Digital insurer Lemonade plans to acquire pay-per-mile auto insurance startup Metromile in an all-stock transaction as it aggressively continues expansion plans.

With the M&A agreement, the New York-based InsurTech stands to gain a national foothold in car insurance, on top of its expanding presence in home, renters, pet and life insurance.

Lemonade’s auto insurance product -Lemonade Car – only launched in Illinois a week ago, with an app that uses telematics and is designed to measure how much and how safe people drive. But as Lemonade noted, Metromile has 49 state licenses. On top of that, Lemonade gets to add to its roster Metromile’s more than $100 million of in-force auto insurance premium, over $250 million of cash on its balance sheet, and the San Francisco-based InsurTech’s experience using big data and AI for its own car insurance process.

Metromile has “been down this road billions of times, and their proprietary data and machine learning algorithms can vault us over the most time and cost intensive parts of the [auto insurance expansion] journey,” Daniel Schreiber, Lemonade CEO and cofounder, said in prepared remarks. “In a vast and competitive market like auto insurance, today’s deal is a huge unlock of value for our customers and shareholders.”

He added in a blog posting explaining the deal that both companies employ “kindred spirits” and that they had a “near-perfect overlap of vision and culture – yet also have zero overlap in products and licenses.”

The deal has a fully diluted equity value of approximately $500 million, or just over $200 million net of cash. Transaction terms call for Metromile shareholders to receive Lemonade common shares at a ratio of 19 to 1. Plans call for closing the M&A agreement during the 2022 second quarter, once all regulatory approvals have been secured. Metromile stockholders must also sign off on the agreement, which is additionally subject to other customary closing conditions.

“We’ve long admired Lemonade for its beautiful products, world-class customer experience, unprecedented growth, and socially-impactful business model,” said Dan Preston, CEO of Metromile. “The data science-driven technology platform we built created fairer and more individualized car insurance for consumers in an industry marred by vast inequities. ”

Preston said the combined company “will create the most customer-centric, fair and affordable car insurance, and is a great outcome for Metromile shareholders, who will benefit as shareholders of the combined company.”

Neither side commented in their announcement on what will happen to Metromile initiatives such as its partnership with Hippo Insurance announced in May, to offer home and auto insurance production by way of a new bundled discount

Raving About the Technology, Not the Growth.

Schreiber’s blog posting observed that Metromile’s pay-as-you-go technology has been long proven, with its car-mounted precision sensors having taken “over 400 million road trips, covering billions of miles and sending real-time streams to the Metromile cloud.”

In turn, this proprietary, AI-driven data was mapped onto behaviors such as how much someone drives, plus when, where and how they drive, he said.

“These machine learning models were regularly ported onto ever more precise ‘forms and rates,’ which were approved by regulators and implemented in the Metromile product, enabling this multi-year cycle to start over,” Schreiber wrote. “Metromile is on its third generation of models, an achievement that requires not only data science and insurance excellence—but years of real-world feedback and iteration at scale.”

Schreiber said that Metromile can identify low-risk drivers with “unrivaled precision” and give savings commensurate with their reduced risk – as much as 47 percent savings for those who switch. But, he claims, Metromile’s pure loss ratio is within 10 percentage points of the direct business of full-stack carrier rivals GEICO and Progressive.

Technology advantages aside, Metromile has struggled to make traction in the marketplace.

Metromile reported 95,314 policies in force as of Q2 2021, compared to 95,958 at the end of Q1 2021, according to its second-quarter shareholder letter. It had 93,117 policies in force in Q2 2020. The company booked just $27.8 million in direct earned premium in the second quarter and remains unprofitable. Metromile had vowed to be all digital but launched an independent agent program earlier this year arguing they could also be a good source of revenue. Metromile, which was founded in 2011, became a public company in February 2021 after a reverse merger/special purpose acquisition company transaction, and it has been widely rumored to be struggling in recent months. Schreiber appeared to acknowledge this in his blog posting.

“While Metromile may not be celebrated for its growth, those in the know recognize its primacy at harnessing telematics and data science to match rate to risk,” Schreiber said. “The extent of this mastery became clear to us once we got a good look under the hood, though Covid-19 provided the industry with a glimpse too” as customers went more digital.

Lemonade reported a customer base that surpassed 1.2 million as of the 2021 second quarter, up from 814,200 the previous year. The company lost $55.6 million, versus a $21 million loss the previous year. Lemonade was scheduled to release its 2021 third quarter earnings later on Nov. 8.

Lemonade’s stock closed at $70.97 on Nov. 8, though it dropped 5 percent in after-hours trading after the M&A news broke. Metromile’s stock closed at $3.16, and it jumped more than 8.5 percent in after-hours trading.

Source: Lemonade, Metromile