Root, Inc. (NASDAQ:ROOT) Q4 2023 Earnings Call Transcript

Root, Inc. (NASDAQ:ROOT) Q4 2023 Earnings Call Transcript February 21, 2024

Root, Inc. beats earnings expectations. Reported EPS is $-1.64, expectations were $-2.49. ROOT isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Root, Inc. Fourth Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. [Operator Instructions] I will now turn the call over to Matt LaMalva, Head of Investor Relations. You may begin your conference.

Matt LaMalva: Good afternoon and thank you for joining us today. Root is hosting this call to discuss its fourth quarter and full year 2023 earnings results. Participating on today’s call are Alex Timm, Co-Founder and Chief Executive Officer; and Megan Binkley, Chief Financial Officer. Earlier today, Root issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document, for more complete information about our financial performance, we also encourage you to read our full year 2023 Form 10-K which was filed with the Securities and Exchange Commission earlier today. Before we begin, I want to remind you that matters discussed on today’s call will include forward-looking statements related to our operating performance, financial goals and business outlook which are based on management’s current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, please review our Form 10-K for the year ended December 31, 2023, as well as our shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section.

I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root’s performance. You can find reconciliations of these historical measures to the nearest comparable GAAP measures in our shareholder letter and our Form 10-K filed with the SEC, both of which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex Timm, Root’s Co-Founder and CEO.

Alex Timm: Thank you, Matt. We closed out 2023 with another quarter of significant increases in gross written premiums and direct contribution, along with continued excellent loss ratio performance, resulting in the best quarter the company has ever produced across almost every metric in the business. I want to take a couple of minutes to walk you through the transformation Root has successfully undergone over the past couple of years and why this transformation has us very excited for the future. Just over 2 years ago, we underwent a crisis as we saw used car prices soar and observed the worst inflationary environment in recorded history. It was clear that we needed to pivot our business. This entailed making a number of decisions that, while difficult in the near term, were ultimately the necessary and correct decisions to ensure we evolved our company and positioned ourselves to be able to fully disrupt the auto insurance industry.

To do this, we crafted a 3-step plan. One, drive toward healthy margins on our business by hitting our target loss ratios; two, materially lower our fixed expenses; and three, efficiently grow to scale in order to drive profitability. Fast forward 2 years and we believe the transformation is remarkable. For the full year 2023, we restarted our growth engines, increasing gross written premiums by 31% and policies enforced by 55%. We generated a Direct contribution of $151 million. That’s nearly a 20x expansion from just 2 years ago. We recorded a gross accident period loss ratio of 66% and a gross combined ratio of approximately 116%, both major improvements while also validating our efforts to enhance our tech and data capabilities. To that point, for the past 3 quarters, our loss ratios have been among the best in the entire auto insurance industry.

Most importantly, we invested considerably in our technology and data science to significantly enhance our underwriting and pricing capabilities. As a result, we enter 2024 believing we have achieved scale in our business which provides us the ability to make decisions for the long-term success of Root. Specifically, we plan to look for opportunities to profitably gain market share or quickly shift our focus if we determine that growth may not achieve our target returns. We could not be more excited for the long-term potential of Root and here’s what you should expect to see from us as the new year progresses. First, we see the opportunity to continue growth in 2024 and expand our market share. We expect the Direct channel to continue to benefit from our machine learning approach to targeted and automated customer acquisition as well as our significant advancements in pricing and underwriting.

We’ll continue to invest our marketing dollars to achieve target returns and respond as we see changes in the competitive landscape. We also expect to grow through our Partnership channel where we will continue to focus on launching additional partners in 2024. The Partnership channel provides potential customers with a differentiated experience at contextually relevant times which we believe will ultimately be foundational to our long-term diversified growth strategy. As we have achieved our target loss ratio and established a scalable expense base, we believe our ability to reach profitability is now largely dependent on the level of our investments in discretionary marketing. Root’s future looks brighter than ever as we continue to profitably and efficiently grow and scale our business.

We continue to build an enduring company and are making excellent progress in our mission to unbreak insurance through our data science and technology. We knew when we started Root, it was going to be a long journey, carving a new approach into an industry that has been untouched for almost 100 years is hard. The challenges of the past 2 years have galvanized our team, who believe in our mission and vision more than ever. We are disciplined, focused and above all, passionate about constantly delivering value to our customers. We remain grateful to our customers, employees and our shareholders for their continued support. I’ll now turn the call over to Megan to discuss our operating results in more detail.

Megan Binkley: Thanks, Alex. Overall, it was a very strong end to 2023 with further improvements on both our top and bottom lines. Our growth continued with total new writings and policies-in-force higher on both a quarter-over-quarter and year-over-year basis. Gross written premium was $279 million, a 25% increase quarter-over-quarter and a 129% increase year-over-year. Gross earned premium was $214 million, a 34% increase quarter-over-quarter and a 50% increase year-over-year. We achieved this growth while also posting a gross accident period loss ratio of 66% for the fourth quarter. Once again, steady on a quarter-over-quarter basis and an 11-point improvement year-over-year. This was predominantly driven by our pricing and underwriting advancements.

Our evolved reinsurance strategy continues to benefit net results through increased retention and lower reinsurance costs. Consistent with prior guidance in Q4 2023, our gross earned premium cession rate was 18% and the gap between gross and net loss and LAE ratios was reduced to single digits. During the fourth quarter, our net loss was $24 million, a 59% improvement year-over-year. Adjusted EBITDA improved 99% over the prior year to a near breakeven loss of $300,000. Compared to the third quarter, our net loss improved 48% and our adjusted EBITDA loss also improved 99%. These improvements were mostly the result of the growth in net earned premium as well as favorable loss development recorded in the quarter. The favorable loss development was primarily driven by better-than-expected emergence on injury coverages for the 2023 accident year and we don’t expect this degree of favorable prior period development going forward.

These impacts were partially offset by higher acquisition investment during the quarter. And as we’ve noted, we do not defer the majority of our customer acquisition costs over the life of the customer which leads to accelerated expense recognition relative to earned premiums. Overall, our results for the fourth quarter and for the full year 2023 continued to reflect the sustained momentum towards management’s top priority of reaching profitability with our existing capital. Unencumbered cash was $507 million as of the end of 2023 compared with $559 million as of the end of 2022, reflecting an annual usage of $52 million. Our unencumbered cash consumption rate improved on a year-over-year basis following our continuous pricing and segmentation improvements and the reset of our fixed expense base and was partially offset by an increase in customer acquisition costs as we continue to position the business for profitable growth.

As Alex stated, 2023 was a transformative year for Root, as we return to growth, recorded sustained improvements in our loss ratio, appropriately aligned our fixed expense structure and pivoted our reinsurance strategy going forward. As a result, we are entering 2024 in a position of strength and we will continue to be mindful of our underwriting and expense management in order to remain on the path to profitability. We are excited for the future. We appreciate your time and look forward to your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Josh Siegler with Cantor Fitzgerald.

Josh Siegler: Nice results here. First, can you give any insight into what trends you’re seeing year-to-date, specifically around severity, frequency? And how are you really expecting loss ratios to trend in the beginning of 2024?

Alex Timm: Yes. Thanks, Josh. We’re continuing to see our loss ratio really progress nicely. And we are seeing severity up continually this quarter and some improvements in frequency trends as well. On severity, we’re seeing used car prices, they’ve started to come down a bit but really used car parts, labor, medical, we’re still seeing some healthy inflation there on the severity side. Frequency, we continue to get better at segmentation and pricing and we continue to iterate on our data science platform. And we’ve seen and you can see this historically, we’ve seen really nice trends in our frequency as we continue to do better at segmenting our book. And so we’re very happy with where our loss ratio is. It is one of the best in the industry at this point. And so we believe we can continue in 2024 at these sustained levels.

Josh Siegler: Got it. That’s helpful. And as a follow-up to that, with these healthy loss ratios, even amongst new cohorts, it sounds like you’re in growth mode right now. Are you thinking about accelerating that growth as we start the new year in 2024? And what would have to happen for you to change your mind and really shift towards that profitability angle instead?

Alex Timm: What I’d say, we are constantly focused on gaining profitable market share. So for us, we don’t think it’s growth or profit, we are really focused on driving new business at our target return levels. And so we’re going to continue to do that. And what our machine does is, it’s constantly looking to see how the competitive environment is evolving. We have seen some competition come back into the market year-to-date and we’re still growing. So we’re — and we continue to invest too in lots of other growth levers in the business. We’ve added multiple additional partners now already this quarter in the business. We’re very excited about our Partnership channels and our embedded product. We’re going to continue to improve pricing and underwriting which we believe ultimately will allow us to have a pricing advantage in the market and continue to grow.

And we’re now looking at marketing channel expansion as well as expanding our state footprint. So we are definitely focused on growth but it’s definitely profitable growth. If we see anything that gives us any pause on the profitability of the business that we are adding to our book of business, we will certainly pull back and that’s what would cause us to shift towards driving more towards near-term profitability.

Josh Siegler: Congrats again on the results, really strong quarter here.

Operator: Your next question comes from Yaron Kinar with Jefferies.

Yaron Kinar: Sorry. Are you able to hear me?

Alex Timm: Yes, we can hear you.

Yaron Kinar: Okay, great. Congrats on a good quarter here. So my first question, just looking at the strong loss ratio clearly, can you maybe talk about the rate adequacy? Are there still pockets where maybe you feel like you need a little more rate? What’s your expectation for rate increases would be for the coming year?

Alex Timm: Yes. We’re currently pricing to sort of a high single-digit trend and we’re prepared to respond. We’re always monitoring the inflationary environment. Clearly, I think as 2023 has shown, in a high inflationary environment, we know how to respond and react and certainly deliver on loss ratios. If there is abatement in the inflationary environment, we think that could certainly be a tailwind to the business as well. Right now, broadly, though, we believe we’re rate adequate across the vast majority of our footprint. And so we feel very good about where we’re positioned today.

Yaron Kinar: Got it. And then I guess my second question, obviously, we saw a very significant loss ratio improvement, at the same time that we’re seeing new business as a percentage of the overall earned premium increase. I often think about a new business penalty that we often see in the industry. Can you maybe comment on that? Can you try and quantify it? And I guess what I’m trying to get at here is the level of improvement, I guess, is even more impressive considering the amount of new business that you achieved.

Alex Timm: Thanks, Yaron. Yes, I would say we definitely — the mix of our business being more new and less renewal and even that our renewal business is actually relatively younger than what you might see generally in the industry, definitely is a headwind to our loss ratios because we do see some, as you referred to it, the new business penalty. It’s not huge. It’s single digits right now. And really, as we’ve continued to progress, particularly on our machine learning underwriting models and really has started to also improve our segmentation, we’ve really been able to bring that first term loss ratio down fairly materially. And so we feel good about that. It certainly has allowed us to scale much more efficiently.