Q2 2024 Lemonade Inc Earnings Call

Participants

Yael Wissner-Levy; Vice President, Communications; Lemonade Inc

Daniel Schreiber; Chairman of the Board, Chief Executive Officer, Co-Founder; Lemonade Inc

Shai Wininger; President, Co-Founder, Director; Lemonade Inc

Timothy Bixby; Chief Financial Officer; Lemonade Inc

Jack MacKinnon; Analyst; BMO

Michael Phillips; Analyst; Oppenheimer & Co. Inc.

Tommy McJoynt; Analyst; Stifel

Bob Huang; Analyst; Morgan Stanley

Matthew O'Neill; Analyst; Financial Technology Partners

Presentation

Operator

Hello, and welcome, everyone, to the Lemonade Q2 2024 earnings call. My name is Maxine, and I'll be coordinating the call today. (Operator Instructions) I will now hand you over to Yael Wissner-Levy, VP Communications at Lemonade's [begin]. Yael please go ahead, when you are ready.

Yael Wissner-Levy

Good morning and welcome to Lemonade second quarter 2024 earnings call. My name is Yael Wissner-Levy, and I'm the VP Communications at Lemonade. Joining me today to discuss our results are Daniel Schreiber, CEO and Co-Founder; Shai Wininger, our President and Co-Founder; and Tim Bixby, our Chief Financial Officer.
A letter to shareholders covering the company's second quarter 2024 financial results is available on our Investor Relations website, investor.lemonade.com. Before we begin, I would like to remind you that management's remarks on this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the risk factors section of our 2023 Form 10-Q filed with the SEC on May 1, 2024 and our other filings with the SEC.
Any forward-looking statements made on this call represent our views only as of today, and we undertake no obligation to update them. We will be referring to certain non-GAAP financial measures in today's call, such as adjusted EBITDA and adjusted gross profit, which we believe may be important to investors to assess our operating performance.
Reconciliations of these non-GAAP financial measures to the most direct comparable GAAP financial measures are included in our letter to shareholders. Our letter to shareholders also includes information about our key performance indicators, including customers, in-force 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.
I'd also like to bring your attention to our upcoming Investor Day to be held on November 19, 2024 in New York City. We will be providing detailed updates on our strategic expansion plans, operating efficiencies, and growth trajectory. Hope to see you there.
With that, I'll turn the call over to Daniel for some opening remarks. Daniel?

Daniel Schreiber

Good morning, and thank you for joining us to discuss Lemonade results for Q2 2024. I'm happy to report continued consistent and strong progress across the board. Year-on-year top line grew 22%, adjusted EBITDA loss improved by 18% and our gross profit grew by a remarkable 155%.
Despite a quarter that saw elevated CAT losses across the industry, our loss ratio came in at 79%, improving 15 points year-on-year. This is no accident.
We have been laser focused on reducing CAT volatility by growing products with lower CAT exposure, notably pet and renters geographic diversification of growth, including via Europe, where we recently launched homeowners insurance in the UK and France, continuing to sell Lemonade homeowners insurance in the US, only where our AI predicts attractive LTVs and simultaneously placing some home premiums with third parties in select geographies.
Tellingly, trailing 12 month gross loss ratio continued to decline for the fourth consecutive quarter, also hitting 79%. We think this number in preference to the quarterly results, neutralizes some of the volatility and provides a more bankable indication of our ongoing performance.
But whatever your preferred metric is the picture that emerges is the same. Great progress that enables us to deliver, notably expanded gross margins. I'm also pleased to share that Q2 was net cash flow positive. We expect cash flow to be positive consistently here on out excepting only Q4 this year, where various timing issues will make that quarter a one-off exception.
In any event we don't expect our cash balances to decline by more than one or maybe 2% before climbing consistently. With these updates, we feel exceedingly well positioned to continue investing in robust and profitable growth.
I also wanted to put a spotlight on our giveback program for a moment. A couple of weeks ago, we announced our contribution of more than $2 million to $43 million nonprofits around the globe, our eighth consecutive year of giving back to dozens of local and global charities chosen by our customers.
Social impacts as a core pillar of who we are at Lemonade, a contribution since inception now exceeds $10 million and this program reflects the collective power of the Lemonade community and its ability to drive meaningful change. But something we're very proud of and we know this is only the beginning.
Next, I'd like to hand over to Shai to tell you more about our recent efficiency improvements unlocked by our technology. Shai?

Shai Wininger

Thanks, Daniel. On the expense side, we've continued to deliver on our autonomous organization vision with remarkable stability. Our operating expense base, excluding gross spend, which is now financed via the synthetic agent's program was unchanged year over year. This underscores the scalability of our tech vision, which leads to measurable efficiency in our operations.
This dynamic we're witnessing robust, predictable IFP growth, alongside an expense base that remains comparatively steady and even shrinks at times isn't a short-term anomaly. We expect this trend to persist in the coming quarters and years as we approach sustainable profitability at scale. This trajectory is a testament of the power of our technology first approach and our commitment to operational excellence.
Investors and analysts often ask about the practical impact of our investments in building our own tech based insurance tech. I believe our recent quarterly results clearly demonstrate that, with large part of our business running on code rather than people. I believe our tech obsession is paying off in a big way and help separate us from incumbents, in visible, measurable and impactful ways.
What we've achieved so far is just the beginning, our team has been hard at work on our next-generation technology platform, code-named L2, which is designed to bring step-change improvements to areas such as underwriting, insurance, operations, compliance and product development.
with L2, we anticipate additional efficiency gains alongside acceleration of our product operations. These improvements should position us to adapt quickly to market changes as well as capitalize on new opportunities, products, markets and even business models.
The potential impact of L2 extends beyond mere cost savings. It's about reimagining how insurance companies should operate in the AI era. We look forward to sharing more about all this at our Investor Day, November 19, in New York City.
And with that, let me hand it over to Tim to cover our financial results.
And outlook in greater detail. Tim?

Timothy Bixby

Great. Thanks, Shai. I'll review highlights of our Q2 results and provide our expectations for Q3 and the full year and then we'll take some questions. Overall, it was again a terrific quarter with results very much in line with or better than expectations and continued notable loss ratio improvement across the board.
In force premium grew 22% to $839 million, while customer count increased by 14% to $2.2 million. Premium per customer increased 8% versus the prior year to $387, driven primarily by rate increases. Annual dollar retention or ADR was 88%, up 1-percentage-point since this time last year.
Gross earned premium in Q2 increased 22% as compared to the prior year to the $200 million in line with IFP growth. Our revenue in Q2 increased 17% from the prior year to $122 million. The growth in revenue was driven by the increase in gross earned premium, a slightly higher effective ceding commission rate under our quota share reinsurance as well as a 45% increase in investment income.
Our gross loss ratio was 79% for Q2 as compared to 94% in Q2 2023 and 79% in Q1 2024. The impact of CATs in Q2 was roughly 17-percentage-points within the gross loss ratio, nearly all driven by convective storm and winter storm activity.
Absent this total CAT impact, the underlying gross loss ratio ex-CAT was 62% in line with the prior quarter and fully 10-percentage-points better than the prior year. Prior-period development had a roughly 3% favorable impact on gross loss ratio in the quarter. Notably, the CAT prior-period development was about 2% unfavorable, well, non-CAT was about 5% favorable netting out to the 3% favorable impact.
Trailing 12 months or TTM loss ratio was about 79% or 12 points better year on year and 4 points better sequentially. From a product perspective, gross loss ratio improved, notably for all products with year-on-year improvements ranging from five 30%.
Operating expenses, excluding loss and loss adjustment expense increased 13% to $107 million in Q2 as compared to the prior year. The increase of $12 million year-on-year was driven predominantly by an increase in gross acquisition spending within sales and marketing expenses.
Other insurance expense grew 25% in Q2 versus the prior year, in line with the growth of earned premium primarily in support of our increased investment in rate filing capacity.
Total sales and marketing expense increased by $12 million as noted, or 48%, primarily due to the increased gross spend, partially offset by lower personnel-related costs driven by efficiency gains. Total gross spend in the quarter was about $26 million, roughly double the $13 million figure in the prior year.
We continue to utilize our synthetic agent growth funding program and have financed 80% of our gross spend since the start of the year. As a reminder, you'll see 100% of our gross spend flow through the P&L as always, while the impact of the new growth mechanism of synthetic agents is visible on the cash flow statement and balance sheet. And the net financing to date under this agreement is about $44 million as of June 30.
Technology development expense declined 12% year-on-year to $21 million due primarily to personnel cost efficiencies, while G&A expense also declined 3% as compared to the prior year to $30 million, primarily due to both lower personnel and insurance expenses.
Personnel expense and headcount control continued to be a high priority. Total headcount is down about 9% as compared to the prior year at 1,211. While the top line IFP, as noted, grew about 22%. Including outsourced personnel expense, which has been part of our strategy for several years, this expense improvement rate would be similar.
Our net loss was a loss of $57 million in Q2 or $0.81 per share, which is a 15% improvement as compared to the second quarter a year ago. Our adjusted EBITDA loss was a loss of $43 million in Q2, a roughly 18% improvement year-on-year.
Our total cash, cash equivalents and investments ended the quarter at approximately $931 million, up $4 million versus the prior quarter, showing a nice positive net cash flow trend in the quarter. This positive net cash flow contrasts markedly with a net use of cash of $51 million in the same quarter in the prior year.
With these metrics in mind, I'll outline our specific financial expectations for the third quarter and full year 2024. Our expectations for the full year remain unchanged as compared to our guidance on our Q1 earnings call.
As has been the case in some prior years, there's a notable seasonal difference in our expected results in Q3 and Q4. Specifically, Q3 is typically our highest gross spend quarter, which tends to drive up sales and marketing spend and also typically a higher expected loss ratio as compared to Q4.
Our third quarter guidance and our implied Q4 guidance reflect these seasonal themes. From a gross spend perspective, we expect to invest roughly $25 million-more in Q3 as compared to Q3 in the prior year to generate profitable customers with a healthy lifetime value. At the same time, we will be proactively non-renewing customers with unhealthy lifetime value, specifically certain CAT-exposed homeowners policies.
As our AI's had become increasingly good at identifying such policies and as our latest underwriting rules have been approved by regulators we now have the ability to identify older policies that we wouldn't write today. We expect this to remove between $20 million and $25 million of IFP from our book in the second half of 2024, dampening growth in the immediate term, while concurrently boosting cash flow and profitability in the medium term and further reducing CAT volatility. Importantly, though, our IFP guidance for the year reflects these plans and remains unchanged.
For the third quarter of 2024 we expect in-force premium at September 30 of between $875 million and $879 million. Gross earned premium between $208 million and $210 million revenue between $124 million and $126 million and adjusted EBITDA loss of between $58 million and $56 million.
We expect stock-based compensation expense of approximately $16 million. Capital expenditures, approximately $3 million and a weighted average share count for the quarter of approximately 71 million shares. And for the full year of 2024, we expect in force premium at December 31 of between $940 million and $944 million.
Gross earned premium between $818 million and $822 million, revenue between $511 million and $515 million and adjusted EBITDA loss of between $155 million and $151 million. And we expect stock-based compensation for the full year of approximately $64 million, CapEx of approximately $10 million and a weighted average share count of approximately 71 million shares.
And with that, I'd like to hand things back over to Shai to answer some questions from a few of our retail investors. Shai?

Question and Answer Session

Shai Wininger

Thanks, Tim. We now turn over to our shareholders' questions submitted through the [say] platform.
I'll start with Matthew H, who asks how are we leveraging AI technology to improve underwriting claim processing and overall customer experience and are there any major business risks or challenges to further leveraging AI?
Thanks, Matthew. We've spoken about this at some depth in prior shareholders letters. As I showed in the past, we're well underway to leverage AI at every stage of the customer journey as well as in many areas of our internal operations. We do that to drive efficiency, improve our underwriting and enhance customer experience with fast and always available smart service.
Our underwriting customer service and claims management, even employee management, administration, engineering, product operations, all use AI heavily as an example, in just over a year, we've went from a standing start to having a comprehensively rolled out generative AI platform to handle incoming customer communications.
We handle email and text communications coming in, and we're now handling more than 30% of these interactions with absolutely no human intervention. Progress to date is the tip of the iceberg though, and I expect us to continue to focus on additional applications of these technologies, delivering concrete measurable impact to the business and helping us widen the gap between our tech and the competitions.
Naomi K, asks if we can share the performance metrics and customer feedback from states where all five of Lemonade insurance products are available and what are the main challenges or limiting factors preventing a broader rollout to additional states? And how do we plan to address these?
So thank you Naomi. The specific order of state expansion is generally based on growth potential and expected profitability in those markets as well as prioritization aspects that have to do with focus and resource allocation.
We expect cross-selling activity to be an increasingly powerful driver of growth as a result. In Illinois, for example, where we have all of our product available, we're seeing multi-line customer rates that are roughly double the rest of the book. We also see other metrics improve such as superior retention rates after bundling and outstanding customer feedback as measured by NPS.
There were several questions about car rollout timing and expectations. And I'll just say that the organization is running around car in a remarkable way, and we're expecting the growth rate of car to begin accelerating in the near future as a result.
We plan to roll out car to several additional states during 2025, with our main considerations being profitability predictions and regulatory approval rates, we aim to operate first in states where we can move quickly and write new business profitably.
In the second half and beyond with the unlock of rate adequacy in multiple geographies, we'll be expanding investment in new customer acquisition as well as cross-selling to our existing user base.
And now I'll turn the call back to the operator for more questions from our friends from the street.

Operator

(Operator Instructions) Jack MacKinnon, BMO.

Jack MacKinnon

Hey, good morning. Just wondering if you could provide some more details on the non-renewals of the CAT-exposed home business, in which states you're actions primarily taken place and other particular years of business that you're focused on. I guess in general, you talked many insights that you've learned from your more our recent miles would lead to your decision?

Timothy Bixby

Yes. So a couple of thoughts there. In terms of the distribution across state, that's really more of a -- it can be concentrated in states. It's really focused more on expected lifetime value, which tends to be quite driven by a higher than target loss ratio. That tends to be concentrated within the home book almost entirely, which is the most challenging loss ratio we have.
As we've talked a little bit about the letter the range that we're targeting, which is [20] to [25], we talk about a range because it's not a hard number, but it's based on what we know and as we're kind of developing that analysis that feels like the most appropriate range. Important to note that while it puts downward pressure on IFP growth because all of our -- every customer kind of adds up to that total IFP number from a cash perspective or a value perspective, it's kind of very high ROI.
We're taking out much more expected costs than we are taking out contribution from the premiums so it's that we are live positive. So if you take out, for example, $25 million of IFP with an elevated loss ratio, you can generate just using our own model of something like $50 million or $60 million in net positive values.
So a little short-term pressure on IFP, but for the medium term, long term value. In terms of timeframe, these tend to be older policies. So our underwriting rules and our AI models, gets a little bit better every day. And so the concentration tends to be business, we wrote two or three or four years ago in some cases. And as noted, the vast majority, if not 100% of this business would be business, we wouldn't write today and our current underwriting guidelines.

Jack MacKinnon

That's helpful. Thank you. And to second question is on capital. Can you talk about the premium to surplus ratio that Lemonade expects to maintain as your business mix evolves.
And I guess somewhat relatedly, it looks like your invested asset balance has been falling in recent quarters. Is that something that the company expects to continue doing moving forward, I think is trying to get some insights into net investment income. Thank you.

Timothy Bixby

Sure. So on the capital surplus, we've not talked about that for a while because these are essentially unchanged. Our target is and continues to be a roughly 1:6 ratio of required surplus to gross from premium. And we've got at least a couple of very effective tools in place to help us drive that number to what is arguably sort of best-in-class industry. This is what many insurance companies should do. And I think we're performing quite well on that metric.
Our quota-share structure, our came in captive structure, these are really designed not only to mitigate volatility, but more importantly to drive, to enable significant capital surplus efficiencies so that's really unchanged at that 1:6 ratio.
from a cash investment standpoint, yeah, you will note charted out the cash balances has increased somewhat as a percentage of the total, but that's not so much concerted strategy, I would expect that trend to moderate or even flatten out before too long.
However, though the interest rate environment is what it is. We're expecting what you and others are expecting to market there will be perhaps more downward pressure on interest rates and upward pressure and we've factored in sort of the most current forecasts into our guidance in terms of what we expect investment income is likely to be.
The good news is our cash and investments balance actually went up this quarter. In total, we're earning really strong returns on the cash as well as the investments. And so that's something that I would highlight if we foresee that cash and investments balance basically dropping, it might drop another 1% or 2%, as you noted.
But that puts us well above a $900 million total cash investments balance from here on out, as far as we can see, compare that to three or four years ago when there was quite a bit more uncertainty as to our growth trajectory and where that balance might end up at a dramatic change, I think provides a tremendous foundation for us going forward.

Operator

Michael Phillips, Oppenheimer.

Michael Phillips

Thank you. Good morning everybody. Question first on auto and kind of follow up from the opening comments about some new state expansions as you get into next year. From -- the last time I had I think you were at 11 states. I'm not sure that's the right. As you look out over the next maybe 18 months, given kind of a decent rate environment for auto, it might be slowing down, but should we expect a state expansion by say, year-end '25 to be close to like 20 states or 40 states? Or just kind of how aggressively you want to be over the next 18 months?

Daniel Schreiber

Hey Mike. No, I don't think we'll be at 40 states and of course, to state the obvious, not all states are born equal. And so we will be expanding and throughout 2025 we haven't given specific numbers into my answer today is that going to remain a little bit big still.
One of the driving factors is going to be the graduation of all renters to be car customers. So we will be looking in one of the guiding principles I spoke about regulatory environments and predictive loss ratios. Another one is where we have the largest footprint of renters and who have cause, but don't have co-insurance with us, and that will be another driving force. But we're not ready to disclose a numbers of states yet.

Michael Phillips

Okay. I can appreciate that, thanks Daniel. I guess continuing with that, maybe a follow up on that is typically as we're growing in new states, there can be some pressure on our margins in auto, maybe for you guys, I guess I want to see, what do you think that might be a bit muted than what normally is the case given I think you've talked about knowledge that you have from your current renters and homeowners customer base and how that can translate into more information in your initial pricing for auto. Is that starts to grow?

Daniel Schreiber

Yeah. Look, we are -- talking about this before, but we are very bullish in the medium to long term on car. We think it's a highly differentiated product with a strong and structural competitive advantage, given that -- at first approximation, all our customers use telematics on an ongoing basis and whereas our first approximation for the incumbents that none of zero. So this is really a very powerful differentiator, quite beside or in addition to the fact that, we've really spectacular user experience, very high customer satisfaction levels, et cetera.
Going back to my comment earlier about the renters aspect so, yes, we are seeing that renters who buy car insurance have very much to use your word muted loss ratio in fact their whole economics are dramatically different. The cost of acquisition is effectively zero and you might even conceive of it as being negative cash because our renters book is very profitable.
And then you've got existing customers who ostensibly have paid to be Lemonade customers, but they are profitable at the outset when we get to sell them a car policy with no incremental costs. Again, I'm rounding here, but I think a personal approximation that holds true and we have found them to be not only highly profitable because of the absence of any customer acquisition cost, but much better because we do use the fact that you said much better risks.
So we can price them effectively. We don't see the new business penalty that you see when you usually grow a book. So very, very different unit economics and lifetime value of existing customers. This is really, I think, a strategic pillar that we will expand on during our Investor Day as well later in the year.
And we do have a little over 2 million existing customers, many of whom have some coinsurance just not with Lemonade. And that opportunity translates into very, very sizable, and ultimately, we expect a profitable opportunity for us.

Timothy Bixby

Probably also worth noting the external environment (multiple speaker) external environment is improving as well. So for some time we and other car providers, we're chasing a target with inflations, unfavorable impact on cost of repairs and cost of claims. The data is now really showing that trend has slowed, if not stalled it, in some cases, may even reverse.
And so chasing that target has now much of the impact of our rate increases, both already in place and those are continuing to work on have even greater impact and that really provides a higher level of confidence comfort in our planning for car for the rest of this year and well into next year as well.
We noted that our gross loss ratio improvement across our product lines improved anywhere from 5% to 30% car was a right at the upper end of that range. So we're seeing lots of great indicators.

Michael Phillips

Yeah. Perfect. Okay, great. Thank you, guys. Appreciate it.

Operator

Tommy McJoynt, Stifel.

Tommy McJoynt

Hey, good morning, guys. Thanks for taking my questions. Tim, kind of going back to the first question that you got on the non-renewal side. So you mentioned the $25 million of I've non-renewed IFP, and that's going to be offset by it sounded like I think you said $50 million to $60 million of sort of net positive value.
But let's call it, $50 million is, sorry, is that saying that the LTV of those policies instead of being presumably positive when you wrote it, is now being sort of reassessed at negative $50 million and hence by not writing non-renewing that business, it will now be zero. Just kind of help explain sort of what that $50 million to $60 million number that you mentioned actually --

Timothy Bixby

Yeah, in rough strokes, the way you describe is right. So a customer has an expected lifetime value, let's say, of 3 times its acquisition cost, which is often typical for us, that means over the course of their lifetime, two, three, four years, depending on the product or more we expect to generate that incremental cash flow or value.
What this says, we expect that lifetime value to be a negative $50 million or $60 million in the case I described before for IFP. So think of that ratio sort of a negative 2:1 ratio. I mean, that's really almost entirely driven by the elevated loss ratio. If a customer has an expected 150% loss ratio, for example, and you carry that customer out for a couple of three years or more, that's the driver. So I think you have the analysis, right that it's rough justice, but it's notably positive ROI for those changes.

Tommy McJoynt

Okay, got it. And do you know what the impact on the loss ratio from that sort of $25 million IFP was in the first half of the year or even in absolute dollars, kind of how much the sort of operating loss that that business generated contributed?

Timothy Bixby

hard to really put a precise number on that I would think of that range of 20 to 25 is over the course of the year, the vast majority in Q3 and Q4. So it's really a forward-looking number and expected impact we had started the process, there was a nominal amount in Q2, probably rounds to and it's pretty close to zero. So it's really a Q3, Q4 and forward expectation.
A little more concentrated in Q3, then Q4. Our loss ratio vary has borne the burden of that business. And so it's really notable. I think that our loss ratio improved mid-double digit year on year with some of that downward pressure. And so all of these changes not just rate changes. We'll have a favorable -- continued favorable impact on the loss ratio going forward.

Daniel Schreiber

(multiple speaker) me about this --

Tommy McJoynt

Okay. Got it.

Daniel Schreiber

Sorry, just a one other kind of bunched point of color, and Tim mentioned this briefly in his comments. This is a really a homeowner's focused plan fix, it's one part of our business that has had pockets of sustained negative LTV and in addition to being negative in LTV, they've been environmental oftentimes we could not get the rate approval, in theory, any risk can be priced adequately, but we don't always find regulators affording us that luxury.
So this is parts of the business where we just were not able to get the approvals and don't expect to in any fashion. Otherwise, we would have been and we've shown more forbearance if we thought it's on the cusp of turning profitable.
But in addition to being still stubbornly unprofitable, it also tends to concentrate very much in volatile parts of the country. So even some of this business where we to get to long-term average profitability, we've always sought to avoid the most CAT exposed part of our business of the country rather sorry, and we have avoided writing in the CAT most exposed places really since our inception, in places where we have still found that the velocity is higher than we want now knowing what we know, we're also take this opportunity to non-renew that part of the business.

Timothy Bixby

And maybe just to put a finer point on it based on a couple of questions have gotten already? I'll answer your question, that was has not been asked, which is if this number is [25] as we expect it to be. The question might be what your if the expectations have been $25 million greater, if not for the impact of this? The answers yeah. Yes.

Tommy McJoynt

Okay. Got it. Appreciate that color. And then just quickly you mentioned expectations for growth spend in 3Q to be $25 million up year-over-year. Did you give a 4Q number or do we have the full year kind of expectations?

Timothy Bixby

Yeah, I would think at the full year is really unchanged. The timing over the course of the quarters has changed somewhat. The guidance we gave historically is sort of between 100 and 110, 105 of the number we mentioned. So I think we're still sort of on track and plan to spend that rough amount over the course of the full year, we have adjusted the timing of that somewhat a little bit more than initially planned in Q3.
Then otherwise, Q3 is typically the highest gross spend quarter in any case in most years. And fourth quarter, obviously, if you can kind of do the math will be somewhat elevated as well. Q1 was really the ramp-up quarter. And so it's a pretty steep climb, and we expect Q3 to be at the rate we disclosed.

Tommy McJoynt

Got it. Thanks.

Operator

Bob Huang, Morgan Stanley.

Bob Huang

Great. Thank you. So, first one is on your 17 points of improvement in CAT losses, which what was I mean -- sorry 17 points of impact on CAT losses, which is a 5 point improvement. Directionally speaking, that's obviously similar to the industry.
As you non-renewal the homeowner side, is there a run rate expectation on what cat losses should look like going forward? Can you give us a little bit more color on just like how we should think about that impact? I know that you already talked about quite a bit on the impact on the other side of things on the homeowner renewal.

Timothy Bixby

Just to see if there's any additional color on the cat side, that's probably a little bit beyond some of the guidance we've given. I can give you a little bit of the way you might think about our home business as a share of the total business, is coming down as a percentage, but just modestly as it came in the quarter. And this is home and condo combined came in about just under 20%, and it's down a couple of points year-on-year. And so you can kind of back into if we were to take $25 million of IFP, are you back into what that impact might be.
And in terms of a specific reduction on a loss ratio, it's a little tricky to do that. I'm not going to venture that far. But CAT is really isolated almost entirely to home, not quite 100%, but primarily home. And really these are the most challenging policies. Obviously, that will go after. So I'll leave it to you to kind of do some math, but that's how I would go about it.

Bob Huang

Okay. Maybe second one on just how we should think about ceding commission. So if we look at a ceding commission as a percent of premium last call it, five quarters is generally about 20%. This quarter was notably lower than that? Is this more of a one-time thing? What's driving that? And should it go back to about 20% of premium going forward?

Timothy Bixby

Yeah. So a couple of ways to think about the ceding commission. So year on year, there is a change because there was a change in the structure. The prior year was a fixed structure up through July renewal a year ago. And so you saw in the face of the P&L, roughly a 20% effective commission.
Now our commission because of the way we do the accounting gets split into two pieces so our effective commission rate was about running about 23%. But the most important thing was it was static. It was a fixed number, that's now variable, that helpful in some ways, but a little less, little trickier when you're building a model.
But the net difference over, I think one way to think about as we look at Q1 and Q2, the net commissions by 18% versus 20%. So modestly lower but just by a couple of points, but more volatility, more variability. So Q1 was a fair bit lower. Q2 was higher, we'll continue to see that move around a little bit quarter-to-quarter, but that gets trued up as you go through the course of the year. So I would expect we'll give us as much of an indication on that as we can. But I would think of it as a couple of points lower than prior year, but there are some offsets to that as well.
Our renewal this year was similar. It is also a sliding scale that begins -- this month began in July, but the scale and the expected effective rate will actually little bit better. At this point, hard to say if it gets back to the prior level, but it should be up maybe a point or two on any sort of apples to apples comparison. So slightly better terms in this renewal.

Bob Huang

Got it. Very helpful. Thank you very much.

Operator

Thank you. our next question come from --

Timothy Bixby

Probably also worth that answering another -- like answering questions that weren't asked. So I'll throw in another one, which is, because the loss ratio varies obviously, quarter to quarter. The typical pattern has been a Q4 loss ratio that's the lowest of the four quarters that's happened often in prior years. We expect it will happen this year. And if that plays out as expected, that has a pretty strong favorable impact on that commission rate.
And so again, a little more volatile quarter to quarter. But if things play out as expected and as historical patterns, you'd see a nice favorable impact, so over the course of the year. It gets us back on track versus, some of the prior quarters can be a little bit lower commission rate.

Operator

Matthew O'Neill, FT partners.

Matthew O'Neill

Yeah. Thank you so much for taking my question. I just wanted to ask a little bit about the premium per customer. It's been growing impressively, but the rate maybe decelerating slightly. So just curious if you could give us an assessment of kind of how far through the rate increases you are on the in-force book.

Timothy Bixby

Yes. So that can vary quarter to quarter. It has been pretty steady contributor, but our customer count was a stronger contributor to growth this year, quarter on quarter. Then the price increase, it varies by product. So as I mentioned in car, you're seeing a pretty dramatic impact in rent much less so because it's really so optimize, the loss ratios is such a strong loss ratio as is and pricing is quite good. So it varies by product.
In terms of where we are, I think two or three quarters ago, we mentioned that we were sort of halfway through. There's a $100 million or so remaining to earn in. That's more or less unchanged because as we -- the pace of us earning in rate and the business filing for new rates, it's been roughly in balance. So I think of us in a similar spot now where there's still plenty of rate to earn in. Obviously, that doesn't last forever.
There will always be rate filings and always increases even in a low or no inflation environment. But we're quite a ways away from that. That is factored into our Q3, Q4 guidance, but that will continue to earn into that pace. And it will go into next year. So things that are approved and in place will earn well into next year.

Matthew O'Neill

Thanks. That's very helpful. And maybe just a quick one, and I realize I may be jumping the gun on potential investor day content, but I know you've spoken about the long term or ultimate target for the loss ratio in the high 60s to 70s. I don't know if there is kind of an internal or a way to think about the ultimate target for the expense ratio going forward.

Daniel Schreiber

Matthew, hi. So we are determined to have an expense load that will be absolutely best in the industry, we're beginning to look less at ratios because we also intend to be a price leader. And that might not give you as clear a picture of just how advantage we think would be coming due to our technology, but it will reflect itself in, I think, best-in-class expense ratio and even more dramatically in actual expense load, if you kind of put it on an apples-to-apples basis with the same premium, and that's being challenged by competitors.
It will manifest itself more powerfully still, I mean, you look at it against our own lower premiums because we think we get to pass some of those savings onto customers and that can accelerate growth and accelerate retention, lower cost of acquisition and allow us to achieve our ultimate and rather ambitious goals for the company.
But if I answer your question kind of more straightforwardly, we think that at scale, we will be in the teens, we disclosed last quarter that LAE component of our expense stack has already achieved parity with the very best in the industry.
We recorded a 7.6% LAE last quarter. So I mentioned some of the efficiencies that we're gaining through automation, and we're really seeing these rollout very, very powerfully from the numbers that we shared earlier about what's happened to our headcount expense, what's happened and to -- what we call the IFP per human, how many people would needed to jump to as we doubled our book we've been able to -- over the course of the last few years, been able to have the ratio of people needed to generate every dollar of premium.
So we're seeing very dramatic advancements all of which will ultimately reflect themselves in our competitive expense structure, some of which will manifest as lower prices and some of which will manifest, we believe still as best-in-class expense ratio.
That said I'll add that it was referenced this in the letter as well. And we think of for structural reasons that may be obvious and some that are less than obvious, we think of growth as the gift that keeps on giving. We really think that the numbers that I just gave and the direction that I just outlined will become -- at the moment you can look at various times and see it in action.
And I referenced a few of them, I think a few years from now it will be a miscible, it will be kind of glaringly obvious. And the difference between now and then is that we'll continue to grow. And as we continue to grow as we've doubled our business while holding our expense structure flat. We've kind of shared that over the course the last few years, we've seen expense net of customer acquisition actually decline even as we've enjoyed rapid growth play that movie forward holding expenses relatively flat.
And you really start seeing how this generates a very, very profitable business. But that dynamic will continue to manifest with ever-greater force as we continue to grow. So when you double our business, you'll see it with greater clarity. When we 10x our business, so I would say it will be glaringly obvious.

Matthew O'Neill

Thank you for that detailed answers. Really helpful. I'll jump back in the queue.

Operator

Yaron Kinar, Jefferies.

Hi, guys. Good morning. This is Charlie on for Yaron. A couple of questions. The first one on with the decision to non-renew certain CAT-exposed homeowners was that previously contemplated in guidance?

Daniel Schreiber

No.

Okay, thanks. And then previous able to give us CAT on prior-year development and LAE on a net basis.

Timothy Bixby

So the prior period development you can split into two pieces. So a 3 points favorable. It was 2 points unfavorable from a CAT perspective and 5 points favorable from a non-CAT perspective. So netting out to the three favorable.

Okay. Sorry. And just to clarify, was that gross cash, our net CAT impact?

Timothy Bixby

That is growth.

Growth okay. And are you guys able to give it net?

Timothy Bixby

Yes. And then that breakdown would be roughly similar on a net basis the prior period development. But total CAT impact on a net basis was about 15 points, whereas on a gross basis, it was about 17 points. LAE came in about 8%. It's been 7 points, mid-sevens edged up a little bit, but in that sort of 7% to 8% range, but by 8% quarter.

Okay, great. Thanks. And then last one, if I could. Just looking at the underlying loss ratio, it looks like you know contemplating in those components, you guys saw about 22 points of underlying improvement. But if we look at the first quarter of '24 I mean year over year basis from first quarter of '23, it looks like it was relatively flat. Is there anything underlying that said you guys could provide some color on.

Timothy Bixby

Pretty distinct quarters, yeah, on a full-quarter basis it was pretty stable. I think that's really important to look at the year on year comparison from a seasonal perspective. And on a trailing 12 month basis, obviously continued significant improvement any given comparison quarters, you might see some trends that are interesting, but not necessarily indicative of the longer term trend.
So nothing in particular to call out that was distinct between Q1 and Q2. Q2 was a really interesting quarter as it evolved really significant impacts early in the quarter and really dramatic favorable outcomes. By the end of the quarter netting out to what ended up to be a quarter that was even better, just modestly better than our expectations. So the months can be pretty unpredictable, but the quarters are a little more predictable.

All right. Great. Thank you, guys for the answers.

Timothy Bixby

Thank you.

Operator

(Operator Instructions) Bob Huang, Morgan Stanley.

Bob Huang

Hi, thanks for this. Just maybe just a follow up on the PYD question. 5 points of favorable on everything else, 2 points unfavorable on the cap QAD. On the 5 points, can you give us maybe a little bit more color on the geography of those like what are those 5 points coming from you possible, sorry, if I missed this a little earlier.

Timothy Bixby

We did not. This a little earlier, we did not. So it's a little more concentrated in the pet product, but it was distributed across some products other than home, the CATs are primarily a home dynamic and the increases driven by those really significant storms from a year ago and a bit earlier this year that have evolved, continue to evolve, but the underlying favorable development I think is really testament to the non-CAT portion of the business, which is really all the other product lines other than home.

Bob Huang

Okay. So basically, cattle is unfavorable and dogs were favorable. That's thank you for that. And that's very helpful. On the other one, maybe on the LTV to CAT side, and I know that you talked about our previously kind of mentioned, LTV to CAT is about of three times. Then that would be the ratio. And then I think one thing we're trying to figure out is that you have the homeowner, non a renewal going forward is that 3 times LTV to CAT equation still holds? How should we think about that renewal impact on the LTV to CAT?

Timothy Bixby

Yes. So LTV to CAT is a is an important metric, but it's a forward metric. It's an it's based on a model. It's based on all the information we collect. It improves a little bit every day every week, every month as we go forward. And so when we acquired that business, when our models were by definition, less sophisticated than today, two, three, four years ago.
We expected those to be profitable customers as we learn more in our models and our existing customer base and claims activity, invariably, and a certain portion of the customer base, their expected LTV will change.
For newly acquired customers, there is no change. So we expect customers we acquire today and tomorrow to be fully profitable. We've seen a ratio greater than three to one is a good rule of thumb, but we've seen certainly periods where it's 3.5 for 4 or more. There tends to be a little bit more pressure when you spend more.
So we're spending double today what we spent a year ago, and that tends to put downward pressure on LTV to CAT. Because but that's a good thing and we earn our way in and develop channels and we expand their spending. Overall for three to one is a good metric to think about.
I'll add one other comment in that area, which I think is helpful, which is LTV to CAT is kind of policy by policy focused. And if you look at our spending per net added customer, you might you might think things got more expensive for us in the quarter. And while that exact math is correct, it's important to look at IFP, net added IFP gross added IFP really is what we're acquiring, expand spend.
And by that measure, we were actually more efficient in the second quarter than we were in the year-ago quarter and even in the prior quarter. So all around that number is stable. And that's what's enabling us to really say we're very comfortable with growth rates that are accelerating. We started out the year in the low 20s from the mid-20s, and now we're pushing towards the high 20s growth rate. And that's the core driver for them.

Bob Huang

Okay. Thank you very much

Daniel Schreiber

May be I'll just add (multiple speaker) comment on the color commentary, Bob as well. Help me to attack, you always wanted to be as high as possible per customer, but truly want to keep growing until you hit the marginal customer with the LTV equals Q$.
In other words, if you could spend a dollar and get a $1.10 instead of getting $3 that is still marginally good for the business, you're still growing profitable presence in terms of LTV calculations, take onboard the time value of money that's already factored in at a fairly robust discount rate.
So while our LTV to Cactus three, that's our average, we have many higher customers and that we acquire many customers in the double digits of LTV to SAC as well, when will stop investing is when we hit the marginal customer because closer to now can eat to cake of one, we take a bit of a margin of safety. But conceptually, that is the philosophy we want to every marginally profitable customer. We want them and we will continue to grow using that.
We have never deviated from that. We have never tried to acquire customers of negative LTV. And sometimes we find this confusing to some investors because in the short term, they do a customer acquisition can impact our financials negatively in the short term, the year in which you spend that cash because we are not an agent based business and we pay all or we take all our payout upfront.
We own it back over time that when we grow sometimes it can appear to be a near term loss. But that is just the meat of the flow of time. Fundamentally, it's about spending $1 now and getting $3 back in today's terms. And if that means that in the near term, we take a hit to our EBITDA, we're okay with that, we don't take a hit to our cash because we've got a synthetic agent program in place.
So we've neutralized the trough in terms of the cash, in terms of EBITDA, those things will work their way out during the course of the lifetime of the customer. I didn't know it because of that, we have always sought to grow customers on an LTV to CAT basis, never acquiring knowingly negative LTV business.
Over the course of the last couple of years with inflationary pressures in others, larger swaths of the nation and of our portfolio were hard to grow in an LTV, positive environment. And we've spoken about that and we slowed our growth, which we're now accelerating and much of those segments of our business have become profitable over time.
As we got to rate adequacy and spoken about this, we were able to recover them back to where we thought they would be all along. What we've talked about today for the first time is that in addition to being conservative and careful and never knowingly writing negative business and proactively working to bring back into profitability and business that fell out of it and largely succeeding.
We're also not tolerating business that has fallen between the cracks and we've not been able to bring back to profitability. So not only are we not writing knowingly unprofitable business as we never have. We are now not renewing such business either having in some places exhausted in the near term what rates can deliver and therefore, the philosophy is the same philosophy. The profitability focus of the business has been the same consistently, but now actually not really slowing down in places that aren't profitable, but even potentially going into reverse and pockets that don't contribute.
And Tim's earlier comment that, yes, you may see a hit -- a potential hit of $25 million to IFP we reiterated guidance. We think we're going to manage that within the guidance already given. So we think that we're over-delivering for the year and we have that space to be able to hit guidance notwithstanding that.
So you won't see a hit to the IFP, but it could have been much higher as Tim said, but we've always been focused not only on growing IFP, but in growing the total value of the book. And this really has a boon to that as Tim said, $56 million of LTV added to our business because of this decision.

Bob Huang

Okay. Thank you very much. Really appreciate it.

Operator

Thank you. That was our final question for today. So this does conclude today's call and thank you for joining. You may now disconnect your line.