Root, Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing. Dollar amounts are in millions unless stated otherwise.
Business context
Root is a U.S. technology-enabled insurer, focused primarily on auto insurance distributed directly through mobile and web channels and through embedded partnerships. Its underwriting model uses telematics and behavioral data. Root relies substantially on reinsurance to manage risk and capital needs. It reported operating in 34 states and the District of Columbia.
Financial performance and key metrics
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Total revenue | $310.8 | $345.4 | Down 10.0% |
| Net premiums earned | $285.9 | $310.3 | Down 7.9% |
| Operating loss | $(263.1) | $(485.2) | Improved by $222.1 |
| Net loss | $(297.7) | $(521.1) | Improved by $223.4; loss per share was $(21.11), adjusted for the 1-for-18 reverse split |
| Adjusted EBITDA (non-GAAP) | $(185.9) | $(446.1) | Improved; not a substitute for GAAP results |
| Direct contribution (non-GAAP) | $27.6 | $8.1 | Improved |
| Net combined ratio | 195.0% | 260.9% | Still indicates an underwriting loss |
| Gross combined ratio | 137.8% | 167.8% | Still indicates an underwriting loss before reinsurance |
| Operating cash used | $210.6 | $403.4 | Cash use declined |
Lower marketing spending materially reduced operating expenses, while revenue and business volume also contracted. Loss and LAE expense was $351.0 million, or 112.9% of revenue. Gross accident-period loss ratio improved to 80.9% from 88.7%; management attributed this to rate increases and a more mature policy mix, partly offset by inflation-driven claim severity. Claim severity rose 11% and frequency declined 6% year over year.
Policies in force fell to 220,354 from 354,371. Gross premiums written declined to $600.0 million from $742.6 million, while premiums per policy increased 21.3% for auto insurance, primarily reflecting rate actions. Approximately 55.6% of gross premiums earned was ceded to third-party reinsurers.
Fourth quarter: Revenue was $71.3 million, operating loss was $47.7 million, and net loss was $58.3 million. Net premiums earned were $64.3 million. The filing’s quarterly table does not provide fourth-quarter 2021 comparatives.
Liquidity, debt and capital
- At year-end, cash and cash equivalents were $762.1 million, including $559.2 million outside regulated insurance entities; marketable securities were $128.8 million.
- Total assets were $1.313 billion and total liabilities were $923.8 million. Stockholders’ equity was $277.1 million; redeemable convertible preferred stock was recorded separately at $112.0 million.
- Root had a $300 million term loan maturing January 27, 2027; its carrying amount, including accrued interest and net of discount and issuance costs, was $295.4 million. Interest is floating at SOFR (1% floor) plus 9% plus 0.26161%.
- The loan generally requires at least $200 million of cash and cash equivalents outside insurance subsidiaries. The threshold can fall to $150 million only if specified Carvana policy/contribution targets are met, or if non-Carvana customer acquisition spending ceases and monthly cash burn is no more than $12 million.
- Operating cash use was $210.6 million; financing provided $283.3 million, mainly from the term loan. Management said available cash, securities and operating cash flow would cover short-term working capital and capital needs for at least 12 months. This is management’s assessment, not a guarantee.
- Insurance subsidiaries’ statutory capital and surplus totaled $97.3 million at year-end, down from $113.3 million. The filing states their risk-based capital levels exceeded regulatory action thresholds and Root’s guaranteed threshold; dividends to the parent required regulatory approval.
Material changes, outlook and risks
- Root cut marketing spending substantially and reduced its workforce by approximately 330 employees early in 2022 and approximately 160 more in the fourth quarter, citing efficiency, inflation and loss-cost trends, and a refocus on underwriting and embedded products. It reported 765 full-time employees at year-end.
- Root’s strategy emphasizes strengthening pricing and underwriting, expanding Carvana and other embedded channels, and pursuing more profitable growth. It expects net premiums earned to decrease in the short term as policies in force decline, with embedded products and higher average premiums intended to support growth. The filing gives no specific numerical earnings or revenue guidance.
- Inflation raised vehicle repair and replacement costs and claim severity. Management cited rate filings and underwriting actions as responses. State rate approval requirements may delay or constrain those actions.
- Root disclosed a suspected misappropriation of approximately $10 million involving a former senior marketing employee. It recorded $10.2 million of expense related to prepaid marketing write-offs and expense reclassifications, partly offset by an anticipated $1.9 million insurance recovery. Root filed suit in February 2023 to recover funds; recovery is not assured.
- Root identified a material weakness in internal control over financial reporting involving senior-leadership hiring practices and vendor review, authorization, monitoring and payment controls, including circumvention of controls. Management and the auditor concluded controls were ineffective at year-end. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Remediation is planned but was not yet considered complete.
- Additional material risks include persistent losses and capital needs; adequacy of claim reserves and pricing; reinsurance availability and counterparty performance; regulatory capital and rate restrictions; dependence on telematics, digital distribution and Carvana; and the $300 million floating-rate loan and its covenants.
- Root is subject to shareholder and policyholder litigation, including putative class actions concerning total-loss claim settlements in Texas and Louisiana and securities-related litigation. The company says it intends to defend the claims; outcomes and potential losses are not estimable in the cited disclosures.
Investor verification priorities
- Track policies in force, new and renewal premium trends, and whether higher rates offset contraction in policy volume.
- Check gross and net combined ratios, accident-period losses, reserve development, and claim severity against management’s profitability claims.
- Monitor cash burn, unrestricted cash relative to the $200 million covenant, debt interest cost, and progress toward any covenant relief conditions.
- Verify execution and economics of the Carvana embedded channel, including policy volumes, contribution, and associated warrants or commissions.
- Follow progress in remediating the material weakness, the investigation and attempted recovery of the approximately $10 million, and developments in litigation.
- Review statutory capital, regulatory reporting requirements, reinsurance recoverables and renewals, and the effect of state rate approvals on pricing adequacy.