Root, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Root is a technology-enabled, direct-to-consumer auto and renters insurer; more than 75% of personal insurance customers are acquired through mobile channels.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $68.6 million | $124.0 million |
| Net premiums earned | $59.1 million | $117.8 million |
| Operating loss | $(94.3) million | $(99.9) million |
| Net loss | $(99.6) million | $(105.6) million |
| Gross profit (loss) / gross margin | $6.3 million / 9.2% | $(17.2) million / (13.9)% |
| Adjusted gross profit (loss), non-GAAP | $17.0 million | $(8.7) million |
| Direct contribution, non-GAAP | $26.6 million | $(11.0) million |
| Operating cash flow | $(90.9) million | $(46.2) million |
Direct written premium grew 23.3% to $202.5 million; direct earned premium rose 11.3% to $160.2 million. Policies in force increased to 360,290 auto and 8,835 renters policies. Direct loss ratio improved to 70.9% from 92.8%; direct accident-period loss ratio was 77.0% versus 80.1%, and direct LAE ratio was 9.8% versus 10.8%.
At March 31, 2021, cash and cash equivalents were $1,106.3 million, marketable securities were $139.3 million, and total investments including other investments were $139.8 million. Total assets were $1,704.2 million and total liabilities $769.9 million. Reported long-term debt was $192.2 million. Management said cash, securities and operating cash flows should fund working capital and capital expenditures for at least the next 12 months.
Material changes and drivers
- Revenue fell 44.7%, mainly because a larger share of premiums was ceded to reinsurers: cession of direct earned premiums rose to 63.1% from 18.1%. Direct written and earned premiums nevertheless increased.
- Loss and LAE expense declined to $59.9 million from $129.9 million, largely reflecting greater reinsurance cessions. Q1 2021 also included $9.9 million of favorable prior-year reserve development; Q1 2020 had $7.9 million of unfavorable development.
- Sales and marketing rose 91.1% to $68.4 million, including increased performance marketing and brand spending. General and administrative expense declined 40.5%, and technology and development expense declined 13.8%, primarily due to lower share-based compensation compared with the 2020 tender-offer period.
- Net loss narrowed modestly, but operating cash outflow increased. Investing activities provided $81.3 million, mainly from investment sales and maturities; cash and restricted cash decreased $6.5 million during the quarter.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management expects marketing expense to increase in absolute dollars near term, with its share of revenue expected to decline over time as renewals grow. Technology and development spending is expected to rise near term to support the platform.
- Management expects continued use of elevated quota-share reinsurance to support growth and capital efficiency, with flexibility to adjust cession levels over time. Results remain sensitive to reinsurance availability and terms, pricing and claims experience, retention, customer acquisition costs, and regulatory capital requirements.
- Term Loan A, with $99.3 million reported carrying value, matures October 15, 2021; a $100 million revolver was undrawn at quarter-end. Term Loan B had $100.0 million principal and matures November 2024; Root elected to pay interest in kind through March 31, 2021 and could do so until October 15, 2021.
- COVID-19 continued to create uncertainty. Management said miles driven had roughly returned to pre-pandemic levels during the quarter, while claims frequency had not returned to historical norms.
- Two shareholder class actions filed in March 2021 allege misleading statements or omissions related to the IPO. Root says it will defend the cases; their outcomes and potential losses could not be estimated. The filing also notes contingent exposure to assessments related to insolvencies of unaffiliated insurers.
- Root adopted lease accounting guidance in 2021, recognizing a $15.8 million operating lease liability at quarter-end; adoption did not materially affect results or liquidity. Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether premium growth and improved direct loss metrics persist after separating underlying performance from reinsurance effects and prior-year reserve development.
- Reinsurance renewal terms, quota-share levels, and the resulting impact on net premiums, earnings, and capital needs.
- Cash burn, funding requirements, and the refinancing or repayment plan for Term Loan A’s October 2021 maturity.
- Whether higher marketing investment produces durable customer growth, retention, and improved acquisition economics.
- Developments in the IPO-related litigation and any changes to the company’s ability to estimate potential exposure.