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Why Lemonade Plunged 20% in November

What happened

Shares of popular insurance technology company Lemonade (NYSE: LMND) fell 20% in November, according to data provided by S&P Global Market Intelligence. Lemonade launched its long-anticipated auto insurance product, Lemonade Car, and announced its acquisition of auto insurance company Metromile (NASDAQ: MILE). The market wasn't pleased about it.

Image source: Getty Images.

So what

Lemonade has been releasing new products in its quest to become a one-stop insurance shop for its young customers and grow with them as they go through lifecycle events. When it went public a year and a half ago, it only sold renters and homeowners insurance (as well as certain liability products in European markets). Since then, it's launched pet insurance, term life policies, and now auto. Since it will take time to roll out its auto products across states, the company acquired Metromile, which has a similar digital focus to Lemonade. It's already functional in 49 states, paving the way for Lemonade Car to roll out quickly.

In this all-stock transaction, Metromile shareholders will get one share of Lemonade for 19 Metromile shares, which totaled about $500 million at the announcement. That includes $250 million in cash on Metromile's balance sheet. But Lemonade's price has since dropped, making the deal even more attractive for Lemonade.

However, what put investors off is the massive increase in its loss. Lemonade itself posted a $66 million loss in Q3, or more than double the amount year over year. Metromile's loss in the third quarter was $26 million, up from $10 million last year.

The other stain in November was a 5% increase in loss ratio to 77%. Management explained this away by saying newer products have a higher loss ratio, and the loss ratio for the more mature products has improved.

Now what

It's essential to keep things in perspective. Lemonade posted a mostly fantastic third quarter with solid growth, including an 84% increase in in-force premium, its top-line growth metric that measures average total policy value. Premium per customer accelerated growth, increasing 26%, in line with its strategy to grow its presence in a client's life cycle.

Management acknowledged that it's focused on the long term, and investors should have that frame of mind as well.

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Jennifer Saibil 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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