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Lemonade Makes a Surprising Acquisition

The deal may not be what it seems to be on the surface.

November 12, 2021

Lemonade (NYSE: LMND), which bills itself as an artificial intelligence (AI)-powered insurance company has agreed to purchase Metromile (NASDAQ: MILE), which uses proprietary data and machine learning algorithms to sell car insurance. Under the terms of the deal Lemonade will acquire Metromile in an all-stock transaction valued at roughly $500 million (or just over $200 million when you consider the cash balances the new owner would be acquiring.

On the surface, this might look like a deal to buy Metromile’s technology. That’s certainly part of it but the real prize might be the company’s existing licenses. Metromile has licenses to operate in 49 states. Acquiring the company should accelerate Lemonade’s nascent effort to begin offering car insurance.

This could be a major revenue accelerator for Lemonade which has a loyal following of customers who have used its life and pet insurance. Auto insurance should be a big driver for the company going forward and having licenses in hand for most of the country will allow it to bring that business online faster than it would have been able to otherwise.

Lemonade has not said how it plans to integrate Metromile’s technology but it’s a platform that fits with the company’s AI-driven model. Steve Symington joined the Nov. 10 edition of “7investing Now” to discuss the purchase and what it means for Lemonade going forward.

A full transcript follows the video.

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Dan Kline: Steve we are going to segue we are going to talk about Lemonade, which is described as an insurance AI company. So I have Lemonade life insurance. It’s delightful. I could not wait. Yeah, like it’s like 10 minutes. They ask you questions. They use an algorithm. It was a much better price. I didn’t have to have a medical exam. And I got I think the number was $500,000 worth of insurance. My wife got more because we we both have policies that we got when our son was born that expire when he’s 20. So I already had half a million. So now I have a million. She only had a quarter million. So now she has a million. And we’ll figure out adding another policy when the first ones expire.

But it took like 10 minutes it is super, super simple. They’re going to be going into car insurance. And they made a purchase. Steve, why don’t you explain what happened yesterday with Lemonade?

Steve Symington  9:02  Right? So it’s kind of interesting dichotomy in the share prices. At first Lemonade shares are down pretty handily. Last I checked like 11% today. And there’s a reason for that, right? It’s not necessarily that this is a bad deal. That’s kind of being panned by the market. But what’s really interesting is Lemonade.

Dan Kline  9:21  Steve, let’s reset. I didn’t actually say who they bought so.

Steve Symington  9:24  Oh, okay. So Lemonade. They announced they’re acquiring Metromile. So Metromile is a, an auto insurance company that that focuses on using telematics data and actually driving data, how far you drive usage based insurance. So really, really kind of compelling play in that space that’s been beaten down really hard. And I do think maybe we get a little bit of pushback from Metromile shareholders, some of them anyway, it still is subject to approval of Metromile shareholders.

But shares are currently trading around $3.25 a share. And I think they peaked at like $20 in February. So they’ve been beaten down pretty hard. Interesting that Metro mile will would agree to this because the deal is valued at about $500 million, or about 200 million net of cash that’s on Metro miles balance sheet, which is equally bonkers, right? Lemonade is a significantly larger company at this point.

But they it’s an all stock deal. So basically, under the terms of transaction Metromile, shareholders will get one share of Lemonade for every 19 shares of Metromile they had. So that’s the reason that Lemonade shares are down about 11%. They’re kind of reeling a little bit from the dilution that’s going to happen from this. And, as a result, Metromile shares are actually down slightly. Last I checked, because their stock is now going to be tied to the transaction with Lemonade stock, as Lemonade stock increases, the value of the deal increases.

So it’s kind of overshadowed and otherwise actually pretty strong report quarterly report from Lemonade. I won’t get into the details of that here. Because Metromile is the focus. And that’s kind of how it’s been. But there is a strategic rationale, as well, for this Lemonade actually only recently launched Lemonade Cars on auto insurance product feels like just a few weeks ago, they said it was available. And I was actually disappointed because they weren’t in Montana yet.

I did the same thing. I went to the site, I got the email, and I checked immediately, and they weren’t available in Florida yet.

Yeah. And they said, well let you know, I’m like, Oh, darn it, and then it looked and they were only in, I think just one or two markets. And it’s like, okay, they’ve technically launched but they’re not everywhere. And that’s part of the challenge of launching an auto insurance or any insurance operation is you have to go through and you have to get licenses to operate in every state.

And Metromile has licenses to operate in 49 states. So basically, this will enable Lemonade to instantly expand and kind of leverage Metromile’s pretty complementary technologies, skill set, with Lemonades existing skill set and Lemonade for its part only just launched life insurance, which we were talking about earlier a few months ago. And, and you know, it started in home and pet insurance. And that’s kind of where it’s been. But now auto, really interesting transaction. And if it can go through, I think Lemonade it’s actually getting a steal of a deal here with with Metromile so badly beaten down.

Dan Kline  12:27  Yeah, so this deal was actually reported, I want to say incorrectly. So there was a lot of negativity, because people thought that what Lemonade was buying was the Metromile sort of business model of tracking how you drive and maybe they will integrate that. But the biggest thing they’re buying here is they got 49 state licenses. I don’t know what state isn’t included, maybe there’s maybe there’s no Alaska, or maybe it’s weird, it’s like no, California, I don’t know, one state not included, this jumpstarts Lemonades ability to have the license needed to offer life insurance in just about all of the country.

Steve, that takes like years out of the process. And that was not at the top of the story in any story like to you as we’re both Lemonade shareholders. I think that’s true. I got really excited about this, because I want to be a customer and I went maybe this means they come to Florida sooner. Is that sort of like the secret sauce of this deal?

Steve Symington  13:21  Yeah, I think that’s what’s going to happen. And they have indicated that they will integrate Metromile’s technology with their own. And, you know, really, it’s they sort of both approach their markets the same way in an effort to kind of disrupt their respective insurance niches with technology. And I think it’s a compelling acquisition. I applaud him for it. And it’ll be interesting to watch how Lemonade shares kind of respond over the next several months, as people kind of get more excited about the potential for ramping this. So definitely a competitive industry, though, for sure. So there’s work to do.

Dan Kline  14:01  It’s a competitive industry, Steve, but do you know anyone who’s like, you know what, I love my car insurance company. I mean, I’m a GEICO customer, and they’ve been fine. Like, we’ve had a couple of accidents like, my wife got hit, and they went after the other person because it was very clear based on how she got hit that even though the police report didn’t make it look made it look like it was equal fault. There was zero possibility. It was her fault. And they won.

I hit a gate in a rental car and GEICO was so like, I like mine more than most. I’m going to leave them in a heartbeat if Lemonade goes into car insurance. Yeah, that’s what I think we won’t see play out. It might be like two or three years until we start seeing the numbers in earnings calls. And this is going to be a massive growth accelerator. Because I think and maybe I’m wrong, Steve, but I actually think Lemonade customers love Lemonade, because life insurance is a terrible process. And they made it simple. I would follow them anywhere pretty much.

Steve Symington  14:54  Yeah. Well, I mean, I had kind of a traditional auto insurance policy through through the kind of old school agent for the longest time. And and I became a Root (NASDAQ: ROOT) customer for that reason, right? It was a fantastic process. It was super easy. And I left my old insurance guy for route because it was such a massive opportunity, right? Yeah, hundreds of billions of dollars, I think if memory serves a $300 billion market, not without competition, obviously.

But if people can find a simple way not have to go into an insurance agent, or call or you know, just just super, super simple. And with a simple app, I love it. And even I know, as a Root customer, I’ll check Lemonades insurance rates, if if all else is equal, I’d jump ship over there. And if they if they’re willing to give me lower premiums, so it really depends on on a combination of ease of use and costs so.

Dan Kline  15:53  We also both have kids who are heading into their driving age, which is, which is a really tricky process. If Lemonade can make that more affordable, frankly, if anyone can because we were going to shop as soon as my son gets his license. Our plan was to shop around our insurance because generally you can you can save by doing that. This is a story we’re gonna keep following. This is kind of an underreported story. I think this is a big deal. But I don’t think it’s a big deal for the reason it’s being reported as a big deal.

I think we’re gonna see Lemonade insurance or car insurance sooner rather than later.

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