Q2 2023 Root Inc Earnings Call
Okay.
Thank you for standby is Robert Mccarthy and I'll be your call.
Operator.
At this time I would like to welcome everybody to the route incorporated Q2.
20, <unk> earnings conference call.
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 press star followed by the number one.
Hum.
If you'd like to withdraw your question simply press Star one again.
Now I would like to turn the call over to Jamie Baker, Vice President and General Counsel.
Please go ahead.
Good morning, and thank you for joining us today really is hosting this call to discuss its second quarter 2023 earnings results participating on today's call are Alex Tim Co founder and Chief Executive Officer, and Megan Binkley, Chief Financial Officer during the question and answer a Porsche.
Of the call our presenters will be joined by Matt, but after 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 Q2 2023 Form 10-Q, which was filed with the Securities and Exchange Commission last evening before we begin I want to remind you that the 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.
<unk> 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 from these statements as well as our shareholder letter in Q2 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 rents 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 D C which are.
Posted on our website at IR Dot join route dotcom.
I will now turn the call over to Alex Tim routes co founder and CEO .
Thank you Jody and welcome everyone.
Q2 was a great quarter for the company. This is the result of our intense work and focus on pricing and underwriting which has allowed us to reignite profitable growth due to our loss ratio. We are uniquely positioned to capitalize on today's marketing environment, while much of the industry is continuing to struggle to underwrite profitably.
As we've consistently stated over the last 18 months. We believe this was made possible by our superior technology that allows us to identify and react quicker than competitors to changes in the pricing environment.
Early actions afforded by advantage are now evident in our results as we posted the highest margin in the history of the company, while growing new writing 65% quarter over quarter.
In the second quarter, we launched our previously announced partnership and also launched our telematics capabilities on our embedded platform. Our current partnership funnel is strong and continues to grow.
This growth has been fueled by our early proof of differentiation in our Carvana partnership where we have tripled the customer adoption by moving to our proprietary product. We are excited by the continued momentum that we are building on this platform.
Our direct new writings growth in Q2 was driven by reactivating, our marketing and product capabilities. This includes deploying marketing and additional states as loss ratios improved expanded underwriting capabilities and opening up additional product experiences to customers with our strong loss ratio performance, we were able to drive this.
While exceeding our profitability targets. We believe we are currently experiencing strong tailwind to this channel as we have seen highly favorable marketing costs driven by the competitive environment and are diligently monitoring this environment on a daily basis to ensure we continue to drive profitable growth.
From the beginning we stated our belief that machine learning and technology would revolutionize the insurance industry, while delivering a superior customer experience. This founding principle continues to guide US today, we've made progress on this strategy and our second quarter by deploying our newest Las cost model with an estimated 17% improvement.
<unk> and predictive power we continue to believe this cornerstone of our strategy is in the early stages and that over time. These capabilities will provide outsized returns to our customers and shareholders.
With the combination of loss ratio improvement technology advancements direct growth and embedded momentum. We believe we are on the path to profitability with the capital that we have we.
We are focused on driving the business forward and are proud of the progress we have made to date.
I'll turn the call over to Meghan to discuss our operating results in more detail.
Thanks, Alex our full GAAP financial results can be found within the shareholder letter and Form 10-Q published yesterday evening, we marked a return to growth in the second quarter, our emphasis on deliberate and profitable growth was evident through an increase in policies in force during the quarter, representing our first increase.
And overall policies in force count in nearly two years.
We executed this growth, while reducing our second quarter gross accident period loss ratio to 68% a slight improvement over Q1.
Gross written premium for the second quarter was $145 million, an 8% increase quarter over quarter gross earned premium for the second quarter was $132 million a slight increase over the first quarter.
On a year over year basis gross written premium of $145 million represents a 3% increase while gross earned premium of $132 million represents a 23% decline when compared to the second quarter of 2022, we continued to make significant strides.
Overall operating results, which is reflected in the 17 point improvement in our gross accident period loss ratio and a 12 point improvement in our gross expense ratio year over ear.
During the second quarter, our net loss was $37 million or 62% improvement year over year.
Adjusted EBITDA, our approximation of operating cash consumption improved 81% over the prior year to a loss of $12 million.
Results for the second quarter reflect the continued progress we've made to strengthen the fundamentals of the business and our continued focus on operating efficiency.
As a reminder, we focus on our unencumbered cash balance or cash held outside of our regulated insurance companies to help evaluate the overall strength of our current capital position. We ended the second quarter with $520 million of unencumbered cash compared to $524 million at the end of the.
The first quarter.
The minimal consumption during the quarter. It was largely due to an improvement in our operating results as well as a reduction in required capital contributions to our insurance subsidiaries and the timing of various net cash settlements.
And we turn to our financial outlook for the second half of the year, we expect continued them, thus far and deliberate and profitable growth and as a result expect to see an elevated level of unencumbered cash burn compared to the first half of the year with strict underwriting discipline, we anticipate new range growth will continue in H, two and will be supported by increased.
Acquisition spend compared to each one we will continue to prioritize loss ratio improvements and plan to take rate as needed as we monitor emerging loss trends.
We are pleased with the progress we've made on operating results and believe we are positioning the company to achieve profitability with the capital. We have we appreciate your time and your attention and look forward to your questions.
Thank you for that at this time, we'd like to remind everyone in order to ask a question press star.
A solid one.
Excuse me I'm, sorry, I would like to.
Remind everyone to ask some question this peso number one on the telephone keypad.
We'll pause just for a moment to compile the <unk>.
Okay.
Great.
It looks like our first question comes from Don Ziegler at Cantor Fitzgerald.
John Go ahead, yes, hi, everyone. Thanks for taking my question today.
Telematics data in an ambient sense and so they might download an app for a different purpose begin to turn on telematics permissions to look at a variety of things related to their to their driving and then be presented with an insurance quote later you know, we also think that through selling and getting closer to vehicles that there's an <unk>.
Opportunity to actually embed telematics directly with vehicles, we're already and have been since 2017 been pulling data directly from <unk> connected cars, we plan to expand that program and we think that particularly with carvana that there's a very attractive opportunity to get closer to those vehicles when they're in the reconditioning centers.
To further expand our telematics platform. So we think telematics is something that's gonna continue to expand we think by having our own proprietary flexible platform. It allows us to put telematics capabilities and novel use cases for the consumer and we actually think long term that that's going to significantly reduce the.
Barrier to collecting telematics data from customers as we start to make it make more sense for them and so so we're excited to continue to expand that.
Understood. That's very helpful for my second question.
Question I was I was curious you know moving forward.
Are you thinking about the mixed split for new writings between direct channels and the embedded platform.
I think yeah in the near future <unk> direct why not I'll say, we're seeing a very favorable environment on direct where we are able to really exceed all of our new business profitability targets Wow significantly growing the writings in that channel.
And we think we're just getting started we really only begun to reignite our growth engines really over the last five to six months of the company and so we think we're in the very early stages, there of where where that product will go and where that growth will go and we think that you know really the reason, we're able to drive that growth is because of.
Of our underwriting discipline and our superior loss ratio inside of the industry, which has all been made possible by our our technology of data science on pricing and so I think in the near term you know the Internet is a very big place and we have a very small share of it still and so you should anticipate in the near term that's been our bread and butter for direct to continue to scale nicely.
That said, we still believe that we are in the early stages of a secular shift and distribution and that longer term, we believe that more and more of our customers will be coming from embedded but we anticipate that grows to really be seen more than 2024, then in 2023.
Understood that's very helpful. Thank you.
Okay. Thanks.
Our next caller comes is <unk>.
<unk> Jeffers.
Uh-huh.
Hi, guys. Good morning. This is Charlie on for your own. The first question I have is just in light of recent headlines around letters of credit and reinsurance structures are you guys considering any changes to your reinsurance program.
Hi, good morning, Thanks for the question.
You know as it relates to the letters of credit issue, we became aware of the allegations of fraudulent collateral in connection with <unk>, a couple of weeks ago, and firstly I just want to make sure that it's it's clear that really has no direct relationship with us till we do have one at three ensure that.
<unk> potentially impacted and look where we are constantly evaluating our reinsurance structures to ensure that we've got the right terms for the business and over the past 18 months with then decreasing our external session percentage as the business has been improving.
So you know as we look at this the worst case scenario for US led for this particular.
Tequila or a ranch or would be for us to exercise our right to commute the deals and we believe that we could do that with a minimal overall impact of the financial statements given our our loss ratio performance. We've got a strong balance sheet and were ready unable to take back this business onto our bucks, if necessary, which would actually.
Further support underwriting profitability over the longterm.
So I would say our our longer term strategy is to continue to retain more business and reduce our reinsurance costs going forward. So this is actually consistent with our existing plans.
Okay. Thanks for the color and then just in terms of direct premiums written gross given that you guys have already inflicted Dr. Grove now do you expect to.
To be positive.
Okay.
Yeah. Thanks for all I appreciate that question as well you know as as we're thinking about just the second half I mean, we are as we reflect on the first half you know our expectations in terms of pets girls N N. G. W. P. Uhm have beat our our expectations and that's really been driven by the.
The work that we did in 2022 and continue to do in 2023 to to strengthen the fundamentals of of the business. So you know that's really put us in a position to increase pith earlier than we initially expected and we're gonna continue to do that as as long as we've got strong profitable unit economics for.
Or for the new business, and we remain confident and and our loss ratio performance. So we are expecting that for the second half of the year. We are expecting that pit bull continue to increase as well as in cross earn premium will continue to increase relative to to eight one.
Okay. Thanks, Uhm and then one last month, if I may you guys had favorable development in the corner. So I'm just curious number one with the source was if you're able to call. It out and then number two if any development was entering ear, so including development from the first quarter of 23.
Yeah. Thanks for the question. This is Matt thought maybe I could tell you a little bit about how we think about reserving internally somebody's actions, we've taken over the last year and a half.
So internally, we maintain an ensemble different types of reserving models Spanninger continue on that kind of looks at both short term trends and long term trends and that allows us to ensure we're diversifying or modeling capabilities and not really risking deficiencies or to any one type of strategy.
On the short term side.
We are heavily invested in the data in technology required to power. These models.
It enables us to a remarkably rescript. These models on a weekly basis and not only take into account the actual experience was coming in but the trends in the business and so that's allowed us to do in 2022 was to identify trends and repair costs that were coming through.
Mental payments and we took in 2022, some adverse development to reflect those trends that we're seeing in on a go forward basis ensure our reserves were reflecting those trends that we've identified.
So.
At the same time, we were able to react to those trends from a pricing perspective, and that's what's put us into into this superior loss ratio position.
From a favorable perspective, it was actually outside of the repair cost that we took the favorable development.
And on a year to date basis, we're feeling very good about the development is essentially zero. When you look at the Q1 versus Q2 results.
Great. Thank you guys.
Thank you.
Okay. So next.
Questioner is.
Yes, I'm from Wells Fargo go ahead.
Hi, Good morning, I had a question about the new pricing model I guess, what does that mean for like loss ratios moving forward I get that it's like 17% more accurate, but like how fast can you kind of see that benefit and is and is there maybe like higher costs associated with it just given that there's double the data that there wasn't the old model.
Don't know if you could quantify like if you use the old model and 20th twenty-three versus the new model like how could that benefited loss ratios.
[laughter].
Hi, Thanks for the question. This is Matt again, so we're really proud of the work we've done in the pricing space. We have invested heavily over the last two to three years in the technology that powers the pipeline from research and development all the way through deploying these models and production. So that allows us to take advantage of new data sources increased <unk>.
Hoser volume and test new statistical methodology that improve the predictive power of these sedimentation models the power of segmentation really comes through.
In mitigating adverse selection and we believe that the improvements interviews.
To the predictive power of these models coupled with the underwriting changes in the base rate increases were taking will continue to see favorable development or loss ratio on a daily basis.
Thank you and then from my second question I guess can you talk a little bit more about just kind of the carvana partnership and kind of traction there because you know embedded as a percentage of your writings was lower versus prior quarter, just because the wreck was up so much but maybe.
Talk about what you're seeing there cause you know we started to see like a new car and used car prices kind of come down in recent months and I think the manager drawing up a little bit. So maybe you could talk about what you've seen in recent months and that channel.
Yeah, absolutely this is Alex.
And.
Carvana, specifically in and are embedded platform more generally.
We are seeing and believe that we're going to continue to see consistent growth and and certainly growth on a year over year basis that we saw in Q2, we think that that in terms of new writings, we believe that that will continue.
And we want to continue to push more in your writings growth.
More generally and into the future.
Not just through the remainder of this year from where we are today, but also through 2024, we think some of that will come from our Carvana partnership which has been very strong and continue and you know we continue to see strong results in Carvana and then also really a growth from the more general platform and as we add on.
Board more and more partners right now we are seeing a very favorable traction in our in our final to get.
Get more partners and that's really been driven by two things the first is.
At this point, we really have a clear differentiation.
That's been proven in the adoption rates that we've been able to driving carvana, we actually have tripled the customer adoption of insurance on the car or on a platform for moving from what they were originally using which was an industry standard product onto our product that has clearly been noticed by several potential partners.
And we've continued to see lots of traction going forward and so we're excited to continue to expand that platform. It will take time to get those partnerships alive and it will take time to find product market fit with each of those individual partners, but we think that long term, it's going to be a very healthy growth engine.
Got it thank you.
Alright next caller is Peter <unk> Evercore.
<unk>.
[noise], Hey, guys. Good morning could you talk a little bit more about what exactly is driving the elevated cash burn in the second half of the year, particularly if you said there's caution on extrapolating. These growth levels moving forward do not expect as much underwriting improvement or is it really just a result of the ramp to marketing.
[noise] and acquisition spent thanks.
Yeah I think.
First I think before we before we go into details on that I think it's vital to understand that we are not growing at the sacrifice of profit and that while you may see near term capital burn increase it's actually on the contrary, we believe that this growth will drive the company to profitability and given are strict underwriting discipline and really what it.
Now an industry leading loss ratio, we think that this is an ideal time to begin to turn back on many of our growth lepers.
And so as we do that I think that that's that's what you might see in the near term accelerate some cash burn.
Yeah. Thanks, Alex.
At the risk of sounding repetitive I I do think it's it's critical to understand that our our main priority is protecting our capital in the business with a focus on both disciplined and cautious new writings growth and profitability. So let's we looked at the second half will continue monitoring the competitive environment that determined what the <unk>.
The more spam levels will be and I'm happy to get a little bit more clarity on how much we're expecting to spend related to acquisition cost.
In H, one for contacts we incurred around $25 million and an acquisition costs and an H two we're expecting to spend roughly 50 million and acquisition costs around 50 per cent of that will be performance marketing.
It'll be heavily dependent on the environment and we are not going to sacrifice profitability for growth.
We also still expect favorable results in terms of capital consumption in 2023 compared to 2022.
Oh, Okay, great. Thanks for that guys helpful. My second question. The eight per cent severity was less than it was in one Q. So I guess could you talk a little bit about what you're seeing in and why you're assuming severity has dropped for for route.
Sure. Thank you this is Frank Uhm.
We have seen both the decrease in frequency and an increase in severity those very quarter to quarter and some of that is driven by our mix of business in our new to renewal.
As we think about kind of a historical severities, and we think that kind of net trend, which would be the overall impact of frequency and severity kind of the overall loss trend. We think was going to be in the high single digits and we'd anticipate taking right to keep up with that pace.
Okay.
Great. Thank you.
Thank you our next caller is Charlie.
See how we go.
Go ahead.
Thank you. Good morning, So may be following up on Peter's question I think Alex said that this is the growth. It that you guys see getting route to profitability.
And clearly are growing in a measured way uhm is there a level of premium that you think you need to get to in the next few years.
Or whenever to get to profitability.
Yeah. We we think you know really there's three primary levers that we began executing on to drive the company to profitability and it's what our our laser focuses right now so our number one priority is to drive the company to profitability with the capital we have and there's three.
Primary levers that we're focused on to do that the first is the loss ratio and we are well on our way to pulling that lever and I think now both with double digit year over year improvements in the loss ratio.
Which has been tremendous and also just an industry leading loss ratio, where we now have a superior law. So he should have most if not all of the top 10. It was was really love her number one number two was reducing fixed expenses. So we pulled 12 points of fix it.
Expense ratio gross expense ratio improvement on a year over year basis, and we're continuing to execute an expense savings and so we do believe going into 24, we will see.
Additional improvement to our total fixed expenses.
From 2023.
So where will also well on our way to that pillar of the strategy in and making sure. We're getting profitable and then the third is what you're touching on which is now you have to drive profitable growth.
So clearly with a 65 per cent growth in your writings quarter over quarter and an improvement in our loss ratio were also well on our way there, but we still believe we're in the very early stages and so what we Wanna do and what you should expect from US is to continue to scale and we believe you know over the next couple of years that will certainly drive the company to profitability.
And what we what we really want to do is to continue to drive growth provided that we are seeing the favorable loss ratio performance that we're continuing to see if.
If that stops being the case, we will stop driving growth.
And so the priority is number one getting profitable with the capital we have a number two driving is much incremental as we possibly can.
With while hitting our profitability targets. So we think that we'll be able to grow well well beyond what just gets us to breakeven, but in in any event and where we also believe that there there will be a favourable growth environment and as long as that persist you should expect us to continue to drive.
[noise] line growth.
Great. Thanks that that's very helpful. Just wondering I guess this is my follow up uhm on.
Marketing spend.
Can you talk about how the efficiency of that's been his tracking versus routes historical averages and how much do you see that benefiting from the the challenging lost environment at your larger competitors.
Thanks.
Yeah. Thanks for the question this is Matt so.
In terms of our marketing investment, we're really focused on the channels were you have a right to win because of our investment in technology and.
And so today those channels are performance marketing channels, which include our political search channels search engine marketing and direct mail.
These channels allow us to use the machine rebuilt.
Bridges granular machine learning models to allow us to deploy our marketing spending a highly targeted way and to use input metrics like internal profitability metrics in the competitive landscape.
Take advantage of the current opportunity ahead of us.
Add those metrics change, we expect the machine to adapt as long as the opportunities remain well capitalized on them when the opportunities go away the machine will adapt.
That in part this growth is driven by the competitive landscape, but a bigger driver of it is our superior loss ratio due to the fact that we were able to identify and react faster than the industry.
Thank you.
Mmm.
Our next question comes from telling me with Joy at K E. W. So let me go ahead.
Hi, Good morning, guys. Thanks for taking my questions can you talk about the trajectory of the convergence of the gross and the net loss ratio is that merely a function of just reaching a gross loss ratio a threshold, where you're no longer hitting los four doors.
Yeah, that's a big part of the function and I think it's important to note that as we have.
Have continued to drive a really remarkable improvements in our direct and gross loss ratio not only will you see has come out of his loss or show corridors, but it also becomes really vital for us to continue to manage that reinsurance costs down and so we are consistently seating last business and we.
Plan to do that going forward to buoy, our our operating income.
Okay I got it and then can you just add a little bit more details around those items that you mentioned for the quarter that prevented uncap unencumbered capital from declining more uhm you called out a few items. So I just wanted to get a little more understanding on what exactly those entailed.
Yeah. Thanks, Tony This is Megan so at the end of the second quarter are unencumbered capital was 520 million and that compares to 524 million at the end of the first quarter I'm really a minimal change quarter over quarter due to an improvement in and net loss primarily driven by <unk>.
Shannon Lawson L. A E, which you know it's it's.
Driving immaterial contributions down to our insurance companies and then we had a couple of one time items that that came thrill around $5 million in terms of cash inflows that we don't expect to be recurring but you know in terms of the 520 million minimal change quarter over quarter and that really <unk>.
[noise] presents the funds that we've got available to run the business.
Got it <unk>.
Alright, thank you.
It looks like our final question <unk> Blueberry UBS Watson go ahead.
Hey, good morning, a couple of follows for Ya I guess could you break out what percentage of your states are now right adequate I think in the past. It was it was in the low single digit Rancho curious if you have an update there.
Sure. Thank you. This is Frank Uhm, we think that 80% of our footprint is now right adequate or at single digit indications.
Okay, Great and then on.
Frequency that's been materially lower over the last couple of quarters I guess, what are your baked in for future pricing assumptions around frequency.
<unk> can you parse out a little bit more why we're seeing the bigger declines I know you highlighted tenure, but.
The drop off I guess, there's a little more material than I would've thought so if you could expand on that that'd be great.
Sure that this is Frank again.
I'd say at first start off with.
We look at what what our premium trends are and what our overall loss trends are so as I mentioned earlier, we we think that we need still need hefty amount of right just to keep pace that we're targeting high single digits.
As far as our like overall trend slicks now that of course, there's a mix of the frequency and severity, but we think that overall, let's put it all together what we're really interested in what we're really pricing too is kind of that future amount of that we think costs are going to be going up which we think is in the high <unk> high single digits now the the actual you know between quarters, there's a lot of mixture.
We are seeing tendering of our renewable so it's not just a new one renewal.
Mixed but like we have more seven year old we didn't have many seven year old customers two years ago now we've got more 77 year old customer. So some of it is just our renewable book as itself has been tenure ring. Some of it's the mix of business has been changing our segmentation as our pricing segmentation of our pricing models have really been driving towards more preferred business, we're seeing them.
Shift towards more preferred customers, which tend to have lower frequency and some higher severity and so what you asked me to look at it and we can think of all of those mix shifts together, what we're really thinking is there still hefty. If you think of normal kind of historic trends are and the 4% range. We still think that we're seeing you know probably double that as far as like overall kind of law.
Right knee trend.
Great and then I guess do you guys disclose where your average tenure is or what it versus what it was historically or the mix between preferred in non standard can you just expand on the numbers on how that changed.
We don't disclose those publicly I'd say as we continue to build.
Our datasets and continued to observe customers in later tenures and we're updating our pricing and segmentation models.
We do look at lifetime based pricing and as part of that what we have consistently seen now is that we are becoming more and more competitive with a more preferred customer segment.
Great. Thank you.
Thanks.
Ladies and gentlemen that concludes today's conference call. Thank you for joining you may not disconnect.
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