Root, Inc. — Q3 2022 Form 10-Q
Business context and period. Root is a technology-enabled personal insurer, primarily focused on auto insurance, with renters coverage and direct-to-consumer and embedded distribution. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with 2021. Dollar amounts are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $73.7 | $93.8 | $239.5 | $252.2 |
| Net premiums earned | $68.6 | $85.1 | $221.6 | $225.4 |
| Operating loss | $(54.7) | $(126.9) | $(206.3) | $(393.3) |
| Net loss | $(64.0) | $(133.0) | $(230.3) | $(411.2) |
| Adjusted EBITDA (non-GAAP) | $(44.0) | $(117.3) | $(162.4) | $(372.7) |
| GAAP gross margin | (11.3)% | (17.2)% | (11.7)% | (11.4)% |
- Q3 operating metrics: gross written premium was $150.7, down 26.3%; gross earned premium was $155.3, down 18.0%. Direct contribution, a non-GAAP measure, was $11.5 versus $(10.5) a year earlier. Gross loss ratio improved to 77.9% from 92.7%; gross accident-period loss ratio improved to 79.5% from 92.8%.
- Portfolio: auto policies in force fell to 255,279 from 380,836 year over year; auto premium per policy rose to $1,150 from $986. Management attributed lower premiums and revenue primarily to reduced marketing and fewer policies, partly offset by rate increases.
- Cash flow, nine months: operating cash used was $163.9, versus $364.3 in 2021; investing cash used was $5.7, versus $83.3 provided; financing cash provided was $283.3, principally from the term loan. Cash, cash equivalents and restricted cash increased to $820.7 from $707.0 at year-end 2021.
- Balance sheet at September 30: cash and cash equivalents were $819.7, marketable investments $120.1, and total assets $1,384.2. Total liabilities were $941.3; stockholders’ equity was $330.9. The balance sheet included $293.9 of long-term debt, net of discount, issuance costs and warrants.
- Debt and liquidity: Root borrowed $300.0 in January under a five-year term loan due January 2027. The floating rate is SOFR (with a 1% floor) plus 9% and 0.26161%. A covenant generally requires at least $200.0 of cash outside insurance subsidiaries, subject to specified conditions for lowering the minimum to $150.0. Of reported cash, $629.2 was outside regulated insurance entities. Management said available cash, investments and operating cash flow were expected to support working capital and capital expenditures for at least 12 months and thereafter.
Material changes and management commentary
- Revenue declined 21.4% in Q3, while net loss narrowed by $69.0. Lower marketing spending drove a sharp reduction in sales and marketing expense, which fell to $5.7 from $65.4; lower claim costs also reflected fewer policies. For the nine-month period, sales and marketing expense fell $199.7, but general and administrative expense rose $16.5, including restructuring and higher share-based compensation.
- Management cited rate actions and a more mature customer mix as supporting improved loss ratios. Inflation and higher replacement-parts and used-vehicle costs increased claim severity: severity rose 7% in Q3 and 11% for the nine months year over year, partly offset by lower claim frequency.
- Root ceded approximately 55.8% of gross earned premiums in both Q3 and the nine-month period. Reinsurance supports capital efficiency, but the company remains liable to policyholders if a reinsurer fails to meet its obligations.
- Management provided no specific forward financial guidance in the supplied filing text. It described continued focus on pricing, underwriting, efficiency and embedded distribution, including the Carvana partnership. The Carvana integrated platform launched during Q3; related warrants generated $10.3 of compensation expense in the first nine months.
Risks, contingencies and unusual items
- On November 9, 2022, after quarter-end, Root announced a workforce reduction of approximately 160 employees, about 20% of its workforce. It expected Q4 severance and related charges of $10.5–$11.5, plus $8.0–$8.5 of compensation expense recognized through Q4 2023, subject to continued employment. Additional costs were not yet estimable. Root said the action was intended to improve efficiency and extend its capital runway.
- Root also recorded $8.4 of restructuring costs in the first nine months of 2022, following an earlier workforce reduction of approximately 330 employees.
- Risks highlighted include inflation and claims severity, competitive and macroeconomic conditions, ability to price risk profitably and retain customers, access to capital, regulatory capital and liquidity requirements, reliance on reinsurance, and attracting and retaining personnel. Root reported an ownership change under Section 382 that may limit use of tax attributes, though it did not expect a material reduction in NOL use from the identified change.
- Shareholder securities and derivative lawsuits seek unspecified damages. Root said it intended to defend the claims, but could not predict outcomes or estimate potential losses. It also disclosed contingent exposure to assessments related to insolvencies or impairments of unaffiliated insurers.
- The company effected a 1-for-18 reverse stock split in August 2022; historical per-share figures in the filing are adjusted to reflect it. The filing reported disclosure controls effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether rate increases and improved loss ratios persist as inflation and claims severity evolve.
- Whether policy counts, renewals and premiums stabilize despite materially reduced marketing and the continuing focus on customer acquisition costs.
- Cash burn, cash held outside regulated insurers, compliance with the term-loan liquidity covenant, and the loan’s floating-rate interest burden.
- Carvana embedded-channel policy production, economics and warrant-related costs, and the extent to which reinsurance supports or constrains profitability.
- Actual restructuring charges and cash costs from the November workforce reduction, along with any additional costs.
- Developments in the shareholder litigation and any effects of Section 382 limitations on future tax-attribute utilization.