ITEM 1A.
RISK FACTORS
RISK
FACTORS
Investing in our securities involves risks.
Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed under the heading “Cautionary
Note Regarding Forward-Looking Statements,” in this Quarterly Report on Form 10-Q, you should carefully consider the specific risks
set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results
of operations. As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally,
the risks and uncertainties described in this Quarterly Report on Form 10-Q are not the only risks and uncertainties that we face. Additional
risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect
our business.
We
have marked with an asterisk (*) those risks described below that reflect substantive changes from, or additions to, the risks described
in our Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 2020 with
the SEC on June 2, 2021.
Risks Related to Our Business
We have a history of net losses
and could continue to incur substantial net losses in the future.*
We have incurred recurring losses on an annual basis since our incorporation
in 2011. We incurred net losses of $120.1 million and $41.3 million for the year ended December 31, 2020, and the three months ended June
30, 2021, respectively. We had an accumulated deficit of $366.6 million and $511.5 million as of December 31, 2020, and June 30,
2021, respectively.
The principal driver
of our losses to date is our insured losses paid associated with accidents and other insured events by our customers. Establishing adequate
premium rates is necessary to generate sufficient revenue to offset losses, LAE and other costs. If we do not accurately assess the risks
that we underwrite, the premiums that we charge may not be adequate to cover our losses and expenses, which would adversely affect our
results of operations and our profitability. Moreover, as we continue to invest in our business, we expect expenses to continue to increase
in the near term. Such expenses may occur in the areas of telematics, digital marketing, brand advertising, consumer-facing technologies,
core insurance operations services and lines of business not presently offered by Metromile. These investments may not result in increased
revenue or growth in our business. If we fail to manage our losses or to grow our revenue sufficiently to keep pace with our investments
and other expenses, our business will be seriously harmed.
In addition, we will
incur additional expenses to support our growth. As a public company, we will incur significant legal, accounting and other expenses
that we did not incur as a private company. We may encounter unforeseen or unpredictable factors, including unforeseen operating expenses,
complications or delays, which may also result in increased costs. Further, it is difficult to predict the size and growth rate of our
market or demand for our services and success of current or potential future competitors. As a result, we may not achieve or maintain
profitability in future periods.
We may lose existing customers
or fail to acquire new customers.
We believe that growth
of our business and revenue depends upon our ability to continue to grow our business in the geographic markets that we currently serve
by retaining our existing customers and adding new customers in our current as well as new geographic markets. Expanding into new geographic
markets takes time, requires us to navigate and comply with extensive regulations and may occur more slowly than we expect or than it
has occurred in the past. If we lose customers, our value will diminish. In particular, while loss performance has improved over time
as more customers renew their policies and remain policyholders for longer, a future loss of customers could lead to higher loss ratios
or loss ratios that cease to decline, which would adversely impact our profitability. If we fail to remain competitive on customer experience,
pricing, and insurance coverage options, our ability to grow our business may also be adversely affected. In addition, we may fail to
accurately predict risk segmentation of new customers or potential customers, which could also reduce our profitability.
While a key part
of our business strategy is to retain and add customers in our existing markets and into our current product offerings, we also intend
to expand our operations into new markets and new product offerings. In doing so, we may incur losses or otherwise fail to enter new
markets or offer new products successfully. Our expansion into new markets and product offerings may place us in unfamiliar competitive
environments and involve various risks, including competition, government regulation, the need to invest significant resources and the
possibility that returns on such investments will not be achieved for several years or at all.
There are many factors
that could negatively affect our ability to grow our customer base, including if:
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we lose customers to new market entrants
and/or existing competitors;
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we do not obtain regulatory approvals
necessary for expansion into new markets or in relation to our products (such as underwriting
and rating requirements);
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we fail to effectively use search
engines, social media platforms, digital app stores, content-based online advertising, and
other current and emerging online sources for generating traffic to our website and our mobile
app;
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our digital platform experiences disruptions;
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we suffer reputational harm to our
brand including from negative publicity, whether accurate or inaccurate;
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we fail to expand geographically;
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we fail to offer new and competitive
products, to provide effective updates to our existing products or to keep pace with technological
improvements in our industry;
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customers have difficulty installing,
updating or otherwise accessing our app or website on mobile devices or web browsers as a
result of actions by us or third parties;
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customers prefer less technological
solutions or are unable or unwilling to adopt or embrace new technology;
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the perception emerges that purchasing
insurance products online is not as effective as purchasing those products through traditional
offline methods;
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technical or other problems frustrate
the customer experience, particularly if those problems prevent us from generating quotes
or paying claims in a fast and reliable manner; or
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we
are unable to address customer concerns regarding the content, privacy, and security of our
digital platform.
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Our inability to
overcome these challenges could impair our ability to attract new customers and retain existing customers, and could have a material
adverse effect on our business, operating results and financial condition.
We may require additional capital
to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on
acceptable terms, if at all.
We intend to continue
to make investments to support our business growth and may require additional funds to respond to business challenges, including the
need to develop new features and products or enhance our existing products and services, satisfy our regulatory capital and surplus requirements,
cover losses, improve our operating infrastructure or acquire complementary businesses and technologies. Many factors will affect our
capital needs as well as their amount and timing, including our growth and profitability, regulatory requirements, market disruptions
and other developments. If our present capital and surplus is insufficient to meet our current or future operating requirements, including
regulatory capital and surplus requirements, or to cover losses, we may need to raise additional funds through financings or curtail
our growth. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things,
on our development efforts, business plans and operating performance, as well as the condition of the capital markets at the time we
seek financing. We cannot be certain that additional financing will be available to us on favorable terms, or at all.
If we raise additional
funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution,
and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Common Stock.
As an insurance company, we are subject to extensive laws and regulations in every jurisdiction in which we conduct business, and any
such issuances of equity or convertible debt securities to secure additional funds may be impeded by regulatory approvals or requirements
imposed by such regulatory authorities if such issuances were deemed to result in a person acquiring “control” of our company
under applicable insurance laws and regulations. Such regulatory requirements may require potential investors to disclose their organizational
structure and detailed financial statements as well as require managing partners, directors and/or senior officers submit biographical
affidavits which may deter funds from investing in our company. Moreover, any debt financing, in addition to our outstanding credit facilities,
that we secure in the future could subject us to restrictive covenants relating to our capital raising activities, our ability to make
certain types of investments or payments, and other financial and operational matters, which may increase our difficulty to obtain additional
capital or to pursue business opportunities, including new product offerings and potential acquisitions. We may not be able to obtain
additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory
to us when we require it, our ability to continue to support our business growth and to respond to business challenges could be impaired,
and our business, revenue, results of operations and financial condition may be materially harmed.
Further, we are restricted
by covenants in our credit agreements. These covenants restrict, among other things, our ability to incur additional debt without lender
consent or grant liens over our assets, which may limit our ability to obtain additional funds.
The COVID-19 pandemic has caused
disruption to our operations and may negatively impact our business, key metrics, and results of operations in numerous ways that remain
unpredictable.
Our business has
been and may continue to be impacted by the effects of the outbreak COVID-19, which was declared a global pandemic in March 2020.
This pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures, orders to
“shelter in place” (“SIPs”) and travel and transportation restrictions, have negatively affected the U.S. and
global economies, disrupted global supply chains, and led to unprecedented levels of unemployment. Beginning in the second quarter of
2020, our business was favorably impacted by the SIPs as our customers drove less. While our premiums collected declined due to per-mile
billing, we had a corresponding material decline in incurred losses. Our business has also been impacted by certain state regulations
related to COVID-19 relief efforts, including restrictions on the ability to cancel policies for non-payment, requiring deferral of insurance
premium payments for up to 60 days and restrictions on increasing policy premiums. We continue to assess and update our business
continuity plans in the context of this pandemic, including taking steps in an effort to help keep our employees healthy and safe. The
spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations in certain cases,
and cancellation of physical participation in meetings, events, and conferences), and we expect to take further actions as may be required
or recommended by government authorities or as we determine are in the best interests of our employees and customers. Furthermore, COVID-19
has impacted and may further impact the broader economies of affected countries, including negatively impacting economic growth, the
proper functioning of financial and capital markets, foreign currency exchange rates, and interest rates. It is possible that the pandemic
will cause an economic slowdown of potentially extended duration, as well as a global recession. This could result in an increase in
costs associated with claims under our policies, as well as an increase in the number of customers experiencing difficulty paying premiums,
any of which could have a material adverse effect on our business and results of operations. It is also possible that working from home
or other remote work arrangements adopted during the SIPs become permanent on a widespread basis, thereby resulting in further reduction
in premiums collected due to per-mile billing, or a permanent reduced need for auto insurance. Furthermore, due to COVID-19’s negative
impact on driving, regulators in many states continue to mandate or request that auto insurance companies refund a portion of their premium
to their policyholders to reflect the insurer’s decrease in projected loss exposure due to the virus. In all of the states in which
we operate, state insurance regulators have either encouraged, strongly suggested or mandated insurers to provide COVID-19-related consumer
relief. Regulators in several states in which we operate or into which we plan to expand placed a mandatory moratorium on non-pay cancellations
and could revive, add to, extend, or expand the scope of such moratoriums, providing consumers grace periods ranging from 60 days to
indefinite (based on the term of emergency orders) in duration, during which premium did not need to be paid in a timely fashion. These
moratoriums resulted in an increase of premium write-offs from 1.9% for the year ending December 31, 2019 to 2.4% for the year ending
December 31, 2020. Premium write-offs have been immaterial to date, but could be significant in the future. There were still several
states with bulletins effective after December 31, 2020, and depending on the unpredictable nature of the pandemic and SIPs such moratoriums
could be revived, added to, or extended. These mandates and similar regulations or suggestions could negatively impact our ability to
charge or increase premiums to adequately cover our losses and could result in continued increased premium write-offs.
Though we continue
to monitor the COVID-19 pandemic closely, due to the speed with which it continues to develop, the global breadth of its spread, the
range of governmental and community reactions thereto and the unknown timing or effectiveness of any vaccine or treatment, there is considerable
uncertainty around its duration and ultimate impact. The impact of the pandemic may also exacerbate the other risks described in these
Risk Factors, and additional impacts may arise that we are not currently aware of, any of which could have a material effect on us. In
addition, if there is a future resurgence of COVID-19, these negative impacts on our business may be further exacerbated. As a result,
the full extent of the impact of the pandemic on our overall financial and operating results, whether in the near or long term, cannot
be reasonably estimated at this time.
Our future growth and profitability
depend in part on our ability to successfully operate in an insurance industry that is highly competitive.
Many of our primary
competitors have well-established national brands and market similar products. Our competitors include large national insurance companies
as well as up-and-coming companies. Several of these established national insurance companies are larger than us and have significant
competitive advantages, including better name recognition, strong financial ratings, greater resources, easier access to capital, and
offer more types of insurance than we do, such as homeowners and renters, which are often bundled together to help attract and retain
customers. Our business model and technology is also still nascent compared to the established business models of the well-established
incumbents in the insurance market. In addition, the insurance industry consistently attracts well-capitalized new entrants to the market.
Our future growth will depend in large part on our ability to grow our insurance business in which traditional insurance companies retain
certain advantages. In particular, unlike us, many of these competitors offer customers the ability to purchase multiple other types
of insurance coverage and “bundle” them together into one policy and, in certain circumstances, include an umbrella liability
policy for additional coverage at competitive prices. Moreover, we may in the future expand into new lines of business and offer additional
products beyond automobile insurance, and as we do so, we could face intense competition from traditional insurance companies that are
already established in such markets. These new insurance products could take months to be approved by regulatory authorities or may not
be approved at all. We have invested in growth strategies by utilizing unique customer value propositions, differentiated product offerings
and distinctive advertising campaigns. If we are unsuccessful through these strategies in generating new business, retaining a sufficient
number of customers or retaining or acquiring key relationships, our ability to maintain or increase premiums written or the ability
to sell our products could be adversely impacted. Because of the competitive nature of the insurance industry, there can be no assurance
that we will continue to compete effectively within our industry, or that competitive pressures will not have a material effect on our
business, results of operations or financial condition.
We rely on telematics, mobile
technology and our digital platform to collect data points that we evaluate in pricing and underwriting our insurance policies, managing
claims and customer support, and improving business processes. To the extent regulators prohibit or restrict our collection or use of
this data, our business could be harmed.
We use telematics,
mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting certain of our insurance
policies, managing claims and customer support, and improving business processes. If federal, state or international regulators were
to determine that the type of data we collect, the process we use for collecting this data or how we use it unfairly discriminates against
a protected class of people, regulators could move to prohibit or restrict our collection or use of this data. In addition, if legislation
were to restrict our ability to collect driving behavior data, it could impair our capacity to underwrite insurance cost effectively,
negatively impacting our revenue and earnings.
Due to Proposition
103 in California, our largest market, we are currently limited in our ability to use telematics data beyond miles-driven to underwrite
insurance, including data on how the car is driven. This could hinder our ability to accurately assess the risks that we underwrite in
other states if they were to pass similar laws or regulations. In three other states where we currently operate, we do not use behavioral
telematics data because it is either permitted, but we opted out given uncertainty regarding the impact such data would have on pricing
or it is voluntary (meaning the policyholder has to opt in). As we aim to be a fully national provider of insurance across 49 states
and the District of Columbia by 2022, we will need to comply with the rules and regulations of each market. At this time, we do not know
which of our target markets prohibit, permit with conditions, or fully permit the use of behavioral telematics to set premiums, and if
permitted, if this will be of benefit to us in pricing. While we are currently in discussions with regulators to allow the use of telematics
to a greater extent to underwrite and price insurance policies, we cannot predict the outcome of these discussions, and there can be
no assurance that state regulators will revise regulations accordingly, if at all, nor that current permissive states will further restrict
the use of such data.
Although there is
currently limited federal and state legislation outside of California restricting our ability to collect driving behavior data, private
organizations are implementing principles and guidelines to protect driver privacy. The Alliance of Automobile Manufacturers and Global
Automakers established their Consumer Privacy Protection Principles to provide member automobile manufacturers with a framework with
which to consider privacy and build privacy into their products and services while the National Automobile Dealers Association has partnered
with the Future of Privacy Forum to produce consumer education guidelines that explain the kinds of information that may be collected
by consumers’ cars, the guidelines that govern how it is collected and used, and the options consumers may have to protect their
vehicle data. The Global Alliance for Vehicle Data Access is another organization that was formed to advocate for driver ownership of
all vehicle data, particularly for insurance underwriting purposes. If federal or state legislators were to pass laws limiting our ability
to collect driver data, such legislation could have a material adverse effect on our business, financial condition or results of operations.
Some state regulators
have expressed interest in the use of external data sources, algorithms and/or predictive models in insurance underwriting or rating.
Specifically, regulators have raised questions about the potential for unfair discrimination, disparate impact, and lack of transparency
associated with the use of external consumer data. A determination by federal or state regulators that the data points we collect and
the process we use for collecting this data unfairly discriminates against a protected class of people could subject us to fines and
other sanctions, including, but not limited to, disciplinary action, revocation and suspension of licenses, and withdrawal of product
forms. Any such event could, in turn, materially and adversely affect our business, financial condition, results of operations and prospects.
Although we have implemented policies and procedures into our business operations that we feel are appropriately calibrated to our machine
learning and automation-driven operations, these policies and procedures may prove inadequate to manage our use of this nascent technology,
resulting in a greater likelihood of inadvertent legal or compliance failures.
In addition, the
National Association of Insurance Commissioners (“NAIC”), announced on July 23, 2020 the formation of a new Race and Insurance
Special Committee (the “Special Committee”). The Special Committee is tasked with analyzing the level of diversity and inclusion
within the insurance sector, identifying current practices in the insurance industry that disadvantage minorities and making recommendations
to increase diversity and inclusion within the insurance sector and address practices that disadvantage minorities. The Special Committee
may look into strengthening the unfair discrimination laws, such as prohibiting the use of credit scores in the underwriting of auto
insurance. Any new unfair discrimination legislation that would prohibit us from using data that we currently use or plan to use in the
future to underwrite insurance could negatively impact our business.
Regulators may also
require us to disclose the external data we use, algorithms and/or predictive matters prior to approving our underwriting models and
rates. Such disclosures could put our intellectual property at risk.
Additionally, existing
laws, such as the California Consumer Privacy Act (the “CCPA”), future and recently adopted laws, such as the California
Privacy Rights Act (the “CRPA”), and evolving attitudes about privacy protection may impair our ability to collect, use,
and maintain data points of sufficient type or quantity to develop and train our algorithms. If such laws or regulations were enacted
federally or in a large number of states in which we operate, it could impact the integrity and quality of our pricing and underwriting
processes.
We depend on search engines, social
media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to our website and
our mobile app both rapidly and cost-effectively. If these third parties change their listings or increase their pricing, if our relationship
with them deteriorates or terminates, or due to other factors beyond our control, we may be unable to attract new customers rapidly and
cost-effectively, which would adversely affect our business and results of operations.
Our success depends
on our ability to attract consumers to our website and our mobile app and convert them into customers in a rapid and cost-effective manner.
We depend in large part on search engines, social media platforms, digital app stores, content-based online advertising and other online
sources for traffic to our website and our mobile app, which are material sources for new consumers.
With respect to search
engines, we are included in search results as a result of both paid search listings, where we purchase specific search terms that result
in the inclusion of our advertisement, and free search listings, which depend on algorithms used by search engines. For paid search listings,
if one or more of the search engines or other online sources on which we rely for purchased listings modifies or terminates its relationship
with us, our expenses could rise if we are required to pay a higher price for such listings or if the alternatives we find are more expensive,
or we could lose consumers and traffic to our website could decrease, any of which could have a material adverse effect on our business,
results of operations and financial condition. For free search listings, if search engines on which we rely for algorithmic listings
modify their algorithms, our websites may appear less prominently or not at all in search results, which could result in reduced traffic
to our websites, as a result of which we might attract fewer new customers.
Our ability to maintain
or increase the number of consumers who purchase our products after being directed to our website or our mobile app from other digital
platforms depends on many factors that are not within our control. Search engines, social media platforms and other online sources often
revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which
we rely for traffic to our website and our mobile app were to modify its general methodology for how it displays our advertisements or
keyword search results, resulting in fewer consumers clicking through to our website and our mobile app, our business and operating results
are likely to suffer. In addition, if our online display advertisements are no longer effective or are not able to reach certain consumers
due to consumers’ use of ad-blocking software, our business and operating results could suffer.
Additionally, changes
in regulations could limit the ability of search engines and social media platforms, including but not limited to Google and Facebook,
to collect data from users and engage in targeted advertising, making them less effective in disseminating our advertisements to our
target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (“DASHBOARD”)
Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies,
such as Facebook, Google and Amazon, including how revenue is generated by user data and what measures are taken to protect the data.
If the costs of advertising on search engines and social media platforms increase, we may incur additional marketing expenses or be required
to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected.
Similarly, changes to regulations applicable to the insurance brokerage and distribution business may limit our ability to rely on key
distribution platforms, if the third-party distribution platforms are unable to continue to distribute our insurance products without
an insurance producer license pursuant to applicable insurance law and regulations.
The marketing of
our insurance products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with
digital app stores, in particular, those operated by Google and Apple. As we grow, we may struggle to maintain cost-effective marketing
strategies, and our customer acquisition costs could rise substantially. Furthermore, because many of our customers access our insurance
products through a mobile app, we depend on the Apple App Store and the Google Play Store to distribute our mobile app.
Operating system platforms and
application stores controlled by third parties, such as Apple and Google, may change their terms of service or policies in a manner that
increases our costs or impacts our ability to distribute our mobile app, collect data through it, and market our products.
We are subject to
the terms of service and policies governing the operating system platforms on which our mobile app runs and the application stores through
which we distribute our mobile app, such as those operated by Apple and Google. These terms of service and policies govern the distribution,
operation and promotion of applications on such platforms and stores. These platforms and stores have broad discretion to change and
interpret their terms of service and policies in a manner that may adversely affect our business. For example, an operating system platform
or application store may increase fees associated with access to it, restrict the collection of data through mobile apps that run on
those platforms, restrict how that data is used and shared, and limit how mobile app publishers advertise online.
We rely on telematics
to collect data points from an OBD-II device in customers’ vehicles. This data is used to accurately bill the miles they have driven,
evaluate pricing and underwriting risks, manage claims and customer support, and improve business processes. Limitations on our ability
to collect, use or share telematics and other data derived from the OBD-II device, as well as new technologies that block our ability
to collect, use or share such data, could significantly diminish the value of our platform and have an adverse effect on our ability
to generate revenue. Limitations or blockages on our ability to collect, use or share data derived from use of our mobile app may also
restrict our ability to analyze such data to facilitate our product improvement, research and development and advertising activities.
For example, in June 2020, Apple announced plans to require applications using its mobile operating systems to obtain an end-user’s
permission to track them or access their device’s advertising identifier for advertising and advertising measurement purposes,
as well as other restrictions that could adversely affect our business.
If we were to violate,
or be perceived to have violated, the terms of service or policies of an operating system platform or application store, the provider
may limit or block our access to it. It is possible that an operating system platform or application store might limit, eliminate or
otherwise interfere with the distribution of our mobile app, the features we provide and the manner in which we market our mobile app,
or give preferential treatment on their platforms or stores to a competitor. To the extent either or both of them do so, our business,
results of operations and financial condition could be adversely affected.
Furthermore, one
of the factors we use to evaluate our customer satisfaction and market position is our Apple App Store ratings. This rating, however,
may not be a reliable indicator of our customer satisfaction relative to other companies who are rated on the Apple App Store since,
to date, we have received a fraction of the number of reviews of some of the companies we benchmark against, and thus our number of positive
reviews may not be as meaningful.
Our expansion within the United States
will subject us to additional costs and risks, and our plans may not be successful.
Our success depends in significant part on our
ability to expand into additional markets in the United States and abroad. We are currently licensed in the District of Columbia
and 49 states of the United States, with licenses active in 46 states and the District of Columbia, and write business in eight
of those states. We plan to have a presence in almost all states by 2022 but cannot guarantee that we will be able to provide nationwide
coverage on that timeline or at all. Moreover, one or more states could revoke our license to operate, or implement additional regulatory
hurdles that could preclude or inhibit our ability to obtain or maintain our license in such states. As we seek to expand in the United States,
we may incur significant operating expenses, although our expansion may not be successful for a variety of reasons, including because
of:
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barriers to obtaining the required government approvals, licenses or other authorizations;
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failures in identifying and entering into joint ventures with strategic partners, both domestically and internationally, or entering
into joint ventures that do not produce the desired results;
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challenges in, and the cost of, complying with various laws and regulatory standards, including with respect to the insurance business
and insurance distribution, capital and outsourcing requirements, data privacy, tax, claims handling, and local regulatory restrictions;
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difficulty in recruiting and retaining licensed, talented and capable employees;
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competition from local incumbents that already own market share, better understand the local market, may market and operate more effectively
and may enjoy greater local affinity or awareness;
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differing demand dynamics, which may make our product offerings less successful; or
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currency exchange restrictions or costs and exchange rate fluctuations, or significant increases to import tariffs.
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Expansion into new
markets in the United States will also require additional investments by us both in marketing and with respect to securing applicable
regulatory approvals. These incremental costs may result from hiring additional personnel, from engaging third-party service providers
and from incurring other research and development costs. If we invest substantial time and resources to expand our operations while our
revenues from those additional operations do not exceed the expense of establishing and maintaining them, or if we are unable to manage
these risks effectively, our business, results of operations and financial condition could be adversely affected.
If we fail to grow
our geographic footprint or geographic growth occurs at a slower rate than expected, our business, results of operations and financial
condition could be materially and adversely affected.
Our technology platform may not
operate properly or as we expect it to operate.
We utilize our technology
platform to gather customer data in order to determine whether or not to write and how to price our insurance products. Similarly, we
use our technology platform to process many of our claims. Our technology platform is expensive and complex, its continuous development,
maintenance and operation may entail unforeseen difficulties including material performance problems or undetected defects or errors.
We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our technology from operating
properly. If our platform does not function reliably, we may incorrectly select our customers, bill our customers, price insurance products
or incorrectly pay or deny insurance claims made by our customers. These errors could result in inadequate insurance premiums paid relative
to claims made, resulting in increased financial losses. These errors could also cause customer dissatisfaction with us, which could
cause customers to cancel or fail to renew their insurance policies with us or make it less likely that prospective customers obtain
new insurance policies from us. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting
process, which could subject us to legal or regulatory liability and harm our brand and reputation. Any of these eventualities could
result in a material adverse effect on our business, results of operations and financial condition.
We depend on third-party technology
providers to support our telematics data acquisition.
We utilize telematics
technology to gather data that we use to underwrite insurance policies, bill customers, and manage claims and customer service. Our telematics
hardware is designed and manufactured and telematics data services are provided to us by third parties. These companies may fail to provide
us accurate or complete data due to technical or operating failures, their hardware may have errors that inaccurately collect or represent
driver behavior, car location, or other sensor data, or they may go stop offering their services to us. If we are delivered inaccurate
or no data due to these failures, we may overpay claims, underbill customers, or create customer dissatisfaction that causes customers
to cancel their insurance policies with us. Any of these eventualities could result in a material adverse effect on our business, results
of operations and financial condition.
Regulatory changes may limit our
ability to develop or implement our telematics-based pricing model and/or may eliminate or restrict the confidentiality of our proprietary
technology.
Our future success
depends on our ability to continue to develop and implement our telematics-based pricing model, and to maintain the confidentiality of
our proprietary technology. Changes to existing laws, their interpretation or implementation, or new laws could impede our use of this
technology, or require that we disclose our proprietary technology to our competitors, which could negatively impact our competitive
position and result in a material adverse effect on our business, results of operations, and financial condition. For example, the November 2020
ballot measure in California, which was formally adopted, will enact the CPRA, which mandates issuance of regulations providing California
residents with the right to information about the logic of certain algorithmic decisions about them and the right to opt-out of such
decisions. Such regulations, and similar laws that could be enacted in other states, could require disclosure of our proprietary technology,
limit the effectiveness of our products and reduce demand for them.
Our brand may not become as widely
known or accepted as incumbents’ brands or the brand may become tarnished.
Many of our competitors
have brands that are well-recognized. As a relatively new entrant into the insurance market, we have spent, and expect that we will for
the foreseeable future continue to spend, considerable amounts of money and other resources on creating brand awareness and building
our reputation. We may not be able to build brand awareness to levels matching our competitors, and our efforts at building, maintaining
and enhancing our reputation could fail and/or may not be cost-effective. Complaints or negative publicity about our business practices,
our marketing and advertising campaigns (including marketing affiliations or partnerships), our compliance with applicable laws, the
integrity of the data that we provide to consumers or business partners, data privacy and security issues, and other aspects of our business,
whether real or perceived, could diminish confidence in our brand, which could adversely affect our reputation and business. As we expand
our product offerings and enter new markets, we will need to establish our reputation with new customers, and to the extent we are not
successful in creating positive impressions, our business in these newer markets could be adversely affected. While we may choose to
engage in a broader marketing campaign to further promote our brand, this effort may not be successful or cost effective. If we are unable
to maintain or enhance our reputation or enhance consumer awareness of our brand in a cost-effective manner, our business, results of
operations and financial condition could be materially adversely affected.
We may not continue to grow at
historical rates or achieve or maintain profitability in the future.
Our limited operating
history may make it difficult to evaluate our current business and our future prospects. While our revenue has grown in recent periods,
this growth rate may not be sustainable and should not be considered indicative of future performance, and we may not realize sufficient
revenue to achieve or maintain profitability. As we grow our business, we expect our revenue growth rates may slow in future periods
due to a number of reasons, which may include slowing demand for our service, increasing competition, a decrease in the growth of our
overall market, and our failure to capitalize on growth opportunities or the maturation of our business. We have incurred net losses
on an annual basis since our inception, and may incur significant losses in the future for a number of reasons, including insufficient
growth in the number of customers, a failure to retain our existing customers, and increasing competition, as well as other risks described
in these Risk Factors, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown factors. We
expect to continue to make investments in the development and expansion of our business, which may not result in increased or sufficient
revenue or growth, as a result of which we may not be able to achieve or maintain profitability.
We rely on highly skilled and
experienced personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, our business may
be seriously harmed. In addition, the loss of key senior management personnel could harm our business and future prospects.
Our performance largely
depends on the talents and efforts of highly-skilled and experienced individuals. Our future success depends on our continuing ability
to identify, hire, develop, motivate and retain highly skilled and experienced personnel and, if we are unable to hire and train a sufficient
number of qualified employees for any reason, we may not be able to maintain or implement our current initiatives or grow, or our business
may contract and we may lose market share. Moreover, certain of our competitors or other insurance or technology businesses may seek
to hire our employees. We cannot assure you that our equity incentives and other compensation will provide adequate incentives to attract,
retain and motivate employees in the future, particularly if the market price of our Common Stock does not increase or declines. If we
do not succeed in attracting, retaining and motivating highly qualified personnel, our business may be seriously harmed.
We depend on our
senior management, including Dan Preston, our Chief Executive Officer, and Paw Andersen, our Chief Technology Officer, as well as other
key personnel. We may not be able to retain the services of any of our senior management or other key personnel, as their employment
is at-will and they could leave at any time. If we lose the services of one or more of our senior management and other key personnel,
including as a result of the COVID-19 pandemic, we may not be able to successfully manage our business, meet competitive challenges or
achieve our growth objectives. Further, to the extent that our business grows, we will need to attract and retain additional qualified
management personnel in a timely manner, and we may not be able to do so. Our future success depends on our continuing ability to identify,
hire, develop, motivate, retain and integrate highly skilled personnel in all areas of our organization.
New legislation or legal requirements
may affect how we communicate with our customers, which could have a material adverse effect on our business model, financial condition,
and results of operations.
State and federal
lawmakers, insurance regulators, and advisory groups such as the NAIC are focusing upon the use of artificial intelligence broadly, including
concerns about transparency, deception, and fairness in particular. Changes in laws or regulations, or changes in the interpretation
of laws or regulations by a regulatory authority, specific to the use of artificial intelligence, may decrease our revenues and earnings
and may require us to change the manner in which we conduct some aspects of our business. We may also be required to disclose our proprietary
software to regulators, putting our intellectual property at risk, in order to receive regulatory approval to use such artificial intelligence
in the underwriting of insurance and/or the payment of claims. In addition, our business and operations are subject to various U.S. federal,
state, and local consumer protection laws, including laws which place restrictions on the use of automated tools and technologies to
communicate with wireless telephone subscribers or consumers generally. For example, a California law, effective as of July 2019,
makes it unlawful for any person to use a bot to communicate with a person in California online with the intent to mislead the other
person about its artificial identity for the purpose of knowingly deceiving the person about the content of the communication in order
to incentivize a purchase of goods or services in a commercial transaction. Although we have taken steps to mitigate our liability for
violations of this and other laws restricting the use of electronic communication tools, no assurance can be given that we will not be
exposed to civil litigation or regulatory enforcement. Further, to the extent that any changes in law or regulation further restrict
the ways in which we communicate with prospective or current customers before or during onboarding, customer care, or claims management,
these restrictions could result in a material reduction in our customer acquisition and retention, reducing the growth prospects of our
business, and adversely affecting our financial condition and future cash flows.
Severe weather events and other
catastrophes, including the effects of climate change, are inherently unpredictable and may have a material adverse effect on our financial
results and financial condition.
Our business may
be exposed to catastrophic events such as tornadoes, tsunamis, tropical storms (including hurricanes), earthquakes, windstorms, hailstorms,
severe thunderstorms, wildfires and other fires, as well as non-natural events such as explosions, riots, terrorism, or war, which could
cause operating results to vary significantly from one period to the next. We may incur catastrophe losses in our business in excess
of: (1) those experienced in prior years, (2) the average expected level used in pricing, (3) current reinsurance coverage
limits, or (4) loss estimates from external tornado, hail, hurricane and earthquake models at various levels of probability. In
addition, we are subject to customer insurance claims arising from weather events such as winter storms, rain, hail and high winds. The
incidence and severity of weather conditions are largely unpredictable. There is generally an increase in the frequency and severity
of customer insurance claims when severe weather conditions occur.
The incidence and
severity of severe weather conditions and catastrophes are inherently unpredictable and the occurrence of one catastrophe does not render
the possibility of another catastrophe greater or lower. The extent of losses from a catastrophe is a function of both the total amount
of insured exposure in the area affected by the event and the severity of the event. In particular, severe weather and other catastrophes
could significantly increase our costs due to a surge in claims following such events and/or legal and regulatory changes in response
to catastrophes that may impair our ability to limit our liability under our policies. Severe weather conditions and catastrophes can
cause greater losses for us, which can cause our liquidity and financial condition to deteriorate. Given our current state mix and performance
of our book, we do not currently carry event reinsurance coverage for severe weather events. In addition, reinsurance placed in the market
also carries some counterparty credit risk.
Climate change may
affect the occurrence of certain natural events, such as an increase in the frequency or severity of wind and thunderstorm events, eruptions
of volcanoes, and tornado or hailstorm events due to increased convection in the atmosphere; more frequent wildfires and subsequent landslides
in certain geographies; higher incidence of deluge flooding and the potential for an increase in severity of the hurricane events due
to higher sea surface temperatures. Additionally, climate change may cause an impact on the demand, price and availability of insurance,
as well as the value of our investment portfolio. Due to significant variability associated with future changing climate conditions,
we are unable to predict the impact climate change will have on our business.
Denial of claims or our failure
to accurately and timely pay claims could materially and adversely affect our business, financial condition, results of operations, brand
and prospects.
Under the terms of
our policies, we are required to accurately and timely evaluate and pay claims. Our ability to do so depends on a number of factors,
including the efficacy of our claims processing, the training and experience of our claims adjusters, including our third-party claims
administrators, and our ability to develop or select and implement appropriate procedures and systems to support our claims functions.
We believe that the
speed at which our technology-based claims processing platform allows us to process and pay claims is a differentiating factor for our
business relative to our competitors, and an increase in the average time to process claims could lead to customer dissatisfaction and
undermine our reputation and position in the insurance marketplace. If our claims adjusters or third-party claims administrators are
unable to effectively process our volume of claims, our ability to grow our business while maintaining high levels of customer satisfaction
could be compromised, which in turn, could adversely affect our operating margins. Any failure to pay claims accurately or timely could
also lead to regulatory and administrative actions or other legal proceedings and litigation against us, or result in damage to our reputation,
any one of which could materially and adversely affect our business, financial condition, results of operations, brand and prospects.
Unexpected increases in the frequency
or severity of claims may adversely affect our results of operations and financial condition.
Our business may
experience volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. Changes in claim
frequency may result from changes in mix of business, miles driven, distracted driving, macroeconomic or other factors. A significant
increase in claim frequency could have an adverse effect on our results of operations and financial condition.
Changes in bodily
injury claim severity are impacted by inflation in medical costs, litigation trends and precedents, regulation and the overall safety
of automobile travel. Changes in auto property damage claim severity are driven primarily by inflation in the cost to repair vehicles,
including parts and labor rates, the mix of vehicles that are declared total losses, model year mix as well as used car values. While
actuarial models for pricing and reserving typically include an expected level of inflation, unanticipated increases in claim severity
can arise from events that are inherently difficult to predict. Although we pursue various loss management initiatives to mitigate future
increases in claim severity, there can be no assurances that these initiatives will successfully identify or reduce the effect of future
increases in claim severity.
Failure to maintain our risk-based
capital at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business.
We are required to
have sufficient capital and surplus in order to comply with insurance regulatory requirements, support our business operations and minimize
our risk of insolvency. The NAIC has developed a system to test the adequacy of statutory capital and surplus of U.S.-based insurers,
known as risk-based capital, that all states have adopted. This system establishes the minimum amount of capital and surplus necessary
for an insurance company to support its overall business operations in consideration of its size and risk profile. It identifies insurers
that may be inadequately capitalized by looking at certain risk factors, including asset risk, credit risk and underwriting risk with
respect to the insurer’s business in order to determine an insurer’s authorized control level risk-based capital. An insurer’s
risk-based capital ratio measures the relationship between its total adjusted capital and its authorized control level risk-based capital.
Insurers with a ratio
falling below certain calculated thresholds may be subject to varying degrees of regulatory action, including heightened supervision,
examination, rehabilitation or liquidation. An insurance company with total adjusted capital that is less than 200% of its authorized
control level risk-based capital is at a company action level, which would require the insurance company to file a risk-based capital
plan that, among other things, contains proposals of corrective actions the company intends to take that are reasonably expected to result
in the elimination of the company action level event. Additional action level events occur when the insurer’s total adjusted capital
falls below 150%, 100% and 70% of its authorized control level risk-based capital. Lower percentages trigger increasingly severe regulatory
responses. In the event of a mandatory control level event (triggered when an insurer’s total adjusted capital falls below 70%
of its authorized control level risk-based capital), an insurer’s primary regulator is required to take steps to place the insurer
into receivership. As part of its regulatory review and approval of this transaction, the Delaware Department of Insurance required us
to enter into a Capital Maintenance Agreement (the “CMA”). The CMA requires us, if the transaction closes, to ensure that
the regulated insurance subsidiary, Metromile Insurance Company, will have and maintain total adjusted capital in an amount equal to
at least 300% of the insurance company’s authorized control level risk based capital from the close of the transaction until a
date to be determined by the regulator in mid-2025. Being required to maintain capital levels above the statutory requirement could put
constraints on our ability to deploy capital to which our competitors are not subject.
In addition, the
NAIC Insurance Regulatory Information System (the “IRIS”), is a collection of analytical tools designed to provide state
insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating
in their respective states. If our ratios fall outside of the usual range for one or more ratios set forth by the IRIS for any number
of reasons, it could subject us to heightened regulatory scrutiny or measures, or create investor uncertainty around the stability of
our financial condition, which could harm our business.
Further, the NAIC
has promulgated a Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial
Condition (the “Hazardous Financial Condition Standards”), which has been adopted by many states in whole or part. If our
financial condition is deemed by state insurance regulators to meet the Hazardous Financial Conditions Standards, it could subject us
to heightened regulatory scrutiny or measures, or create uncertainty around the stability of our financial condition, which could harm
our business.
As a relatively new
entrant to the insurance industry, we may face additional capital and surplus requirements as compared to those of our larger and more
established competitors. Failure to maintain adequate risk-based capital at the levels required by law and/or the Delaware Department
of Insurance as described above could result in increasingly onerous reporting and examination requirements and could adversely affect
our ability to maintain regulatory authority to conduct our business.
Security incidents, or real or
perceived errors, failures or bugs in our systems, website or app could impair our operations, compromise our confidential information
or our customers’ personal information, damage our reputation and brand, and harm our business and operating results.
Our continued success
depends on our systems, applications, and software continuing to operate and to meet the changing needs of our customers and users. We
rely on our technology and engineering staff and vendors to successfully implement changes to and maintain our systems and services in
an efficient and secure manner. Like all information systems and technology, our website and mobile app may contain or develop material
errors, failures, vulnerabilities or bugs, particularly when new features or capabilities are released, and may be subject to computer
viruses or malicious code, break-ins, phishing impersonation attacks, attempts to overload our servers with denial-of-service or other
attacks, ransomware and similar incidents or disruptions from unauthorized use of our computer systems, as well as unintentional incidents
causing data leakage, any of which could lead to interruptions, delays or website or mobile app shutdowns.
Operating our business
and products involves the collection, storage, use and transmission of sensitive, proprietary and confidential information, including
personal information, pertaining to our current, prospective and past customers, staff, contractors, and business partners. The security
measures we take to protect this information may be breached as a result of computer malware, viruses, social engineering, ransomware
attacks, hacking and cyberattacks, including by state-sponsored and other sophisticated organizations. Such incidents have become more
prevalent in recent years. For example, attempts to fraudulently induce our personnel into disclosing usernames, passwords or other information
that can be used to access our systems and the information in them have increased and could be successful. Our security measures could
also be compromised by our personnel, theft or errors, or be insufficient to prevent exploitation of security vulnerabilities in software
or systems on which we rely. Such incidents have in the past resulted in unauthorized access to certain personal information, and may
in the future result in unauthorized, unlawful or inappropriate use, destruction or disclosure of, access to, or inability to access
the sensitive, proprietary and confidential information that we handle. These incidents may remain undetected for extended periods of
time.
We rely on third-party
service providers to provide critical services that help us deliver our solutions and operate our business. These providers may support
or operate critical business systems for us or store or process the same sensitive, proprietary and confidential information that we
handle. These service providers may not have adequate security measures and could experience a security incident that compromises the
confidentiality, integrity or availability of the systems they operate for us or the information they process on our behalf. Such occurrences
could adversely affect our business to the same degree as if we had experienced these occurrences directly and we may not have recourse
to the responsible third-party service providers for the resulting liability we incur.
Because there are
many different cybercrime and hacking techniques and such techniques continue to evolve, we may be unable to anticipate attempted security
breaches, react in a timely manner or implement adequate preventative measures. While we have developed systems and processes designed
to protect the integrity, confidentiality and security of our and our customers’ confidential and personal information under our
control, we cannot assure you that any security measures that we or our third-party service providers have implemented will be effective
against current or future security threats.
A security breach
or other security incident of our systems, data, website or app has occurred in the past, and may occur in the future. For example, in
January 2021, we discovered a security incident related to our online pre-filled quote form and application process, which resulted in
unknown person(s) accessing personal information of certain individuals, including individuals’ driver’s license numbers.
An actual security breach or incident, a material vulnerability, or the perception that one has occurred or exists, could result in a
loss of customer confidence in the security of our platform and damage to our reputation and brand; reduce demand for our insurance products;
disrupt normal business operations; require us to expend significant capital and resources to investigate and remedy the incident, and
prevent recurrence and comply with any breach notification obligations; and subject us to litigation (including class actions),
regulatory enforcement action, fines, penalties, and other liability, which could adversely affect our business, financial condition
and results of operations.
Even if we take steps
that we believe are adequate to protect us from cyber threats, hacking against our competitors or other companies in our industry could
create the perception among our customers or potential customers that our digital platform is not safe to use. Security incidents could
also damage our IT systems and our ability to make the financial reports and other public disclosures required of public companies. These
risks are likely to increase as we continue to grow and process, store and transmit an increasingly large volume of data.
We may be unable to prevent, monitor
or detect fraudulent activity, including policy acquisitions or payments of claims that are fraudulent in nature.
If we fail to maintain
adequate systems and processes to prevent, monitor and detect fraud, including fraudulent policy acquisitions or claims activity, or
if inadvertent errors occur with such prevention, monitoring and detection systems due to human or computer error, our business could
be materially adversely impacted. While we believe past incidents of fraudulent activity have been relatively isolated, we cannot be
certain that our systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes.
We use a variety of tools to protect against fraud, but these tools may not always be successful at preventing such fraud.
Instances of fraud
may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on our
business and reputation. In addition, failure to monitor and detect fraud and otherwise comply with state Special Investigation Unit
requirements can result in regulatory fines or penalties.
We are subject to stringent and
changing privacy and data security laws, regulations, and standards related to data privacy and security. Our actual or perceived failure
to comply with such obligations could harm our reputation, subject us to significant fines and liability, or adversely affect our business.
In the United States,
insurance companies are subject to the privacy provisions of the federal Gramm-Leach-Bliley Act and the NAIC Insurance Information and
Privacy Protection Model Act, to the extent adopted and implemented by various state legislatures and insurance regulators. The regulations
implementing these laws require insurance companies to disclose their privacy practices to consumers, allow them to opt-in or opt-out,
depending on the state, of the sharing of certain personal information with unaffiliated third parties, and maintain certain security
controls to protect their information. Violators of these laws face regulatory enforcement action, substantial civil penalties, injunctions,
and in some states, private lawsuits for damages.
Privacy and data
security regulation in the U.S. is rapidly evolving. For example, California recently enacted the CCPA, which became effective January
1, 2020. The CCPA and related regulations give California residents expanded rights to access and request deletion of their personal
information, opt out of certain personal information sharing, and receive detailed information about how their personal information is
used and shared. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches,
which is expected to increase the volume and success of class action data breach litigation. In addition to increasing our compliance
costs and potential liability, the CCPA’s restrictions on “sales” of personal information may restrict our use of cookies
and similar technologies for advertising purposes. The CCPA excludes information covered by Gramm-Leach-Bliley Act, the Driver’s
Privacy Protection Act, the Fair Credit Reporting Act (the “California Financial Information Privacy Act”) from the CCPA’s
scope, but the CCPA’s definition of “personal information” is broad and may encompass other information that we maintain.
Some observers have noted that the CCPA could mark the beginning of a trend toward more stringent privacy legislation in the U.S., and
multiple states have enacted or proposed similar laws. There is also discussion in Congress of new comprehensive federal data protection
and privacy law to which we likely would be subject if it is enacted.
In addition, California
voters approved the November 2020 ballot measure which will enact the CPRA, substantially expanding the requirements of the CCPA.
As of January 1, 2023, the CPRA will give consumers the ability to limit use of precise geolocation information and other categories
of information classified as “sensitive”; add e-mail addresses and passwords to the list of personal information that, if
lost or breached, would give the affected consumers the right to bring private lawsuits; increase the maximum penalties threefold for
violations concerning consumers under age 16; and establish the California Privacy Protection Agency to implement and enforce the new
law, as well as impose administrative fines. The effects of the CCPA, CPRA and other similar state or federal laws are potentially significant
and may require us to modify our data processing practices and policies, incur substantial compliance costs and subject us to increased
potential liability.
In addition to privacy
and data security requirements under applicable laws, we are subject to the Payment Card Industry Data Security Standard (“PCI
DSS”), a self-regulatory standard that requires companies that process payment card data to implement certain data security measures.
If we or our payment processors fail to comply with the PCI DSS, we may incur significant fines or liability and lose access to major
payment card systems. Industry groups may in the future adopt additional self-regulatory standards by which we are legally or contractually
bound.
If we expand into
Europe, we may also face particular privacy, data security, and data protection risks in connection with requirements of the General
Data Protection Regulation (E.U.) 2016/679 (“GDPR”) and other data protection regulations. Among other stringent requirements,
the GDPR restricts transfers of data outside of the E.U. to countries deemed to lack adequate privacy protections (such as the U.S.),
unless an appropriate safeguard specified by the GDPR is implemented. A July 16, 2020 decision of the Court of Justice of the European
Union invalidated a key mechanism for lawful data transfer to the U.S. and called into question the viability of its primary alternative.
As such, the ability of companies to lawfully transfer personal data from the E.U. to the U.S. is presently uncertain. Other countries
have enacted or are considering enacting similar cross-border data transfer rules or data localization requirements. These developments
could limit our ability to deliver our products in the E.U. and other foreign markets. In addition, any failure or perceived failure
to comply with these rules may result in regulatory fines or penalties including orders that require us to change the way we process
data.
Additionally, we
are subject to the terms of our privacy policies, privacy-related disclosures, and contractual and other privacy-related obligations
to our customers and other third parties. Any failure or perceived failure by us or third parties we work with to comply with these policies,
disclosures, and obligations to customers or other third parties, or privacy or data security laws may result in governmental or regulatory
investigations, enforcement actions, regulatory fines, criminal compliance orders, litigation or public statements against us by consumer
advocacy groups or others, and could cause customers to lose trust in us, all of which could be costly and have an adverse effect on
our business.
We rely on our mobile application
to execute our business strategy. Government regulation of the internet and the use of mobile applications in particular is evolving,
and unfavorable changes could seriously harm our business.
We rely on our mobile
application to execute our business strategy. We are subject to general business regulations and laws as well as federal and state regulations
and laws specifically governing the internet and the use of mobile applications in particular. Existing and future laws and regulations
may impede the growth of the internet or other online services, and increase the cost of providing online services. These regulations
and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications,
electronic signatures and consents, consumer protection and social media marketing. It is at times not clear how existing laws governing
issues such as property ownership, sales and other taxes and consumer privacy apply to the internet and the use of mobile applications
in particular, as the vast majority of these laws were adopted prior to the advent of the internet and the use of mobile applications
and do not contemplate or address the unique issues raised by the internet. It is possible that general business regulations and laws,
or those specifically governing the internet and the use of mobile applications in particular, may be interpreted and applied in a manner
that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our
practices have complied, currently comply or will comply fully with all such laws and regulations. Any failure, or perceived failure,
by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or
actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant
amounts in defense of these proceedings, distract our management, increase our costs of doing business and decrease the use of our mobile
application or website by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually
liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.
Our intellectual property rights
are valuable, and any inability to protect them could reduce the value of our products, services and brand.
Our trade secrets,
trademarks, copyrights, patents, and other intellectual property rights are important assets for us. We rely on, and expect to continue
to rely on, various agreements with our employees, independent contractors, consultants and third parties with whom we have relationships,
as well as trademark, trade dress, domain name, copyright, patent, and trade secret laws, to protect our brand and other intellectual
property rights. Such agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual
property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information,
intellectual property or technology, and we may fail to consistently obtain, police and enforce such agreements. Additionally, various
factors outside our control pose a threat to our intellectual property rights, as well as to our products, services and technologies.
For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not
be available in every country in which our products and services are available. Also, the efforts we have taken to protect our intellectual
property rights may not be sufficient or effective in all cases. For example, governmental entities that grant intellectual property
rights may deny our applications for such rights despite our best efforts. Additionally, granted intellectual property rights are subject
to challenge. Successful challenges may result in such rights being narrowed in scope or declared invalid or unenforceable. Despite our
efforts to obtain and protect broad intellectual property rights, there can be no assurance our intellectual property rights will be
sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business,
and unauthorized parties may attempt to copy aspects of our technology and use information that we consider proprietary. Competitors
or other third parties may also attempt to circumvent or design around our intellectual property rights.
In addition to registered
intellectual property rights such as trademark registrations, we rely on non-registered proprietary information and technology, such
as trade secrets, confidential information, know-how and technical information. Certain information or technology that we endeavor to
protect as trade secrets may not be eligible for trade secret protection in all jurisdictions, or the measures we undertake to establish
and maintain such trade secret protection may be inadequate. In order to protect our proprietary information and technology, we rely
in part on agreements with our employees, investors, independent contractors and other third parties that place restrictions on the use
and disclosure of this intellectual property. In some cases, these agreements may not adequately protect our trade secrets, these agreements
may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become known to our competitors,
which could cause us to lose a competitive advantage resulting from this intellectual property. However, our employees, independent contractors
or other third parties with whom we do business may nonetheless use intellectual property owned by others in their work for us, and disputes
may arise as to the rights in related or resulting know-how and inventions. Current or future legal requirements may require us to disclose
certain proprietary information or technology, such as our proprietary algorithms, to regulators or other third parties, including our
competitors, which could impair or result in the loss of trade secret protection for such information or technology. The loss of trade
secret protection could make it easier for third parties to compete with our products and services by copying functionality. In addition,
any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and
intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary
rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results
of operations and competitive position.
We have filed, and
may continue in the future to file, applications to protect certain of our innovations and intellectual property. We do not know whether
any of our applications will result in the issuance of a patent, trademark or copyright, as applicable, or whether the examination process
will require us to narrow our claims or otherwise limit the scope of such intellectual property. In addition, we may not receive competitive
advantages from the rights granted under our intellectual property. Our existing intellectual property, and any intellectual property
granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent
third parties from infringing our intellectual property rights. Therefore, the exact effect of the protection of this intellectual property
cannot be predicted with certainty. Because obtaining patent protection requires disclosing our inventions to the public, such disclosure
may facilitate our competitors developing improvements to our innovations. Given this risk, we may sometimes choose not to seek patent
protection for certain innovations and instead rely on trade secret protection. Any failure to adequately obtain such patent protection,
or other intellectual property protection, could later prove to adversely impact our business.
We currently hold
various domain names relating to our brand, including Metromile.com. Failure to protect our domain names could adversely affect our reputation
and brand and make it more difficult for users to find our website and our mobile app. We may be unable, without significant cost or
at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
We may be required
to spend significant resources in order to monitor and protect our intellectual property rights, and some violations may be difficult
or impossible to detect. For example, infringement of patent rights related to internal software processes may be difficult to detect.
Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and
could result in the impairment or loss of portions of our intellectual property. Our efforts to enforce our intellectual property rights
may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights
or asserting that we infringe third-party intellectual property rights. The unauthorized copying or use of our proprietary technology,
as well as any costly litigation or diversion of our management’s attention and resources, could impair the functionality of our
platform, delay introductions of enhancements to our platform, result in our substituting inferior or more costly technologies into our
platform or harm our reputation or brand. In addition, we may be required to license additional technology from third parties to develop
and market new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect
our ability to compete.
Although we take
measures to protect our intellectual property, if we are unable to prevent the unauthorized use or exploitation of our intellectual property,
the value of our brand, content, and other intangible assets may be diminished, competitors may be able to more effectively mimic our
service and methods of operations, the perception of our business and service to customers and potential customers may become confused,
and our ability to attract customers may be adversely affected. Any failure to protect our intellectual property could adversely impact
our business, results of operations and financial condition. While we take precautions designed to protect our intellectual property,
it may still be possible for competitors and other unauthorized third parties to copy our technology and use our proprietary brand, content
and information to create or enhance competing solutions and services, which could adversely affect our competitive position in our rapidly
evolving and highly competitive industry. Some license provisions that protect against unauthorized use, copying, transfer and disclosure
of our technology may be unenforceable under the laws of certain jurisdictions and foreign countries. While we enter into confidentiality
and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with our third-party
providers and strategic partners, we cannot assure you that these agreements will be effective in controlling access to, and use and
distribution of, our products and proprietary information. Further, these agreements do not prevent our competitors from independently
developing technologies that are substantially equivalent or superior to our offerings.
Some of our products and services
contain open source software, which may pose particular risks to our proprietary software, products, and services in a manner that could
have a negative effect on our business.
We use open source
software in our products and services and anticipate continuing to use open source software in the future. Some open source software
licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of
the source code of such software product or to make available any derivative works of the open source code on unfavorable terms or at
no cost, and we may be subject to such terms. The terms of certain open source licenses to which we are subject have not been interpreted
by U.S. or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated
conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we could face claims from
third parties claiming ownership of, or demanding release of, the open source software or derivative works that we develop using such
software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license.
These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license
or cease offering the implicated products or services unless and until we can re-engineer such source code to eliminate use of such open
source software. This re-engineering process could require us to expend significant additional research and development resources, and
we may not be able to complete the re-engineering process successfully. In addition to risks related to license requirements, use of
certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally
do not provide warranties, assurance of title or controls on the origin or operation of the open source software, which are risks that
cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate
these risks, including a review process for screening requests from our development teams for the use of open source software, but we
cannot be sure that all of our use of open source software is in a manner that is consistent with our current policies and procedures,
or will not subject us to liability. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have
a negative effect on our business, financial condition and operating results.
Claims by others that we infringe
or have infringed their proprietary technology or other intellectual property rights could harm our business.
Companies in the
internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual
property rights. In addition, certain companies and rights holders seek to enforce and monetize patents or other intellectual property
rights they own, have purchased or have otherwise obtained. As we gain an increasingly high public profile, the possibility of intellectual
property rights claims against us grows. From time to time, third parties may assert claims of infringement of intellectual property
rights against us. Although we may have meritorious defenses, there can be no assurance that we will be successful in defending against
these allegations or in reaching a business resolution that is satisfactory to us. Our competitors and others may now and in the future
have significantly larger and more mature patent portfolios than us. In addition, future litigation may involve patent holding companies
or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may therefore provide
little or no deterrence or protection. Many potential litigants, including some of our competitors and patent-holding companies, have
the ability to dedicate substantial resources to the assertion of their intellectual property rights. Any claim of infringement by a
third party, even those without merit, could cause us to incur substantial costs defending against the claim, could distract our management
from our business and could require us to cease use of such intellectual property. Furthermore, because of the substantial amount of
discovery required in connection with intellectual property litigation, we risk compromising our confidential information during this
type of litigation. We may be required to pay substantial damages, royalties or other fees in connection with a claimant securing a judgment
against us, we may be subject to an injunction or other restrictions that prevent us from using or distributing our intellectual property,
or from operating under our brand, or we may agree to a settlement that prevents us from distributing our offerings or a portion thereof,
which could adversely affect our business, results of operations and financial condition.
With respect to any
intellectual property rights claim, we may have to seek out a license to continue operations found or alleged to violate such rights,
which may not be available, or if available, may not be available on favorable or commercially reasonable terms and may significantly
increase our operating expenses. Some licenses may be non-exclusive, and therefore our competitors may have access to the same technology
licensed to us. If a third party does not offer us a license to its intellectual property on reasonable terms, or at all, we may be required
to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue
to offer our affected offerings), effort and expense and may ultimately not be successful. Any of these events could adversely affect
our business, results of operations and financial condition.
We may be subject to compliance
obligations arising from medical information privacy regulations.
By processing certain
personal injury data on behalf of our clients, we may be subject to compliance obligations under privacy and data security-related laws
specific to the protection of healthcare or medical information. Although we may be subject to the Health Insurance Portability and Accountability
Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”) and
comparable state laws, we do not have a process in place to assess or align our privacy and security practices specifically against requirements
for protecting medical information.
We may be unable to prevent or
address the misappropriation of our data.
From time to time,
third parties may misappropriate our data through website scraping, bots or other means and aggregate this data on their websites with
data from other companies. In addition, copycat websites or mobile apps may misappropriate data and attempt to imitate our brand or the
functionality of our website or our mobile app. If we become aware of such websites or mobile apps, we intend to employ technological
or legal measures in an attempt to halt their operations. However, we may be unable to detect all such websites or mobile apps in a timely
manner and, even if we could, technological and legal measures may be insufficient to halt their operations. In some cases, particularly
in the case of websites or mobile apps operating outside of the U.S., our available remedies may not be adequate to protect us against
the effect of the operation of such websites or mobile apps. Regardless of whether we can successfully enforce our rights against the
operators of these websites or mobile apps, any measures that we may take could require us to expend significant financial or other resources,
which could harm our business, results of operations or financial condition. In addition, to the extent that such activity creates confusion
among consumers or advertisers, our brand and business could be harmed.
If our customers were to claim
that the policies they purchased failed to provide adequate or appropriate coverage, we could face claims that could harm our business,
results of operations and financial condition.
Although we aim to
provide adequate and appropriate coverage under each of our policies, customers could purchase policies that prove to be inadequate or
inappropriate. If such customers were to bring a claim or claims alleging that we failed in our responsibilities to provide them with
the type or amount of coverage that they sought to purchase, we could be found liable for amounts significantly in excess of the policy
limit, resulting in an adverse effect on our business, results of operations and financial condition. While we maintain errors and omissions
insurance coverage to protect us against such liability, such coverage may be insufficient or inadequate.
If we are unable to underwrite
risks accurately or charge competitive yet profitable rates to our customers, our business, results of operations and financial condition
will be adversely affected.
In general, the premiums
for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known.
The accuracy of our pricing depends on our ability to adequately assess risks, estimate losses and comply with state insurance regulations.
Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. We also utilize the data that we gather
through our interactions with our customers, as evaluated and curated by our technology-based pricing platform.
Establishing adequate
premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, LAE, and other
costs. If we do not accurately assess the risks that we underwrite, the premiums that we charge may not be adequate to cover our losses
and expenses, which would adversely affect our results of operations and our profitability. Moreover, if we determine that our prices
are too low, insurance regulations may preclude us from being able to cancel insurance contracts, non-renew customers, or raise premiums.
Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to fewer customers and lower revenues,
which could have a material adverse effect on our business, results of operations and financial condition.
Pricing involves
the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends,
among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies,
we must:
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collect and properly analyze
a substantial volume of data from our customers;
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develop, test and apply appropriate
actuarial projections and rating formulas;
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review and evaluate competitive
product offerings and pricing dynamics;
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closely monitor and timely
recognize changes in trends; and
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project both frequency and
severity of our customers’ losses with reasonable accuracy; and
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in many states obtain regulatory
approval for these processes and the resulting rates.
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There are no assurances
that we will have success in implementing our pricing methodology accurately in accordance with our assumptions. Our ability to accurately
price our policies is subject to a number of risks and uncertainties, including:
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insufficient or unreliable
data;
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incorrect or incomplete analysis
of available data;
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uncertainties generally inherent
in estimates and assumptions;
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our failure to implement appropriate
actuarial projections and rating formulas or other pricing methodologies;
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incorrect or incomplete analysis
of the competitive environment;
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regulatory constraints on rate
increases or the use of certain types of data; and
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our failure to accurately estimate
investment yields and the duration of our liability for loss and loss adjustment expenses, as well as unanticipated court decisions,
legislation or regulatory action.
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To address the potential
inadequacy of our current business model, we may be compelled to increase the amount allocated to cover policy claims, increase premium
rates or adopt tighter underwriting standards, any of which may result in a decline in new business and renewals and, as a result, could
have a material adverse effect on our business, results of operations and financial condition.
Our product development cycles
are complex and subject to regulatory approval, and we may incur significant expenses before we generate revenues, if any, from new products.
Because our products
are highly technical and require rigorous testing and regulatory approvals, development cycles can be complex. Moreover, development
projects can be technically challenging and expensive, and may be delayed or defeated by the inability to obtain licensing or other regulatory
approvals. The nature of these development cycles may cause us to experience delays between the time we incur expenses associated with
research and development and the time we generate revenues, if any, from such expenses. If we expend a significant amount of resources
on research and development and our efforts do not lead to the successful introduction or improvement of products that are competitive
in the marketplace, this could materially and adversely affect our business and results of operations. Additionally, anticipated customer
demand for a product we are developing could decrease after the development cycle has commenced. Such decreased customer demand may cause
us to fall short of our sales targets, and we may nonetheless be unable to avoid substantial costs associated with the product’s
development. If we are unable to complete product development cycles successfully and in a timely fashion and generate revenues from
such future products, the growth of our business may be harmed.
Litigation and legal proceedings
filed by or against us and our subsidiaries could have a material adverse effect on our business, results of operations and financial
condition.
From time to time,
we are subject to allegations, and may be party to litigation and legal proceedings relating to our business operations. Litigation and
other proceedings may include complaints from or litigation by customers or reinsurers, related to alleged breaches of contract or otherwise.
We expect that as our market share increases, competitors may pursue litigation to require us to change our business practices or offerings
and limit our ability to compete effectively.
As is typical in
the insurance industry, we continually face risks associated with litigation of various types arising in the normal course of our business
operations, including disputes relating to insurance claims under our policies as well as other general commercial and corporate litigation.
Although we are not currently involved in any material litigation with our customers, members of the insurance industry are periodically
the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate
amounts, and the outcomes of which are unpredictable. This litigation is based on a variety of issues, including sale of insurance and
claim settlement practices. In addition, because we employ a technology platform to collect customer data, it is possible that customers
or consumer groups could bring individual or class action claims alleging that our methods of collecting data and pricing risk are
impermissibly discriminatory. We cannot predict with any certainty whether we will be involved in such litigation in the future or what
impact such litigation would have on our business. If we were to be involved in litigation and it was determined adversely, it could
require us to pay significant damages or to change aspects of our operations, either of which could have a material adverse effect on
our financial results. Even claims without merit can be time-consuming and costly to defend, and may divert management’s attention
and resources away from our business and adversely affect our business, results of operations and financial condition. Additionally,
routine lawsuits over claims that are not individually material could in the future become material if aggregated with a substantial
number of similar lawsuits. In addition to increasing costs, a significant volume of customer complaints or litigation could also adversely
affect our brand and reputation, regardless of whether such allegations have merit or whether we are liable. We cannot predict with certainty
the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation or other proceedings filed by
or against us, including remedies or damage awards, and adverse results in such litigation, and other proceedings may harm our business
and financial condition.
Our ability to utilize our net
operating loss carryforwards and certain other tax attributes may be limited.
As of December 31,
2020, we had gross federal income tax net operating losses (“NOLs”), of approximately $279 million available to offset our
future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), or otherwise. Of our NOLs, $142 million of losses will begin to expire in
2031 through 2040 and $137 million of losses can be carried forward indefinitely.
We may be unable
to fully use our NOLs, if at all. Under Section 382 of the Code, if a corporation undergoes an “ownership change” (very
generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain stockholders or groups
of stockholders over a rolling three-year period), the corporation’s ability to use its pre-ownership change NOLs to offset its
post-ownership change income may be limited. We have experienced ownership changes in the past, and we may experience ownership changes
in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. Future regulatory
changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs,
our net income and cash flows may be adversely affected.
The Tax Cuts and
Jobs Act (the “Tax Act”), as modified by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
among other things, includes changes to U.S. federal tax rates and the rules governing NOL carryforwards. For federal NOLs arising in
tax years beginning after December 31, 2017, with certain exceptions, including for insurance companies that are not life insurance companies,
the Tax Act as modified by the CARES Act limits a taxpayer’s ability to utilize NOL carryforwards in taxable years beginning after
December 31, 2020 to 80% of taxable income. In addition, federal NOLs arising in tax years beginning after December 31, 2017, with an
exception for insurance companies that are not life insurance companies, can be carried forward indefinitely. For federal NOLs for insurance
companies that are not life insurance companies subject to taxation under Part 2 of subchapter L of the Code, NOLs may be carried forward
for 20 taxable years regardless of when they arise. The income of insurance companies that are not life insurance companies is generally
not subject to a percentage limitation for offset by group NOLs. Deferred tax assets for NOLs will need to be measured at the applicable
tax rate in effect when the NOLs are expected to be utilized. The new limitation on use of NOLs may significantly impact our ability
to utilize our NOLs to offset taxable income in the future. In addition, for state income tax purposes, there may be periods during which
the use of net operating loss carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes
owed. For example, California recently imposed limits on the usability of California state net operating losses to offset taxable income
in tax years beginning after 2019 and before 2023.
Our enterprise software business
unit has limited operating history, which makes it difficult to forecast operating results from the business unit, and we may not achieve
the expected operating results in the future.
We established the
enterprise software business unit in 2018 and signed its first customer the same year. Since then, we have seen a growth in revenue and
deployments. However, as a result of its limited operating history, our ability to forecast future operating results from this business
unit, including revenues, cash flows and profitability, is limited and subject to many uncertainties. The historical revenue growth in
this business unit should not be considered indicative of its future performance.
Furthermore, the enterprise business unit’s
revenue and customer growth could slow or decline for a number of reasons, including slowing demand for its products, increased competition,
changes to technology, a decrease in growth in the overall market, or our failure, for any reason, to continue to take advantage of growth
opportunities. Moreover, we have encountered and will continue to encounter a number of risks and uncertainties frequently experienced
by growing companies in the technology industry, such as the risks and uncertainties described in this Quarterly Report on Form 10-Q.
If our assumptions regarding these risks and uncertainties are incorrect or change due to changes in our market, or if we do not address
these risks successfully, the enterprise business unit’s operating and financial results could differ materially from our expectations
and this business unit could suffer.
Our enterprise software business
has relied on, and is expected to continue to rely on, orders from a relatively small number of customers for a substantial portion of
our revenue, and the loss of any of these customers would significantly harm our operating and financial results
Our revenue is dependent
on orders from customers in the property and casualty (“P&C”) insurance industry, which may be adversely affected by
economic, environmental, social, and geo-political conditions. We currently charge customers a license fee for our enterprise software
that is proportional to the size of their business. This means we can expect to make more revenue from one large-sized customer (as measured
by the size of the customer’s business) than from several small-sized customers (as measured by the size of their business). We
currently rely on and expect to continue to rely on a relatively small number of large-sized customers to account for a majority of our
revenue. As a result, if we fail to successfully sell our products and services to one or more of these large-sized customers in any
particular period or fail to identify additional potential large-sized customers, or such customers purchase fewer of our products or
services, defer or cancel purchase orders for any reason, fail to renew their license or subscription agreements or otherwise terminate
their relationship with us for any reason, the results of operations and financial condition of the enterprise business unit would be
significantly harmed.
Our Metromile Enterprise business
may cost more to operate than anticipated.
Metromile Enterprise
has historically generated more cash than operating expenses due to prepaid revenue and service fees associated with signed deployments.
As customer deployments increase, customers request new features, and upgrades and investments are required, we may need to accelerate
our spend meaningfully and this could adversely impact our operating income.
The market in which
the enterprise software business operates is highly competitive, and if we do not compete effectively, our business, our financial condition,
and results of operations could be harmed
The market in which
our enterprise software business operates is rapidly evolving and highly competitive. As it continues to mature and evolve, existing
competitors will continue to introduce new, innovative products, and new competitors will continue to enter, thereby further intensifying
competition.
We face competition
from a number of sources:
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Large, well-established, P&C
software providers that have been selling into the P&C industry for quite some time seeking to introduce new features or launch product(s)
that mimic the functionality of some of our product(s);
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Large, well-established, custom
software development and professional services companies offering bespoke software that competes with some or all of our enterprise software
products; and
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New or emerging entrants seeking
to develop competing technology products.
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We compete based
on a number of factors, including innovativeness of our products, demonstrable breadth of use cases, maturity of software, speed of deployment,
total cost of ownership of our products, customer service and support, brand recognition of the core Metromile business and ease of implementation.
Some of our competitors have substantially greater customer relationships, and financial, technical and other resources than we do, and
may be able to respond more effectively than us to new opportunities, technologies and customer needs. As a result, competition may negatively
impact our ability to attract new customers or retain existing ones, or put downward pressure on our prices, any of which could materially
harm our business, results of operations and financial condition.
Our enterprise software products
expose us to liability associated with customer contracts and the use of their customers data.
Metromile Enterprise
is a cloud-based subscription software solution provided to global P&C insurers. Through the deployment of this service, insurers
may share or provide Metromile with customer data or aggregated data that reveals personally identifying information about the insurers’
customers. This data exposes us to material liability if it is publicly disclosed, copied, or used in an inadvertent way that violates
the terms of our contract with our enterprise business unit’s customers, or their terms of service with their customers, or state
or national laws.
We may become subject to intellectual
property disputes or other claims of infringement, which are costly and may subject us to significant liability and increased costs of
doing business.
We compete in a market
where there are a large number of patents, copyrights, trademarks, trade secrets, and other intellectual and proprietary rights, as well
as disputes regarding infringement of these rights. In particular, leading companies in the software industry own large numbers of patents,
copyrights, trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties holding such
intellectual property rights, including leading companies, competitors, patent holding companies and/or non-practicing entities, may
assert patent, copyright, trademark or other intellectual property claims against us.
Although we believe
that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure that third parties
will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any
such assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to
use certain intellectual property. We cannot assure that we are not infringing or otherwise violating any third-party intellectual property
rights.
Any intellectual
property litigation to which we become a party may require us to do one or more of the following:
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cease selling, licensing, or
using products or features that incorporate the intellectual property rights that we allegedly infringe, misappropriate, or violate;
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make substantial payments for
legal fees, settlement payments, or other costs or damages, including indemnification of third parties;
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obtain a license or enter into
a royalty agreement, either of which may not be available on reasonable terms or at all, in order to obtain the right to sell or use
the relevant intellectual property; or
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redesign the allegedly infringing
products to avoid infringement, misappropriation, or violation, which could be costly, time-consuming, or impossible.
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Any of these events
or any adverse result in any litigation claims against us could have a material adverse effect on our business, financial condition,
and results of operations.
A significant portion of our future
operating profit gains are expected to arise from the growth in our enterprise software revenue, which may not be realized.
Our Metromile Enterprise
business is a new and growing business. While we have several new customer deployments active or underway, there is no guarantee that
these deployments will materially increase revenue if customers cancel their contracts, reduce their desired level of services, or new
customers do not sign up for the services. Any of which could significantly harm our business, operating results and financial condition.
Risks Related to Our Business Model
and Industry
The insurance business, including
the market for automobile, renters’ and homeowners’ insurance, is historically cyclical in nature, and we may experience
periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.
Historically, insurers
have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels
of capacity, adverse litigation trends, regulatory constraints, general economic conditions, and other factors. The supply of insurance
is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate
in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business
historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity
as well as periods when shortages of capacity increased premium levels. Demand for insurance depends on numerous factors, including the
frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers and general economic conditions.
All of these factors fluctuate and may contribute to price declines generally in the insurance industry.
We cannot predict
with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability
to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed. Additionally, negative market
conditions could result in a decline in policies sold, an increase in the frequency of claims and premium defaults, and an uptick in
the frequency of falsification of claims. If we cannot underwrite insurance at appropriate rates, our ability to transact business will
be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, results of operations and
financial condition.
Reinsurance may be unavailable
at current levels and prices, which may limit our ability to underwrite new policies. Furthermore, reinsurance subjects us to counterparty
risk and may not be adequate to protect us against losses, which could have a material effect on our results of operations and financial
condition.
Reinsurance is a
contract by which an insurer, which may be referred to as the ceding insurer, agrees with a second insurer, called a reinsurer, that
the reinsurer will cover a portion of the losses incurred by the ceding insurer in the event a claim is made under one or more policies
issued by the ceding insurer, in exchange for a premium. Our regulated insurance subsidiary, Metromile Insurance Company, obtains reinsurance
to help manage its exposure to property and casualty insurance risks. Although our reinsurance counterparties are liable to us according
to the terms of the reinsurance policies, we remain primarily liable to our policyholders as the direct insurers on all risks reinsured.
As a result, reinsurance does not eliminate the obligation of our regulated insurance subsidiary to pay all claims, and we are subject
to the risk that one or more of our reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay
in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts, limiting recovery.
We are also subject to the risk that under applicable insurance laws and regulations we may not be able to take credit for the reinsurance
on our financial statements and instead would be required to hold separate admitted assets as reserves to cover claims on the risks that
we have ceded to the reinsurer. Reinsurers may become financially unsound by the time they are called upon to pay amounts due, which
may not occur for many years, in which case we may have no legal ability to recover what is due to us under our agreement with such reinsurer.
Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success.
Market conditions
beyond our control impact the availability and cost of the reinsurance we purchase. No assurances can be made that reinsurance will remain
continuously available to us to the same extent and on the same terms and rates as is currently available, as such availability depends
in part on factors outside of our control. A new contract may not provide sufficient reinsurance protection. Market forces and external
factors, such as significant losses from weather and seismic events (like hurricanes or earthquakes) or terrorist attacks or an increase
in capital and surplus requirements, impact the availability and cost of the reinsurance we purchase. If we were unable to maintain our
current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient at acceptable prices, we would
have to either accept an increase in our catastrophe exposure, reduce our insurance underwritings, or develop or seek other alternatives.
The unavailability
of acceptable reinsurance protection would have a materially adverse impact on our business model, which depends on reinsurance companies
to absorb any unfavorable variance from the level of losses anticipated at underwriting. If we are unable to obtain adequate reinsurance
at reasonable rates, we would have to increase our risk exposure or reduce the level of our underwriting commitments, each of which could
have a material adverse effect upon our business volume and profitability. Alternatively, we could elect to pay higher than anticipated
rates for reinsurance coverage, which could have a material adverse effect upon our profitability unless policy premium rates could also
be raised, in most cases subject to approval by state regulators, to offset this additional cost.
Reinsurance subjects us to risks
of our reinsurers and may not be adequate to protect us against losses arising from ceded insurance, which could have a material effect
on our results of operations and financial condition.
The collectability
of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether
insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, their affiliates, or certain regulatory
bodies have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Any disruption,
volatility and uncertainty in the financial reinsurance markets may decrease our ability to access such markets on favorable terms or
at all. In addition, we are subject to the risk that one or more of our reinsurers will not honor its obligations, that the reinsurers
will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts,
limiting recovery. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not
occur for many years, in which case we may have no legal ability to recover what is due to us under our agreement with such reinsurer.
In addition, any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain
of success. Our inability to collect a material recovery from a reinsurer could have a material effect on our results of operations and
financial condition.
We are subject to extensive regulation
and potential further restrictive regulation may increase our operating costs and limit our growth.
We are subject to
extensive laws by the individual state insurance departments in the states in which we transact business. These laws are complex and
subject to change. Changes may sometimes lead to additional expenses, increased legal exposure, increased required reserves or capital
and surplus, delays in implementing desired rate increases or business operations, and additional limits on our ability to grow or to
achieve targeted profitability. Laws to which our licensed insurance carriers and producer subsidiaries are subject include, but are
not limited to:
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prior approval of transactions
resulting in a change of control;
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approval of policy forms and
premiums;
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approval of intercompany service
agreements;
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statutory and risk-based capital
solvency requirements, including the minimum capital and surplus our regulated insurance subsidiary must maintain pursuant to applicable
laws and the CMA entered into as required by the Delaware Department of Insurance described above;
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establishing minimum reserves
that insurance carriers must hold to pay projected insurance claims;
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required participation by our
regulated insurance subsidiary in state guaranty funds;
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restrictions on the type and
concentration of our regulated insurance subsidiary’s investments;
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restrictions on the advertising
and marketing of insurance;
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restrictions on the adjustment
and settlement of insurance claims;
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restrictions on the use of
rebates to induce a policyholder to purchase insurance;
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restrictions on the sale, solicitation
and negotiation of insurance;
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restrictions on the sharing
of insurance commissions and payment of referral fees;
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prohibitions on the underwriting
of insurance on the basis of race, sex, religion and other protected classes;
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restrictions on our ability
to use telematics to underwrite and price insurance policies, such as in California, our largest market, and other states in which we
operate or may operate in the future;
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restrictions on the ability
of our regulated insurance subsidiary to pay dividends to us or enter into certain related party transactions without prior regulatory
approval;
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rules requiring the maintenance
of statutory deposits for the benefit of policyholders;
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privacy regulation and data
security;
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state-mandated premium rebates,
refunds, or reductions as a result of potentially lower risk exposure due to the COVID-19 pandemic and related emergency orders;
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regulation of corporate governance
and risk management; and
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periodic examinations of operations,
finances, market conduct and claims practices; and required periodic financial reporting.
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To the extent we
decide to expand our current product offerings to include other insurance products, this would subject us to additional regulatory requirements
and scrutiny in each state in which we elect to offer such products. Most states have also adopted legislation prohibiting unfair methods
of competition and unfair or deceptive acts and practices in the business of insurance as well as unfair claims practices. Prohibited
practices include, but are not limited to, misrepresentations, false advertising, coercion, disparaging other insurers, unfair claims
settlement procedures, and discrimination in the business of insurance. Noncompliance with any of such state statutes may subject us
to regulatory action by the relevant state insurance regulator, and possibly private litigation. States also regulate various aspects
of the contractual relationships between insurers and independent agents as well as, in certain states, insurers and third-party administrators.
Although state insurance
regulators have primary responsibility for administering and enforcing insurance regulations in the United States, such laws and regulations
are further administered and enforced by a number of additional governmental authorities, each of which exercises a degree of interpretive
latitude, including state securities administrators; state attorneys general as well as federal agencies including the SEC, the Financial
Industry Regulatory Authority, the Federal Reserve Board, the Federal Insurance Office, the U.S. Department of Labor, the U.S. Department
of Justice and the National Labor Relations Board. Consequently, compliance with any particular regulator’s or enforcement authority’s
interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when
compliance is judged in hindsight. Such regulations or enforcement actions are often responsive to current consumer and political sensitivities,
which may arise after a major event. Such rules and regulations may result in rate suppression, limit our ability to manage our exposure
to unprofitable or volatile risks, or lead to fines, premium refunds or other adverse consequences. The federal government also may regulate
aspects of our businesses, such as the protection of consumer confidential information or the use of consumer insurance (credit) scores
to underwrite and assess the risk of customers under the Fair Credit Reporting Act (“FCRA”). Among other things, the FCRA
requires that insurance companies (i) have a permissible purpose before obtaining and using a consumer report for underwriting purposes
and (ii) comply with related notice and recordkeeping requirements. Failure to comply with federal requirements under the FCRA or
any other applicable federal laws could subject us to regulatory fines and other sanctions. In addition, given our short operating history
to-date and rapid rate of growth, we are vulnerable to regulators identifying errors in the policy forms we use, the rates we charge,
with respect to our customer communications. As a result of such noncompliance, regulators could impose fines, rebates or other penalties,
including cease-and-desist orders with respect to our operations in an individual state, or all states, until the identified noncompliance
is rectified.
In addition, there
is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue or the scope of a regulator’s
authority may change over time to our detriment. There is also a risk that changes in the overall legal environment may cause us to change
our views regarding the actions we need to take from a legal risk management perspective. This would necessitate changes to our practices
that may adversely impact our business. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the
interests of a specific constituency rather than a range of constituencies. State insurance laws and regulations are generally intended
to protect the interests of purchasers or users of insurance products, rather than the holders of securities that we issue. For example,
state insurance laws are generally prescriptive with respect to the content and timeliness of notices we must provide policyholders.
Failure to comply with state insurance laws and regulations in the future could have a material adverse effect on our business, operating
results and financial condition.
Additionally, the
federal government could pass a law expanding its authority to regulate the insurance industry, expanding federal regulation over our
business to our detriment. These laws and regulations may limit our ability to grow, to raise additional capital or to improve the profitability
of our business.
Our ability to retain
state licenses depends on our ability to meet licensing requirements established by the NAIC and adopted by each state, subject to variations
across states. If we are unable to satisfy the applicable licensing requirements of any particular state, we could lose our license to
do business in that state, which would result in the temporary or permanent cessation of our operations in that state. Alternatively,
if we are unable to satisfy applicable state licensing requirements, we may be subject to additional regulatory oversight, have our license
suspended, or be subject to the seizure of assets. Any such events could adversely affect our business, results of operations or financial
condition.
A regulatory environment that
requires rate increases to be approved and that can dictate underwriting practices and mandate participation in loss sharing arrangements
may adversely affect our results of operations and financial condition.
From time to time,
political events and positions affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach
targeted levels of profitability. For example, if our loss ratio compares favorably to that of the industry, state or provincial regulatory
authorities may impose rate rollbacks, require us to pay premium refunds to policyholders, or challenge or otherwise delay our efforts
to raise rates even if the property and casualty industry generally is not experiencing regulatory challenges to rate increases. Such
challenges affect our ability to obtain approval for rate changes that may be required to achieve targeted levels of profitability and
returns on equity. In particular due to the COVID-19 pandemic, state regulators and legislators are under increased political pressure
to provide financial relief to policyholders through premium rebates or requiring insurers to pay claims arising from COVID-19 related
losses, regardless of the applicable policy’s exclusions.
In addition, certain
states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance
facilities and joint underwriting associations. Certain states also require insurers to offer coverage to all consumers, often restricting
an insurer’s ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant
amounts of business at lower-than-desired rates, possibly leading to an unacceptable return on equity. Laws and regulations of many states
also limit an insurer’s ability to discontinue writing some or all of its business or to withdraw from one or more lines of insurance,
except pursuant to a plan that is approved by the state insurance department. Additionally, as addressed above, certain states require
insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess losses against
all insurance companies doing business in the state. Our results of operations and financial condition could be adversely affected by
any of these factors.
State insurance regulators impose
additional reporting requirements regarding enterprise risk on insurance holding company systems, with which we must comply as an insurance
holding company.
In the past decade,
various state insurance regulators have increased their focus on risks within an insurer’s holding company system that may pose
enterprise risk to the insurer. In 2012, the NAIC adopted significant amendments to the Insurance Holding Company Act and related regulations
(the “NAIC Amendments”). The NAIC Amendments are designed to respond to perceived gaps in the regulation of insurance holding
company systems in the United States. One of the major changes is a requirement that an insurance holding company system’s
ultimate controlling person submit annually to its lead state insurance regulator an “enterprise risk report” that identifies
activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have
a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.
As the ultimate controlling person in our insurance holding company system, we are required to file an annual enterprise risk report
in one or more states. Other changes include the requirement that a controlling person submit prior notice to its domiciliary insurance
regulator of a divestiture of control, having detailed minimum requirements for cost sharing and management agreements between an insurer
and its affiliates and expanding of the agreements between an insurer and its affiliates to be filed with its domiciliary insurance regulator,
including states in which the insurer is commercially domiciled. The NAIC Amendments must be adopted by the individual state legislatures
and insurance regulators in order to be effective, and many states have already done so.
In 2012, the NAIC
also adopted the Risk Management and Own Risk and Solvency Assessment Model Act (the “ORSA Model Act”). The ORSA Model Act,
as adopted by the various states, requires an insurance holding company system’s Chief Risk Officer to submit annually to its lead
state insurance regulator an Own Risk and Solvency Assessment Summary Report (“ORSA”). The ORSA is a confidential internal
assessment appropriate to the nature, scale and complexity of an insurer, conducted by that insurer of the material and relevant risks
identified by the insurer associated with an insurer’s current business plan and the sufficiency of capital resources to support
those risks. The ORSA Model Act must be adopted by the individual state legislature and insurance regulators in order to be effective.
We cannot predict the impact, if any, that any other regulatory requirements may have on our business, financial condition or results
of operations.
There is also risk
that insurance holding company systems may become subject to group capital requirements at the holding company level. The NAIC is currently
working to develop a group capital calculation framework that regulators may use for informational purposes. As envisioned, the framework
is intended to complement the current holding company analytics framework by providing additional information to the lead state regulator
for use in assessing group risks and capital adequacy. The NAIC has not promulgated a model law or regulation on this subject.
The increasing adoption by states
of cybersecurity regulations could impose additional compliance burdens on us and expose us to additional liability.
In response to the
growing threat of cyber-attacks in the insurance industry, certain jurisdictions have begun to consider new cybersecurity measures, including
the adoption of cybersecurity regulations. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve
as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents,
and other licensed entities registered under state insurance laws. Alabama, Connecticut, Delaware, Indiana, Iowa, Louisiana, Maine, Michigan,
Mississippi, New Hampshire, North Dakota, Ohio, South Carolina and Virginia have adopted versions of the Insurance Data Security Model
Law, each with a different effective date, and other states may adopt versions of the Insurance Data Security Model Law in the future.
The New York Department of Financial Services has promulgated its own Cybersecurity Requirements for Financial Services Companies
that is not based upon the Insurance Data Security Model Law and requires insurance companies to establish and maintain a cybersecurity
program and implement and maintain cybersecurity policies and procedures with specific requirements. In addition, some jurisdictions,
such as California, Colorado, Massachusetts, Nevada, and Virginia have enacted more generalized data security laws that apply to certain
data that we process. Although we take steps to comply with financial industry cybersecurity regulations and other data security laws
and believe we are materially compliant with their requirements, our failure to comply with new or existing cybersecurity regulations
could result in material regulatory actions and other penalties. In addition, efforts to comply with new or existing cybersecurity regulations
could impose significant costs on our business, which could materially and adversely affect our business, financial condition or results
of operations.
We rely on technology and intellectual
property from third parties for pricing and underwriting our insurance policies, handling claims and maximizing automation, the unavailability
or inaccuracy of which could limit the functionality of our products and disrupt our business.
We use technology
and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party
technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could
result in harm to our brand and business. In addition, licensed technology and intellectual property may not continue to be available
on commercially reasonable terms, or at all.
Further, although
we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use,
the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected
products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business
would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were
either no longer available to us or no longer offered to us on commercially reasonable terms or prices. In either case, we would be required
either to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop
these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new
product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could
harm our business, results of operations and financial condition.
We are subject to payment processing
risk.
We currently rely
exclusively on one third-party vendor to provide payment processing services, including the processing of payments from credit cards
and debit cards, and our business would be disrupted if this vendor refuses to provide these services to us and we are unable to find
a suitable replacement on a timely basis or at all. If we or our processing vendor fail to maintain adequate systems for the authorization
and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use
of their payment products. In addition, if these systems fail to work properly and, as a result, we do not charge our customers’
credit cards on a timely basis or at all, our business, revenue, results of operations and financial condition could be harmed.
The payment methods
that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to
obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules
or requirements for the payment methods we accept, or if payment-related data are compromised due to a breach of data, we may be liable
for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees,
or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in
certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result
in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public
perception of our security measures, and significantly higher credit card-related costs, each of which could harm our business, results
of operations and financial condition.
Our success depends upon the insurance
industry continuing to move online at its current pace and the continued growth and acceptance of online and mobile app-based products
and services as effective alternatives to traditional offline products and services.
We provide automobile
insurance products through our website and our online and mobile apps that compete with traditional offline counterparts. We do not offer
insurance through traditional, offline brokers or agents. We believe that the continued growth and acceptance of online products and
services as well as those offered through mobile devices generally will depend, to a large extent, on the continued growth in commercial
use of the internet and mobile apps, and the continued migration of traditional offline markets and industries online.
Purchasers of insurance
may develop the perception that purchasing insurance products online or through a mobile app is not as effective as purchasing such products
through a broker or other traditional offline methods, and the insurance market may not migrate online as quickly as (or at the levels
that) we expect. Moreover, if, for any reason, an unfavorable perception develops that telematics, mobile engagement, a technology-based
platform and/or bots are less efficacious than traditional offline methods of purchasing insurance, underwriting, and claims processing,
or if it is perceived that our processes lead to unfair outcomes, our business, results of operations and financial condition could be
adversely affected.
Our actual incurred losses may
be greater than our loss and loss adjustment expense reserves, which could have a material adverse effect on our financial condition
and results of operations.
Our financial condition
and results of operations depend on our ability to accurately price risk and assess potential losses and loss adjustment expenses under
the terms of the policies we underwrite. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate
of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater than or less
than the current estimate. In our industry, there is always the risk that reserves may prove inadequate since we may underestimate the
cost of claims and claims administration.
We base our estimates
on our assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial
theories of liability, and other factors. These variables are affected by both internal and external events that could increase our exposure
to losses, including changes in actuarial projections, claims handling procedures, inflation, severe weather, climate change, economic
and judicial trends and legislative and regulatory changes. We regularly monitor reserves using new information on reported claims and
a variety of statistical techniques to update our current estimate. Our estimates could prove to be inadequate, and this underestimation
could have a material adverse effect on our financial condition.
Recorded claim reserves,
including case reserves and incurred but not reported (“IBNR”), claims reserves, are based on our estimates of losses after
considering known facts and interpretations of the circumstances, including settlement agreements. Additionally, models that rely on
the assumption that past loss development patterns will persist into the future are used. Internal factors are considered including our
experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaid claims,
loss management programs, product mix, state mix, contractual terms, industry payment and reporting patterns, and changes in claim reporting
and settlement practices. External factors are also considered, such as court decisions, changes in law and litigation imposing unintended
coverage. We also consider benefits, such as the availability of multiple limits for a single loss occurrence. Regulatory requirements
and economic conditions are also considered.
Because reserves
are estimates of the unpaid portion of losses and expenses for events that have occurred, including IBNR losses, the establishment of
appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process that is regularly refined to
reflect current estimation processes and practices. The ultimate cost of losses may vary materially from recorded reserves and such variance
may adversely affect our results of operations and financial condition as the reserves and reinsurance recoverables are re-estimated.
If any of our insurance
reserves should prove to be inadequate for the reasons discussed above, or for any other reason, we will be required to increase reserves,
resulting in a reduction in our net income and stockholders’ equity in the period in which the deficiency is identified. Future
loss experience substantially in excess of established reserves could also have a material adverse effect on future earnings and liquidity
and financial rating, which would affect our ability to attract new business or to retain existing customers.
Performance of our investment
portfolio is subject to a variety of investment risks that may adversely affect our financial results.
Our results of operations
depend, in part, on the performance of our investment portfolio. We seek to hold a diversified portfolio of investments in accordance
with our investment policy, which is routinely reviewed by the Investment Committee of our Board of Directors (the “Board”).
However, our investments are subject to general economic and market risks as well as risks inherent to particular securities.
Our primary market
risk exposures are to changes in interest rates. See the section titled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Quantitative and Qualitative Disclosures about Market Risk.” In recent years,
interest rates have been at or near historic lows. A protracted low interest rate environment would continue to place pressure on our
net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely
affect our operating results. Future increases in interest rates could cause the values of our fixed income securities portfolios to
decline, with the magnitude of the decline depending on the maturity of the securities included in our portfolio and the amount by which
interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining
rate environments. Other fixed income securities, such as asset-backed securities, carry prepayment risk or, in a rising interest rate
environment, may not prepay as quickly as expected.
The value of our
investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial
condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees
an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative
effect on the market valuation of such securities.
Such factors could
reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation
uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby
increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect
prices at which actual transactions would occur.
Risks for all types
of securities are managed through the application of our investment policy, which establishes investment parameters that include, but
are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe
are within applicable guidelines established by the NAIC as it relates to the portfolio of Metromile Insurance Company. The maximum percentage
and types of securities we may invest in are subject to insurance laws and regulations, which may change. Failure to comply with these
laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory
surplus and, in certain circumstances, we would be required to dispose of such investments.
Although we seek
to preserve our capital, we cannot be certain that our investment objectives will be achieved, and results may vary substantially over
time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures,
losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of
the losses on us.
Unexpected changes in the interpretation
of our coverage or provisions, including loss limitations and exclusions, in our policies could have a material adverse effect on our
financial condition and results of operations.
There can be no assurances
that specifically negotiated loss limitations or exclusions in our policies will be enforceable in the manner we intend, or at all. As
industry practices and legal, judicial, social, and other conditions change, unexpected and unintended issues related to claims and coverage
may emerge. For example, many of our policies limit the period during which a customer may bring a claim, which may be shorter than the
statutory period under which such claims can be brought against our customers. While these limitations and exclusions help us assess
and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion,
or legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental actions could
result in higher than anticipated losses and loss adjustment expenses, which could have a material adverse effect on our financial condition
or results of operations. In addition, court decisions, such as the 1995 Montrose decision in California, could read policy exclusions
narrowly so as to expand coverage, thereby requiring insurers to create and write new exclusions. Under the insurance laws, the insurer
typically has the burden of proving an exclusion applies and any ambiguities in the terms of a loss limitation or exclusion provision
are typically construed against the insurer. These issues may adversely affect our business by either broadening coverage beyond our
underwriting intent or by increasing the frequency or severity of claims. In some instances, these changes may not become apparent until
sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our
insurance contracts may not be known for many years after a contract is issued.
Risks Related to Ownership of Our
Securities
Concentration of ownership among
our existing executive officers, directors and their respective affiliates may prevent new investors from influencing significant corporate
decisions.
At the Closing, our
affiliates, executive officers, directors and their respective affiliates as a group beneficially owned approximately 15% of our outstanding
Common Stock. As a result, these stockholders are able to exercise a significant level of control over all matters requiring stockholder
approval, including the election of directors, amendment of our Certificate of Incorporation and approval of significant corporate transactions.
This control could have the effect of delaying or preventing a change of control of us or changes in management and will make the approval
of certain transactions difficult or impossible without the support of these stockholders.
We do not expect to declare any
dividends in the foreseeable future.
We do not anticipate
declaring any cash dividends to holders of Common Stock in the foreseeable future. Consequently, investors may need to rely on sales
of their shares after price appreciation, which may never occur, as the only way to realize any future gains on their investment.
Provisions in our charter and
Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our Common
Stock and could entrench management.
Our Certificate of
Incorporation contains provisions that may discourage unsolicited takeover proposals that stockholders may consider to be in their best
interests. These provisions include the ability of the Board to designate the terms of and issue new series of preferred shares, which
may make more difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over
prevailing market prices for our securities. These anti-takeover defenses could discourage, delay or prevent a transaction involving
a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other
stockholders to elect directors of your choosing and cause us to take corporate actions other than those you desire.
A market for our securities may
not continue, which would adversely affect the liquidity and price of our securities.
The price of our
securities may fluctuate significantly due to general market and economic conditions. An active trading market for our securities may
not be sustained.
We will incur significant costs
and obligations as a result of being a public company.
We have only recently
become a publicly traded company. As a publicly traded company, we have and will incur significant legal, accounting and other expenses
that we were not required to incur in the past. These expenses will increase once we are no longer an “emerging growth company”
as defined under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). In addition, new and changing laws, regulations
and standards relating to corporate governance and public disclosure for public companies, including Dodd Frank, the Sarbanes-Oxley Act,
regulations related thereto and the rules and regulations of the SEC and Nasdaq, have increased the costs and the time that must be devoted
to compliance matters. We expect these rules and regulations will increase our legal and financial costs and lead to a diversion of management
time and attention from revenue-generating activities.
For
as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions
from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.”
We may remain an “emerging growth company” until December 31, 2025 or such earlier time that we have more than $1.07 billion
in annual revenues, have more than $700.0 million in market value of our Common Stock held by non-affiliates, or issue more than $1.0
billion of non-convertible debt over a three-year period. To the extent we choose not to use exemptions from various reporting requirements
under the JOBS Act, or if we no longer can be classified as an “emerging growth company,” we expect that we will incur additional
compliance costs, which will reduce our ability to operate profitably.
As an “emerging growth company,”
we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our Common
Stock less attractive to investors.
As an “emerging
growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public
companies that are not “emerging growth companies,” including not being required to obtain an assessment of the effectiveness
of our internal controls over financial reporting from our independent registered public accounting firm pursuant to Section 404
of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements,
and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any
golden parachute payments not previously approved. In addition, the JOBS Act provides that an emerging growth company can take advantage
of an extended transition period for complying with new or revised accounting standards, which we have elected to do.
We cannot predict
if investors will find our Common Stock less attractive because we will rely on these exemptions. If some investors find our Common Stock
less attractive as a result, there may be a less active market for our Common Stock, our share price may be more volatile and the price
at which our securities trade could be less than if we did not use these exemptions.
If we do not develop and implement
all required accounting practices and policies, we may be unable to provide the financial information required of a U.S. publicly traded
company in a timely and reliable manner.
As Legacy Metromile
was a privately held company, it was not required to adopt all of the financial reporting and disclosure procedures and controls required
of a U.S. publicly traded company. We expect that the implementation of all required accounting practices and policies and the hiring
of additional financial staff will increase our operating costs and require our management to devote significant time and resources to
such implementation. If we fail to develop and maintain effective internal controls and procedures and disclosure procedures and controls,
we may be unable to provide financial information and required SEC reports that are timely and reliable. Any such delays or deficiencies
could harm us, including by limiting our ability to obtain financing, either in the public capital markets or from private sources and
damaging our reputation, which in either cause could impede our ability to implement our growth strategy. In addition, any such delays
or deficiencies could result in our failure to meet the requirements for continued listing of our Common Stock on Nasdaq.
We may issue additional shares
of Common Stock or other equity securities without your approval, which would dilute your ownership interest in us and may depress the
market price of our common stock.
We may issue additional
shares of Common Stock or other equity securities in the future in connection with, among other things, future acquisitions, repayment
of outstanding indebtedness or grants under our 2021 Equity Incentive Plan (the “2021 Plan”) without stockholder approval
in a number of circumstances.
Our issuance of additional
Common Stock or other equity securities could have one or more of the following effects:
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our existing stockholders’
proportionate ownership interest in us will decrease;
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the amount of cash available
per share, including for payment of dividends in the future, may decrease;
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the relative voting strength
of each previously outstanding share of Common Stock may be diminished; and
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the market price of our Common
Stock may decline.
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If our performance does not meet
market expectations, the price of our securities may decline.*
If our performance
does not meet market expectations, the price of our Common Stock may decline from the price of our Common Stock prior to the Closing.
The trading price of our Common Stock could be volatile and subject to wide fluctuations in response to various factors, some of which
are beyond our control. Any of the factors listed below could have a material adverse effect on your investment in our Common Stock and
our Common Stock may trade at prices significantly below the price you paid for them.
Factors affecting
the trading price of our Common Stock may include:
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actual or anticipated fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
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changes in the market’s
expectations about our operating results;
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our operating results failing
to meet market expectations in a particular period;
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changes in financial estimates
and recommendations by securities analysts concerning us or the insurance industry and market in general;
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operating and stock price performance
of other companies that investors deem comparable to us;
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changes in laws and regulations
affecting our business;
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changes in the interpretation
or enforcement of statutes and regulations affecting our business;
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commencement of, or involvement
in, litigation involving us;
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changes in our capital structure,
such as future issuances of securities or the incurrence of additional debt;
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the volume of shares of our
Common Stock available for public sale;
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any significant change in our
board or management;
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sales of substantial amounts
of Common Stock by our directors, executive officers or significant stockholders or the anticipation of sales or lock-up expirations;
and
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general economic and political
conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
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Broad market and
industry factors may depress the market price of our Common Stock irrespective of our operating performance. The stock market in general
and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance
of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be predictable.
A loss of investor confidence in the market for companies in the insurance industry or the stocks of other companies which investors
perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions or results of
operations. A decline in the market price of our Common Stock also could adversely affect our ability to issue additional securities
and our ability to obtain additional financing in the future.
There is no guarantee that the
Public Warrants may ever be in the money, and they may expire worthless.
The exercise price
for our Warrants is $11.50 per share. There can be no assurance that the Public Warrants will be in the money prior to their expiration
and, as such, they may expire worthless.
The terms of our
Warrants may be amended in a manner that may be adverse to the holders. The Warrant Agreement between Continental Stock Transfer &
Trust Company, as warrant agent, and us provides that the terms of the Warrants may be amended without the consent of any holder to cure
any ambiguity or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public
Warrants to make any change that adversely affects the interests of the registered holders. Accordingly, we may amend the terms of the
Warrants in a manner adverse to a holder if holders of at least 65% of the then outstanding Public Warrants approve of such amendment.
Our ability to amend the terms of the Warrants with the consent of at least 65% of the then outstanding Public Warrants is unlimited.
Examples of such amendments could be amendments to, among other things, increase the exercise price of the Warrants, shorten the exercise
period or decrease the number of shares of our Common Stock purchasable upon exercise of a Warrant.
We may redeem your unexpired Warrants
prior to their exercise at a time that is disadvantageous to you, thereby making your Warrants worthless.
We have the ability
to redeem outstanding Warrants (excluding any Placement Warrants held by the Sponsor, Cantor Fitzgerald & Co (“Cantor”)
or their permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per Warrant, provided
that the last reported sales price (or the closing bid price of our Common Stock in the event the shares of our Common Stock are not
traded on any specific trading day) of the Common Stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends,
reorganizations and the like) on each of 20 trading days within the 30 trading-day period ending on the third business day prior to the
date on which we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire
period thereafter until the time we redeem the Warrants, we have an effective registration statement under the Securities Act covering
the shares of Common Stock issuable upon exercise of the Warrants and a current prospectus relating to them is available. If and when
the Warrants become redeemable by us, we may exercise our redemption right even if we are unable to register or qualify the underlying
securities for sale under all applicable state securities laws. Redemption of the outstanding Warrants could force a Warrant holder:
(i) to exercise its Warrants and pay the exercise price therefore at a time when it may be disadvantageous for it to do so, (ii) to
sell its Warrants at the then-current market price when it might otherwise wish to hold its Warrants or (iii) to accept the nominal
redemption price which, at the time the outstanding Warrants are called for redemption, will be substantially less than the market value
of its Warrants.
We may not be able to timely and
effectively implement controls and procedures required by Section 404 of the Sarbanes-Oxley Act of 2002 or which could have a material
adverse effect on our business.
Commencing with our
annual report for the year ending December 31, 2021, we are required to provide management’s attestation on internal controls.
The standards required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those
required of Legacy Metromile as a privately-held company. Management may not be able to effectively and timely implement controls and
procedures that adequately respond to the increased regulatory compliance and reporting requirements that are applicable to us. If we
are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not
be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences
and could harm investor confidence and lead to a decrease in the market price of our Common Stock.
Pursuant to the JOBS Act, our
independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial
reporting pursuant to Section 404 of the Sarbanes-Oxley Act for so long as we are an “emerging growth company.”
Section 404
of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting,
and generally requires in the same report a report by our independent registered public accounting firm on the effectiveness of our internal
control over financial reporting. However, under the JOBS Act, our independent registered public accounting firm will not be required
to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act
until we are no longer an “emerging growth company.” We will be an “emerging growth company” until the earlier
of (1) the last day of the fiscal year (a) following September 8, 2025, the fifth anniversary of INSU’s IPO, (b) in
which we have total annual gross revenue of at least $1.07 billion or (c) in which we are deemed to be a large accelerated filer,
which means the market value of our Common Stock that is held by non-affiliates exceeds $700.0 million as of the last business day of
our prior second fiscal quarter, and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during
the prior three-year period. Accordingly, until we cease being an “emerging growth company” stockholders will not have the
benefit of an independent assessment of the effectiveness of our internal control environment.
We have identified a material
weakness in our internal control over financial reporting which, if not remediated, could result in material misstatements in our financial
statements.
We amended and restated
certain items in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 31, 2021 (the “Amended
Annual Report”), including INSU’s consolidated financial statements and related disclosures as of and for the year ended
December 31, 2020 (the “Restatement”). In connection with the Restatement, management re-evaluated the Company’s disclosure
controls and procedures as of December 31, 2020 and identified a material weakness in internal control over financial reporting relating
to the accounting treatment for certain complex financial instruments. A material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or
interim financial statements will not be prevented or detected on a timely basis.
We are taking steps
to remediate the identified material weakness by, among other things, devoting significant effort and resources to the remediation and
improvement of our internal control over financial reporting as it relates to the accounting treatment for complex financial instruments.
However, we cannot be certain that such measures will remediate the identified material weakness or that we will not identify additional
material weaknesses in our internal control over financial reporting in the future.
If we are unable
to remediate the identified material weakness, our ability to record, process and report financial information and required SEC reports
in an accurate and timely manner could be adversely affected. Any such failure could negatively affect the market price of our Common
Stock, cause investors to lose confidence in our reported financial information, subject us to litigation or investigation by the SEC
or other regulatory authorities and generally materially adversely impact our business and results of operations.
Our ability to meet expectations
and projections in any research or reports published by securities or industry analysts, or a lack of coverage by securities or industry
analysts, could result in a depressed market price and limited liquidity for our Common Stock.
The trading market
for our Common Stock is influenced by the research and reports that industry or securities analysts may publish about us, our business,
our market, or our competitors. If no securities or industry analysts commence coverage of us, our stock price would likely be less than
that which would obtain if we had such coverage and the liquidity, or trading volume of our Common Stock may be limited, making it more
difficult for a stockholder to sell shares at an acceptable price or amount. If any analysts do cover us, their projections may vary
widely and may not accurately predict the results we actually achieve. Our share price may decline if our actual results do not match
the projections of research analysts covering us. Similarly, if one or more of the analysts who write reports on us downgrades our stock
or publishes inaccurate or unfavorable research about our business, our share price could decline. If one or more of these analysts ceases
coverage of us or fails to publish reports on us regularly, our share price or trading volume could decline.
We may be subject to securities
litigation, which is expensive and could divert management attention.
Our share price may
be volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities
class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in
substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on business,
financial condition, results of operations and prospects. Any adverse determination in litigation could also subject us to significant
liabilities.
Our Certificate of Incorporation
provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States of America will
be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability
to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our Certificate of
Incorporation provides that the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of
Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts
lack subject matter jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following claims
or causes of action under Delaware statutory or common law: (a) any derivative claim or cause of action brought on our behalf; (b) any
claim or cause of action for breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to
us or our stockholders; (c) any claim or cause of action against us or any of our current or former directors, officers or other
employees, arising out of or pursuant to any provision of the Delaware General Corporation Law (the “DGCL”), our certificate
of incorporation or our Bylaws; (d) any claim or cause of action seeking to interpret, apply, enforce or determine the validity
of our certificate of incorporation or our Bylaws; (e) any action or proceeding as to which the DGCL confers jurisdiction to the
Court of Chancery of the State of Delaware; and (f) any claim or cause of action against us or any of our current or former directors,
officers or other employees that is governed by the internal-affairs doctrine, in all cases to the fullest extent permitted by law and
subject to the court having personal jurisdiction over the indispensable parties named as defendants. This provision would not apply
to claims or causes of action brought to enforce a duty or liability created by the Exchange Act, or any other claim for which the federal
courts have exclusive jurisdiction, or the Securities Act.
Furthermore, Section 22
of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly,
both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions
and the threat of inconsistent or contrary rulings by different courts, among other considerations, our Certificate of Incorporation
provides that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint
asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions
are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum
provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions
of our Certificate of Incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions
and there can be no assurance that the provision will be enforced by a court in those other jurisdictions.
These exclusive forum
provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us
or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees.
If a court were to find either exclusive-forum provision in our Certificate of Incorporation to be inapplicable or unenforceable in an
action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business.
Changes in law or regulations,
or a failure to comply with any laws and regulations, may adversely affect our business, investments and results of operations.
We are subject to
laws and regulations enacted by national, regional and local governments, including in particular, reporting and other requirements under
the Exchange Act. Compliance with, and monitoring of, applicable laws and regulations may be difficult, time consuming and costly. Those
laws and regulations and their interpretation and application may also change from time to time and those changes could have a material
adverse effect on our business, investments and results of operations. In addition, a failure to comply with applicable laws or regulations,
as interpreted and applied, could result in fines, injunctive relief or similar remedies which could be costly to us or limit our ability
to operate.
Risks Related to the Business Combination
We have incurred significant transaction
and transition costs in connection with the Business Combination.
We have incurred
and expect to incur significant, non-recurring costs in connection with consummating the Business Combination and operating as a public
company following the consummation of the Business Combination. We may also incur additional costs to retain key employees. Certain expenses
incurred in connection with the Merger Agreement and the transactions contemplated thereby (including the Business Combination) have
been or will be paid by us. Our transaction expenses as a result of the Business Combination are currently estimated at approximately
$38.0 million. The amount of the deferred underwriting commissions was not adjusted for any shares that were redeemed in connection with
the Business Combination.
We may be required to take write-downs
or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition,
results of operations and our stock price, which could cause you to lose some or all of your investment.
Although INSU conducted
due diligence on Metromile in connection with the Business Combination, this diligence may not have surfaced all material issues present
in Metromile’s business. Moreover, factors outside of Metromile’s business and outside of our control may later arise. As
a result of these factors, we may be forced to write down or write off assets, restructure operations, or incur impairment or other charges
that could result in losses. Further, unexpected risks may arise and previously known risks may materialize in a manner not consistent
with our risk analysis. Even though these charges may be non-cash items and not have an immediate impact on our liquidity, the fact that
we report charges of this nature could contribute to negative market perceptions about us or our securities. Accordingly, our securities
could suffer a reduction in value. Our security holders are unlikely to have a remedy for such reduction in value, unless stockholders
are able to successfully claim that the reduction in stock value was due to the breach by our officers or directors of a duty of care
or other fiduciary duty owed to them, or if they are able to bring a private claim that the proxy statement relating to the Business
Combination contained an actionable material misstatement or material omission.
If the Business Combination’s
benefits do not meet the expectations of investors or financial analysts, the market price of our securities may decline.
If the benefits of
the Business Combination do not meet the expectations of investors or securities analysts, the market price of our securities may decline.
Fluctuations in the price of our securities could contribute to the loss of all or part of your investment. Immediately prior to the
Business Combination, there was no public market for Metromile’s stock and trading in the shares of our securities was not active.
If an active market for our securities develops and continues, the trading price of our securities could be volatile and subject to wide
fluctuations in response to various factors, some of which are beyond our control. Any of the factors listed below could have a material
adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for
them. In such circumstances, the trading price of our securities may not recover and may experience a further decline.
Factors affecting
the trading price of our securities may include:
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actual or anticipated fluctuations
in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
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changes in the market’s
expectations about our operating results;
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the public’s reaction
to our press releases, our other public announcements and our filings with the SEC;
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speculation in the press or
investment community;
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success of competitors;
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our operating results failing
to meet the expectation of securities analysts or investors in a particular period;
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changes in financial estimates
and recommendations by securities analysts concerning us or the market in general;
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operating and stock price performance
of other companies that investors deem comparable to us;
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our ability to market new and
enhanced services on a timely basis;
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changes in laws and regulations
affecting our business;
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commencement of, or involvement
in, litigation involving us following the Business Combination;
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changes in our capital structure
following the Business Combination, such as future issuances of securities or the incurrence of additional debt;
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the volume of securities available
for public sale;
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any major change in the Board
or management;
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sales of substantial amounts
of securities by our directors, officers or significant stockholders or the perception that such sales could occur;
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the realization of any of the
other risks described herein;
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additions or departures of
key personnel;
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failure to comply with the
requirements of Nasdaq;
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failure to comply with the
Sarbanes-Oxley Act of 2002 or other laws or regulations;
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actual, potential or perceived
control, accounting or reporting problems;
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changes in accounting principles,
policies and guidelines; and
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general economic and political
conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
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Broad market and
industry factors may materially harm the market price of our securities irrespective of our operating performance. The stock market in
general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating
performance of the particular companies affected. The trading prices and valuations of these stocks, and of our securities, may not be
predictable. A loss of investor confidence in the market for the stocks of other companies which investors perceive to be similar to
the post-combination company could depress our stock price regardless of our business, prospects, financial conditions or results of
operations. A decline in the market price of our securities also could adversely affect our ability to issue additional securities and
our ability to obtain additional financing in the future.
In the past, securities
class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of
litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to
make substantial payments to satisfy judgments or to settle litigation.
General Risks
Future acquisitions or investments
could disrupt our business and harm our financial condition.
In the future we
may pursue acquisitions or investments that we believe will help us achieve our strategic objectives. There is no assurance that such
acquisitions or investments will perform as expected or will be successfully integrated into our business or generate substantial revenue,
and we may overestimate cash flow, underestimate costs or fail to understand the risks of or related to any investment or acquired business.
The process of acquiring a business, product or technology can also cause us to incur various expenses and create unforeseen operating
difficulties, expenditures and other challenges, whether or not those acquisitions are consummated, such as:
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intense competition for suitable
acquisition targets, which could increase prices and adversely affect our ability to consummate deals on favorable or acceptable terms;
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inadequacy of reserves for
losses and loss adjustment expenses;
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failure or material delay in
closing a transaction, including as a result of regulatory review and approvals;
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regulatory conditions attached
to the approval of the acquisition and other regulatory hurdles;
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a need for additional capital
that was not anticipated at the time of the acquisition;
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anticipated benefits not materializing
or being lower than anticipated;
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diversion of management time
and focus from operating our business to addressing acquisition integration challenges;
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transition of the acquired
company’s customers;
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difficulties in integrating
the technologies, operations, existing contracts and personnel of an acquired company;
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retention of employees or business
partners of an acquired company;
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cultural challenges associated
with integrating employees from the acquired company into our organization;
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integration of the acquired
company’s accounting, management information, human resources and other administrative systems;
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the need to implement or improve
controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls, procedures and policies;
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coordination of product development
and sales and marketing functions;
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theft of our trade secrets
or confidential information that we share with potential acquisition candidates;
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risk that an acquired company
or investment in new offerings cannibalizes a portion of our existing business;
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adverse market reaction to
an acquisition;
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liability for activities of
the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes,
tax liabilities and other known and unknown liabilities; and
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litigation or other claims
in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties.
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If we are unable
to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, we
might not realize the anticipated benefits of that acquisition or investment and we might incur unanticipated liabilities or otherwise
suffer harm to our business generally.
To the extent that
we pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of cash available to us for other
purposes. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt,
contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill on our consolidated
balance sheet, any of which could seriously harm our business.
We expect a number of factors
to cause our results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
Our revenue and results
of operations could vary significantly from quarter to quarter and year to year, and may fail to match periodic expectations as a result
of a variety of factors, many of which are outside of our control. Our results may vary from period to period as a result of fluctuations
in the number of customers purchasing our insurance products and renewing their agreements with us as well as fluctuations in the timing
and amount of our expenses. In addition, the insurance industry is subject to its own cyclical trends and uncertainties, including extreme
weather which is often seasonal and may result in volatility in claims reporting and payment patterns. Fluctuations and variability across
the industry may also affect our revenue. As a result, comparing our results of operations on a period-to-period basis may not be meaningful,
and the results of any one period should not be relied on as an indication of future performance. Our results of operations may not meet
the expectations of investors or public market analysts who follow us, which may adversely affect our stock price. In addition to other
risks described in these Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q, factors that may contribute to the variability
of our quarterly and annual results include:
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our ability to attract new
customers and retain existing customers, including in a cost-effective manner;
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our ability to accurately forecast
revenue and losses and appropriately plan our expenses;
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our ability to develop and
offer new products, including in a cost-effective manner;
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the effects of changes in search
engine placement and prominence;
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the effects of increased competition
on our business;
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our ability to successfully
maintain our position in and expand in existing markets as well as successfully enter new markets;
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our ability to protect our
existing intellectual property and to create new intellectual property;
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our ability to maintain an
adequate rate of growth and effectively manage that growth;
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our ability to keep pace with
technology changes in the insurance, mobile and automobile industries;
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the success of our sales and
marketing efforts;
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costs associated with defending
claims, including accident and coverage claims, intellectual property infringement claims, misclassifications and related judgments or
settlements;
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the impact of, and changes
in, governmental or other regulation affecting our business;
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the attraction and retention
of qualified employees and key personnel;
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our ability to choose and effectively
manage third-party service providers;
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our ability to identify and
engage in joint ventures and strategic partnerships, both domestically and internationally;
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the effects of natural or man-made
catastrophic events;
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the effectiveness of our internal
controls; and
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changes in our tax rates or
exposure to additional tax liabilities.
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New or changing technologies,
including those impacting personal transportation, could cause a disruption in our business model, which may materially impact our results
of operations and financial condition.
If we fail to anticipate
the impact on our business of changing technology, including automotive technology, our ability to successfully operate may be materially
impaired. Our business could also be affected by potential technological changes, such as autonomous or partially autonomous vehicles
or technologies that facilitate ride, car or home sharing, or vehicles with built-in telematics features. Such changes could disrupt
the demand for products from current customers, create coverage issues or impact the frequency or severity of losses, or reduce the size
of the automobile insurance market, causing our business to decline. Since auto insurance constitutes substantially all of our current
business, we are more sensitive than other insurers and more adversely affected by trends that could decrease auto insurance rates or
reduce demand for auto insurance over time. We may not be able to respond effectively to these changes, which could have a material effect
on our results of operations and financial condition.
A significant portion of our total
outstanding shares of our Common Stock are restricted from immediate resale but may be sold into the market in the near future. This
could cause the market price of our common stock to drop significantly, even if our business is doing well.
Sales of a substantial
number of shares of our Common Stock in the public market could occur at any time. We have filed a registration statement to register
for resale the shares issued in the private placement that closed concurrent with the Business Combination, and certain other holders
pursuant to a registration rights agreement. These sales, or the perception in the market that the holders of a large number of shares
intend to sell shares, could reduce the market price of our Common Stock. We are unable to predict the effect that sales may have on
the prevailing market price of our Common Stock and Public Warrants.
To the extent our
warrants are exercised, additional shares of our Common Stock will be issued, which will result in dilution to the holders of our Common
Stock and increase the number of shares eligible for resale in the public market. Sales, or the potential sales, of substantial numbers
of shares in the public market by certain selling securityholders, subject to certain restrictions on transfer until the termination
of applicable lock-up periods, could increase the volatility of the market price of our Common Stock or adversely affect the market price
of our Common Stock.
