Root, Inc. Q3 FY2025 earnings call

• The third quarter was a record quarter for policies in force and revenue, driven by accelerating growth in direct and partnership distribution channels.
• Deployed a new pricing algorithm that improved customer LTVs by 20% and launched a new UBI model with 10% improved predictive power.
• Partnership channel saw more than tripling of new writings from independent agents, representing 50% of partnership distribution, with over $100 billion in premium nationally and long runway for expansion.
• Direct channel had new writings increase sequentially high single digits despite competition, with investment in real-time bidding algorithms.
• R&D efforts in new marketing channels, plan to continue investing; net loss in Q3 was $5M due to $17M noncash expense related to Carvana warrant structure, but year-to-date net income was $35M.
• Strong capital position, excess capital in insurance subsidiaries, disciplined approach to direct marketing investment.

For the third quarter, Root recorded a net loss of $5 million, operating income of $300,000, and adjusted EBITDA of $34 million. Year-over-year, the company delivered double-digit percentage increases in policies in force, written premium, and earned premium while achieving a 59% gross accident period loss ratio. Policies in force and revenue were record highs, driven by accelerating growth in direct and partnership distribution channels. The capital position remained strong with unencumbered capital of $309 million at the end of the third quarter. Revenue contribution from partnership channel: more than tripled new writings year-over-year from independent agents, now representing 50% of partnership distribution, which is over $100 billion in premium nationally but Root is active in less than 10% of agents.

• Expect continued acceleration of policies in force growth and increase direct R&D marketing by roughly $5 million in the fourth quarter.
• Anticipate headwind to loss ratio in Q4 due to seasonality (elevated animal collisions, bad weather) with similar impact to last year's 5 percentage points on the accident period loss ratio.

• Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from expectations.
• Seasonality in Q4 may impact the loss ratio.
• Competitive environment could affect growth and unit economics.

Q: Sounds like some opportunities in the direct channel this quarter with some new writings increasing sequentially, high single digits. Maybe you could just talk about how that opportunity came to be and just the overall level of competitiveness you're seeing on the direct channel?

A: Yes. Thanks for the question. We are still seeing competition up in the quarter and in the channel. But really, what has happened, and we've continued actually to see that even this quarter to date, a continued acceleration of new writings and growth in our direct channel and our partnerships channel and really every channel overall. And a big thing that's driving that is our price. Last quarter, we detailed that we shipped a new pricing algorithm that improved customer LTVs by 20%. That unlocks a lot of opportunity for us to continue to grow. And as we do that and we continue to refine pricing, continue to collect more data and continue to get better at it, you're going to continue to see us be able to grow despite increased competitive pressures. And that's exactly what you saw this quarter, and we're still seeing that quarter-to-date as well.

Q: Can you just give us some color on how the partnership penetration figure has trended over the last couple of years so we can get a sense of the trajectory of your penetration? And then what's the process to go live with more agents?

A: Absolutely. Independent agents has been one of the most attractive near-term growth levers we've actually seen in the business, and we just are getting started. We really just launched a couple of years ago significantly into independent agents. And last quarter, I believe we had disclosed that we were in less than 4% of all agents nationally. And so it represents -- it's 1/3 of the market still. It was 1/3 of the market a decade ago, it was 1/3 of the market 100 years ago. So we don't think the independent agents channel is going anywhere. And we're -- again, we're just barely dipping our toe in. And so as we continue to grow that, we grew at 3x year-over-year this quarter, and we're not seeing that slow down. So we are marketing to agents. We're actively onboarding more agents. We are continuing to improve the product for agents so that they have more service capabilities, better prices for their customers as well. So we're seeing that as a really attractive growth channel, and we don't have any plans to slow down on appointing agents.

Q: My first question is on the average premium per policy. It actually went down quarter-over-quarter. And I was trying to get a sense of how much was that driven by that new pricing model? And then given you continue to trend well below the 60% to 65% target loss ratio, do you have more flexibility to maybe give up a little bit more on price to continue to win in this environment?

A: First, on average premium, you saw us, I believe it was in June, take a fairly sizable rate decrease at the order of like -- it was double-digit rate decrease in Florida. And Florida is a very big market. I think you saw that some folks had to do some refunds in Florida. We really wanted to make sure that we were giving the right prices to customers upfront. And so we took that rate decrease proactively. And that's why you've seen sort of those average premiums come down, which has actually put us in a really good position for the end of the year. In terms of the ability to give more price back or to potentially lower prices, we're not in a position right now where we're broadly lowering rates, believing that we're overpriced. But we really do see a continued very healthy loss ratio. And what that's allowing us to do is to just continue to grow faster. And that's what we saw in this quarter. And again, we've seen that quarter-to-date as well.