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Here's Why Lemonade's Acquisition of Metromile Is a Smart Move

By Matthew Frankel, CFP® – Updated Dec 9, 2021 at 9:39AM

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Auto insurance disruptor Metromile hasn't been a great performer as a stand-alone company, but under Lemonade's umbrella...

Insurance disruptor Lemonade (LMND 1.65%) recently announced its intention to acquire fellow insurance tech company Metromile (MILE) in an all-stock deal, and judging by the buyer's stock performance following the announcement, it's fair to say many investors weren't thrilled. However, in this clip from Matt Frankel's Nov. 29 interview with Lemonade co-CEO Daniel Schreiber, you'll hear why the acquisition could turn out to be a tremendous value for the business. 

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Matt Frankel: For the Metromile acquisition, there are three real reasons I could see to acquire it, just from reading through your presentation on it. One is the 49 state licenses, which you just mentioned. There is the company's proprietary data, which is massive. And then there is their insurance book, which I believe is about $100 million in in-force premiums. Can you talk about how those three things really fit into your growth strategy?

Daniel Schreiber: Absolutely. The overwhelming focus of the acquisition is what you call the data, but more broadly, the system they have built in order to understand and price and underwrite risk at a level of granularity that nobody else really can.

The way car insurance works today in the United States almost entirely -- I'm generalizing, but only a little bit -- is based on proxies. I get your credit score, I ask you for your gender, your age, your education level, I'm even going to ask you your marital status. And it turns out that all of those things are correlated to what risk you represent on the roads today. It's statistically sound, but it really means grouping large swaths of humanity into a monolithic group because they all have the same credit score or the same gender.

What Metromile has done in a way that I think is unmatched, certainly in the United States, possibly worldwide, is they said, we're not interested in credit score correlations to driving. We want to get down to the most granular level we can. We want to be able to price at the level of one mile driven by this person, and then you can aggregate it up. But we want to get down to really granular pricing, looking at how much you drove, how you drove, getting granular data at several hertz -- so multiple times a second, they are polling their technology to see whether you're driving, where you're driving, what time of day you're driving, how you're driving, all that stuff.

That creates just an incredible, detailed, textured map of what represents what kind of risks. It's invisible to the incumbency entirely. They haven't been pricing this way, they don't have these datasets, they can't price at that level of precision. Now, car insurance is a massively competitive market. We have nothing but respect for the companies we're coming up against, the GEICOs, the Progressives of this world -- fearsomely impressive. I think, left to our own devices, we would get there. It would be a multiyear process. We would launch, we would let our system and our telematics and our sensors collect the data. When we got critical masses, we'd be able to find the correlates between all of those signals and claims. But it would be an expensive road to go down because while you're learning, you're turning out that you're mispriced, you're underwriting it imprecisely, and therefore you're being hammered along the way.

We will still have some tuition fees to be paid, no doubt. But I think Metromile shortens that tremendously, and that's really the overarching thing. If you think about the strength that Lemonade brings to car insurance -- the product, the design, the marketing, the bundling -- we've got tremendous assets that I think give us a huge competitive advantage. But we lack the heart, which is pricing and underwriting insurance for car with precision.

If you think about Metromile, they're almost the mirror image of that. They don't have bundlable products. Their marketing has been OK. But this is what they are: They are a data science company focused on car insurance. You combine the two, you end up with something pretty powerful, that at least is the theory. You layer on top of that the fact that they've got a quarter of a billion dollars in the bank, 49 state licenses, an incredible skilled workforce, and you just see the value of the deal accruing, I think, in a way that is extraordinary.

Frankel: Speaking of the value of the deal. Since you announced it, your stock price has fallen, which is important because it's an all-stock deal. If I'm doing the math [right], you're paying just a little bit over what the cash that Metromile has right now. Is this just a real steal, or am I missing something about the terms of the deal, or anything like that?

Schreiber: You're not missing anything in the terms of the deal. I think that for Lemonade, this is an extraordinarily good deal -- strategic, affordable, a bit of a game-changer. So I think, for us, it is a stupendous deal.

But I have to tell you, I think this is a win-win. I think if you're a shareholder of Metromile, this is a stupendous deal for you too. Because the path that you were on was a tough one, and there's a reason why their stock price was struggling. Because when you don't have a lot of capital and you've got a depleted stock price, you don't have access to a lot of capital, and you don't have an installed base that you can up-sell and cross-sell to. All of those things really do put a ceiling pretty low on what you can do, or makes it very difficult or risky. I think that for us, this is a tremendous unlock.

The 19-to-1 ratio was brought by taking their price, our price, and just looking at the market values. This wasn't some big discount, it was actually a premium to where the stock was already trading, so we weren't in any way taking advantage. We were actually paying a premium to their stock price. Then you think about if you're a Metromile shareholder, will your investment likely be worth more because of this deal over time, and I would argue emphatically that it will. It suddenly unlocks 1.4 million customers that can buy this technology. It unlocks homeowners that you can bundle with. It unlocks a brand that is better known and available in more states, and it allows you not to duplicate all the spend on all the technology of running an insurance company. So there are tremendous efficiencies to be had there as well. Which is why as I say, I think a great deal for us, but a compelling deal for the Metromile shareholder base as well.

Matthew Frankel, CFP® owns shares of Lemonade, Inc. The Motley Fool owns shares of and recommends Lemonade, Inc. The Motley Fool has a disclosure policy.

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