MediaAlpha, Inc. (MAX) Earnings Call Transcript & Summary

Good afternoon. We'll get started. Cory Carpenter, Internet Analyst at JPMorgan. Pleased to have Pat from MediaAlpha. Thanks for joining.

Excellent, Cory. Thanks for having me here.

So wrapping up Day 3. Thanks for all those who have stayed with us online. Maybe, Pat, for those newer to the story, could you start with a high-level overview of the business and how MediaAlpha fits within the broader insurance industry?

Yes, happy to. So in MediaAlpha, we're an interesting business. And just to maybe start at the beginning, give the bit of the history on the business and kind of how we evolve to where we're at today because I actually find that tends to be more explanatory, which is we were originally founded as a business called Quote Lab, which was a lead generation website focused on auto insurance. So pretty simple business, buy traffic from Google, drop it on the page, ask the consumers some questions, qualify the consumer and ultimately sell it as a call click or lead to an insurance carrier. It was a very nice business, totally bootstrapped, profitable from the third month, grew nicely. First big unlock in the company's history was creating a programmatic and transparent bidding platform that allowed carriers to bid very granularly on the customers that were coming in through Quote Lab at the time. And that was a meaningful unlock because there were a number of black box ad networks that were in existence at the time they charged pretty high rates, 25% to 35% plus take rates. And ultimately, the granularity that advertisers and carriers were allowed to realize, allowed them to spend a lot more over time. And so that drove kind of the first leg of the company's growth. One of the big carrier advertisers at that point in time was a company called Esurance, now part of Allstate today, and Esurance was a big advertiser. They had a number of states, that they didn't write coverage in, and they approached us about monetizing through our platform, and that was an interesting opportunity, and so we pretty quickly spun it up. And it was wildly successful. So Esurance saw markedly better monetization. And we were able to grow much faster signing up third-party publishers than growing our own presence as an owned and operated business marketing directly to consumers. And so the business pretty quickly pivoted from being a lead generation business that marketed exclusively for its own account to a marketplace business that it is today with hundreds of different publishers or folks that have consumers that have some interest in insurance products and hundreds of advertisers, which are primarily carriers, but could also be brokers or individual agents, as well. And so it's a 2-sided online marketplace business to use Internet lingo.

So there's a number of insurance lead generation companies out there. Could you talk about what's differentiated about MediaAlpha, how do you think about your competitive moat?

Yes. So I would say what's differentiated about us is really that operating model that we have that many of the other public players do much more marketing for their own account or that is their core business. And with us, we are servicing hundreds of different publishers. So we have a very, very broad set of potential traffic for advertisers to acquire. Secondly, is our scale. We are the largest player in the insurance market doing this type of advertising support for them. And fundamentally, this is a scale business where advertisers want to be where the publishers are and publishers want to be where the advertisers are, and data kind of underpins all of it. And I think the data, the customer relationships and the integrations are the other big point of differentiation for us. And we've got all of the plumbing set up to share data. and to pass it back and that is actually a massive source of differentiation for us.

So the B2B marketplace over -- I think over 400 publishers is the latest number, 600 advertisers. Who are these publishers and advertisers? And could you talk about the primary channels where you're facilitating transactions for them?

Yes. So on the publisher side, I would say, broadly speaking, they fall into 4 categories. One would be insurance carriers, and that would be the Esurance example I gave. So Esurance didn't write in every state. And so a customer would come in, in Alaska where they didn't write through Esurance.com, and we would power click ads for them to click out to some of the other major carriers that you write in that state. Second would be financial app, so you could think of some of the big players out there like a credit bureau or a credit monitoring or a personal loan site, something like that, that we would power. Third would be price comparison sites. So there are some specific price comparison sites for insurance. And fourth would be lead generation players, and that would be -- we do a bit of that for our own account. We have partnerships with some of the big public players and also there are a number of smaller players in the space that we work with as well. On the advertising side, the business is very carrier-centric with us. We also do business with some of the big brokerages. And I would say brokerages are more present on the health side of our business. And we also have a small but growing business on the agent side selling to independent and captive agents, so you can think of like a state farm agent, for example.

So let's talk about the industry dynamics. It's been a wild ride over the past few years. So could you just walk through kind of the dynamics maybe since COVID, what kind of talk about the downturn the industry is facing and where you are on or where we are in terms of the recovery?

Yes. And so starting with COVID, 2020 was the most profitable year for the auto insurance industry in its history from a margin standpoint. And I suspect that, that record will stand for a long period of time, at least I hope it does, and we don't get another pandemic anytime soon. And coming out of 2020, there were a large number of kind of shocks to the system in the auto insurance space. And so as COVID started to subside, people started to drive again. And more importantly, costs to resolve claims shot up. And so used car prices at one point were up 50%. And so what that means is a car that was insured for $20,000 that got totaled, carrier might need to pay $30,000 out when that accident happened. Auto body labor shot up. Parts availability declined. And so to share a personal anecdote, we had 2 very similar vehicles that got rear-ended a couple of years apart. One, I got rear-ended over the weekend, took it in on a Monday, had it back on a Wednesday or Thursday. My wife had it. We had a loaner car for 5.5 months, while they were waiting for one part to resolve it. And that led to a massive increase in costs. And given the regulatory regime in the states around rates, rates weren't able to keep up. And so what we've seen over 2022 and 2023, those were periods of time where the carriers were generally very aggressively taking rate to try to get their underwriting results back to where they needed to be, which are breakeven or profitable. And what we've seen is a very slow progress over 2022 and a lot of '23. And as we got into the back half of '23, we started to see the pace of progress pick up and the results from pretty much all the public carriers have been improving pretty dramatically, and some of the big players are solidly profitable and some of the other, maybe more mutual players and the like are making good progress. Probably not quite where they want to be, but they've got good visibility to better results to come.

So you guided P&C transaction value to grow 60% to 70% sequentially, in what is typically a seasonally down 2Q. This is higher than some of the other public company peers. So how are you thinking about share shifts in the industry coming out of the hard cycle?

Yes. And I would say the start of the auto insurance market recovery has been pretty good so far. We grew transaction value 150% sequentially from Q4 of last year to Q1 of this year, which is great. And as you mentioned, we guided 60% to 70% for Q2 when we came out with earnings a couple of weeks ago. And we got this question a lot in the hard market. And I think our view is that different business models in the space behave a little bit differently. And what we mean by that is there are some other players in the space that are very dependent on selling to individual agents. And so those could be independent agents, state farm agents, allstate agents. And that business, we tend to liken to the bond portion of an investment portfolio, meaning it is downside protected. It doesn't tend to go down as much, but it's also less growthful over time. And our business is very -- and that's selling leads to them, the old-school data leads and our business is very click centric, so it's selling online clicks from publishers who can ramp up their traffic acquisition efforts pretty dramatically when times get good. And it's selling to carriers that just, quite frankly, have more variability in their desire to acquire customers. And so we would liken that carrier budget to being more like a stock in an investment portfolio, which is it may have more risk and volatility, but it ultimately has a much higher expected CAGR over time.

So we've talked about we're in the recovery phase. How is the recovery compared -- so far compared to your expectations? And how do you think about the sustainability of these trends as we get into the second half of the year and even into 2025?

I think the term we've used through the downturn was that it would be lumpy and nonlinear and our expectation for the recovery is that would be lumpy and nonlinear and it has been unpredictable. I think we've been pleasantly surprised by how steep the slope of the recovery has been. I think, quite frankly, our performance in Q1 versus our guidance showed that and we were pleasantly surprised by how that performed. And as we look forward, ultimately, the best forward indicator in our minds of the recovery is going to be the reported results from the big auto insurance carriers, and we see the numbers either monthly or quarterly, depending on the carrier and the numbers look pretty good. So we're feeling all right at the moment.

So auto policy prices, we've probably all felt have increased, I don't know, 50% or more over the past few years. How does this impact carrier customer acquisition budgets? Is it as simple as saying, okay, policy prices are 50% higher, so carrier spend should go up by a similar amount relative to the last cycle? Or how do you think about that dynamic?

Yes. And Cory, it's a really good question. The -- I would say for a lot of the -- for some of the carriers that have profitability targets and the like, that logic is sensible, where some of the carrier is like, hey, I want to have a 95% combined ratio, for instance, in a world where premiums were X percent higher, you would expect our marketing spend to be X percent higher, assuming they had similar lifetime values and everything. I think there are other carriers that maybe don't think about it in that manner, and so they're a little bit harder to predict. And the other challenge, I would say, to a degree is that the peak for -- our prior peak for us and really the industry was during the hard of COVID when profitability was high. So it's a bit hard to know exactly where that's going to shake out. But I think the numbers where we guided to for Q2 a couple of weeks ago showed that the momentum is pretty good in the business.

Okay. So let's talk about Health. You do have a sizable Health business. It's about 25% roughly of transaction highest moving around as P&C moves around. Could you talk about your outlook on the health vertical. And then also, just more broadly, why you decided to stay in it despite some of your competitors exiting during the downturn?

I would say we love the health business. It is, for us, it's a mixture of Medicare Advantage and under 65 Health and it's a healthy blend of the two. And within under 65, it's a mix of both Affordable Care Act, subsidy exchange business and then some nonsubsidized stuff as well. And as we think about the business, like if auto insurance is in the early to middle innings of transitioning from an off-line business to an online business, the health business is probably in something like the first inning. And so one of the stats that persuaded me to join MediaAlpha and still gets me really excited every time I see it in our investor presentation is the stat that insurance marketing is 20% to 25% online, in the U.S., whereas 65% to 70% of all ad dollars in the U.S. are spent online, just to 65% to 70% of all media consumption is online. That number is going to be lower on the health side than it is in auto. And so we think we got the wind at our back for a pretty long period of time in that business going forward. And Cory, I also realized I didn't answer the why did we stay. And I think on that, we've had some competitors that have backed away from that business. And I think that our model in health is very similar to what it is on the auto side, which is we work with a lot of different publishers that have calls, clicks and leads that they're looking to monetize. And a number of the folks that are in our industry that have exited that business, they had businesses where they had pools of agents that were actually trying to bind policies. And so I think those are very different businesses, and that businesses have some unique challenges and some unique and challenging accounting on it. And with us, it's very straightforward. It's a media model where it's the price times quantity times take rate is our economics, and there's no performance risk on our side where we get paid for the media, not for whether a policy gets bound.

Okay. So there's a number of regulatory changes happening in health, Medicare Advantage, in particular. What are the key ones that you're watching? And how could they impact you?