- Shares of Metromile have collapsed by nearly half since the company's SPAC debut earlier this year.
- Metromile is a well-recognized car insurance vendor that has made a name for itself by offering per-mile-driven insurance plans.
- Car insurance is a heavily fragmented industry that is ripe for new, tech-emboldened entrants.
- The company's loss ratio has been improving over time with scale, which distinguishes it from other new insurance players like Lemonade.
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It's been clear that insur-tech as a space is losing some of its appeals, at least when it comes to the public markets and recent IPOs. Lemonade (NYSE:LMND) is a good example here: after an initial spike that took Lemonade well above 3x its IPO price, the stock has been crashing all year as investors digested its heavy losses and souring policy loss ratios.
Metromile (MILE), however, could be the exception to the rule. Metromile started off as a hot commodity when it went public via a SPAC merger in January, but the stock has quickly ceded ground. Now, about half a year after its public debut, Metromile has shed about half of its market value.
While it's evident that investing in a relatively new, high-growth insurance vendor comes with its share of risks, I think Metromile's severe price declines and the fact that the stock is now sitting at under $1 billion in market cap (there are very few growth stocks that can claim the same size) more than compensate patient investors for that risk. In my view, Metromile is worth nibbling on.
The auto insurance industry and how Metromile stands out
The first thing that investors should know is that Metromile has a huge market ahead of it in auto insurance alone. As shown in the slide below, Metromile estimates the market for auto insurance in the U.S. to stand at $250 billion annually. For the current fiscal year, Wall Street analysts are expecting ~$65 million in revenue for Metromile, meaning, its penetration of its market is less than a fraction of 1%. If we look outward at the rest of the world, the size of the auto insurance market climbs to $700 billion.
Source: Metromile May investor presentation
So we've established one of the most important things to check for in investing in a growth stock: Metromile's market is certainly large enough. We note that it's a fragmented market as well. As the slide above substantiates, while there are certainly giants in the industry like Geico and State Farm, no individual carrier owns more than 20% in the market. And in such a price-elastic product, drivers have very little brand loyalty.
Metromile's key distinguishing factor, in my view, is a stroke of marketing creativity, but it's one that has resonated well with the millennials: paying for insurance by mile driven. Especially as more of today's workforce concentrates themselves in dense city centers (we'll see if the pandemic has truly spawned a durable renaissance of the suburbs, but my bet is that cities will get quickly repopulated once all offices and schools reopen), infrequent drivers want an insurance model that compensates them for their more sparing use of their cars.
Right now, Metromile cites that its typical policy leads to a 3.4-year relationship with any given customer: indicating that this model is proving both durable and appealing.
Multiple avenues for growth
Part of the reason sentiment has been a little weak for Metromile is that the pandemic has actually been a headwind to its growth objectives. Because it prices its insurance on a per-mile basis, the company cites that a wide reduction in the number of miles driven has reduced its revenue per policy sold.
We'll dive into the near-term metrics shortly, but when we look out at the longer term for Metromile, we find some pretty compelling growth opportunities ahead.
One of the most compelling opportunities that Metromile laid out in the chart above is to expand its core auto insurance offerings within the U.S. If you live in a coastal market, you've probably heard all about Metromile: but anywhere outside of the coasts, the brand probably need not have crossed your radar.
At present, as shown in the chart below, Metromile is only operating in a limited handful of states and serving only 45 million potential drivers, which is only a small portion of the adult U.S. population.
Metromile's big growth push, meanwhile, is coming this year. The company has aggressive nationwide expansion plans that it's embarking on in the second half of 2021, and by the end of this year, it's seeking to expand its territories to cover 50% or more of the U.S.
Another big opportunity lies in insurance bundling. Metromile notes that 56% of consumers choose to bundle home and auto insurance to unlock savings. Lemonade tried to capitalize on this trend by adding Lemonade Car insurance to its core homeowners' and renters' insurance, a move I criticized because Lemonade is entering into unknown territory while its core homeowners insurance business is still rather small.
Metromile, however, may be taking the wiser approach in partnering with Hippo to offer bundled insurance products. Combining Hippo's policy base on top of Metromile's ~100k existing policies creates an exciting cross-selling opportunity.
While it's true that Metromile's growth has flagged since the pandemic, we note that the company has continued growing. As of the end of the most recent quarter (Q1, the March quarter and Metromile's first and only public earnings release since its SPAC IPO), the company had 96.0k policies in force, up 6% y/y:
Figure 5. Metromile policies in force
Source: Metromile May investor presentation
With an expected policy tenure of 3.4 years, and a one-year customer retention rate of roughly 70%, plus the incoming growth initiatives from both expansion to ~50% of the U.S. population and bundling opportunities with Hippo, I'd say Metromile has a number of drivers that support continued growth in policies.
Meanwhile, the trend of reduced annual revenue per policy ($1,100 as of the end of Q1, down -2% from the same time last year) may reverse as commuting and school drop-offs return in full force this fall.
One other promising metric that Metromile enjoys an advantage over Lemonade in is improving policy loss ratios. As can be seen in the chart below, loss ratios have been trending downward and policy contribution margins have been trending upward, in a steady fashion each single year:
Source: Metromile May investor presentation
Compare that to Lemonade, which recently saw loss ratios spike due to the February 2021 Texas power crisis due to frozen pipes.
This Lemonade spike also illustrates another point in Metromile's favor. In general, I think auto insurance is a much safer space for smaller startup vendors to operate in than home insurance. Car accidents may be frequent, but these are distributed, uncorrelated events. A small homeowners' insurance vendor like Lemonade, meanwhile, may be subject to entire geographies falling prey to the same natural disaster.
For a company like Metromile that is still only operating in a handful of states, it's much better to be in the auto insurance game than to be in home insurance.
In my view, it's worth taking a chance on Metromile. There are quite a few fundamental drivers for Metromile to continue increasing its grip on the car insurance industry, including regional expansions, a new bundling partnership with Hippo and seemingly good economies of scale, as demonstrated by consistent year-over-year loss ratio improvements. Take the recent dips as an opportunity to nibble on this name.
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