Q4 2020 Root Inc Earnings Call
I'll now hand over the call to Joe The Roche Investor Relations for route you may begin Sir.
Good afternoon, and thank you for joining us today.
Hosting this call to discuss its fourth quarter earnings results for the period ended December 'twenty 'twenty participating on today's call are Alex Tim co founder and CEO, and Dan Rosenthal Chief Financial Officer.
Earlier. This afternoon route issued of 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 annual report on form 10-K to be filed with the Securities and Exchange Commission next week 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.
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 and.
And 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. Once again. Please review our upcoming form 10-K, where you will see a discussion of factors that could cause the company's actual results to differ materially from the statements as well as our shareholder letter released today.
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 of non-GAAP measures in talking about routes performance you can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our shareholder letter released today and our filings with the SEC each of them.
Which will be posted on our website at IR Dot joined route of Dot Com I will now turn the call over to Alex Tan Crudes co founder and CEO.
Thanks, Joe and good afternoon, everyone on today's call I'll be underscoring a few highlights of routes Q4, and fiscal 'twenty 'twenty performance and provide some additional context on three key drivers of our business one of the powerful competitive advantages enabled by our investment in proprietary technology in telematics to how these advantages.
Meekly position us to manage risk as we expand our footprint and achieve scale and three how are seasoned states will increasingly contribute to our management of the business the deployment of our capital and profitability. I'll, then turn the call over to Dan who will discuss our Q4 and fiscal 'twenty 'twenty results in detail and then we'll open up the.
For Q&A.
I'm happy to share the despite the unprecedented turbulence of Twenty-twenty route is better positioned across almost every metric we delivered a 37 per cent increase in direct written premiums while simultaneously delivering a 26 point improvement in our direct accident period loss ratio.
That is tremendous.
Today every large insurance carrier is eager to message to the consumers and to the world and they're developing advanced technologies in reality they are not technology companies.
Route is a technology company.
So let me tell you a little bit about our technology and our models and why we believe our models are so much better.
First rich pricing model has been built from the ground up based on modern technology and data, placing fairness of the center of our model the.
The realization that each individual's of universe of one has allowed us to create a better pricing and underwriting model and reward safe drivers, we put the customer in control while simultaneously delivering a superior modern experience via our mobile app.
It is rich proprietary telematics and enables us to deliver these consumer benefits and deliver profitable growth to the business.
The foundation of roots proprietary telematics is the transparent collection and analysis of the actual driving behavior off of the smartphone. This is the most powerful variable in our underwriting model by collecting and synthesizing massive amounts of rich sensory behavioral data across thousands of driving variables, including identifying distracted driving which.
One of the biggest causes of car accidents today, we price based on actual causality rather than just correlation.
The data, we collect identifies the worst 10% to 15% of drivers on the road we call. It like it is and we don't some of those drivers. This factor alone separates route from any competitor.
This allows us to the quote the remaining population fairly in at lower rates, which then allows us to build a more attractive book over time.
Let me be very clear.
This technology is difficult to build well.
While telematics in one form or another has been around for decades mobile telematics is actually only recently been feasible due to advancements in mobile technology, but as well as the advancements in machine learning.
Today, we believe that route is actually accumulated the largest proprietary data set of behavioral driving data.
Tied to the associated claims data.
We are the only insurance company to design our program to operate across our entire book of business.
This has allowed us to build what we believe is the most powerful model in the industry on.
Almost all of our competitors outsources capability, which prevents them from achieving similar results. This.
This is evidenced by the Milliman study that validated route is 10 times more predictive than a leading the industry competitor and that was outlined in our prospectus.
So given all of this amazing technology, we often get the question why can't we see it on the loss ratio.
To isolate the positive impacts of our proprietary technology of models, we've created a metric of seasoned states as shared on today's letter of seasoned state of the state where one of the regulator has approved our data science driven loss cost model and two we have been writing policies in the state for a minimum of one year and we've.
Two price filings approved.
Your line. This criteria, we started 2020 with only three states that we considered seasoned.
By the end of 'twenty 'twenty that number was 20.
As expected our percentage of earned premium in the season States also increased throughout the year and it totaled 60% in the second half of 2020, which has enabled us to draw meaningful conclusions about the states from that data.
What we've learned and what we see is that the season states. During the second half of 2020 ran a loss ratio of 415 points below on season States.
This demonstrates the success of our approach and the materially positive impact of our improvements in segmentation. This is possible through the increasing data that we have in the states and this shows our data flywheel at work the.
The strong loss ratio of performance in our sees in the states in 'twenty and 'twenty validates that the root pricing model is working.
It is consistent with our expectations of each iteration of our UBI model resulted in meaningful improvements in predictive power and segmentation, which then fuels our loss ratio trend. This is a trend that we fully expect to continue in the future.
As a management team, we take very seriously the deployment of your money.
And as such we are constantly balancing growth versus profitability.
And something that's special about route.
In addition to driving growth and profit growth actually also creates a natural moat around our business is what we call. Our flywheel basically more data leads to better pricing that drives faster growth as prices get better, which then leads to more data on.
That growth makes us smarter and with each new learning, we create better products at better prices and this is the beauty of the machine learning based business.
Our seasoned state analysis is enabling us to learn and fine tune of pricing model in each state before we aggressively drive growth.
Once we have proof that our state's unit economics are sound, we quickly and efficiently than we'll throttle up marketing spend and the capital we are deploying in that state.
This provides us confidence as we drive growth that we will also be driving profit.
We look forward to sharing further details around the evolution of our telematics and our technology and the growth and performance of our business within the season states in the quarters ahead.
With that I'll turn that over to Dan.
Dan.
Thanks, Alex let me start by saying how proud both Alex and I are of the entire route team's accomplishments in 2020.
Together, we grew the business substantially improved our path to profitability made significant improvements around our debt structure and reinsurance arrangements and set the business up for long term success with the completion of our initial public offering.
Against any backdrop, and particularly in the context of a global pandemic and all of the disruption and uncertainty of caused those accomplishments in one year or nothing less than extraordinary.
We continued to show progress against our financial objectives in Q4, you'll find these along with our GAAP financial results contained in the shareholder letter we published this evening highly.
Highlights include.
For the fourth quarter of 'twenty 'twenty, we grew direct earned premium of 30% year over year to $155 million.
Direct loss ratio totaled 76%, including $10 million of favorable direct prior period development, primarily in the most recent quarters.
Adjusting for the impact of that prior development direct accident period loss ratio totaled 82%, a 16 point improvement from the comparable period in Q4 of 2019.
Direct contribution a new metric that we're sharing with you increased by $26 $3 million to $13 $5 million with the majority of improvement coming from loss.
I will be talking a little more about direct contribution in a few minutes as it's a really important profitability measure for the business.
Adjusted gross profit increased by $18 $1 million to $3 $9 million.
And now pivoting to our full year 'twenty 'twenty results.
We were able to show strong growth. Despite the decision to pull back on marketing spend towards the end of the first quarter, resulting from the global pandemic and surrounding macroeconomic and regulatory uncertainty. While this decision slowed our growth in the second half of 'twenty 'twenty overall, we were still able to deliver 37%.
Growth in direct written premiums to $617 million day.
Direct earned premium grew by 71% to $605 million.
Direct loss ratio improved 18 points to 82%, including $24 million of unfavorable prior period development.
Adjusting for the impact of prior period development direct accident period loss ratio improved 26 points from 104% in 2019% to 78% in 2020.
Direct contribution improved $76.3 million to $18 $9 million with the majority of improvement coming from loss of.
Adjusted gross profit improved by $75 $2 million to a profit of $21 million.
We ended the year with $1.1 billion in cash and cash equivalents at root, Inc, and outside of our regulated insurance entities with an additional $255 million in cash and investments at our insurance subsidiaries.
We feel great about our balance sheet and it will enable all of the progress yet to come.
Since our last earnings call, we've met with hundreds of investors and held nearly 71 on one meetings, you're passionate interest in understanding the root business model and differentiation was remarkable.
Many of you asked great questions around our loss ratio trends.
To be responsive in our letter and as referenced by Alex We provided additional cohort data around our seasoned state performance and the progress made in state management.
I want to tie all that together to the 26 points of progress we made against the accident period loss ratio in 2020.
First we attribute 15 points of improvement to pricing and underwriting actions taken in 2020, we separate these into two buckets, our proprietary segmentation, which captures the power of our UBI and pricing algorithms to target superior risk segmentation, we believe improvements and further deployment of these.
Models across two thirds of our footprint delivered eight points of annual loss ratio improvement.
And state management, which was a focus for us in 2020 delivered a further seven points of improvement.
We attribute of another five points to positive tenure mix as our renewal premiums increased as a percent of total earned premiums.
And we attribute the remaining six points to Covid on a full year basis. Most of this came with lower claims frequencies in March April and may with a bit towards the end of the year as well.
So where are we going in 2021 we.
We expect to continue to deliver meaningful improvements to the loss ratio through further seasoning of states and the launch of new iterations of our proprietary telematics model and pricing algorithm.
In addition, our decision to enter fewer states in 'twenty 'twenty, one improves our loss ratio outlook net.
Net net we expect year over year improvement, despite higher new writings and lapping the 'twenty 'twenty COVID-19 related favorability.
I also want to lay out where we are going in the longer term.
We believe as our data grows and flywheel accelerates, we will continue to extend our pricing advantage.
With the developed and tenured book, we expect to deliver a loss and loss adjustment expense ratio in the low seventies.
We expect expansion of fee income via cross sell of our homeowners product, where we collect an agency commission.
As well as the embedded value of our telematics to grow a SaaS revenue stream.
Minor variable cost efficiencies round out our long term direct contribution target at 25% to 30%.
We have added direct contribution to our ongoing reported kpis, we as a management team focus on this metric and want to share it with you going forward.
Our capital strategy and reinsurance programs are also vital to our business.
Part of my and my team's job is to take our direct outcomes and manage the net results.
As detailed on our prospectus, we put in place a comprehensive reinsurance program.
Our counterparties include five of the top 10 reinsurers in the world as well as a large pension fund.
We've shared that our reinsurance program would be in place for at least the next several years because it enables us to both use reinsurance capital to fuel our growth and derisk the balance sheet.
This program has a meaningful impact on our cost of capital and multiple lines of our consolidated financial statements.
We've also shared that our reinsurance program is made up of several layered treaties and is designed for flexibility.
Earlier this year, we made the decision to delay the renewal of one of these reinsurance treaties.
The positive loss ratio trends, we expect to receive superior terms by delaying the treaty from January one to April one this drives higher GAAP revenues as we retain more premium in the first half, but it has a negative impact on operating income due to reduced ceding commissions.
The decision to delay caused the short term noise in our quarterly financials, but as we have always said, we will make the right decisions for the long term business rather than managing to quarterly results.
While the modification to seeding levels will impact the P&L, we foresee only a minor change to overall 'twenty 'twenty, one capital needs because our structure has efficient alternatives such as our Cayman captive to manage the higher level of retained premiums.
I will close with a few more details on how we're thinking about the financial outlook for 'twenty 'twenty, One and then Alex and I will welcome your questions.
First we plan to more than double our sales and marketing investments in 'twenty and 'twenty one following a COVID-19 driven pullback in 2020.
This investment in marketing fuels and accelerating growth trajectory throughout the year.
For the full year, we expect direct written premium in the range of $805 million to $855 million and direct earned premium in the range of $685 million to $715 million.
Driven by my prior discussion of loss ratio, we expect direct contribution in the range of $25 million to $35 million.
The delayed implementation of one of our reinsurance treaties results in ceded earned premium dropping to the mid fifties as a percent of earned premium by the second quarter, and then scaling back to our target seeding level by the fourth quarter.
This reduced ceding level, along with fee income as a percent of earned premium consistent to 'twenty 'twenty and a nominal amount of investment income results and GAAP revenues expected in the range of $270 million to $300 million.
Based on what we know today and our base case expectation of our reinsurance for the year. We expect other insurance expense to result in a small expense position in each of the first two quarters of the year, given reduced ceding commissions and transition to an offsetting contra expense in the second half of the year as seen.
The premiums resumed prior levels.
Our fixed expense base remains in line with 'twenty 'twenty as a percent of direct earned premium.
Together. These assumptions result in operating income in the range of of loss of $555 million to $505 million.
With that Alex and I look forward to your questions.
At this time for participants to ask a question. Please press star one on your telephone keypad and to cancel the question you made the price dependent or the Ashton.
We'll pause for just a moment to compile the Q&A roster.
And then we have our first question from Yaron <unk> from Goldman Sachs. Your line is open.
Thank you very much on good afternoon everybody.
Yes, maybe a couple of questions on on blocks ratio so the.
How exactly the determine the various components of the loss ratio improvement.
I thought it was fascinating that the way you laid it out I guess as an outsider I'm just curious how do you know that.
Six points of of the improvement came from Covid as opposed to from a seasoning or from the underwriting actions in the bedroom segmentation.
Thanks, Hey, Ron This is Dan in the nice to hear your voice.
We obviously spent a lot of time.
Talking to investors over the last couple of months, who wanted to see additional data about the loss ratio and we're thrilled to disclose the day to today, we think it tells a very powerful story at the.
Chart that you see on page seven of the shareholder letter splits the 26 points of loss ratio improvement into.
Into the four different categories, and we talk about each of those categories in the letter itself.
I think as you noted your own it's very powerful to show the 20 points of that improvement 20 of the 26.
We believe were not related to COVID-19, but were related to the work that we have undertaken around getting our pricing algorithm and telematics models into the market working on state management directly state by state as well as what you saw from the renewal of customers, increasing which we show later in the.
In the letter you asked about Covid itself, and we monitor very carefully COVID-19 in a couple of different ways and we think we have.
And the ability to do that that goes beyond most other carriers given how we are able to use our telematics and track driving so obviously you were able to monitor miles driven.
And we will look forward to providing future updates on that on on future calls we look at not just the quality of the miles driven but the quantity as well. So we understand not only how many miles people are driving but what time of day, what are the road conditions and those miles. So again it gives us a good.
Understanding of what's happening in the mileage itself and through all of that we did see as we disclosed on our Q3 call up 15 to 17 points of impact.
On claims frequency, mostly with a little bit of recognition of claim severity in that sort of mid early to mid March period through April and May and then we saw a slight uptick towards the very end of the year that was not particularly material. So overall blended across the year. It was six <unk>.
Thanks.
Represented in the loss ratio I think the other part that's relevant if you're looking and comparing to other carriers.
We are if you look at our footprint today of the 30 States. We are not license today in New York.
Or in Massachusetts, which are obviously high commuting cities.
That had significant COVID-19 restrictions in place for certain parts of 2020.
Were not particularly active in the California market as you know your own given the inability to use telematics at this time. So that would include Los Angeles, San Francisco again high commuting areas with significant COVID-19 restrictions. So we think that that is part of the reason.
Debt as we've tracked the miles and understood our footprint that's part of the reason as well understanding the the 6% Delta due to Covid.
Okay.
And it's not necessarily that I was trying to pick on Covid I'm, just trying to better understand how it is that you know that proprietary segmentation was.
Accounted for eight per cent of the improvement versus the state management accounting for seven per se.
How how are you able to neatly allocate between the buckets I guess is what I'm trying to understand.
Yeah. That's a good question you're on and there's the this is Alex.
Essentially when we ship things in one state you know they don't it doesn't all go out all of that one. So for instance, if we have a new model that we're going to deploy let's say we deployed in Texas first well we know that.
And maybe another one of our state of AEP, Ohio doesn't have that and what we can do is we will look at what did the delta in the loss ratio due between those states before and after and it's actually the same thing even with Covid Covid hit you know all of this the the mileage driven we can look at that across a bunch of different states and so when you can look at state.
The state and you see a certain state management actions and you start to see the loss ratio has actually changed relative to one another and that's really how you control for all of those confounding factors and so that gives us. We then load that and that gives us the good dataset. They begin to actually attribute of where the loss ratio is coming from and sort of why.
Of those principal components that are driving it.
Got it that's helpful color and my follow up on still on velocity ratio would be just looking at 'twenty one.
I think you gave some qualitative commentary there that you shipped you expected the loss ratio to improve over.
Over the course of the year relative to 'twenty.
20.
Are you able or willing to quantify or give some sort of range.
Bridging the gap between where we ended 2020 and you know the the longer term target of the law.
Low seventy's range.
Yes, your own I'll I'll jump in on that one and as you know we haven't guided direct loss ratio of specifically.
Instead guided to direct contribution, which really of how we manage the business and we think an important metric for investors you know ultimately there there are some different offsets happening to the loss ratio in 'twenty and 'twenty one in terms of the outlook.
There are headwinds in.
In two ways. One we are anticipating the elimination of the of the abatement of sort of the COVID-19 benefit being debated year over year. So that is the way we are planning for 2021, although we're cognizant that no one knows precisely what will happen with COVID-19 and its impact on driving and claims that.
What we're planning for the year. So if you think about that six points that was 2020 benefit we are planning that that is not showing up in 2021.
We also are planning negative tenure mix and we show. This in the letter because we are ramping up our growth and ramping up our level of new writings with our sales and marketing spend that means that new writings will again be a larger percentage of our overall earned premium.
Per to renewals and obviously as you know that will drive a higher loss ratio. So we of headwinds from both of those things that said, we believe we're going to have year over year improvement in the loss ratio itself due to continued benefits of the proprietary segmentation and state management work some of those first two buckets that we.
<unk> talked about are going to improve and overcome the headwinds from tenure mix and Covid abatement.
So that's the that's the way the loss ratio picks for take shape, although again, we're not guiding direct loss ratio specifically for 2021.
Got it thank you very much.
We have our next question from Michael Phillips from Morgan Stanley Your.
Your line is open.
Hello, everybody I.
I guess I wanted to touch on the comments in the.
Other than sometimes you said here about how there'd be some fluctuations in the kpis for this year given the way you're changing kind of a new marketing plans and the state expansion maybe can you expand upon.
Things that we should look for in terms of those near term fluctuations.
Mike This is Dan I'm not sure maybe if it could be a little more specific there are some different puts and takes although by and large the strategy is the same strategy consistent with what we've talked about the during the IPO of are there specific kpis debt that youre thinking about beyond.
The loss ratio, we just talked about.
No I mean, I'm I'm, referring to I guess more so too.
And maybe I read that maybe I read of wrote in your letter, but I'm, referring more to is it sounds like you're you know you're slowing down of bits of the state expansion.
To focus on the states, where you've got the regulatory approval. So you can focus more on the loss ratio I guess, what that means going forward for this year and customer count and premium you given your guidance on premium line customer accounts I mean, your sentence was our investments are going to close near term fluctuations of our kpis as a result of of our.
New investments in 2021, so it kind of just focus on that.
And which kpis you're referring to.
Does that help Ken if now we can.
Yes, yes that helps us Alex.
And maybe I'll start with sort of how we're managing those.
Big investments that we're making and then turn it over to Danny you can talk a little bit about those impacts.
In terms of state expansion are we do want to be very cognizant of the balance between growth and profitability and ensuring that we're really making the right and appropriate trade off in that.
In states, we have in testing mode versus states that we have in it that are fully seasoned.
And that process is some of volatile Ah <unk>.
And as we add new states, we're going to learn our way into those states.
And Additionally, when we do that and how we do that can be dependent on regulatory timelines now as we add the states in the faster we build confidence in the states. You know, we'll certainly be able to then accelerate growth in the states and so that's going to be some of the things where you may see some noise, which like I said, there's just some <unk>.
Variability, whether it be from regulators or how long it takes us to really build confidence in the states to push growth.
The second is we're continuing to push out new products right. We're still.
In mostly our mono line auto we are now we've launched our renters product and we're scaling that we're also launching and scaling our homeowner.
Homeowners product, which is going to also.
Curious the change the business, but that's still some investments that we're making and then lastly, what I'll touch on too is we're still investing in brand and we've been very happy with those results yet of the Bubba.
All of this campaign around our progress there's no apology, which was really our way of explaining our brand in a very authentic modern way that got almost half of 1 billion impressions.
In the matter of a month and so we're starting to see early signs of success of those brand initiatives and so that's something we're going to keep continue to invest in which we believe long term definitely pays off but we also understand you don't build the household brand in the matter of a couple of months.
So those are some of the big investments that we're making today that we believe long term it certainly pays off well for the business, but predicting the exact timing can be difficult Dan do you want to talk maybe about some of the the other key kpis on that may be impacted.
Yeah, I think Mike now I understand your question and I. Appreciate it I think we've talked about there are four fundamental things that matter in the business as we manage it on the day to day basis growth loss ratio retention and customer acquisition cost and Alex just touched on most of those four but just to.
It hit them quickly on growth I think what we're trying to guide to is that there are going to be acceleration throughout the year as we increase this marketing spend youre going to see that show up in written and earned premium over the course of the year with acceleration of along the way.
But starting off smaller.
On the loss ratio I think I've touched on that in terms of that trend and obviously part of the decision that we've made is to approach state expansion a little bit more moderately although we expect to be an 85% of the U S addressable market by year end, so again quite significant growth quite of <unk>.
<unk> footprint on retention retention for us is consistent with what we reported in our prospectus on the guidance accounts for continued seasoning of states, which could include pricing changes in a couple of places in temporary retention changes.
Not a not a significant material near term fluctuations.
That's a little bit about how we expect retention to progress through the year and then attack Alex talked about the brand spend and we talked about this Mike and our third quarter earnings call that we were going to invest into the IPO and the bubble of wireless campaign, and frankly testing out some of our marketing and branding.
Prepare us better to be in that larger footprint as we go throughout 2021 of them beyond.
So it's.
It's consistent with what we've talked about in the third quarter, we're expecting our customer acquisition cost levels to be a bit higher in the fourth quarter and then in the early part of this year and then you'll see that scale.
I think in a more efficient manner as the year continues and we will see the impact of the marketing investments, we're making in the back half pay off even as we get into 2022. So that's a little bit of how we expect the year to progress across those four key kpis.
Okay no. Thanks, that's very helpful.
I guess this question would be geared more towards the states that you called the seat in the states of maybe the one specifically that you show on page nine.
On your bigger states, Texas until the end, Kentucky NPA in Arizona.
Given the where you're.
Where you showed the loss ratios our debt. This year do you think your current level of pricing in those seasons states, where you needed to be or is there more work to be done on just the absolute level of pricing in those seats in the states.
Yeah.
The absolute level of price you know we feel good we feel is adequate and the season states for sure.
That being said right now we have UBI 4.0 in the hopper and it's going to be shipped out sometime in the first half of this year. It is a material improvement of China, roughly a 30% improvement in predictive power of our current of our prior model. So that's substantial we're on.
Also continuing to find other segmentation benefits and so we're going to keep rolling those out into the states now when we're comfortable with the target loss ratio that the state is running at which like I said most of the that sees in the states we are.
What we do is we actually flow those benefits to conversion and allows us to grow faster and reduce customer acquisition costs, even further and so that's really the plan there, but we and those season. The states we feel very good about our rate levels.
Okay. Thanks.
Just one more generically for me guys is just if you look back over your history so far.
Mobile based UBI telematics is fairly unique.
And certainly probably a lot more difficult than other forms of telematics, but what do you would you classify as I guess the the.
Hardest piece to get right for mobile base of the data integrity of day of quality or what would it be how would you classify what's been the biggest challenge for you coming using mobile based technology for telematics.
Okay.
Yeah. That's a that's a very good question and it's something that is hard to answer because really the thing you have to nail about mobile telematics is everything.
And why it's not so simple to say, there's only one thing right you've got to understand the engineering components of each of the smartphones and each of the the makes of smartphones you have to understand the quality of data you're pulling off the phone you have to then understand the physical events going on in the vehicle and that alone is very difficult to actually understand what of heartbreak.
Looks like what texting and driving looks like all of that is very difficult, but what makes it much harder and what very few people are then able to do is to then take all of that.
Data and all of those insights and technology and correlate it to actual underlying claims data and that's the benefit we get as the carrier, we're not using any sort of implied claims or anything like that we are just tuning on the actual underlying data and that's why our model has become so much more predictive than really any of our competitors because we can do and build on.
All of this technology fully in house. So if I was to say one thing that's difficult. The most difficult thing is if you want to do this right you have to be of technology company and an insurance company and that's a very difficult business to belt.
Okay. Thanks, Alex I appreciate it.
Thank you.
And the once again to ask a question. Please press star one on your telephone keypad again Thats star one on your telephone keypad.
We will of pause for a moment again to take any questions.
We have all the next question from Tracy.
When do you get from Barclays. Your line is open.
Thank you.
Maybe we could touch on on the favorable reserve development of member last quarter U S.
Screen on favorable on and now it's favorable and I'm wondering if you can little data Goldilocks porridge, it maybe too high of the charge last quarter.
You were able to release some of this quarter and we should be just about the right spot on the going forward basis.
Thanks, Tracy this is Dan and if my kids are listening to the call. They will be thrilled that this might be the first part of the call that they actually understand with the goldilocks porridge reference.
I am not sure I remember enough of it to be accurate and sticking with your analogy.
But here's what I would say there they really are not not related and we talked about the first part back on our Q3 call that the new disclosure for the fourth quarter, specifically, you're right on the direct basis, we took $10 million in favorable prior development. The vast majority of this related to accident year of 2020.
Whereas what we talked about on the Q3 call. We are mostly related to prior years. So it really is apples and oranges. If you will overall I would just note Tracy we really feel great about our reserving process, we've invested cash.
Considerable resources and it's just like Alex was talking about on Mike's question I.
I think it's one of the places that for us traditional insurance principles or the great reserving actuary combined with technology and data science has really made a difference in supporting the critical work around reserving. So we're really thrilled about the position we're in.
And feel good about it going forward.
And then my follow up is really on the delay of implementation of our reinsurance one of your reinsurance Treaty I'm. Just wondering if that would lead you to conserve more accounts at all and people to grow with the same speed.
And tell US your April appeal.
On the contract.
Yeah of Tracy the good news is this is Dan again as you know we've got over $1 billion in cash on cash equivalents on the balance sheet as well of a couple of hundred million in the insurance company and so we are well position for the year were certainly not managing.
The month.
We're doing the right thing for the long term and frankly, you kind of as we talked about we put in place of really comprehensive reinsurance program that we're proud of our Counterparties include five of the top 10 reinsurers in the world as well as the large pension fund and the way we've talked about our reinsurance program has been really consistent it'll be in play.
For the next several years because it allows us to use of reinsurance capital both to fuel growth through the ceding commissions as well as derisk the balance sheet. So it really twin twin positives.
Graham does have a meaningful impact on overall, our cost of capital and the way we've talked about it is there are several layered treaties and it's designed for flexibility.
So earlier this year, we saw the way that our loss ratio was trending in the fourth quarter and frankly into January and so we made the decision to delay the renewal of the January 1st Treaty.
And we intend to delay till April one.
Frankly, we're making great progress on the April 1st Treaty, we of top commitments that indicate oversubscription at favorable terms. So we're excited about it it was not motivated by any short term financial concern it will not at all impact our strategic plan and growth investments for 2021.
The impact is quite the opposite it's the right thing to do for the long term of the business and again the support from our reinsurers.
Proving terms shows that our loss ratio is trending well Tracy as you know reinsurers care of about three things loss ratio loss ratio and loss ratio. So the fact that this is moving positively as we approach April one.
It is again, a nice positive reinforcement of the way our loss ratio is trending so we'll look forward to coming back on our Q1 call Im talking more about where it stands.
Okay I appreciate the comment about the of our subscription because then that lake that was like my follow up question. If there was in the meeting of the minds, but that's that's good information.
Oh, you're welcome Thanks, Tracy from the question.
We have our next question from Elyse Greenspan from Wells Fargo. Your line is open.
Thanks.
So my first question on.
Do you guys I recognize this is the first time you guys, you're giving on 'twenty 'twenty, one guidance and obviously a bunch of the moving parts and you guys. Obviously don't want to guide to a specific loss ratio, but is there a way to just kind of diving back into some of the part of your question that you could give us the sense like how.
How we can think about it sounds like the profitability that you were expecting on for 2021 kind of will be adjusted for some of the timing of the reinsurance from life is better than what it would have been you know three months ago and so can you just give us a sense on obviously you know as Youre doing less state expansion just how we can think about the profit.
It looks better perhaps today than it would have been a few months ago.
Yeah at least thanks for the question. This is Dan you're right I think just to reiterate a little bit on the loss ratio and tie it into your question. If you. If you look at all of the puts and takes on the loss ratio. What we're saying is we are we expect a bit of year over year improvement overall in the loss ratio although work.
Not guiding to a specific number you can see and direct contribution were guiding to a range of 25% to $35 million that we're very pleased about and reflects the fact that we're moderating the state expansion. So we are going to have.
A bit of frankly loss ratio relief.
Starting those states in the right manner and trying to put in place our pricing algorithm and telematics.
Appropriate rate plans from early on and so as opposed to trying to do every state this year and that remains.
The goal is to get the 85% of of the addressable market by year end, which we still believe is on.
Obviously very significant but will protect the loss ratio of debt and frankly protect our capital that we are investing. So then as you go down the profitability lines I think that was sort of the other part of your question around operating income and most of that frankly is tied to the sales and marketing expense in the <unk>.
And that which we've talked about.
Several different points there are as you alluded to of leased there are some puts and takes from the reinsurance.
On the fact is we are going to be ceding less premium by delaying the treaty from January one the April one so that means our GAAP revenues will be increased because we are retaining a bit more premium.
But it means we'll be paid a little bit lessen the ceding commissions and so obviously, if you think about add on that other insurance expense line as a contra expense that will be a bit lower again, we think that directionally. This is absolutely the right thing to do for the business in terms of how we're managing our state of expansion and from a capital.
[laughter] standpoint, our plan around reinsurance is highly consistent with what we've talked about during the IPO and frankly, just taking advantage of the fact that our loss ratio of continues to trend in the right direction and the overall market conditions.
Okay and then.
No policy growth actually worked on.
Pretty good I didn't picked up in the quarter.
Obviously.
The growth, maybe a little bit lower than you would've expected in 2021 by <unk>.
The kind of the expansion on.
You know plans switching a little bit on.
We've also in the market.
The other players trying to use the eye at the point.
<unk> sales.
So I just wanted to get a sense it sounds like the growth being lower due to.
On your own decision why not expand in certain states and not doing nothing too on some of it.
The competitors in the space.
Yeah, absolutely yeah, you're totally right. The this is completely Ben.
In our own control and is our own decision because we think it's prudent and we really haven't seen although there's a lot more advertisement out there around the apps you know there were apps every major competitor out of nap.
Presumably that would we did five years ago. When we started the company and we haven't seen any material changes in that technology.
Has made us see any sort of increased competition or difficulty in actually acquiring customers.
Okay, and then one last one from me.
I recognize that usually passed on are not typically the auto losses whatsoever, but do that just kind of the winter the sort of thing I guess that is kind of unprecedented of that you guys have a sense of.
Oh go ahead of.
We should be thinking about.
You know some losses there.
Yeah first.
I'll I'll jump in here and then let Dan talk a little bit about the financial impact, but first I do want to say.
We do have employees in Texas and customers and partners and we are very aware that a lot that they are going through a lot right now and have been affected by these events and we're definitely thinking of them and we have proactively reached out to our customers to allow them to know about ex.
And grace periods as they may not be able to to pay their bills and so we're certainly thinking about everybody down there.
Dan would you like to maybe cover some of the the financial impact.
Yeah, Thanks, Alex very well, it's had about the events in Texas on Elyse. Thanks for the timely question I mean, we've seen insurance industry loss estimates ranging from 5% to $20 billion.
On the risks affecting several lines of business across the entire state. So obviously a significant event, but as you noted of lease much less so from an auto perspective.
We're protected in a couple of ways, we've observed the slight uptick in claims being reported in Texas in the last two weeks, but the losses don't look like they will materially impact our book.
It's still obviously a bit early to estimate.
The aggregate loss on our book, but.
Its worth, noting and reinforcing that we have a robust catastrophe reinsurance cover in place.
Limits, our exposure to $3 million per catastrophe event or just under about 50 basis points loss ratio impact of the overall annual result.
And then in addition to the cat coverage, we renewed our ex ol coverage on January 1st of this year from 900 by 100, which obviously the limits our exposure to large claims I think the other thing that we've done nicely, although Texas is our largest state obviously as we've diversified our premium across our 30 states and of really.
Good way that in addition to the reinsurance coverages really minimizes our overall risk tied to any one event in a single state.
That's helpful color. Thank you.
Yeah.
We have our next question from Phil Stefano from Deutsche Bank. Your line is open.
Thanks, and good evening.
In the shareholder letter you talked about routinely changing the pricing fine tuning the models.
Being able to.
The.
We price the algorithms every nine months. So I was hoping you could talk about like the the state.
The regulators in my mind don't move as fast as you do and what are the frictional pressures of of of having new pricing, so often but the regulators maybe not being able to keep up with you.
Yeah, that's a fantastic question and something certainly that I think we've we've pushed in the industry.
One I will say like not all of the states are our sort of created equally at all there are certain states, where the theoretically you can file every day and changed the pricing structure everyday or every week.
That's not something we we tend to do but we do want to file more frequently and that goes all the way to other states that want you to only changed your prices.
A couple of times of year, maybe four times of year once a quarter.
And those states, we reach out to and we've got really good relationships there.
And we look to see okay. How do we actually built in flexibility to that rate plan. Specifically that then allows us to iterate around meaningful things. So for instance, when we update the UBI model that just makes it more accurate how do we make sure that maybe we can expedite some of those filings in the early days of state launch, that's usually where we have the biggest changes and so the.
Those are really the ones that we expect to take the longest but then typically from there as we build these relationships out and as they get more comfortable with what our models are doing the updates don't take nearly as long I'm going forward.
Okay, Okay and.
Maybe a follow up to a question that the lease had earlier about the the competitive dynamics in the in the industry, but you know.
On my mind is less so focused on the UBI in telematics and just more broadly it feels like some of the the legacy personal lines insurers had been cutting price recently on.
On the on the auto business in reaction to Covid and the auto frequency benefit I mean, how have you seen this in any way impacting the.
The growth or the retention metrics that you have are you feeling this in the market yet.
No we have no data that suggests right now that we're feeling that in the market.
It is a massive market again into $266 billion market.
And so we're still quite small and so we believe particularly because our product is so unique with our telematics differentiation that that does provide a pretty robust.
The book of business against a lot of the more macro trends. So you know the state farm lowers the rates, 3%, we're probably not going to be very heavily impacted by that just because we are so differentiated in the market and we are still so small relative to the size of the market.
And now we have all of our next question from the current Karaleti from JMP. Your line is open.
Hey, Thanks, good afternoon.
Got a question on the top line and you know as we think about the the 'twenty one guidance and kind of for lack of a better from a rebalance a little bit between growth and loss ratio well I know you arent you haven't provided any guidance on kind of of two or three year view I'm sure you have it internally.
Would there be any change to where you would expect to be from either of pits or direct written premium standpoint, you know two or three years out.
From these changes or is this more of just kind of the steepness of the line in which you get there.
Yeah, I'll I'll, maybe talk first and then pass it over the dam for some of that particular timing.
We do not think that this change is that the small change in top line of rebalancing.
And our projection for 2021, we do not think that that changes. The fact that we're still on a giant industry that we are still long term going to be national on that we still see a massive opportunity to build market share via our differentiated products. So I do not think that this changes whatsoever. The.
Long term nature of value of this of the business and so Dan you could talk a little bit about maybe some of those near term metrics and what we think.
As our strategy evolves, how some of those things might change.
Yeah, Thanks, Alex and thanks, Matt for the question nice to hear your voice.
As I talked about at the top of the call. We have been out on the road talking to investors and it's been wonderful I mean, the the interest and route the interest in understanding our business plan.
Alex and I have really enjoyed it.
We're looking forward in the conferences ahead in the one on ones to get them back out there.
And frankly, the the message that has come through loud and clear that is highly consistent with our strategy.
Is to drive our investments towards sustainable repeatable durable growth. That's our focus so we're really excited about the season states and the progression in the season states because for us that sustainable repeatable durable growth, we see it in the data and so that's where we want to focus our.
So we don't feel like this is a significant slowdown in growth, we're still gonna add seven states. This year and we expect to be in the 85 per cent of the addressable market in the United States by year end and that's a big deal.
So as far as what happens then in 'twenty, two and beyond as you know to map, we're not providing specific guidance at this time, but our overall outlook remains really consistent. This is just a massive opportunity in auto and as we further enter states and season them. We're confident as Alex said that were.
On the progress to our longer term goals.
Great. Thank you and then just a quick follow up kind of as the so we think about kind of that little bit slower state rollout can you can you talk a little bit about what that might mean for kind of the as you're implementing the UBI three point of <unk> and <unk>.
Yes.
Rolling out 4.0.
Allow you to do that more efficiently because youre just focused on a smaller set of state of the more mature set of states and if so what might we expect of what might that mean for.
The.
Test drive periods.
The difference between pre and post telematics loss ratios, which I know you quantified a little bit in the shareholder letter and the I'd be curious if you could talk about that per second.
Yeah.
Absolutely I'll talk about it I you know the higher level of and then pass it over to Dan for any any further details.
Focusing on a smaller set of states.
While still getting 285 per cent of the U S population is definitely I view it as a win win because that's still a material increase in addressable market.
But while being able to focus on fewer states and so that allows US then to roll out these models.
[noise] quicker and to really in a controlled sense measure of how these models are performing real time in the states.
So certainly it will allow us to continue to iterate faster and to push faster on.
On our pricing models, so what you'll see two of us as we iterate on these models things like the test drive period for instance, actually have become shorter we're actually able to identify good risks versus bad risks much sooner and better and more accurately one of the things that are new model also does quite well is it does.
Better with limited inspires data so as we know that there there are a phone models out there that for whatever reason you may not get high quality data off of.
And as we've advanced the these models, we've gotten much better at that so where there are consumers that may be we can want we watch for a long period of time, and we say hey, maybe we still don't know we don't have the degree of confidence enough to give that person of quote.
That number's, reducing quite a bit and so youre seeing improvement really throughout all of the product in terms of shorter test drives usually means happier customers. They don't have to wait as long.
And that really does sort of.
Pound and create a better product experience in terms of numbers.
I do believe we found some good good ways to reduce even the pre telematics loss ratios.
And even optimize the post telematics loss ratios, but I'll leave that Dan if you'd like to comment on on that.
No I think you nailed it and maybe just in the interest of time happy to catch up later, but I think you nailed it in terms of the the evolution.
We have all of our next question from David <unk> from Evercore ISI.
Your line is open.
Hi, good evening.
I just wanted to.
Confirm it sounds like you still expect.
Our marketing spend to more than double in 2021.
But but you are entering into fewer states and and.
I guess, we will be acquiring fewer customers than originally planned I guess.
Have you changed at all the the marketing expense expectation or are you just kind of continuing with the same level of marketing spend.
As a sort of a I guess downpayment on growth post 2021 went or what you know whenever you enter into the remaining states.
After 2021.
Yes, David it's a great question.
It's really the the ladder, we're continuing with the similar level of marketing spend we are going to invest in brand spend and.
And we talked about earlier, how we've really seen it work through the fourth quarter and now we want to.
The test.
Even recognizing that the payoff maybe later of the year or into 'twenty. Two we think it's really important as we continue to expand our footprint in outweighs any near term pressure.
So while overall ACA is going to remain a little bit elevated in the earlier part of the year, we do expect to see gradual efficiency throughout the year.
Particularly as we do enter those new states, where we should see benefit from improved awareness and high efficiency, social and digital AD placements. So that's the plan that we are implementing in 'twenty one.
And then we will take our final question from Mark Hughes from Truest. Your line is open.
Yeah. Thank you. Good afternoon, just a quick one Dan did you quantify how much GAAP revenue might be impacted by the delay on the reinsurance agreement, presumably it's the little bit of the tailwind, but any sense what that could be.
Yeah.
I didn't specifically, but I'd I'd point, you to the guidance, obviously with the revenue range from $270 million to $300 million from the year, which is reflective of the reinsurance plan and I talked in my remarks at the top a little bit about how we expect the seeding levels to flow throughout the year.
So that effectively can can help you understand the direct impact of GAAP revenues.
Thank you very much.
Thanks Mark.
Okay.
This concludes today's presentation participants may now disconnect.
Thanks, everyone for participating.
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