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spk00: Greetings. Welcome to Metro Mile Incorporated second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Gary Edson at ICR. Thank you. You may begin.
spk01: Thank you, operator. Good afternoon and welcome to MetroMile's second quarter 2021 earnings call. This afternoon, the company released its financial results for the quarter ended June 30th, 2021. Shareholder letter is available in the investor relations section of the company's website at www.metromile.com. I would like to remind everyone that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements. Any statements that refer to projections, forecasts, or other characterizations of future plans, events, or circumstances, including any underlying assumptions, are forward-looking statements. These statements are based on management's current expectations, 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 made with the SEC for a more detailed discussion of the risks and factors that could cause actual results, levels of activity, performance, or achievements to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of 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 to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC at www.sec.gov. Joining me on the call today are Dan Preston, the company's Chief Executive Officer, Troy Dye, Senior Vice President of Growth, and Reggie Van Galil, Metromile's Chief Financial Officer. With that, I am now going to turn the call over to Dan.
spk04: Thank you. Good afternoon to everyone and welcome to our second quarter 2021 earnings call. We appreciate your interest and continued support of Metromile. During the second quarter, we encountered several unexpected challenges, including some shifts in consumer behavior that we are seeing as the country continues the journey to a post-COVID-19 environment. We are learning how to best navigate the shifting market. And with a new growth leader on board, we are also using this as an opportunity to refresh and optimize our long-term growth strategy. During the quarter, we experienced several positive milestones. Driving return to near pre-pandemic levels, which sparked a sizable increase in our direct earned premiums and premium run rate as of June 30, 2021. As more Americans continue hitting the road, We expect to continue to generate solid direct earned premium year-over-year growth on a more consistent basis. We continue to experience high new customer one-year retention, which measured a robust 68% for the second quarter. Drivers continue to switch to Metro Mile to save, and we believe they stay with us because of the experience. We rounded out our senior leadership team with the key hires of Troy Dye as Senior Vice President Growth and Reggie Vengelo as our Chief Financial Officer. Both are already making significant and valuable contributions to Metromile, and we're excited to have them on board. Personally, I am thrilled to have a complete seasoned management team and look forward to working with this group to drive the business forward. That said, the positives were offset by headwinds we experienced toward the latter part of the quarter. First, our accident quarter loss ratio trended higher, as it did for others throughout the industry. We note that excluding bodily injury, claim frequency per mile has largely been consistent since the onset of the pandemic, However, claims severity has increased throughout the industry, mainly due to inflation and bodily injury and physical damage claims. Further, we have observed that the relationship between miles driven and losses is even more elastic than previously modeled. In recent rate filings, we have leveraged this insight to adjust more of our premium to be priced variably, or per mile, and reduced monthly fixed costs and expect to do so further in subsequent rate filings. This is a powerful way to drive improved unit economics, and additional price competitiveness for the millions of low-mileage drivers in the U.S. Second, although we noted in our last call that cancellations related to government-mandated COVID-19 payment extensions would be processed in the second quarter, those cancellations turned out to be greater than we expected. We also experienced higher-than-expected cancellations due to consumer behavioral changes, such as out-of-state moves, vehicle fails, and high-mileage driving. Finally, we encountered unexpected industry-wide regulatory delays, which deferred timely approvals of our pricing changes. We have since received those approvals, and they will go into effect at the end of August. As a reminder, we expect these pricing changes will drive additional policy and force in the future. As a result of these headwinds, policies and force were roughly flat for the second quarter and contribution margin dipped. These results are not acceptable to us, and we'll outline a few examples of the high-priority areas we're executing on to drive growth. We believe we have a superior underwriting model and customer experience and deliver a strong value proposition for our customers. As we've consistently noted, drivers who switched to Metromile say 47% annually on average. Additionally, when driving returned to near pre-pandemic levels in the second quarter, nearly half of prospects exploring Metromile self-reported 20% or greater savings compared to their current premium. This clearly demonstrates the substantial savings we can provide for nearly two-thirds of Americans before, during, and after the pandemic. As we continue laying the groundwork for our nationwide expansion, the recent challenges and significant strengthening of our leadership team have given us an opportunity to thoroughly assess our go-to-market growth strategy to introduce Metromile to new states. We believe we now have a more robust and visible path to achieve our mid- and long-term growth plan. However, to execute this strategy, our near-term policies and force growth will be deferred by a few quarters as we focus on implementation. While this leads to slower near-term policy growth, the long-term trajectory remains unchanged. We believe that most Americans would save substantially with metro miles per mile insurance, and we have clear paths towards scale, driven by an incredible team we recently brought on board to drive the Go-To-Market Strategy Board. With that, I'll turn the call over to our new Senior Vice President of Growth, Troy Dye. Troy joined us in late May from Capital One and immediately went to work refining our growth plan. He'll walk you through them now.
spk06: Thank you very much, Dan. I'm thrilled to be working with such a talented team at Metro Mile. We're executing quickly on our top priorities, and I look forward to sharing more with you today and in the quarters ahead. As Dan has mentioned previously, we have an incredible opportunity to capture a material share of the more than $160 billion premium total addressable market that represents what we believe are overpriced policies for low mileage drivers. In my first three months, I have been focused on optimizing our growth effort and ensuring our strategy is aligned with shifting consumer behavior in the pre- to post-COVID-19 journey. To that end, we have developed a more fulsome strategy that we believe will generate rapid and ultimately profitable growth as we expand nationwide. As a result, our initial expectations for policy-enforced growth for full year 2021 have been deferred by a few quarters based on several key changes, both internal and external, to Metro Mile. First, we experienced reduced COVID-19 pandemic-driven demand for pay-per-mile in the second quarter of 2021. We expect this and the trend in elevated cancellation rates to persist, creating downward pressure on near-term channel performance and net policies-enforced growth. Second, we expect state expansion to contribute material policies in force in 2022 compared to our initial expectation for new states to contribute in the second half of 2021. Lastly, the regulatory delays implementing pricing changes that Dan referenced earlier in the call will reduce previously expected growth in the third quarter of 2021. We believe the enhancements we are making to our growth plan will enable us to acquire new customers more rapidly in the future and meet our multi-year growth trajectory. I'll spend the next few minutes on three critical elements of this plan. First, we recently refreshed our brand and product positioning to reflect the new normal that drivers are settling into. Simply put, we believe there are too many drivers that still do not recognize or understand the value proposition, savings, and experience that Metro Mile seeks to offer. Moving forward, you will see us more actively sharing the Metro Mile story to our target customers to drive greater familiarity and trust. Next, we want to be omnipresent to our consumers. While we continue to enhance and optimize our direct-to-consumer channels, we recently opened new distribution channels and partnerships to capture an even greater addressable market. The two I'll talk about today are HIPPO and the independent agent channel. Last week, we sold our first few bundled homeowner insurance policies from HIPPO to Metro Mile customers. We are thrilled to formally launch our auto and homeowner solution well ahead of schedule. We believe a home and auto bundle will prove to be very attractive to many of our existing customers as well as prospects. We also believe there is significant opportunity with independent agents who account for over 30% of all auto insurance sales and as a channel, double our distribution access to our target market. In the second quarter, we successfully launched the initial phase of our independent agent program and have appointed more than 600 agents to date. We are beginning to scale sales production by integrating with comparative raters and fine-tuning our incentive structure with our agency partners. In the coming quarters, we expect to add significantly more independent agents and build additional integrations and infrastructure to support their efforts. We're excited about adding this new channel and believe it will become a strong contributor to growing our policies in force in time. We also plan to continue to advance our distribution opportunities through additional scalable partnerships with like-minded companies and well-aligned customer bases. In the weeks ahead, we'll be launching a new partnership with a leading fintech company that serves over 5 million customers, and we look forward to sharing more details soon. The third key area I'd like to discuss is our state expansion strategy. We continue to plan to file rates in new states by the end of the year, which, when combined with our current footprint, will allow us to reach more than 50% of Americans. We expect to start with Indiana, Colorado, Missouri, Iowa, and Texas. We believe our new states will begin to contribute meaningfully to our policies in force beginning in 2022. We were delivered in choosing these states based on the ease of entry and similarity to existing metro mile markets in order to ensure we generate healthy and profitable growth and ultimately expand our contribution margin. We will be disciplined in our expansion strategy to ensure we are managing growth without sacrificing our unit economics. In the months ahead, we'll provide updates on our progress on these fronts and other growth initiatives. We believe that Metromile is a strong fit for two-thirds of U.S. drivers and that as we move ahead, a rapidly growing number of Americans will realize it as well and become satisfied, loyal Metromile customers. With that, I'll hand the call back to Dan.
spk04: Thanks, Troy. Finally, along with our auto insurance offering, our Metromile Enterprise software platform continues to generate interest and demand. Enterprise is expanding its set of ecosystem partners to provide best-of-breed offerings to the insurance industry. In July, Enterprise announced an integration with Lob, a leading direct mail platform, into Streamline, our no-code claims automation platform, to automate claims payments and make direct mail workflows 25% more efficient for insurers. Enterprise is also expanding and formalizing a customer relationship with Metro Mile Insurance to include its new payments platform and digital tools. We expect this to bring Metro Mile Enterprise to over $5 million of annual standalone recurring revenue. and we are optimistic that amount will rise nicely in the quarters ahead given our pipeline. I'll now turn over the call to our Chief Financial Officer, Reggie Vendello. Reggie?
spk03: Thank you, Dan, and good afternoon to everyone. Let me take you through some of our second quarter 2021 results. For the second quarter, we generated direct earned premium of $27.8 million, a 23% increase from the prior year period. At the end of the quarter, we had 95,314 policies in force, a 2% increase from the prior year period, and largely flat when compared to the quarter ending March 31st. Our premium run rate, which we define as ending policies in force, multiplied by the average annual premium per policy was 113 million at the end of Q2, a 22% increase compared to the prior year period. Our one-year retention. or the percentage of new customers who remained with us after their first two policy terms as of June 30, 2021, was 68%. Accident quarter losses for the second quarter of 2021 were 20.6 million, leading to an accident quarter loss ratio of 74.2%, compared to 49.8% in the prior year period. The difference in loss ratio was primarily due to an increase in both claim severity observed industry-wide and bodily injury frequency. It was partially offset by the higher earned premium from our per mile pricing model. Accident quarter loss adjustment expense, or LAE, was $4.6 million, leading to an LAE ratio of 16.5% compared to 7.2% in the second quarter of 2020. The difference in LAE is due to the increase in reserve driven by increased claims inventory and incremental staffing in the claims department, given the higher claim count. Policy servicing expenses in the second quarter of 2021 were $3.5 million or 12.6% of direct earned premium compared to $3.2 million or 14.4% of direct earned premium in the prior year period. The lower policy servicing expense as a percentage of direct earned premium was primarily due to reduced bad debt expenses. Accident quarter contribution loss for the second quarter of 2021 was $0.9 million compared to contribution profit of $6.5 million in the prior year period. An accident quarter contribution margin was minus 3.3% compared to positive 28.8% in the prior year period, primarily due to the higher loss ratio and loss adjustment expense. In the second quarter of 2021, we had an additional 0.3 million of unfavorable prior period loss development. When including prior period development, calendar quarter contribution loss was 1.2 million compared to contribution profit of 4.8 million in the prior year period. At our Metromile enterprise segment, we generated revenue of $1.1 million during Q2 and ended the quarter with $4.2 million of booked annual recurring revenue, which is our primary KPI for the segment, given the durable nature of the revenue. Cash and cash equivalents at the end of Q2 were $202.6 million, compared to $221.5 million at the end of the first quarter. As a result of the factors shared by Dan and Troy earlier, we are lowering our outlook for the full year 2021 as follows. We now expect an end of year 2021 premium run rate of 115 to 125 million. We expect to achieve the previously forecast 2021 premium run rate of 143 to 176 million by the third quarter of 2022. With our lower premium run rate outlook, we now also project to end the year with more than 100,000 policies in force, given the revised growth strategy and timing of nationwide expansion. Given the increase in claim severity and bodily injury frequency, we now expect to incur an accident year loss ratio for the full year 2021 between 70% and 75%, and to record accident year contribution margin between 0% and 5%. I'll now turn it back to Dan.
spk04: Thanks, Reggie. We believe our challenges are temporary, and we are confident in the opportunity ahead. The potential savings for consumers before, during, and after the pandemic are unmistakable, and we believe we have the right team executing on a plan we expect will drive sustainable and profitable growth. I want to thank our entire team for working tirelessly to expand Metromile nationwide, create a growing community of loyal customers, and enhance shareholder value. We'll now open up to questions. Operator?
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Josh Siegler with Cantor Fitzgerald. Please proceed.
spk05: Hi, good afternoon. Thanks for taking my question. To start, in terms of state expansion plans, are you still targeting to have a footprint in 49 states by the end of 2022, or do you think the expansion may occur a little more slowly moving forward?
spk04: So we expect to continue to file pretty rapidly in the second half of this year with the anticipated additional growth primarily coming in 2022. And so we're not giving specific guidance on the number of states that are going live next year, but we do expect to be rolling on nationwide over the next two years.
spk05: Great. Thank you. And has there been any significant change in the competitive landscape? You know, are you seeing more competition in the per mile space from the traditional insurers, for example?
spk04: We haven't seen anything in particular to show that there is a changing competitive dynamic. If anything, the pandemic elevated the level of awareness around per mile, which was a tailwind for us. And one of the things that's happening as people start to drive more is that awareness is shifting, which is part of the strategy that Troy and team are deploying now.
spk08: Great. Thank you very much.
spk00: Our next question is from Gary Ramson with Dally and Partners. Please proceed.
spk02: Yes, good afternoon. I had a couple of questions. One on the new agent relationships. Are those agent relationships just normal? They get a commission. They own the customer. Is there anything special about the relationships?
spk06: You know, it's a traditional independent agent relationship. So, yeah, we pay a standard commission model on that, and that book of business is still part of that agent's overall book.
spk04: One thing I will add is that the experience for the customer, so their ability to file a claim digitally, interact with the app, get value from their experience, that's unchanged regardless of how you buy the product. But everything else that Troy shares, right? Right, okay.
spk02: And then the other thing I wanted to follow up on, what you were just starting to address, how the message was different or drivers weren't connecting quite as much. Could you give us a little more color about what it was that as people drive more, somehow they're missing the message that by the mile is a good idea?
spk06: It's a great question. And I think the way I characterize it is it's less about – Consumers driving more and more about a reduction in a tailwind from the pandemic. So during the pandemic, you really had people incredibly focused on how much less they drove and how much their car was sitting in front of their house when they were in a shelter in place order. And that, I think, drove consumers broadly to a paper mile product. We're seeing that kind of organic demand trail off as those shelter-in-place orders expire and folks get back on the road. And so what we're working on is a more evergreen positioning. That's what we've been testing over the course really of the last three months to be able to understand what's the ongoing positioning for pay-per-mile that isn't quite so pandemic-centric, which is really where we've been living for the past year or so. So it's largely about retooling how we present ourselves in the marketplace so that we can drive longer-term growth on a sustained basis.
spk04: Yeah, one of the things I'll add is part of the data that we shared in the letter on the call was we were asking folks in that period where people had started to drive more again how much they currently pay for auto insurance and what they drive on average. And that's where we have the figure of about half of people would save 20% or more with us. So the market size is as large as it ever was, but the way that you talk about the product needs to and has been evolving.
spk02: Does that change also how you target or the kinds of customers you target or the means of approach? I'm not as well versed here, whether it's streaming or searches. Does that have to change here in terms of bringing those customers in?
spk06: I don't think that it's – let me answer your question on a couple points. First, I don't think it's a different sort of customer that we're targeting. We still – I have a ton of interest in folks who are retirees, who are stay-at-home parents, who live in urban environments, and increasingly folks who work all or partially at home. And that was true prior to the pandemic. Some of those populations have gotten bigger, as you can imagine, in particular the work-from-home population as a result of the pandemic and as kind of workforce methods have changed. And on the channel front, we're not changing the way we use existing channels. Our real focus is on diversifying channels. And so, again, I want to come back to you. We've got a solid D2C engine that I think still has upside in it but has a good foundation. Adding independent agents really doubles our access to our market. and then some over-the-top investment in the top of our funnel and really starting to mature how we tell our story, how we educate customers over time is going to be a force multiplier on both the D2C and the independent agent side. So it's more about channel diversification than changing the way we use the channels we have today.
spk02: Great. Thank you very much.
spk00: Our next question is from Christopher Martin with KPW. Please proceed.
spk07: Hey, guys. Thanks for taking my question here and glad to join the call for the first time. I had a quick question on the enterprise side. So looking at your disclosures here, 0.9 million was your current revenue with 1.1 million in total revenue. Can you go into a little bit more detail about is that one customer or is that selling on a moving from a POC to a pilot to a a full engagement with that client? Is there anything you can talk about how enterprise looks like and what kind of to expect from that part of the business moving forward?
spk04: Yeah, thanks for the question. So it represents multiple customers. Part of the larger dollar amount in the prior period, that is some implementation fees that we charged. So basically part of the initial setup. But the AR today represents multiple customers.
spk07: Gotcha. What type of focus is going, I guess this might be towards the growth side, but focus on building out enterprise versus building out the traditional product that you guys started off with? Where do you guys see sort of your energy going in those two different directions?
spk04: Yeah, it's a great question. So we look at the two businesses as being independent operations with technology that's leveraged overall. And in the enterprise side, they have their own distribution opportunity and they have their own P&L. And with that, we're not necessarily making distinct decisions about how the investment is being deployed across those two. And so the team there is focused on how to achieve performance cash flow positive over time in their own independent way. And so that team has been developing a strong pipeline of insurers with several late-stage deals that they expect to close this year that we expect to accelerate that business. It is a longer sales cycle business overall because it's infrastructure for insurance companies. But the robust pipeline, along with a larger ecosystem of partners, is allowing that team to ultimately expand rapidly over the quarters and years to come.
spk07: Awesome. That's very helpful. Appreciate that. And just one more quick one, just kind of following up on what Gary was asking about in sort of the messaging around post-pandemic type of marketing in your customers. Has there been any focus around understanding what the shift in potentially work-from-home versus have-to-be-in-the-office type of work? So like the companies that – sorry, 10 companies, states that you mentioned that you're expanding into – definitely seems to be more so drive-to-work type of companies. Have there been any focus on having that messaging out there versus traditionally what you're saying in dynamics, hey, you're not driving that much, but there could be a shift in the way work actually is being done in, like, Colorado and Indiana moving forward?
spk06: Chris, we think this is a huge opportunity. You know, we've been watching at an occupation level the rates of workers who both work from home today and plan to continue to work from home over time. And when we think about this, it's not just those who work from home 100%. It's anyone who's moving to a work-from-home or hybrid environment is now going to be driving their car on a commute significantly less. And I think the position that Metro Mile has is is an incredibly powerful one because our product is actually built to respond to that dynamic immediately, right? Other insurers, I think, will have to try and play a little bit of catch-up on that path. But because we're a per-mile product, the minute you drive less, you pay less. And so I think this is a huge opportunity for us when you're going to see a lot of activity over the next six months and further because we think this is just a marketplace that We'll be stable. We now have a great deal more certainty around this marketplace than we did in the middle of the pandemic when it was just unclear what the kind of quote-unquote new normal would be. And, again, we feel like our product is incredibly powerful and superior to alternatives in the marketplace. So I think if we can drive good education into this particular segment, we can really develop a strong position.
spk07: Awesome. Thank you very much. That's all I have for now. Talk to you guys later.
spk00: And we do have a follow-up from Josh Ziegler with Cancer Fitzgerald. Please proceed.
spk05: Hi, thanks for taking my follow-up. So are you seeing the 2Q trends in loss severity continue into the beginning weeks of 3Q? I think the point I'm trying to get at, was this really a shock impact as the vaccines rolled out and lockdowns were lifted for the first time, or are you kind of seeing the trend persist?
spk04: Yeah, it's a good question. what we saw when the pandemic first happened is of course the reduction in frequency happened right away and obviously premium followed that for us um but severity went up with the bleeding kind of thesis behind that being that there are fewer people on the road people are going faster so the accidents that do happen are likely to be more severe and you see this also in pedestrian hits and other things that can lead to higher severity The thing that was surprising as we started to enter into more of a post-pandemic period is that that severity never went back down as we would expect it to. So the frequency on a per-mile basis stayed largely consistent over time, but the severity stayed elevated, which is leading to the higher loss ratio. From what we've seen from other reports out there, I think you've seen some of the earnings from other insurers, is that this is an industry-wide trend. So we expect we'll need to make rate adjustments as others will as well.
spk05: Great. That's super helpful. And speaking of rate adjustments, you know, the new pricing change, do you plan to roll that out at scale in August or just in specific states or specific areas and building scale over time?
spk04: It will happen in a very targeted way because we have a number of tools available at our disposal across different ways to segment the portfolio across behavioral pricing per mile and other ways. We're going to be focused on just the areas where we need to do those rate adjustments, which will mean a more targeted impact rather than a broad one.
spk05: Thanks very much, and thanks for taking my follow-up.
spk08: Go ahead.
spk00: As there are no more questions in the queue, I would like to turn the conference back over to Dan Preston for closing remarks. Thank you.
spk04: Great. Thank you all very much for joining us for our second quarter earnings call. Fundamentally, the market potential for Metromile is gigantic, and the product market fit is clear. And finding that half of consumers would save 20% or more of Metromile, it's well known that if you can drive saving the substantial of this, the opportunity to drive accelerated growth is really substantial. So we look forward to continuing the conversation.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.
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