What happened

Shares of insurance-technology company Lemonade (LMND 7.46%) sank on Wednesday after the company reported financial results for the third quarter of 2021. Many of its metrics came in higher than expected, but there were some troubling signs that were hard to overlook.

Moreover, it seems the market isn't keen on Lemonade's proposed acquisition of competitor Metromile (MILE). As of 10:40 a.m. EST, Lemonade stock was down 12% and Metromile stock was only up 3%.

So what

In Q3, Lemonade's in-force premium -- the total annualized amount of its insurance premiums -- was $347 million, up 84% year over year. This bested the high end of management's guidance of $339 million and was a sharp increase from the $297 million it had at the end of last quarter. Consequently, Lemonade's revenue was up 101% year over year to $35.7 million, which also beat guidance.

A frustrated person covers their eyes to avoid looking at what's on a computer screen.

Image source: Getty Images.

Lemonade started as renters insurance, but management talked about the success of it newer offerings. Pet insurance, life insurance, and homeowners insurance now account for 47% of Lemonade's business, and it's pushing to diversify even further with auto insurance.

Lemonade Car only launched last week, but the company is already doubling down by acquiring competitor Metromile for $500 million in an all-stock deal. However, net of Metromile's cash, it's around a $200 million deal.

Now what

Here are some future issues that could be weighing Lemonade stock down today. First, even though results beat expectations in Q3, management didn't raise its full-year in-force premium guidance at all. It even lowered its guidance for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), now guiding for an EBITDA loss of $185 million to $183 million.

Second, Lemonade's loss ratio got worse in Q3 -- a troubling sign for an insurance company. Its gross loss ratio was 77%, compared to 72% last year and 78% two years ago. Management highlighted that newer products have better loss ratios.

But Lemonade's premiums are written using artificial intelligence (AI). Therefore, if anything, the older products should be improving more than newer ones for the AI to demonstrate its merits. For this reason, shareholders should continue to monitor Lemonade's loss ratio going forward.

Finally, it's likely the market doesn't like Lemonade's acquisition of Metromile. Management is excited because it quickly adds customers and, more importantly, customer data to feed its AI algorithms. However, Metromile's second-quarter net loss of $48 million is almost as big as Lemonade's, despite it being a much smaller business. It's possible shareholders don't see this as a shareholder-friendly move.

However, it's important to note Metromile operates in 49 U.S. states, whereas Lemonade Car is only in one. So this will accelerate Lemonade's auto-insurance rollout, which should provide a silver lining.