Q4 2020 Metromile Inc Earnings Call
Greetings and welcome to the Metro mild fourth quarter and full year 2020 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
One should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn this conference over to your host Mr. Garrett Edson of ICR. Thank you you may begin the floor is yours.
Thank you operator, good afternoon, and welcome to Metro miles fourth quarter and full year 2020 earnings call. This afternoon. The company released its financial results for the quarter for year ended December 31, 2020. The shareholder letter is available in the Investor Relations section of the company's website at Www Dot Metro miles dot com I would like to remind everyone that certain state.
That's made in the course of this call are not based on historical information and May constitute forward looking statements. These statements include statements regarding our ability to grow our business as well as certain projections for the first quarter and full year 2021 and are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from.
Those described in the forward looking statements I refer you to the company's filings with the FCC for more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today all such forward looking statements are made US stay at March 30, <unk> 2021, and the company undertakes no duty to update any forward looking statements that may be made.
This call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP reconciliations of these non-GAAP financial measures for the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC.
At Www Dot FCC Dot Gov.
Turning me called standard Dan pressed in the Companys, Chief Executive Officer, and Lindsey <unk> Company's Chief accounting officer with that I'm now going to turn the call over to Dan.
Thank you good afternoon to everyone and welcome to our fourth quarter and full year 2020 earnings call. Our first call. Other publicly traded entity. We appreciate your interest and support of Metro miles.
On today's call I will provide a brief overview of metro mile and a competitive advantage walk through a few high level results and discuss our overall growth strategy for 2021 and beyond.
Linda will follow with additional detail around our fourth quarter and full year 2020 results. I will then provide an outlook for 2021 and then we'll open up open up for your Q&A.
As a newly public company I think it would be helpful to spend a few minutes, providing some additional context about our business and what makes metro miles platform and product unique to our customers and how those same advantages lead to shareholder value creation.
In short we started Metro Island 20, Aladdin to make the $250 billion auto insurance industry fare for for drivers.
Catalyst for this is that as people in phones become more connected to the world is rapidly digitizing, creating enormous opportunity to fundamentally rebuild products and services to better serve customers.
The opportunity in auto insurance are straightforward nearly two thirds of the drivers in the United States drive less than half the miles you get paid the same fixed rates as one third of drivers who drive the most and get into most of the accidents. This fundamentally unfair proposition led us to build pay per mile insurance, which day allows customers to say, it's <unk> 47 per cent for you.
On average are paying for the miles they actually drive.
Fast forward to today and metro miles at the forefront of digitizing auto insurance entirely as a data science company using technology and telematics as a foundation to build insurance from the ground up.
By moving away from proxies to assess groupings of classes of drivers we were able to make insurance real time personalized infer we're ending the era of fixed price auto insurance and doing it in a way that supports drivers every day.
Our approach prioritizes the customer experience and focus is on profitable unit economics over growth cell costs.
As a result, we became a full stack carrier a few years ago, and we emphasize solid underwriting and building a business that returns meaningful profit for every policy sold well beyond per policy acquisition costs.
In short we believe our invested dollars helped achieve substantial returns, which ultimately will enhance our ability to grow and scale our business more rapidly for years to come.
We've leveraged our tremendous stadia advantage, we've already collected approximately 3 billion miles of data to build a better fully digital auto insurance company.
By modeling the data, we collect understand driver behavior on a moment by moment basis. We believe we can better segment customers automate processes, which positions us to deliver improved and industry, leading loss ratios steadily increasing accident year contribution profit.
Our platform was different from any other insurer.
As we constructed it with sensors and data science since day one for.
We stream data from any source that measure is driving the car itself with the device or integrating with automotive Oems or the phone in your pocket.
Secondly model that data to improve or replace all insurance functions.
This means that every decision we make is better informed more accurate and more automated.
We are using high quality sensor data actually connected to your car, we believe our underwriting and our product for superior.
But far more accurate approach compared to relying solely on low frequency mobile phone data, which can be more coarser imprecise measurement.
With our wealth of data. We can also leverage detailed modeling of what truly causes accidents down to the recreation of individual moments to create a substantial pricing edge.
With this we believe we have the most accurate and most competitive rates, which has the dual benefit of improving profitability, while still driving down costs for our customers.
And because their model is inherently responses significant behavioral shifts are captured in the pricing model nearly instantly.
Crucially, we do this while delivering a delightful experience for our customers.
Drivers switched to the Metro model to take advantage of clear savings and we believe they stay with us longer because of the experience.
We offer them a seamless automated claims experience they had an accident often the moment of truth for any insurer.
We algorithmically reconstruct the accident scene and can instantly validate claims for the majority of cases.
The customers that are on their way with higher satisfaction and is now less likely to leave out correctly.
Just as importantly, our App features things like doing in short summary, our car health monitor and street sweeping alerts in some cities.
Engage with our customers at every step of their journey.
We believe this combination of savings and experience means that our customers remain with us longer.
At year end 2020, we had a new customer one year retention rate of 69% and an average new customer lifetime three for years.
By engaging meaningfully and intelligently with our customers, we're able to extend their lifetime with metro model increased retention and accelerate growth through new winning customers.
In short we've created a technology driven offering that is vastly different.
As a result metro mindless steadily growing our competitive advantage with high customer satisfaction and retention and low customer acquisition costs.
Beyond our consumer insurance products gaining market share.
Have also turned our core technology advantage into a growing and substantial revenue opportunity now as the Metro model enterprise.
But from my own enterprise licenses, our claims software platform, providing key claims automation and fraud detection tools to global P&C insurers.
But for my own enterprise for offers additional recurring high margin revenue that we believe is scaling towards a substantial business in its own right.
Recently, we were excited to onboard a new client title a member of the farmers insurance family.
Probably was using my turmoil enterprises' first notice of loss report and streamlined end to end claims automation products and will be deploying our portal and detect products by the end of 2021.
We also continue to maintain a strong pipeline of potential enterprise clients and look forward to updating you on enterprises progress in the quarters ahead.
It is clear to us that the era of fixed price auto insurance is coming to an end and metro miles place to succeed in this rapidly digitizing world. Our model is built to adapt to change and drive both for our customers and for the health of our business.
While 2020 was an unprecedented year due to COVID-19, and also helps prove the resilience of our financial model as our 2020 accident year loss ratio of 57, 4% for this significant.
Significant improvement from 2019.
With remote work potentially becoming the new normal even after the pandemic the need for flexible insurance that matches our customers actual use is more pronounced than ever.
This makes us an ideal fit for low mileage drivers from all walks of life, whether youre working remotely retired or living in a city suburb of rural location.
While the pandemic impacted our premiums given the reduction in driving our built in margins expanded validating our model and positioning us very well for long term sustainable growth.
Let me take a minute to discuss some of our highlights from 2020.
And then 2020 with 92635 policies in force growth of 5% from year end 2019, despite the pandemic.
As I just noted despite the reduction in driving in 2020, our margins expanded.
Our accident year loss ratio of $57 four per cent for the full year 2020 was a 1830 basis point improvement from 2019.
This improvement resulted in year over year pricing improvements advantages from a per mile and behavioral pricing model.
Hence fraud detection using our proprietary claims platform.
And maintaining our disciplined investing in profitable segments.
We also made significant progress by the end of 2020 to reduce future servicing expenses through successful renegotiations, we were able to significantly lower our data cost for each new pulse device installed moving forward.
The pulse is the device our customers plug into their cars Ob due to part to accurately count their miles.
Until OEM connectivity becomes more prevalent we believe pulse devices continue to be the most accurate way to collect data and ensure the best overall customer experience.
Further by the end of 2020, we estimate that incremental servicing expense for each marginal new policy sold has been reduced to approximately 9%.
We expect to see the benefits from these cost reductions in 2021 and as you can.
Further scale our policies in force in future years, our overall servicing expenses should begin to better reflect our marginal cost buoyed by our along loss ratio. We generated full year 2020 accident year contribution profit of $18 4 million and an accident year contribution margin of $18 one per cent because accident your contribution margin.
Presents the best estimate of the profitability of the in force portfolio.
This is a financial measure we use to estimate the lifetime value per customer.
We also made significant progress towards further optimizing our customer acquisition costs.
At the end of 2020, we successfully reduced the cost of acquiring a pulse device by 26 per cent and through negotiations, we lowered our underwriting report costs by 36% on a per policy basis, which will be able to begin to earnings starting in mid 2021.
We are consistently looking to streamline our customer acquisition costs as we squarely focused on enhancing our profitable unit economics and expanding our margins.
As we look into 2021 and beyond we have a long runway for sustainable growth in Metro miles.
First we have started accelerating our growth within our existing eight state footprint, which already reaches more than $45 million low mileage drivers generally considered those who drive less than 12000 miles a year.
Already we have enough data in nearly all of our markets to permit us to effectively and profitably scale.
With the business combination now complete and a robust balance sheet. We are preparing to begin expanding nationwide, which will triple our market reach to $143 million licensed drivers in the U S representing $160 billion of potential premiums.
We also continue to see strong traction for our new ride along feature App, which we launched in 2020. It allows drivers to essentially try before they buy and find out for themselves. If they are indeed, a low mileage driver and earn even further savings if they are safe driver.
We continue to see strong traction with right along in its early stages. This allows us to better optimize marketing spend create a violent organic flywheel effect for our product and drive high intent prospects for metro mile at a low cost.
We will also continue to partner with automotive Oems to introduce metro miles for low miles driver shortly after they purchase their vehicle and provide them with a customized offer based on true miles driven showing how much you can say with pay per mile insurance.
Given our enduring relationship with our customers, we expect to begin offering bundled products by the end of 2021, which should be significantly beneficial to further increase the lifetime of our customers.
And we expect our Metro model enterprise offering to partner with additional insurers around the world to help them reduce cost and digitize their operations, while generating consistent profitable growth from extra mile.
As I noted before we're thrilled to welcome portal a number of farmers insurance family as our newest metro mile Enterprise clients.
I'd be remiss, if I didn't thank our incredible metro mile team, whose non stop work and dedication have brought us to this point to drive the digital evolution of insurance setting us up for breakaway growth and compelling long term value creation for years to come we are committed to sustainable and profitable growth reinforced by our innovative proprietary <unk> technology platform by attracting the best.
Drivers, enabling them to save and giving them a personalized digital experience we are poised to succeed in this.
<unk> digitizing world.
Great Fair insurance for all.
With that I look forward to providing you with regular updates on our progress in the quarters and years ahead I'll now turn it over to our Chief Accounting Officer Lindsay last question for Wendy.
Thank you Dan and good afternoon, everyone. Let me take you through some of our fourth quarter highlights and our full year 2020 are resolved and then Dan will provide our outlook for 2021.
For the fourth quarter, we generated direct earned premium of $25 6 million, a 5% increase from the prior year period.
At the end of the quarter and the year, we had 92635 policies in force a 5% increase from the end of 2019.
Accident quarter losses for the fourth quarter of 2020 were $14 $5 million, leading to an accident quarter loss ratio of 56, 9% a $26 nine point improvement compared to the prior year period.
Accident quarter loss adjustment expense or L. A E with $2 $5 million, leading to an accident quarter LAE ratio of nine 8%, which was 50 basis points improvement from the fourth quarter of 2019.
Going forward, we highlight accident period loss and loss adjustment expense as they represent the ultimate expected loss and LAE from accidents incurred in that period.
This is a critical figure can measure current policy profitability as it represents the in force pricing model and current claims experience as opposed to including fluctuations from prior periods, which may not be indicative of current operating practices.
In order to determine accident period loss Meli E. We consider the total value of claims in the off net period, along with an estimate of the value of all unreported claims for that period.
Each quarter, we reassessed our estimates for all accident periods back to when we purchase or a carrier in 2016.
Therefore prior accident periods may experienced favorable or unfavorable development that doesn't reflect the current state of our pricing model and claims handling procedures.
In the fourth quarter of 2020, we had a combined for $7 million of unfavorable prior period loss and LAE development.
The increase in <unk> reserves is the result of our annual review when we increase reserves based on the development of litigation costs for claims primarily in older accident years, such as 2016, and 2017, which was shortly after we purchased the carrier.
Since then we have substantially improved our settlement and litigation procedures and believe we are adequately reserved with the requisite mitigation strategies for ongoing accident periods.
Servicing expense from the fourth quarter of 2020 was $3 $5 million or $13 five per cent of direct earned premium.
Accident quarter contribution profit for the fourth quarter of 2020 was $5 $6 million and accident quarter contribution margin was $21 four per cent.
When factoring in prior period development the calendar quarter contribution margin was $3 four per cent.
For the full year 2020, we generated a direct earned premiums of $99 $7 million compared to $102 $2 million from the prior year correct.
Direct earned premiums were impacted by the COVID-19 pandemic as we saw 30% less driving nationwide from the second to fourth quarters of 2020 compared to the same period in 2019.
Driving patterns can cause total premium to vary in any given period, given our mileage based pricing model and therefore, that's driving returns to pre COVID-19 levels revenue will increase in income and certain manner.
Our premium run rate, which we define as ending policies in force multiplied by the average annual premium per policy at.
At the end of 2020 was $103 million.
Average annual premium per policy with $1111 at the end of 2020.
Our one year retention or the percentage of customers, who remained with us. After two policy terms as of the end of 2020 was $69 four per cent.
Figure is slightly elevated from what we would expect going forward at some customers received government mandated COVID-19 payment extension in the event they were unable to pay their premium.
For the full year 2020 accident year losses were $57 $3 million compared to $77 $4 million in the prior year.
Accident year loss ratio for 2020 with $57 four per cent 1830 basis point improvement from 2019 with the improvement primarily due to better pricing enhanced fraud detection and a reduction in miles driven during 2020.
Accident year, La <unk> for 2020 was $11 $5 million compared to $12 $2 million from the prior year.
Accident year La <unk> for 2020 was 11 five per cent.
A 40 basis point improvement from 2019.
For 2020, we experienced $6 $5 million of unfavorable prior period development, primarily related to L. E E.
As a further historical guide for the accident years 2017 to 2019, we averaged 50 basis points of favorable combined loss and LAE development from our initial point estimate.
We will always aim to be adequately reserved to prevent prior period development. However, given the multiyear nature of some claim types. The limited history of the carrier and the nature of reserving estimate there will be adjustments from time to time, as we mature and gather more data.
Accident year contribution profit for 2020 was $18 $4 million compared to a loss of zero point $6 million in 2019.
Accident year contribution margin was $18 one per cent compared to a negative 0.6% in 2019, we.
We believe the accident your contribution margin is the most meaningful representation of profitability of our in force portfolio and thus is the measure we use to estimate the lifetime value of our customers.
With the inclusion of prior period development calendar year contribution profit for 2020 was $11 $9 million in calendar year contribution margin was 11, 8%.
And our Metro model Enterprise segment, we ended 2020 with $5 $7 million of total enterprise software revenue recognized in for $2 million of booked annual recurring revenue, which is our primary keep your eye for the segment given the durable nature of the revenue.
Cash and cash equivalents at the end of 2020 were $19 $2 million as a result of the business combination. We closed in February 2021 Metro mile received additional net proceeds of approximately $300 million, which will be reflected on our balance sheet at the end of the first quarter 2021.
We utilized a portion of this to pay off any remaining debt that was not paid as part of the consummation of the transaction and this was approximately $37 million.
We are also actively restructuring our reinsurance program as part of this restructuring and to ensure adequate capitalization at the insurance carrier approximately $50 million of cash and cash equivalents will move from unrestricted to restricted in Q1 2021, a portion of this we will use for reinsurance commutation settlement.
And now I'll turn it back to Dan for the 2021 outlook.
Thanks, Lindsey with the completion of our business combination in early 2021, and the fact that our first quarter of 2021 is nearly complete we are providing an outlook on select metrics from the first quarter of 2021.
Moving forward, we would expect to provide an annual outlook as we are focused on running the business on a year to year, rather than a quarter to quarter basis.
For the first quarter 2021, we expect to end the quarter with policies in force between 95500, 96000, which would be a 3% to four per cent increase from the end of 2020.
We also expect to end the first quarter of 2021 with an accident quarter loss ratio between 62, 5% ex <unk>.
Seven five per cent.
And an accident quarter contribution margin between six and 11%.
For the full year 2021, we are projecting to end the year between 125000, and 133000 policies in force, which entails year over year policies in force growth of 35% from the low end and 44% from the high end.
As a reminder, we began accelerating our marketing spend in November 2020 in anticipation of ramping up our growth in 2021 and beyond.
As a result, we would expect our policies in force sequential its growth trajectory to steadily increase throughout the year as marketing channel as mature and as we enter new markets in the second half of the year.
We currently do not expect to provide a premium outlook on a go forward basis as premiums are subject to driving patterns and the unpredictability of miles driven on a monthly basis, particularly during the ongoing and paying down debt or we've seen material changes once a month. However, because their model is price on a per mile basis, we would expect to continue generating profitable unit economics.
Fairly and accurately bill our customers for the commensurate risk.
We also expect to incur an accident year loss ratio for the full year 2021 between $65 70 per cent and to record an accident year contribution margin between eight five and 13, 5%.
We thank you for your time and interest today, and we'll now open up open up for questions operator.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad it called for.
Formation from will indicate your line is in the question queue. You May press Star true if he would like to share with your question from the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before pressing the star keys and on that I'll poll for questions.
Our first question comes from the line of Jed Kelly with Oppenheimer. You May proceed with your question.
Great guys. Thanks, Thanks for taking my question.
Patients how.
Okay.
If I may one Dan can you just sort of just.
So on a constant competition you are seeing with some of the larger carriers and their pay per mile campaigns in Q1.
The loss ratio.
Breaking down between.
I guess youre, calling for 16, 17% loss ratio, how much is that going to be driven by interest nature entering persona lines.
Thank you.
Yes.
Thanks, I appreciate it Chad.
So I'll start with a question on competition overall.
Our general understanding right now is that it continues to be difficult for large carriers to be able to offer per mile insurance as a primary offering given that the low mileage drivers today are still providing the subsidy for higher mileage customers, but I think it's becoming clear over time that I think you've seen this over the last year or so as COVID-19.
Has really reinforced for everyone. The need for flexible insurance. This is ultimately an inevitability as more customers move to per mile insurance.
The subsidy that they were previously paying for something like a high mileage customers going away and so naturally you will have to evolve and offer per mile insurance over time.
And so.
We have seen a number as per mile insurance products come about what we've found is that were.
Highly competitive relative to them on a pricing basis and most of what we've seen so far today is that at least for the large carriers that offer per mile insurance, it's primarily being used as a retention technique, particularly in this time when people are looking for alternative options as opposed to a primary instrument.
On loss ratio.
The new states contribute, especially in the second half of the year to higher losses as we've expected that as we go into new States and this is kind of model than when we first.
Cash from ops market.
And that when we go into a new market the loss ratio will be higher, especially for the first series you go in with a pricing model that does not yet have maturity and hadn't yet capture enough customers to be able to price based on that.
The higher loss ratio for the year is based on those new markets and the expectation that they will run at a higher loss ratio than the baseline.
For the mature business.
One of the other dynamics that were following closely is what happens as people return.
Two driving we've certainly seen a big uptick very recently and miles driven.
And so based on that we expect some some variance throughout the year, which will be somewhat unknown so of course.
Pricing on a per mile basis. It allows us to have more robust loss ratios in that.
Normally with a static rate policy, you would expect loss ratios to increase substantially as miles driven to go up but of course, our revenue will go up which should mute the impact of the higher loss GAAP.
Great that's great and just two more fall two follow ups, just one any exposure or any any issues with some other chip shortage. The Oems are experiencing and then to <unk>.
Just on the.
Just just on the.
Yes, so on the other OEM chip shortages and then can you talk just talk about how your algorithms are going to adjust for the bundling you called out in the shareholder letter. Thank you.
Yeah absolutely.
On the chip shortage, Fortunately, we've been aware of the situation and frankly, they're either getting.
For some time now and we've worked with our vendors to make sure that we have adequate coverage. So we have a number of mitigation strategies and we don't expect that to be an issue for for our devices.
On unbundling, one of the exciting parts about being able to offer.
Both homeowners and auto together, which is likely going to be the first product is that we can offer some discounts to our customers associated with that given that customers who have bundled the products will have a.
A higher lifetime value higher retention.
And ultimately likely lower cost of acquisition as well as we're able to acquire customers that previously may have not had that bundling discounts.
So that will be part of.
It's about the algorithm.
We also would expect that that will open up a number of new opportunities for us in different channels.
Our debt previously well if someone were say a renter in saving.
40% to 50% with metro mile as a homeowner you may not save as much but once you start bundling that are pricing discount.
Should be closer to what everyone's here may have for instance, so that certainly will help as well.
Thank you.
Absolutely.
As a reminder, if you would like to ask a question. Please press star one on your telephone keypad on moment, all the poll for questions.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Dan <unk> for closing remarks.
Absolutely.
I want to thank everyone for them for the conversation and look forward to continuing the dialogue and building a relationship over the coming quarters.
So thanks, again and look forward to talking to you.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your day.
Okay.
[music] zone.