Gruppo MutuiOnline & Online Insurance Broking | In Practise

Gruppo MutuiOnline & Online Insurance Broking

In Practise Weekly Analysis

Summary

In Practise reflects on some of the key lessons and major questions explored in one or more interviews each week

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Last month we published one interview on the BPO division of Gruppo MutuiOnline (MOL), the Italian owner-operated company that has compounded FCF at over 40% for nearly 20 years. This week we published two more interviews on the company from different angles: one interview on the price comparison business unit and the other with a MOL customer of both broking and BPO. We believe the two interviews this week highlight MOL’s growth opportunity and deep moat.

In 2020, 75% of MOL's operating income came from the Broking division which owns a collection of price comparison businesses for mortgages, consumer loans, and insurance products. We interviewed the Former COO of facile.it, the PE-owned multi-product price comparison site, to understand how the company competes with MOL’s mutuionline.it and segugio.it sites.

Price comparison is a simple lead generation business: buy large TV ads to drive online traffic and generate the cheapest leads for suppliers. Comparison sites are effectively outsourced marketing units for suppliers with huge network effects that lead to winner-takes-most dynamics and 50%+ EBITDA margins. These are unique assets mainly that are worth exploring.

As a quick side note, we are curious why price comparison sites are usually found outside the US? Maybe it’s because the likes of GEICO and Progressive (price comparison mainly started in the more commoditised motor insurance) already had large market share and relatively high percentage of direct traffic that a standalone site didn’t make sense?

In Italy, only ~13% of motor insurance policies are sourced through price comparison compared to over 65% in the UK. This is mainly due to an older, less-digitally savvy Italian population which prefers the traditional, physical branch channel to provide comfort when purchasing complex financial products. Another barrier to higher penetration is that policies are less profitable for insurers online relative to the branch network. The average Italian motor policy has decreased from over 330 EUR to 220 EUR in the last 10 years as over 70% of new policies are sold online. An aging Italian population, stronger labour unions, and less profitable policies online have led to online penetration to only grow from 3% to 13% in 10 years.

Another insight was the difference in motor insurance and mortgage price comparison. Car insurance seems to be the perfect product to generate leads online for a few reasons:

  • Car insurance is mandatory and renewed annually
  • Average policy value is 200-300 EUR
  • Large number of policies and low policy value diversifies risk
  • Average retention rate is ~65%

After the consumer completes personal and vehicle details, the insurer can offer a price for the policy which can be purchased instantly. If the policy is underwritten incorrectly, the absolute loss is low given the number of policyholders and potential claims value. This comment highlights how different selling mortgages online is compared to car insurance: 

With insurance you can acquire new leads and control your conversion rates. Customers operate autonomously online. You cannot sell a single mortgage online. You can get leads but buying or selling a house in Italy is a long process with tons of paperwork and stakeholders. The historical data never works correctly so a consultant is required. That is why banks pay more for mortgages. The average commission on a car insurance premium is €30 whereas for a mortgage sold it is €2,000.

Not only is there more paperwork and legislation when buying a house but the major difference is the level of balance sheet risk for mortgages relative to a car insurance policy. A 300,000 EUR thirty-year loan is very different to a 300 EUR insurance policy. The mortgage supplier needs more equity on the balance sheet and is exposed to a higher absolute loss given default compared to an insurer.

Also, mortgages don’t renew annually and policyholders don’t churn every 3 years. Banks don’t need to continually replenish their mortgage book like a motor insurer needs to replace a third of customers each year. This leads to a complex mortgage underwriting and lead generation process and a more cyclical mortgage credit market relative to motor gross written premiums.

"insurers need new insurance contracts daily whereas banks do not. It depends on how much money they have. If they have a surplus, they will need to offer mortgages. There are some periods when it is difficult to find a mortgage and others when it seems money has no value and everyone is offering mortgages for 0.1% per year...The key to online mortgage broking on a price comparison website is by having contracts with the banks. You need many banks because, whilst most car insurances are similar, all mortgages differ because the offers from banks vary."

This difference is important to understand the competitive landscape in mortgage broking. When facile.it entered the mortgage comparison market, they struggled to onboard banks. The higher balance sheet risk and cyclical mortgage demand means banks are far more selective in building a mortgage asset base relative to insurance policies. So the banks didn’t need another comparison site. Mutuionline.it 70% market share plus a bank’s own branch network seems to generate more than enough mortgage demand for the bank. Being first to market in mortgage broking is even more of an advantage than other categories due to these unique product dynamics. Mutuionline.it has ~4x the number of banks compared to the nearest competitor. This leads to better pricing for consumers which drives more traffic and fuels the network effect.

Consumers also associate a brand with one job-to-be-done. Mutuionline sells mortgages. Facile.it sells car insurance. Whilst it’s easy to bolt on adjacent products, a company usually occupies one small part of a consumer’s mind. Mutui is mortgages in Italian which gives it almost an unfair advantage. Consumer brand awareness plus the largest number of suppliers provides MOL with a deep moat in mortgage comparison. This moat and the structural tailwind of higher digital penetration online presents a long growth runway for Gruppo MutuiOnline’s broking business.

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