Root, Inc. Q4 FY2024 earnings call

• 2024 was a landmark year for Root, achieving first full year of net income profitability with GAAP net income of $31M and adjusted EBITDA of $112M on $1.3B gross premiums written.
• Policies in force grew 21% YOY to over 414,000, with best-in-class underwriting performance (gross loss ratio 59%, gross combined ratio 95%).
• Deployed latest pricing and underwriting models, reduced run rate interest expense by over 50% and reinsurance costs, expanded into new channels in Direct and partnership channel.
• Partnership channel new writings more than doubled in 2024, with Q4 new writings through partnership channel representing roughly a third of overall new business; pipeline strong across automotive, financial services, and independent agents.
• Recently launched in Minnesota, reaching 76% of U.S. population, with filings pending in additional states.
• Focus on disciplined underwriting driven by proprietary tech platform and data science algorithms, able to reduce rates in select states due to gross loss ratio below long-term target.

In 2024, Root achieved a gross combined ratio of 95 on $1.3 billion of gross premiums written, generating GAAP net income of $31 million and adjusted EBITDA of $112 million. Policies in force grew by 21% year-over-year to more than 414,000. For the fourth quarter of 2024, net income was $22 million, operating income was $35 million, and adjusted EBITDA was $43 million. Gross written premium, gross earned premium, and policies in force all saw material increases compared to Q4 2023. Q4 gross accident period loss ratio was 61%, a 2 point improvement year-over-year, and the growth combined ratio was 91%, a 19 point improvement year-over-year. Root ceded approximately 9% of gross earned premium in Q4 2024, with the difference between gross and net loss and LEE ratios being just 1 point for the quarter.

• Expect modest rate decreases in some geographies, but partnership and independent agency channels have fatter policies, so per policy premiums may be relatively flat to modestly increasing.
• Reinsurance session levels going forward will be materially consistent with Q4 2024 levels (around 9%).
• Focus on growing through expanding footprint, distribution channels, and investing in high return potential opportunities, including measured experiments across marketing funnel; may see P&L pressure in short-term due to investments but long-term growth expected.
• Expect low-to-mid single-digits loss trend in 2025, with ability to respond quickly to macroeconomic changes or tariffs via technology platform.

• Forward-looking statements subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from expected; detailed risk factors in recent 10-K and shareholder letter.
• Macro economic uncertainty could impact results; potential impact from tariffs, which would be monitored real time and responded to via technology platform.

Q: With what you see as some geographies and customer segments allowing for selective rate decreases and mapping that against others still needing rate increases, what do you expect to be the direction of the premium per policy in the year ahead?

A: You are going to see us file and continue to see some modest rate decreases, but partnership and independent agency channels have policies that retain longer and are fatter, so on a per policy basis, may be relatively flat to modestly increasing.

Q: When we think about modeling the session rate on your premium going forward, is the fourth quarter a good run rate of that mid single-digits number?

A: The reinsurance structure has evolved, and session levels of earned premium in Q4 were around 9%, and we expect session levels going forward to be materially consistent with Q4.

Q: You gave some commentary about the retention levels on recent cohorts improving. Are there any data points that you guys would be willing to share or disclose around what those retention versus churn metrics actually look like?

A: Not going to share additional data points right now, but PIF churn has seen abatement of hyper growth penalty, and retention in new cohorts is fairly consistent.

Q: My first question is just around ad spend going into 2025. Can you guys talk about whether or not you're shifting the type of ad spend between like brand awareness spend versus performance marketing?

A: On increased acquisition spend, moving more up funnel into channels like YouTube, video, and direct mail; using same technology and discipline in mid-to-upper funnel channels to drive returns, not just brand awareness spend.

Q: Between the direct and the embedded partnership channel, where are you guys seeing better returns going into 2025?

A: Both direct and embedded partnership channels operating at target returns; direct has low customer acquisition costs but expenses dollars upfront; embedded partnership has longer retention, higher average premiums, and commission rates with customer acquisition costs incurred over longer period; actively investing in both channels.