Root, Inc. (NASDAQ:ROOT) Q4 2022 Earnings Call Transcript

Root, Inc. (NASDAQ:ROOT) Q4 2022 Earnings Call Transcript February 23, 2023

Operator: Ladies and gentlemen, thank you for standing by and welcome to the Root Inc. 4Q 2022 Earnings Conference Call. I would now like to turn the call over to Jodi Baker, Corporate Secretary. Please go ahead.

Jodi Baker: Good morning and thank you for joining us today. Root is hosting this call to discuss its fourth quarter 2022 earnings results. Participating on today’s call are Alex Timm, Co-Founder and Chief Executive Officer; and Rob Bateman, Chief Financial Officer. During the question-and-answer portion of the call, our presenters will be joined by Dan Rosenthal, Chief Revenue and Operating Officer; Matt Bonakdarpour, Chief Technology Officer and Frank Palmer, Chief Insurance Officer. Last evening, Root issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document. For more complete information about our financial performance, we also encourage you to read our 2022 Form 10-K, which was filed with the Securities and Exchange Commission last evening.

Before we begin, I want to remind you that matters discussed on today’s call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management’s current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results.

For a more detailed description of our risk factors, please review our Form 10-K for the year ended December 31, 2021, where you will see a discussion of factors that could cause the company’s actual results to differ materially from these statements as well as our shareholder letter released last evening. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root’s performance. You can find reconciliations of those historical measures to the nearest comparable GAAP measures in our shareholder letter released last evening and our Form 10-K filed with the SEC which are posted on our website at ir.joinroot.com.

I will now turn the call over to Alex Timm, Root’s Co-Founder and CEO.

Alex Timm: Thank you, Jodi. In 2022, we significantly strengthened the foundation of the company by achieving profitable pricing levels in the majority of our markets and reducing our capital consumption by 48%, all while much of our competition continued to see rising loss ratios and deteriorating earnings. We did this through the worst inflationary environment in auto insurance in decades, showing the differentiation of our pricing and underwriting technology and our ability to quickly detect and respond to changes in the environment. This has positioned the company to achieve profitability with the capital we have. We drove a 17 point improvement in gross accident period loss ratio year-over-year in Q4 and we continue to see our loss ratio decline through January.

In 2023, we plan to release our newest segmentation model, which is showing large improvements to our pricing accuracy. We believe our data science and technology competitive advantage is a major contributor to our loss ratio progression over the last 12 months. This has resulted in taking us from over 10 points worse than the industry to now beating the industry average since the third quarter of 2022. All of this positions us to scale our business profitably. As we announced, we are continuing to expand our embedded business with a national digital financial services company. We continue to see momentum in the funnel for future partners who valued speed, innovation and commitment to customer experience. We believe that embedded insurance will be the next large secular trend in distribution and our flexible tech stack and insurance product give us a leading advantage to build differentiated access to customers in this growing channel.

In 2022, we grew our embedded new writings more than 8x. This success, combined with our new partnerships, is setting us up to scale our embedded platform through 2023. With command of our loss ratio and underwriting results and dramatically reduced fixed expenses, we are well positioned to drive both new ratings growth and profitability in the year ahead. We are excited for the year and are deeply grateful to our team, investors and customers. I will now turn the call over to Rob to discuss our operating results in more detail.

Rob Bateman: Thanks, Alex. Results for the fourth quarter of 2022 reflected our continued focus on strengthening underwriting performance and reducing expenses across the company. Our full GAAP financial results are disclosed in the shareholder letter we published yesterday evening, but I want to focus on a few key highlights. Gross written premium for the fourth quarter of 2022 was $122 million, a 23% decline year-over-year. Gross earned premium was $143 million, a 25% decline. We expected this lower premium from rate we have taken in stricter underwriting and underperforming geographies and customer segments, along with significantly lower level of marketing spend compared with the fourth quarter of 2021. These actions cause new business ratings to decrease with renewals making up 81% of gross earned premium this quarter as we focus on profitability.

The gross accident period loss ratio was 77% for the fourth quarter, a 17 point improvement versus the fourth quarter of 2021. We have recognized and responded to loss trends early, which has driven this year-over-year improvement. In 2022, we implemented 53 rate filings with an average increase of 37% across our total book. We filed revised policyholder contracts in 33 markets to tighten underwriting and refine our fee schedules. We plan to increase rates again in 2023 where needed to offset loss trends from persistently higher than historical severity. The combination of rate increases strengthened underwriting and meaningful segmentation improvements continue to drive decreases in our loss ratios quarter-over-quarter, moving us closer to our long-term target of 65%.

The operational actions we took in 2022 demonstrate our commitment to lowering loss ratio and expenses to improve our financial performance in the fiscal foundation of the company. During 2022, our operating loss was $263 million, a 46% improvement compared to 2021. Adjusted EBITDA, our approximation of operating cash consumption, improved 58% over the prior year. We ended the fourth quarter of 2022 with $559 million of unencumbered cash compared with $629 million at the end of the third quarter. We reduced our operating cash consumption by $193 million in 2020 from $403 million in the prior year. We took actions to significantly lower our headcount and not headcount fixed expenses by 38% on a run-rate basis. Turning to 2023, our results will reflect the actions we are taking.

We expect contraction of premium again in 2023 as our in-force policy decreases outpaced new writings from our embedded platform in profitable direct markets. We look ahead to continued year-over-year improvement in adjusted EBITDA and operating loss in 2023 from a lower loss ratio and a significantly smaller expense base. We are making progress against our strategic priorities and we will continue to drive them forward in 2023. By focusing our efforts and capital deployment in areas, we believe will hit our profitability targets we expect to significantly reduce our operating capital consumption again in 2023 and believe we are positioning the company to achieve profitability with the capital we have. With that, we look forward to your questions.

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Q&A Session

Operator: The floor is now open for your questions. Our first question comes from the line of Josh Siegler from Cantor Fitzgerald. Please proceed.

Josh Siegler: Yes. Hi, thanks for taking my question today. Good morning. I was wondering if you could provide an update on the pipeline for future embedded partnerships?

Alex Timm: Absolutely. Good morning, Josh. I think as we announced today and as we said last quarter, we are seeing really because of our differentiation in our product and our technology and our ability to really seamlessly integrate with these partners. We are seeing room momentum in our embedded funnel and in our pipeline. And that’s as evidenced by we €“ as we announced we have signed our commercial agreement with our second embedded partner and we are expecting a third to follow soon. But I will turn over to Dan who can talk a bit more about the pipeline.

Dan Rosenthal: Yes, I think Alex is right, we are seeing real differentiation in the marketplace. We see it with the new partner that we were delighted to announce overnight, but also in the pipeline that we talked about just given the better consumer experience that our product offers, it’s just we are able to produce a findable quote much faster than anyone else. And we are meeting customers in a moment of need. Secondly, we are seeing better unit economics and business results across the product and that I think provides an opportunity to scale. And then third, it’s really the thing I’d highlight most is our differentiated technology and the insurance product design allows us to seamlessly integrate with partners and that is what provides a leading advantage that’s going to help us build and scale this channel. It’s not going to happen overnight. But we know we are on the right track. And we are excited to move forward.

Josh Siegler: Understood. That’s helpful. And then looking out into 2023, I know your soft guidance calls for a contraction in revenue. But as these embedded channels grow, do you ultimately expect policy in force to start improving in the back half of €˜23 or I guess, when do you expect the revenue to start showing signs of improvement moving forward? Thanks.

Rob Bateman: Hi, Josh, this is Rob. If you are looking at €“ what we’re looking at for growth next year is we expect our correct ratings, we expect our renewal book to continue to shrink. But as the new embedded partners come on, our new rates will increase quarter-over-quarter throughout the year.

Josh Siegler: Okay, thank you.

Operator: Our next question comes from the line of Charlie Lederer from Citi. Please proceed.

Charlie Lederer: Hi, thanks for taking my question. Good morning. In the shareholder letter, you mentioned leaning into direct writings in certain markets. Can you talk about what segments I guess you are seeing as attractive and whether this is going to translate into kind of higher marketing spend relative to the fourth quarter?