Root, Inc. Q3 FY2024 earnings call

• Achieved net income profitability in Q3, a pivotal moment validating the business model, technology, and customer experience.
• Amended term loan with Blackrock, reducing the facility size from $300 million to $200 million while maintaining $150 million of available growth capital and improving the cost of capital by at least 300 basis points.
• Experienced growth in new writings, policies in-force, gross written premium, and gross earned premium compared to Q3 2023.
• Attained an industry-best 57% gross loss ratio due to disciplined underwriting driven by proprietary technology and data science, enabling rate reductions in select states while maintaining target returns.
• Made progress in the partnerships channel with new writings more than doubling year-over-year and launching partnerships like with Goosehead Insurance, providing contextually relevant customer meetings and efficient technology for agents.

For the third quarter, Root achieved net income of $23 million, an improvement of $69 million year-over-year. Operating income was $34 million, and adjusted EBITDA was $42 million, with year-over-year improvements of $68 million and $61 million respectively. Net earned premium grew, with a gross combined ratio of 89% (a nearly 30 point improvement year-over-year) and a gross accident period loss ratio of 58% (a four point improvement year-over-year). The company ceded approximately 12% of its growth earned premium, and operating cash flow was nearly $50 million in the quarter. Revenue contribution details weren't explicitly broken down by product segment in terms of percentage, but key metrics around new writings, policies in-force, gross written premium, and gross earned premium showed significant growth compared to Q3 2023.

• Successfully refinanced the term loan, expecting a ~50% run rate reduction in interest expense moving forward, enhancing operating performance and enabling further investment in growth.
• Intends to reinvest profits into the business, particularly in growth engines like the direct and partnerships channels, expanding marketing funnel areas and geographic footprint.
• Anticipates continued profitable growth, expanding the geographic footprint, and delivering better products at better prices in 2025 and beyond.

• Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those expected.
• Detailed risk factors can be found in the most recent 10-K, 10-Q, and shareholder letter.

Q: Hey, good evening, guys. Thanks for taking my questions. It sounded like you are expecting your appetite for growth spend to increase. I think you said modestly going forward, could you talk about sort of where you're looking to spend that, is that consistent with geographic expansion? And in any way you could help us think about the magnitude of where that sales and marketing spend could go from 3Q level.

A: Yes. We continue to see opportunity to reinvest profit into growth in the business. There's opportunity in the partnerships channel and mid to upper funnel marketing channels. We're actively working on state expansion. We're only in 75% of the population, and we expect to deploy growth capital into new geographies. We're not giving a specific target on marketing investment for Q4 or 2025 but will continue a disciplined approach to driving profitable new business.

Q: Thanks for those comments. And you may have touched on it a little bit there, but can you give us an update on how you guys are seeing the retention rates of your book of business go, especially the perhaps policies that you put on over the last 12 months? And then when you think about the potential to reduce rates in certain markets, do you anticipate that, that will help your retention rates further?

A: Yes. We had a lot of brand-new PIF during the hypergrowth period, which tended to churn faster. As PIF ages, churn has come down and continues to abate. We don't think we're at normalized levels yet. Rate reductions will help retention, as lower rates lead to better retention and higher conversion rates.

Q: Thanks. And actually, just one quick one on the retention side that I forgot to ask one element of that. The partnership channel versus the direct-to-consumer, the retention rates of those businesses, do they differ materially?

A: Yes. The partnerships channel has much higher retaining business. Partnership customers are stickier due to differentiated access and better customer experience, with policies being fatter (higher average premium, more vehicles per policy).

Q: Thanks. Maybe to follow-up on some of the churn and retention questions. If we were to look at cohorts, are you seeing churn improving namely if we have a first year cohort from the most recent year is the churn there better than the first year cohort a year ago and two years ago and the like? And the same I guess would be true for other cohorts, I just used first year as an example.

A: Yes. We've seen improved retention rates as the rate environment stabilizes. The partnerships channel has higher retention, and we're seeing modest improvement in cohort-based retention. The expansion of the partnerships channel and moving to more preferred marketing channels contribute to this.

Q: And would you expect that to accelerate or just for me kind of a modest improvement cohort by cohort?

A: There are factors that could accelerate it, like continued expansion of the partnerships channel (which grew 130% year-over-year) and moving to more preferred marketing channels. We're also making product changes to improve retention, so we anticipate some acceleration in improved cohort retention.

Q: Thank you and congrats on the quarter and on the debt refinancing.

A: Thank you