God sends nuts to those who have no teeth

They say that chance favors the prepared mind. The pandemic was Metromile’s chance to shine in a category where insurance companies act as buffets, charging customers a premium for an all-you-can-eat experience while many are on a strict diet by a doctor’s order. However, Metromile was unprepared and the pandemic punched the lights out of the company when it wasn’t able to secure the funding round it hoped for. Of course, different sayings fit different circumstances and the following one describes best the recent announcement of Metromile going public: “God sends nuts to those who have no teeth.”

In our Metromile story from earlier this year, we shared a comment by CEO Dan Preston in regards to the decision to cut marketing spend in January, before the pandemic forced people to shelter-in-place and before the company layoffs. “We hired some new marketing leadership in the middle of 2019 to set us up for growth this year, as we had achieved strong profitability thresholds. As we began to scale the new strategy, we decided to shift some of our marketing investment to meet internal profitability guidelines because, like other insurance carriers, we are always balancing growth and profitability,” he said. Looking at Metromile’s investor deck, it clearly failed to balance growth and profitability. In 16 quarters (2016-2019), the company grew its policy base by 47K policies; Root did more than that in just one (Q4, 2019-Q1, 2020).

The book of Isaiah teaches us that we shouldn’t focus on the past: “Remember ye not the former things, neither consider the things of old.” So, let’s look at the “encouraging” present and even “greater” future Preston promised on April 20, 2020 despite the marketing cuts. “At the same time, we began seeing meaningful increases elsewhere, including organic and word of mouth referrals. Overall, it was clear Metromile and our model was increasingly resonating with people—showing our best growth tends to come from existing customers sharing with their friends and family. Our adjustments are part of an ongoing discipline behind the balance between growth and profitability, and we’re excited to expand the approach to reach a now even-larger addressable market of drivers.”

Period Direct premiums written Website traffic
Q1, 2020 $26,538,439 862,758
Q2, 2020 $21,730,720 482,922
Q3, 2020 $28,095,701 627,175

Judging by these numbers, Metromile is still failing to balance growth and profitability—as of September 30, 2020, the company’s DPW reached $76,364,860—down ~6% for the same period in 2019. Of course, the company disclosed that premium per customer declined by 30%+ due to per-mile billing, but you’d imagine it would enjoy some of the good fortunes of WFH-friendly companies such as Zoom and Peloton by at least increasing its customer base. This did not happen—the company presented an outlook of 91,944 policies for 2020 in its investor deck—an increase of just 3,845 from 2019. As previously stated, chance favors the prepared mind and Metromile was unprepared.

For investors, Metromile has a pretty compelling story. The offering is relevant at a time when many folks may find themselves working from home and the numbers are positive. The company is expecting close to 700K policies by 2024 and it showcases a customer acquisition cost of $238. But before you try to poach Metromile’s marketing team (they don’t have one), you should read the fine print. The Q2, 2020 customer acquisition cost figure includes underwriting fees and Pulse device cost only, after all, the company slashed their marketing spend and fired the sales and marketing team.

Metromile likes to say that its a technology company. Now, technology means efficiency but that doesn’t mean that every tech-enabled company is efficient. With that in mind, we published a report for research members in May that benchmarked the efficiency of three digital auto insurers: Metromile, Root, and Clearcover. To make a long story short, Metromile is extremely inefficient compared to Root. While Metromile has a good loss ratio (thanks to attracting those who drive less), their payroll-to-premium ratio is bad. According to our analysis, Metromile spent $106,335,000 on payroll since inception to year-end 2019. When you compare this figure to their 2019 direct premiums written ($103,282,510), the company presents a payroll-to-premium ratio of 103%. On the other hand, Root’s payroll-to-premium ratio in 2019 was 16%. And yet this did not stop Metromile from spending more on growth—between 2018 and 2019 it increased its payroll spend by ~20% while DPW increased by ~18%.

Another aspect we looked at was the different departments at each company. Metromile is indeed a technology company—it had more engineers (58) than claims professionals (49), while Root resembles more of a traditional insurer with a bigger claims department (219) than an engineering one (136). But perhaps the most crucial aspect is employee loyalty. Usually, employees who join a startup in the early days enjoy greater stock options and some share a sense of belief in the company and its mission, hence making them more loyal. This isn’t the case with Metromile as 88% of its first 50 employees are no longer with the company.

Efficiency aside, Metromile doesn’t get a medal for its technology either. We previously mentioned the malfunctions with the Pulse device and bumpy quote process, which hurt conversion rates according to several former employees. However, the company is making an effort to improve one aspect as highlighted in a job ad captured by Coverager in July: “Applying for car insurance involves answering a lot of confusing questions, so our team is working tirelessly to implement a shorter, cleaner, more user-friendly workflow. This new workflow will have a huge impact on our conversion rate, so you would have real impact on both our product and our bottom line.” And perhaps more connected vehicles will result in fewer Pulse devices.

In the investor call announcing the recent news, Preston said that US auto insurance incumbents are at best marketing companies that deliver an inequitable product to the majority of their customers. Metromile’s performance is a great lesson that you’re better off delivering something than nothing.

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