Q3 2021 Root Inc Earnings Call
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Okay.
Good day and thank you for standing by welcome to the REIT third quarter 2021 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Christine Patrick Vice President of Investor Relations. Please go ahead.
Okay.
Good morning, and thank you for joining US today route is hosting this call to discuss its third quarter 'twenty 'twenty. One earnings results participating on today's call are Alex Tim Co founder and Chief Executive Officer, and Dan Rosenthal, Chief Operating Officer, Chief revenue Officer, and Chief Financial Officer.
During the question and answer portion of this call our presenters will be joined by Matt, but not to Port Chief data Science, and analytics Officer, and Frank Palmer Chief Insurance Officer.
Last evening REIT 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 'twenty 'twenty 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 for.
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 in.
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 last evening.
A replay of this conference call will be available on our website under the Investor Relations section I would like to also remind you that during the call. We are discussing some non-GAAP measures in talking about routes performance you can find the reconciliation of those historic measures to the nearest comparable GAAP measures in our shareholder letter released last evening in our filings with the SEC each of which.
<unk> will be posted on our website at IR dot join route dotcom.
I will now turn the call over to Alex Tim roots founder and CEO.
Thank you Christine good morning, everyone and thank you for joining us on our third quarter call. During the quarter. We made progress on many of our key initiatives and deepened our founding commitment to building World class technology that addresses the long standing inefficiencies and unfairness in the auto insurance industry.
We're seeing the movement toward fairness grow as evidenced by some of the largest incumbents following our leading questioning the use of credit scores and pricing. We're excited to be leading this charge in the industry and bringing others along with us.
This quarter, we placed the chief revenue and Chief operating officer responsibilities under Dan Rosenthal.
In his new role Dan oversees three critical areas of route marketing insurance and business growth development.
This gives him the ability to drive profitable top line growth and streamline operations with Dan history of entrepreneurial success I think he is the perfect person to lead this charge for our organization.
I'd now like to walk you through highlights of the third quarter.
We made progress toward diversifying our distribution channels and initiative, we detailed on last quarter's call rich technology enables us to offer a quote in under a minute providing meaningful opportunities to build differentiated access to customers and broaden our distribution.
By embedding our product offering and moments that meet consumers when they need us most opens up a sizeable and largely untapped opportunity in adjacent industries. This also creates a vastly superior customer experience.
To bring this to life, we focused on building an embedded product that powers, our exclusive partnership with Carvana since announcing our partnership in mid August Cross functional route and Carvana teams have been hard at work developing a fully integrated point of sale offering.
We are currently testing the first iteration in 12 states.
Early signs are positive and we look forward to providing additional detail on results in the months ahead, we have made investments to bring the speed and ease of use powered by our technology to the independent agency channel, giving us access to a larger demographic of consumers.
We have developed a quote and buying process that takes a fraction of the time required compared to other carriers platforms.
Increases productivity for our agency partners.
Currently testing this product in five states with largely positive feedback to date.
Investing in the diversification of our distribution channels, we have significantly dialed back our spend in performance marketing, reducing sales and marketing spend by 40%.
This move has greatly reduced our customer acquisition costs, which can be seen in our $45 million improvement to our operating loss compared to the second quarter of this year.
This is a prudent use of capital, particularly given the current inflationary loss environment, we find ourselves in.
We believe the diversified channel approach will enable us to further lower customer acquisition costs.
Attract customers with higher lifetime values and provide additional levers to deliver strong profitable top line growth.
We have substantially improved our pricing and underwriting models. We continued the rollout of UBI four point out our latest and greatest telematics model Amick model for 0.1, our national pricing model UBI four point out is currently active in 20 of our 31 states, representing roughly 70% of our addressable market.
This model enables a precise telematics quote improves overall segmentation and does more with less data since the rollout of this model we have been able to extend quotes to an additional 10% of users. We are also in the process of rolling out make model 4.1, which leverages routes growing dataset to expand modeled coverages.
Improved segmentation and better predict the lifetime value of a customer as I stated previously by growing the dataset, we can accelerate the momentum of our flywheel as our pricing algorithms improve we bring down the cost of insurance for good drivers, which allows us to attract and retain a more profitable mix of business and.
To the segmentation improvements driven by Malo enhancements, we're also tightening our underwriting by refining contracts and endorsements and leaning on our state management group to unlock state level efficiencies, we will see the results of these improvements in the quarters to come.
The actions we've taken this quarter demonstrate our awareness of deploying your capital thoughtfully and balancing growth and profitability. We still have work to do but we know what we need to do to positively impact our bottom line.
This is an ongoing process and we will continue to find ways to drive toward profitability.
I'm thankful for the continued support and trust of our customers team members and investors with that I'll turn the call over to Dan.
Thanks, Alex our results for the third quarter of 2021 reflected a decrease in our marketing spend and continued pressure from the loss environment Youll.
You'll 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 gross written premium of 24% year over year to $205 million.
Our gross earned premium increased 23% year over year to $189 million.
Our gross earned premium from season states increased to 76% of total earned premiums.
The top line outperformance was driven by the tail effect from performance marketing dollars previously committed.
Overall for the quarter sales and marketing expense declined 40% as we took action to reduce cash burn, especially in the face of the surge in performance marketing costs in the current inflationary environment.
We continue to expect gross written premium to reflect year over year declines in the fourth quarter and first half of 2022 as we take active steps to reposition our marketing investments pursuing more cost efficient distribution channels and otherwise reduce our customer acquisition costs and operating loss.
Shifting to profitability gross accident period loss ratio was 91% for the third quarter, a 12 point increase year over year against Q3, 2020, when compared with the low loss environment last year.
More importantly, we recorded a nine point improvement from Q3 2019, demonstrating improved performance when stripping away the impact of the pandemic, which was partially offset by the current loss cost environment.
The year over year increase in the loss ratio was primarily driven by eight points of severity and nine points of frequency as inflationary pressures increased cost and miles driven remain above pre pandemic levels in our book.
Leveraging our technology reading engine and data architecture has allowed us to respond faster than industry norms with 13 rate increases taken during the third quarter and more planned in the coming months.
Direct contribution was a $10 million loss for the quarter.
The decline in direct contribution and related margin was driven primarily by direct loss ratio as I covered above.
Operating loss was $127 million, a $45 million improvement when compared with the second quarter driven by the aforementioned reduction in performance marketing spend following quarter close we repaid both our term loan a and term loan B, we have signed an exclusive term sheet with black.
Rock Financial Management, Inc. On behalf of funds and accounts under its management.
To put in place a larger term loan facility with a longer maturity than our previous structure.
We expect to work in good faith with Blackrock to close the facility before year end subject to negotiation and documentation of final terms and the terms and conditions contained in the definitive documentation.
Turning to our outlook, we remain on the path, we laid out last quarter.
We have rained in customer acquisition costs in an inflationary environment and are actively laying the foundation for profitable growth.
The work we're doing around cost management is a critical step forward to create the flexibility necessary to invest in and grow our business over the long term.
These actions have also given us a more optimistic view of full year operating income.
We now expect to close the year on the favorable side of the midpoint of our original guidance of a loss of $555 million to $505 million.
I would like to Echo Alex's statement that we have taken a handful of actions that demonstrate our thoughtfulness around deploying capital.
It is something we take very seriously and the effort to improve our bottom line is ongoing.
In my new role as Chief revenue and Chief operating Officer, I am tasked with aligning our customer experience products and market opportunities to drive profitable growth, giving further focus to these key drivers of our customer centric business.
I am excited to continue the work around securing our future.
We're excited about the opportunities before us and appreciate your continued support.
With that Alex Frank Matt and I look forward to your questions.
Thank you as a reminder to ask a question you'll need to press star one on your telephone.
Two of them yourself from the queue press the pound key.
Our first question comes from Michael Phillips with Morgan Stanley. Your line is open.
Hey, Thanks, good morning.
Have you seen any change in the auto loss trend environment from last quarter. It looks like maybe your severity numbers can be a better owner.
If that's true what kind of what's driving that and just overall thoughts there.
Sure. This is Frank your question was on loss trend.
I'd say that we're seeing a number of demo.
Yes, so we're seeing we're seeing a number of factors there first as we see higher miles, driven which which translates into increased frequency. We've seen that in a number of different reports across the industry. So we believe that that's an industry thing not just a good thing.
And then as we've seen there is inflation across the United States, which increases overall costs, but in particular in the cost of used cars used car parts, which is causing a supernormal increase in severity, especially and as Dan side. So these two things together have increased losses dramatically over a very short amount of time.
Historically, they've been trend turns in the past that this is probably one of the most severe trend turns that I've seen in 2025 years.
I guess frankly.
I think I think your wording was severity was eight points this quarter and last quarter was 16, so that seems to be down, but maybe I'm reading it wrong. So anything there it looks like it might be improving there.
So yes, so I think we saw a big step function from quarter, one to quarter. Two we are still seeing increased trends, but we're not seeing the same amount of step increase from quarter to quarter. Three so there are still loss trends, we're still seeing inflation, we see that in the news, but I would say, we're not seeing as much of an acceleration away.
In quarter three as we did in quarter, two but it's still up.
The inflationary pressures are still high.
Okay. Thank you.
Got it.
To last couple of calls you talked about a delay of one of your reinsurance treaties.
It would affect your ceded you seeded ratio it was still down this quarter I don't think I understand that I thought it was your prior wording was that is going to kick back up to around 70%.
And in the back half of this year, but it stayed at 55. So is there something else going on or was it is it going to stay this way until <unk> or would you try to think about how and why it was at the helm and then.
What we can expect that to be in <unk> and going forward.
Yes, Thanks, Mike This is Dan and good morning.
Our third quarter, especially in level remained roughly flat at 55% and that's really a function of the way that our cohort base treaty's work, where it's just as a refresher they are multiyear treaties.
We're the first 12 months, we have taken new business and then the reinsurance treaty follows that cohort of new business into additional years and really just a function of the two treaties. We've executed this year on four one in seven one depend upon levels of new business.
And so given the fact that the pullback on the marketing spend.
Lower levels of new business that we've talked about that did lead the discussion level staying flat in the third quarter I would expect that to roughly continue in the fourth quarter Youll see a little bit higher session rates as we put in place our 10, one treaty, which was oversubscribed at this point so.
That's where we stand in terms of staffing levels going forward.
Okay.
Thanks.
I guess, maybe one more here for now and then we'll see.
When you talk about further reduction in customer acquisition costs I assume you mean relative to kind of what you saw into two and the kind of the current environment. There from what was happening in your direct channel.
Or do you mean further reductions from.
From I guess prior to the split that occurred into Q.
Yes, no. We mean effectively further reductions in terms of sales and marketing spend on a quarter over quarter basis. So youll note that in the third quarter. We said, what we talked about on the Q2 call we pulled back marketing by 40%.
On the sales and marketing side focused on really utilizing the most efficient performance marketing channels.
Yes.
Some of that level in the third quarter was that we were talking to you in early August and we have some dollars that were already committed.
Third quarter started and so now we're being able to effectively to pull that back even further as we enter the fourth quarter.
Okay. Thanks.
Although your triple Chief hats here, we're in today.
Thank you very much.
Thanks, Mike.
Thank you. Our next question comes from Matt.
Matt <unk> with JMP Securities. Your line is open.
Hey, Thanks, good morning.
Wanted to ask.
Hey.
First question around UBI, 4.0, and you talked about how it.
I think in the past and also in the letter.
As you to offer a quote with less data and I was hoping you could peel back the onion, a little bit and what have you seen in terms of the impact that that's had on test drive periods.
As well as the implications that might have for churn.
Yes, hi, Thanks for the question this is Matt Black before.
Historically, when we first released our telematics, scoring models, we were conservative in the way we defined our eligibility rules, which is how much data we need before we can produce a score price with ASIC.
As we have collected more data has been able to test <unk>.
Different models that require less data to see if that degrade predictive power UV.
<unk> 4.0 allowed us to really dig deep into that question and do more with less so users are becoming eligible much sooner than the test drive and as a result, we can issue a telematics expired.
Much sooner, we're seeing if that does translate into better conversion level people are getting more telematics inspired books and.
We will continue to work on pushing down that test period in the model.
Okay, Great and then kind of along.
Along those lines, just hoping you could kind of process flow just somebody who comes through the App and does a test drive.
Because you've got a history of knowing how that works when we think about carvana or think about your independent agent channel is growing.
That work differently and differently when it comes to an agent.
Do they then have to do a test drive after downloading the app or do they get up get a quote that gets adjusted over time kind of how does that work differently than kind of the direct to consumer process.
Yes.
Right now this is a this is Alex and thank you for that question right.
Right now we are in the independent agency channel.
Still very new and we are continuing to experiment with different product flows in where we can introduce telematics, we have a very flexible telematics platform, which allows us to both collect telematics data upfront before a quote.
After a quote as we also have in our direct model.
Or even more of a traditional policy over six month period and incorporate that telematics data, where we see it.
To me the most beneficial for us and our customer and so we are still exploring in the independent agency channel, where we're actually introducing that telematics and the Carvana channel right now and we're very excited about that that is an instant quote basically with the vehicle purchase and so it allows it.
Consumer to really just get insurance connected to that vehicle and right now we are not collecting telematics data through that.
To that flow, but we do have plans to incorporate telematics and future product iterations.
Okay, great. Thank you very much for the color and best of luck.
Thank you.
Our next question comes from Josh Seigler with Cantor Fitzgerald. Your line is open.
Hi, Good morning, Thanks for taking my question heavier telematic capabilities and segmentation that allowed you to better weather the increased severity and frequency in the market. For example by identifying higher speed drivers are drivers responsible for more miles or do you find that these macro trends are impacting a wide array of drivers on your platform.
Sure. This is Frank Great question.
First it gives us greater granularity and greater insight into the trends that are happening. So even before frequencies started to go up we could see that miles driven was going up and could start to prepare rate actions in anticipation of the frequency going up. So we have really great granular data to explain and help us understand what was going.
As we started to see frequency going up other carriers may have been a pause have been like is this a onetime thing.
This is a catastrophe thing we could actually tell that was driving patterns that are causing the increases in frequency and so it could respond I think much faster than the industry. So not as much as at a granular customer level. Although of course, our score to the extent that customers may be speeding more because there's less on the road as we recapture that in our score at regular rate time.
A big benefit I think has been the actual like granular insights into what's going on with trends has allowed us to respond best.
Got it I appreciate all the color there and then just continuing down this road.
You mentioned you took 13 rate increases during <unk>, where do these rate increases incremental in nature or perhaps larger step ups to reflect the loss environment and how is the market reacted to them, albeit I understand it's early stage still.
Sure.
I'll start also with we had we had some rate increases even early or late sorry in Q1, so based on that telematics data and the increase in and driving in frequency. We actually started around the rate increases in quarter, one followed that up more with quarter, two and then had the bunch in quarter three.
We still intend to take more in quarter, four and quarter. One some of them are base rate increases, but as we mentioned we're also rolling out our new MC model for which we think will also give us greater segmentation power as long as well as helping us capture more rate.
Got it thank you very much.
We have a question from Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks, Good morning, My first question.
Back to the guidance you guys provided for gross premiums.
The decline in the fourth quarter.
Given that we still saw good growth in the third quarter I'm, assuming I'm glad you're back.
A significant decline in your policy count.
Given that you're getting.
As you alluded to you're getting good levels of rate increases across your book. So can you give us a sense of the expected decline in pet and you expect sequentially in Q4 as well as just the level of churn Youre expecting a class you are bulk embedded within guidance.
Yes, I think look at least good morning, and thank you for the question given the actions we've taken on sales and marketing. That's why we wanted to continue to provide the color for the fourth quarter and the first half of next year consistent with what we shared on the Q2 call.
And I think the way you should model it and think about it is that premiums will will loosely follow the policy count we're not guiding to any specific levels of retention I think Frank just articulated extremely well what we're doing in the context of the macro environment.
So we're not providing any specific guidance with respect to renewals.
But you can expect that as we continue to reduce that sales and marketing spend level, there will be an impact on pip.
Okay, and then as we think about kind of working through like a frequency and severity issue and kind of your changing marketing spend should we assume that.
The issue is that right beyond the first half of next year that you guys will consider to kind of.
Continue to rain and the marketing spend I guess, just kind of getting through the loss of key impact when you guys kind of return to <unk>.
Increasing marketing and looking at your pursuit of greater growth.
Thanks for that this is.
This is Alex.
I think when we think about our marketing spend and really our growth drivers over the long term of the company. We're really excited and we're seeing really strong results already.
Our embedded product and we believe that meeting consumers, where they are in that moment is really going to drive long term differentiated access to customers and growth.
And really what we're doing now is we're making sure that we are preserving that capital, particularly given the inflationary environment that we're in so that we can continue to develop that product and continue to develop more diversified sources of demand.
In terms of timing I will turn it over to Frank who can talk about when we may see our pricing sort of get to the levels that we wanted to see as a correction for the inflationary environment.
Sure.
And as we think about kind of returning to growth. There's two parts. There. When you think about our rate increase when you raise rates today your new business kind of has the full impact of those rate changes, but it takes time for your renewals to earn in.
As we as we raise rates and take these rate actions we.
We expect the new business to return to target profitability faster than what our calendar year or total renewable might be so we might expect our ability to kind of turn marketing back on to be faster than what we might actually see in a kind of a calendar year calendar year loss ratio period.
Now as that we do have some pretty advanced marketing model data Science group has come up with that take a look at a state by state and customer by customer segment level profitability and so I think starting in the first quarter, it's likely that we'll be able to turn on either entire states are various segments on marketing and start to grow them.
The new business again.
That's helpful.
Okay.
Okay. Our next question comes from Nick Jones with Citi. Your line is open.
Great. Thanks for taking the questions.
I guess two.
One I guess on the broader auto environment.
We've heard that people are actually starting to delay purchases due to how high used car pricing is and we know there's still this.
Chip challenge for new cars, so is that potentially a headwind heading into next year in terms of kind of triggering people to think about auto insurance changes and the second question.
Oh go ahead I have a follow up.
Okay.
We don't see that as a headwind going into next year, we think right now actually demand.
Particularly for cars is still very high although some of the inflationary pressures that we are seeing our supply chain and chip related. We are also seeing a material amount of it being demand related as well so if anything we're pretty excited.
That there is more interest there.
Than historic levels.
Great and then and then Carvana partnership I know, it's still kind of early days, but is there any kind of early indication of what kind of attach rate.
<unk>.
We were just saying.
On the operating level.
Thanks, Nick this is Dan.
Alex touched a little bit on this we are really excited about the fact, theres really no more opportune moment.
Connect with the consumer and auto insurance that at the moment they purchased their vehicle and there is no better partner no more technology for customer centric auto retailer then carvana.
Their enthusiasm and commitment to the success of the partnership it really been showing by the exclusive relationship their investment in <unk>, which we closed on the first of October and just to provide some more color. In fact, we had more than a dozen carvana team members in Columbus This very week.
I commend people like Andy, Let's go and Chloe Johnston, and Josh Brown, and Rachel Nelson and all of their teams for all the hard work that has already live testing. The first iteration in 12 states. So we were excited about the partnership back in August and our expectation to have really been exceed.
Got it.
Now, it's time to deliver a seamless experience and a fair price to consumers I don't want to get into specific levels on the task quite yet.
But I would tell you we're off to a great start we're going to come back in 2022, and we'll talk to you about milestones timing and growth at the right time.
Great. Thanks for taking the questions.
Thank you. Our next question comes from Tracy <unk> with Barclays. Your line is open.
Thank you. Good morning. My first question. This is more of a philosophical question.
At your long term loss ratio target of 60% to 65% when lost cost trends were more benign pandemic. So I'm wondering if you may be revisiting that 60% to 65% target because I noticed even your renewed business is well north of that range in the last two quarters with it.
You're speaking.
Yes. This is Frank Greg Great question, I don't know that the pricing philosophy has changed a lot we still want to price to two lifetime profitability on a cohort of customers.
So as we think about new business coming in we still would like that cohort of new business to have a 65 target loss ratio based upon anticipated long term expenses and so now that somewhat balanced by what the in force book that we have currently and so for both new and renewals, we do want to bring that loss ratio down given the current environment.
Okay. Okay.
I also have a question on your marketing efficiency discussed her work with independent agency channel and I'm wondering is the idea is that maybe at least in the short term CAC is lower for agency distribution and if so how meaningful do you think this revenue source could be.
Okay.
Thanks Tracy.
Yes.
We're not going to get into specific backlog levels by channels I think the key for us in the discussion we had over the last several quarters is diversifying our distribution channels and so for US obviously, we were too concentrated in the performance marketing channels in the first half of this year. That's the conversation that we had following the.
Q2 call, we are executing on that with Carvana on the embedded insurance product. We are executing on that with what we are exploring on the independent agent product. So we're focused on testing and Iterating focused on diversification focused on return on capital across the investments, which obviously has to do with cat, but.
Also the lifetime value of the customers that come through those channels and we will come back and talk specifically on each of those channels as that testing develops and we execute further.
This is Frank.
As we think about the independent agency channel. It please and both are being and expansion into new consumer segments. It also plays to our strength in UBI.
UBI is generally not as developed in the independent agency channel. There are a lot of carriers there that still do not have <unk> and there are agency groups that are concerned with that theyre getting cherry picked by a lot of the direct carriers and so we do see some demand in the independent agency channel both for our technology and the ability to write a customary in under a minute or two compared to <unk>.
20 minutes with some of their other carriers as well as being able to deliver them a lower rate for good drivers VR a telematics. So we think that there is good pricing competitive abilities there too.
Yes.
Well, it's interesting because we've actually done some work and reached out to the agency your I guess testing the waters with and.
One thought that I heard is that they are looking for consistency for their customers.
Is that limit how agile you could be in pricing.
Okay.
So one of the things we're doing right now with the independent agents and I think we referenced this a little bit earlier.
Is to actually make sure that the telematics.
Program works for an independent agents and so it will look different than the direct model, where we may be pricing repricing midterm, we may be using now telematics data at renewal.
So I have developed a product that allows consumers, it's really up into telematics.
And we think that using that consumer experience both works well for an agent as well as works well for that.
<unk> customer and that's really where we're starting to iterate on our product and develop a product that really does work for that channel.
Very helpful context, Thank you for taking my questions and congrats again on your new role.
Thanks Tracy.
Our next question comes from David Mcmahon with Evercore ISI. Your line is open.
Hi, good morning.
Just a question on the outlook.
And so I understand the gross premiums written are expected to be down in the fourth quarter and then in the first half of 'twenty. Two so I just wanted to make sure I'm thinking about this right. Yeah, you guys, obviously had a strong third quarter this year.
The 205 million of gross premiums written.
Is that I guess, when we think about third quarter 'twenty two is that sort of the timing. When you guys think you can start to grow gross premiums written again.
Yeah.
Thanks, David for the question. This is Dan I touched on this a little bit earlier with a lease we wanted to provide color on.
Where we are through the fourth quarter of this year in the first half of 2022, given the line of sight that we have to those quarters and given what we've shared on both the Q2 call and today about our sales and marketing timing the development of the Carvana product and the like we have a lot we're going to come back and talk to the market about following Q4 on our thoughts for.
Full year 2022.
But I'd, rather not get into the specifics for specific timing quarter by quarter next year quite yet as Carvana further develops and the testing as we develop the diversification of channels that Alex just touched on we will come back and talk to you, but right. Now we are focused on execution. We are focused on what we call internally one.
Play display and the play is really focused on a lot of what Frank has been talking to you about on this call our differentiated technology and how it impacts our ability to get ahead of loss cost environment. That's our focus right now will come back and talk to you in February about 2022.
Okay, Great that's helpful.
And then I guess maybe.
I guess this is also somewhat of an outlook question on the on the 22 operating loss.
It sounds like that is going to really be driven by just rationalize sales and marketing spend but.
But I was wondering if you could just touch on thoughts of the law on the loss ratio over that timeframe as well not.
Necessarily quarter by quarter, but just sort of thoughts in terms of how you expect that to trend over over the next year.
Thanks, David This is Dan again, maybe I'll start and then turn it over to Frank on the loss ratio.
Operating loss overall.
We were pleased to report this.
This quarter that we're expecting to close the year on the favorable side of the midpoint of our original operating loss guidance.
That is a function of the execution that we've been undertaking.
Dip in performance marketing spend that we highlighted during the quarter and I think it's fair to say that we expect to deliver a meaningful improvement in full year operating loss in 2022 versus the 2021 levels as we continue with that strategy and continue with that focus and disciplined execution.
As for the loss ratio I'll turn it over to Frank to speak to trends, you're seeing next year.
As mentioned earlier as Alex mentioned, we have a number of.
Opportunities to improve the loss ratio. So we started early with rate increases we've got a new models coming in we're looking at.
Improving our underwriting and our contracts and so we expect meaningful improvement in the loss ratio in 2022, the timing on that is probably less clear certainly as we putting these actions. It takes time for them to earn in but we're still trying to understand what the macroeconomic trends are we have as mentioned earlier, we've got a little indication that it.
Not further accelerating in quarter three over quarter, too, but theres still only been a few months.
I actually have seen those trends, so well have to wait and see exactly how much loss ratio improvement, we'll we'll see as we understand how these trends develop.
Okay great.
Thanks for that and then maybe maybe I can just sneak one more in just on the Carvana partnership.
Good good to hear about some of the early success in some of the 12 state you're testing in.
Do you have a sense for.
When that will be rolled out on a broader basis.
We're going to continue to develop that product and as we do the rollout will continue to.
Accelerate as the product becomes more and more mature and we continue to get those consumer learnings were.
We're really excited about this we think that this is absolutely how insurance should be purchased in the future meeting consumers, where they are in a really seamless experience. We think it's a clearly superior product experience and we're really excited by it and we're going to continue to work hard and focus.
Great. Thank you.
Thank you. Our next question comes from Mike Hughes with <unk>. Your line is open.
Yes. Thanks, good morning, what should we think about in terms of the average rate hike. It looks like your premium per policy was up about 6% in the quarter or is that a good proxy for what you're putting in place the Q4 Q1.
Yes, I would go back to to the actions that we're taking right. So we do have rate increases we've got new models segmentation and we've got.
Improved underwriting.
As I think about that part of the loss ratio improvement is going to come from just kind of flat rate increases. We also expect that should not necessarily be totally flat given that we expect.
First quarter, maybe 12 to 15 different states picking up or make model or <unk> model version and so the actual increase in premiums will vary greatly by customer segment and so I don't know that we've got kind of a target like this is how much. The average premium is going to change as much as we've got an idea as to we think we'll get meaningful improvement from a loss ratio.
Okay.
When you think of independent agents.
Yeah go ahead.
Yeah.
But I am please continue.
Okay alright, thank you.
When you think about the independent agency channel.
How quickly can you roll that out or are there bigger chunks of may.
Maybe agency associations or groups that you can target to two fewer.
Your penetration of that market.
Yes. Thanks, This is Dan and I appreciate the question.
I think we are we're focused right now on testing and Iterating. The channel again. This is about diversification. This is about testing. This is about driving towards the path to profitability. So we'll have a better answer to that is we continue testing with a select group of agents that we're focused on right now absolutely. We believe that there are opportunities.
This is frank touched on to take our product and leverage it with the <unk>.
Water agency market.
But we're going to focus right now on testing Iterating and executing and then come back and talk about specifics around growth and timing.
And then one more if I might the.
Repayment of the loans.
Extending the term sheet with Blackrock can you talk about the rationale for that and what benefits you think that'll bring.
Yes, I think for us theres sort of two parts to that the first as well.
We're really excited about the partnership with Blackrock, we talk about in the letter that it's <unk>.
Facility that we think will work really well for us and we will come back to the market as we have a fully executed deal in place and provide more specifics.
For us, it's about just thoughtful and prudent management of our balance sheet and thinking through our capital overall and that's what we took into account in terms of maturity level maturity timing of the prior facilities.
As well as the partnership with an entity like Blackrock.
Thank you.
Thank you. Our next question comes from Andrew Klinger.
<unk> with credit Suisse. Your line is open.
Just to follow up on some of the earlier questions just on the sales and marketing area.
After the sharp drop off in sales and marketing costs from $112 million to $65 million in the third quarter Q over Q.
You talk about dialing that down.
Kind of kind of prior to the fourth quarter of last year do you kind of get into that range of say, 15% to $35 million is that kind of the.
The range that youre thinking about dialing it down two for the immediate term.
Yes, thanks for the question Andrew.
Think the way I would touch on that is to really focus on how seasonality impacts some of this so the fourth quarter. We've talked about is both traditionally the most expensive quarter from the marketing channels that we have been in.
That's a retail focused quarter approaching the holidays.
And then it's a quarter when just frankly consumers focus a little bit less on things like car insurance or focus more on on their other purchases approaching those holidays, so for us seasonally.
Would already approach performance marketing in the fourth quarter differently than in prior quarters, and then that is highlighted this year by the fact that we are pulling back in some of those more concentrated marketing channels and focusing on the most efficient channel. So you can expect the level to come down materially in the fourth quarter.
And we're focused on really investing our dollars in the right channels and taking it from there.
Okay.
No numbers around that.
Sorry, no numbers.
Okay.
And then the last question with regard to.
Independent agency and again.
Youre not going to focus exactly on the numbers you said and Youre also.
Looking at testing and Iterating here, but as.
As you think about that channel the independent agency channel.
Is it is it going to be sharply less expensive than digital.
Is it a situation where you can go into a large brokerage firm and maybe add a wholesaler to end.
And you could get up and running pretty quickly I just wanted to get a sense of the magnitude of the potential upcoming spend is materially less than.
What you need for your other channels.
This is Alex.
In terms of the cost relative to the direct channel I think what we see is it.
It's just different it's not necessarily less or more.
In the independent agency channel, we will be paying a commission so instead of a flat fee to get a customer as you see in the direct channels.
We'll be paying a commission based on the premium that comes through.
On a.
The premium that comes through the channel and so we like that we think it's very cash flow efficient because you do not pay all of the customer acquisition cost upfront, but rather you get to really pay that over the life of that customer.
We also know that there is very high retaining customer segments that still go to independent agency channels and.
And we've seen that really persist a decade ago. The independent agency channel had a third of all volume today, It's got roughly a third of all volume and so we believe that using our.
Platform that allows us to deliver quote in under a minute to those customers is really valuable for the productivity of agents.
And we think that.
It will have favorable unit economics as well both in terms of retention and then again that favorable cash flow profile to customer acquisition cost.
That's helpful. Thank you.
Thank you. Our next question comes from Mike Zarinsky with Wolfe Research. Your line is open.
Hey, this is Charlie on for Mike. Good morning, I'm wondering if you can provide some color on accident frequency and miles driven levels.
You're seeing has that relationship changed at all versus pre pandemic levels is it consistent across the states or does it vary.
It did it vary across the months of the quarter any any views or it seems you could share there would be helpful.
Sure talking about this is Matt. Thanks for the question talking about this year, we did see an uptick in accident frequency.
Into April since then it's been a pretty consistent trend month over month until now.
We looked at.
Time of day frequency, we have seen.
As we come out of the pandemic and increased frequency both from vehicle mileage and accident frequency in the weekday mornings from say six a M to 10 a M.
These are in line with pre pandemic levels in terms of accident frequency within route because of underwriting and pricing model changes, we have seen a decrease in frequency as a population as mix shifted to lower frequency customers, that's driven by not only underwriting the telematics and other pricing model changes.
So overall, we're seeing a lower frequency average on our book, but within this year, we're seeing the uptick going into April.
Thanks, that's helpful sorry.
And then for my second question second question can you guys.
You talked earlier in the year about raising rates in Georgia can you talk about what youre seeing there it looks like it didn't slow your growth is Georgia a season states now.
Yes.
In Georgia that we did have a rate increase there we are rolling out a new program it's not.
It's not fully in market yet so we haven't fully turned Georgia back on we do expect to in the fourth quarter.
Okay. Thank you.
Thank you. Our next question comes from Chris Martin with K B W. Your line is open.
Hey, guys congrats.
In the quarter.
A couple of follow up questions on the Carvana piece and the first one is it's really I don't know what work you've done around.
Kind of bringing out the credit score from pricing, but if you are not going to be using the telematics keeping the carvana side is that going to be back to kind of a traditional pricing model, where we built something else a little bit different too.
Build out that relationship kind of unit costs.
We think that there is actually a.
<unk> future and a differentiation in the pricing model for.
For Carvana.
And it's not just a traditional underwriting models.
One of the things that's a very interesting opportunity that we're exploring is when these vehicles are sold to consumers.
Actually in the possession of Carvana first and that gives us actually an opportunity to get closer to that vehicle and closer to the technology inside of that vehicle and so as we continue to really expand this partnership and continue to do more product development, we fully expect to bring in more data science capabilities.
And more unique data sources, both from mobile phones and consumers and then also from the vehicles themselves.
Alright, great Yeah that makes sense.
And just with all.
All of the chatter I may have missed this.
Mike <unk> will kick in the door about 10 minutes ago, but.
Dependent agent side will get in your car from Carvana trigger anything with to then be places of independent. If you are in the right place or will that be a fully direct business.
That will be fully direct business.
Okay. Thank you.
Okay.
Thanks to all of them we have.
Thank you and we have a question from Ryan Tunis with Autonomous Research. Your line is open.
Hey, Thanks, following up on some of the independent agency questions.
My understanding is always been the table Stakes for writing and that channel is like a minus financial strength rating from am best or S&P can maybe get away with.
Demo taxi for your coastal company could you remind us.
Who's giving you your financial strength rating now and if you don't have an a minus from investor S&P have you thought about.
Trying to go out and get one.
We are not rated right now we have not.
Found a strong demand from.
Any of our agency partners actually that we have spoken to.
Primarily because it is <unk>.
Personal auto and so typically that's not something that that consumers themselves also are really demanding.
And so we do not have a financial rating from a M best or <unk> at this point.
And we have not seen that.
And all will be a block or two our partnerships with agents.
Got it.
And then my one follow up was.
I guess, just maybe looking for some color I guess, what you guys are doing with the performance marketing pullback, which makes sense.
But.
Are you seeing that.
Some of the advertising or AD dollars, becoming arguably a little bit more efficient given the pullback of a lot of carriers you actually.
I mean theoretically seeing that if you did want to spend.
You could maybe do a cheaper if you wanted to at this point.
Theme there.
Yes. Thanks for the question. This is Matt talked before we are definitely seeing improvement in efficiency on back of the pullback of marketing spend.
And it's not just a pullback, but also more sophisticated segmentation and targeting to ensure that we are allocating our marketing budget in segments that are providing profitable lifetime value.
And so the new levels of marketing spend we certainly are seeing return on that spend and more efficient spend as a result.
That's good to hear thank you.
Thank you and we have a question from Youssef Squali with <unk> Securities. Your line is open.
Oh, great. Thank you very much just wanted to follow up on a couple of questions. My colleague Mark asked earlier, but just kind of maybe at a higher level Alex stepping back a few years ago. You guys are one of them is a very very few companies kind of.
Todd and telematics.
The virtues of it it seems like.
On the one hand, more and more people are.
More companies are talking about it yesterday, we saw the deal between eliminated Metro Metro model to kind of double click on this.
Carvana.
With its instant quote seems to kind of move away a little bit from it even at least.
First glance can you just maybe.
Kind of describe how how you feel the industry is evolving around telematics and just the importance of it.
Today versus how you thought about maybe three years ago or two years ago and second maybe just give us an update on on your campaign to trap, the credit score and pricing and any any kind of traction there.
Absolutely. Thank you for that question.
We're seeing is that telematics is as consumers become more and more comfortable sharing data that telematics is becoming more of a wave of the future and I think we have seen several points of validation.
Across the industry that being said, we also know that we are at the forefront and we know that for a few reasons.
One we are entirely focused and committed on disrupting and using new data science methods.
To disrupt the United States personal auto market, which is a $260 billion market. We have all of our resources all of our investments and really have for the last six years entirely dedicated and focused to building the best technology in that space and we've seen it.
The Carvana, we believe actually is just the next evolution.
The technology and so we believe that as we've developed this technology that is highly differentiated that now allows us to embed into other vehicles and to actually ingest even more unique data sources, we do not believe that the evolution of data science and insurance stops at the smartphone we seek to smartphones.
It all pivotal.
<unk> of the puzzle, but we don't believe that's where it stops and we think we've demonstrated that we are now in more states really than any of our insured tech peers.
We are also.
Multiples the size of most of them. So we.
We believe that we are out at the forefront. We think telematics is the wave of the future and we're excited to be leading that wave and to really have differentiated technology based on rich behavioral mobile data there.
In terms of dropped <unk> score and dropped the credit score. We also know that when we look at the industry that consumers arent getting a fair shake, particularly those consumers that we believe need it the most and.
And we think that Theres lots of discriminatory factors that do go into car insurance pricing today, and so we have decided to launch a.
A campaign to really challenge the industry and again, we're out in the forefront here to drop the credit score and were really excited actually a major incumbent has followed us into this movement and is following our lead and we are incredibly happy with that we have.
And we've also now started to see progress at even the National Association of insurance Commissioner level, where they are now.
Considering laws and models for how to handle discrimination in car insurance and those were things that did not exist three years ago and so the industry is changing it is moving.
And we really know that we're at the forefront.
Yeah.
Alright.
Good color.
That's all the time, we have for questions.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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