Q2 2022 Root Inc Earnings Call
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Ladies and gentlemen, good morning, My name is Abby and I will be your conference operator today.
At this time I would like to welcome everyone to the route incorporated second quarter 2022 earnings conference call.
Today's conference is being recorded and all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply prestige Starkey followed by the number one on your telephone keypad. If you would like to withdraw your question just press star one once again.
Thank you and I will now turn the conference over to Christine Patrick you may begin.
Yeah.
Good morning, and thank you for joining US today route is hosting this call to discuss its second quarter 2022 earnings results participating on today's call are Alex Tim Co founder and Chief Executive Officer, and Rob Bateman, Chief Financial Officer.
The question and answer portion of the call. Our presenters will be joined by Dan Rosenthal, Chief revenue and operating officer mapping Okta poorer Chief Technology 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 second quarter 2022 Form 10-Q, which was filed with the Securities and Exchange Commission last evening before we begin I want to remind you that matters to sky.
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.
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. Please review our Form 10-K for the year ended.
<unk> 31, 2021 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 in second quarter 2022 Form 10-Q released last evening.
A replay of this conference call will be available on our website under the Investor Relations section I would also like to remind you that during the call. We will discuss some non-GAAP measures talking about routes performance you can find the reconciliation of those historical measures to the nearest comparable GAAP measures in our shareholder letter released last evening in our Form 10-Q filing with the SEC.
C, which are posted on our website at IR dot join roof Dot Com I would now like to turn the call over to Alex Tam routes co founder and Chief Executive Officer.
Thank you Christine we continue to execute on our playbook of raising rates tightening underwriting and managing cash as we respond to a prolonged difficulties with the supply chain inflation. Despite this.
Challenging environment. The proactive steps we are taking have resulted in further improvements to our financials.
Through our tech stack and reading engine year to date, we have been able to implement 35 rate filings with an average increase of 28% wildfire revised insurance contracts in 23 states to tighten underwriting rules and reduce premium leakage.
On a year over year basis, we have significantly reduced cash burn and improved our gross accident period loss ratio five points adjusted EBITDA of 59% and non loss in LAE expenses by 57%.
We focused on deepening our competitive advantage through continued investment in technology, we have shipped our fully integrated product Carvana insurance built with route.
Which is showing improved attach rates and its early days, we believe that being able to offer an instant quote at the point of vehicle sale creates a product that works better for consumers and it's something that our technology platform can uniquely provide.
Though the current focus of our embedded channel is on our exclusive partnership with Carvana, our technology, an embedded capabilities have driven discussions with additional prospective partners we.
We have also recently launched our digital agency.
As root to service customers that are not best suited for our particular insurance offering it.
It is a capital light revenue stream that allows our partners to access our technology and distribution capabilities.
While still early in development, we are excited to expand this offering in the future.
We are constantly refining our models and the process around their development. This quarter, we made enhancements to the post deployment review of our country wide pricing model.
This enhancement identifies segments that would benefit from pricing adjustments earlier informing necessary model improvements to be made even more quickly.
We are also working on the next generation of our UBI pricing model, which leverages our growing dataset. We believe this will lead to more accurate pricing the ability to simplify and speed future model development and reduce test drive days required for UBI based rate looking ahead, we're going to can.
To execute on pricing and underwriting improvements through the back half of 2022.
Along with our continued focus on expanding and deepening our embedded product experience. We expect to continue to drive improvements in our financial results. While further building differentiated access to customers I will now turn the call over to Rob to discuss our operating results in more detail.
Thanks, Alex results for the second quarter of 2022 reflected our continued focus on strengthening underwriting performance in developing our industry leading embedded offering.
Our full GAAP financial results are disclosed in the shareholder letter, we published yesterday evening, but I want to focus on a few key highlights.
On the top line gross written premium declined 21% year over year to $140 million. Our gross earned premium decreased 6% year over year to $171 million. The top line decline reflects higher rates and stricter underwriting an underperforming geographies and customer segments along with.
Substantially reduced marketing spend these actions have caused new business writings to decrease with renewals, making up 75% of gross earned premium this quarter as we focus on profitability.
Gross accident period loss ratio was 85% for the second quarter, a five point improvement versus the second quarter of 2021.
Our early response to higher severity and the ability to implement rate changes quickly along with a higher weight of renewal premiums have driven consistent year over year improvement.
We expect to continue to raise rates and take underwriting actions to improve bottom line results.
We remain focused on lowering expenses across the company to further reduce operating losses during the second quarter operational changes resulted in a 57% reduction in non loss in LAE expenses compared with the second quarter of 2021.
Operating loss was $81 million.
A 53% improvement over prior year adjusted.
Adjusted EBITDA of Kpis, we introduced last quarter to give a clearer view of the underlying performance of our business, excluding certain noncash items improved 59%.
We're conserving capital as we drive toward profitable unit economics.
Ended the second quarter was $696 million of unencumbered capital compared with roughly $736 million at the end of the first quarter.
Our operating cash consumption has dropped over 54% when compared with the first half of 2021, turning to our outlook. We continue to expect our results to reflect the actions. We are taking as we navigate through this challenging environment. We expect gross written premium to reflect significant year over year declines in the second half of 2022 and <unk>.
Any full improvement in our operating losses, we expect the magnitude of both measures to accelerate when compared with the first half of 2022 as we remain focused on improving operating results through strong underwriting and rate actions as well as prudent capital management, we are making progress against the goals, we set out a year ago.
We are not finished our focus is clear strengthening our underwriting foundation and conserve capital while utilizing our technology advantage to build out our embedded product. We appreciate your continued support with that we look forward to your questions.
Okay.
And at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And we will pause for just a moment to compile the Q&A roster.
Yeah.
We will take our first question from Elyse Greenspan with Wells Fargo. Your line is open.
Great. Thanks. Good morning. My first question was following up on just the outlook quite you said significant decline in the back half.
And if you compare that to the first half of the year, but what about if you compared it to the Q2 expected premium and policy decline in the back half to be in line I guess with the pretty sharp declines we saw in the second quarter.
Hey, Chris This is Rob, yes that would be that'd be right. We'd say if you look at the back half of the year I would say, it's going to look more like Q2 than Q1.
We do expect that if you look at it year over year from the second half of this year compared to the second half of last year that will be well it won't be above that 25% decline in both our gross written premium and operating loss that we had we had talked about earlier.
And then what's your.
Like how are you thinking about the severity and frequency.
Over the balance of the year.
Do you think trends.
Especially in severity are you expecting them to continue to remain elevated.
Yes, I'll just I'll give you the actual that we had so our severity was 6% and our frequency is 1% and I will turn it over to Frank to give you a sense of what we're looking at for the back half of the year.
Our loss ratio picks.
Sure good morning.
Say that we are expecting that expenses and costs for frequency and severity will remain elevated but I think the trends will be probably slower through the second half of this year compared to last year. So while we don't expect to see used car prices for example, going down we don't expect to see the same amount of acceleration that we saw last year.
Yeah.
Okay, and then one last one with marketing spend that obviously have continued to come down with your expectations be that I guess that would remain more muted.
Perhaps on into 2023 as well.
Yes.
Thanks for the question release right now we are entirely still focused on protecting the business and for US what that means is day and really laser focus on profitability and so getting our loss ratio to the point, where we feel that growth is prudent.
And we expect to stay in that position at least through the back half of this year. We also though in terms of growth in spend we also believe and we continue to see growth in carvana through our new product, where we're even further integrated with purchase flow and we do expect to see.
Continued growth in that channel.
Thank you.
Thanks.
We will take our next question from Michael Phillips with Morgan Stanley . Your line is open.
Thanks. Good morning first question is on the gross accident period loss ratio this quarter to 85%.
Down five points from a year ago I guess.
Little surprised by that only because of the comments on.
Your severity, 6% seems low to me I was expecting something to be a little bit higher than that but given it was 6% their frequency is only up 1%.
You've taken a lot of rate why not more improvement in the loss ratio.
I think first what I'd say on that is we have taken a lot of rate, but a lot of that has not earned in yet and so I believe that we have and we acted very quickly and.
And we have taken a lot of that right and a lot of those actions are behind us, but I think we're still in the early stages of seeing that rate earn through the book.
Turn it over to Frank who can talk a little bit about the numbers, yes, I would say Additionally, when you when you look at quarter two versus quarter, two and you think about last year, we saw exceeding trends.
Both in quarter, three and in quarter four so last year the loss ratio actually got worse quarter, two to quarter, three and quarter three to quarter. Four so when you look at that the 89 versus the 85, we actually were up higher than the 89 around 94 later in the year. So I think we've actually come down a lot in being able to mitigate some of those trends the back half of a lag.
Year.
Okay.
And just to put some put some numbers to it might just to give you a sense.
Just keep in mind on that severity, that's six six points. That's the all in severity so let's buy in and the Michelle material damages coverages, so youre going to see it higher on the material damage coverages, but just to give you a sense on the right. We've taken 28 points year to date, we've only we only had about six points of that earnings in the second quarter. So if you look at our rate filings to <unk>.
Really they were really concentrated in the back half of the back half of the second quarter. So we still have we still have quite a bit of rate to earn in over the course of the year.
Yeah.
Okay. Thank you and that makes sense.
I guess I was a little surprised by.
Youre quoted new premium volume excuse me that came from Carvana was about a third of surprised that that'd.
It would be a little bit more than a third given the focus on that channel I know youre slowing down things, but.
So I thought that would be a higher proportion of new business any reason why.
That was the lower should've been surprised.
Hey, Mike, It's Dan and good morning. Thanks for the question I don't know that.
Good morning.
I think for US we don't necessarily have a target for in terms of what carvana as new business is going to be as a percentage of our overall new business for us. What we're excited about is the fact that we launched a fully embedded product, bringing it down from 24 screens to three screens is monumental.
I just wanted to take a moment to call that out tremendous effort by the Carvana and route teams nights weekends and alike to move from a soft launch of a product last October to putting that fully embedded product in market. In July is really really monumental and so now we think from here we have the ability.
<unk> to ramp up Carvana and do it the right way Alex Hughes.
<unk> prudent earlier I think for us, it's really about the excitement around the channel.
This is a.
A really good partner for us to launch the embedded channel with we see the attach rate continuing to improve and.
And we see a good quality customer coming through this 80% of our carvana customers have prior insurance, it's a newer car hire coverage levels because of the auto financing thats in place in many cases and the early signs and retention are positive. So for us. It really is let's focus on growing that channel the right way, let's focus on that scale.
Knowing that embedded product.
Two other partners, which we're active we're in active discussions on.
And that's going to be our focus on embedded for the back half of the year.
Okay. Thanks, Dan.
One more from me if I could here.
I've got a tone I guess from the letter from your opening comments of kind of thinking about or pursuing other.
The revenue channels.
So.
You mentioned, even Dan just mentioned the other prospective partners maybe besides carvana.
Putting that and excluding the digital agency.
And they are excluding those two things are there other things that you're thinking about that would be a different revenue source for you guys. Besides the traditional insurance with Carvana and other partnerships and besides digital agency.
Thanks, Mike.
On the digital agency, we continue to we just launched that capability, where we're alive in three states now.
And we do expect to continue to expand that offering into bringing more partners on to that platform. We think it's a really unique offering because it allows us to basically leverage our technology, which is what we are good at and and pair that with lots of different insurance offerings and as we can.
<unk> scale that we do expect that to be.
More meaningful portion long term.
Of our revenue.
And I'll turn it over to Dan who can talk a bit about some of the additional partnerships we're considering yes.
Yes, Mike.
First would be.
We're focused on what we think we are good at the experience that we built up the data that we've built up in personal auto and we think we have a long way to go in terms of the opportunity.
Certainly what we have accomplished with Carvana has been transformational for our business and people are taking notice and so we do see the opportunity to build out the embedded vertical with other partners for us. It's about two things number one stay focused on Carvana there is still tremendous opportunity.
In front of us and the roadmap to enhance the customer experience enhance the attach rate and drive the carvana product forward and then the good news is we believe we can scale that product and take many aspects of it into other areas.
Approach customers at a more meaningful point for them to buy insurance as opposed to traditional marketing and so that is something that for US we think offers better customer acquisition.
<unk>, a better customer profile and we want to continue from there I think it's fair to say that the industry has taken notice.
The rate filings that we have put in place the success that that Rob talked about earlier that quick and decisive actions.
We have had different carriers reach out interested in how were accomplishing some of that so we don't have any news to report on that front, but just frankly, good recognition that what were doing in personal auto is gaining attention.
People are seeing our technology working faster and we think that offer opportunities for us to solidify the foundation and grow the business in the future.
Okay. Thank you guys appreciate it.
Yes.
We will take our next question from Matt <unk> with JMP Securities. Your line is open.
Hey, Thanks, good morning.
Good morning, Dan I had a couple follow ups on some of the comments you had there on carvana.
I guess first one is apologize for maybe getting getting ahead of myself here.
But as you think about whether it's carvana or any other potential partner, which is how do we think about how much is too much. When we think about you talked about that channel ramping that partnership ramping and third of new business coming in if we fast forward down the road do you guys have a mindset around just concentration with any.
Visual partner and how you might want to potentially manage that.
Good morning, Matt and thanks for the question. Yes. This is clearly the embedded channel and the embedded opportunity and it starts with carvana, but it will not be exclusively carvana.
For us as we go forward and I think diversification is really important that said we are seeing a diverse group of customers come through the Carvana channel and it's a really attractive groups group of customers. Thus far. So we are excited to continue and I think are our future on the embedded front is going to go in two directions. One is.
There is a lot more opportunity with carvana on the roadmap leveraging the reconditioning centers the last mile delivery capabilities that carvana has throughout the United States to just provide a highly differentiated consumer experience from Carvana insurance built with root and we're excited to come back with Carvana in the <unk>.
Quarter is ahead and talk about some of that opportunity on the product roadmap, so real real customer benefits and opportunities coming in the future with Carvana and then second we've learned so much.
I can't.
Besides enough how open a partnership that this has been with Carvana youre, putting together to digitally native companies focused on the consumer experience and really changing the consumer experience in insurance and a lot of that learning a lot of the sharing back and forth can be leveraged with other partners and so the ability.
80 to understand the consumer understand what the consumer wants to see in the personal auto book.
<unk> buying experience.
As information that we can leverage elsewhere. So I think there is going to be opportunity for us to extend the platform.
And stay tuned on that front, we're excited to come back to the market as we have future announcements to make.
Great and then just the Carvana follow up Dan you mentioned kind of really attractive kind of customer profiles.
Coming in through that partnership in that channel.
Is there anything you can see I know, it's early days, but anything you can see in loss ratios are just kind of whether it's frequency or severity of accidents at similar cohorts that have come through other channels that kind of kind of give you a little more color on that I'm, just curious because if I.
If I recall correctly.
<unk> channel is largely kind of not employing telematics correct and so I'm just trying to get a feel for kind of the rest of the book that has that Youre telematics technology in it versus Carvana, which I believe at this point largely doesn't.
That's right to date, we haven't yet leverage telematics and the Carvana space. This has not been asked for by the way and so Dan mentioned some of the early indicators that we saw as it pertains to customer demographics, we are seeing.
More preferred customer based on Prime insurance history in the light vehicle age.
Compared to the route direct book, but even when controlling for those demographics. We also see better than expected early indicators of both retention and loss ratio. It's still early days, but when we control for the customer demographics in the Carvana channel and we compare across the <unk>.
Route direct channel versus Carvana, we're seeing better than expected retention and loss ratio. This was very encouraging to leading indicator, but we're keeping a close eye on it.
Great very helpful. Thank you.
Yes.
Okay.
As a reminder, the star one if you would like to ask a question.
We will take our next question from Josh <unk> with Cantor Your line is open.
Hi, Good morning, Thank you for taking my question.
Notably the gap between loss ratios for new and renewal business in season States narrowed this quarter is this a reflection of your improved pricing models in telematics in decent shape.
Hi, This is Alex.
When we look at the.
The new versus renewal.
Loss ratios I think one of the things is we will you should expect to see a lot of the new pricing actually hit the new business earlier, where there are things like rate cap in place for example for.
For renewals and so you will tend to see that new business loss ratio being a bit more of a leading indicator, but I'm going to turn it over to Frank to talk a little bit more about the.
The particulars.
That's right both on the earning in but also on the underwriting a lot of the underwriting actions that we take hit new business first.
And won't pertain as much to the renewals.
Great. Thank you and then in your letter you mentioned that the <unk> loss ratio a sequential pick up was driven by a mix of seasonality and inflationary pressure can you help quantify how much of that was in each bucket.
Okay.
Okay.
You are talking about the seasonality from Q1 to Q2, yes correct.
Yes, so we saw that both both in our results in an industry results and so I think it's hard to kind of tease that apart the seasonality apart with the amount of rate thats, earning in.
Okay. Thank you.
Yeah.
Okay.
We will take our next question from Francois <unk> with Evercore. Your line is open.
Good morning.
This your cash flow used in operating activities has trended in the $50 million to $55 million per quarter is this a good run rate for us to think about going forward.
Okay.
Hi, This is Rob just to so you talk about the first part of the year. If I look at the second part of the year I wouldn't expect I would expect that to improve as we are completely focused on protecting the business.
<unk> The foundation of the company, we're doing everything we need to do.
Preserve cash so if you look at last year, we shut down our marketing spend in the second quarter, we've been taking rate over the last part of last year and all of this year, we had an expense reduction action in the first part of this year, we do expect for the back half of the year operating losses to be.
A substantially better than substantially lower than they were in the second part of last year. So we would expect in the back half of this year for that.
The cash burn.
About the same as the first two quarters of this year, but maybe a little.
Accelerated basis.
Got it. Thank you and then could you just elaborate.
On the adverse how familiar PID you took during the quarter.
Yes, there was.
Some small unfavorable city unfavorable development in the reserves.
And what that was largely driven by was a bit of an uptick in the severity on.
Our PD and collision and so we did see some.
Reserve deterioration, but it was not.
Material, it's not something that we believe.
As signs of <unk>.
Weaknesses in our reserves, we still feel very confident in our in our bookings.
Great. Thank you.
Okay.
As a reminder, it is star one if you would like to ask a question.
And we will take our next question from Tommy Moll join with K B W. Your line is open.
Hey, good morning, guys. Thanks for taking my questions.
Going back to your answer to Matt's question on the loss performance of Carvana relative to customers, where you applied telematics as part of the underwriting process prior to quoting and binding does that surprise you that the performance there has been better than I would've thought there would have been maybe.
The difference there, where the telematics would've actually play to a larger impact.
So I think that the telematics certainly has a large impact and we know it's one of the most predictive variables.
In our in our rating system in our direct business.
And time and time again, we have seen that that technology is very differentiated in that our ability to segment risk using mobile sensor data.
Do believe is world class.
However on Carvana the interesting.
Point, there, it's actually a little bit of a different phenomenon, we believe where consumers are buying that insurance for he's not necessarily for prices. So you're not getting the same shopping dynamics. Obviously, you get a lot of favorability on the loss ratio too in terms of things like fraud, where if I just.
At purchased a vehicle I know that there is no preexisting damage to that vehicle. So we are seeing a lot of sort of favorable selection.
We're seeing reduced sort of moral hazards too in that in that channel and I think that that's what you see driving maybe the benefit there and you had the other thing I'll say is we expect the loss ratios to continue to materially improving.
Even through core through this quarter quarter to date, we're continuing to see our loss ratio.
Materially improve across both Carvana and our direct business.
Yeah.
Yes, those are a couple of good points, thanks for pointing that out.
And then switching over in the past you've talked about a high percentage of the workflow for ratings changes being somewhat automated could.
Could you give us a little more detail on which parts of the process are automated and as that process kind of what youre thinking of monetizing perhaps to other carriers throughout the industry that are inquiring as to how you were able to take all the rate that you have.
Okay.
Yes. Thanks. This is Matt we have invested a considerable amount of effort in our pricing platform that allows us to do the end to end research process from identifying new rating variables all the way through creating rate filing exhibits for the regulators in an automated fashion with very little software engineering input required so Beth.
The way we've developed it is from a platform perspective to allow the users of the platform to customers being the data scientists the actuaries state managers to basically create configurations or select from dropdown menu is exactly how they want to test different pricing elements.
At the exhibits compare them to our incumbent models and automatically generate rate filing gigabits to send over to the regulators. So each of those components have become automated over time really the only time, we need an engineer to support a new rate filing is it.
We have a completely new data source that we have never used before we have to create a connection to the third party vendor ingest that data and then from there we use a platform like everywhere else Dan alluded to this before but that platform has allowed us to act more quickly and it has caught the attention of those in the industry and so we have.
Had active conversations about that platform and others.
But we do believe that.
This investment in our technology that has allowed us to not only identify the trends back more quickly on them.
Yes.
Just add there that as we think about the over 30 rate increases that we've taken this year over two thirds of them have been complete rate plan upgrades not just base rate increases. So there is a lot of companies that can just raise rates by seven 8%.
Really quickly, but it's much harder throughout the industry takes much longer to be able to update all of your factors and so we've been able to that automation that Matt was describing is across the board. So we've been able to completely upgrade the rate plans in most of our states. This year.
Okay.
That's a good explanation thanks guys.
Okay.
Yes.
And ladies and gentlemen. This concludes today's conference call. We thank you for your participation you may now disconnect.
Okay.
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