Lemonade, Inc. (LMND) Q3 2021 Earnings Call Transcript

Lemonade, Inc. (LMND -1.15%)
Q3 2021 Earnings Call
Nov 09, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Lemonade, Inc. third quarter 2021 earnings conference call. [Operator instructions] I would now like to turn the conference over to Yael Wissner-Levy. Please go ahead.

Yael Wissner-Levy -- Vice President of Communications

Good morning and welcome to Lemonade's third quarter 2021 earnings call. My name is Yael Wissner-Levy and I am the VP of 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, chief financial officer. A letter to shareholders covering the company's third quarter 2021 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 8, 2021 and our other filings with the SEC. Any forward-looking statements made on this call represent our views only as of today and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key operating metrics, including 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, who will begin with a few opening remarks. Daniel?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Good morning. I'd like to begin with a very exciting news about our car-in product strategy. Lemonade car was launched last week and today as part of our continued investment in this line, we announced our acquisition of the tech-enabled car insurance company, Metromile. We believe the deal will be a significant value unlock to our shareholders and our customers and we expect this transaction to pay dividends in three important currencies.

Firstly, by collapsing time. We're acquiring billions of miles of highly textured driving data, advanced telematic technologies and deep pricing and underwriting knowledge. Metromile has implemented seasoned proprietary machine learning models that are informed by real world feedback and iteration at scale. It would candidly take us years to gather this level of insight.

The deal also delivers over $100 million of seasoned in-force premium, 49 state licenses and a team steeped in every aspect of digital car insurance, all things that can accelerate the growth trajectory of our own car insurance business. Secondly, the deal allows us to flatten risk curves. Not only does the transaction accelerate our growth trajectory and knowledge base, but importantly, it allows us to bolster the riskiest parts of our car ambitions, namely growing Lemonade car before our data models season. Lastly, this transaction delivers increased efficiencies.

Post transaction close, our strategy is to build a business that preserves a single culture, single tech stack, single brand, unified team and a single product experience. We believe this strategy yields considerable revenue and cost synergies that will enhance Lemonade's financial profile. Just days ago, we launched Lemonade Car. This was our Herculean effort by our team.

The results of the car insurance product built from scratch by the largest team we've assigned to a single product ever. We're incredibly proud of how it works out and believe it's only going to get better from here. Injecting all the Metromile mojo into Lemonade car will lead to a product offering that stands alone in the market. Together, we'll have all the people and tools in place to deliver the market's most seamless and customer-centric car insurance product that is also its most affordable, precise and fair.

That, at any rate is the plan. Concurrent with these significant developments in our car product and strategy, the rest of our book has happily sustained its growth trajectory. With helping unit economics and robust customer demand, the overarching theme of 2021 sustained through Q3. We leaned in and sequentially ramped up our investment in growth.

We saw robust premium growth in Q3 with IFP increasing by 84% year on year. In fact, in Q3, we drove a record $50 million net change in IFP. This marks the third consecutive record quarter and was a direct result of leaning in, a sequential increase in advertising investment for the period. Across our book of business, we are seeing trends that enhance our customer lifetime value, most notably the increasing prevalence of bundling and the formation of healthy loss ratio trends in our newer business lines and this gives us confidence to accelerate our investment pace.

Additionally, Q3 is typically the quarter where we see tailwinds driven largely by seasonality and renters moving behavior. We capitalized on this effectively delivering a record volume of gross new renters business for the period. While rentals growth remains healthy, consistent with our sustained strategy of diversifying our book, we actually drove faster year-on-year growth rates in each of our non-rental lines of business. As a result, the business mix evolution we highlighted in detail last quarter has sustained with non-rentals share of the overall book of business ticking up to 47% of from 44% last quarter.

And with that, let me hand over to Shai for more updates.

Shai Wininger -- President, Chief Operating Officer, and Co-Founder

Thank you, Daniel. On the topic of growth in our advertising budget allocation strategy across the product portfolio, our growth investment dollars will continue to follow the areas of our business that demonstrate the most healthy unit economics. On last quarter's call, we touched on the formation of favorable trends in our European loss ratios. As a result, in the near term, we expect to reallocate marketing dollars from our life business to Europe.

While our European life businesses each have relatively small scopes today, we continue to believe that they will achieve meaningful scale in the long term. Beyond our customer acquisition strategy, we are observing positive trends in the growth contribution from our existing customer base. Doubling behavior is growing substantially across the book with bundles now representing 8% of total IFP compared to 0% prior to launch of PET in Q3 '20. This quarter, we recognized a record volume of cross-sells at about $5 million and saw a more than 4x increase in the number of customers with policies in multiple lines relative to last year.

And while the average premium per customer in Q3 '21 was $254, our bundled customers show close to 3x that number. Shifting gears to underwriting profitability across our product portfolio. Our Q3 '21 gross loss ratio was 77%, up from 72% a year ago. I wanted to provide some color to address this trend.

The increase in our loss ratio masks an important underlying trend. Our less mature lines of business are demonstrating meaningfully improved profitability. These gains are driven by a comprehensive strategy and rigorous focus across the organization to improve loss ratio and customer lifetime value. The improvements we're seeing put us on a clear path to our ultimate destination.

In the long term, we expect the loss ratios of all Lemonade product lines to be under 75%. And with that, let me hand over to Tim for a bit more detail around our financial results. Tim?

Tim Bixby -- Chief Financial Officer

Great. Thanks, Shai. I'll give a bit more color on our Q3 results as well as expectations for the fourth quarter and the full year of 2021 and then we'll take your questions. We had another strong quarter of growth driven by additions of new customers as well as a continued increase in premium per customer.

In-force premium grew 84% in Q3 as compared to the prior year to $346.7 million. We believe this metric captures the full scope of our top-line growth before the impact of reinsurance and regardless of the timing of customer acquisition during the quarter. Premium per customer increased 26% versus the prior year to $254. This increase was driven by a combination of increased value of policies over time as well as mix shift toward higher-value homeowner and pet policies.

Roughly 80% of the growth in premium per customer in Q3 was driven by a product mix shift, including cross sales, while the remaining 20% was from increased coverage levels and pricing. Gross earned premium in Q3 increased 86% as compared to the prior year to $79.6 million, roughly in line with the increase in in-force premium. Our gross loss ratio was 77% for Q3 '21, 5 points higher than 72% in Q3 2020. And this was primarily driven by the impact of our rapidly growing new business lines, but was partially offset by a considerable and notable 52-point year-over-year improvement in the loss ratio of our homeowners book.

As Shai noted, it's important to understand the impact of mix shift on the overall loss ratio to get a better feel for the underlying improvements in loss ratio on a product level. Put more simply, each of our products are showing loss ratio improvements, though the overall loss ratio showed a slight increase due to the shift in mix. Operating expenses, excluding loss and loss adjustment expense, increased 98% in Q3 as compared to the prior year and this is primarily driven by a 90% increase in sales and marketing spend as a result of leaning into advertising investment. We also continue to add new Lemonade team members in all areas of the company in support of customer and premium growth and both current and future product launches and thus, saw increases in each of the other expense lines.

Global head count grew 111% versus the prior year to 969 with a greater growth rate in customer-facing departments and product development teams. Net loss was $66.4 million in Q3 as compared to the $30.9 million we reported in the third quarter of 2020, while our adjusted EBITDA loss was $51.3 million in Q3 as compared to $27.6 million in the third quarter of 2020. Our total cash, cash equivalents and investments ended the quarter at roughly $1.1 billion reflecting primarily the net proceeds from our January follow-on offering of approximately $640 million partially offset by the use of cash for operations of $95 million since year-end 2020. And with these goals and metrics in mind, I'll outline our specific financial expectations for the fourth quarter and updated full year of 2021.

For the fourth quarter, we expect in-force premium at December 31 of between $380 million and $384 million, gross earned premium of $88 million to $89 million, revenue between $39 million and $40 million, and an adjusted EBITDA loss of between $52 million and $50 million. We also expect stock-based compensation expense of approximately $19 million and capital expenditures of approximately $3 million. And this guidance would imply for the full year in-force premium at December 31, of between $380 million to $384 million, gross earned premium between $291 million and $292 million, full year revenue between $126 million and $127 million, and an adjusted EBITDA loss between $185 million and $183 million. For the full year, it would imply a stock-based compensation expense of approximately $50 million and capital expenditures of approximately $11 million.

Now notably, we've increased our investment pace and thus reduced the low end of our full year EBITDA guidance range by about $13 million. There are two drivers here, primarily: one, conservatism related to marketing efficiency; and two, accelerated spend in support of the launch of Lemonade Car. In order to allow our teams sufficient time to learn and ramp up prior to servicing customers, we've staffed up and continue to staff up all of our customer-facing teams prior to launch. In prior iterations of our forecast, these costs were slated for 2022 closer to the onboarding of car customers and we've pulled forward a portion of that planned spend into 2021.

And with that, I would like to turn the call back over to Daniel. Daniel?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Thanks, Tim. As is our custom, we're happy to address investor questions that were entered and upvoted on the state platform and I'll turn to some of these right now. The first question comes from Jacob. And Jacob asks, will M&A adopt the paper mile business model that Metromile is using through which it is failing at? So Jacob, I don't want to disclose here specifics about future iterations of the Lemonade car product.

We tend not to preannounce exact features or time lines. But I do want to give some context and color and talk about some of the underlying elements of your question. I think the important thing, which I'll return to in a few minutes' time as well is to distinguish between pricing based on proxies and pricing based on precision. One of the fundamental drivers of how Lemonade thinks about car insurance and how Metromile thinks about car insurance is to increasingly underweight proxies such as credit score and gender, marital status, job history, all things that incumbents rely on exclusively or nearly, exclusively, in pricing and underwriting and to use instead continuous data streams, which give precise information about how much has driven, how well those miles are being driven and to use those and overweight those at the expense of proxies.

As I say, Lemonade car has been architected that way based on telematics and on the continued data feed. The Metromile acquisition for us really jumps that capability forward in very significant ways and what it gives us really world-beating understanding of expected losses per mile driven. So what Metromile has spent the better part of a decade doing and has garnered billions of miles of driving data in support of is getting pinpoint data on every mile driven and the risks associated with all the elements of the driving. And that then allows you as FA to be able to predict losses per mile driven at a level of granularity and precision that proxies can never ever get to.

Once you have that understanding and you understand the true expected costs per mile driven, how you package that up to consumers is an important question, but a secondary one. You can package that in different ways. You can package it as Metromile sales have done on a paper mile basis. You can package it as Lemonade car does today where you get a flat rate per month, although that can change based on your driving patterns.

So we will experiment and bring to market different capabilities over time. Our customer-centric will use what customers want as our guiding principle in how we package. But as I say, the fundamental decision to draw is between precision pricing and proxy-based pricing and we're very much going to lean in on the precision side of the house. Let me take another question from Ecopod.

And the question is, are you in talks with automakers to form a partnership? Capital dated times at all, would Lemonade delightful customer experience includes the best of both wells. Thanks for that question. And as I just said to Jacob in a slightly different context, I don't want to reveal what is or isn't in the works at the moment. I will draw your attention to the fact that Metromile results have in the past made announcements about various cooperations with OEMs.

But again, I'd like to address the fundamentals of your question. Undoubtedly, the trend worldwide is toward connected cars. And Metromile have been implementing an OBD device and divide that plugs into the car and the engines computer and adds to it augmented with GPS and accelerometer and the GCM -- GSM chip, allowing it to really become a connected car. So all of the Metromile customers are effectively driving connected cars already today.

Our own app that launched last week for Lemonade car does something similar, but it's really a connected to driver than a connected car using a smartphone rather than the onboard device. We take an approach that is largely agnostic to the data source. Whether the data is coming from the OEM through a connected car through an OBD device, Metromile bio or through the smartphone as is the case with Lemonade car, we'll be able to integrate all the different data sources. So we're not committed to any one but we are committed to.

It's using that data or those data to generate ever more precise expected losses per mile driven. And we will, with the acquisition of Metromile, be able to do that in a way that just a couple of days ago, it was impossible to us, gives us multiple sources and multiple years of turning that data and really understanding it deeply. Now, I'd like to lay one other dimension on to this now. Again, coming back to the distinction between proxies and precision pricing.

The basic capabilities that I discussed using data streams in order to get to precision pricing are at a fundamental level available to everybody. They're becoming more and more available through connected cars and OBD devices have existed for a while, smartphone tracking capabilities are also technologies that have been developed and deployed in the past. And yet, we don't see them adopted in a meaningful way by the car insurance industry. And I think that the fundamental obstacle here, that thing that's slowing down adoption is really a classic innovative dilemma.

And at the most recent Berkshire Hathaway annual general meeting, the leadership of Berkshire, the owners of GEICO said the following. They said that GEICO clearly missed the bus when it came to telematics. And I do ask myself, why would it be that a company as vulnerable and a sophisticated as GEICO would entirely miss the bus in the level of its own leadership? Why is it that of the 210 million policies home, car insurance policies in effect in the United States, 95 or over 95 even are not using telematics? And why does the 4% or so that do use telematics are reusing a muted version of it? They only allow it to run for about two weeks before discontinuing it. And whatever signal they pick up during that time or meaningfully underweighted.

They do not rely on them as heavily as companies like Lemonade or Metromile do and they do not pass on the anticipated savings to the customers at anything like a rate commensurate with the expected loss. And I think the answer to that why question is that ignorance is bliss. If I were running a legacy company with tens of billions of dollars invested in proxy-based pricing, I might well do the same thing. I think it's a rational thing to do, because what happens when you move from proxy-based pricing to precision-based pricing, you discover that large groups that you were treating as monolithic are actually made up of very different risks.

About two-thirds of drivers drive less than average. And if you were to know that, if you could differentiate your customers, you would probably have to lower rates of about two-thirds of your book by as much as 30% or 40% and that would be a devastating hit to our legacy business. And what you'll also discover, of course, is that the other a third are being subsidized. And having lost that subsidy, you would now have to raise rates you'd have to hike them for about a third of book, which would lead to tremendous churn.

So all in all, adopting these technologies is not good news in the short term for people in the business of protecting the legacy business, but that is also the opportunity of Lemonade and Lemonade car and now enjoying a tremendous boost through the acquisition of Metromile to lean in on a technology-based fundamentals of precision pricing and pass on those savings in a way that creates a sustainable and indeed a structural advantage relative to incumbent. The final question I want to take us from Jeevan. And Jeevan asks the following, why should I as an investor continue to hold on to Lemonade stock when the company is not expected to turn positive cash flow for many years to come? Jeevan, we really do appreciate that question. I also appreciate your faith in being a shareholder to date.

And I want to concede and say at the outset, we're not of the view that Lemonade as a stock is necessarily right for every investor. In fact, Shai and I have always paid, excuse me, have always placed a big premium on being aligned with our shareholders, being very transparent about how we'd intend to run the business and seeking shareholders who see value in that particular way of prioritizing. To that end, we wrote a founder's letter, made it into our S-1. It's also available on the home page of our investor website, investor.lemonade.com.

And I would encourage you to read it. I'm just going to quote a couple of sections briefly. The first one is we say the following. Lemonade is not everyone's cup of tea, which is why we wanted to outline our approach and hope that investors who share our thinking will be on to Lemonade, while those who do not will seek their fortunes elsewhere.

So just acknowledging you on that, the way we're running the business is right for some investors, but not for all. And the one for whom it is right, I think, are the ones who are really looking at the long term rather than the near term. And I'll read one more paragraph, we write industries like insurance are reinvented once every few centuries. Optimizing for profitability is important, that can wait.

We aim to grow fast and capture as much market share, mind share and a larger geographical footprint as possible. If we were to reverse that, we would have a finely honed business but with risk losing the market. That does not mean our bottom line does not guide or constrain us. It absolutely should and does.

We do not launch products, open territories or sell policies and we believe will be a long time drain rather than a long-term gain, but the key phrase is long term. And coming back, Jeevan to just give you a little bit more context. So since we wrote those as well, it was 16 months ago that we had our IPO. In the intervening 16 months, our in-force premium has grown by over 160%.

Our gross profit has grown by over 180%. We have moved from being a mono line business doing only home insurance to also does pet insurance, life insurance, car insurance and as of our recent announcement has acquired Metromile. So the bottom line is we think of the industry that we're in, insurance, as the largest disruptable industry on the planet. And we believe that, that is a huge prize that's worth fighting for and that there will be disproportionate rewards for whoever attains pole position or first position as we go through the next few years.

So while we could be profitable today, all our products, all our campaigns, all our geographies have positive LTV to CAC, that would be at the expense of great fortunes down the road. And we believe that these are the years for growing customers, growing products, growing markets, growing top line and that really translates into sizable investments that put us cash flow negative. So coming full circle back to your question, why should you hold the stock despite negative cash flow? The answer is where it depends obviously on you, but if you believe in our thesis, if you believe as we do that there is unlimited opportunity almost and there is a limited window of opportunity and if you believe that the moves we're making, the investments we're making had a good chance of the outsized return, then that would provide an answer to the fundamental question of why hold on to Lemonade. I hope that was some help.

But with that, let me hand the call back to the operator, so we can take some questions from the phones on the street. Thank you.

Questions & Answers:

Operator

[Operator instructions] And the first question comes from Michael Phillips with Morgan Stanley. Please go ahead.

Michael Phillips -- Morgan Stanley -- Analyst

Hey. Good morning, guys and congrats on all the news from last night. Good stuff. I guess, first question would be on your comments in the letter about leading end of the quarter.

And we know that seasonality and you talked about that a lot of the third quarter means certain things for wanting to maybe ramp up marketing spend. But ex that impact or ex that phenomenon, I guess, what else led you to see that this was a time to lean in besides the normal seasonality?

Tim Bixby -- Chief Financial Officer

Hey, Mike, thanks. So I would think of give kind of an overarching theme if you kind of scan back over the five or six quarters since we've been public, there's a trend that stands out. A greater level of confidence has led us to increase investment levels and accelerate plans. And in a couple of instances, we saw the opposite.

Early days, months of the pandemic, we saw the opposite, a great deal, a great lack of confidence and we dialed back and we're quite cautious. That was a very brief period. For the most part, these quarters have been the former, increasing confidence better ability to get products in the hands of customers, more assurance in our competitive position. And when we see that, it gives us more confidence to accelerate and advance.

And that usually comes and exhibits itself in a P&L dynamic where we spend a little bit more. The bottom-line shows that impact in the short term, but the LTV to CAC remains strong. The market position remains strong and with the pending combination with Metromile, give us that, that confidence and then some in what is arguably our most important product launch, certainly our largest addressable market. And so you see that reflected both in the Q4 numbers.

And I think you should also feel in our posture as we head into next year.

Michael Phillips -- Morgan Stanley -- Analyst

Tim, maybe I should be a little more specific to the question, I guess, you leaned in also -- and that absolutely made a lot of sense, but you lean in all at a time where you admitted as well as the industry that there's higher customer acquisition costs and higher marketing spend costs as well. So I guess I kind of want to marry those two things. It was a tougher time because of higher marketing spend, but it's all time to lean in. So help us think about whether that was at the right time? And how you view those increased marketing spend dollars that are maybe here to stay for a while or how long you see this will last?

Tim Bixby -- Chief Financial Officer

Well, so I would think of it maybe less at a tougher time, but perhaps a little bit more expensive time to acquire customers. So there is a case to be made where if customer acquisition cost increases, that feels bad in the short term, but if the lifetime value potential is strong and increasing, that's an impact that impacts everybody in the market. And so it's not just more challenging for us and more expensive for us, it's a marketwide phenomenon. And so we choose to kind of lean into that knowing what the return is on those investments.

And we're a little bit conservative in the forward period. So we've seen this now for a long enough period of time that we don't have enough data to say this is a persistent thing it's going to last for years. But we're a little cautious about the coming quarter. And so you see that reflected in the numbers.

In terms of seasonality, I think in the first part of your question, that's still there, but it's a nominal impact. It's softening somewhat because of our much more diverse product base. We still do see that in Q3, but that's been less of a factor and it's really our choice to spend more to acquire more customers as well to accelerate some of the hiring plans to support the expanding car launch.

Michael Phillips -- Morgan Stanley -- Analyst

OK. That makes sense. You guys are pretty exact with your wording, so I might be slicing too finely here. But if I look at the current letter and your long-term target loss ratio less than 75%.

I think prior year, you had said something a little bit that, again, I might be just closing here, so I want to make sure I'm not prior comments there, we're in the low 70s, 70% to 75% and today it was less than 75%. So is there a change there? That's maybe something to be read from that, that's making you maybe I think that should be a little bit higher than what it was before or again, am I just reading too much into that?

Tim Bixby -- Chief Financial Officer

No real change there. I would think of it as a -- our long-term target remains unchanged. As you may recall, we have a business model structure where we take a 25% flat fee and remaining 75% goes for reinsurance and customer claims and loss, just an expense and all of those things. So I would think of that as unchanged.

Our long-term target is still there. And I think in the short term, I think it's very important to note that while the loss ratio did tick up a little bit in aggregate, each of the product lines has shown some nice improvement and it's really a mix shift. That is accelerating. It is a little bit ahead of where we thought it might be a year ago in a good way.

Less than half of our business today is made up of our renters book and that's decreasing, which means the other parts are increasing and that really reflects the market. Homeowners is a very large market, life bigger than that and car something like three times the homeowners market. Until you're seeing our book of business and the loss ratio shift to look more like the market each quarter.

Michael Phillips -- Morgan Stanley -- Analyst

OK, thanks. Last one for me and I'll just do one on Metromile, let's save that for later, I guess. One is, obviously, a lot of comments in the -- whether any comments today on preciseness of the data and what that's going to mean for your pricing and customer acquisition anything else in your margins. I guess, can you comment on how confident you are today with the pricing, technological advances of Metromile, given where their underwriting margins have been loss and adjustment expense ratios have been? And does that make you confident with their current pricing algorithms and data they're collecting or any concerns are at all the things that might need to be tweaked or fixed at all?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Hey, Mike. Our confidence is very high. This is really what we spent the last while diligently. There's no question that there's been an uptick in severity across the auto insurance space.

This has affected Metromile. It's affected everybody else, Progressive and others have spoken about it at some point. I think the industry as a whole will be taking rate to reflect the increase in the cost of repairing cars in the last three months. So there's definitely been a near-term impact that has affected them.

But we look right through that. What we're looking through is really nothing to do with the near-term loss ratio of Metromile and it's really about the fundamental capabilities and strategic strengths. And there, we believe that there is a pronounced advantage that is readily visible. So there's a couple of things that we mentioned in the last half.

One, the very notion that customers report savings something like 47% when touching to Metromile. And at the same time, the loss ratio is within 10 points of Progressive's direct business, suggesting that even if they took a rate increase, there would still be sizable savings for consumers even as the loss ratio hit its long-term target. So we see a structural advantage in the capabilities that they have built and we're unmoved by the near-term changes that they plan to make anyway in order to bring the loss ratio in line with the long-term targets.

Michael Phillips -- Morgan Stanley -- Analyst

OK, guys. Thanks so much for your questions. Appreciate it.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Thank you.

Operator

The next question comes from Tracy Benguigui with Barclays. Please go ahead.

Tracy Benguigui -- Barclays -- Analyst

Thank you. Good morning. Just a follow up on this past discussion just on growth outpacing marketplace conditions that doesn't always turn out well. I think Metromile has 49 state licenses, but it operates in eight states now for plans to enter five more next year.

Does that cadence change in your view?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

I think, Lemonade, in general, has been characterized by more emphasis on growth. Certainly, if you look at our rollout of our prior products and compare them to Metromile, we do lean in more aggressively in that regard. So I do anticipate that with or without Metromile, we would have been looking for a rapid deployment across the United States and we've seen Metromile as an accelerant for that.

Tracy Benguigui -- Barclays -- Analyst

OK. Got it. I also believe that Metromile has commuted the reinsurance program. Is the idea that you would have buy-in on the new program that's starting in January?

Tim Bixby -- Chief Financial Officer

So during this period between sign and close, as you know, we're separate independent companies sort of managing our own businesses, but looking ahead to all of the approvals coming together and the companies coming together. It is -- you're correct that they've chosen to go without reinsurance at the moment. But I think like Lemonade, they're thoughtfully assessing the market would be my guess and my understanding to see what kind of terms are out there and what's available. We made the choice actually last summer and the year prior to go with terms that we found very attractive, although we could have done without reinsurance.

And so I would think the Metromile has those options and they'll make those choices. Once the companies come together, we'll more than likely continue to enjoy the reinsurance structure we have in place, so we have lots of flexibility with that. And we do get a nice -- or we expect to get a nice capital surplus benefit from the combination of the company, something in the order of 30% perhaps or more. The exact number will have to determine.

But generally, when you bring companies together in this way, you can have a benefit from a surplus view as well. So there's two or three areas in this from a perspective of reinsurance, capital surplus and other regulatory benefits that loo, that makes us a great combination for us.

Tracy Benguigui -- Barclays -- Analyst

Maybe just a follow up there, because you mentioned surplus. Typically, what you see is that an auto insurance writer could run at a higher premium to surplus? Does that change your equation at all in your view?

Tim Bixby -- Chief Financial Officer

A little premature for us to get too specific about what those benefits will be. But yes, we're well aware of some of the -- both benefits and incremental costs of car versus the other product lines, but I would reckon maybe staying tuned as we get closer to close, we'll give a more little more clarity on some of the more specific benefits.

Tracy Benguigui -- Barclays -- Analyst

Got it. Thank you.

Operator

The next question comes from Jason Helfstein with Oppenheimer. Please go ahead.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thanks. Two. Just first on Metromile, I mean you kind of alluded maybe that Metromile wasn't charging enough, but besides bundling, which you can clearly bring to the table, maybe if you want to talk about how you would run Metromile differently as part of Lemonade. And then just a second, as you expand to Europe, just are there broader financial implications we should think about or not expand, but kind of spend more on your expansion in Europe? Are there implications we could just think about in the model next year? Thanks.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Jason, hi. Good to talk to you. I don't think -- I don't want the net picture was, but I don't think the right way to think about this is how we would run Metromile differently. We don't intend to run Metromile distinctly at all.

We intend to run a single company with a single product. There will be over time once the combination is complete, it will be a successor to Lemonade car that was launched last week. So this isn't about changing or fixing or transforming Metromile. It's about strengthening Lemonade car and leap frogging after to the vanguard of car insurance.

And we alluded to this in the post that I shared yesterday as well, the idea that where Metromile to have access to 1.4 million customers and the home insurance product that they could bundle with and pet insurance they could bundle with, that would be hugely valuable to them as it is. But as I say, our focus is really on how can we inject all of those capabilities into Lemonade car. And hopefully, we've given you a good sense of why we think that, that is a game changer and why that is a really important long-term value unlock for our customers and for our shareholders. In terms of your question on the EU, when we give guidance next year, we'll perhaps be able to provide some more color.

But I don't think you need to be making any dramatic changes right now. We're just giving kind of a broad strokes indication that the EU is performing well. And while it's been a small part of our business, we do anticipate in the future is growing perhaps at a faster rate than the rest of our business.

Jason Helfstein -- Oppenheimer and Company -- Analyst

Thank you.

Operator

Next question comes from Andrew Kligerman with Credit Suisse. Please go ahead.

Andrew Kligerman -- Credit Suisse -- Analyst

Hey. Thank you very much. Tom, good morning. I was wondering a little more on the sales and marketing.

It was up a little over 90% in the quarter and you mentioned leaning in as these marketing costs in the industry have gone up. Could you give us a little color on what you're seeing? Like I've heard advertising on social media has got more than 50%. Could you give a little color on those types of metrics and what you're seeing out there in terms of sales and marketing costs?

Tim Bixby -- Chief Financial Officer

Sure. I'll take that one. I think the theme that you're highlighting, we have seen. Certainly upward pressure, whether it's social media or the cost of search terms or other key channels that we rely on.

I think the metric you note of 50% is quite dramatic. Our experience has been a fair bit less. I would think of it as something in the order of 20% or 25%-ish or so, so maybe half of perhaps what you're seeing in other companies or across the industry. And important to note that we've been able to offset some of that, not all of that, but some of that are just continued improvement in performance.

And so while this is not something we would wish upon ourselves from a competitive standpoint, our track record is quite strong in this area. These impacts affect us, they affect all competitors. And so long as we continue to execute as we have in the past, we've been able to mitigate this somewhat. And then we, as a reminder, just kind of keep our eye on the lifetime value, the reason the cost of insurance are high because there's a tremendous potential lifetime value, particularly when you see churn and retention stable as we do, as you see our capabilities in bundling expand as we are seeing.

Today, we can boast of our first customers with three policies. A couple of years ago, that was one policy. So these are all themes and trends, which tell us even if customer acquisition costs increased somewhat in the short term, but it's something we're confident that we can compete effectively and weather in the long term.

Andrew Kligerman -- Credit Suisse -- Analyst

Well that was very helpful. And then with respect to Metromile, was kind of running through their financials last night and just thinking about their operating losses and the fact that it was over $100 million in operating losses, net operating losses in the first half of the year. And if you kind of extrapolate that out, then you're run rating at over $200 million a year. And I'm wondering -- and I guess that you want to grow and then there's tremendous opportunity in that.

How long would you expect to see those type loss in EMEA?

Tim Bixby -- Chief Financial Officer

So I would point you back to a couple of the comments that Daniel just made and the best way to think about that. So again, during this period of time, we're independent companies operating independently. But the goal is one company, one consolidated brand, one consolidated customer experience and that's the Lemonade car product. And so the synergies that we see between the two companies are significant.

We have a fairly ambitious growth plan. A big part of that is hiring people that do all the amazing things from a product and a customer standpoint that help us build our company. And so folks that we would plan to hire will as likely or not find those folks at Metromile with tremendous experience and background in a market that we're just entering and that's really the leapfrogging capability. And so I would not think of it as taking two companies and putting them together and adding the P&Ls and finding synergies, which is what is a reasonable approach in many acquisitions.

This is much more about us seeing the real core value in what Metromile has learned and developed over time. The data they've created, the third-generation technology that they've come to, which is something we would just be starting out with in our product launch. Those are the real values. And so we'll work aggressively to integrate and bring the companies together once we get to the point of close.

So the cash burn, you've seen how we manage our business historically from a cash and capital perspective and we'll continue to use that approach and ethos once we bring our companies together.

Andrew Kligerman -- Credit Suisse -- Analyst

OK, thank you.

Operator

The next question comes from Mike Zaremski with Wolfe Research. Please go ahead.

Mike Zaremski -- Wolfe Research -- Analyst

Hey, thanks. Good morning. Maybe switching gears a little bit to loss expense inflation in the existing book. And maybe you can give us some color on what you're seeing.

I think as you guys know, some of your competitors so that you guys have more renters have been talking about kind of high single, low double-digit rates of inflation in our homeowners portfolios or auto portfolios. Maybe you can give us some color what you're seeing in your book? And in particular, on the renter side as well and whether you'll be raising pricing accordingly?

Tim Bixby -- Chief Financial Officer

So we've not disclosed any specific plans in terms of price increases or significant changes, though we're always evaluating prices and certainly on a state-by-state basis. We've made appropriate filings and made adjustments where we feel it makes sense. There's some, certainly some impact of the price creep that you mentioned. I wouldn't note it as dramatic, but it is something that we've seen to some extent.

But it's really been overpowered by the overall improvement in the loss ratio overall. So when you aggregate the losses and the loss adjustment expense, again, we're seeing nice improvement it's also a benefit that comes with scale. It's growing at the pace we're growing. We're able to mitigate some of these price impacts and cost impacts through scale.

We're still relatively early in that cycle at our current IFP run rate, but I think with the launch in the car and the pending combination with Metromile that we'll see some more benefit there in terms of faster scale and ability to mitigate some of those price increases.

Mike Zaremski -- Wolfe Research -- Analyst

OK. As a follow up on the reinsurance and I know you have a multiyear program. Some of the reinsurers are talking about, hopefully, raising rates, high single to low doubles as well. Should we be contemplating higher reinsurance costs when we think into the future as well and other offsets that you can kind of levers you can take to potentially offset if there are pricing increases?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

We've spoken before about reinsurance. Tim mentioned this in passing earlier as well, which is that we see reinsurance as an option, not as a necessity. And we take the kind of reinsurance and the quantum of reinsurance that makes sense from a financial perspective. If prices were to rise significantly and we've been given no indication of that, then it's entirely possible that we would lower the amount of reinsurance that we take.

We have been gradually stepping it down anyway. You may note that last July, we went from 75% to 70% coverage of the book grows as it diversifies across products and across geographies. We see that, that's natural and correcting for us to do. But really for us, more than anything else, reinsurance is about capital optimization.

The cost of capital through reinsurance is lower than elsewhere. So we've been relying on it heavily. If the cost benefits change, our structures will change to accommodate that as well. That said, this is the kind of ebbs and flows that you're talking about, come and go with some frequency.

We're not up for a major reinsurance renegotiation for quite a while. So I would anticipate absolutely no change in the near term, maybe slight changes in the medium term. And as for the long term, let's take the pulse of the industry 18 months hence and we'll have greater clarity on what we do.

Mike Zaremski -- Wolfe Research -- Analyst

That's helpful. Lastly, a follow up, can you offer us any kind of color or views on whether your views on pet insurance has changed and kind of an update on how that's going as it becomes a bigger portion of your book? One of the pet insurance stocks has done very well and it seems like they're starting a lot of demand for pet insurance. So maybe you can kind of give us an update on your views on that line of business. Thanks.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Happy to. We are very happy with our launch of pet insurance. The product has been incredibly well received. It has outperformed our expectations.

Customer delight levels are really very, very high. It has formed in short order a sizable portion of our business. On any given day, oftentimes 20% to 30% of our sales will come from pet insurance. It has provided both an additional on-ramp to Lemonade.

So customers that we otherwise might not have gotten at all. something in the order of two-thirds of our pet insurance customers are ones who have joined us through this additional on-ramp. So that has been tremendously valuable to us, but it has also provided our first proof of cross-sell. So something like a third of our pet policies are to existing customers.

And as we've commented in the past, when a renter has a pet policy, you see the premiums jump by 300% or 400%. So this has really been incredibly helpful. It has been transformative of our LTV. It has added, as I say, additional on-ramps and it's been performing very well.

Broadly speaking, pets have also been a boom or enjoyed a boom during the COVID period and that's reflected itself in the pet insurance space as well. So for all those reasons, I'd say that all the lights are green.

Mike Zaremski -- Wolfe Research -- Analyst

Thank you.

Operator

The next question comes from Josh Shanker with Bank of America. Please go ahead.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

Yeah. Thank you for taking my question. So I was curious, I looked at the premium in-force for homeowners was stable at 30% of the portfolio in this quarter and in the quarter ago. It looks like pricing is up about 20%.

That's pricing and expansion of coverage. I assume it's happening in homeowners more than the other line. So to what extent is that is homeowners as on a policy basis, perhaps growing less low than the rest of the book or is it less quickly than the book overall?

Tim Bixby -- Chief Financial Officer

So a couple of things, Josh. So one of the notes we made in the letter and in the script was the majority of the price impact this quarter is mixed. something in the order of 80% of the premium per customer is a shift in mix and that's all the policy types. So homeowners and pet is driving that, not car yet, obviously, just out.

And that's an increase over time. So there was a time when that was about 50-50, because the mix shift was nominal. And so I would say that our ability to sell more of the higher-priced policies, whether it's directly, whether it's bundling for existing customers, all of those are kind of moving in the right direction. And I would not say that homeowners caused a disproportionate impact.

We saw it from across the book.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

Can we dig into that 20% number a little bit more? I mean, I think if price goes up by 20%, that's a fairly large raise. I mean you said price and there is a price in people buying more coverage, although I mean in my experience, people don't buy that much more coverage on a new policy. But 20% feels a little bit like broaden at a teaser rates. And then immediately after, you get a fairly sizable rate increase that might be structured to persistency.

Tim Bixby -- Chief Financial Officer

No, let me be clear. There was no 20% increase in any pricing or any rate. About 20% of the premium per customer increase was driven by pricing or increased coverage and that's across the book of business, a relatively modest amount. And that includes customers that require more coverage, get more coverage, pay more higher premium for that coverage.

Price is a very minimal impact. The vast majority is mix and bundling where drive is increasing and also driving the overall average premium per customer up.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

So you're saying in that if somebody bought a pet policy from you, you're including that if they only had a renters initially and they bought a pet that's in the 20%?

Tim Bixby -- Chief Financial Officer

No. It's an apples-to-apples comparison. So in the 20%, where it's driven by increased coverage or increased price, it's an apples-to-apples comparison. In the 80%, which is driven by mix, that would capture the pet example that you just gave.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

So I mean, I don't mean to belabor the point, when you say that 20% is very little is price, but the majority of the 20% is that people bought a more expensive policy for the same type of possible bought more covered than maybe a year ago?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Just let me try and phrase it differently. We've seen premium per customer increase. So the premium customer is up 26% to $254. And we're saying that the overwhelming majority of that has nothing to do with price.

That just has to do with people buying more coverage, more products, bundling products. So at first approximation, all of that to do with things other than price.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

So that 20% of it, you're saying 80% of it but 20% is due to pricing and coverage, while 80% is due to mix.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

That's right. So overwhelming just has nothing to do with prices. We have not increased our prices in any meaningful way, certainly not by 20%. So you could round that down and just focus on the fact that this has to do with people buying more policies, more expensive policies.

That's the real driver of this.

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

All right. I'll leave the question to somebody else. Thank you for the clarification.

Operator

[Operator instructions] Next question comes from Christopher Marinac with KBW. Please go ahead.

Christopher Marinac

Hey, guys. Congrats and thanks for having me today. I have two questions kind of totally unrelated. The first one just goes back to Dan, as you're just talking about precision versus proxy pricing and how Metromile has been at that for a long way and they have all the data there for them.

Can you go into a little bit then on if you can, how they seem to have a little bit struggled to actually get that statutory net loss ratio kind of even anywhere close to the industry average and kind of has stayed elevated even in like dirty COVID, lost in the LAE kind of pretty elevated to keep it still over that 100% range.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Hi, Chris. You mentioned two questions. I see there's another one to come. The loss ratio has been much lower.

If memory said, they reported something like a 70% first quarter, excluding LAE, but it's been in that kind of ballpark and the LAEs and the teams. So you're talking about a lot historically in the last couple of quarters, the loss ratio, all in from 80s. So I'm not familiar with a triple-digit loss ratio for the company. They did enjoy a dip during COVID, but that dip was less pronounced than it was for others.

And I think that's important. It's actually really telling because whereas other folks don't monitor how much you drive, they just charge a flat average rate and then people suddenly to stay home and they pend themselves overpaying to insurance. Metromile's rates intrinsically went down automatically by virtue of the fact that people drive less than pay less. So actually, they were able to weather the COVID transformations, I think, with greater simplicity and smoothness than others did.

But I mentioned this earlier, the loss ratio, they're targeted to lower it by another bunch of points, 10, 15 points perhaps. But they do enjoy that tremendous cushion from which to take that. So we've seen there are some statistics I mentioned one earlier, I'll mention another one now. And if you look at the people getting quotes at Metromile, not just the ones who selected Metromile and converted and bought it, but just getting quotes.

55% of the people quoting on Metromile will have savings of 20% or more. And for almost half for 45%, the savings of 30% or more, with a medium saving of 60%. I throw all those stats out to give you a sense that if they, alongside anybody else in the, industry raised rates some in order to compensate for the shortcomings of the loss ratio to date, that would be a welcome near-term fix, which will do no at all the fundamental strategic advantages that they enjoy.

Christopher Marinac

Absolutely. That makes a lot of sense. And the numbers I was referring to from the yellow books looking at where Metromile insurance company has run on a yearly basis for the last five years. On the stat level, then that is in the -- yes, from the loss anomaly.

That's where I was getting that from.

Daniel Schreiber -- Chief Executive Officer and Co-Founder

OK. thanks.

Christopher Marinac

Yeah, yeah. And then the second question was, you mentioned earlier sort of a shift in the ad spend from life to European based on how that's kind of performing relative to each other. How much should we think about that in the life business? I think you mentioned in your letter that, that's still sitting about less than 1% of the total premium in force. Is that what we should kind of expect moving forward? Is it kind of shifting resources and allocation of focus into different levels?

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Actually, it's 2%, if I'm not wrong and that kind of doubled from where it was the quarter before, so small numbers, but went from 1% to 2%. And we're still learning the industry. So it has been growing and growing, nicely doubling as outpacing the rest of the book. But we are finding other places where we could invest incremental dollars and get higher return.

So rather than continue to double down on life growth at least at the moment and this is something that we review almost in real time. But at the moment, we're just finding more attractive places to deploy our incremental dollar and that's what we intend to do. So while I do expect our life business to continue to grow, I don't think we're going to be sharing it with disproportionate lob in the coming quarters. I will also say that it is a product that does very well as a cross-sell.

So even though the customer acquisition cost for life policies can be daunting at times and a lot of insurtech that, that bread and butter have had a rough time of it. And for us, that's not the case. We're able to offer it as an upsell to all of our customer base with no incremental spend and I expect to see an increasing amount of our life policies being sold that way. It's already a sizable portion.

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

Yael Wissner-Levy -- Vice President of Communications

Daniel Schreiber -- Chief Executive Officer and Co-Founder

Shai Wininger -- President, Chief Operating Officer, and Co-Founder

Tim Bixby -- Chief Financial Officer

Michael Phillips -- Morgan Stanley -- Analyst

Tracy Benguigui -- Barclays -- Analyst

Jason Helfstein -- Oppenheimer and Company -- Analyst

Andrew Kligerman -- Credit Suisse -- Analyst

Mike Zaremski -- Wolfe Research -- Analyst

Josh Shanker -- Bank of America Merrill Lynch -- Analyst

Christopher Marinac

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