Root, Inc. — Q2 2022 Form 10-Q
Business context and reporting period. Root is a technology-enabled personal insurer, primarily selling auto insurance directly to consumers, with renters insurance and an embedded insurance partnership with Carvana. This unaudited report covers the quarter and six months ended June 30, 2022; amounts are in U.S. dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $80.4 million | $89.8 million | $165.8 million | $158.4 million |
| Net premiums earned | $74.7 million | $81.2 million | $153.0 million | $140.3 million |
| Operating loss | $(80.7) million | $(172.1) million | $(151.6) million | $(266.4) million |
| Net loss | $(89.9) million | $(178.6) million | $(166.3) million | $(278.2) million |
| Adjusted EBITDA (non-GAAP) | $(67.2) million | $(165.2) million | $(118.4) million | $(255.4) million |
| Gross margin | (9.3)% | (21.0)% | (11.9)% | (8.0)% |
| Direct contribution (non-GAAP) | $(0.2) million | $(3.8) million | $6.2 million | $22.8 million |
- Underwriting metrics: Q2 gross loss ratio was 87.0% versus 89.9%; gross accident-period loss ratio was 85.2% versus 89.9%. For the first half, those ratios were 85.6% versus 81.0% and 83.1% versus 83.4%, respectively. Gross LAE ratio improved to 9.9% in Q2 from 10.6%.
- Cash flow: First-half operating cash outflow was $104.9 million, compared with $226.5 million in 2021. Investing cash outflow was $1.8 million; financing provided $286.3 million, principally from the new term loan. Cash, cash equivalents and restricted cash ended at $886.6 million.
- Balance sheet and debt: June 30 cash and cash equivalents were $885.6 million, including $695.7 million outside regulated insurance entities; marketable securities were $120.8 million. Total assets were $1.48 billion, total liabilities $979.8 million, and stockholders’ equity $388.0 million. Long-term debt had a $292.3 million carrying value.
Material changes versus comparable periods
- Q2 revenue fell 10.5%, primarily as reduced marketing spend lowered policies in force and gross written premium; higher auto premium per policy from rate increases partly offset the decline. Auto policies in force were 297,716, down from 373,721 a year earlier.
- First-half revenue rose 4.7%, reflecting higher net premiums earned, lower reinsurance cession, and assumed premiums under the Texas fronting arrangement. Gross written premium declined 13.8% to $327.3 million, while gross earned premium increased 1.3% to $345.5 million.
- Sales and marketing expense fell 77.3% in Q2 and 77.7% for the first half, substantially narrowing operating and net losses. Conversely, first-half loss and LAE expense rose 13.1%, and general and administrative expense rose 41.3%, including restructuring and higher share-based compensation.
- Auto premium per policy increased 10.9% year over year, primarily from rate actions. The company reported claim severity increases of 8% in Q2 and 10% for the first half; first-half claim frequency increased 2%.
Outlook, commentary, risks and unusual items
- Management stated that existing cash, marketable securities and operating cash flows should support working capital and capital expenditure needs for at least the next 12 months. No specific revenue, earnings or other numerical operating guidance is provided in the filing.
- Root entered a $300 million, five-year term loan in January 2022, maturing January 27, 2027. Its floating rate is SOFR, subject to a 1% floor, plus 9% and 0.26161%. Covenants require at least $200 million of cash outside insurance subsidiaries, with conditional paths to lower that threshold to $150 million. The loan also included warrants for 5.7 million Class A shares at $9 per share.
- Inflation and higher replacement-parts and used-vehicle costs increased claim severity. Management cited ongoing uncertainty from inflation, supply-chain disruption, COVID-19 effects and economic conditions. Loss-reserve development for prior periods was slightly unfavorable in the first half, primarily due to higher-than-expected property damage, collision and comprehensive losses, partly offset by lower LAE.
- In January, the company announced an organizational realignment affecting approximately 330 employees, about 20% of its workforce. First-half restructuring costs were $8.4 million.
- Two shareholder suits related to the IPO remained unresolved; the company said it could not estimate the likelihood or magnitude of potential loss. It also reported an ownership change under Section 382 that limits use of some tax attributes, though it did not expect a material reduction in NOL utilization from the identified change.
- After quarter-end, the board approved a 1-for-18 reverse stock split, expected to take effect after market close on August 12, 2022. The filing also notes potential dilution from outstanding warrants and equity awards.
Important facts for investors to verify
- Whether reduced acquisition spending can stabilize policy count and premium volume while sustaining improved loss performance.
- Whether rate increases will keep pace with claim severity and frequency, and how loss-reserve estimates develop.
- Progress and economics of the Carvana embedded offering, including its role in satisfying loan covenant conditions and potential additional warrant issuance.
- Cash burn, unrestricted cash availability, debt servicing costs and compliance with the term-loan liquidity covenants.
- Developments in the shareholder litigation, the reverse stock split, and the effect of Section 382 limitations on future tax attributes.