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METROMILE, INC. – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the accompanying notes and other information included elsewhere
in this Annual Report. This discussion and analysis below include
forward-looking statements that are subject to risks, uncertainties and other
factors described in "Risk Factors" that could cause actual results to differ
materially from such forward-looking statements. Additionally, our historical
results are not necessarily indicative of the results that may
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be expected for any period in the future. A discussion of the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 has been reported previously under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our definitive proxy statement (DEFM14A) filed onDecember 29, 2021 . Section Page Overview 50 Our Model 51 Reinsurance 52 Key Performance Indicators 52 Recent Developments Affecting Comparability 54 Key Factors and Trends Affecting our Operating Performance 55 Components of Our Results of Operations 55 Results of Operations 58 Non-GAAP Financial Measures 60 Liquidity and Capital Resources 61 Contractual Obligations 63 Financing Arrangements 63 Critical Accounting Policies and Estimates 64 New Accounting Pronouncements 67
Overview
We startedMetromile based on the simple observation that the physical world is being increasingly digitized, that this digital data can be used to better estimate the future, and that the best opportunity to create value for everyday customers in an increasingly predictable world is to reinvent insurance, one of the largest and most important global markets. At its core, insurance financially protects the insured customer from the occurrence of specific future events. If these events can be more accurately estimated, using data and data science, then the insurance provided can be more accurately priced - lower likelihood events would cause the price of insurance to go down and higher likelihood events would cause the price of insurance to go up. The proliferation of sensor data, from cars, mobile phones, and elsewhere, means we have a greater ability to estimate the likelihood of future events and, thus, help many customerswho are overpaying for insurance save money. We foundedMetromile in 2011 to realize this opportunity and tackle the broken auto insurance industry. With data science as our foundation, we offer our insurance customers real time, personalized auto insurance policies, priced and billed by the mile, with rates based on precisely how and how much they actually drive, instead of using the industry standard approximations and estimates that make prices unfair for most customers. Through our digitally native offering, built around the needs of the modern driver, we believe our per-mile insurance policies save our customers, on average, 47% over what they were paying their previous auto insurer. We base this belief on data our customers self-reported in 2018 with respect to premiums paid to providers before switching toMetromile . We believe the opportunity for our personalized per-mile insurance product is significant.Federal Highway Administration data indicates that approximately 35% of drivers drive more than half the total miles driven. We believe there is a correlation between the number of miles driven and the number of insurable losses. AnOctober 2016 report by theInsurance Information Institute noted that the increase in claims frequency appears directly linked to the increase in the number of miles driven. Notwithstanding the relationship between miles driven and claims, auto insurance premiums have historically been priced based on a driver's "class" - and drivers are charged the same basic premium rate as others in their class no matter the actual miles driven. In the traditional pricing model, a driver's age, credit score, accident history, and geography influence the premium paid more than the actual miles driven. Thus, the 35% of driverswho account for more than half the total miles driven are not paying premiums based on how often they are behind the wheel and increasing the potential for an insurable loss claim. We believe the traditional pricing model is inherently unfair to the majority of drivers - the 65% of driverswho drive less than half the miles driven - as they are effectively subsidizing the minority of driverswho are high-mileage drivers. By offering auto insurance using a per-mile rate and then billing each customer monthly based on their actual miles driven, we are able to provide significant savings to the 65% of driverswho drive less than half the miles driven. Customers can simply use their connected car or use The Pulse to share their data with us - which includes miles driven, and in certain states where permitted by insurance regulators (four of the eight in which we currently operate), driving habits, such as phone use, speeding, hard-braking, accelerating, cornering, and location. Our customers are able to choose when and how to drive and share this information with us to realize these data driven savings every day. 50
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TheU.S. auto insurance market is massive, dominated by insurers stuck on legacy technology infrastructurewho offer antiquated services.U.S. personal auto insurers write approximately$250 billion of premiums each year, with no carrier currently achieving more than 20% market share. We believe we are strategically positioned to succeed as industry incumbents struggle to meet the significant structural changes underway in an increasingly digital world. The advent of mobile phones has revolutionized modern mobility, while connected and autonomous technologies are drastically changing consumer relationships. As we scale and accumulate more data, we believe that we can deliver increasingly better service, pricing and experiences for customers across all stages of the policy lifecycle. Additionally, with the per-mile insurance thatMetromile provides, customers are incentivized to drive less and choose more environmentally friendly transportation methods. We found that after customers switch to per-mile insurance, they tend to decrease their overall miles driven. Not only does this equate to a lower bill, but also a significant reduction in carbon emissions.
Recent Developments
OnNovember 8, 2021 , we entered into an Agreement and Plan of Merger (the "Agreement") with Lemonade, Inc., aDelaware corporation ("Lemonade"),Citrus Merger Sub A, Inc. , aDelaware corporation and a wholly-owned subsidiary of Lemonade ("Acquisition Sub I") andCitrus Merger Sub B, LLC , aDelaware limited liability company and wholly owned subsidiary of Lemonade ("Acquisition Sub II"), pursuant to which (i) Acquisition Sub I will merge with and intoMetromile (the "First Merger" and the effective time of the First Merger, the "First Effective Time"), withMetromile continuing as the surviving entity (the "Initial Surviving Corporation "), and (ii) theInitial Surviving Corporation will merge with and into Acquisition Sub II (the "Second Merger"), with Acquisition Sub II continuing as the surviving entity as a wholly owned subsidiary of Lemonade (the First Merger, the Second Merger and the other transactions contemplated by the Agreement, collectively, the "Proposed Transaction"). The Proposed Transaction implies a fully diluted equity value of approximately$500 million , or an enterprise value of about$340 million net of unrestricted cash and cash equivalents asSeptember 30, 2021 . In accordance with the Agreement, at the First Effective Time, each share of our common stock issued and outstanding immediately prior to the First Effective Time will be converted into the right to receive 0.05263 (the "Exchange Ratio") validly issued, fully paid and non-assessable shares of common stock of Lemonade, par value$0.00001 per share ("Lemonade Common Stock"). Although the applicable waiting period for the Proposed Transaction under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, has expired and we have received approval of the Proposed Transaction from our stockholders, the Proposed Transaction is conditioned on certain additional customary closing conditions, including receipt of applicable regulatory approvals, and is expected to close in the second quarter of 2022. For additional information related to the Proposed Transaction, please see Note 1, Basis of Presentation and Significant Accounting Policies to our consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K and our Current Report on Form 8-K filed with theSEC onNovember 9, 2021 as well as the proxy statement/prospectus filed with theSEC onDecember 29, 2021 . Our Model The traditional auto insurance industry is focused on charging customers static insurance rates based on a "class" of driver, which is determined based on a set of variables that approximate and estimate risk. The traditional approach requires little ongoing customer engagement and requires manual claims servicing, which results in lower gross margins. In contrast, our model is digitally native, automated, and built using predictive models. Our product provides customized rates for each individual driver, using telematics data and proprietary predictive models to assess risk and determine pricing for each customer, while billing customers based on their actual miles driven. We have automated the claims approval process, resulting in higher margins, and reduced fraud rates through real-time reporting from telematics devices, resulting in lower loss ratios. We have experienced strong growth since inception; however, our focus has been on prioritizing unit economics rather than solely focusing on revenue growth through increased net losses. Our priority has been on developing a durable business advantage. Total revenue increased from$35.1 million for the year endedDecember 31, 2020 to$104.9 million for the year endedDecember 31, 2021 . Our gross profit/(loss), defined as total revenue as adjusted for losses and LAE, policy servicing expense and other and amortization of capitalized software, and which is impacted by our reinsurance arrangements, increased from$(14.1) million for the year endedDecember 31, 2020 to$(15.2) million for the year endedDecember 31, 2021 . Our accident period contribution profit/(loss), a non-GAAP financial measure that excludes from gross profit/(loss) the results of prior period development on loss and LAE, decreased from$18.4 million for the year endedDecember 31, 2020 to$(3.5) million for the year endedDecember 31, 2021 , largely due to an increase in losses, despite an increase in direct written and earned premium for both periods. Accident period refers to the period in which the loss occurs, and estimates are made to determine the ultimate expected cost of that loss. These estimates are reassessed each subsequent period, and the movement from the initial estimate of that accident period is known as prior period development. We view accident period contribution margin as the most relevant metric of current product profitability and use accident period contribution margin to consistently evaluate the variable contribution to our business from insurance operations from period to period based on the most current product profitability. Contribution profit/(loss), a non-GAAP financial measure that includes the results of prior period development accident period contribution profit/(loss), decreased from$11.9 million for the year endedDecember 31, 2020 to$(5.6) million for the year endedDecember 31, 2021 largely due to unfavorable prior period loss development. We use contribution profit/(loss) as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from insurance operations from period to period. See the section entitled "- Non-GAAP Financial Measures" for additional information regarding our use of 51
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accident period contribution profit/(loss) and contribution profit/(loss)and a
reconciliation to the most comparable GAAP measure.
Reinsurance
We review our need to obtain reinsurance to help manage our exposure to property
and casualty insurance risks.
The reinsurance arrangement covering the periodsMay 1, 2017 toApril 30, 2018 andMay 1, 2018 toApril 30, 2019 covered 85% of our renewal policies and beginningMay 1, 2019 , the reinsurance arrangements expanded to also include new policies. In addition, under the reinsurance agreements from various years, LAE was ceded at a fixed rate ranging from 3% to 6% of ceded earned premium. In the first half of 2021, we commuted all of our reinsurance. We did not enter into new reinsurance agreements for the remainder of 2021. As management continuously monitors and seeks to maintain adequate capital levels at the insurance company level, a reinsurance agreement was entered into and effectiveJanuary 01, 2022 withSwiss Reinsurance America Corporation . On a prospective basis, under the terms of the transaction, 25% of the Company's gross written premiums, losses, and LAE related to its business is ceded to the reinsurer throughJune 30, 2023 . For more information, please see Note 22, Subsequent Events to our consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K As we change our reinsurance arrangements, whereby the terms and structures may vary widely, our prior results, impacted by reinsurance, may not be a good indicator of future performance, including the fluctuations experienced in gross profit. Thus, we use accident period contribution profit/(loss) and contribution profit/(loss) as key measures of our performance.
Key Performance Indicators
We regularly review key operating and financial performance indicators to
evaluate our business, measure our performance, identify trends in our business,
prepare financial projections and make strategic decisions. We believe these
non-GAAP financial and operational measures are useful in evaluating our
performance, in addition to our financial results prepared in accordance with
GAAP. See the section entitled "- Non-GAAP Financial Measures" for additional
information regarding our use of accident period contribution profit/(loss),
contribution profit/(loss), accident period loss ratio and accident period LAE
ratio and a reconciliation to the most comparable GAAP measures.
The following table presents these metrics as of and for the periods presented:
Years Ended
December 31,
2021 2020
($ in millions, except
for
Direct Earned Premium
per Policy)
Policies in Force (end of period) 98,416 92,635
Direct Earned Premium per Policy (annualized) $ 1,166 $ 1,092
Direct Written Premium $ 110.7 $ 100.6
Direct Earned Premium $ 111.1 $ 99.7
Gross Profit/(Loss) $ (15.2) $ (14.1)
Gross Margin (14.5) % (40.3) %
Accident Period Contribution Profit/(Loss) $ (3.5) $ 18.4
Accident Period Contribution Margin (3.1) % 18.1 %
Contribution Profit/(Loss) $ (5.6) $ 11.9
Contribution Margin (5.0) % 11.8 %
Direct Loss Ratio 78.4 % 57.7 %
Direct LAE Ratio 14.0 % 17.7 %
Accident Period Loss Ratio 75.1 % 57.4 %
Accident Period LAE Ratio 15.3 % 11.5 %
Policies in Force
We define policies in force as the number of current and active policyholders as
of the period end date. We view policies in force as an important metric to
assess our financial performance because policy growth drives our revenue
growth, increases brand awareness and market penetration, generates additional
data to continue to improve the performance of our platform, and provides key
data to assist strategic decision making for our company.
Direct Earned Premium per Policy
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We define direct earned premium per policy as the ratio of direct earned premium divided by the average policies in force for the period, presented on an annualized basis. We view premiums per policy as an important metric because it is a reliable indicator of revenue earned in any given period, and growth in this metric would be a clear indicator of the growth of the business. However, as evidenced by the substantial reduction in miles driven during the COVID-19 pandemic, near-term fluctuations in miles driven can lead to fluctuations in direct earned premium. Thus, we refer to policies in force as a more stable indicator of overall growth. Direct earned premium excludes the impact of premiums ceded to reinsurers such that it reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Additionally, premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we use.
Direct Written Premium
We define direct written premium as the total amount of direct premiums on policies that were bound during the period. Direct written premium is a standard insurance metric and is included here for consistency. However, given that much of our premium is written and earned as customer miles are driven (i.e., customers are billed based on true use), unlike our competitors that write all premium up-front, we believe earned premium is a more meaningful comparison to other insurers. Direct written premium excludes mileage-based premium that has not yet been earned. It also excludes the impact of premiums ceded to reinsurers such that it reflects the actual business volume and direct economic benefit generated from our customer acquisition efforts. Additionally, premiums ceded to reinsurers can change based on the type and mix of reinsurance structures we use. Direct Earned Premium We define direct earned premium as the amount of direct premium that was earned during the period. Premiums are earned over the period in which insurance protection is provided, which is typically six months. We view direct earned premium as an important metric because it allows us to evaluate our growth prior to the impact of ceded premiums to our reinsurance partners. It is the primary driver of our consolidated GAAP revenues and represents the result of our sustained customer acquisition efforts. As with direct written premium, direct earned premium excludes the impact of premiums ceded to reinsurers to manage our business, and therefore should not be used as a substitute for net earned premium, total revenue, or any other measure presented in accordance with GAAP.
Gross Profit/(Loss)
Gross profit/(loss) is defined as total revenue minus losses and LAE, policy servicing expense and other, and amortization of capitalized software. Gross margin is equal to gross profit/(loss) divided by total revenue. Gross profit/(loss) includes the effects of reinsurance, thereby increasing volatility of this measure without corresponding changes in the underlying business or operations.
Contribution Profit/(Loss) and Accident Period Contribution Profit/(Loss)
Contribution profit/(loss), a non-GAAP financial measure, is defined as gross profit/(loss), excluding the effects of reinsurance arrangements on both total revenue and losses and LAE and excludes enterprise software revenues, investment income earned at the holding company, amortization of internally developed software, and devices, while including bad debt, report costs and other policy servicing expenses. Accident period contribution profit/(loss), a non-GAAP financial measure, further excludes the results of prior period development on losses and LAE. We believe the resulting calculations are inclusive of the variable costs of revenue incurred to successfully service a policy, but without the volatility of reinsurance. We use contribution profit/(loss) as a key measure of our progress towards profitability and to consistently evaluate the variable contribution to our business from insurance operations from period to period because it is the result of direct earned premiums, plus investment income earned at the insurance company, minus direct losses, direct LAE, premium taxes, bad debt, payment processing fees, data costs, underwriting reports, and other costs related to servicing policies. Accident period contribution profit/(loss) further excludes the results of prior period development on loss and LAE, thereby providing the most accurate view of the performance of our underlying insurance product, which drives our growth investment decisions and is a strong indicator of future loss performance. See the section entitled "- Non-GAAP Financial Measures" for a reconciliation of total revenue to accident period contribution profit/(loss) and contribution profit/(loss).
Contribution Margin and Accident Period Contribution Margin
Contribution margin, a non-GAAP financial measure, is defined as contribution
profit/(loss) divided by adjusted revenue. Adjusted revenue, a non-GAAP
financial measure, is defined as total revenue, excluding the net effect of our
reinsurance arrangements, revenue attributable to our enterprise segment,
interest income generated outside of our insurance company, and bad debt
expense. We view contribution margin as an important metric because it most
closely correlates to the economics of our core underlying insurance product and
measures our progress towards profitability. Accordingly, we use this non-GAAP
financial measure to consistently evaluate the variable contribution to our
business from insurance operations from period to period. Accident period
contribution margin, a non-GAAP financial measure, is defined as accident period
contribution profit/(loss) divided by adjusted revenue. We view accident period
contribution margin as an important metric as it excludes the results of prior
period development on loss and LAE, thereby providing the most meaningful view
of the performance of our current underlying insurance product, which drives our
growth investment decisions and is a strong indicator of future loss
performance.
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See the section entitled "- Non-GAAP Financial Measures" for a reconciliation of total revenue to contribution profit/(loss) and accident period contribution profit/(loss).
Direct and Accident Period Loss Ratio
We define direct loss ratio expressed as a percentage, as the ratio of direct losses to direct earned premium. Direct loss ratio excludes LAE. We view direct loss ratio as an important metric because it allows us to evaluate losses and LAE separately prior to the impact of reinsurance. We define accident period loss ratio as direct loss ratio excluding prior accident period development on losses. We view accident period loss ratio as an important metric because it allows us to evaluate the expected ultimate losses, including losses not yet reported, for the most recent accident period.
Direct and Accident Period LAE Ratio
We define direct LAE ratio expressed as a percentage, as the ratio of direct LAE to direct earned premium. We view the direct LAE ratio as an important metric because it allows us to evaluate losses and LAE separately prior to the impact of reinsurance. We actively monitor the direct LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy. We define the accident period LAE ratio as the direct LAE ratio excluding prior quarter development on LAE. We view accident period LAE ratio as an important metric because it allows us to evaluate the expected ultimate LAE, including LAE for claims not yet reported, for the most recent accident period.
Business Combination with INSU
InFebruary 2021 , we completed the Merger, pursuant to whichMetromile Operating Company (formerlyMetroMile, Inc. ) became our wholly owned direct subsidiary. The Merger was accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, although INSU was the legal acquirer, INSU is treated as the "acquired" company for financial reporting purposes andMetromile Operating Company is treated as the accounting acquirer. This determination was primarily based on the fact thatMetromile Operating Company's stockholders prior to the Merger have a majority of our voting power,Metromile Operating Company's senior management now comprise substantially all of our senior management, the relative size ofMetromile Operating Company compared to our company, and thatMetromile Operating Company's operations comprise our ongoing operations. Accordingly, for accounting purposes, the Merger is treated as the equivalent of a capital transaction in whichMetromile Operating Company issued stock for our net assets, which are stated at historical cost, with no goodwill or other intangible assets recorded, andMetromile Operating Company's financial statements became the Company's financial statements.
In connection with the Business Combination, we received approximately
million
herein. We expect to use our cash on hand for working capital and general
corporate purposes. We may also use the proceeds for the acquisition of, or
investment in, technologies, solutions, or businesses that complement our
business.
COVID-19 Impact
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business. We have taken measures in response to the ongoing COVID-19 pandemic, including closing our offices and implementing a work from home policy for our nationwide workforce; implementing additional safety policies and procedures for our employees; and suspending employee travel and in-person meetings. We may take further actions that alter our business operations as may be required by federal, state, or local authorities or that we determine are in the best interests of our employees, customers, and stockholders. For the year endedDecember 31, 2021 , we generated$111.1 million in direct earned premium, an increase of$11.4 million or 11%, as compared to$99.7 million for the year endedDecember 31, 2020 . This increase was partially due to a year-over-year increase in direct earned premium per policy, which is a reflection of miles driven. Based on internal data, average daily miles driven increased by 19% from 2020 to 2021. We believe that the potential long-term impacts of COVID-19, as more companies embrace work from home policies, represent an opportunity for us to increase our customer base as drivers continue to look for value-driven insurance solutions that provide the same or a better quality product that aligns to their own driving behaviors. The future impact of the COVID-19 pandemic on our operational and financial performance will depend on certain developments, including the duration and spread of the pandemic, impact on our customers and their spending habits, impact on our marketing efforts, and effect on our suppliers, all of which are uncertain. Public and private sector policies and initiatives to reduce the transmission of COVID-19 and disruptions to our operations and the operations of our third-party suppliers, along with the related global slowdown in economic activity, may result in decreased revenues and increased costs. Impacts on our revenue and costs may continue through the duration of this crisis. It is possible that the COVID-19 pandemic, the measures taken by federal, state, or local authorities and businesses affected and the resulting economic impact may materially and adversely affect our business, results of operations, cash flows and financial positions as well as our customers. 54
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Key Factors and Trends Affecting our Operating Performance
Our financial condition and results of operations have been, and will continue
to be, affected by a number of factors, including the following:
Our Ability to Attract New Customers
Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform. Our growth strategy is centered around accelerating our existing position in markets that we already serve, expanding into new markets nationally acrossthe United States , developing new strategic partnerships with key players in the automotive industry, and growing our enterprise software sales.
Our Ability to Retain Customers
Turning our customers to lifetime customers is key to our success. We realize increasing value from each customer retained as a recurring revenue base, which forms a basis for organic growth for our new product offerings and improves our loss ratios over time. Our ability to retain customers will depend on a number of factors, including our customers' satisfaction with our products, offerings of our competitors and pricing of our products.
Our Ability to Expand Nationally Across the United States
Our long-term growth opportunity will benefit from our ability to provide insurance across more states inthe United States . Today, we are licensed in 49 states and theDistrict of Columbia , with licenses active in 46 states and theDistrict of Columbia , and writing business in eight states. We plan to apply our highly scalable model nationally, with a tailored approach to each state, driven by the regulatory environment and local market dynamics. This will allow us to expand rapidly and efficiently across different geographies while maintaining a high level of control over the specific strategy within each state.
Our Ability to Introduce New and Innovative Products
Our growth will depend on our ability to introduce new and innovative products that will drive the organic growth from our existing customer base as well as from potential customers. Our insurance offerings as well as our technology platform offered to enterprise customers provides us with a foundation to provide a broad set of insurance products to consumers in the future.
Our Ability to Manage Risk Through Our Technology
Risk is managed through our technology, artificial intelligence, and data science, which we utilize to accurately determine the risk profiles of our customers. Our ability to manage risk is augmented over time as data is continuously collected and analyzed by our machine learning with the objective of lowering our loss ratios over time. Our success depends on our ability to adequately and competitively price risk.
Our Ability to Manage Risks Related to Severe Weather Events and Climate Change
Both seasonal and severe weather events impact the level and amount of claims we receive. These events, as well as climate change and its potential impact on weather patterns, include hurricanes, wildfires, coastal storms, winter storms, hailstorms, and tornados.
Components of Our Results of Operations
Revenue
Revenues are generated primarily from the sale of our pay-per-mile auto insurance policies withinthe United States , revenue related to policy acquisition costs recovered as part of the reinsurance arrangement, and through sales of our proprietary AI claims platform. Revenue excludes premiums ceded to reinsurers (see the section entitled "- Reinsurance" for further information).
Premiums Earned, net
Premiums earned, net represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under any reinsurance agreements. Revenue from premiums is earned over the term of the policy, which is written for six-month terms. The premium for the policy provides for a base rate per month for the entire policy term upon the binding of the policy plus a per-mile rate multiplied by the miles driven each day (based on data from the telematics device, subject to a daily maximum).
Investment Income
Investment income represents interest earned from our fixed maturity and
short-term investments less investment expenses and is recorded as the income is
earned. Investment income is directly correlated with the size of our investment
portfolio and with the market level of interest rates. In the near future, we do
not intend to pursue an aggressive investment strategy and therefore do not
expect an increase in investment income. However, we intend to complement our
underwriting results with investment profits on an opportunistic basis.
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Table of Contents Other Revenue Other revenue consists of Enterprise revenue, revenue related to policy acquisition costs recovered as part of a reinsurance arrangement with reinsurance partners, reinsurance profit commissions based on performance of the ceded business, gain on reinsurance commutation and policy commissions earned from NGI. We have developed technologies intended for internal use to service our insurance business and have started offering our technologies to third-party insurance carriers. Enterprise revenue represents revenues generated from the licensing of such internally developed software on a subscription basis, and sales of our professional services, which includes customization and implementation services for customers. We also earned revenues from policy acquisition costs recovered for policies newly ceded to our reinsurance partners, and we earn commissions for policies underwritten by NGI prior to becoming a full-stack insurance carrier in 2016.
Costs and Expenses
Our costs and expenses consist of losses and LAE, policy servicing expense and other, sales, marketing, and other acquisition costs, research and development, amortization of capitalized software, and other operating expenses.
Losses and LAE
Our losses and LAE consist of the net cost to settle claims covered by the policies we issued. Losses consist of claims paid, case reserves, as well as claims incurred but not reported, net of estimated recoveries from salvage and subrogation. LAE consists of costs borne at the time of investigating and settling a claim. Losses and LAE represents management's best estimate of the ultimate net cost of all reported and unreported losses occurred through the balance sheet date. Estimates are made using individual case-basis valuations and statistical analyses and are continually reviewed and adjusted as necessary as experience develops or new information becomes known. These reserves are established to cover the ultimate cost to settle insured losses. Both losses and LAE are net of amounts ceded to reinsurers. We evaluate whether to enter into reinsurance contracts to protect our business from losses due to concentration of risk and to manage our operating leverage ratios, as well as to provide additional capacity for growth. Our reinsurance contracts have historically consisted of quota-share reinsurance agreements with our reinsurance partners under which risks are covered on a pro-rata basis for all policies underwritten by us. All reinsurance has been commuted as ofDecember 31, 2021 (see the section entitled "- Reinsurance" for further discussion). As ofJanuary 1, 2022 , the Company entered into a new reinsurance agreement. For additional information, see Note 22, Subsequent Events to our consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K. Losses and LAE are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks. Losses and LAE may be paid out over a period of years. Various other expenses incurred during claims processing are allocated to LAE. These amounts include claims adjusters' salaries and benefits, employee retirement plan related expenses and stock-based compensation expenses (Personnel Costs); software expenses; and overhead allocated based on headcount (Overhead).
Policy Servicing Expense and Other
Policy servicing expense and other includes personnel costs related to our technical operations and customer experience teams, data transmission costs, credit card and payment processing expenses, premium taxes, and amortization of telematics devices. Policy servicing expense and other is expensed as incurred.
Sales, Marketing and Other Acquisition Costs
Sales, marketing, and other acquisition costs includes spend related to
advertising, branding, public relations, third-party marketing, consumer
insights, reinsurance ceding commissions, and expense recognized due to return
of onboarding allowance as part of reinsurance commutations. These expenses also
include related personnel costs and overhead. We incur sales, marketing and
other acquisition costs for all product offerings including our newly introduced
software as a service ("SaaS") platform which provides access to our developed
technology under SaaS arrangements, along with professional services to
third-party customers ("Enterprise business solutions"). Sales, marketing and
other acquisition costs are expensed as incurred, except for costs related to
deferred acquisition costs that are capitalized and subsequently amortized over
the same period in which the related premiums are earned. We plan to continue
investing in marketing to attract and acquire new customers and increase our
brand awareness. We expect that sales and marketing expenses will vary from
period-to-period as a percentage of revenue in the near-term. We expect that, in
the long-term, our sales, marketing and other acquisition costs will decrease as
a percentage of revenue as the proportion of renewals to our total business
increases.
Research and Development
Research and development consist of costs that support our growth and expansion
initiatives inclusive of website development costs, software development costs
related to our mobile app and Enterprise business solution, and new product
development costs. These costs include third-party services related to data
infrastructure support; personnel costs and overhead for product design,
engineering, and management; and amortization of internally developed software.
Research and development costs are expensed as incurred, except for costs
related to internally developed software that are capitalized and subsequently
amortized over the expected useful life. We expect that research and development
expenses will increase in both absolute dollars and percentage of revenues in
future periods in the near-term. We expect
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that, in the long-term, our research and development expenses will decrease as a
percentage of revenue as these represent largely fixed costs.
Amortization of
Amortization of capitalized software relates to the amortization recorded for
the capitalized website and software development costs for the period presented.
Other Operating Expenses
Other operating expenses primarily relate to personnel costs and overhead for corporate functions, external professional service expenses and depreciation expense for computers, furniture, and other fixed assets. General and administrative expenses are expensed as incurred.
We expect to incur incremental operating expenses to support our operational
growth and enhancements to support our reporting and planning functions.
We expect to incur significant additional operating expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of theNasdaq Capital Market, additional corporate, director and officer insurance expenses, greater investor relations expenses and increased legal, audit and consulting fees. We also expect to continue to increase the size of our accounting, finance, and legal teams to support our increased compliance requirements and the growth of our business. As a result, we expect that our other operating expenses will increase in absolute dollars and percentage of revenues in future periods in the near-term. We expect that, in the long-term, our other operating expenses will decrease as a percentage of revenue as these represent largely fixed costs.
Interest expense
Interest expense primarily relates to interest incurred on our long-term debt,
the amortization of debt issuance costs.
Impairment on digital assets
Impairment on digital assets relates to losses that occur when the fair value of the digital asset at the time of measurement (the balance sheet reporting date) is less than its carrying value.
Increase in fair value of stock warrant liability
Increase in fair value of stock warrant liability primarily relates to changes
in the fair value of warrant liabilities.
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Table of Contents Results of Operations
Comparison of the years ended
The following table presents our consolidated statement of operations for the years endedDecember 31, 2021 and 2020, and the dollar and percentage change between the two periods: Years Ended December 31, 2021 2020 $ Change % Change Revenue Premiums earned, net$ 75,601 $ 12,464 $ 63,137 507 % Investment income 117 523 (406) (78) % Other revenue 29,179 22,077 7,102 32 % Total revenue 104,897 35,064 69,833 199 % Costs and expenses Losses and loss adjustment expenses 88,467 21,208 67,259 317 % Policy servicing expense and other 20,304 16,813 3,491 21 % Sales, marketing and other acquisition costs 102,989 5,483 97,506 1778 % Research and development 16,027 8,211 7,816 95 % Amortization of capitalized software 11,306 11,188 118 1 % Other operating expenses 63,510 16,981 46,529 274 % Total costs and expenses 302,603 79,884 222,719 279 % Loss from operations (197,706) (44,820) (152,886) 341 % Other expense Interest expense 15,974 6,067 9,907 163 % Impairment on digital assets 183 - 183 NM Increase in fair value of stock warrant liability 2,596 69,294 (66,698) (96) % Total other expense 18,753 75,361 (56,608) (75) % Net loss before taxes (216,459) (120,181) (96,278) 80 % Income tax benefit - (84) 84 (100) % Net loss after taxes$ (216,459) $ (120,097) $ (96,362) 80 % Revenue Premiums Earned, net Net premiums earned increased$63.1 million , or 507%, from$12.5 million for the year endedDecember 31, 2020 to$75.6 million for the year endedDecember 31, 2021 , which was primarily attributable to a$51.7 million decrease in premiums ceded to our reinsurance partners, and a$11.4 million increase in direct earned premium. The decrease of$51.7 million in premiums ceded to our reinsurance partners was driven largely by reinsurance commutation. Direct earned premium increased by$11.4 million from$99.7 million for the year endedDecember 31, 2020 to$111.1 million for the year endedDecember 31, 2021 . The increase in direct earned premiums was primarily attributable to an increase in policies in force during the year endedDecember 31, 2021 as well as increase in miles driven during the same period due, in part, to COVID-19 shelter-in-place restrictions in the comparative period, which generally began inMarch 2020 . We believe direct earned premium is the best measure of top-line revenue, as it excludes the impacts of reinsurance.
Investment Income
Investment income decreased$0.4 million , or 78%, from$0.5 million for the year endedDecember 31, 2020 to$0.1 million for the year endedDecember 31, 2021 . The decrease was primarily due to lower interest rates, partially offset by a higher average level of fixed maturity investments.
Other Revenue
Other revenue increased$7.1 million , or 32%, from$22.1 million for the year endedDecember 31, 2020 to$29.2 million for the year endedDecember 31, 2021 . The increase was primarily attributable to a$19.4 million gain recognized on reinsurance commutation settlement in the first half of 2021, partially offset by a$11.2 million decrease in revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program and reinsurance profit 58
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commission. A substantial portion of Enterprise business solutions revenue was from one customerwho was an investor and therefore a related party, as described in Note 20 of the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Costs and Expenses
Losses and LAE
Losses and LAE increased$67.3 million , or 317%, from$21.2 million for the year endedDecember 31, 2020 to$88.5 million for the year endedDecember 31, 2021 . Ceded losses and LAE decreased$39.3 million as a result of commuting all of our reinsurance programs and thereby retaining more losses. Direct losses and LAE increased by$28.0 million , driven by an overall increase in claims costs due to an increase in claims severity observed industry-wide and a reserve adjustment. Additionally, losses in the year endedDecember 31, 2021 include the impacts from Hurricane Ida and severe storms in several regions ofthe United States .
Policy Servicing Expense and Other
Policy servicing expense and other increased$3.5 million , or 21%, from$16.8 million for the year endedDecember 31, 2020 to$20.3 million for the year endedDecember 31, 2021 . The increase was primarily attributable to telematics device write-offs as a result of our upgrade from the use of 3G technology which accounted for$1.4 million of the increase and, to a lesser extent, an increase in our customer experience and other policy servicing personnel related expenses to support our growth objectives. Partially offsetting the increases, were decreased data costs in 2021 by$0.1 million as the upgrade to 4G corresponds to more economical hardware costs.
Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased$97.5 million from$5.5 million for the year endedDecember 31, 2020 to$103.0 million for the year endedDecember 31, 2021 . Of this increase,$66.7 million was reinsurance-related including the commutation settlement and impact to the ceding commission offset. During the year endedDecember 31, 2021 , we commuted all of our reinsurance programs. As a result of the commutations, we recorded a gain of$19.4 million recorded in Other Revenue as well as Sales, Marketing, and Other Acquisition Cost expense of$58.4 million related to a return of revenues from policy acquisition costs recovered for policies onboarded into our reinsurance program. Further resulting from the commutation settlement, was a decrease of$8.4 million in reinsurance ceding commission which serves as an offset to sales and marketing expense. Aside from reinsurance related impacts, as part of our typical marketing efforts, there was an increase of$26.4 million in both our online and offline marketing campaigns. On the sales side, there was a marginal increase in sales costs due to the use of independent agents for the first time in 2021. Research and Development Research and development increased$7.8 million , or 95%, from$8.2 million for the year endedDecember 31, 2020 to$16.0 million for the year endedDecember 31, 2021 . The increase was primarily attributable to employee personnel costs related to our expansion initiatives in the engineering and technology areas of approximately$6.8 million , and an increase in stock compensation expense for related departments of$3.3 million , partially offset by a decrease of$2.2 million in capitalized software costs which serves as an offset to research and development expense.
Amortization of
Amortization of capitalized software increased$0.1 million , or 1%, from$11.2 million for the year endedDecember 31, 2020 to$11.3 million for the year endedDecember 31, 2021 . The increase was primarily related to the amortization of our website development costs and capitalized costs related to internal use software.
Other Operating Expenses
Other operating expenses increased$46.5 million , or 274%, from$17.0 million for the year endedDecember 31, 2020 to$63.5 million for the year endedDecember 31, 2021 . The increase was primarily driven by an increase of$27.4 million in director's, officers', and employees' stock-based compensation expense,$15.2 million increase in general and administrative costs as a result of operating as a public company, including expenses related to compliance with the rules and regulations of theSEC and the listing standards of the Nasdaq Capital Market, additional corporate, director and officer insurance expenses, and increased legal, audit and consulting fees, and$3.5 million transaction costs incurred in 2021 in connection with an intended merger with Lemonade.
Interest Expense
Interest expense increased$9.9 million , or 163%, from$6.1 million for the year endedDecember 31, 2020 to$16.0 million for the year endedDecember 31, 2021 . The increase was primarily attributable to a$14.1 million non-recurring write off of unamortized debt issuance costs and debt prepayment fees related to debt payoff during the year endedDecember 31, 2021 . As ofDecember 31, 2021 , all debt had been repaid and no outstanding debt remains on the balance sheet. 59
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Table of Contents Impairment on digital assets Impairment on digital assets in the 2021 period relates to subsequent losses arising from changes in the fair market value on acquired digital assets initially accounted for at cost. For more information, see Note 8, Digital Assets, Net to our consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K.
Increase in fair value of stock warrant liability
Fair value of stock warrant liability decreased$66.7 million from$69.3 million for the year endedDecember 31, 2020 to$2.6 million for the year endedDecember 31, 2021 . The decrease was primarily driven by the change in fair value of our preferred stock warrants issued inApril 2020 and exercised inFebruary 2021 and public and private placement warrants as described in Note 2 of the consolidated financial statements included in Part II, Item 8, of this Annual Report on form 10-K. Non-GAAP Financial Measures The non-GAAP financial measures below have not been calculated in accordance with GAAP, and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, accident period contribution profit/(loss) and contribution profit/(loss) should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that these non-GAAP measures fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies. Our management use these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (1) monitor and evaluate the performance of our business operations and financial performance; (2) facilitate internal comparisons of the historical operating performance of our business operations; (3) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (4) review and assess the operating performance of our management team; (5) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (6) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. 60
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The following table provides a reconciliation of total revenue to contribution
profit/(loss) and accident period contribution profit/(loss) for the periods
presented:
Years Ended
December 31,
2021 2020
($ in millions)
Total revenue 104.9 35.1
Losses and LAE (88.5) (21.2)
Policy servicing expense and other (20.3) (16.8)
Amortization of capitalized software (11.3) (11.2)
Gross profit/(loss) (15.2) (14.1)
Gross margin (14.5) % (40.3) %
Less revenue adjustments:
Revenue Adjustments Related to Reinsurance 9.6 69.5
Revenue from Enterprise Segment (4.9) (5.7)
Interest Income and Other 2.4 2.4
Less costs and expense adjustments:
Loss and LAE Adjustments Related to Reinsurance (14.7) (54.0)
Loss and LAE Adjustments Related to Prior Period Development 2.1 6.5
Bad Debt, Report Costs and Other Expenses 0.5 (1.1)
Amortization of Internally Developed Software 11.3 11.2
Devices 5.4 3.7
Accident period contribution profit/(loss) $ (3.5) $ 18.4
Prior Period Development $ (2.1) $ (6.5)
Contribution profit/(loss) $ (5.6) $ 11.9
Total revenue $ 104.9 $ 35.1
Revenue adjustments 7.1 66.2
Adjusted revenue $ 112.0 $ 101.3
Accident period contribution margin (3.1) % 18.1 %
Contribution margin (5.0) % 11.8 %
Liquidity and Capital Resources
We are a holding company that transacts a majority of our business through operating subsidiaries. Through our insurance subsidiaries, we sell pay-per-mile auto insurance policies to customers and through our Enterprise subsidiary, we sell our insurance solution technology to third-party insurance carriers. From inception through completion of the Merger, we financed our operations primarily through sales of insurance policies, sales of our Enterprise platform, and the net proceeds received from the issuance of preferred stock, debt, and sales of investments. As ofDecember 31, 2021 , we had$120.9 million in unrestricted cash and cash equivalents compared to unrestricted cash and cash equivalents of$19.2 million as ofDecember 31, 2020 . Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist ofU.S. treasury securities, municipal securities, corporate debt securities, residential and commercial mortgage-backed securities, and other debt obligations. Insurance companies inthe United States are also required by state law to maintain a minimum level of capital and surplus. Insurance companies are subject to certain RBC requirements as specified by NAIC. These standards for property and casualty insurers are used as a means of monitoring the financial strength of insurance companies. Under these requirements, the amount of capital and surplus maintained by an insurance company is to be determined based on the various risk factors related to it. Such regulation is generally for the protection of the policyholders rather than stockholders. As ofDecember 31, 2021 andDecember 31, 2020 , our capital and policyholders' surplus exceeded the minimum RBC requirements. We believe that our existing cash and cash equivalents, marketable securities, and cash flow from operations will be sufficient to support working capital and capital expenditure requirements for at least the next 12 61
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months. Our future capital requirements will depend on many factors, including
our insurance premium growth rate, renewal activity, including the timing and
the amount of cash received from customers, the timing and extent of spending to
support development efforts, the introduction of new and enhanced products, the
continuing market adoption of offerings on our platform, and the current
uncertainty in the global markets resulting from the worldwide COVID-19
pandemic.
Our principal sources of liquidity are funds generated by operating activities,
and available cash and cash equivalents, subject to the limitations set forth in
the merger agreement related to the Proposed Transaction.
The following table summarizes our cash flow data for the periods presented:
Years Ended
December 31,
2021 2020
($ in millions)
Net cash used in operating activities $ (95.1) $
(32.2)
Net cash (used in) provided by investing activities
Net cash provided by financing activities
$ 273.5 $ 37.7
Operating Activities
Net cash used in operating activities for the year endedDecember 31, 2021 was$95.1 million , which was an increase of net cash used of$62.9 million from$32.2 million for the year endedDecember 31, 2020 . Cash used during this period included$144.3 million from net loss for the year endedDecember 31, 2021 , excluding the impact of changes in fair value of our outstanding warrants, depreciation expense and stock-based compensation and other non-cash expenses. Net cash provided by changes in our operating assets and liabilities increased by$51.5 million , which is primarily attributable to ceded reinsurance premiums, reinsurance recoverable on unpaid losses, accounts payable and accrued expense, prepaid reinsurance premium, premiums receivable which outpaced reinsurance recoverable on paid losses, partially offset by an increase in paid claims on loss and LAE reserves year over year. Net cash used in operating activities for the year endedDecember 31, 2020 was$32.2 million . Cash used during this period included$29.8 million from net loss for the year endedDecember 31, 2020 , excluding the impact of changes in fair value of our outstanding warrants, depreciation expense and stock-based compensation and other non-cash expenses. Net cash provided by changes in our operating assets and liabilities decreased by$2.4 million , which is primarily attributable to ceded reinsurance premiums, reinsurance recoverable on unpaid losses, accounts payable and accrued expense, prepaid reinsurance premium, premiums receivable which outpaced reinsurance recoverable on paid losses, prepaid expenses and other, unearned premium reserve, and loss and LAE reserves.
Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2021 was$64.8 million compared to net cash provided by investing activities of$1.8 million during the year endedDecember 31, 2020 , which was primarily driven by a change from net proceeds to net payments for securities, as well as continued investment in our website and software development, partially offset by a decline in investment in telematics devices, leasehold improvements, and other equipment. Financing Activities Net cash provided by financing activities for the year endedDecember 31, 2021 was$273.5 million compared to$37.7 million in cash provided by financing activities for the year endedDecember 31, 2020 . InFebruary 2021 , the Company completed a business combination (the "Merger") withINSU Acquisition Corp. II ("INSU"), where theMetromile merged with a wholly-owned subsidiary of INSU, withMetromile surviving the Merger as a wholly-owned subsidiary of INSU. The increase in cash provided by financing activities is primarily due to cash received from the trust account and the private placements in connection with the Merger. 62
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Table of Contents Contractual Obligations
The following is a summary of material contractual obligations and commitments
as of
Total 2022 2023 - 2024 2025 - 2026 Thereafter
(in millions)
Long-term debt $ - $ - $ - $ - $ -
Interest on long-term debt - - - - -
Operating Leases 18.9 2.2 4.9 3.8 8.0
Purchase Commitments 3.3 3.3 - - -
Total $ 22.2 $ 5.5 $ 4.9 $ 3.8 $ 8.0
Financing Arrangements
Subordinated Note Purchase and Security Agreement
InApril 2020 , we entered into the Note Purchase Agreement with Hudson, which was amended inFebruary 2021 to reflect the consummation of the Merger by adding INSU as a guarantor and reflecting our new corporate structure. An executive of Hudson is on our board of directors and is a related party, as discussed in Note 20 of the consolidated financial statements included in Part II, Item 8, of this Annual Report on Form 10-K. Under the Note Purchase Agreement, we could issue up to$50.0 million in aggregate principal amount of senior secured subordinated PIK notes due in 2025 (the "Notes"). The Note Purchase Agreement further provided for additional funds of up to an aggregate of$15.0 million over time from Hudson, the timing of which was subject to reinsurance settlement timing. Notes issued under the Note Purchase Agreement were due on the fifth anniversary of their issuance, starting inApril 2025 , and bore interest at the following rates: 2% per annum payable quarterly in arrears in cash, and a varying interest rate of 9.0% to 11.0% PIK interest. The PIK interest was based on the aggregate outstanding principal balance as follows: (i) 11.0% if the outstanding balance was less than$5.0 million ; (ii) 10.0% if the outstanding balance was greater than or equal to$5.0 million but less than$10.0 million , and (iii) 9.0% if the outstanding balance was greater than or equal to$10.0 million . PIK interest represents contractually deferred interest that was added to the principal balance outstanding each quarter and due at maturity. The Notes were secured by substantially all of our assets. We had the right to prepay the Notes at any time subject to payment of a fee. As ofDecember 31, 2020 ,$31.6 million aggregate principal amount of the Notes was outstanding, along with$0.9 million of capitalized PIK interest. Subsequent toDecember 31, 2020 , we issued additional Notes having an aggregate principal amount of$2.0 million . As ofMarch 30, 2021 , there was approximately$36.6 million of principal and PIK interest outstanding under theHudson debt facility, which we repaid on such date, along with the prepayment fee of$0.4 million . Accordingly, there are no longer any Notes outstanding. As part of the entry into the original Note Purchase Agreement, we issued warrants for up to 8,536,938 of Series E convertible preferred shares, which we estimated to have a fair value of$12.5 million at issuance, which was recorded as a discount to the debt and is being amortized to interest expense over the term of the debt. These warrants were net exercised immediately prior to the consummation of the Business Combination with INSU and are no longer outstanding.
Paycheck Protection Program Loan
InApril 2020 , we were granted a loan under the Paycheck Protection Program offered by theSmall Business Administration under the CARES Act, section 7(a)(36) of the Small Business Act for approximately$5.9 million . The balance outstanding for the Paycheck Protection Program loan was$5.9 million atDecember 31, 2020 . We repaid this loan concurrent with the consummation of the Business Combination with INSU and it is no longer outstanding as ofDecember 31, 2021 .
2019 Loan and Security Agreement
InDecember 2019 , we entered into a Loan and Security Agreement (the "2019 Loan and Security Agreement") with us, as borrower, certain of our subsidiaries, as guarantors and certain affiliates ofMultiplier Capital, LLC and other financial institutions, as lenders and agent, providing for a term loan in aggregate principal amount of$25.0 million . Minimum payments of interest were due monthly throughDecember 2021 . Beginning inJanuary 2022 , equal payments of principal would have been due monthly in an amount necessary to fully amortize the loan byJune 5, 2024 . An end of term payment of$0.6 million was due at maturity or date of any prepayment. The loan was secured by substantially all of our and the guarantor's assets. Lender's consent was required to be obtained regarding certain dispositions, and changes in business, management, or ownership including mergers and acquisitions, such as the Merger, as more fully described in the 2019 Loan and Security Agreement. The balance outstanding net of debt issuance costs for the 2019 Loan and Security Agreement was$24.3 million as ofDecember 31, 2020 . The loan could be prepaid in an amount equal to the outstanding principal, accrued interest, and the end of term fee, plus a prepayment charge of 3% if paid in the first two years after the effective date, 2% if paid in the third year after the 63
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effective date, or 1% if prepaid after the third year subsequent to the
effective date. Accordingly, we prepaid this loan in connection with the
consummation of the Merger and is no longer outstanding.
At the time of origination, the lender was granted a warrant to purchase Series E convertible preferred stock, estimated to have a fair value of$0.5 million at issuance. These warrants were net exercised immediately prior to the consummation of the Business Combination with INSU and are no longer outstanding as ofDecember 31, 2021 . Critical Accounting Policies Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and LAE, premium write-offs, and share-based compensation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We believe that the accounting policies described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 1, Basis of Presentation and Significant Accounting Policies, to the audited consolidated financial statements included elsewhere in this Form 10-K.
Unpaid Losses and LAE Reserves
Unpaid losses and LAE reserves are the difference between the estimated ultimate cost of losses and LAE and the amount of paid losses and LAE as of the reporting date. These reserves reflect our management's best estimate for both reported claims and incurred but not reported claims and the reserves include estimates of all expenses associated with processing and settling all reported and unreported claims. Our management regularly reviews the reserve estimates and updates those estimates as new information becomes available or as events emerge that may affect the resolution of unsettled claims. Losses and LAE reserves are estimated based on the assumption that past-experience is an appropriate indicator of future events. Updates made to reserve estimates based on new information may cause changes in prior reserve estimates. These changes are recorded as Loss and LAE in the period such changes are determined. Estimating the ultimate cost of claims and claims expenses is an inherently complex process that involves a high degree of judgment. The estimate of unpaid losses and LAE reserves utilizes several key judgmental inputs:
•the determination of the appropriate actuarial estimation methods to be applied
to outstanding claims,
•estimations of claims cycle times and claims settlement practices,
•estimates of expected losses through the use of historical loss data, and
•broader macroeconomic assumptions such as expectations of future inflation
rates.
Claims are classified based the year in which the claims occurred ("accident
year"). This classification is utilized within actuarial models to prepare
estimates of required reserves for payments to be made in the future. Claim
cycle times, or the speed of claim to claim settlement, vary and depend on the
type of claim being reported; property damage as compared to personal injury
claims. Claims involving property damage are generally settled faster than
personal injury claims. It has been our management's experience that the longer
the cycle time, the more the ultimate settlement amount can vary. Historical
loss patterns are then applied to actual paid losses and reported losses by
accident year to develop expectations of future payments. Implicit within the
actuarial models are the impacts of inflation, especially for claims with longer
expected cycle times. See Note 9, Loss and Loss Adjustment Expense Reserves, to
our audited consolidated financial statements included elsewhere in this
prospectus for more information regarding the methodologies used to estimate
loss and LAE reserves.
Considerable variability is inherent in these estimates, which may have a
material impact on the ultimate liability. The aggregation of numerous estimates
for each of the major components of losses and groups of states as well as other
considerations such as trends in claim frequency and severity, regulatory and
judicial environments, allocations of ceded amounts in accordance with
reinsurance agreements, and driving behavior including miles driven, may impact
reported losses and IBNR. Reserve estimates are inherently very complex to
determine and subject to significant judgment, and do not represent an exact
determination for each outstanding claim. Due to the inherent uncertainty in
estimating reserves, we evaluated what the potential impact on consolidated
results of operations, financial position, and liquidity would be based on a
hypothetical 10% change in reserves described above. A 10% variance in estimated
reserves net of reinsurance would be approximately $7.3 million as of December
31, 2021 , and would result in an increase or decrease to Net loss of $7.3
million to a Net loss of $223.8 million or $209.2 million , respectively. This
would also result in a change to Total stockholders' equity of $7.3 million
increasing or decreasing it to $193.7 million or $179.1 million , respectively.
The reserve range represents a range of reasonably likely reserves, not a range
of all possible reserves. Therefore, the ultimate liability may reach levels
corresponding to reserve amounts beyond the stated figures. Given the growth
since 2017, we believe evaluating sensitivity based on a hypothetical change of
10% is reflective of management's best estimate and provides a range of
variability in key assumptions.
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The following table summarizes our gross and net reserves for loss and LAE:
As of December 31, 2021
Loss and LAE reserves Gross % of Total Net % of Total
($ in millions)
Case Reserves $ 36.2 49.3 % $ 36.2 49.3 %
IBNR 37.2 50.7 % 37.2 50.7 %
Total Reserves $ 73.4 100 % $ 73.4 100 %
As of December 31, 2020
Loss and LAE reserves Gross % of Total
Net % of Total
($ in millions)
Case Reserves $ 29.4 51.5 % $ 7.2 31.0 %
IBNR 27.7 48.5 % 16.0 69.0 %
Total Reserves $ 57.1 100 % $ 23.2 100 %
Given the inherent complexity and uncertainty surrounding the estimation of our
ultimate cost of settling claims, reserves are reviewed throughout the year with
in-depth reviews quarterly by combining historical results and current actual
results to calculate new development factors. In estimating loss and LAE
reserves, our actuarial reserving group considers claim cycle time, claims
settlement practices, adequacy of case reserves over time, and current economic
conditions. Because actual experience can differ from key assumptions used in
estimating reserves, there may be significant variation in the development of
these reserves and the actual losses and LAE ultimately paid in the future.
These adjustments to the loss and LAE reserves are recognized in our
consolidated statement of operations in the period in which the change occurs.
The following table summarizes our gross losses and LAE, and net losses and LAE
as of
Gross Ultimate Loss & LAE Net Ultimate Loss & LAE
Accident Year 2021 2020 Change 2021 2020 Change
($ in millions)
2017 and prior $ 54.4 $ 53.1 $ 1.3 $ 41.9 $ 40.7 $ 1.2
2018 77.5 76.2 1.3 38.6 38.7 (0.1)
2019 92.5 92.2 0.3 31.1 33.0 (1.9)
2020 68.3 68.5 (0.2) 16.5 16.1 0.4
2021 100.3 100.3 88.6 88.6
Total $ 393.0 $ 290.0 $ 103.0 $ 216.7 $ 128.5 $ 88.3
As of December 31, 2021 , the Company had commuted all of its reinsurance
agreements. Although no reinsurance arrangements were in place as of December
31, 2021 , the impacts of non-loss related commutation expenses from previous
arrangements created differences between gross and net ultimate loss and LAE.
Premiums Receivable and Reinsurance Recoverable and Related Expenses
Premiums receivable represents premiums written but not yet collected. Generally, a policyholder is given a grace period to pay the premium, can vary by state, before the coverage is canceled. Once a policy is canceled, the remaining unearned premium liability for that policy is written off along with the remaining premium receivable balance. We recognized premium write-offs of$2.0 million and$2.3 million for the years endedDecember 31, 2021 and 2020, respectively. Reinsurance assets consist of reinsurance recoverable on paid and unpaid losses and LAE from our reinsurance partners of which the estimates are based on the same reserving practices as described above. Our use of reinsurance does not extinguish our primary liability under the policies written. In the event that any of our reinsurance partners might not be able to fulfill their obligations under our reinsurance contracts, we would be liable for the amounts defaulted. The amounts recoverable from our reinsurance partners are therefore exposed to the credit risk of our reinsurance partners. Therefore, we regularly evaluate the financial condition of our reinsurers, the sufficiency of collateral posted by our reinsurance partners, and establish provisions for uncollectible reinsurance as appropriate. 65
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Capitalization of
We invest in research and development for the purpose of developing new functionality for our website, apps, and gathering and analyzing data received from the driving habits of our customers. We primarily develop software for internal use. For all internal use software, we account for software development costs under ASC 350-40, "Internal-Use Software ; Computer Software Developed or Obtained for Internal Use." With respect to internal use software, software and technology development activities generally fall into three stages: 1.Preliminary Project Phase includes activities, such as the determination of needed technology and the formulation, evaluation, and selection of alternatives of those needs;
2.Application Development Phase includes activities that focused on software
design and configuration, coding, installation, testing, and parallel
processing; and
3.Post-Implementation/Operating Phase includes activities that address training,
administration, maintenance, and all other activities to operate developed
software.
During the Preliminary Project Phase, we expense all costs to expense as
incurred.
During the Application Development Phase, we capitalize costs for projects that
we determine are probable of being completed.
During the Post-Implementation/Operating Phase we expense all costs related to such activities as incurred. However, upgrades and/or enhancements of existing software will be capitalized to the extent that we determine that such upgrades and/or enhancements will result in additional functionality. We define additional functionality as modifications that enable additional tasks that our software was previously incapable of performing which normally requires new software specifications or a change to all or a part of existing software. Internal costs incurred for upgrades and/or enhancements are expensed or capitalized based on the three stages of development noted above. We track projects individually, such that the beginning and ending of the capitalization can be appropriately established, as well as the amounts capitalized therein. All capitalized software requires the ongoing assessment for recoverability which requires judgment by management with respect to certain external factors including, but not limited to, anticipated future gross revenues, estimated economic useful life, and changes in competing software technologies. We have determined that our internal-use software's estimated useful life is three years. For all software to be sold to third-party insurance carriers, we account for software development costs under ASC 985-20, "Costs of Software to be Sold, Leased, or Marketed." Costs incurred to develop software to be sold to third parties are expensed as incurred until technological feasibility is reached. All costs incurred after technological feasibility is reached and prior to when the developed software is available for general release to our customers are capitalized. As ofDecember 31, 2021 , software costs to be capitalized under ASC 985-20 have not been significant.
Stock-based Compensation
Stock-Based compensation, inclusive of stock options with only a service
condition and stock options with service and performance conditions, restricted
stock awards, restricted stock units ("RSUs"), and performance awards ("PSUs"),
are awarded to our officers, directors, employees, and certain non-employees
through approval from the compensation committee of the Board of Directors.
We account for stock-based compensation in accordance with ASC Topic 718,
"Compensation - Stock Compensation." Stock-based compensation is measured at the
grant date based on the fair value of the award. Stock-based compensation for
stock options and RSUs with service conditions are recognized as expense over
the requisite service period, which is generally the vesting period of the
respective award. The expense recorded is based on awards ultimately expected to
vest and, therefore, is reduced by estimated forfeitures. Forfeitures are
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. For stock options with
performance-based metrics and PSUs, stock-based compensation is recognized when
it is probable that the performance criteria are achieved.
Stock Options
We calculate the fair value of stock options using the Black-Scholes option
pricing model and recognize expense using the straight-line attribution
approach. The fair value of stock options is determined on the grant date using
the Black-Scholes Merton ("BSM"), option-pricing model. The BSM option pricing
model requires inputs based on certain subjective assumptions, including the
fair value of our common stock, expected stock price volatility, the expected
term of the options, the risk-free interest rate for a period that approximates
the expected term of the options and our expected dividend yield.
• Expected Term - The expected term is the period of time when granted options
are expected to be outstanding. In determining the expected term of options, we
utilized the midpoint between the vesting date and contractual expiration date.
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• Risk-Free Interest Rate - The risk-free interest rate is based on theU.S. Treasury yield curve for zero-couponU.S. Treasury notes with maturities similar to the option's expected term as of the grant date.
• Volatility - Because our stock is not traded in an active market, we calculate
volatility by using the historical stock prices of public companies that we
consider to be comparable to our business.
• Forfeiture Rate - The weighted average forfeiture rate of unvested options.
• Expected Dividends - We assumed the expected dividend to be zero as we have no
current expectations to be paying dividends in the foreseeable future.
• Common Stock Valuation - Given the absence of a public trading market of our
common stock for those options granted prior to the Merger, our board of
directors considered numerous subjective and objective factors to determine the
best estimate of fair value of our common stock underlying the stock options
granted to our employees and non-employees. The grant date fair value of our
common stock was determined using valuation methodologies which utilize certain
assumptions, including probability weighting events, volatility, time to
liquidation, a risk-free interest rate, and an assumption for a discount for
lack of marketability. We used a weighted average value determined through the
Option Pricing Model (OPM) and the Probability-Weighted Expected Return Method
("PWERM") for allocating our enterprise value. Application of these methods
involves the use of estimates, judgments, and assumptions that are complex and
subjective, such as those regarding our expected future revenue, expenses, and
cash flows, discount rates, market multiples, the selection of comparable
companies, and the probability of future events.
• Fair Value - our board of directors determines the fair value of the common
stock based on the closing price of the common stock on or around the date of
grant.
As defined by Staff Accounting Bulletin ("SAB") 107, Share-Based Payment, the
Company categorizes stock-based payment awards issued under the 2011 and 2021
Stock Plans as "plain vanilla" options.
RSUs and PSUs
As ofFebruary 9, 2021 , the Company stopped issuing stock options under the 2021 Plan and only issues RSUs on a go-forward basis. As ofDecember 31, 2021 , the Company has granted RSUs with service conditions as well as RSUs with performance conditions and market conditions. Service conditions, as well as performance conditions, that affect whether or not an award vests or becomes exercisable are not directly incorporated into the estimate of fair value at the grant date whereas the effect of a market condition is reflected in estimating the fair value of an award at the grant date. Compensation cost thus is recognized for an award with a market condition provided that the good is delivered or the service is rendered, regardless of when, if ever, the market condition is satisfied. Grants to Non-Employees In determiningwho should be considered a non-employee rather than an employee, the Company considered ASC 718's definition of an employee. The Company complies with this guidance in classifying its members of the BOD as employees. Treatment of non-employee awards are consistent with the accounting for employee awards. Please refer to the "Stock Options" and "RSUs and PSUs" sections above for more detail.
For more information, see Note 15, Stock Option Plans, to the audited
consolidated financial statements included in Part II, Item 8, of this Annual
Report on Form 10-K.
Warrant Liability
We classify warrants to purchase shares of our common stock that are
contingently puttable or redeemable as liabilities. Such warrants are measured
and recognized at fair value and are subject to remeasurement at each balance
sheet date. The fair value of our private warrant liabilities is measured using
a Black-Scholes ("BSM") option-pricing model whereas the fair value of our
public warrants are measured using level 1 inputs. Under the BSM option-pricing
model, the fair value is measured using the following assumptions and inputs:
exercise price, fair value of the underlying preferred stock, expected term,
expected volatility, and risk-free interest rate.
We classify the warrants as a liability on our consolidated balance sheets as of
December 31, 2021 and 2020. The warrant liabilities are measured at fair value
at inception and on a recurring basis, with changes in fair value presented
within change in fair value of warrant liabilities in the consolidated statement
of operations. Prior to Merger, we had warrants exercisable for convertible
preferred stock which were exercised at the time of the Merger and no longer
considered outstanding. These warrants were measured using the BSM option
pricing-model.
The Company currently does not have any warrants for preferred convertible stock
outstanding as of December 31, 2021 but does have 7,666,646 public warrants and
180,000 private placement warrants outstanding as of December 31, 2021 . For more
information, please see Note 14, Public and Private Warrants to the audited
consolidated financial statements included elsewhere in this Form 10-K.
New Accounting Pronouncements
See Note 1, Basis of Presentation and Significant Accounting Policies, to our
consolidated financial statements included in Part II, Item 8, of this Annual
Report on Form 10-K.
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CLOVER HEALTH INVESTMENTS, CORP. /DE – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
CROSS COUNTRY HEALTHCARE INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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