Description

1-minute Pitch

Metromile (“MLE”) is an auto insurtech company that uses telematics (GPS tracking devices attached to cars) and data analytics to offer pay-per-mile insurance policies to drivers. The idea underpinning Metromile’s offering is clever: why should low-mileage/safer drivers overpay on premiums to subsidize risky drivers, when the former can easily prove they are lower-risk via GPS data? In a world where data generation and analysis are proliferating, MLE is modernizing auto insurance through smarter risk pricing.

I believe Metromile is a compelling long and has the potential for long-term value creation because 1) its pay-per-mile pricing model is a clear win for most drivers, and that should drive high levels of adoption as it becomes available in additional states and internationally, 2) its TAM is massive (U.S. TAM alone = some % of $250bn annual auto insurance premiums) and gives MLE a lot of white space to achieve scale, and 3) with scale, it can become a real, cash-generative business because of its already terrific unit economics that should only improve over time.

I write these points in the above order deliberately. Points 1 and 2 are what will drive market cap appreciation in today’s zero-rates markets. Point 3 is what will help those returns endure well after SPACmania ends. I believe Metromile could be worth $34 per share in 5 years, representing an IRR of 18% from current levels.

Business Overview

Metromile was started in 2011 by Silicon Valley entrepreneur David Friedberg with the simple idea that drivers should be able to pay less for insurance if they drive less. The company tracks customer location & driving data via sensors that are plugged into their vehicles’ on-board diagnostics ports. Premiums are determined based on this data using a largely per-mile formula (the per-mile coefficient varies based on the customer’s driving behavior – e.g., propensity to speed and start/stop suddenly).

The dirty secret of auto insurance is that the StateFarms and Progressives of the world depend on the 65% lowest-mileage drivers to subsidize claims payouts for the remaining, high-risk 35%. This subsidy concept applies to all types of insurance – its merits and faults in health insurance are complex and heavily debated – but for auto, it leaves a huge swath of customers simply “overpaying” for their policies.

Metromile can charge lower premiums than competitors – average monthly savings for new customers are around 50% – and pay out even lower proportions to satisfy claims – MLE’s loss ratio, or ratio of payouts to premiums collected, has declined sharply from 101% in 2016 to 52% in Q2 2020 (and should continue to improve as its models become more sophisticated), compared to the mid-60’s for the rest of the industry – because of its data science-driven risk pricing models. Incumbents determine how much to charge you for car insurance based on your age, years of driving experience, claim history, vehicle cost, and so forth. Metromile factors in these same variables PLUS how much you drive (an incredibly powerful predictor of accident rates), how fast you drive, what roads you frequent, etc.

Insurance is a sleepy business with track records of poor customer satisfaction. Recognizing the opportunity to delight customers through seamless, automated claims-filing experiences, in 2016, Metromile acquired Mosaic Insurance for $22mm to help MLE transition from simply a lead-generator to a full-stack insurer. The acquisition gave MLE licenses which enabled it to be a full-fledged insurance carrier in a handful of states, and thus allowed it to start controlling the full customer experience, from accident reporting to quickly filing claims to locating appropriate repair centers. The result has been strong NPS performance for an insurer: 55 overall and 75 for claims-related activity. The incumbent car insurance players live in the 30’s to low 40’s.

In 2019, Metromile launched an enterprise offering (“Metromile Enterprise”) to license its claims experience automation software to competitors. The segment has grown from <$1mm of annual revenue in 2019 to $5.6mm expected in 2020. This business is a nice, high-margin compliment to the core insurance business. More importantly, incumbents’ desire to license MLE’s tech illustrates the quality of MLE’s core offering.

SPAC

Metromile is going public via a merger with a SPAC announced in Q4 2020 and expected to close in Q1 2021. The SPAC, INSU Acquisition Corp II, trades under the ticker NASDAQ:INAQ today, and is managed by financial services firm Cohen & Company. Cohen is a frequent insurance investor and has been involved in other insurance plays such as CardConnect, Intermex, Shift, and Paya. Upon transaction close Metromile will be listed under the ticker NASDAQ:MLE.

Along with the SPAC, Metromile raised $160mm through a PIPE backed by Chamath Palihapitiya, Mark Cuban, and others. Other investors who participated in Metromile’s previous private funding rounds include New Enterprise Associates, Index Ventures, and Future Fund. A transaction sources & uses summary is below.

Growth Opportunity

MLE is offering half off on premiums AND a smoother, faster customer experience to the 65% of lowest-mileage drivers. The pitch to customers is easy, and is substantiated by low quotes and NPS scores/reviews. Why does this company only have ~100,000 policies?

One answer is red tape. To be a full-stack insurance carrier, you need a ton of different approvals from different government agencies, you need biographical affidavits done, you need to prove you have surplus capital to service claims, etc. As such, Metromile is only available in 7-8 states following the Mosaic acquisition. Availability across the U.S. is an obvious growth driver that should help policy growth dramatically even if market shares stay at today’s levels. SPAC proceeds and simple learning by doing should help in this endeavor. I’d imagine launching in each incremental state becomes easier than the last.

Another answer is the marketing flywheel. Signing up for insurance requires a high level of trust by the policyholder in the payer. This is why auto insurance companies are some of the most prolific ad spenders out there. Metromile is dealing with a chicken and egg problem: there is a higher bar for customers to switch to MLE today as it is an unproven offering, therefore customer acquisition costs are high, which makes it expensive to escape velocity and establish trust in the marketplace. Scale will be incredibly helpful for Metromile’s marketing efforts and profitability. You can see this in action already here: 

An interesting feature of this business is that alternatives to its offerings – traditional auto insurance policies – will become even less compelling as Metromile scales. As low-mileage drivers defect from competitors to MLE, competitors will have to raise premiums for its remaining customers to maintain profitability, making Metromile's discounts even more attractive. Again, the key is scale to get the flywheel spinning.

I really like the growth opportunity for the core business based on the state expansion opportunity (and ultimately overseas) and MLE’s really simple and powerful value proposition to customers. There are three other growth avenues that support the valuation multiples I ascribe to the business in the valuation section: enterprise, OEM partnerships, and autonomous. Briefly on these:

The enterprise segment can be worth a lot if growth targets are achieved. It may even be a higher-margin way for MLE to capitalize on its tech in the long-term. Moreover, the offering highlights just how valuable MLE would be as an acquisition target. If Allstate bought MLE for $2.5bn tomorrow, it could make MLE be worth multiple times that as an Allstate subsidiary via immediate access to a ton of markets and other synergies. I wouldn’t be surprised if MLE was already approached by competitors over the last few years.

MLE is also striking partnerships with auto OEMs to make its product available instantly in new cars (i.e., linked up to existing telematics). Being able to sign up for Metromile quickly and without any device installation friction should drive low-CAC new customer wins.

And last, autonomous. This will likely not materialize for years but is something that should support MLE’s valuation multiples. When autonomous vehicles are introduced to the fleet in a big way, how can you logically charge drivers for auto insurance in any way BESIDES pay-per-mile? Metromile's pricing scheme will be the only way auto insurance makes sense when autonomous vehicles are common.

Unit Economics & Valuation

I’m confident MLE can grow into a strong cash-generator because it has terrific unit economics today.

Below are some of Metromile’s noteworthy unit economics. I mentioned its loss ratio above, and I would also point you to MLE’s LTV / CAC. The 3.1x number is really impressive in the full spectrum of recurring revenue-type businesses, and particularly among insurance companies.

Metromile’s numbers stack up really well against high-flying insurtech peers Lemonade and Root Insurance, yet MLE trades at a significant discount to these companies. I wouldn’t slap on Lemonade’s revenue multiple to Metromile since the former seems overvalued (to say the least), but this does show that Metromile represents relative value within the growth stock comp set. My valuation for MLE is below.

Yes, Ben Graham would cringe at this approach, but I believe there is appropriate conservatism baked into the above assumptions. This valuation assumes MLE can grow its market share from 0.15% - 0.25% today to 1.50%, which I think is a realistic target given their policies are HALF OFF traditional policies with better customer experiences. To account for the difficulty/risk in achieving that growth goal, I use a 2x annual premiums valuation multiple, which is a fraction of Lemonade and Root’s trading multiples and more or less in-line with old-school, low-growth insurance peers.

This is a growth investment at the end of the day. Both on an absolute basis and relative to other growth plays, MLE’s current valuation is very attractive. It’s $2bn market cap is a fraction of the aggregate auto insurance universe, and this business could be worth many times what it's worth today.

Note: Market figures as of 12/30/20

Risks

•         Delays & costs related to new state expansion
•         Customer willingness to embrace an auto insurance upstart is lower in incremental states compared to CA/WA/OR
•         Privacy and data regulation limits use of telematics
•         Data breach(es)

Catalyst

• Successful launches in additional states
• Policy growth over time
• Pricing model improvement drives stronger loss ratio and customer LTV, while scale drives marketing costs down