Q4 2022 Root Inc Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Inc. For Q2022 earnings conference call.
I would now like to turn the call over to Jodi Baker Corporate Secretary. Please go ahead.
Good morning, and thank you for joining us today really is hosting this call to discuss its fourth 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 the question and answer portion of the call. Our presenters will be joined by Dan Rosenthal, Chief revenue and operating officer, Matt, but not the poor Chief Technology Officer, and Frank Palmer, Chief Insurance Officer last evening, we 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 2020 to Form 10-K, 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.
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, 2022, where you will see a discussion of factors that could cause the company's actual results to differ materially.
Really 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 also like to remind you that during the call. We will discuss some non-GAAP measures while talking about rigs 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-K filed with the SEC, which are posted on our website at IR Dot join route Dot Com I will now turn the call over to Alex Tim routes co founder.
<unk> and CEO. Thank you Jody and 2022 we significantly strengthened the foundation of the company by achieving profitable pricing levels in the majority of our markets and reducing our capital consumption by 48% all while much of our competition continued to see rising loss ratios and deteriorating earnings we did.
This through the worst inflationary environment in auto insurance in decades, showing the differentiation of our pricing and underwriting technology and our ability to quickly detect and respond to changes in the environment. This has positioned the company to achieve profitability with the capital. We have we drove a 17 point improve.
And gross accident period loss ratio year over year in Q4, and we continue to see our loss ratio declined to January in 2023, we plan to release, our newest segmentation model, which is showing large improvements to our pricing accuracy. We believe our data science and technology competitive advantage is a major contributor.
To our loss ratio progression over the last 12 months. This has resulted in taking us from over 10 points worse than the industry. So now beating the industry average since the third quarter of 2022 all of this positions us to scale our business profitably as we announced we are continuing to expand our embedded business with a national digital.
Financial services company, we continue to see momentum in the funnel for future partners, who value speed innovation and commitment to customer experience. We believe that embedded insurance will be the next large secular trend in distribution and our flexible tech stack and insurance product give us immediate advantage to build.
<unk> access to customers in this growing channel in 2022, we grew our embedded new writings more than eight X. This SaaS combined with our new partnerships is setting us up to scale, our embedded platform through 2023.
With command of our loss ratio and underwriting results and dramatically reduced fixed expenses, we are well positioned to drive both new writings growth and profitability in the year ahead. We're excited for the year and are deeply grateful to our team investors and customers I'll now turn the call over to Rob to discuss our operating results in more detail. Thanks.
<unk> results for the fourth quarter of 2022 reflected our continued focus on strengthening underwriting performance and reducing expenses across the company.
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.
Gross written premium for the fourth quarter of 2022 was $122 million, a 23% decline year over year gross earned premium was $143 million a 25% decline we expected this lower premium from right, we have taken and stricter underwriting an underperforming geographies and customer segments along with significant.
The lower level of marketing spend compared with the fourth quarter of 2021. These actions cause new business writings to decrease with renewals, making up 81% of gross earned premium this quarter as we focus on profitability.
<unk> accident period loss ratio was 77% for the fourth quarter, a 17 point improvement versus the fourth quarter of 2021, we recognized and responded to loss since early which has driven this year over year improvement in 2022, we implemented 53 rate filings with an average increase of 37% across our total book.
We filed revised policyholder contracts in 33 markets to tighten underwriting and refine our fee schedules, we plan to increase rates again in 2023, where needed to offset loss trends from persistently higher than historical severity. The combination of rate increases strengthen underwriting and meaningful segmentation improvements continue to drive decrease.
<unk> and our loss ratios quarter over quarter, moving us closer to our long term target of 65%. The operational actions. We took in 2020 to demonstrate our commitment to lowering the loss ratio and expenses to improve our financial performance in the fiscal foundation of the company during 2022, our operating loss was 260.
$3 million, a 46% improvement compared to 2021 adjusted EBITDA, our approximation of operating cash consumption improved 58% over the prior year. We ended the fourth quarter of 2022 with $559 million of unencumbered cash compared with $629 million at the end of the third.
Quarter, we reduced our operating cash consumption by $193 million in 2022 from $403 million in the prior year, we took actions to significantly lower our head count and non head count fixed expenses by 38% on a run rate basis, turning to 2023. Our results reflect actions. We are taking we expect <unk>.
<unk> a premium again in 2023 as our in force policy decreases outpaced new ratings from our embedded platform and profitable direct markets. We look ahead to continued year over year improvement in adjusted EBITDA and operating loss in 2023 from a lower loss ratio and a significantly smaller expense base, we are making progress against our strategic.
<unk> and will continue to drive them forward in 2023 by focusing our efforts and capital deployment in areas. We believe will hit our profitability targets, we expect to significantly reduce our operating capital consumption again in 2023 and believe we are positioning the company to achieve profitability with the capital we have with that we look forward to your.
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The floor is now open for your questions to ask a question at this time. Please press star one on your telephone keypad. If at any point you would like to withdraw from the queue. Please press star one again, you'll be provided the opportunity to ask one question and one further follow up question.
We will now take a moment to render our roster.
Our first question comes from the line of Jos.
Seigler from Cantor Fitzgerald. Please proceed.
Yes, hi, Thanks for taking my question today. Good morning, I was wondering if you could provide an update on the pipeline for future embedded partnerships.
Absolutely good morning, Josh.
As we announced today and as we said last quarter, we are seeing really because of our differentiation in our product and our technology and our ability to really seamlessly integrate with these partners. We are seeing real momentum in our embedded.
Funnel.
And in our pipeline and that's as evidenced by we as we announced we signed a commercial agreement with our second embedded partner and we're expecting.
Third to follow soon.
I'll turn it over to Dan who can talk a bit more about the pipeline yes.
Yes, I think Alex is right, we're seeing real differentiation in the market place.
We see it with the new partner that we were delighted to announce.
Overnight, but also in the pipeline that we talked about just given the better consumer experience that our product offers its just we are able to produce a binder book quote much faster than anyone else and we're meeting customers in a moment of need.
Secondly, we're seeing better unit economics and business results across the product and that provides an opportunity to scale and then third it's really the thing I'd highlight most is our differentiated technology and the insurance product design allows us to seamlessly integrate with partners and that is what.
Provides a leading advantage that's going to help us build and scale. This channel, it's not going to happen overnight, but we know we're on the right track and we're excited to move forward.
Understood. That's helpful. And then looking out into 2023 I know your soft guidance calls for a contraction in revenue, but as these embedded channels grow do you ultimately expect policy enforced to start improving in the back half of 'twenty, three but I guess when do you expect the revenue to start.
Signs of improvement moving forward.
Hi, Josh this is Rob.
If you look at well what were looking at for growth next year as we we expect our direct writings, we expect our renewable book to continue to shrink, but as the new embedded partners come on our new rates will increase quarter over quarter throughout the year.
Okay. Thank you.
Okay.
Yeah.
Our next question comes from the line of Charlie Lederer from Citi. Please proceed.
Hey, Thanks for taking my question good morning.
In the shareholder letter you mentioned leaning into a direct writings in certain markets can you talk about.
What segments I guess youre seeing is attractive in and whether this is going to translate into kind of higher marketing spend.
Relative to the fourth quarter.
Yeah. Thanks, Thanks, Charlie this is Alex.
Yes, I think really what we're seeing right now is in 2022.
We really invested to lower the loss ratio substantially and reduced our fixed expenses and what that has allowed us to do is really reset the foundation of the company and deliver profitable underwriting results because of those loss ratio levels. Now we still have some work to do on loss ratios and we think those are going to continue to trend down.
But when you look at the market. There are very few competitors that can actually profitably deploy marketing dollars right now because of the elevated loss ratio environment.
So what we're seeing is a unique opportunity in the near term to strategically deploy direct marketing dollars in areas that we are seeing hit our return thresholds I'll pass it to Matt our CTO and talk a bit about where those are but we do believe that because of the hard work. We did in 2022 to get ourselves to.
Really what right now is close to an industry leading loss ratio.
That has now allowed us a very unique opportunity in the short to medium term to return to that direct channel.
Yes, and our focus is on channels, where we have a right to win.
So we're focused on the channels, where we believe data and technology gives us an outsize advantage today those are our performance marketing channels. So quote Aggregators search engine.
Optimization and direct mail allow us to leverage granular models to ensure we are deploying our capital and disciplined manner.
In a way that hits the targets as Alex said.
What we've been able to show that over time as these models become better we're able to scale those channels with no degradation to efficiency. So we're taking a disciplined approach and the way, we invest our capital and we expanded scale through the year.
Okay.
Got it. Thanks, So I guess as we think about like capital consumption coming down further in 'twenty three is as more of that this year going to be unlike loss ratio improvement relative to last year or.
Would it be I kind of just because it sounds like marketing spend maybe ticks up a little bit.
Or is it I guess other areas.
Hi, Charlie it's Rob it's a couple of things number one it's.
On the cash burn if you think about what we did we.
We burned about $400 million in cash in 2021.
$200 million in roughly in 2022, and we expect.
Have that again for 2023 roughly.
The primary driver of the loss ratio, we expect the loss ratio to come down substantially again in 2023 as well as we continue to do around our cost structure.
Got it alright, thanks, everyone.
Thanks, Charlie.
Okay.
Our next question comes from the line of Tommy MS joined from K VW. Please proceed.
Hey, guys good morning.
Yes. My first question just continuing on that topic of capital you talked about being capital self sufficient with your current outlook.
Your internal forecast how much of a cushion at the trough cash level do you have and at what quarter do you envision that occurring.
Okay.
Yes.
Thanks for the question Tommy Craig could you just.
I'm trying to understand what exactly what youre trying to ask what's the Oh, yeah, you're asking are we yet at the bottom of the cash burn.
And just when do you think you'll be at the bottom of the of your cash level.
Hey, Bob.
We haven't disclosed that publicly yet we do expect it to be in the next two years.
Okay. Okay.
Sure.
And then the other thing.
So your head count is now down about 50% year over year and.
Do you feel that you now have the right kind of work force and personnel in the fixed expense base going forward or do you envision any any further actions.
Yeah. Thanks for that question where are we.
I think what we're doing is looking at our expense base.
Constantly and we've taken a number of head count actions, but we do we do have work to do around our non head count expenses still if you think about what the company was squirrel scaling for commitments to a bigger company. We have some commitments in 'twenty three that we have.
To take down for 24, we've done already some of that from 'twenty to 'twenty three but we've got some more work to do there.
Thank you.
Our final question comes from David Moat to maiden.
From Evercore ISI.
Please proceed.
Hey, good morning.
I just had a question just in terms of selectively turning on the marketing spend.
And how you think about balancing profitability with with that.
I look at the improvement in the loss ratio over the last couple of quarters and a lot of that.
Obviously, you guys are taking rate and it sort of come through is just a higher portion of your book being renewal as opposed to new business. So.
Could you just talk about how you're balancing the sort of new business penalty. As you think you can you can ramp up some of these new writings in 2023 within your outlook for.
Showing continued improvement in the loss ratio.
Yes.
Good question.
Thanks for that I'll start this is Alex and then I'll pass it over to Matt.
Yes, I think where we are today and the progression that we've made on our loss ratio and reducing it.
Almost 14 points in one year.
He is really tremendous and we think that that is mostly because of the way how fast we were able to react to the environment and in the inflationary trends leveraging our technology and a really flexible pricing underwriting stack and what that's allowed us to do is to get to a much better position and to understand our loss.
She is at a very granular level.
And really by customer segment.
We've also really improved our underwriting and so a lot of that first term what we're actually seeing is a lot of our first term new business penalty is actually really come down and so when we think about deploying our marketing dollars are one we are now and we've been deploying more marketing dollars really through January and February and we are seeing.
Good very good results.
And and we're doing that while we're continuing to see loss ratio progression and I think that's evidenced just really of the strength of our ability to one target the right customers through our technology and then too.
Making sure that we're just really disciplined on making sure that whoever we bring in the front door is the right customer for us and so I believe that you will see us be able to grow.
And continue that grow new writings and continue to show that loss ratio progression.
Yes, I'll Echo what Alex said, we continue to deploy our capital in a disciplined manner with a delicate balance between calendar year results and lifetime results over the last few quarters, we've been able to gain confidence as leading indicators come in.
As we kind of reengage with the direct channels and that explains why we are scaling even further in the coming quarters. So as we do our financial forecasting our planning our cash burn analysis and provide us guidance all of that is taken into account.
As our confidence increases with the leading indicators will continue to scale.
Got it that's helpful. I appreciate that color and then I guess, maybe just thinking about.
You guys have obviously taken a decent amount of rate and it's clearly a hard market in in personal auto. So it's still conducive for that to continue I guess when you think about.
How much rate you still need to take just to keep in keep it keep pace with loss trend and continue to continue on the right trajectory on the loss ratio.
Could you help us think about you know how youre thinking about you know how much rate you still need to take as well as what you embed.
From a.
From a frequency and severity.
Expectation for 2023.
Okay.
Sure Hi, this is Frank thanks for the question.
As we think about the the rate need to think about your question I want to think about it not just on a countrywide basis, but on a state by state basis. So as we think about those markets and when you go back to your earlier question around marketing and starting to think about growth. We can find states that have certainly lower loss ratios in other states as well as segments.
Within those states that are more profitable and so it's that that insights on being able to find the states. The <unk>. The segments that are profitable that have the lower loss ratios, where we have less rate need that allow us to turn on the marketing selectively now certainly we still have some states that when you look at our country wide loss ratio. There are some states that are ahead of that country wide.
Loss ratio, that's where we can do more of the marketing and some states that lag behind so we will be taking rate more aggressively in the higher loss ratio states as.
As a base as a baseline kind of countrywide I'd say, our average overall trend we're thinking is around 7% to 8%. So if we needed no rate in any state in order to stay at that same rate level, we would need to raise rates around 78%, which is about twice what historical rate trends have been if you think over the last 40 years loss trend it's been about.
4%, we're thinking all in it's about 8% so that'll be about 8% and then plus more in the states that needed more maybe a little bit less in the states that needed less.
Got it that's helpful. Yeah that sounds that sounds about in line with what we were thinking in terms of the loss trends so that makes sense.
And then lastly, I guess just yeah I know.
You guys are.
Reinsurer and a decent amount of the book I guess could you just comment it's a hard.
Reinsurance market at least on the property cat side not sure if that really how much that impacts you guys on the auto side, but wondering if you can share any perspective, you have is you sort of navigate a more difficult.
Reinsurance renewals just generally across the marketplace.
Yeah.
Hi, David It's Rob.
We saw it last year, we renewed all of our quota shares at <unk> on our cat.
We've not had any.
Problems getting the capacity we needed I think it's a combination of things number one.
Our loss ratio has come down we have an attractive we have more attractive auto book that has more stability than property cat and two we really are.
Our slowly pulling back on our quota shares and.
Taking more participation on our ex ol and cat, So where we've been able to go out and set pretty aggressive firm order terms and we've not we've not been able to fill those for more returns just taken a we've taken out a little bit more coinsurance ourselves.
Okay.
That's helpful. Thank you.
Thanks.
And we deal with have a another question from the line of Weston Bloomer from UBS. Please proceed.
Hi, Thanks for taking my question I was curious you've now revised policyholder contracts in 33 states that was up from 25 last quarter I was hoping you could quantify maybe quantify the impact that that had on your loss ratios in 2022, and then do you expect additional revisions in 2023 or should most.
The improvement from here just come from additional rate actions through your book.
Yes, Susan this is Frank Thanks again for the question as we think about those contracts.
Mostly onetime revision now theres still some states, where we're where we're implementing those and still seeing that the benefits, but we think of it that contract revision is kind of a state by state onetime overhaul.
No. We wouldn't we will expect to see continued earnings improvement from those so we changed our contracts in November we would still expect to see throughout this year as new renewable customers renew onto those.
Some improvements kind of going forward, but wouldnt expect to see kind of the same type of like Hey, we took contract changes and got this much benefit and then we take more contract changes and get more benefit the way you do with rate changes. So it would be more of a one time change that we would see earning into our book throughout this year and into next year.
Great.
62% on level loss ratio kind of contemplates.
That continue earn in from those revisions.
Yeah, it's in the 62% on level loss ratio that is really reflective of the rate that we have taken and we did we do not actually on level the loss ratio for changing of contracts and so that should be incremental benefits.
Great. Thank you.
Thanks.
Yeah.
There are no more questions. Thank you ladies and gentlemen, this does conclude today's call. Thank you for your participation you may now disconnect.
Okay.
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