Home business solution METROMILE, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS

METROMILE, INC. – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND OPERATING RESULTS

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Section                                 Page
  Overview                                                            25
  Our Model                                                           26
  Reinsurance                                                         27
  Key Performance Indicators                                          27
  Recent Developments Affecting Comparability                         29
  Key Factors and Trends Affecting our Operating Performance          30
  Components of Our Results of Operations                             31
  Results of Operations                                               33
  Non-GAAP Financial Measures                                         37
  Liquidity and Capital Resources                                     38
  Contractual Obligations                                             40
  Financing Arrangements                                              40
  Off-Balance Sheet Arrangements                                      41
  Critical Accounting Policies and Estimates                          41
  New Accounting Pronouncements                                       41

Overview

We started Metromile 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 customers who are overpaying for insurance save money.
We founded Metromile 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 to Metromile.
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. An October 2016 report by the Insurance 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 drivers who
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 drivers who drive less than half
the miles driven - as they are effectively subsidizing the minority of drivers
who 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 drivers who 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
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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.
The U.S. auto insurance market is massive, dominated by insurers stuck on legacy
technology infrastructure who 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 with vehicles. 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 that Metromile 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
On November 8, 2021, we entered into an Agreement and Plan of Merger (the
"Agreement") with Lemonade, Inc., a Delaware corporation ("Lemonade"), Citrus
Merger Sub A, Inc., a Delaware corporation and a wholly-owned subsidiary of
Lemonade ("Acquisition Sub I") and Citrus Merger Sub B, LLC, a Delaware limited
liability company and wholly owned subsidiary of Lemonade ("Acquisition Sub
II"), pursuant to which (i) Acquisition Sub I will merge with and into Metromile
(the "First Merger" and the effective time of the First Merger, the "First
Effective Time")), with Metromile continuing as the surviving entity (the
"Initial Surviving Corporation"), and (ii) the Initial 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 as September 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"). The Proposed Transaction is
conditioned on customary closing conditions, including receipt of applicable
regulatory approvals and approval of the Proposed Transaction by our
stockholders, and is expected to close in the second quarter of 2022.
Contemporaneously with the execution of the Agreement, certain of our
stockholders holding approximately 11.3% of the outstanding shares of the our
common stock, including all members of our Board of Directors and certain of our
officers (the "Stockholders"), entered into voting and support agreements (the
"Voting and Support Agreements") with Lemonade, pursuant to which the
Stockholders agreed to, among other things, vote all of their shares of our
common stock ("Voting Shares") (i) in favor of the adoption of the Agreement and
approval of the Proposed Transaction; (ii) in favor of any adjournment or
postponement recommended by us with respect to any stockholders meeting to the
extent permitted or required pursuant to the Agreement; (iii) against any
alternative acquisition proposal or transaction; (iv) against any merger, sale
of substantial assets or liquidation of Metromile; and (v) against any proposal,
action or agreement that would reasonably be expected to impede, interfere with,
delay or postpone, prevent or otherwise impair the Proposed Transaction.
For additional information related to the Proposed Transaction, please see Note
1, Overview and Basis of Presentation and Note 18, Subsequent Events to our
unaudited consolidated financial statements included in Part I, Item 1, of this
Quarterly Report on Form 10-Q and our Current Report on Form 8-K filed with the
SEC on November 9, 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 $8.0 million for the three months ended September
30, 2020 to $30.0 million for the three months ended September 30, 2021, and
increased from $24.4 million for the nine months ended September 30, 2020 to
$75.4 million for the nine months ended September 30, 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 $(3.3) million for
the three months ended September 30, 2020 to $(6.0) million for the three months
ended September 30, 2021, and increased from $(8.9) million for the nine months
ended September 30, 2020 to $(10.4) million for the nine months ended
September 30, 2021. Our accident period
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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 $6.2 million for the three months ended September 30, 2020 to
$(3.0) million for the three months ended September 30, 2021, and decreased from
$14.0 million for the nine months ended September 30, 2020 to $(1.1) million for
the nine months ended September 30, 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 $4.7 million for the three months ended September 30, 2020 to
$(2.1) million for the three months ended September 30, 2021, and decreased from
$11.1 million for the nine months ended September 30, 2020 to $(5.1) million for
the nine months ended September 30, 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 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 periods May 1, 2017 to April 30, 2018
and May 1, 2018 to April 30, 2019 covered 85% of our renewal policies and
beginning May 1, 2019, the reinsurance arrangements expanded to also include new
policies. Thus, from May 1, 2019 through April 30, 2021, we ceded a larger
percentage of our premium than in prior periods, resulting in a significant
decrease in our revenues as reported under GAAP. 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 February 2021, we commuted 67% of our
reinsurance program, resulting in 34.2% of the book being ceded as of March
2021. As of September 30, 2021 we have commuted the remainder of our reinsurance
programs to allow us to manage our surplus at the insurance carrier at a lower
cost of capital. Going forward, and given the strength of our current balance
sheet, we will continue to monitor our reinsurance needs, including new quota
share arrangements, to maintain adequate capital levels at the insurance company
level.
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.
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The following table presents these metrics as of and for the periods presented:
                                                     Three Months Ended                       Nine Months Ended
                                                        September 30,                           September 30,
                                                     2021             2020                   2021             2020
                                                 ($ in millions, except for               ($ in millions, except for
                                                    Direct Earned Premium                   Direct Earned Premium
                                                         per Policy)                             per Policy)
Policies in Force (end of period)                     95,238          92,318                  95,238           92,318

Premium earned directly per policy (annualized) $ 1,197 $ 1,128 $ 1,160 $ 1,082
Direct written bonus

                        $         29.1     $      28.1          $         83.4     $       76.4
Direct Earned Premium                         $         28.5     $      26.7          $         82.1     $       74.1
Gross Profit/(Loss)                           $         (6.0)    $      (3.3)         $        (10.4)    $       (8.9)
Gross Margin                                           (20.0)  %       (41.3) %                (13.8)  %        (36.5) %

Contribution profit / (loss) for the accident period ($ 3.0) $ 6.2 $ (1.1) $ 14.0
Contribution margin for the accident period

                    (10.4)  %        22.6  %                 (1.3)  %         18.6  %
Contribution Profit/(Loss)                    $         (2.1)    $       4.7          $         (5.1)    $       11.1
Contribution Margin                                     (7.3)  %        17.2  %                 (6.2)  %         14.8  %
Direct Loss Ratio                                       81.3   %        58.2  %                 79.5   %         59.1  %
Direct LAE Ratio                                        14.4   %        12.9  %                 13.9   %         13.1  %
Accident Period Loss Ratio                              81.6   %        56.7  %                 73.7   %         58.6  %
Accident Period LAE Ratio                               17.3   %         8.8  %                 14.9   %          9.6  %


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
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.
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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.
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.
Recent Developments Affecting Comparability
Business Combination with INSU
In February 2021, we completed the Merger, pursuant to which Metromile Operating
Company (formerly MetroMile, 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 and
Metromile Operating Company is treated as the accounting
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acquirer. This determination was primarily based on the fact that Metromile
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 of Metromile
Operating Company compared to our company, and that Metromile Operating
Company's operations comprise our ongoing operations. Accordingly, for
accounting purposes, the Merger is treated as the equivalent of a capital
transaction in which Metromile Operating Company issued stock for our net
assets, which are stated at historical cost, with no goodwill or other
intangible assets recorded, and Metromile Operating Company's financial
statements became the Company's financial statements.
In connection with the Business Combination, we received approximately $310.0
million of cash, which we used to repay certain indebtedness as described
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
In March 2020, the World 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 three months ended September 30, 2021, we generated $28.5 million in
direct earned premium, an increase of $1.8 million or 7%, as compared to $26.7
million for the three months ended September 30, 2020. For the nine months ended
September 30, 2021, we generated $82.1 million in direct earned premium, an
increase of $8.0 million or 11%, as compared to $74.1 million for the nine
months ended September 30, 2020. This increase in both reporting periods was
primarily 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 18% for the first nine months of 2021 as compared to
the same period in 2020. 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.
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 across the 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 in the United States. Today, we are licensed in 49
states and the District of Columbia, with licenses active in 46 states and the
District 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.
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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 within the 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
our 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. The size of our
investment portfolio is expected to increase in future periods, and therefore
investment income is also expected to increase, as we continue to invest both
customer premiums and equity proceeds into our investment portfolio.
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 submitted by our
customers. 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 estimated ultimate cost to settle insured losses.
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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 of September
30, 2021 (see the section entitled "- Reinsurance" for further discussion).
These expenses 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 losses
and 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, increase our brand
awareness, and expand our Enterprise product offering. We expect that sales and
marketing expenses will increase in absolute dollars in future periods and 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 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 Capitalized Software
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 global
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 the SEC and the listing standards of the Nasdaq 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.
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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.
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and September 30, 2020:
The following table presents our consolidated statement of operations for the
three months ended September 30, 2021 and 2020, and the dollar and percentage
change between the two periods:
                                                 Three Months Ended
                                                    September 30,
                                               2021               2020             $ Change              % Change
Revenue                                              (unaudited)
Premiums earned, net                       $  28,142          $   3,139          $  25,003                      797  %
Investment income                                 30                 81                (51)                     (63) %
Other revenue                                  1,829              4,731             (2,902)                     (61) %
Total revenue                                 30,001              7,951             22,050                      277  %
Costs and expenses
Losses and loss adjustment expenses           27,480              4,443             23,037                      519  %
Policy servicing expense and other             5,674              4,119              1,555                       38  %
Sales, marketing and other acquisition
costs                                         12,332                 28             12,304                    43943  %
Research and development                       5,130              1,832              3,298                      180  %
Amortization of capitalized software           2,838              2,815                 23                        1  %
Other operating expenses                      14,207              3,924             10,283                      262  %
Total costs and expenses                      67,661             17,161             50,500                      294  %
Loss from operations                         (37,660)            (9,210)           (28,450)                     309  %
Other expense
Interest expense                                   -              1,513             (1,513)                    (100) %
Impairment on digital assets                     117                  -                117                          NM
Decrease in fair value of stock warrant
liability                                    (11,020)               (26)           (10,994)                   42285  %
Total other expense                          (10,903)             1,487            (12,390)                    (833) %
Loss before taxes                            (26,757)           (10,697)           (16,060)                     150  %
Income tax benefit                                 -                (67)                67                     (100) %
Net loss                                   $ (26,757)         $ (10,630)         $ (16,127)                     152  %


Revenue
Premiums Earned, net
Net premiums earned increased $25.0 million, or 797%, from $3.1 million for the
three months ended September 30, 2020 to $28.1 million for the three months
ended September 30, 2021, which was primarily attributable to a $22.7 million
decrease in premiums ceded to our reinsurance partners, a $1.8 million increase
in direct earned premium, and a $0.5 million decrease in bad debt expense which
was due primarily to state mandated COVID-19 payment extensions. The decrease of
$22.7 million in premiums ceded to our reinsurance partners was driven largely
by reinsurance commutation settlements. Direct earned premium increased by $1.8
million from $26.7 million for the three months ended September 30, 2020 to
$28.5 million for the three months ended September 30, 2021. Increase in direct
earned premiums was primarily attributable to an increase in policies in force
during the three months ended September 30, 2021 as well as increase in miles
driven during the same period. We believe direct earned premium is the best
measure of top-line revenue, as it excludes the impacts of reinsurance.
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Investment Income
Investment income decreased $51 thousand, or 63%, from $$81 thousand for the
three months ended September 30, 2020 to $30 thousand for the three months ended
September 30, 2021. The decrease was primarily due to a lower yield on fixed
maturity investments resulting from reinvesting at lower rates, despite a higher
level of invested assets.

Other Revenue
Other revenue decreased $2.9 million, or 61%, from $4.7 million for the three
months ended September 30, 2020 to $1.8 million for the three months ended
September 30, 2021. The decrease was primarily attributable to reinsurance
commutation settlements in 2021 resulting in no reinsurance related revenue in
the current period, including a $2.1 million decrease in revenues from policy
acquisition costs recovered for policies onboarded into our reinsurance program
as well as a decrease of $1.0 million due to reinsurance profit commission and
brokerage rebates in the 2020 period that did not exist in 2021.
Costs and Expenses
Losses and LAE
Losses and LAE increased $23.1 million, or 519%, from $4.4 million for the three
months ended September 30, 2020 to $27.5 million for the three months ended
September 30, 2021. Ceded losses and LAE decreased $14.5 million as a result of
commuting all of our reinsurance programs and thereby retaining more losses.
Direct losses and LAE increased by $8.3 million due to an overall increase in
claims cost, frequency, and severity. Losses in the third quarter of 2021 were
primarily driven by Hurricane Ida and severe storms in several regions of the
United States.
Policy Servicing Expense and Other
Policy servicing expense and other increased $1.6 million, or 38%, from $4.1
million for the three months ended September 30, 2020 to $5.7 million for the
three months ended September 30, 2021. The increase was primarily attributable
to telematics device write-offs as a result of our upgrade from the use of 3G
technology and, to a lesser extent, an increase in our customer experience and
other policy servicing personnel related expenses to support our growth
objectives.
Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased $12.3 million from $0.03
million for the three months ended September 30, 2020 to $12.3 million for the
three months ended September 30, 2021. This increase was driven by an increase
of $8.0 million in our online and offline marketing campaigns. Additionally, as
a result of reinsurance commutation in 2021, the 2020 period was increased $2.3
million less due to reinsurance ceding commission which serves as an offset to
sales and marketing expense. The third quarter of 2020 includes the benefit of
lower net expenses related to COVID-19, such as a decrease in personnel costs
attributable to a reduction in force in response to the COVID-19 pandemic.
Research and Development
Research and development increased $3.3 million, or 180%, from $1.8 million for
the three months ended September 30, 2020 to $5.1 million for the three months
ended September 30, 2021. The increase was primarily attributable to an increase
in personnel related expenses to support our growth objectives.
Amortization of Capitalized Software
Amortization of capitalized software was relatively flat, increasing by 1%, from
$2.82 million for the three months ended September 30, 2020 to $2.84 million for
the three months ended September 30, 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 $10.3 million, or 262%, from $3.9 million for
the three months ended September 30, 2020 to $14.2 million for the three months
ended September 30, 2021. The increase was primarily driven by an increase of
$5.1 million in employee stock-based compensation expense and a $4.9 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 the SEC and the listing standards of the Nasdaq Capital Market,
additional corporate, director and officer insurance expenses, and increased
legal, audit and consulting fees. Also attributing to the change was an increase
in fulfillment costs associated with telematics device packaging, shipping and
other related expenses.
Interest Expense
Interest expense decreased $1.5 million, or 100%, from $1.5 million for the
three months ended September 30, 2020 to $0.0 million for the three months ended
September 30, 2021. The decrease was primarily attributable to lower debt
principal balance during the third quarter of 2021 as debt was paid off during
the first quarter of 2021 and no outstanding debt remains on the balance sheet.
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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 6, Digital
Assets, net to our unaudited consolidated financial statements included in Part
I, Item 1, of this Quarterly Report on Form 10-Q.
Decrease in fair value of stock warrant liability
Fair value of stock warrant liability decreased $11.0 million, from $(0.03)
million for the three months ended September 30, 2020 to $(11.02) million for
the three months ended September 30, 2021. The decrease was primarily driven by
the change in fair value of our preferred stock warrants issued in April 2020
and exercised in February 2021 and public and private placement warrants as
described in Note 2 of the unaudited consolidated financial statements included
in Part I, Item 1, of this Quarterly Report on Form 10-Q.
Comparison of the nine months ended September 30, 2021 and September 30, 2020:
The following table presents our consolidated statement of operations for the
nine months ended September 30, 2021 and 2020, and the dollar and percentage
change between the two periods:
                                                  Nine Months Ended
                                                    September 30,
                                               2021                2020             $ Change               % Change
Revenue                                              (unaudited)
Premiums earned, net                       $   47,316          $   9,360          $   37,956                      406  %
Investment income                                  85                500                (415)                     (83) %
Other revenue                                  27,974             14,499              13,475                       93  %
Total revenue                                  75,375             24,359              51,016                      209  %
Costs and expenses
Losses and loss adjustment expenses            62,383             12,214              50,169                      411  %
Policy servicing expense and other             15,172             12,803               2,369                       19  %
Sales, marketing and other acquisition
costs                                          85,552              3,616              81,936                     2266  %
Research and development                       11,898              6,668               5,230                       78  %
Amortization of capitalized software            8,190              8,311                (121)                      (1) %
Other operating expenses                       39,534             13,138              26,396                      201  %
Total costs and expenses                      222,729             56,750             165,979                      292  %
Loss from operations                         (147,354)           (32,391)           (114,963)                     355  %
Other expense
Interest expense                               15,974              3,453              12,521                      363  %
Impairment on digital assets                      183                  -                 183                          NM
Increase in fair value of stock warrant
liability                                       8,133                640               7,493                     1171  %
Total other expense                            24,290              4,093              20,197                      493  %
Net loss before taxes                        (171,644)           (36,484)           (135,160)                     370  %
Income tax provision (benefit)                      -                (67)                 67                     (100) %
Net loss after taxes                       $ (171,644)         $ (36,417)         $ (135,227)                     371  %


Revenue
Premiums Earned, net
Net premiums earned increased $37.9 million, or 406%, from $9.4 million for the
nine months ended September 30, 2020 to $47.3 million for the nine months ended
September 30, 2021, which was primarily attributable to a $29.9 million decrease
in premiums ceded to our reinsurance partners, a $8.0 million increase in direct
earned premium, and, to a far lesser degree, a decrease in bad debt expense
which was due primarily to state mandated COVID-19 payment extensions in the
2020 period. The decrease of $29.9 million in premiums ceded to our reinsurance
partners was driven largely by reinsurance commutation settlements. Direct
earned premium increased by $8.0 million from $74.1 million for the nine months
ended September 30, 2020 to $82.1 million for the nine months ended
September 30, 2021. The increase in direct earned premiums was primarily
attributable to an increase in policies in force during the nine months ended
September 30, 2021 as well as increase in miles driven during the same period
due, in part, to COVID-19 shelter-in-place
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restrictions in the comparative period, which generally began in March 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 83%, from $0.5 million for the nine
months ended September 30, 2020 to $0.1 million for the nine months ended
September 30, 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 $13.5 million, or 93%, from $14.5 million for the nine
months ended September 30, 2020 to $28.0 million for the nine months ended
September 30, 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 $6.0 million decrease in revenues from policy acquisition
costs recovered for policies onboarded into our reinsurance program and
reinsurance profit commission. A substantial portion of Enterprise business
solutions revenue was from one customer who was an investor and therefore a
related party, as described in Note 17 of the unaudited consolidated financial
statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q.

Costs and Expenses
Losses and LAE
Losses and LAE increased $50.2 million, or 411%, from $12.2 million for the nine
months ended September 30, 2020 to $62.4 million for the nine months ended
September 30, 2021. Ceded losses and LAE decreased $26.5 million as a result of
commuting all of our reinsurance programs and thereby retaining more losses.
Direct losses and LAE increased by $23.4 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 nine months ended
September 30, 2021 include the impacts from Hurricane Ida and severe storms in
several regions of the United States.
Policy Servicing Expense and Other
Policy servicing expense and other increased $2.4 million, or 19%, from $12.8
million for the nine months ended September 30, 2020 to $15.2 million for the
nine months ended September 30, 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 $1.2 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.
Sales, Marketing, and Other Acquisition Costs
Sales, marketing, and other acquisition costs increased $82.0 million from $3.6
million for the nine months ended September 30, 2020 to $85.6 million for the
nine months ended September 30, 2021. Of this increase, $64.5 million was
reinsurance-related including the commutation settlement and impact to the
ceding commission offset. During the nine months ended September 30, 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 $58.3 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 $6.2 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 $15.3 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. We expect such expenses, due to
the expanded use of this channel, to continue to increase in the near future.
Research and Development
Research and development increased $5.2 million, or 78%, from $6.7 million for
the nine months ended September 30, 2020 to $11.9 million for the nine months
ended September 30, 2021. The increase was primarily attributable to employee
personnel costs related to our expansion initiatives in the engineering and
technology areas of approximately $3.0 million, an increase in stock
compensation expense for related departments of $2.0 million, and a decrease of
$0.7 million in capitalized software costs which serves as an offset to research
and development expense.
Amortization of Capitalized Software
Amortization of capitalized software decreased $0.1 million, or 1%, from $8.3
million for the nine months ended September 30, 2020 to $8.2 million for the
nine months ended September 30, 2021. The decrease 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 $26.4 million, or 201%, from $13.1 million
for the nine months ended September 30, 2020 to $39.5 million for the nine
months ended September 30, 2021. The increase was primarily driven by
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an increase of $15.9 million in director's, officers', and employees'
stock-based compensation expense and a $10.2 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 the SEC and the
listing standards of the Nasdaq Capital Market, additional corporate, director
and officer insurance expenses, and increased legal, audit and consulting fees.
Interest Expense
Interest expense increased $12.5 million, or 363%, from $3.5 million for the
nine months ended September 30, 2020 to $16.0 million for the nine months ended
September 30, 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 nine months ended September 30, 2021 as
described in Note 9 of the unaudited consolidated financial statements included
in Part I, Item 1, of this Quarterly Report on Form 10-Q. As of September 30,
2021, all debt had been repaid and no outstanding debt remains on the balance
sheet.
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 6, Digital
Assets, net to our unaudited consolidated financial statements included in Part
I, Item 1, of this Quarterly Report on Form 10-Q.
Increase in fair value of stock warrant liability
Fair value of stock warrant liability increased $7.5 million from $0.6 million
for the nine months ended September 30, 2020 to $8.1 million for the nine months
ended September 30, 2021. The increase was primarily driven by the change in
fair value of our preferred stock warrants issued in April 2020 and exercised in
February 2021 and public and private placement warrants as described in Note 2
of the unaudited consolidated financial statements included in Part I, Item 1,
of this Quarterly Report on form 10-Q.
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.
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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:
                                                  Three Months Ended                      Nine Months Ended
                                                     September 30,                          September 30,
                                                2021                2020               2021                2020
                                                    ($ in millions)                        ($ in millions)
Total revenue                                    30.0                 8.0                75.4               24.4
Losses and LAE                                  (27.5)               (4.4)              (62.4)             (12.2)
Policy servicing expense and other               (5.7)               (4.1)              (15.2)             (12.8)
Amortization of capitalized software             (2.8)               (2.8)               (8.2)              (8.3)
Gross profit/(loss)                              (6.0)               (3.3)              (10.4)              (8.9)
Gross margin                                    (20.0)  %           (41.3) %            (13.8) %           (36.5) %

Less revenue adjustments:
Revenue Adjustments Related to Reinsurance          -                19.6                 9.5               52.7
Revenue from Enterprise Segment                  (1.5)               (1.1)               (3.7)              (3.6)
Interest Income and Other                         0.3                 0.9                 1.7                1.7

Less costs and expense adjustments:
Loss and LAE Adjustments Related to
Reinsurance                                         -               (14.5)              (14.7)             (41.2)
Loss and LAE Adjustments Related to Prior
Period Development                               (0.9)                1.5                 4.0                2.9
Bad Debt, Report Costs and Other Expenses         0.5                (0.6)                0.3               (0.8)
Amortization of Internally Developed
Software                                          2.8                 2.8                 8.2                8.3
Devices                                           1.8                 0.9                 4.0                2.9

Contribution profit / (loss) for the accident period $ (3.0) $ 6.2

       $     (1.1)         $    14.0

Prior Period Development                   $      0.9           $    (1.5)         $     (4.0)         $    (2.9)
Contribution profit/(loss)                 $     (2.1)          $     4.7          $     (5.1)         $    11.1

Total revenue                              $     30.0           $     8.0          $     75.4          $    24.4
Revenue adjustments                              (1.2)               19.4                 7.5               50.8
Adjusted revenue                           $     28.8           $    27.4          $     82.9          $    75.2

Accident period contribution margin             (10.4)  %            22.6  %             (1.3) %            18.6  %
Contribution margin                              (7.3)  %            17.2  %             (6.2) %            14.8  %



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 of September 30, 2021, we had $159.2 million in cash and cash
equivalents and $49.8 million of marketable securities, compared to cash and
cash equivalents of to $19.2 million and $24.7 million of marketable securities
as of December 31, 2020. Our cash and cash equivalents primarily consist of bank
deposits and money market funds. Our marketable securities consist of U.S.
treasury securities, municipal securities, corporate debt securities,
residential and commercial mortgage-backed securities, and other debt
obligations.
Insurance companies in the 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
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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 of September 30, 2021 and December 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 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:
                                                          Nine Months Ended
                                                            September 30,
                                                          2021          2020
                                                           ($ in millions)
Net cash used in operating activities                 $    (70.3)     $ 

(19.3)

Net cash (used) from investing activities (43.3) 4.6
Net cash flow generated by financing activities

                  273.5         

25.7

Operating Activities
Net cash used in operating activities for the nine months ended September 30,
2021 was $(70.3) million, which was an increase of net cash used of $51.0
million from $19.3 million for the nine months ended September 30, 2020. Cash
used during this period included $113.3 million from net loss for the nine
months ended September 30, 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 $49.9 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, and
loss and LAE reserves which reflect a decrease in paid claims year over year.
Net cash used in operating activities for the nine months ended September 30,
2020 was $19.3 million. Cash used during this period included $12.5 million from
net loss for the nine months ended September 30, 2020, excluding the impact of
changes in fair value of our outstanding warrants, depreciation expense and
stock compensation and other non-cash expenses. Net cash used by changes in our
operating assets and liabilities decreased by $7.6 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 loss
adjustment expense reserves.
Investing Activities
Net cash used in investing activities for the nine months ended September 30,
2021 was $(43.3) million compared to net cash provided by investing activities
of $4.6 million during the nine months ended September 30, 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 nine months ended
September 30, 2021 was $273.5 million compared to $25.7 million in cash provided
by financing activities for the nine months ended September 30, 2020. 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 Closing in February 2021.
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Contractual Obligations
The following is a summary of material contractual obligations and commitments
as of September 30, 2021:
                                                       2021 (remaining
                                      Total             three months)           2022 - 2023           2024 - 2025           Thereafter
                                                                               (in millions)
Long-term debt                     $       -          $            -          $          -          $          -          $         -
Interest on long-term debt                 -                       -                     -                     -                    -
Operating Leases                        23.9                     0.8                   6.3                   5.6                 11.2
Purchase Commitments                     1.1                     1.1                     -                     -                    -
Total                              $    25.0          $          1.9          $        6.3          $        5.6          $      11.2



Financing Arrangements
Subordinated Note Purchase and Security Agreement
In April 2020, we entered into the Note Purchase Agreement with Hudson, which
was amended in February 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
17 of the unaudited consolidated financial statements included in Part I, Item
1, of this Quarterly Report on form 10-Q.
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
in April 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 of December 31, 2020, $31.6 million
aggregate principal amount of the Notes was outstanding, along with $0.9 million
of capitalized PIK interest. Subsequent to December 31, 2020, we issued
additional Notes having an aggregate principal amount of $2.0 million. As of
March 30, 2021, there was approximately $36.6 million of principal and PIK
interest outstanding under the Hudson 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
Effective Time (as defined in the Merger Agreement) and are no longer
outstanding.
Paycheck Protection Program Loan
In April 2020, we were granted a loan under the Paycheck Protection Program
offered by the Small 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 at
December 31, 2020. We repaid this loan concurrent with the consummation of the
Merger and it is no longer outstanding.
2019 Loan and Security Agreement
In December 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 of Multiplier 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
through December 2021. Beginning in January 2022, equal payments of principal
would have been due monthly in an amount necessary to fully amortize the loan by
June 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 of
December 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 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.
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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 Effective
Time and are no longer outstanding.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably
likely to have, a current or future material effect on our financial condition,
results of operations, liquidity or cash flows.
Critical Accounting Policies and Estimates
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
stock-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.
See Note 1, Summary of Significant Accounting Policies, to our unaudited
consolidated financial statements included in Part I, Item 1, of this Quarterly
Report on Form 10-Q for material changes to our critical accounting policies
from the ones described under the section Critical Accounting Policies and
Estimates of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Summary of Significant Accounting Policies in the
notes to the audited consolidated financial statements which are which are
included in the Company's Post-Effective Amendment No. 2 to Form S-1 filed with
the SEC on August 27, 2021.
New Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies, to our unaudited
consolidated financial statements included in Part I, Item 1, of this Quarterly
Report on Form 10-Q.