The Rundown – Your weekly SPAC Deep Dive (11/03/21)
Metromile is a Unique Auto Insurance Play
Metromile is an exciting insurance tech company that has had a rough few quarters. The company has been billed as being the disruptor of the auto insurance market through a cutting-edge pay-for-use model, but with the pandemic winding down, there are several headwinds ahead.
The company delivered disappointing numbers, where growth stalled and margins shrunk, sending the stock tumbling 20%. MILE Stock is now trading close to $3.5, down approximately 85% since its listing in February. This is a great opportunity to revisit a company that was described by Chamath Palihapitiya as the ’Next Geico’.
MILE delivers competitive rates for its customers by correlating premiums with the total number of miles driven. MILE estimates that 65% of drivers currently subsidize insurance for the other 35% who cause more than half the losses. Traditional auto insurance still relies on antiquated pricing models designed decades ago and takes into account a variety of factors such as customer age, credit score, and zip code.
The main philosophy behind MILE is that if you drive less, you should pay less. In theory, customers on average pay 47% less than their previous auto insurance, but in practice, it can vary depending on the total miles driven.
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Auto Insurance is Ripe for Disruption
The US personal auto insurance market is valued at $250 billion but is massively fragmented. No US carrier has more than 20% market share and there are over 110 carriers with premiums over $100 million. Drivers typically have little brand loyalty in the space but are very sensitive to price changes.
Considering the potential savings from the switch, MILE estimates that there are currently 45 million drivers that may be enticed to switch over to the company’s policy. MILE currently operates in Arizona, California, Illinois, New Jersey, Pennsylvania, Oregon, and Virginia but is looking to expand into another 10-15 states by the end of 2022 to address an additional 143 million potential customers.
The company estimates that there are plenty of low mileage drivers who stand to benefit from switching to the company’s plan. This includes workers who plan to continue work from home, customers who live in cities, stay-at-home parents, and drivers who are over the age of 65.
In addition to the insurance business, MILE offers a SaaS product for enterprises that could outgrow the insurance business. MILE will be able to license its proprietary risk model to other insurance companies to help improve the efficiency of claims experience, improve margins and decrease fraud while generating recurring revenue.
Bargain Buy or Going Bust?
MILE shares are down nearly 85% since the deal closed back in February, with the stock now trading close to $3.5. MILE’s insurance plan made sense during the height of the pandemic, as it was practical for consumers to buy only as much insurance as they needed. But the road ahead is bumpy, as driving patterns have shifted to pre-pandemic levels, resulting in lower premiums, loss ratio, and contribution margins for MILE.
Q2 was a horror show for the company, with CEO Dan Preston stating that the results ‘were unacceptable’. In Q2, the Accident Loss Ratio was up 9% sequentially to 74.2%, which is close to the levels seen in 2019 (77.2%). Management has also revised guidelines for the next few quarters stating that the policies in force will be over 100,000 compared to the initial target of 125,000-133,000.
As consumers have started traveling more lately, driving frequency is up compared to the pandemic era, which has resulted in higher risk and higher claims. The benefits of the pandemic are now fading away resulting in the company going back and changing its pricing model. While there are significant headwinds over the next few quarters, there are several positive developments that should translate to higher policies in force and higher margins in FY22.
MILE’s customer retention stood at 68%, which is much higher than peers such as Lemonade (62%), Root (33%). Furthermore, while MILE’s premiums and margins were lower, the whole industry has taken a hit as a result of inflation and higher claims. To adapt to the change in driver behavior, the company is changing its pricing structure. The company is reducing its monthly fixed costs, in favor of increasing variable pricing. This will translate to better unit economics and result in higher savings for low-mile drivers.
MILE is currently trading at $3.25, implying a valuation of $413 million. At the end of Q2, the company had cash and investments worth $203 million. Deducting cash from the company’s market cap implies an enterprise value of $210 million. MILE currently has $113 million premiums in force, implying a 1.85x multiple. With the recent correction, MILE is trading at comparable multiples to Root, while having a much lower customer churn.
Critics believe that MILE will face intense competition over the next 12-18 months as larger insure-tech companies will look to make a play in the space. But MILE has the advantage of being the first mover in the market and continues to tweak its policy to improve unit economics and save more money for low-milage drivers.
MILE is also run by capable leadership and has investors who can steer the company through the current headwinds. In addition to CEO Dan Preston, Founder David Friedberg is known in the Valley for high-profile exits like his farming insurance company Climate Corporation, which he sold to Monsanto for $1 Billion back in 2013.
In addition, high-profile investors like Chamath Palihapitiya and Mark Cuban have poured in more than $160 million in capital into the company. Investors looking at the stock now can get in at a 65% discount compared to PIPE investors. If MILE was an exciting yet slightly overvalued auto insurance company, the current discount makes the stock even more appealing.
Metromile is an exciting bet on the future of auto insurance. The company’s proprietary per-mile pricing delivers impressive savings for low milage customers while employing strong unit economics. There are substantial opportunities for growth considering the national expansion, enterprise business, and margin expansion. While there have been some challenges in the last couple of quarters, shares of the company are now at a large enough discount for even the most skeptical investors to buy into. MILE will not only create substantial wealth for shareholders over the coming years but has the potential to monopolize the auto insurance industry.