Root, Inc. annual report, FY2021

Root, Inc. — 2021 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; the supplied text does not provide a clear standalone fourth-quarter income statement or cash-flow result.

Business context

Root is a technology-enabled, full-stack personal insurer focused primarily on U.S. auto insurance, using mobile distribution and telematics-based underwriting. It also offers renters insurance and places homeowners coverage through a third party. Root reported operating in 32 states, despite holding insurance authority in more states.

Financial performance and position

Metric20212020
Total revenue$345.4 million$346.8 million
Net premiums earned$310.3 million$322.5 million
Gross written premium$742.6 million$616.8 million
Gross earned premium$719.6 million$605.2 million
Operating loss$485.2 million$285.3 million
Net loss$521.1 million$363.0 million
Net cash used in operating activities$403.4 million$287.2 million
Cash and cash equivalents at year-end$706.0 million$1,112.8 million
  • Gross loss ratio rose to 86.0% from 82.0%; gross accident-period loss ratio increased to 87.9% from 76.2%. Gross LAE ratio was 10.5%, versus 10.1%.
  • GAAP gross loss was $51.9 million, or a negative 15.0% gross margin, compared with a $14.2 million gross loss and negative 4.1% margin in 2020.
  • Management’s non-GAAP adjusted gross loss was $3.3 million, versus adjusted gross profit of $21.0 million. Non-GAAP direct contribution was positive $8.1 million, down from $18.9 million.
  • Sales and marketing expense increased 93.4% to $270.2 million. Total operating expenses rose 31.4% to $830.6 million.
  • At December 31, 2021, total assets were $1.319 billion, total liabilities $670.9 million, and stockholders’ equity $536.4 million. Loss and LAE reserves were $320.2 million; unearned premiums were $180.1 million.
  • Root had no long-term debt outstanding at year-end after repaying its Term Loan A and extinguishing Term Loan B. Cash flow from investing activities was positive $76.9 million, mainly from investment sales and maturities.

Changes and significant developments

  • Gross written premium grew 20.4%, while net premiums earned fell 3.8%, primarily because the share of gross earned premium ceded to reinsurers increased to 56.9% from 46.7%.
  • Claims costs increased amid recovery in miles driven and inflation in vehicle repair and replacement costs. Higher average premiums partially offset these pressures. Prior-year loss development reduced 2021 incurred losses by $13.6 million.
  • In August 2021, Root began a Texas fronting arrangement, assuming 100% of related premiums and losses while gaining greater rating and underwriting flexibility. The arrangement contributed $16.7 million of assumed written premium in 2021.
  • In October, Carvana invested $126.5 million gross for Series A preferred stock and received warrants tied to development and policy-originations milestones for an embedded insurance offering. Root recorded $8.8 million of warrant compensation expense. The warrants could represent up to 129.1 million shares under the short-term tranche structure described in the filing; dilution and vesting depend on specified conditions.
  • In January 2022, Root obtained a $300 million five-year term loan with interest based on SOFR plus 9% (plus the stated adjustment) and issued warrants for approximately 5.7 million shares at $9.00. This financing occurred after the reporting date.

Outlook, risks and unusual items

  • The filing gives no specific numerical revenue, earnings, loss-ratio or cash-burn guidance. Management expects portfolio maturation and more renewals to support lower loss ratios and marketing costs over time, but those benefits are not assured.
  • Root cited ongoing inflation and supply-chain pressures, competitive digital advertising costs, uncertainty from COVID-19, and the need for rate filings to keep pace with loss costs. State rate-approval constraints, especially California’s limits on telematics use, could affect pricing and growth.
  • Insurance capital, reserving and reinsurance remain central risks. The company said its insurance subsidiaries’ risk-based capital levels exceeded regulatory action thresholds at year-end; however, it disclosed that certain NAIC financial ratios were outside usual ranges and that Ohio had determined its financial condition met certain hazardous-condition standards, requiring monthly financial reports. The Ohio regulator had taken no action based on the ratio disclosure.
  • Root stated it expected existing resources and financing access to support short-term needs for at least 12 months. Cash was down substantially year over year, operating cash use increased, and debt covenants require at least $200 million of cash and cash equivalents outside insurance subsidiaries, subject to specified conditions for reduction.
  • In January 2022, Root reduced its workforce by approximately 330 employees, or 20%. It recorded $6.8 million in first-quarter 2022 severance and related charges, expected approximately $2.4 million of real-estate exit costs, and estimated annual expense savings of approximately $30 million. Additional restructuring costs remained uncertain.
  • A shareholder class-action lawsuit concerning alleged IPO-related statements seeks unspecified damages; Root said it could not estimate the likelihood or magnitude of loss. Virginia and Texas market-conduct examinations were ongoing at filing. The completed Ohio and Delaware financial examinations reported no formal findings or required financial statement adjustments.
  • The auditor issued unqualified opinions on the financial statements and internal controls. Loss and LAE reserves of $320.2 million were identified as a critical audit matter because estimates depend on judgment and uncertain claims development.

Important facts for investors to verify

  • Whether rate actions and underwriting changes can offset higher claim frequency and severity, and whether loss ratios improve as the book matures.
  • How much reinsurance and related commissions affect reported net premiums, profitability, recoverables and capital needs; assess reinsurer counterparty exposure and contract terms.
  • Cash runway and covenant compliance after the January 2022 $300 million loan, including its high floating-rate cost and warrant dilution.
  • Carvana embedded-product launch, policy-originations milestones, commercial economics and potential warrant vesting or preferred-stock conversion.
  • Regulatory capital and solvency requirements, monthly reporting obligations, pending market-conduct examinations and the status of California telematics restrictions.
  • Actual restructuring savings versus severance, facility-exit and other costs, and the impact of workforce reductions on claims handling and customer retention.
  • Reserve development and the unresolved IPO-related shareholder litigation, including any subsequent changes disclosed in later filings.