Lemonade+Metromile: Bright spot on insurtech’s disruption roadmap

With a market cap of $2 billion, Lemonade had traded at about eight times its annual sales. Most traditional insurers, like Allstate and Travelers, trade at around one multiple of the year’s sales. The price-to-sales ratio for Lemonade is seemingly reasonable relative to its growth expectations. Since it went public a couple of years ago, Lemonade has seen customers being slowly won over as well as posted better growth. The top-line growth metric of in-force premium (average total policy amount for trailing 12 months) increased 54% y-o-y in the second quarter to $458 million. Customer count grew 31% to nearly 1.6 million.

One of the foundations of insurtech’s growth model is cross-selling and upselling policies. In Lemonade’s case, it launched homeowners, life, pet, and auto insurance over the past two years. This translated into 36% of Q2 sales, resulting from cross-sells or upsells. Premium per customer has been on the rise, climbing over 18% last year in the second quarter to $290. This tactic is also helping inch forward on the path to profitability, as these increases come sans acquisition costs.

As part of its foray into auto insurance, Lemonade has now acquired pay-per-mile auto insurer Metromile in a transaction that yielded $155 million cash, $110 million car premiums, 49 state licenses, and precision data from 500 million car trips. The all-stock transaction was announced end 2021 and involved 7.3 million LMND shares changing hands.  The deal followed closely the launch of Lemonade Car – “its biggest project ever”. Metromile’s AI-driven models are expected to turbo-boost Lemonade in its bid to offer competitive, precise, and fair car insurance.

The day after the Metromile acquisition closed, Lemonade laid off 20% of the Metromile team, citing acquisition synergies. For ten years, Metromile’s intricate sensors monitored billions of miles of driving, while their AI cross-referenced this data with hundreds of thousands of claims, to accurately score each tap of the brake and turn of the wheel. Adding these models into the Lemonade Car platform will give the latter an ideal launchpad into a very competitive line of business.

Lemonade now expects to generate about 20% of its revenue from Lemonade Car, compared to just 1% before the deal closed. Its revenue from renters insurance will likely drop from half of its top line to just a third. Lemonade is showing healthy growth. Established insurers with years of rigorous modeling typically have low loss ratios, but Lemonade is still working out its pricing as it launches new products in new locations. The loss ratio increased from 74% last year to 86% this year. CEO Schreiber explained that loss ratios from newer customers and products are higher than lifetime loss ratios, and loss ratios from older cohorts are better than those from newer ones. Management expects the loss ratio to increase with the acquisition of online auto insurer Metromile.

Lemonade has announced it would stop fundraising for now, and that it has enough money to grow until it becomes profitable. So far, the business is steadily growing as per expectations. It’s going to take time before it turns profitable, but the path is clearer at this stage.

Incumbent insurers have reasons to be worried and business moves such as Lemonade’s are rightful wake-up calls for larger carriers. Market consolidation will create a handful of extremely strong insurtechs with profitability levels that will offer strategic opportunities that incumbents will lack. The market might have punished big insurtechs due to high revenue multiples and due to lack of product diversity, which consolidation will assuage. Interestingly, Lemonade could 5x from here and still have a market cap that’s only 15% of Progressive’s. Regardless, disruption dreams of early-stage proponents will keep getting fueled with expansionary moves and more cycles, with smart business moves helping them find pathways to the league of leaders.

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