All right. Good afternoon. We'll get started. Cory Carpenter, internet analyst at J.P. Morgan. Pleased to have, Pat from MediaAlpha. Thanks for joining.
Excellent, Cory. Thanks for having me here.
All right, so wrapping up day three, 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?
Yeah, happy to. So, at MediaAlpha, we're an interesting business, and just to maybe start at the beginning, give the bit of the history on the business and kinda how we evolved to where we're at today, 'cause I actually find that tends to be more explanatory. Which is, we were originally founded as a business called QuoteLab, which was a lead generation website focused on auto insurance. So pretty simple business: buy traffic from Google, drop it on a 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 you know bid very granularly on the customers that were coming in through QuoteLab at the time. And that was a meaningful unlock because there were a number of kind of black box ad networks that were in existence at the time. They charged pretty high rates, 25%-35%+ 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, you know, 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, you know, 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.
So it's a two-sided online marketplace business, to use kind of internet lingo.
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?
Yeah. So I would say, you know, 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, you know, we are servicing hundreds of different publishers, so we have a very, very broad set of, you know, potential traffic for advertisers to acquire. Secondly is our scale. We are the largest player in the insurance market, doing, you know, this type of advertising support for them. And fundamentally, this is a scale business, where advertisers wanna be where the publishers are, and publishers wanna be where the advertisers are, and, you know, data kind of underpins all of it.
I think the, the data, the customer relationships, and the integrations are the other big point of differentiation for us in that, you know, 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, 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?
Yeah. So on the publisher side, I would say, broadly speaking, they fall into four 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 do write in that state. Second would be financial apps, so you could think of, you know, some of the, the big players out there, like a credit bureau or a, you know, credit monitoring or, you know, personal loan site, something like that, that we would, 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... you know, 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 could think of, like, a State Farm agent, for example.
... Okay. 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? Talk about the downturn the industry faced, and where you are on or where we are in terms of the recovery?
Yeah, and so, you know, 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, well, 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 you know, 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, the 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 two 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 five and a half months while they were waiting for one part to resolve it. And, you know, that kind of led to, you know, massive increase in costs, and given the regulatory regime in the States around rates, rates weren't able to keep up.
You know, what we've seen over, you know, 2022 and 2023, those were periods of time where the carriers were generally very aggressively taking rate to try to get either their underwriting results back to where they needed to be, which are break even or profitable. You know, what we've kind of seen is, it was very slow progress over 2022 and a lot of 2023, and as we got into the back half of 2023, 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.
Some of the big players are solidly profitable, and some of the other, you know, maybe more mutual players and the like are, you know, 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%-70% sequentially in what is typically a seasonally down 2Q. You know, 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?
Yeah, and I would say, you know, 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%-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, you know, I think our view is that different business models in the space behave a little bit differently. And, you know, 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, you know. And that's selling leads to them, kind of the old-school data leads, and our business is very click-centric, so it's selling, you know, 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, you know, 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 has the recovery compared, you know, 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?
Yeah, and 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 it 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. You know, I think quite frankly, you know, our performance in Q1 versus our guidance showed that.
Yeah.
That we were pleasantly surprised by how that performed. And, you know, 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, you know, 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?
Yeah, and Cory, it's a really good question. You know, I would say for a lot of the... For some of the carriers that have kind of profitability targets and the like, you know, that logic is sensible. Where, you know, so if a carrier's like: "Hey, I want to have a 95 combined ratio," you know, for instance. In a world where, you know, premiums were X% higher, you would expect their marketing spend to be X% higher, assuming they had similar lifetime values and everything. You know, 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 heart of COVID-
... when profitability was high. So it's a bit hard to know exactly where that's gonna shake out. But, you know, I think the numbers were, you know, we guided to for Q2 a couple of weeks ago, you know, showed that the momentum's 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 volume. It's moving around as P&C moves around.
Yep.
Could you talk about your outlook on the health, health vertical, and then also just more broadly, you know, why you decided to stay in it, despite some of your competitors exiting during the downturn?
Yeah, yeah, and 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, you know, kind of subsidy exchange business, and then, you know, some non-subsidized 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 offline business to an online business, the health business is probably in something like the first inning.
And so, you know, 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%-25% online in the US. Whereas 65%-70% of all ad dollars in the US are spent online, just as 65%-70% of all media consumption is online. And, you know, that number is gonna 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.
Could you talk about the
Oh, and Cory, I also realize I didn't answer the why did we stay in the business?
Yes, why did you stay?
Please. And, you know, 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.
Yeah.
And so I think those are very different businesses, and that business is, has some unique challenges and some unique and challenging accounting on it. And with us, you know, it's very straightforward. It's a media model where, you know, it's the, you know, 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, you know, regulatory changes happening in health, Medicare Advantage in particular. What are the key ones that you're watching, and how could they impact you?
Yeah, and on the Medicare Advantage side, there was a big change made last year, which was around marketing approvals were required from the carriers that were ultimately, you know, buying this traffic or binding policies through, you know, their brokers or agents. And that process was instituted relatively late in the game, and it was a complicated process that the industry, quite frankly, wasn't really staffed up for. And so the situation was you'd you know, we and others would be submitting creative for approvals. The approvals were slow in coming because there was just more demand, or there was more demand for it than there was capacity to provide it. And there wasn't a lot of clarity as to what was allowed and what wasn't. So you'd submit it to one carrier, and they would say it was fine.
You submit it to another carrier, and they'd go change four words, and then you'd submit it to the third carrier, and they'd go change 17 things in it. And even within carriers, you know, John would say something was okay, and Jane would not say it was okay, and so there was a lot of inconsistency and churn, and that process is already underway for the next AEP, and it's looking much smoother. I think, you know, the other side of things is there are some things around, Medicare Advantage reimbursement rates, which gets to plan design, and I think, you know, some of the carriers are seeing margins get squeezed. I think, you know, on the one side, on the one hand, that's a negative for us because maybe they'll be less aggressive.
On the other hand, it sounds like there will be some plan design changes, which could cause more switching, which could be good for us. And so, you know, I think we've been able to navigate the regulatory and kind of political shifts across the health business over time, and we have confidence we'll continue to do so.
So going kind of more to the financials, during the P&C downturn, you cut costs and headcount. Your EBITDA margins are back already near prior cycle highs. So could you talk about the cost changes you made, and, you know, are your margins now structurally higher as a result?
Yeah, and so we, we don't share long-term guidance on margin targets or anything like that, but one thing I would say is that we, as a business, have always run lean. So bootstrap business, profitable since the third month, and we ended 2023 with 137 employees, and virtually all of our employees are categorized as OpEx for us. And so, you know, as we kind of come into this year and the, the growth trajectory has been pretty positive, you know, we're gonna see a bit of reinvestment into the business. I think we guided for, you know, Q2, that overhead would be up a bit, and guessing for, you know, Q3, it'll be up another $500,000-$1 million versus Q2, and probably up the same amount in Q4 versus Q3.
But this is a business where, you know, we got a lot of fixed costs or costs that are, you know, semi-fixed. So we've got sales and account management teams, and those will grow, but, you know, potentially less quickly than revenue. So this is a business we think can lever.
All right. You kind of answered that question, or you may have totally answered it, but how much incremental investment is needed to support the top-line growth through the cycle upswing?
Yeah.
Are there any areas that you're also looking to proactively make discretionary investments?
Yeah, I would say, you know, broadly speaking, you know, the OpEx cost bar, you know, for the business is four things, which is, you know, kind of tech product analytics, which is, you know, the core offering. It's, you know, sales and account management, which is driving the revenue. It's, you know, overhead to support the business, and that'll be, you know, finance and legal and HR and stuff like that. And, you know, then it'll be other, you know, indirect spend, of which, you know, pro fees, public company costs are gonna be the big ones. And so, as I, you know, think about that cost bar, you know, the tech product analytics piece, that is core to our, you know, differentiation in long-term success, and so that's an area that is important to us.
We will be investing in it over time. The sales and account management, you know, piece, that tends to, you know, pay back faster and be more directly tied to revenue. We'll be adding some to that. And as you think about the overhead and the, the public company costs, you know, that's the area where, you know, I would say there will be much less expansion for us going forward.
So two primary ways partners can transact with you, you call it private and then also an open platform. Could you walk through how these are different? And then I know there's some accounting nuance, so perhaps just the economics of each at a high level.
Yep, happily. So our core offering is Open Exchange, and what the Open Exchange is, is we act as the principal facilitating all transactions. And so we've got hundreds of publishers, most of which are relatively small, hundreds of advertisers, most of which are relatively small. And in the Open Exchange, we make it as easy as possible for folks to transact. There will likely be no direct relationship between the advertiser and the publisher, like, they never meet each other, they don't know much about each other besides their names. And, you know, we will do, you know, all billing, all remittance, all invoicing, all ad tracking, all ad serving, and, you know, we quite frankly bring the advertisers to the publishers and bring the publishers to the advertisers, and that's our, our core model.
Take rates on that are typically in the teens for us, and we define take rates as being contribution divided by transaction value. And because we're the principal in the transaction, everything's recognized on a gross basis. So if a carrier spends $100 with us, we would have $100 of transaction value, which is our main top-line metric, $100 bucks of revenue. Call this... we assume a 15% take rate. There will be $85 of cost of sales, which is the remittance to the publisher, and $15 of contribution for us. Pivoting to the Private Exchange, the Private Exchange is a kind of lower touch solution we offer for big advertiser-publisher combinations that wanna transact with each other directly and have a deeper, more strategic long-term relationship.
And so we've got, you know, couple, a handful, couple handful of these relationships, and they tend to be, you know, top couple carriers with top couple publishers. And in this, you know, they'll have a direct relationship. They'll handle all, you know, financials between each other, and, you know, we effectively offer tracking and ad serving for those partners. And take rates for us, which once again, are contribution divided by transaction value, are kind of 4%-5%, for those on average, and we recognize financials on a net basis. So if a carrier spends $100 on that, we would recognize, you know, call it $4 of revenue. There'd be virtually zero cost of sales and $4 of contribution on that.
Great, so, your biggest customer historically has been Progressive. They've been talking a bit more about this AutoQuote Explorer comparison product. Two questions here, you know, maybe one for those less familiar, kind of could you what is that product? And then also, is it competitive with your offering?
Yep. Yeah, so Progressive is obviously a big carrier and an important part of the ecosystem, and they have actually two products. They have AutoQuote Explorer, and then they have another one called HomeQuote Explorer, and HomeQuote Explorer has actually been around longer... and what those are is for a certain subset of customers that come in, they are choosing to show agency rates from other carriers to that customer. And, you know, it could, it can be online or through a call center. And these are, you know, independent agent rates that they would show to that customer, and they're presumably doing it because they think there's a, you know, there's an opportunity to win that customer and/or show that customer a better experience.
And they've been focused on it and home for longer, where, you know, I think they're, quite frankly, just not as advanced as a company. And so, you know, I would say it doesn't really compete with us because these are bindable rates for them on their side, and not necessarily and often not from the largest players that you would consider to be their direct competitors. And, you know, our perspective would be to the extent they can drive additional monetization through that, that'll, you know, could lead to more advertising spend, and, you know, we think it's great that they're focused on providing the best customer service they can.
Okay. One of the things we, we've kind of always talked about is just kind of surprised there was not industry consolidation during the down cycle. Question for you would be: Do you think the industry needs to consolidate, and if so, what's MediaAlpha's appetite for acquisitions?
Yeah, and I would say I don't think the industry needs to consolidate. I do think it's an industry that has a number of players, and it's an industry where there are benefits to scale. And so, you know, when those characteristics are present, I think that consolidation, you know, can and often does occur, and, you know, I think our view is that, you know, wouldn't be surprised if there is some consolidation over time, and we would probably view ourselves as more likely a consolidator than a consolidatee, given our presence.
So, three more questions. One, you've historically focused on the direct carrier relationships. You mentioned this earlier, but could you talk about your presence in the agency channel, and what are your ambitions to grow and expand here?
Yeah. So we, you know, our business is very carrier-centric. A couple of years ago, we started up a business focusing on agents, and so those could be either, you know, small independent agents or small captives. We've made some nice progress on it. It's a nice little business for us. It's a very small percentage of our mix, given just how many of these agents there are out there and their typical size. So, you know, you can have car- we have carriers that'll spend, you know, multiple millions of dollars per month, and there are some individual agents that, hey, they spend $100 a month or $500 a month, and so you've got to aggregate a lot of them. And so, you know, we like the progress that we've made. There's obviously a long way to go.
It's a pretty small portion of the overall mix, but we're kind of happy with the investment.
So one on capital allocation, you have about $15 million of cash, about $170 million of debt. What are your capital allocation priorities, and is there a certain leverage level you're managing to?
Yeah, so we don't have a hard leverage target. You know, would say that, you know, we had, you know, $170 million of debt, and, you know, given the trailing EBITDA, you know, some of those leverage ratios were probably pretty clearly higher than we would've liked. And so we're in a spot, you know, now for the next little bit, where we're focused on net debt reduction, and I would say that, you know, will take a couple forms. One is mandatory amortization on the term loan. It's about $2.4 million a quarter, so we're paying that off every quarter. And we have $5 million drawn on our revolver, and so paying that off is a near-term priority, as is building up a bit of cash balance.
And I would say, you know, over the longer term, you know, as a management team, we're large shareholders in the company, and we endeavor to be very shareholder-friendly, and we've done a buyback in the past. I would say that, you know, M&A is obviously, given your prior question, something that, you know, could be interesting over time, and returning capital to shareholders is always an intriguing option as well.
Last question, then we'll wrap up. So you also, we've talked about health, we've talked about P&C. You have a smaller business in life insurance, you have a presence in travel and consumer finance, outside of insurance. Anything you, you'd highlight across those areas?
Yeah. I would say life insurance is... it's a nice, kind of Steady eddy business for us in that P&C is our largest vertical, health is smaller, but still very meaningful, and life is, you know, quite a bit smaller than health. Life has done, you know, did well in COVID, and then as mortality fears declined and people weren't hearing news stories multiple times a day about dying, they stopped buying life insurance, and it seems like that market's starting to normalize. And so, you know, that's one we, you know, think is a, is a nice market and should continue to be. And I would say the, the non-insurance verticals for us were, you know, much more important to us historically, and they're, you know, profitable for us, but the, the crux of our focus going forward is on insurance.
Great. Well, we'll leave it there. Thank you.
Excellent.