about cat. One is the quarters may be slightly less randomly distributed than you might expect. What I mean by that is, there were some speculation in Q2 and we saw very severe storms in Q2, at a time that we didn’t expect and in some places that, didn’t expect. California for example was basically really hit. Those put some speculation at the time that that may result in a lighter wildfire season which would have been around now, because so much of the timber, so much of the fuel is dampened by it. So, we do see perhaps that Tim’s earlier comments about the quarter is being swapped around, there may be some actual basis for that rather than it being entirely random.

But it is an opportune time to say these storms and wildfires, and other catastrophes come basically in a way that we can’t predict. And we do encourage everybody to look at the long-term trend, we do have reinsurance that Buffett’s from the worst of the shock, at least in terms of our EBITDA impact. And by the same token, if we have one or two good quarters. We don’t necessarily bank that on the assumption that that trend will continue. We always prepare also the notion that, the next quarter may be different. We tried to take a zoomed-out long-term perspective on this. You had another question, Jason.

Jason Helstein: Do you have any thoughts about competitors who’ve been kind of moving in and out of markets and obviously these things take kind of long planning and what not, but have you made any change to kind of your three-year plan based on or five-year plan. Based on competitors moving in and out of markets?

Shai Wininger: Not so much about competitors moving in and out, but we follow similar forces. Sales of certain products in certain markets have changed dramatically over recent years. I think it was Tommy, who asked earlier about our concentration of clients in California, and you will see that we have made concerted efforts in product and that, by the way is something that we inherited from Metromile. We have made concerted efforts to re-balance some of our products in that sense, particularly when it comes to cat exposure. So in recent years, our sales of home insurance in general and home insurance cat exposed areas has dropped off precipitously. And we keep looking at the areas of greatest exposure and try to balance the book accordingly.

So, we have taken and continue to take measures to avoid the worst of those. The fact that our competitors are pulling out of those markets doesn’t make them attractive to us. We’re really focused on selling in places that we feel we have price adequacy and secondly a preference for low volatility, particularly given the high cost of reinsurance at the moment.

Jason Helstein: Thank you.

Operator: [Operator Instructions] Our next question comes from Andrew Anderson of Jefferies. Andrew, your line is open. Please go ahead.

Andrew Anderson: Hi, good morning. I think you had kind of touched on the ex-CAT gross loss ratio earlier, but maybe if we go back to it 73% in the quarter and kind of consistent with first quarter and second quarter results. I’m just thinking, there’s been a lot of rate taken quick kind of get some puts and takes perhaps by line on why we haven’t been seeing a little bit of sequential improvement. Maybe, some seasonality, or just the lagging timing of earned rate?

Tim Bixby: Yes, I think if you break down the loss ratio, you certainly see a couple of consistency themes. We don’t see improvement every single quarter as we move forward. And so we saw some ups and downs in Q3. The net impact was a fair bit better obviously because of the CAT impact, which is primarily a home dynamic. In terms of specifics we saw continued improvement in CAT quarter-to-quarter, which obviously is not CAT exposed and we saw a nice improvement in car even, even obviously before this most recent rate increase from Q2 to Q3. Renters nudged up very slightly and home was up somewhat and so this is a pretty common theme, we shared the product write-downs a couple of times over the past year. And you’ll see some short-term fluctuations in volatility quarter-to-quarter, and then you’ll see the long-term trend reflecting that those rates earning in, and I’d refer folks back to the letter, where we had some specifics on the dollar impact of rates earning in.

So a fair amount somewhere in to date, a good amount of progress and with the rates just to prevent California, obviously that number is going to continue to be a very solid driver of both growth and loss ratio improvement going forward.

Andrew Anderson: Okay. And I think you had mentioned 10 points of gross CAT losses. Do you have net CAT losses handy, as well as the 3.8 points of favorable PYD was that on a net basis as well.

Tim Bixby: So you’ll typically see our gross and net impacts to be very close not identical. But very consistently similar impacts quarter-to-quarter and that’s been true for some time. In terms of the prior period development that was driven. There’s two numbers there. One is the in-quarter prior period development impact is about 3.8% favorable. That number moves around quarter-to-quarter, but that was primarily a CAT reserve benefit in the quarter. And then there’s a prior year number that’s disclosed in the year, those are two different numbers. The drivers are similar. The numbers are different because prior years, prior year and prior period is all, all prior periods combined. But the impact was the same both favorable, primarily driven by CAT.

Andrew Anderson: So the prior period was 3.8 points of favorable, the PYD was also 3.8 points

Tim Bixby: No, the prior year is a $1 number and that would be a smaller dollar number. And the current, the current quarter 3.8% – is 3.8% of gross earned premium in the current quarter. So that dollar impact in the current quarter would be about, if you do the math about $6 million in the prior year number – prior year numbers about $3 million. So two different numbers, and I would caution you to not – to be careful when you combine those because they are two different analysis, two different numbers and can lead to some confusing conclusions but happy to follow-up after the call if more detail is helpful.

Andrew Anderson: Great, thank you.

Operator: Thank you. [Operator Instructions] At this stage we have no further questions. And therefore, this concludes today’s call. Thank you all for joining. You may now disconnect your lines.