Q2 2021 Root Inc Earnings Call

August 12, 2021

[music].

Welcome to the route incorporated second quarter 2021 earnings Conference call. My name is John and I'll be your operator for today.

All participants are in a listen only mode. Later, we will conduct a question and answer correct and during the question and answers that you do have a question. Please press Star then one on your Touchtone phone and I will now turn the call over to Christine Patrick Christine May begin.

Good morning, and thank you for joining US today route is hosting this call to discuss its second quarter 2021 earnings results participating on today's call are Alex Tim co founder and CEO and Dan Rosenthal Chief Financial Officer. During the question and answer portion of the call. Our presenters will be joined by math binocular.

Poor Chief data Science, and analytics officer, and Frank Palmer, Chief Insurance Officer.

Last evening route issued a 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 10-Q as well as our 2020 form 10-K before we begin I want to remind you that matters discussed on today's call will include forward looking.

<unk> related to our operating performance financial goals and business outlook, which are based on management's current beliefs and assumptions. 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.

In addition, 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 form 10-K, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements as well as our shareholder letter released today a re.

Play 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 some 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 other filings with the SEC.

Each of which will be posted on our website at IR Dot joined route Dot Com I will now turn the call over to Alex Tim routes co founder and CEO.

Thank you Christy and good morning, everyone and thank you for joining us on our second quarter call. Today I will provide a summary of our second quarter business results, then I'll turn the call over to Dan for a deeper dive into our second quarter financials.

Before touching on those topics I'm extremely excited to share further detail on our exclusive partnership with Carvana that we announced last night. Our partnership has deepened as the two companies have gotten to know each other and understand each other's businesses and shared values mutual respect them belt. As we are two companies focused on delivering the best customer experience through technology.

What form and after success with our initial partnership it made sense to find ways of accelerating this opportunity by expanding our relationship.

This industry first partnership goes beyond what any other carrier aggregator has done before empowering route to build a fully integrated insurance solution for Carvana customers is.

As a tech company with a full stack insurance carrier route is best positioned to deliver personalized findable quote embedded into the car ownership experience meeting customers, where they are at the point of sale creates a natural onboarding experience that is likely to result in meaningful uptake with an attractive customer profile and attractive acquisition costs.

Carvana is investment in the company underscores their commitment to the partnership while providing route with additional capital we are hard at work, bringing the new partnership with Carvana to life and will share our progress along the way now turning to the second quarter.

We continue to operate on the three key drivers I laid out at the beginning of the year.

First the powerful competitive advantages enabled by our investment in proprietary technology and telematics.

Second how these advantages uniquely position us to manage risk as we achieve scale and third how our season states will increasingly contribute to our management of the business deployment of capital and profitability.

A key mile step down was the release of our latest underwriting model UBI for pointing out.

This brings to market increase predictive power that allows us to give the best drivers rates stay there.

The enhancements to the model Leverages more than three times the data of our prior model, allowing us to better identify extreme risks and more accurately predict loss.

We now have UBI for quite a running in 16 states allow.

Allowing over half of our current customer quotes to utilize this model with continued rollout over the coming months.

The advantage of our technology is not just on display when a customer shops and binds with us to also apparent in our retention metrics.

Through scaling our datasets and improving pricing algorithms, we've been able to better segment our risks.

In an increasing retention among the best 25% of drivers while simultaneously decreasing the worst 25 per cent of drivers that renew this further validates that we're giving customers the policy and pricing commensurate with their rack com.

A concept that is central to our sense of fairness.

We continued down the path of National expansion, having launched our entry into Wisconsin during the second quarter we.

We were also able to accelerate our entrance into Washington State. Following the insurance commissioners ban on the use of credit score a biased we believe should be removed from rate setting altogether.

Through our data science capabilities, we were able to move from research to filing in less than two months and effort that takes most competitors in excess of a year.

Income at carriers in the state struggled to reflect the change we will be able to enter the disrupted market with a pricing model that reflects the elimination of credit score across all variables are flexible platform best positions route to win in a future where this bias is consistently eliminated nationally.

During the second quarter, our marketing environment proved to be a challenge across virtually all of our digital AD channels. We saw placement cost increased substantially which has since become a documented trend across the entire consumer product landscape. While we were in the process of ramping customer acquisition. The prices. We are seeing particularly later in the call.

Or simply got beyond our standards, and we began flattening or ramping spend down in certain channels to more acceptable levels.

Given the magnitude of the cost increase this quarter, we recognize the value and diversifying our customer acquisition channels through technology and data science building embedded insurance partnerships and expanding our independent agent product, we see enormous and largely untapped opportunity and creating bespoke insurance offerings for relevant consumer.

Verticals as we expand our network of partners.

As a tech company with a full stack insurance carrier that owns the into and consumer experience. We are in a unique position to offer a fully integrated digitally native experience.

Our exclusive partnership with Carvana is a significant step forward in demonstrating our value in this area and we look forward to sharing the progress we are making in this channel in the quarters ahead.

To extend our value proposition to more customers, we continue to build out our independent agency product.

A third of customers shop for insurance with an agent and this number has stayed steady over the past decade, even with the rise of direct channels.

We're leveraging our technology to create convenience and transparency for both agents and consumers and we'll share more on our work in this space in the coming quarters broadening our approach to customer acquisition channels is critical for us to manage your capital over the long term, we are conscious of bringing the right risks onto the book for the right cost.

And believe using our technology advantage to tap into these enormous opportunities positions us to more efficiently deploy your capital over the long term.

We believe we're on the path to truly unique opportunities within these channels and we can't wait to update you in coming quarters.

I'm thankful for the continued support of our investors our team and our customers with that I'll turn the call over to Dan.

Thanks, Alex and good morning, everyone.

The second quarter of 2021 reflected the environmental changes that the auto insurance industry experienced.

You will find our full GAAP financial results contained in the shareholder letter, we published yesterday evening, but we wanted to give a few of the key highlights.

On the topline we grew direct written premium 24% year over year to $177 million.

Our direct earned premium increased 19% year over year to $181 million.

Our direct earned premium from season states increased to 77% of total earned premiums.

Shifting to profitability direct accident period loss ratio was 88% for the second quarter.

22% increase year over year against Q2, 2020, when compared with a low loss environment in the previous year during the pandemic.

More importantly, we recorded a 23 point improvement from Q2.2019, demonstrating how significantly we've improved performance stripping away the impact of the pandemic.

This has been accomplished through the launch of new iteration of our proprietary UBI models and pricing algorithms further state seasoning and attention to bringing on the right risks at the right cost.

The year over year increase in the loss ratio was primarily driven by 16 points of severity and 11 points of frequency as inflationary pressures increase costs and miles driven rose to above pre pandemic levels in our book.

Direct contribution was a $4 million loss for the quarter.

The decline in direct contribution and related margin was driven primarily by direct loss ratio as I covered above.

The industry ourselves included faced headwinds this quarter, we continue to make progress on the business overall.

While uncertainty remains around the ongoing impact from loss cost inflation, we believe that the underwriting and planned rate actions, coupled with our ability to update our loss cost model frequently ease, allowing route to react quickly. Additionally.

Additionally, we believe the prior rate increases taken as we saw these trends emerging will continue to earn into the book.

As Alex detailed we are focusing on diversifying our distribution channels, particularly through our embedded insurance offering an independent agent product.

Our partnership with Carvana is the first significant step in unlocking the enormous and largely untapped opportunity that our technology platform brings to the partnership channel.

As a whole our actions this quarter set the stage for route to drive growth at attractive unit economics, and create long term value for our shareholders.

The actions we are taking on both the marketing and partnership fronts, not only better position the company for sustained growth, but open channels to more efficiently deploy your capital and strengthened our liquidity position over the long term.

I am also pleased to announce that we have successfully placed a multiyear quota share effective July one.

Reinsurer interest was strong with oversubscribed demand and the ability to renew at improved terms.

We remain excited about the strength of our reinsurance partners is a key component of our capital structure.

There is additional stability as all of our treaties are now placed on a multiyear basis.

I Echo Alex's excitement about our prospects with Carvana has an embedded insurance partnership.

Over time, we expect our relationship to drive a significant competitive advantage.

We are laser focused on efficiency and differentiation in our customer acquisition strategy.

We therefore expect to significantly reallocate and reduce our current marketing spend impacting near term growth, but positioning us for higher and more efficient growth into the future.

As a result, we are revising our topline and profitability guidance for 2021, we now expect direct written premium growth for Q3 in the low to mid single digits and a year over year decline in Q4.

So on a year over year basis, we expect direct earned premium and GAAP revenues to grow high single to low double digits in Q3, followed by a decline in Q4.

Looking ahead to 2022, we currently expect declines in topline measures as we lap periods of high growth and significantly higher marketing spend while we prioritize building out new channels at lower spend.

We expect direct contribution to be in a modest loss position in the near term as we make pricing adjustments to match the current industry environment.

We expect quarterly operating loss to stay elevated in Q3.2021, then materially decline in Q4.2021, as we focus on our most efficient marketing channels, resulting in a full year operating loss in line to slightly unfavorable to the high end of our initial outlook range of 555.

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Noteworthy is that our updated guidance does not include any impact from the exclusive partnership with Carvana that we announced today, we are excited about the opportunities before us.

So Alex as appreciation of your continued support.

With that we look forward to your questions.

Thank you we'll now begin the question and answer session. If you have a question then one on your Touchtone phone.

If you wish to be removed from the queue. Please press the pound or the asking.

If you're using a speakerphone you may need to pick up the handset first before pressing the numbers.

Once again, if you do have a question rather than one on your Touchtone phone.

And our first question is from Matt Koranda from M.

N P.

Hey, Thanks, good morning.

Dan I just wanted to.

Make sure I'm hearing you right on kind of the reasons behind the changes in the growth outlook and that they are kind of purely customer acquisition cost focused.

And that does not.

Related to kind of the near term pressures that have been on the loss ratio, but more just directly related to them.

What's happened with cost of marketing through performance channels.

Yeah.

Yes.

Good question. This is Alex and I'll, let Dan add more detail here.

For us what we saw with the spike in loss ratio quarter over quarter from the increase in inflation.

As well as the increase in cost and marketing channels and we just don't near term see that adds an efficient time to actually be deploying capital and we think it's much better longer term to deploy that capital when we actually.

When we have a better sense for where we want those loss ratios to be and when we have a better sense for for that marketing acquisition.

Dan would you add anything.

Yes, Thanks, and good morning, Matt Thanks for the question.

Look.

Echo what Alex said.

You should not think of this as a massive strategy shift. This is really a prudent use of capital given the current industry environment.

Having to do more with the marketing channels in the loss ratio both.

Across our marketing channels, where you see Matt is some things are working.

We're going to keep investing in those channels.

Some are not and what we're saying is we're either going to fix those or stopped utilizing those channels.

And then we have a couple of new things, we're thrilled about the partnership with Carvana. It's the first of.

What we hope will be multiple embedded partnerships embedded insurance partnerships.

And as well as some of the other new channels that we talked about and we feel like those channels combined with the current ones that are working well help us get right back on the growth trajectory at the right time.

Great and then just a follow up if I could.

I heard you talk a little bit about kind of you're working with agents I think left lane.

What I've seen it's kind of a name for it and there was some news I can't remember the announcement for you guys or just industry press about Europe.

Route ready during the quarter and kind of embedded tech within cars and some manufacturers can you tell us a little bit about what youre doing there and how we should think about that.

Absolutely. So route ready is a program that we've actually been working on for a few years and we're proud of where we've gotten it.

It really allows us to position the company much better for the future as vehicle technologies continue to improve and as vehicles become increasingly connected and effectively what we do is we are.

Can we have access to databases that are effectively when a consumer comes to our website or our app.

They provide some basic information we can actually see if they previously had a connected vehicle are currently have a connected vehicle in which we already have driving data and in that case, what we will do is we'll actually provide an immediate quote leveraging telematics data now.

Now, we still want to cell phone data because obviously from vehicle data you don't get texting and driving and other behavioral data. So we will still collect that data over the following six months after the consumer binds.

To incorporate that new data in on renewal, but this really allows us to basically provide an instant quote that has much more it's much more data informed than than otherwise.

Great. Thank you for the color.

Our next question from Elyse Greenspan from Wells Fargo.

Hi, Thanks, good morning.

My first question.

It's just building upon that last topic I mean, you guys mentioned.

By acquisition channels, and bringing on new partner relationships as well as building out your independent agent product can you just and you can give us a sense.

Ultimately like how big.

Some of these endeavors could be over time.

Yes.

Absolutely. So we think that there is going to be a fundamental shift towards embedded insurance, where it makes much more sense for the consumer and has much better consumer experience too.

Effectively while they're purchasing a vehicle to just have insurance included in that vehicle purchase it makes it much more seamless much less of a headache auto insurance is not necessarily a product consumers love shopping for and what we have found is that through our technology have you really built an insurance company from scratch over the line.

Five years that we have a very nimble and flexible tech stack that allows us to seamlessly integrate.

Really with a variety of partners and we think Carvana is.

Obviously, a major partner here with.

Gotten to know the company very well, we feel very culturally aligned with them and we think that there is lots of opportunity for them to continue to disrupt.

The space that they are playing in and so we think that that's meaningful.

In terms of independent agents.

They've weathered the direct.

Market shift very well they have really shown resilience over the last 10 years their market share has been relatively stable at about 30% and so we do know and we believe that there are many consumers and there will continue to be many consumers that prefer to go to an independent agent.

We also believe that those independent agents need better technology from carriers and that allows them to easily quote somebody so that youre not on the phone for 20 or 30 minutes with an agent just to get a simple auto insurance quote.

And we found that in our early testing and R&D that we can actually build much better seamless products for the agent. The agent enjoys and then also that allows the agent to get their consumers onto a mobile device and into a mobile setting.

So we've really found.

Is that our technology, there can extend to serve those customers too.

That's 30 plus percent of the market and it's a $270 billion market in total and so we think that.

Clearly is a very large opportunity and in terms of customer acquisition costs Theres, a few things I'd say, one I think all of these channels won't be nearly as exposed to some of the short term noise that we may be seeing right now in digital marketing channels.

And then two I think they will also be not only much more predictable, but we think there'll be very efficient and so we will be acquiring the right customer at the right price over the long term.

That's helpful. Do you have a sense of.

You can get with Carvana I recognize you guys just announced it but you'll have a sense of the Tam there over time as you guys agreed to enter into this relationship.

How much of an opportunity that could be for rate.

Okay.

Yes, we're really excited about it at least this is Dan for the reasons that Alex articulated. This is a transformational partnership for route and we believe for consumers.

Autos and auto insurance.

Alex mentioned, we are like minded companies, we both put digital first and the good news is we've gotten to know each other we've worked together now for a year and we've seen in the early days of our partnership the significant opportunity as far as the Tam I would point you to carvana disclosure of having a.

Proven model with some of their other embedded services for example, as they have disclosed about 80% of their customers choose to finance with them. They also offer a warranty and service embedded and we think as Alex has said.

<unk> today go to buy a car with batteries not included because they don't have the opportunity to purchase insurance at that point of sale and so the Tam here that we think we can unlock together with Carvana is massive.

At the same time.

We are.

Making sure that we invest in the right way with them to provide and build a product that can that works with consumers and we think that will ultimately lead to better economics as a more vertically integrated player and we restructured our agreement with Carvana to split those in a way that's fair.

We're not going to provide any more details at this time, we're going to hunker down get to work and build an incredible product for consumers.

That's great and then one last one you guys said.

It should be down next year right recognizing that there's been some stuff in growth to start 'twenty 'twenty. One is that like would you expect growth to be down in all four quarters or is it something where as you see things today, perhaps.

Given these dynamics are going to impact the second half of this year that you would return to top line growth.

In the second half of 2022.

Yes. Good question at least we've and the guidance that we've put forward we've alluded to the first half of the year for the reason that you suggested we think that we are going to be disciplined in our marketing spend.

Especially at the tail end of this year and into early next year and you're exactly right. As you look at lapping the first and second quarter of this year.

Going to make sure that we're focusing our resources on investing in the new channels that Alex talked about as well as some of the existing marketing channels that are working and our guide is that that's not going to keep us on the same growth trajectory as we conserve our marketing spend and focus it on the channels that are.

Working so that is the plan as we move forward and then as we build out those new channels.

We will be excited to come back and talk to the market about the growth opportunities that we see beyond.

Okay. Thanks for the color.

Our next question is from Europe.

From Cantor Fitzgerald.

Hi, Good morning. Thanks for taking my question can you describe the actual experience carvana customer wilhide regarding rate when the process are they presented with the quote and will they receive any telematic adjusted rate after a certain amount of time.

Right now we really are in the early stage of developing the.

The product and embedding the product and the experience, but we will make it very seamless for consumers and we're going to test along the way and we think we're going to learn a lot in terms of telematics will be integrated.

With the Carbone App and we do expect that we will be actually even closer to the vehicle through this partnership and even closer to some of the new sources of telematics data.

At this time, so we're we'll be excited to share as we.

Develop the product into the future with all of you.

Great. That's helpful. And then speaking on partnerships can you speak a little bit about the pipeline of additional partnerships right. Now do you expect the future partnerships to kind of look like this exclusive deal with carvana or maybe more like some of your prior partnerships.

Uh huh.

I think really where we are as we've had partnerships in place for quite a while.

Both.

In the auto space, but then even more broadly in financial it with other financial service companies and we do think that intercepting consumers in times that makes sense to them is really important and we have seen in various degrees of success with partners. We've tested out lots of partners some that work really well and some that don't.

And what we want to do going forward is really focus and double down on those partners, where we think the product makes the best sense for consumers and so we see it as we have a very healthy pipeline and.

And we want to make sure that we're focused on right now we think that the focus really is on the Carvana partnership because that's really where we see one as Dan alluded to the most aligned team in terms of technology in terms of culture, and really intimately getting to know one another.

But also in terms of the ability to really create a differentiated consumer experience.

And the only thing I would just briefly add is not only from our perspective does it create a differentiated consumer experience, but it does so with a really attractive customer demographic for us. These are not consumers, who are going on Google or vertical search to buy car insurance. These are meeting consumer.

At the point of sale.

And we believe that that will have not only a more efficient customer acquisition cost for us compared to our performance channels, but also frankly a longer retaining customer.

Bye bye, having met them at the point of sale. So we're really excited and I Echo what Alex said I think we cannot overestimate the the real.

Bond that the teams have had between route and Carvana really focused on creating the ultimate consumer experience and we're very excited about what's to come.

Got it that's very helpful. Thank you very much.

Our next question is from Nick Jones from Citi.

Great. Thanks for taking my questions I guess one.

Carvana.

Can you maybe describe the nature of the agreement or the exclusivity.

And does this mean carvana can only offer route or are you kind of an exclusive technology partner that over time, they can embed other.

Auto insurers into the platform, but just maybe a little clarity there and then.

Can you remind us how many drivers or maybe swapping out used cars are just changing cars also.

Consider changing auto insurance during.

Those transactions.

I can take the first question Nick.

Then turn it over to Alex.

The exclusivity and the partnership is something we're really excited about we are going to build really the first vertically integrated embedded insurance product exclusively for carvana and working with them on an exclusive basis now we recognize that there are some states where.

We are not yet writing business.

And there are perhaps other aspects, where the right thing for the consumer as to your point to broker in another insurance carrier or what have you and the north star for US here is to do the right thing for the consumer but this is really an exclusive partnership where we are going to be investing a lot of time.

And energy and people resources.

In order to build out that really differentiated embedded insurance product partnering.

Partnering with Carvana Alex.

Yes in terms of consumer consumer shopping behavior. This is one of the unique moments of truth. So this is when consumers do change vehicles as.

As you would expect we typically see.

Wanted to change in price to their current insurance and that does tend to trigger.

Shopping moments and so we think.

If you can get in front of the consumer at this moment. This is easily within the top three or four sort of triggers.

For shopping in insurance that's out there so it's very big and I'll also say even in.

<unk> terms and in these moments you also get access as Dan was referring to to consumers that may not otherwise shops or insurance.

Because they are not necessarily going to Google and Google in auto insurance to his job.

Frequently or maybe ever and so it also gets us access to consumers that we may not otherwise see through more traditional marketing funnels.

Great. Thank you.

Our next question is from <unk> <unk> from Barclays.

Good morning, you mentioned that miles driven is rising above pre pandemic levels peer buck, but we're hearing from other either auto insurers that miles driven is approaching pre pandemic levels is there something unique to your book that we should consider or is there a data set youre using that could help.

It's different.

Good morning. This is Frank I can take that one.

I've got two.

It's on that first as I look across the industry and have seen what other other folks are reporting there are some general telematics and traffic data that besides just route that have said that we are at pre pandemic levels or higher.

And then we might also be looking at we're looking at very granular data on our customers and being able to see in real time.

Where those models are going and so it's not clear that all of the reports that you might be reading that they are actually looking at like real time in the last month or two versus looking at like miles driven compared to the pandemic over the last six months or in the quarter. One. So we feel that we actually have really early warning sign.

And can really more quickly and granularly see what's going on and it also varies by state. So we can actually tell in certain states, where the miles are up versus other states and so we believe that we've got very granular insights into how that.

That driving happened.

Okay. That's really helpful. And then in response this loss trend how would you describe the magnitude of rate increases you may need to get closer to your long term loss ratio targets.

Swiftly do you think you could get through the approval process.

Sure few.

A few things on that first I would say that we had seen some signs of increasing trend before the second quarter and so we have had.

Differentiated maybe in the industry rate increases in the first quarter and second quarter.

Not necessarily as large as what we think we need now, but we've kind of been flowing right into our book all year.

Well, we think faster and sooner than what some of the industry has been seeing as we look out over the next six months I think that we will end up being able to do.

More rate increases than what most of the competitors will be able to do some of that is just again because of our real time looking in the fact that we've been able to see the sooner allows us to start that filing process earlier, maybe than some of the industry.

Okay, maybe just a quick follow up on that I mean, I think you're right.

Couple of quarters, you had filed some rate increases without limit your ability for more on a regulatory standpoint.

Others are trying to do that for the first time.

So so theres going to be so first as we filed that Theres. Some states. We haven't filed any at all and we will be first into those states, probably with with filed rate increases compared to competitors in states that we took rate increases in the first quarter. Most of those are many of those states are ones, where you don't have to get regulatory approval.

File or us and so we think that will be and given the fact that we took smaller rate increases in first and second quarter as we're coming back in in the third and fourth quarter. We will also be then looking for smaller rate increases than if we had had a bunch it up the way our competitors do so it's much easier to get say two fours than an eight approved in a particular state.

Okay very helpful. Thank you.

Our next question is from Mark Hughes from through it.

Yeah.

Yes, Thank you and good morning, I'm curious on the.

Severity and frequency how much of that do you think is the.

Broader inflation Spike certainly used cars you mentioned in your release the pricing has been up dramatically but.

Some of those factors may be temporary or maybe not.

I'm just curious how you see these losses how much of it.

Didn't do or how much might be transitory.

Sure.

So so so first.

We've only had.

Say, one quarter's worth of data, where we've really seen the spike up so trying to figure out those trends are still are still opaque I'd say, we don't really have a clear view are we seeing a bubble that is going to come down.

On the miles driven when you look at other countries say, China, we did see China had a big spike right after their pandemic kind of slowed down.

People move from public transportation to regular transportation or to driving and then it came back down a little bit on the miles driven as some as people move back the transportation, but hasnt yet come back down to <unk>.

<unk> levels, so that we could see a bubble on the severity side and talked about used car prices. We talked to you can talk you can see general inflation throughout the U S economy, I don't see that dropping back down in the next 12 months to two zero trend levels.

So I see the severity is part of it probably more of a 12 to 18 months sustained increase.

But again, we've only got three months to six months worth of data. So the trends are pretty pretty hard to tell there.

Yeah.

Then on the reinsurance.

Renewed.

Multiyear agreement anything you could tell us around the economics.

Yes.

Is the model similar to what you had discussed in earlier period I think there is both the.

Element of that where the loss sharing mix shifted over time.

Any updates there on the new agreement.

Thanks Mark.

All positive on the reinsurance front as we've talked about before we manage the business on a direct basis and then Alex.

<unk>.

And maybe to manage the balance sheet in the appropriate way and we're really pleased with the renewal of the 71 Treaty is a similar cohort based multiyear treaty to what we've been doing oversubscribed improved financial terms.

We're very pleased with not only the terms and the size, but the partners who continued.

And increased.

As well there are allocations.

We can we can talk more about that in the weeks and months ahead, but not nothing to see here all positive all consistent with the model all moving forward.

Thank you.

Our next question is from Josh Shanker from Bank of America.

Yeah. Thank you I wanted to follow up on that reinsurance question in a quarter like card to Q 'twenty, one where your direct loss ratio plus AOI is 100%.

What are the economics of a quarter like that to the reinsurers are they taking also a loss ratio of 100% and they're paying you a ceding commission and they have their own expenses can you sort of talking about how their economics work in the contract.

Yes.

Thing that we considered as as we.

Approach, obviously the disc.

Discussions with the different different reinsurers and Josh.

Really pleased with the reinsurers took a long term view and saw the improvements that are happening.

And in our loss ratio through the use of our differentiated technology and.

And some of the work that Frank is doing on segmentation and state management, that's showing up in the in the actuarial results. So they are committed for the long term through these cohort base treaties. The structure is the same as we've talked about in the past we get paid a ceding commission upfront for securing the business and then we pay the reinsurers a margin over time.

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And.

They ultimately.

Focus on the fact that on in a cohort base treaty.

They are benefiting from the lifetime value of the customers. So they're not so much focused on this month's results or that that next month's results. It really is a long term approach looking at the trend of our losses, the improvements that Frank and his team are making as.

As well as the overall personal auto sector and.

Reinsurers as you all know Josh want diversification in their risk book and they are pleased to continue renewing with us and I was not only pleased with the fact that we were oversubscribed in the treaty.

But again.

The terms are improving as well.

And on your growth guidance I know you don't want to talk about the carvana product still in development and whatnot.

And so the timing may not be clear, but the the growth guidance.

Any.

Possible benefit from the Carvana relationship doesn't include some carvana in it.

Should I think about your outlook for growth and that deal.

It does not include Carvana and it.

It does not include any carvana.

And our timing.

And then the timing when we could see some contribution youre not prepared to say just yet.

We've talked about that with our partners at Carvana and our message is we're getting in and starting to work.

The teams the product teams Josh are tremendously excited by some of the opportunities that are in the works.

And stay tuned we're not prepared to give a specific timeline.

But again these are two teams.

That move very fast.

That are used to that.

<unk>.

Native approaches.

So I would say stay tuned and we'll come back to the market together when we have more to talk about.

Thank you for the answers.

Our next question is from Bill.

Which bank.

Yes, thanks, and good morning, congrats on the.

On the partnership.

I feel like there's been a number of questions around the strategy. So maybe just a quick housekeeping item on that and I apologize if I missed it was there a coupon or a rate that was mentioned on the preferreds or is there a way you could help us to think about that.

Yes, we filed our 8-K this morning, Phil with all of the details there is no coupon on the convertible preferred.

Okay perfect. Thank you.

In the shareholder letter on the UBI for pointed out section you noted that there is.

I believe that it will help in the identification of new segments for expansion and I was hoping you could just.

Flush this out a little more I mean is that.

Is that a roundabout way of saying the independent agent markets or is there.

Current.

New segments.

Just to point us to when you talk about this.

Yeah, Hi, Thanks for the question this is Matt.

So thats referring to something.

Something we're really excited about with UBI four point out which is the ability to score drivers with far less data. So historically, we've been very conservative in the criteria, we set to make a user eligible to be score. We wanted to ensure that we had enough data to create a high fidelity score.

Now that we've collected a tremendous amount of trip data and lawsuit over time, we've been able to fine tune, our telematics risk score so basically do more with less so there was a.

Reasonably large population of drivers.

Who don't drive very much who we werent unable to score because of the conservative eligibility rules and now we're able to confidently score them with a predictive score and really open up.

That quoted population to getting fair rates through our telematics score.

And is there a is there a way to think about how this will be evident and many.

More people coming into the funnel is it better conversion through the funnel.

How do we think about it.

As theres more iterations of the Uba technology.

How do I think about the right metric to judge the success of them.

Yeah. So in the shareholder letter you will look at the good driver proportion over time, we will see a dramatic increase over time, because we're able to provide segmentation August bucket that we were unable to provide segmentation on before or said another way. There is a large proportion of good drivers that.

We were not segmenting before UBI for pointed out and now we're able to provide them adequate rates that reflect their driving experience.

Okay.

Got it thank you.

And our next question is from David Mont Maiden from Evercore ISI.

Hi, good morning.

I guess just.

Yes.

Feels like a big a big strategy shift here.

Just just from the distribution side.

And I guess.

I just wanted to understand.

Sort of the mix of your of your business and your path and how much of it comes from each channel whether it be performance marketing direct.

<unk> ship.

Is there any way you can give us a sense for how big of a shift in your book of business. This will be.

Yes.

We really do not view this as a strategy shift we have been working on our embedded insurance product for actually over four years and have been experimenting with various partners and we've been working with Carvana over the last year and they really got to know us and our company intimately we got.

No each other on a cultural level intimately as well.

And I think Thats really where we started to see a potential for the acceleration of our strategy and with independent agents and agents is always something we wanted to eventually.

We've always believed that we can through our technology and through telematics provide.

A disproportionate value proposition to customers that are coming through that channel as well and that said, we also still really believe in our direct model, we will grow with our direct model when it makes sense to grow and our direct model and we won't when it doesn't and that way. We believe we're going to create the best long term shareholder.

<unk>.

When we look over the long term, we do believe that our marketing channels. We will continue to invest in the marketing channels that are the most deficient in the distribution channels that are the most efficient and we would expect there to be a large shift of volume to these new channels that are emerging and we truly do believe that the future.

Auto insurance looks much different than what it does today.

And we think that it will work better for consumers through partnerships like Carvana and the embedded platform Dan would you add anything.

No I think thats right.

As we move forward, you're going to find that some of these channels are accretive really multifaceted ways and I would echo what Alex said this is not a massive strategy shift for US. This is about investing capital in the channels that are working and doing the right thing for shareholder value over the long term.

<unk> and where we see channels that are not working at a time where.

You can see it in Google and Facebook to earnings you can see it and what other carriers are doing in terms of vertical search.

And some of the different channel.

Channels out there it doesn't make sense to invest that capital and we think our investors would prefer that we'd be prudent stewards of that capital and focus on building out the new channels that were tremendously excited about.

This partnership with Carvana.

It's really transformational for us we think it's groundbreaking we think it's going to change the way that consumers buy cars and buy their car insurance.

So it's important for us to prioritize that based upon what we've learned in partnership with them over the last year. So this is only the beginning and we're excited to move forward and really build out that shareholder value for the long term.

Understood.

That's helpful. And then I guess just wanted to just shift to.

The debt and capital position.

I guess could you just I believe there is some debt that's maturing in October could you just remind me of your plans.

For that and then also do you have.

An update just on the capital levels.

In the Ohio subsidiary in the Cayman captive.

And I guess your plans for the proceeds from the investment from Carvana are those I guess are those going to be injected into either one of those.

Of those subsidiaries.

To support capital levels there.

Yes, David Thanks for the questions on the first question, we do have a $100 million.

Funded term loan with a group of eight banks maturing in October we are in discussions right now with those banks and we will come back to the market as we have a further update.

As far as the capital levels. Overall, there are two aspects that are important here. One is obviously the investment from the Carvana partnership.

It is important to us on several levels.

<unk> enabler that really solidifies our already strong financial position and then gives us the flexibility to take full advantage of the opportunity in front of US and then second we're noting throughout our shareholder letter and on the call today that we are going to drive a material reduction in our marketing.

Spend in the coming quarters.

That we are going to focus on long term shareholder value and when you combine those two things the reduction in our marketing spend and the investment from the carve out a partnership that will meaningfully extend our capital runway expectations.

As we have more on the debt front reinsurance front or what have you, we'll come back and talk to the market, but we sit here outside of the insurance entities as of June 30th with $825 million of unencumbered capital and.

And we feel like we're in a good position when you add that to the Carvana proceeds from their investment.

And then coupled with the reduction in our marketing spend going forward. We're in good position for years to come.

Yeah.

Great. Thank you.

Our next question is from Gary Ransom from Dowling and partners.

Yes. Good morning, most of my questions have been answered, but I wanted to understand what you were doing with Carvana. Before this deal. You said you had been working with them was there were there were some sales through the partnership was it just more rudimentary type of.

Technology could you help us out with what you were doing before versus what you've talked about for the future.

Absolutely before we're really just displaying route to a subset of customers small subset of customers that were coming through.

The carvana.

Experience.

And it also would not an embedded experience it was really just testing to see.

What does take rates could be and how interested consumers may be in the product.

Thank you and one other question on retention just overall I know you talked about retention being better for the better drivers, but even within those better drivers has there been any change as the frequency has come back and driving has come back.

Any.

Anything youre seeing there that might be helpful for the outlook.

Yes.

Yes, we look historically in compare to seasonal trends receipt of this year's seasonal trends.

As it pertains to retention mimics the pre covid seasonal trend. So the trend is looking the same throughout the year we have.

Implemented product changes that have shown through rigorous experimentation improvements to our retention and so while the trend is the same we have seen some shifts in those carriers as those changes get implemented on top of our entire customer base. We expect to continue to see improvements to those numbers.

Okay.

Alright. Thank you very much that's all I have.

Our next question is from Ryan Tunis from autonomous.

Hey, Thanks, Good morning, first question on distribution and Carvana.

A couple of pieces to it first as you work with independent agents <unk> Carvana are you more willing to move away from.

Kind of the core telematics drive throughs type type offering.

And then also with Carvana.

How does the underwriting work with that I would think that carvana would be holding you to some kind of a mandatory acceptance rate.

So what's your flexibility and your ability to get the pricing to get the mix right.

Writing with Carvana.

Really our.

Our underwriting our telematics will be deployed.

Really in full force.

Carvana platform as well and we actually see it as an opportunity to extend our advantage as we get closer to vehicles, which we can then supplement the cell phone data.

From whether it's a car mountain readout.

Yes.

Vehicle data and data directly off of the vehicle.

In addition, there is no mandatory acceptance ratios that we have crafted with Carvana, we will do what's right for the consumer and every.

<unk> and make sure that we can address as many consumers as possible and make sure that consumers have a really great experience across 100% of their funnel, but that may or may not mean that those consumers are going to be underwritten directly by a reinsurance entity.

Got it and then maybe for Dan.

The pullback in marketing spend.

Would have thought would've maybe benefited the P&L a little bit in the back half of the year the guidance still implies.

The low end of your.

Your previous guidance, so I'm wondering.

Rob.

Why is there not more of a benefit there or is it that advertising will still be relatively elevated or.

Is there something else is it an expectation.

Your loss ratio or more tech investments just some color on.

And why you don't expect the quarterly net income run rate to improve materially.

Yes, Thanks, Ryan, it's a combination of losses, which Frank talked about and we obviously talked about in the shareholder letter and then just the fact that we're sitting here already midway through Q3, and a lot of the marketing spend obviously July is in the past.

And some of the marketing spend is already committed.

As we look forward so as we.

Assessed our channels and really decided to make a move to focus on.

Making sure our capital is being invested in the channels that are working and turning off the ones that are not just takes a little bit of transition time to do that so I think you'll really start to see the impact of that show up in Q4.

And so that impacts the operating income guide for the year.

Thank you.

And our next question is from Christopher Martin from CDW.

Hey, guys. Thanks for taking my call.

A follow up.

From the last few quick question does but taking it all in.

Like the coupling of moving to an independent agent distribution channel and then also looking at the embedded in.

Insurance channels.

With all the work you've done to build your technology and your brand differentiation.

How does that kind of fit with <unk>.

Those types of growth for the future, where it's still hey, here's what route really stand score, but you're no longer really owning the customer in the same way and shifting towards more of a GAAP balance sheet and claims organization as opposed to getting this from route as opposed to them getting us for my age I'm getting this through Carvana.

If you had any thoughts.

Around that for the future growth potential and like the economics of it.

Absolutely.

We do feel that test, particularly Leverages, our engineering and data science work in really is an extension of our value proposition and so being able to power seamless great experiences for consumers, whether or not they may see the root brand or see at Carvana brand.

We think it's still leveraging our core competencies that we've always been about which is engineering data science and consumer experience and everywhere, we see the opportunity to build what is best for the consumer.

We'll do that.

We do not believe that that necessarily preclude us from building a really strong brand, we think there's lots of <unk>.

Tech companies out there that embed their software.

They'll have very strong brands and so we do not believe that that moves us away from what we are all about particularly because what we'd be we're all about is quite frankly, just building a better business through technology for the consumers.

We think we can do that also through the independent agent channel as we see lots of technology gaps that exist in the independent agency offerings and by the way telematics gaps as well.

Take rates on telematics and independent agency.

Historically very very low we believe we can change that and we think that that's really meaningful for consumers to provide large hosted those consumers with better.

<unk> at better prices and that's what we're going to continue to do and we're going to continue to invest in that we still again believe in our direct channel and we will grow that when it makes sense, but we're going to be nimble and we're going to build a diversified set of really demand generation platforms and thats going to include.

The embedded insurance platform and the independent insurance platform independent agents.

Gotcha that makes sense. Thanks.

That was my only question for now thanks.

Thank you.

Our next question from Greg <unk> from Barclays.

Well. Thank you for taking my next question.

<unk> been pretty agile repricing at that 30 day, Mark when you're driving I can go through that rehearsal period and as you enter more affinity relationships like carvana.

You have that same ability to be just as agile so where I'm getting at is that you have a good thought process behind your churn rate to get to your desired customer match rate adequacy, but when an infinity partner be okay with higher churn.

And this is.

This is Alex.

Really we view our telematics as you as you said, it's a way where we can clean up our book and what that means for some customers is that they take the test drive before they ever are insured with us.

And they go through because they wanted to see what rate they might be able to get with other folks we might see that they want a 30 day test driver to matts earlier points on being able.

On being able to price people, even earlier it could mean, even earlier than that and so really we view our telematics platform is something that is very flexible and extensible and so.

What we're doing is we are building customized solutions with some of these affiliate partners that can work for their customer set while allowing us to still leverage that data and the best possible way.

And over time, but we believe that will do is build the best consumer experience isn't the most data informed way.

Okay, So what you're saying you'll be nuance for some of these relationships.

Absolutely.

Okay, great. Thank you.

And thank you ladies and gentlemen that concludes today's call. Thank you for participating and you may now disconnect.

Thank you everyone.

[music].

Welcome to the route incorporated second quarter 2021 earnings Conference call. My name is John and I'll be your operator is fortunate.

All participants are in a listen only mode. Later, we will conduct a question and answer questions. During the question and answers that you do have a question. Please press Star then one on your touch tone phone now and I will turn the call over to Christine Patrick Christine May begin.

During the question and answer portion of the call. Our presenters will be joined by mouth been okta poor Chief data Science, and analytics Officer, and Frank Palmer Chief Insurance Officer.

Last evening route issued a shareholder letter announcing its financial results.

This call will reflect items discussed within that document for more complete information about our financial performance. We also encourage you to read our 10-Q as well as our 2020 form 10-K 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 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.

We're 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.

Each of which will be posted on our website at IR Dot join road Dot Com I will now turn the call over to Alex Tim routes co founder and CEO.

Before touching on those topics I am extremely excited to share further detail on our exclusive partnership with Carvana that we announced last night.

Our partnership has deepened as the two companies have gotten to know each other and understand each other's businesses and shared values mutual respect has been belt. As we are two companies focused on delivering the best customer experience through technology platform and after success with our initial partnership it made sense to find ways of accelerating this opportunity by expanding our.

Chip.

This industry first partnership goes beyond what any other carrier aggregator has done before empowering route to build a fully integrated insurance solution for carvana customers.

As a tech company with a full stack insurance carrier route is best positioned to deliver personalized findable quote embedded into the car ownership experience.

Customers, where they are at the point of sale creates a natural onboarding experience that is likely to result in meaningful uptake with an attractive customer profile at an attractive acquisition costs.

Carvana is investment of the company underscores their commitment to the partnership while providing route with additional capital we are hard at work, bringing the new partnership with Carvana to life and will share our progress along the way now turning to the second quarter.

We continue to operate on the three key drivers I laid out at the beginning of the year.

First the powerful competitive advantages enabled by our investment in proprietary technology and telematics.

Second how these advantages uniquely position us to manage risk as we achieve scale.

And third how our season states will increasingly contribute to our management of the business deployment of capital and profitability.

A key miles stepped down was the release of our latest underwriting model you'd be I four point out.

This brings to market increase predictive power that allows us to give the best drivers rates stay there.

The enhancements to the model Leverages more than three times the data of our prior model, allowing us to better identify extreme risks and more accurately predict loss.

We now have in UBI for quite a running in 16 states.

Oh I went over half of our current customer quotes to utilize this model with continued rollout over the coming months.

The advantage of our technology is not just on display when a customer shops and buys with us to also apparent in our retention metrics.

Through scaling our datasets and improving pricing algorithms, we've been able to better segment, our risks, resulting in increasing retention among the best 25% of drivers while simultaneously decreasing the worst 25% of drivers that renew this further validates that we're giving customers the policy in price.

Commensurate with their risk a concept that is central to our sense of fairness.

We continued down the path of National expansion, having launched our entry into Wisconsin during the second quarter.

We were also able to accelerate our entrance into Washington State. Following the insurance commissioners ban on the use of credit score a bias, we believe should be removed from rate setting altogether.

Through our data science capabilities, we were able to move from research to filing in less than two months and effort that takes most competitors in excess of a year.

Income and carriers in the state struggled to reflect the change we will be able to enter the disrupted market with a pricing model that reflects the elimination of credit score across all variables.

Our flexible platform best positions route to win in a future where this bias is consistently eliminated nationally.

Order simply got beyond our standards, and we began flattening or ramping spend down in certain channels to more acceptable levels.

Given the magnitude of the cost increase this quarter, we recognized the value in diversifying our customer acquisition channels through technology and data science building embedded insurance partnerships and expanding our independent agent product, we see enormous and largely untapped opportunity and creating bespoke insurance offerings for relevant consume.

Or verticals as we expand our network of partners.

As a tech company with a full stack insurance carrier that owns the into and consumer experience. We are in the unique position to offer a fully integrated digitally native experience.

To extend our value proposition to more customers, we continue to build out our independent agency product.

A third of customers shop for insurance with an agent and this number has stayed steady over the past decade, even with the rise of direct channels. We are leveraging our technology to create convenience and transparency for both agents and consumers and we'll share more on our work in this space in the coming quarters broadening our approach to customer acquisition.

And channels is critical for us to manage your capital over the long term, we are conscious of bringing the right risks onto the book for the right cost and believe using our technology advantage to tap into these enormous opportunities positions us to more efficiently deploy your capital over the long term.

We believe we're on the path to truly unique opportunities within these channels and we can't wait to update you in coming quarters.

I'm thankful for the continued support of our investors our team and our customers with that I'll turn the call over to Dan.

Thanks, Alex and good morning, everyone.

The second quarter of 2021 reflected the environmental changes that the auto insurance industry experienced.

You will find our full GAAP financial results contained in the shareholder letter, we published yesterday evening, but we wanted to give a few of the key highlights.

On the top line, we grew direct written premium of 24% year over year to $177 million.

Our direct earned premium increased 19% year over year to $181 million.

Our direct earned premium from season states increased to 77% of total earned premiums.

Shifting to profitability direct accident period loss ratio was 88% for the second quarter.

A 22% increase year over year against Q2, 2020, when compared with a low loss environment in the previous year during the pandemic.

More importantly, we recorded a 23 point improvement from Q2.2019, demonstrating how significantly we've improved performance stripping away the impact of the pandemic.

This has been accomplished through the launch of new iterations of our proprietary UBI models and pricing algorithms further state seasoning and attention to bringing on the right risks at the right cost.

The year over year increase in the loss ratio was primarily driven by 16 points of severity and 11 points of frequency as inflationary pressures increased costs and miles driven rose to above pre pandemic levels in our book.

Direct contribution was a $4 million loss for the quarter.

The decline in direct contribution and related margin was driven primarily by direct loss ratio as I covered above while the industry ourselves included faced headwinds this quarter, we continue to make progress on the business overall.

While uncertainty remains around the ongoing impact from loss cost inflation.

We believe that the underwriting and planned rate actions, coupled with our ability to update our loss cost model frequently is allowing route to react quickly.