Root, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are to Q1 2021 unless noted. Root is a technology-driven personal insurer, primarily selling auto insurance through direct and mobile channels, with renters insurance and other fee-based offerings.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $85.4 million | $68.6 million |
| Net premiums earned | $78.3 million | $59.1 million |
| Operating loss | $70.9 million | $94.3 million |
| Net loss | $76.4 million | $99.6 million |
| Loss per share | $0.30 | $0.40 |
| Operating cash flow | $(51.2) million | $(90.9) million |
| Adjusted EBITDA (non-GAAP) | $(51.2) million | $(90.2) million |
GAAP gross loss was $12.3 million, with a gross margin of negative 14.4%, versus gross profit of $6.3 million and a 9.2% margin in Q1 2021. Direct contribution, a non-GAAP measure, was $6.4 million (3.7% of gross earned premium), down from $26.6 million (16.6%). Gross loss ratio rose to 84.1% from 70.9%; gross accident-period loss ratio rose to 81.4% from 76.2%. Gross LAE ratio improved to 9.1% from 9.8%.
At March 31, cash and cash equivalents were $934.7 million, including $735.9 million outside regulated insurance entities; marketable securities were $129.6 million. Total liabilities were $982.5 million and stockholders’ equity was $468.7 million. The company reported $290.8 million of long-term debt, net of discount and issuance costs, from a $300 million term loan. Cash, cash equivalents and restricted cash increased by $228.7 million in the quarter, largely due to $286.0 million of net loan proceeds. Investing cash flow was $(6.3) million.
Changes and management commentary
- Revenue grew 24.5%, driven by higher gross earned premiums and a lower share of premiums ceded to reinsurers. Net premiums earned increased 32.5%; gross written premiums declined 7.6% to $187.2 million as marketing was reduced.
- Loss and LAE expense rose 61.4% to $96.7 million. Management cited greater business retention, inflation-related claim severity, higher claims volume, and less favorable prior-year development. Claim severity increased 12% and frequency increased 2% year over year.
- Sales and marketing expense fell 78.5% to $14.7 million following lower performance marketing and advertising spending; this included $5.3 million of Carvana warrant compensation expense. General and administrative expense increased 63.0% to $30.0 million, including restructuring charges.
- In January, Root announced an organizational realignment affecting about 330 employees, approximately 20% of its workforce. It recorded $7.8 million of restructuring-related charges, including severance, real estate exit costs and accelerated software expense.
- The January 2022 Term Loan C matures in 2027, bears floating interest at SOFR (subject to a 1% floor) plus 9% and 0.26161%, and included warrants to purchase 5.7 million Class A shares at $9 per share. A covenant generally requires at least $200 million of cash outside insurance subsidiaries, subject to specified conditions for a lower threshold.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management said existing cash, investments and operating cash flows were expected to support working capital and capital needs for at least the next 12 months, while noting that longer-term capital requirements depend on growth, renewals, the Carvana offering, investment needs and market conditions. Its strategy includes using reinsurance to support growth and limit capital requirements.
Key disclosed risks include inflation and supply-chain effects on repair costs and claim severity; the ability to price risk accurately, improve retention and reach profitability; reliance on reinsurance and the risk of reinsurer nonperformance; regulatory capital and dividend restrictions; and the need to maintain loan covenant liquidity. Root reported a shareholder class action related to its IPO; it disputes the allegations, but said the outcome and potential loss could not be estimated. Management reported effective disclosure controls as of March 31, 2022. No material changes to the risk factors in the 2021 10-K were reported.
Important facts for investors to verify
- Whether rate increases and underwriting changes can offset inflation-driven claim severity and improve loss ratios.
- Whether lower marketing spend and reduced gross written premiums affect policy growth, retention and future earned premiums.
- Cash available outside regulated insurers, ongoing operating cash burn and compliance with Term Loan C covenants.
- Carvana partnership execution, including policy issuance, contribution economics and potential warrant-related dilution.
- Ultimate cost and timing of restructuring actions, the shareholder litigation, and any future restrictions on use of tax loss carryforwards.