Root, Inc. Q2 FY2025 earnings call

• Second quarter was impressive with record revenue of $371 million in gross earned premiums and net income of $22 million.
• New-gen pricing model improves risk selection, increasing customer lifetime values by 20% on average.
• Partnership channel saw quarterly new writing nearly triple year-over-year, available through top comparative raters and live in over 20 states.
• Received product filing approval in Washington, moving towards national expansion.
• Investing in R&D for mid- to upper-level funnel marketing channels as a long-term growth lever.

In the second quarter, Root delivered strong financial results with $371 million in gross earned premiums and net income of $22 million. The partnership channel saw quarterly new writing nearly triple year-over-year. Revenue contribution details weren't explicitly broken down by specific product segments beyond the partnership channel growth, but the overall gross earned premiums were $371 million.

• Expect investments in Q3, including R&D testing, to put pressure on near-term net income profitability.
• If Carvana short-term warrants expire unexercised, expect approximately $16 million to $18 million in noncash expense in Q3, with $15.5 million being a cumulative catch-up tied to warrant structure.
• Plan to continue investing in key strategic areas like expanding national footprint, enhancing product suite, and deepening data science/technology capabilities in the second half.

• Potential tariff impacts, though currently not seeing meaningful impact, but loss ratios below long-term target could be affected.
• Competitive dynamics in the direct channel, which led to reduced marketing spend in Q2.
• Seasonal loss ratio pressure in the second half of the year impacting net income profitability.

Q: Talk about expectations for policies in force growth, appetite to lean into direct side and PIF growth.

A: Saw modest PIF growth Q3-to-date, direct channel competitive so not chasing soft market, partnership channel growing 3x year-over-year in new writings, received product filing approval in Washington, and testing mid- to upper-level funnel marketing channels as long-term growth lever.

Q: Partnership channel size enabling PIF growth through soft market despite direct side pullback.

A: Partnership channel will continue to grow, already 3x year-over-year in new writings, only appointed in fewer than 4% of independent agents nationwide, and can continue growing even through soft markets.

Q: Budget for growth spend/sales and marketing for rest of year.

A: On direct side, opportunistic and monitor competitive environment, R&D investments in back half will elevate spend slightly, with investments being upfront and scaling over long term.

Q: General pricing, segmentation, and algorithms.

A: Price adequate, trending below long-term loss ratio targets, new algorithm increased customer LTVs by over 20%, algorithms able to price across standard, nonstandard, preferred customer segments, and company built on AI/machine learning from inception to ingest data and improve predictions.

Q: Net expense ratio, impact of R&D investments.

A: Gross expense ratio fluctuates due to acquisition and fixed expenses, targeted investments in product/technology for scaling pricing models and distribution channels, with investments being a couple of points of GEP.

Q: Balancing moving parts in pricing, growth, and loss ratios.

A: Constantly monitoring environment, no material tariff impact yet, loss ratios expected to tick up a couple of points in second half due to seasonality, channel factors in pricing ensure appropriate loss ratios across channels, and Carvana partnership is successful but no single partner is majority of partnership volume.

Q: Loss ratios between channels, new business penalty, pull forward of demand.

A: Slight more new business penalty in direct than partnership, mix in partnership channel is more preferred with slightly elevated severity, saw headwinds in Q2 from first quarter tariff-related demand pull forward.

Q: States pending product filings after Washington.

A: Received product filing approval in Washington, with host of other states having filings pending in public domain