Auto insurance

Could Lemonade’s car insurance business finally be taken to the next level?

insurance disruptor Lemonade (LMND 1.12%) has gained popularity in its core businesses of renters, landlords and pet insurance. However, its initial rollout of Lemonade Car – its car insurance product – has been rather slow, despite it being the most potential type of insurance offered by the company so far.

Last November, Lemonade announced its agreement to acquire auto insurance technology company Metromile in an all-stock deal to revive its auto insurance business. Almost nine months later, the acquisition has been finalized and Metromile is officially part of Lemonade. Here’s why investors should pay attention and what it could mean for Lemonade in the long run.

Why this could be so important

The Metromile acquisition adds $110 million in auto insurance premiums to Lemonade’s business, and also adds $155 million in cash to the company’s already cash-rich balance sheet (the company had over $1 billion in cash). dollars in cash and investments at the end of the first quarter). Lemonade paid for the acquisition with around $145 million in stock, so that already seems like a lot.

However, there are two other key elements that could end up being the most valuable parts of the acquisition:

  • Metromile has auto insurance licenses in 49 states. Prior to the acquisition, Lemonade Car was only licensed in three (Illinois, Ohio, and Tennessee).
  • Metromile has an unrivaled collection of driver data, built over a decade with its sensors monitoring billions of miles of driving. The idea is that this data-driven approach will allow Lemonade to offer the cheapest fares to the drivers who deserve them, while producing a profit.

It’s hard to overstate the potential of Lemonade’s auto insurance business. About a year ago, the company estimated that its current customers were spending about $1 billion on auto insurance premiums every year, and that was at a time when the number of customers was about two-thirds of its current size. . For context, even after the $110 million in premiums that accompanied the Metromile acquisition, Lemonade has about $530 million in premiums in force. In other words, it could triple in size if its existing customers use Lemonade auto insurance.

Car insurance is a more expensive form of insurance than Lemonade’s staples today. The average auto insurance premium paid by U.S. drivers is more than 10 times the average rental insurance premium, which is Lemonade’s daily bread today. With a total market size of over $300 billion in the US alone, it wouldn’t take too much market share to make a significant impact.

Is lemonade a purchase?

Granted, there are still big unanswered questions, which is why lemonade is trading around 90% below its all-time high. The main problem is that Lemonade is paying far too much in its premiums to cover the losses, and this cannot continue if Lemonade is to be a sustainable business. The company’s gross loss ratio was 90% of premiums in the first quarter, well above the 75% target. Frankly, it doesn’t matter that Lemonade receives $5 billion in auto bonuses if it fails to get proper underwriting.

If the company box grow its auto insurance business, and can do so profitably, the current stock price could end up being a bargain. But that’s a big “if” for now, and we should start to get some clarification in the coming quarters as the auto insurance business expands.