Back in November, 2020, billionaire investor Chamath Palihapitiya boldly proclaimed that he would be investing in insurance start-up Metromile. In his words, it would be his version of Warren Buffett’s famous investment in Geico.
Chamath’s investment, coming in the form of Private Investment into Public Equity (PIPE) would accompany investment from a SPAC, taking Metromile public in a deal valuing the start-up at $1.3 billion.
Initially, investors were rewarded with the stock rising from $10 to $19. The company’s basic business model, that it could bill insurance by the mile rather than over a given period of time, sort of made some sense.
The leading premise, as given in Chamath Palihapitiya’s public investment memo, was that ⅓ of drivers drive most of the miles and get in the most accidents, yet pay the same premiums as everyone else. Moreover, per-mile insurance would better fit a work-from-home environment, supplemented by ride-share and AI-empowered self-driving cars.
The first claim is probably untrue. Insurance rates are probably not the same for a driver with no accidents compared to a driver who drives a lot and gets in many accidents. The second claim contemplates a shrinking customer pool, which is bad for a company.
At any rate, Metromile’s S-1 revealed that the company’s strategy did not work anyway. Insurance companies make money by collecting premiums on policies and paying on claims – like car accidents – less than what they collect from premiums.
Metromile had this important formula reversed: its losses were due to paying out on lots of claims: “The principal driver of our losses to date is our insured losses paid associated with accidents and other insured events by our customers.” So things weren’t going well from the start.
The unprofitable pay-per-mile insurance business was not subsequently rewarded in public markets after posting three quarters of losses. As of close of market today, it held a $411 million market cap, which is much less than $1.3 billion. Basically any shareholder who bought shares at any point during the brief life of the company as a publicly-traded firm lost money:
Yesterday, it was announced that another insurance start-up, Lemonade, would acquire Metromile in an all-stock purchase for $500 million.
How does Chamath Palihapitiya’s Geico compare to the real thing? Warren Buffett’s investment vehicle, Berkshire Hathaway, acquired the entirety of Geico in 1995. But Buffett was not a new shareholder in 1995: “For Buffett, the Geico move marks a return to his investing roots, expanding a stake he took in 1951 at age 20 when he put 70% of his net worth into the insurer.”
Today, Geico runs a profitable insurance enterprise. Berkshire Hathaway’s 2020 Annual Report is refreshingly clear in presenting the profit drivers for its Geico segment, shown below:
If losses exceeded the premiums written or earned, the business would post losses like Metromile. As shown, Geico earns billions in profits year after year.
A Metromile investor may wonder why the company’s mile-tracking concept, part of data collection approach for insurers called “telematics”, did not edge out incumbents like Geico.
Failing to edge out incumbents can probably be attributed to a bunch of things: convincing people to switch insurers is hard. The people most likely to switch are maybe not great drivers!
But it’s also true that incumbents are also thinking about clever ways to optimize car insurance, such as using technology. This August 2019 article from Insurance Journal notes how large insurers – Geico among them – were incorporating telematics.
So Metromile is not Chamath’s Geico in any sense. He held shares for a tiny fraction of the time that Buffett held shares in Geico (he will become a Lemonade shareholder at the conclusion of the acquisition).
Metromile incinerates money while Geico is reliably profitable. Metromile’s claim at technological edge seems replicable and unextraordinary since Geico seems to have internally developed similar innovation.
Chamath did not buy shares of Metromile when he was 20. But being Warren Buffett is hard for these sorts of reasons: he bought shares in profitable businesses a long time ago.
Investing is also notably hard – smart people lose money all the time in public markets – but Chamath’s claims to investment prowess akin to the world’s most well-known and successful investor demands accountability, if only as a future warning.
It would be a footnote in the annals of Venture Capital history were the claims of Buffett parity not so wildly arrogant. Investors following Chamath’s bold claims will be left holding the bag – Metromile shareholders will be lucky if they can get any juice from this lemon of a stock.
San Francisco Securities Outlook 