Root, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; selected quarterly information is included, including the quarter ended December 31, 2020. Amounts are in U.S. dollars.
Business context
Root is a direct-to-consumer personal insurance company using mobile technology, telematics and data analytics to price and service policies. Its principal business is auto insurance; it also offers renters insurance and distributes homeowners insurance through a third party. At year-end it wrote auto insurance in 30 states, renters in nine states, and offered homeowners insurance in 18 states. More than 75% of personal insurance customers were acquired through its mobile app or mobile web platform.
Financial and operating results
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $346.8 million | $290.2 million |
| Net premiums earned | $322.5 million | $275.3 million |
| Net loss | $363.0 million | $282.4 million |
| Gross loss / margin | $(14.2) million / (4.1)% | $(83.5) million / (28.8)% |
| Net cash used in operating activities | $287.2 million | $127.2 million |
| Direct written premium | $616.8 million | $451.1 million |
| Direct earned premium | $605.2 million | $352.9 million |
| Direct loss ratio | 82.0% | 99.9% |
| Direct accident-period loss ratio | 78.0% | 103.7% |
Net loss per share was $(4.81) in 2020 versus $(8.33) in 2019. The company reported non-GAAP adjusted gross profit of $21.0 million and direct contribution of $18.9 million, compared with losses of $54.2 million and $57.4 million, respectively, in 2019. These measures exclude or adjust for items and should not be treated as GAAP results.
At December 31, 2020, cash and cash equivalents were $1.113 billion, investments were $224.5 million, total assets were $1.762 billion, and total liabilities were $729.9 million. Long-term debt and warrants were reported at $188.2 million carrying value; contractual principal debt was $199.5 million. The company also had a $100 million revolving credit facility. It reported $1.032 billion of stockholders’ equity, versus a $374.0 million deficit a year earlier, following its IPO and concurrent private placements.
Financing cash flow was $1.099 billion, principally from the October 2020 IPO and concurrent private placements. Management stated that cash, investments and expected cash flows would be sufficient for working capital and capital expenditures for at least the next 12 months. Debt principal of $99.5 million was scheduled for 2021 and $100.0 million for 2024; the filing also lists $68.6 million of future interest obligations.
Material changes and unusual items
- Revenue rose 19.5%, while direct written premium grew 36.7% and direct earned premium grew 71.5%. Net premiums earned grew more slowly, partly because external reinsurance cessions increased.
- Beginning July 1, 2020, Root adopted a staggered multi-treaty quota-share reinsurance program. It ceded 46.7% of direct earned premium for 2020, versus 22.0% in 2019; the new program initially ceded approximately 70% of direct earned premiums. This reduced net premium retained while providing capital relief and risk transfer.
- Direct loss ratios improved, which management attributed to underwriting and rating changes, a rise in “seasoned” states from three to 20, and temporarily lower claim frequency as customers drove less during the pandemic. Management said claim frequency had returned near pre-pandemic levels.
- 2020 loss expense included $20.9 million of adverse development on prior accident years, principally from bodily injury and collision claims. Premium write-offs rose to $23.6 million from $9.0 million, partly reflecting pandemic-related payment deferrals and cancellation restrictions.
- Other insurance expense included substantial reinsurance ceding-commission benefits. Interest expense rose to $77.7 million, including a $54.7 million warrant fair-value adjustment recognized before warrant exercise in connection with the IPO.
- Root acquired Catlin Indemnity Company, renamed Root Property & Casualty, for $22.8 million, including $8.4 million of insurance license intangibles. The acquisition expanded its ability to sell auto insurance in 48 states and the District of Columbia.
- For the fourth quarter, revenue was $50.9 million and net loss was $133.3 million; interest expense was $44.8 million. The reported quarterly results reflect, among other factors, reinsurance changes and the warrant remeasurement. Q4 weighted-average shares increased substantially following the IPO.
Outlook, risks and contingencies
The filing provides no quantified financial guidance. Management plans to continue investing in customer acquisition, national brand awareness, technology, geographic expansion, and cross-selling auto, renters and home products. It expects sales and marketing, technology and development, and general and administrative expenses to rise in absolute dollars in the near term. Its longer-term objectives include improving retention and loss performance as the portfolio matures, expanding product offerings, and developing enterprise technology revenue.
- Insurance regulation and capital: Both U.S. insurance subsidiaries were above regulatory risk-based capital intervention thresholds at year-end, but the Ohio regulator had determined Root Insurance Company met certain hazardous-financial-condition standards and required monthly financial reports. The company also disclosed that certain NAIC IRIS ratios were outside usual ranges. Ohio financial and Virginia market-conduct examinations were ongoing, with conclusions expected in 2021.
- Cancellation notices: Root reported discovering failures to meet certain notice-period requirements when cancelling policies for nonpayment. It was assessing how many cancellations were affected and said the potential impact could be material, but could not yet be estimated clearly.
- Reserves and reinsurance: Claims reserves depend on estimates and may develop adversely. Root remains primarily liable to policyholders even when risks are reinsured, exposing it to reinsurer credit, coverage and availability risks. Gross loss and LAE reserves were $237.2 million; reinsurance recoverables on unpaid losses were material.
- COVID-19: Lower driving temporarily reduced claims, while payment deferrals, non-cancellation rules, premium relief and economic uncertainty affected collections and operations. The pandemic’s ultimate effects remained uncertain.
- Data, technology and competition: Risks include restrictions on telematics and algorithmic pricing, privacy and cybersecurity obligations, dependence on mobile platforms and digital advertising, and competition from established insurers. California rules restrict use of telematics data beyond miles driven for auto pricing.
- Other financial risks: Root has a history of substantial losses, negative operating cash flow, debt obligations and restricted access to insurance-subsidiary dividends. It reported $591.7 million of federal net operating loss carryforwards, subject to possible limitations, and a $137.3 million valuation allowance against deferred tax assets.
The financial statements received an unqualified audit opinion. The auditor did not express an opinion on internal control over financial reporting; Root was not required to provide an auditor attestation as a newly public emerging growth company. Management concluded that disclosure controls were effective at a reasonable-assurance level.
Key facts for investors to verify
- Whether the improved direct loss and accident-period loss ratios persist after pandemic-related driving changes and as the book grows.
- How prior-year claims develop, particularly bodily injury and collision reserves, and whether further reserve strengthening is needed.
- The financial and policyholder impact of the identified cancellation-notice failures, and the outcomes of ongoing regulatory examinations and monthly reporting.
- Reinsurance treaty economics, ceding commissions, loss corridors, recoverability from reinsurers, and the degree of capital relief actually achieved.
- Liquidity and financing needs relative to operating cash burn, 2021 debt maturities, covenant terms and insurance-subsidiary capital requirements.
- Customer retention, acquisition costs, premium write-offs, and the economics of cross-selling renters and homeowners products.