Root, Inc. — Q3 2021 Form 10-Q
Business context and reporting period
Root is a technology-enabled insurer focused primarily on direct-to-consumer auto insurance, with renters insurance and related fee and technology income. This unaudited filing covers the three and nine months ended September 30, 2021; comparisons are with the same 2020 periods.
Financial and operating performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $93.8m | $50.5m | $252.2m | $295.9m |
| Net premiums earned | $85.1m | $44.9m | $225.4m | $278.4m |
| Operating loss | $(126.9)m | $(65.7)m | $(393.3)m | $(196.8)m |
| Net loss | $(133.0)m | $(85.2)m | $(411.2)m | $(229.7)m |
| Operating cash flow | Not stated for Q3 alone | $(364.3)m | $(94.8)m |
Q3 gross written premium rose 24.3% to $204.6m and gross earned premium rose 22.7% to $189.4m. Policies in force were 380,836 auto and 9,143 renters; auto premiums per policy were $986. The gross loss ratio was 92.7% (89.8% prior year), gross LAE ratio 10.6% (9.9%), and gross accident-period loss ratio 91.3% (79.6%). Management-defined direct contribution was $(10.5)m for Q3 and $12.3m for the first nine months; adjusted gross profit was $(2.7)m and $10.5m, respectively. These are non-GAAP measures.
At September 30, cash and cash equivalents were $834.1m, restricted cash $1.0m, and total investments $132.1m. Total assets were $1,524.5m, total liabilities $888.5m, and stockholders’ equity $636.0m. Long-term debt was $201.7m, including accrued interest and net of unamortized costs. Nine-month investing cash flow was positive $83.3m; financing cash flow was positive $2.3m.
Changes versus the prior comparable periods
- Q3 revenue increased 85.7%, chiefly as net premiums earned grew; nine-month revenue decreased 14.8%, mainly because a greater share of earned premiums was ceded to reinsurers.
- Nine-month gross written premium increased 24.0% to $584.2m and gross earned premium increased 17.8% to $530.3m, while net premiums earned fell 19.0%. The nine-month cession rate rose to approximately 57.5% from 38.2%.
- Q3 net loss widened by $47.8m; nine-month net loss widened by $181.5m. Sales and marketing expense rose 77.2% in Q3 and 172.5% year to date, reflecting higher customer acquisition and advertising investment.
- Loss ratios increased amid higher claims frequency and severity. For the nine months, prior-year reserve development reduced incurred losses by $9.3m, compared with a $21.3m increase in the 2020 period.
- Cash and cash equivalents declined from $1,112.8m at year-end 2020 to $834.1m. Operating cash use increased, which management attributed to the volume and timing of premiums, claims, reinsurance, marketing, and other expenses.
Outlook, risks, contingencies, and unusual items
- The filing gives no specific numerical financial guidance. Management said existing cash, cash equivalents, marketable securities, and operating cash flow were expected to support working capital and capital expenditures for at least 12 months.
- Management described plans to grow renewal premiums, improve retention and loss performance, diversify acquisition channels, and maintain elevated third-party reinsurance while scaling. These are expectations, not assured outcomes.
- Management cited miles driven exceeding pre-pandemic levels, rising claims frequency, vehicle and repair-cost inflation, supply-chain disruptions, higher digital advertising competition, and uncertainty around COVID-19 as operating pressures.
- In August 2021, Root began routing all new Texas auto policies through an unaffiliated county mutual fronting carrier, while assuming 100% of related premiums and losses and subjecting them to external reinsurance.
- After quarter-end, Root received approximately $126m gross from Carvana for convertible preferred stock and entered a five-year embedded-insurance commercial agreement. Carvana also received warrants potentially exercisable for approximately 129m Class A shares, subject to conditions and milestones.
- Term Loan A was repaid at maturity on October 15, 2021, and Term Loan B was repaid November 8, 2021. In November, Root signed an exclusive term sheet with BlackRock for a proposed larger, longer-term facility; closing remained subject to definitive terms and documentation. Repayment of debt issuance costs was expected to increase 2021 interest expense.
- A shareholder class action alleging securities-law violations related to the IPO was at an early stage. Root said it considered the claims without merit; it could not estimate the likelihood or magnitude of any loss.
- Insurance-subsidiary dividends are restricted by regulators. Root reported its insurance subsidiaries were above levels requiring corrective action at September 30, 2021. Management stated disclosure controls were effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether subsequent filings confirm the final terms and closing of the proposed BlackRock facility, and the resulting interest expense and liquidity position.
- Whether claims frequency, severity, and loss ratios moderate, particularly given inflation and post-pandemic driving trends.
- Whether growth in gross premiums converts to improved net profitability after reinsurance, marketing costs, and claims expenses.
- Carvana agreement milestones, warrant vesting and potential dilution, and the performance of the embedded distribution channel.
- Developments in the securities class action and any change in the estimated contingency.