Root, Inc. — Q1 2023 Form 10-Q Summary
Business context and reporting period
Root is a technology-enabled personal auto and renters insurer, operating primarily through direct-to-consumer mobile channels and embedded partnerships. This unaudited report covers the three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. Amounts are in millions of dollars except per-share data and operating metrics.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $70.1 | $85.4 | Down 17.9% |
| Net premiums earned | $60.0 | $78.3 | Down 23.4% |
| Operating loss | $(29.8) | $(72.0) | Loss narrowed |
| Net loss | $(40.9) | $(77.5) | Loss narrowed 47.2% |
| Loss per share, basic and diluted | $(2.88) | $(5.54) | — |
| Operating cash flow | $(83.7) | $(51.2) | Cash use increased |
| Cash, cash equivalents and restricted cash, quarter-end | $680.3 | $935.7 | Down $255.4 year over year |
Revenue declined mainly because policies in force and written premiums were lower. Higher investment income partly offset the decrease: net investment income rose to $6.7 from $0.6, primarily from higher interest on cash and investments. Operating expenses fell 36.5% to $99.9, led by lower claims, marketing and personnel costs. Interest expense increased to $11.1 from $5.5, largely reflecting higher average rates and debt.
Insurance performance improved but remained loss-making. Net loss and LAE ratio was 105.5% (123.5%); net expense ratio was 55.7% (71.3%); and net combined ratio was 161.2% (194.8%). Gross combined ratio improved to 123.0% from 135.6%, still above the 100% underwriting-profit threshold. Gross accident-period loss ratio decreased to 69.3% from 81.5%. Management cited rate increases and a more mature tenure mix, partly offset by higher claim severity. Severity rose 12% while claim frequency declined 7% year over year.
Policies in force fell to 199,685 from 335,273, while premiums per policy increased to $1,292 from $1,040. Gross premiums written declined 28.0% to $134.7. Direct contribution, a non-GAAP measure, improved to $18.6 from $6.4; adjusted EBITDA improved to a loss of $11.3 from a loss of $51.8.
At March 31, 2023, cash and cash equivalents were $679.3, including $523.6 outside regulated insurance entities, and marketable securities were $126.5. Total assets were $1,201.1 and total liabilities were $845.4. Long-term debt had a carrying value of $296.3; the $300.0 term loan matures January 27, 2027 and bears floating interest at SOFR (subject to a 1% floor) plus 9% and 0.26161%. Debt covenants require at least $200.0 of cash and cash equivalents outside insurance subsidiaries, subject to specified conditions for reducing the threshold. Management stated available liquidity and operating cash flow should support requirements for at least the next 12 months and foreseeable future.
Material changes, outlook and risks
- Management expects net premiums earned to decrease in the short term as reductions in policies in force outpace new business, while citing embedded products and higher premiums per policy as potential sources of growth. The filing provides no specific financial guidance or quantified forecast.
- Root continued to use elevated third-party reinsurance to support capital efficiency. It ceded approximately 53.9% of gross premiums earned in Q1 2023, compared with 55.2% in Q1 2022. Root remains liable to policyholders if reinsurers fail to meet obligations.
- Management identified inflation, vehicle repair and medical costs, supply-chain disruption, rising interest rates, market volatility and bank failures as risks to claims, investments, capital costs and fundraising. It is pursuing rate actions in multiple states. Cash used in operations increased, in part due to timing of reinsurance and claims payments and payments of payables.
- The company reported a material weakness in internal control over financial reporting tied to control environment and monitoring failures, including a former senior marketing employee’s fraud. Disclosure controls were not effective as of March 31, 2023. Remediation measures were underway, but management said the weakness would not be considered remediated until controls operated effectively for a sufficient period and were tested.
- Q1 2022 comparative expenses were revised for sales and marketing and general and administrative costs associated with the purported misappropriation of funds. The company concluded the errors were not material to that interim period; the revision increased Q1 2022 net loss by $1.1.
- Contingencies include putative class actions concerning total-loss vehicle settlements in Louisiana and Texas, and shareholder litigation. The Ohio securities class action was dismissed with prejudice on March 31, 2023, but the dismissal was appealed; related derivative litigation was stayed. Root said it could not estimate potential losses for the described pending matters.
- Q1 restructuring costs were $5.6. Root expected approximately $5.5 of additional employee compensation expense to be recognized through Q4 2023, with cash payment expected in January 2024.
Important facts for investors to verify
- Whether policy count and premium growth stabilize, and whether rate increases offset claim-cost inflation without harming retention.
- Whether improved loss ratios and adjusted EBITDA translate into sustained GAAP profitability and lower operating cash use.
- Liquidity available outside regulated insurers, covenant compliance, floating-rate debt costs and the ability to access additional capital.
- Progress in remediating the material weakness and effectiveness of the controls after a sufficient testing period.
- Reinsurance recoverability and the outcome or potential financial exposure of the disclosed litigation.
- The assumptions behind management’s liquidity outlook and its plans for embedded partnerships, including Carvana; the filing does not provide quantified forward guidance.