Root, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Root is a technology-enabled, direct-to-consumer insurer focused primarily on auto insurance, with renters insurance and other fee-generating activities. This unaudited report covers the quarter and six months ended June 30, 2021; amounts are in U.S. dollars.
Key financial and operating metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $89.8 million | $121.4 million | $158.4 million | $245.4 million |
| Net premiums earned | $81.2 million | $115.7 million | $140.3 million | $233.5 million |
| Net loss | $(178.6) million | $(38.9) million | $(278.2) million | $(144.5) million |
| GAAP gross profit/(loss); margin | $(18.9) million; (21.0)% | $8.8 million; 7.2% | $(12.6) million; (8.0)% | $(8.4) million; (3.4)% |
| Direct written premium | $177.1 million | $142.3 million | $379.6 million | $306.5 million |
| Direct loss ratio | 89.9% | 70.4% | 81.0% | 81.3% |
| Direct LAE ratio | 10.6% | 8.5% | 10.2% | 9.5% |
| Adjusted gross profit/(loss), non-GAAP | $(3.8) million | $16.1 million | $13.2 million | $7.4 million |
| Direct contribution, non-GAAP | $(3.8) million | $22.0 million | $22.8 million | $11.0 million |
Q2 operating loss was $172.1 million, compared with $31.2 million a year earlier. Six-month operating loss was $266.4 million, versus $131.1 million. Q2 loss per share was $(0.72), versus $(1.03); the weighted-average share count increased substantially, to 248.9 million from 37.9 million.
At June 30, cash and cash equivalents were $973.1 million and investments were $135.5 million, including $134.7 million of marketable securities. Total assets were $1.588 billion, total liabilities $825.7 million, and stockholders’ equity $762.0 million. Long-term debt carrying value was $197.1 million. The company reported $100 million available on its revolving facility, with no borrowings or letters of credit outstanding.
For the six months, operating cash use was $226.5 million, investing cash provided was $82.6 million, and financing cash provided was $4.2 million. Cash, cash equivalents and restricted cash declined $139.7 million to $974.1 million. Management said available cash, marketable securities, revolver capacity and operating cash flow were expected to support working capital and capital expenditures for at least 12 months.
Material changes versus comparable periods
- Q2 revenue fell 26.0% year over year even as direct written premium rose 24.5% and direct earned premium rose 19.0%. Net premiums earned declined because Root ceded a greater share of premiums under changed reinsurance arrangements: approximately 55.1% of direct earned premiums in Q2 2021 versus 23.8% in Q2 2020.
- Q2 sales and marketing expense increased to $111.7 million from $17.4 million, reflecting higher performance marketing and advertising amid heightened competitor spending and increased customer acquisition efforts.
- Q2 loss and LAE expense rose 13.3% to $110.2 million. Management cited increased claim severity and frequency as miles driven exceeded pre-pandemic levels; the direct accident-period loss ratio increased to 88.3% from 66.2%.
- For the first half, direct written premium grew 23.8%, but net premiums earned fell 39.9% as the share ceded to reinsurers increased to approximately 58.8% from 21.1%. The first-half direct accident-period loss ratio rose to 83.1% from 73.0%.
- Six-month prior-year reserve development reduced incurred losses by $8.6 million, mainly due to lower-than-expected bodily injury claims and higher subrogation and salvage recoveries. In the prior-year period, reserve development increased incurred losses by $13.0 million.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects to continue elevated third-party quota-share reinsurance while growing, and described a longer-term opportunity to reduce cessions as the business scales. Management also expects sales and marketing to rise in absolute dollars near term; its longer-term view is that marketing will decline as a share of revenue as renewals grow.
- Management said rising miles driven could bring claims frequency back toward customary levels. Higher replacement-parts costs and used-car values, competitive digital advertising and customer acquisition costs, and uncertainty around COVID-19 and the Delta variant were cited as business pressures.
- Term Loan A, with a carrying value of $99.0 million, matured in October 2021. The filing said Root expected to meet the obligation through refinancing, operating funds or available cash. Term Loan B was $100.0 million and carried a 10.5% margin over three-month LIBOR; Root had elected to pay interest in kind through June 30, 2021.
- On August 11, 2021, after quarter-end, Root and Carvana announced an agreement for Carvana to invest approximately $126 million through a convertible preferred security, convertible at $9 per share, and to partner on an embedded insurance platform. The transaction was subject to regulatory approvals and expected to close in the second half of 2021; the agreement also included milestone-based warrants.
- A shareholder class action related to Root’s IPO remained in early stages. Root said it intended to defend the claims and could not estimate the likelihood or amount of any loss. A separate purported class action was voluntarily dismissed in May 2021.
- Root stated there had been no material changes to the risk factors in its 2020 Form 10-K. It also disclosed that insurance-subsidiary dividends were restricted without regulatory approval and that insurance entities must maintain regulatory capital levels.
Most important facts for investors to verify
- Whether growth in direct premiums can translate into higher net earned premiums and improved profitability despite the increased reinsurance cessions.
- Whether claim severity, frequency and loss ratios stabilize, and whether marketing spend and customer acquisition costs become more efficient.
- How Root refinanced or repaid the October 2021 Term Loan A maturity, and the resulting debt and interest burden.
- Whether the Carvana transaction closed on its stated terms, received regulatory approvals, and achieved the platform and sales milestones tied to its warrants.
- Developments in the IPO-related class action and any resulting financial exposure.