Quick refresher on prior period development (PPD):

When Lemonade incurs a claim, they record estimates for what it will eventually cost. These estimates are inevitably different than actual outcomes, which leads to favorable or unfavorable PPDs. A favorable PPD means claims from previous customers were less costly than expected and reserves can be released, directly lowering loss ratios. Unfavorable means the opposite. This quarter, there were 2 points of favorable PPD on both a gross (pre-reinsurance impact) and net (post-reinsurance impact) basis, vs. 5 points of favorable gross PPD in Q3 2025, so it actually made the Y/Y comp look worse.

As you can see below, the year-over-year trends across its major products (besides pet) look good. Home improved by a point, and car sharply improved by another 13 points, after 16 points of progress during last year's Q3. So what happened with pet? There's a wave of industry-wide inflation hitting veterinary services right now that weighed on this loss ratio, before Lemonade was able to fix things with pricing action. While this sounds hauntingly familiar to the issues they've had in home insurance in the past (that took several quarters to fix), this isn't nearly that concerning. They've made great progress in passing price increases through regulatory bodies, and think the impact is already set to moderate from here over the next several quarters. Getting back to the typical segment loss ratios we saw before this mild issue will take a few quarters, but they're well on their way.

They also had elevated loss ratios in Europe during the quarter. But again, that's not as alarming as the home issue, and it's not particularly close. In Europe, insurance companies have a much easier time quickly and frequently passing rate changes without much problem or pushback. They should be able to rapidly remedy any issues they're having here and get that back on track.

With all that said, they still beat profit estimates and delivered a stable year-over-year net loss ratio and a strong trailing 12-month gross loss ratio of 60%. Despite the mild headwinds, their increasingly diverse and scaled book is becoming more resilient and able to overcome challenges as they pop up. More evidence of that is Lemonade still setting positive EBITDA guidance for Q4 and reiterating annual profit expectations. No excuses. Just keeping promises.