Lemonade, Metromile shares react to tie-up; P&C stocks tick down

Lemonade Inc.'s shares dipped after the company announced plans to buy Metromile Inc. in an all-stock transaction, a move executives said would help Lemonade accelerate its expansion into the auto insurance space.

The broader markets moved down slightly during the week ending Nov. 12, with the S&P 500 slipping 0.31% to 4,682.85. The S&P 500 Insurance index climbed 0.68% to 545.87.

The all-stock deal for Metromile implies a fully diluted equity value of approximately $500 million, or just more than $200 million net of cash.

Kaenan Hertz, a managing partner at Insurtech Advisors LLC, called the decision to purchase Metromile a "brilliant move" by Lemonade that "really leapfrogged" the insurtech's abilities to be competitive in the auto market.

"They were able to go from one state to 49 states overnight," Hertz said in an interview. "They were able to join an organization that has already worked through some of the telematics growing pains."

But though the strategy appears sound, Hertz noted that Metromile is "by no means competitive," adding that some investors may look at the combination as "two money-losing organizations that are going to be losing even bigger sums of money."

"For those insurtechs that have gone public and have not been able to perform, they will have a much harder time raising additional capital because they have not been able to return at the rates that they were originally valued," Hertz said.

Lemonade's plans to buy Metromile also underscores the likelihood that a flurry of merger activity in the U.S. insurtech space is on the way as lackluster performances persist among newly public startups.

Lemonade's shares slumped 8.08% on the week, while Metromile's stock rose 7.14%.

As third-quarter earnings wrapped up, several clear trends emerged across the insurance industry. On the life side, many of the major players reported a spike in COVID-19 mortality, much of which was experienced in a younger age cohort.

CreditSights analyst Josh Esterov said mortality claims varied substantially by geography and were particularly impactful on insurers that have more of a group platform focus and tend to cater more to employees.

But it was still another quarter of "exceptional" alternative investment income for the sector, which for the time being is "more than offsetting" any operational pressures associated with pandemic-related mortality claims, Esterov said. The quarter also brought evidence that the sales experience is rebounding.

"I classify it as things are creeping back to normal, probably not at the pace insurers would like to see, but any kind of shift toward normalization is probably a good thing," Esterov said in an interview.

Voya Financial Inc.'s stock declined 1.79%, while Prudential Financial Inc. edged down 0.15%. Aflac Inc. ended the week in the green, rising 0.46%.

The property and casualty story is being driven by "surging premium rates," Esterov said, with many management teams this quarter reporting that the rate environment is still accelerating in excess of their expectations for loss cost trends.

"I'd say the operational environment for P&C insurers has really turned for the better," he said.

P&C insurers are still facing plenty of challenges out there as average catastrophe losses and frequency increases, and insurers struggle to model appropriately for the risk. Esterov said. American International Group Inc. stood out in particular by absorbing a "pretty heavy burden" in terms of catastrophe losses from Hurricane Ida and flooding in Europe.

"Old AIG would have posted a massive loss on that event alone, but this time around given all of AIG's efforts to right the ship in terms of its P&C operations, they actually managed to eke out underlying underwriting gains across a number of their P&C lines of business," Esterov said.

AIG's shares ended the week down 1.27%.

Fellow P&C insurers Chubb Ltd., The Travelers Cos. Inc. and The Allstate Corp. all lost a bit of ground, declining 0.18%, 1.37% and 2.09%, respectively.

Online health insurance marketplace eHealth Inc. released third-quarter earnings early in the week and cut its total revenue guidance for 2021 to a range of $535 million to $575 million, down from its previous forecast of $660 million to $700 million. The insurer also predicts a GAAP net loss in the range of $43 million to $63 million compared to previous guidance of GAAP net income in the range of $42 million to $57 million.

The insurer ended the week among the biggest losers with its shares plummeting 30.69%.