Q3 2022 Root Inc Earnings Call
Good day and welcome to the route incorporated third quarter 2022 earnings Conference call. Please note today's conference is being recorded 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad if.
If you would like to withdraw your question Press Star followed by the number one again. Thank you at this time I would like to turn the conference over to Jody Baker, Vice President and corporate Secretary. Mr. Baker, You May begin your conference.
Good morning, and thank you for joining us today really is hosting this call to discuss its third quarter 2022 earnings results participating on today's call are Alex Tim Co founder and Chief Executive Officer, and Rob Bateman, Chief Financial Officer.
During our question and answer portion of the call. Our presenters will be joined by Dan Rosenthal, Chief revenue and operating officer.
<unk> been asked a poor 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 third 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 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.
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 December 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 and third quarter 'twenty.
22 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 while talking about routes performance you can find reconciliations of those historical measures to the nearest comparable GAAP measures in our shareholder letter released last evening and our Form 10-Q filed with the U S.
E C, which are posted on our website at IR Dot joined route Dot com.
I will now turn the call over to Alex Tim routes co founder N C. E O. Thank you Jody I wanted to take today's call and backup a minute to remind everyone of why we built group.
During the last year, we have continued to comment on how our technology has allowed us to recognize one of the worst inflationary environment to ever hit the auto insurance industry.
We have continually communicated how that technology allows us to drive loss ratio improvement above and beyond anyone else in the industry.
Q3. This is exactly what you saw we.
We improved our loss ratio 14 points year over year, while most others in the industry had their loss ratio go in the other direction.
This effectively tripled the margins of our business and we are continuing to see loss ratio improvements.
We have done this while improving our ability to segment risk underwrite risk and classify risk using what we believe is the very best technology and predictive analytics and software development.
That improvement is the bedrock of our ability to profitably scale, but it is just step one.
Step two is building differentiated access to customers.
We have further invested in our product innovation through our embedded channel even during this runaway inflationary environment, we were able to further differentiate our product as demonstrated by 200% growth on our embedded platform year to date.
What's more we believe this channel offers extremely attractive conversion rates acquisition costs and underwriting ratios. We are progressing towards finalizing our second embedded partnership and look forward to providing further details in the months ahead.
We believe we are at the very beginning of a massive shift in auto insurance distribution and that we are at the tip of the spear.
In our direct channel, we are focusing on only writing clearly profitable business with an immediate return.
This means utilizing our deep understanding of customer segmentation and geography to drive profitable new writings with very limited marketing spend.
By leveraging our ability to quickly retrain our loss models, we can drive frequent increases to the sophistication of the accuracy of our prices.
We believe we are in a position to drive growth in the most profitable segments as we go forward.
Over the last year, one thing has been made crystal clear route must control its own destiny.
To do this we are driving the company to profitability year over year, we have reduced our operating cash consumption by 55% as.
As part of this we had to make the difficult decision to separate with 17% of our work force yesterday.
At the same time, we continue to right size, our non head count expenses together. These actions will lower our run rate expenses by roughly $50 million annually.
I would like to thank the customers and shareholders that have been with US on this journey I would also like to share my gratitude with all route employees current and past I am grateful for their hard work and contributions to route.
I'll now turn the call over to Rob to discuss our operating results in more detail.
Thanks, Alex 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 26% year over year to $150 million. Our gross earned premium decreased 18% year over year to $155 million. The top line decline reflects higher rates and stricter underwriting an underperforming geographies and customer segments along.
Long with a 91% reduction in marketing spend compared with the third quarter of 2021.
These actions have caused new business writings to decrease with renewals, making up 79% of gross earned premium this quarter as we focus on profitability.
We are committed to lowering the loss ratio and expenses to further reduce operating losses.
During the third quarter, the operating loss was $55 billion, a 57% improvement over prior year.
Adjusted EBITDA at <unk>.
K P. IV introduced this year to give a clearer view of the underlying performance of our business, excluding certain noncash items improved 62%.
Gross accident period loss ratio was 79% for the third quarter, a 14 point improvement versus the third quarter of 2021.
Our ability to recognize and respond to loss trend early along with a higher weight of renewal premium have driven consistent year over year improvement.
Year to date, we have implemented 41 rate filings with an average increase of 35% representing 97% of our total book.
In addition, we have filed revised contracts in 25 states to tighten underwriting refine our fee schedules and reduced premium leakage.
Going forward, we will continue to take rate in response to inflationary trends and in states, where we are actively working to address profitability concerns in combination with the markets, where we believe we have adequate pricing. We forecast. This approach will allow our loss ratio to continue to improve to our target levels and generate capital over the long term.
As Alex discussed we have taken further expense action to decrease cash burn we are moving closer to our optimal cost structure by further reducing both head count and non head count expenses. We expect these actions to collectively reduce run rate expenses by roughly $50 million annually.
The fourth quarter will include a restructuring charge of approximately 10, and a half to $11 $5 million, including fourth quarter cash expenditures of approximately seven to seven and a half million dollars.
We ended the third quarter was $629 million of unencumbered capital compared with roughly $696 million at the end of the second quarter.
Our operating cash consumption has dropped 55% year to date.
We are continuing to enact measures to reduce cash burn as we are focused on strengthening the financial foundation of the company.
Turning to our outlook, we expect our results to reflect the actions we are taking as we navigate through this challenging environment.
We anticipate that the gross written premium decline will continue into next year as growth in our embedded channel is overshadowed by declines in our direct channel as we focus on accretive business.
We expect continued year over year improvement in adjusted EBITDA and operating loss in the fourth quarter, so to a lesser degree than the first nine months as our cost cutting efforts begin to improve the bottom line in the fourth quarter of 2021.
We are making progress against our strategic priorities they'll recognize there's further work to be done.
By focusing our efforts and capital deployment in areas. We believe will produce immediate returns. We believe we are positioning route to reach profitability and create long term shareholder value.
With that we look forward to your questions.
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, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Michael Phillips with Morgan Stanley .
Hi, good morning, Thanks, everybody.
I guess first question to my first question relates to kind of familiar wording.
In the letter.
Excuse me profitable new writings in our direct channel with limited marketing kind of expand upon that what you meant.
And then I'm Gonna marketing are there and then as you look out over whatever time period three five years.
What's your mix that youre looking to do for embedded versus versus direct because you do say that it is going be the primary focus of your new business.
Okay.
Yes. Thanks for the question this is Dan Rosenthal and good morning.
We think embedded.
It's a really special opportunity as we go forward and we're seeing the product prove out with better unit economics, a better customer experience.
And the technology that only we have can really service those needs and drive a superior experience. So that is our focus we don't put a percentage on it but you can see in the letter a really nice trend line for the percentage of our new writings that are coming from embedded and we look forward to growing that in the quarters ahead.
On the direct channel and really for much of 2022 and Youre seeing that continue we have narrowed our focus to.
Areas that are immediately profitable, we leverage our technology and our learnings to help us find a profitable segments indirect.
And that's where our focus has been but again going forward there will be a greater emphasis on embedded as we continue.
Yeah.
Thank you Dan I guess as you think.
I was just on the beans on Europe coming allows them the next partnership.
But when I think about the universe of embedded for auto insurance I think okay.
Oems and I think most of the Oems already have some kind of partnership with somebody. So can you maybe just again without getting specific with your coming announcement lately.
Give me an educational waterworn on like what else should I be thinking about for where embedded can be in auto insurance.
Yeah, absolutely, okay, starting with real success in the Carvana partnership so growth of 200% year to date with a lot more on the product roadmap in the quarters ahead as exciting and as we mentioned in the shareholder letter we're progressing towards finalizing our next embedded partner, we expect to have an announcement in the coming months.
We've got multiple additional prospects in various stages of discussion.
With more than one of those advancing rapidly and so as we enter 2023, we're going to ramp up our business development and our product work going forward on about it.
Our focus is meeting consumers at logical points as companies expand out their platforms to generate revenue across their existing customer basis that it will include companies in the auto sector and the financial services sector, there's actually quite a wide breadth that are interested in learning more about our embedded <unk>.
<unk> and our speed.
To produce definable quote within 45 seconds, specifically with the auto Oems a lot of the partnerships that you sort of read about that are in place are not really truly embedded they don't compare to the product that we have with carvana. They are not driving a minable quote within 45 seconds. They are not meeting consumers.
With a differentiated experience.
So we think that there will be opportunities in the quarters ahead again across a lot of different sectors to just meet consumers at logical places.
And build out the embedded channel it starts with getting the product right. It starts with getting the technology right and our learnings that we really have an industry, leading embedded technology that helps our partners quickly integrate a seamless buying experience that quality that differentiation is going to appear to be appealing.
A lot of folks.
Okay. Thank you, Dan and last one if I could.
You had a bullet on your frequency and severity, what's driving the negative products Canadian deposit frequency for you guys and then what are you assuming going forward as you do your pricing.
Sure I'll start with that as we going forward assuming in our pricing, we've got higher net trends around 9% 10%.
We are seeing kind of flat this year vehicle prices. So when you look year over year, we're seeing a higher severity trends than we see like in the most recent six months.
On the frequency, we do have mix shifts in our business, we've got some more towards more profitable or more tenured preferred segments. We also have shifted the shift from new to renewal.
All of those will kind of contribute to a lower frequency higher severity and then we are seeing some decrease in mileage in third quarter seasonality versus.
Earlier in the year.
Okay. Thank you guys appreciate it.
Your next question comes from the line of Elyse Greenspan with Wells Fargo.
Hi, Thanks, Good morning, My first question.
<unk> provided you information right around head count reduction you guys are also focusing on bringing in.
New embedded relationship.
How do you think I know you said that you know gross premiums to decline into next year, but you guys have a sense of when you might start returning to growth or.
Or also a sense of just the level of decline will be target next year relative to what we've seen in the third quarter and throughout 2022.
Okay.
Yeah, good morning Elyse.
First I would say we are in growth mode. When you look at our embedded channel we have grown those new writing to 200%.
Year to date, and we expect to continue to grow.
That channel for Us and we think that there is a huge amount of opportunity.
In that channel and so we do believe that we are well positioned for growth in that highly differentiated channel and that's based on our technology in.
In terms of when we expect premium declines in our guidance and go forward I'll turn it over to Rob you could talk a bit about <unk>.
Expectations, I think our expectations leases Rob Bateman.
That that premium will decline going into next year and possibly into 2024 as the direct book sort of runs down in states that we have accretive business and we spend very little on direct marketing and as we wrap.
Wrap up with additional partners in the embedded in the embedded channel.
Okay, and then you guys have continued to take a good amount that weighting.
Rate increases I guess, where are you in terms of the rate increases.
What do you expect I guess through the balance of this year and into 2023.
A rate increase perspective.
Yeah.
Sure.
In quarter, three we took 13 rate increases as mentioned earlier, we've taken 41 throughout this year, we still got about 13 seven to somewhere between 10% to 15% rate that's still earning in we're monitoring as I mentioned earlier, we've got trends selects future trends selects of around 10%. So we're kind of monitoring those trends and seeing.
How those pan out, but we are planning to continue aggressively taking rate as long as what youre seeing those types of aggressive trends.
Yeah.
And then last one.
I did point out like that.
Underlying.
Underlying loss ratio did get better in the quarter.
Would you expect that to continue.
Yes, we do expect that to continue and we've seen continued progression through October we do with that rate, earning in with an odd level loss ratio that is materially below.
Our Q3 loss ratio, we expect continued improvements until we hit our targets.
Thank you.
Thanks.
Your next question comes from the line of Yaron Qunar with Jefferies.
Thank you good morning, everybody.
First question going back to the frequency improvement. So I think you call out mix change as part of the driver. There can you maybe elaborate on that a little bit do you see that as a <unk>.
Direct impact from the Carvana.
Embedded growth.
Or is there something else and I guess the reason I'm asking this is just I am trying to figure out if there is a risk that maybe we see that loss ratio, while still improving maybe not improving as much frequency trends.
Stabilized.
Yes.
I think this is frankly, what I think of those loss trends.
We're again, we're pricing to 10% future increase trends. So we are expecting losses to go up 10%, so frequency going down or or severity going up that mix. We're more concerned about the total now we know that new business has higher losses than renewal. So if we start to grow more youre going to sit.
See that frequency severity shift.
Go up but if we're taking overall enough rate to maintain to maintain the loss ratio. Even if he saw frequency go up you would still expect the loss ratio to go down if we're taking it up right. So that's the way we look at it. So some of those mix shifts to your question, yes, our into more more profitable segments. Some of that is mix shifting into carvana some of that.
As with our new segmentation models, we're seeing more preferred segments get lower rates and so we're seeing a mix shift into those segments as well as the new renewal mix shifts that we're seeing so all of those kind of combined to that to that frequency decrease, but again thats an observed frequency severity quarter three over quarter three not necessarily what.
We expect going forward.
Got it thank you.
And then.
With the head count actions that you took on overnight.
I think those come on top of actions earlier in the year. So can you maybe talk a little bit about where.
The reduction is coming from is it broad based or is it concentrated in specific units.
And maybe how do we as outsiders look at this and.
Have confidence that youre not cutting to the bone.
Okay. Thanks for that question.
Where we are focused right now is on driving the company to profitability and so we have been taking aggressive expense action throughout the year on both head count and non head count and we have materially reduced our cash fixed expenses year to date, and we think that that is appropriate given the increase in cost of capital.
Given the uncertain environment that we're in and we believe that that's very necessary now I will point out in terms of cutting to the bone during that period.
Where we were eliminating almost 50% of our cash fixed expenses, we were still able to ship. What we believe is an incredibly innovative product with carvana and actually grow that product, 200% almost entirely through product improvements and innovation in the flows and the experience for customers.
<unk>. So we do not believe that we are cutting to the bone. In addition, we were able to make meaningful segmentation improvements.
And continue to make meaningful segmentation improvements in our models. So we are still actually able to keep that momentum going forward. Rob do you want to comment a bit on where exactly the expense savings are occurring sure. So.
If you think about what we're talking about is more of a pivot to embedded growth. So if you were to look at our head count reductions they really were around marketing and other thing marketing.
Employees personnel that support and other areas that support the direct channel and then just other areas that we just felt that we needed.
We needed to take some head count out as our premium comes down.
Got it thanks, so much for the answers and good luck.
Thanks Sharon.
Your next question comes from the line of Matt <unk> with JMP.
Thanks, Good morning.
I just have one question left there is a lot of others have been answered in your letter you.
You say that we believe we have the ability to reach breakeven in the coming years.
My question is the caveat to that.
Without raising additional capital or do you see that happening.
With the need for additional capital down the road.
Okay.
Okay.
So Matt this is Rob I would say we have we believe we have enough capital to execute our strategy in the coming years. If you look at the combination of the reductions we're taking on the loss ratio.
We're implementing policyholder fees, minimizing marketing expense and reducing expenses and.
Even this year, we're going to invest about $400 million of our cash to take advantage of the interest rates. So we're doing everything we can to either.
Reduced cash burn or generate cash and we looked at the growth trajectory over the over the over the next couple of years with embedded we believe we have enough capital to execute that strategy.
What we really want to do is control our own destiny.
What we're talking about about around here a lot is what do we have to do to control our own destiny.
Through both like I said expense reductions and through the underwriting and even in the investment stuff that we're doing the other thing.
<unk> of course, it always just depends on where that was.
Happens in the macro environment, but.
Way, we look at it now with the actions, we've taken and what we've done in the past and going forward. We think we can we are we have the runway to execute our strategy.
Great. Thank you I appreciate it.
Thanks, Matt.
Your next question comes from the line of Tracy <unk> with Barclays.
Thank you good morning.
I think I heard you comment that you expect to take some rate actions and these rates are still earning and if I could get some clarity on a comment you made in your shareholder letter. You mentioned you believe you have achieved rate adequacy and a significant number of your market.
How much of that book significant markets represent and what gives you confidence that you have achieved rate adequacy.
Okay.
Sure. So this is Frank as.
As we think about the overall loss ratio. It certainly varies greatly by state. So for example, California Hasnt allowed rate increases for almost two years. So we're not rate adequate there we've pulled back greatly shrank our writings there.
Our rate adequate now we think between five and 10 states.
We do have rates still rolling in in those states and then there's other states that where you expect to be rate adequate in the next year. So we're starting to as we as we talked about that focused marketing. We're doing limited amounts of focused marketing targeting some of those states, where we believe we are rate adequate and then in particular segments, where we think can be capital to occur.
Creative in the short term.
Yeah, and I'd add when we look at the third quarter.
We have an on level loss ratio, so accounting for all of the rates that we have already taken this does not even account for the future right. We will take we are seeing in on level of loss ratio in the low <unk> and as we probably said you know our long term target is 65, so that gives us a lot of confidence when you.
Look at the book of business that we have taken appropriate action to get to rate adequacy in many many areas.
So what percentage of your above premium.
Five to 10 states representing.
Okay.
About 40%.
Okay.
And then just going back to the frequency comments about the improvement you said youre not expecting that to continue so when you come up with your loss picks are you, saying, you're putting a number that reflects your perspective you.
What youre seeing now on the frequency side.
Correct, we're pricing to expected future loss trends, which as I mentioned earlier, we're seeing between 9% and 10% and not necessarily on a year over year right. So again, what we published for frequency and severity are year over year or quarter three to quarter three.
And so last year, you had dramatically increasing phys dam, but not as much on the on the liability of medical cost. This year were seeing much flatter on the Phys dam severity used car prices have been flat most of this year, but we're seeing some increase in litigation and medical costs and so I wouldn't set the prices based on the frequency severity of quarter three over quarter three.
And so we're setting we're setting our future rate need in future rate expectations based upon that in total about 10% going forward.
Thanks, Ken.
Your next question comes from the line of French law Mackerras with Evercore.
Thanks, Good morning in the press release, you mentioned the goal of decreasing cash burn next year.
Can you quantify that for us how much less cash burn would you be expecting in 2023.
Okay.
Yep.
This is Robert.
Like I said earlier in the call. We're doing everything we can to to decrease cash burn and generate generate cash.
Expect our cash burn to be substantially less next year than it was this year.
We haven't published a number yet on that but we do expect it to be significantly lower than in this year and you can see year over year. If you look at adjusted EBITDA.
Improved 60, we improved 62% there year over year and we plan to.
With the rate actions, we're taking loss ratio improvements the things we're doing on fees.
Rent reductions.
We've taken it.
As well as other things, we're doing with the business. We do expect the cash burn to be significantly lower next year.
Got it thanks, and just on the timing of the $50 million annual expense saves.
When would you expect to.
<unk> reached that full $50 million.
Okay.
I would say by the end of the head count reductions piece will will reach for the full year of 2023 on the non head count reduction will it take for the full year to recognize the rest of that $50 million.
Got it thank you.
Your next question comes from the line of Mark Hughes with Truest.
Yes, Thanks, and good morning, let's talk about your posture towards reinsurance.
What you see in terms of.
Pricing dynamic.
How much you intend to rely on reinsurance on a go forward basis.
Okay.
So hi, this is Rob again so.
On the reinsurance market. So as you think about our program we have a number of ways.
A number of trees in our program. So we have a typical cat treaty for auto. We also have a single occurrence ex ol, but are primarily capital support is from quota share agreements.
We have a total of.
Three quota share agreements that we have we renew each year right now what we're seeing in the market we have been able to for the most part get the terms that we want to get we haven't really seen a lot of pressure.
On the terms and pricing for us we have taken over quarters shares down by.
Pretty small amounts. So for example, one of them we went from the 35% quota share to a 30% quota share, but we really haven't seen.
I haven't seen haven't seen our terms tightening much we do expect that as our loss ratio gets better. However that we will pull back on the quota shares overtime our quota shares include.
Some lost corridors that are a bit punitive that wed like to as we as we move over time remove those last quarters from our agreements.
And then I didn't get that number but the unencumbered capital at the end of the quarter what was that number.
Okay.
Okay.
Yes, Rob.
Okay.
Yes.
Yes, it does.
The scrip scripts.
Sure.
Sure.
Okay.
If it's not immediately available I'll look at the transcript.
Thank you very much I appreciate it.
Thank you.
Your next question comes from the line of Brian Meredith with UBS.
Hey, Thanks, a couple quick questions here for you first did you have any losses from hurricane and was there any cat losses in the quarter because I know there was some auto Washington and that hurricane.
Yeah.
Brian . This is just to go back on the last question was 629 on the unencumbered cash at the end of the at the end of the quarter.
Ian we had.
We have essentially nothing we don't have a lot of exposure in Florida. If you think about it. We just started writing in Florida, a couple a couple of months ago. So our our exposure the number of claims <unk> gotten an R. R.
Our very very minimal at this point.
Great that's helpful.
And then my next question I'm, just curious so there's been a lot of press on Carvana recently with respect to their financial situation.
And I guess my question is more.
Is there much more to do with respect to rolling out that relationship as far as worker investment that carvana needs to make have you seen any slowdown at all in that and then is there any financial ramifications back to you in the event something does happen with Carvana.
Okay.
Hi, Brian This is Dan and good morning.
Thanks for the question no.
No question economic conditions are impacting car sales on a macro level.
We believe the Carvana team is focused in the right areas and frankly, where economic conditions are is driving an even higher focus on gross profit per unit and that means an even higher focus on the insurance product. So the product roadmap that we are building.
Been proven out we expect it to improve the attach rate next year and there is focus from both companies are doing so which is wonderful for our embedded product as far as the second part of your question.
No I can't foresee any financial ramifications with the agreement that we have in place with Carvana.
Pretty straightforward.
As as they continue to sell cars, we're focused on driving attach rate and ultimately leading to new writings and again, we believe that the macroeconomic conditions around car sales.
Are not going to have a negative impact in our ability to drive new writings mixed.
Makes sense. Thank you and then I just wanted to quickly slip in here.
And noticing that the renters Pip has been declining sequentially for a little while could you just remind us what's going on with that business.
Yeah, we have renters really as a cross sell opportunity, it's a very low premium product that we don't.
Look to acquire mono line renters, it's just hard to ever recoup the customer acquisition cost and so it is it is a cross sell product that is primarily active in our direct channel and so as we have de prioritized to some extent the direct channel in favor of growing the embedded channel we have seen those.
And the policies enforced their decline yeah, Brian I think this is Dan I think what youre seeing from US is just a laser focus on execution and prioritization. We've been running one part of this play for more than a year and you heard from Alex and Frank It's been paying off we've turned the corner in terms of leveraging our technology and improve.
Moving our pricing and underwriting foundation. So now we've just got to continue to chart. The course for driving the embedded growth and driving that continued focus and prioritization in and that's what we're focused on executing.
Sure. Thank you.
Your next question comes from the line of Josh <unk> with Cantor Fitzgerald.
Hi, guys. This is <unk> on for Josh Good morning, So the growth in the Carvana product has been really impressive and exciting to hear that you are close to closing a second embedded partnerships will be lessons learned and work you did on Carvana second embedded product easier to bring to market and scale and are you able to add any detail around what a <unk>.
Embedded rollout might look like.
Okay.
Yes. Thanks for the question Josh. This is Dan we're really excited about the opportunities in the embedded product thats, what youre hearing from us and what we see as we build the channel is we're really going to have two types of products in two types of partners. One thats more customized focused on the underlying customer focused on the opportunities within that particular.
Our partner in within that particular channel.
And we are seeing opportunities there to leverage the learnings from Carvana. What has worked what has not worked into creating a more successful customized product for other partners and then we're also finding that in order to drive new writings volume in a positive way, we can leverage those learnings to create more of an off the shelf product so that we.
Can drive that faster and more seamless integration.
With partners that don't require the significant level of customization and Thats part of how we're going to be able to drive new writings with the team and the resources that we have in place.
Understood that's really helpful. Thank you.
Thanks, Jeff.
Your next question comes from the line of Andrew <unk> with Credit Suisse.
Hey, good morning.
First question just need a little more clarification on how your pricing to 10% increases in rates for future losses.
Is that does that mean that your work is not done that you really across the board have to take more rate this year and.
Yeah.
And is it is it coming from.
Thank you were saying, it's coming from areas like litigation and <unk>.
Social inflation, maybe elaborate on why you need that.
Absolutely. So when we think about where we are today again, when we look at the current loss levels and the current level of where were seeing severity has come in and frequencies come in.
We do believe given our on level loss ratio being in the low sixty's that at we are broadly right adequate across many many markets for where loss costs are today.
That said going forward, we do believe that as inflation continues whether it's from social inflation medical inflation labor inflation.
Its inflation whatever it may be we do believe that we need to continue to take rates as the entire industry will need to continue to take rates to keep up with an ever rising cost.
Inside of inside of claims or claims costs. So that is when we are talking and that's what we're talking about when we say a 10% forward trend is that we want to take at least 10% rate sort of going forward. So that we can keep up with inflation.
Got it so hard to say exactly where but you are feeling it and you expect that inflation to continue is that the right way to think about it.
That's the right way to think about it I will note, we're seeing right now in our actual numbers something lower than what we are assuming going forward and so we are in a very conservative stance, we believe with a 10% forward trend.
Got it.
Yes.
With your loss ratio, having improved so much when we think about carvana, which is a lot newer than direct how's the profitability. There could you share anything around the loss ratios on year Carvana business to date.
Absolutely we are seeing materially better.
Loss ratios on the Carvana and embedded business, that's largely driven why we why we believe it is because a lot of these customers are actually purchasing for east not necessarily price and so when a customer purchases on carvana. They actually are comparing us against fewer options than when they purchase on our direct.
Channel. We also believe that we have eliminated some moral hazard. So there is less fraud in that channel and so all of the leading indicators. Although it is early are looking very positive on the carvana loss ratios and it is outperforming our direct business.
When we look at just those first term early indicators on loss ratio.
Got it and then just lastly.
And congrats on the second embedded product.
What are you seeing in terms of competition for that business I'm sure.
A lot of the big auto players are tailing, taking notice of what Youre doing are you seeing a lot of competition as you aim to write embedded business and if you could elaborate on.
How that how that's playing out that would be great.
Yes. This is Dan thanks for the question.
We are seeing a lot of people talk about embedded but when you think about what Alex just said around <unk> and around the customer experience. We are not seeing competition in terms of the product that we offer we are leveraging.
The technology that we have built.
Have our partners quickly integrate a seamless buying experience for their customers.
And we're doing so.
<unk> faster than others for two reasons, one we've built the technology stack in the right way and it allows us to access everything interconnected in a very very fast manner and then number two you are hearing from us that embedded is our priority.
We are driving embedded auto insurance is our top priority for growth and as Alex said, we're already in growth mode. We are already leveraging the foundation that Frank and team and.
And Matt and team have helped build around the pricing and underwriting side to go forward with the embedded growth. So driving that prioritization is something that partners and prospective partners are really feeling from us when they interact with us and they ask questions and they say can you introduce this product or can you introduce this level of customization.
The address specific customer need we are able to respond very very fast we haven't embedded team that is second to none that is deeply passionate about creating a differentiated customer experience that is going to have an impact on the way consumers buy their car insurance for many many years to come and that's what our.
Active partners are feeling theyre, feeling just a speed a speed to market and a level of customization that no one else has.
Interesting actually gives me.
<unk> follow on.
Just given what you announced today with a second partner.
And what you just said does this give you a lot of optimism about 2023 and that will be hearing.
More and more partners that youll be binding.
Yes. Thanks for the question. So just to be clear we are not announcing a second partner today, we're announcing multiple partners deep into the funnel and frankly, just excitement around the product look I don't want to be over exuberant on this we think that we have built a product that is highly differentiated and showing very very clear success.
With our launch partner and as Alex said, we've scaled those new writings, 200% year to date and now we're going to continue to do so, but we want to make sure that we choose the right partners that we build the right products and then that we test those products in the right states with the right customer segments, and then scale them. So that's our focus so.
I am not promising significant embedded new writing script growth next quarter and I don't want you to think that but I want you to understand that embedded insurance is our top priority from a growth perspective, we are seeing at work and we are going to continue to invest in scaling the channel from here.
Awesome, Thanks, a lot.
Your final question comes from the line of Tommy Mac joint with K B W.
Hey, good morning, guys. Thanks for taking my questions just a quick follow up or two actually on Mark's earlier question on reinsurance.
Just confirming if I heard your comments correctly that you have not seen and are not expecting any changes in the ceding commission on those quota share contracts.
Yeah, we've seen very minimal change on the ceding Commission what we've done is win.
We've gotten non concurrent.
Non concurrent terms to the to the <unk>.
For mortgage loans, we've put out there we've just backed off on a quota share percentage. We're sticking to what are our firm order terms are and just backing obviously non concurrent terms now that said we do see.
Are some of the terms of within the contracts actually improving a bit when it comes to the loss corridor as our loss ratio gets better.
Which would you will you would expect so.
Got it and just remind me of your quota share agreements staggered or multiyear or what's the setup of those.
Yeah. So yes, there are more the way. They work is there are multiyear agreements that are risk attaching. So if we have a risk that we write this year that that quota share will stay with the with that risk for the period that it's on the books for up to about four I think it's four years, depending on the contracts were for.
Yes.
Thanks, and then just last one is there a long term sort of steady state level for the quota share percentage that you envision.
Okay.
There is we just have that we haven't we haven't gotten there yet we haven't we haven't we still have some analysis to do around it.
Okay no problem. Thanks.
That concludes today's conference. Thank you for participating you may disconnect at this time.
[music].
Thank you.