Q3 2023 Root Inc Earnings Call
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Good morning, My name is Chris and I'll be your conference operator today at this time I'd like to welcome everyone to the Route Inc. Q3, 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
To withdraw your question. Please press star one again.
Thank you Matt.
Good morning, and thank you for joining us today.
Hosting this call to discuss its third quarter 2023 earnings results.
Participating on today's call are Alex Tim Co founder and Chief Executive Officer.
And Megan <unk> Chief Financial Officer.
Last evening Rubis should a shareholder letter announcing its financial results Paul.
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 2023 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, 2022 as.
As well as our shareholder letter in third quarter Form 10-Q.
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 and our Form 10-Q filed with the S. E C.
Which are posted on our website that I R that joined route Dot com.
I will now turn the call over to Alex Tim roots co founder and CEO.
Thank you, Matt Q3 marks an excellent quarter for route we broke company records for both gross written premiums and direct contribution this quarter for the third consecutive quarter, we saw material growth in your writings in our direct channel. We grew total new writings of 141% over last quarter and 376%.
Over the third quarter of 2022, our posting a gross loss ratio of 66%.
Management's top priority remains driving route to profitability we.
We developed a three part plan to get us there.
One drive to healthy margins on our business by hitting our target loss ratios.
To reduce fixed expenses to materially lower our burn rate and three efficiently grow to scale to profitability.
We have successfully executed on one and two as has been demonstrated in previous quarters.
Our performance in Q3 shows our ability to execute on all three.
We believe this combined with advancements in our reinsurance strategy, which Megan will detail has put us on a clear path to growth and profitability.
The strong growth this quarter was primarily driven by our direct channel.
This can be attributed to a rapid response to inflation, our advancements in segmentation and underwriting and our ability to leverage favorable marketing conditions with our automated marketing approach.
Today, we are in a strong position as we continue to exceed profitability targets on our new business if.
If we see changes in the environment or degradation in our loss ratios. Our systems are designed to automatically pull back on growth.
Our objective remains to optimize for profit.
Roots embedded channel is a core part of our distribution strategy and we continue to believe it is a meaningful part of our foundation for long term growth.
Our embedded product is now active in 33 states with new writings and premiums up quarter over quarter.
Additionally, we launched several partnerships this quarter and we believe we have a strong funnel for future launches.
All of this is made possible by rich technology and data science.
We are grateful to our customers employees and investors.
Lastly, I would like to announce that Frank Palmer will be leaving route at the end of the year. We are grateful for his contributions and thanks to his leadership have established strong pricing and underwriting teams. So that's fully assumed his previous students.
I'll now turn the call over to Megan to discuss our operating results in more detail.
Thanks, Alex overall, we are very pleased to report the progress in our financial results. This quarter our growth trajectory continued with total new writings and policies in force higher on both a quarter over quarter and year over year basis.
Gross written premium was $224 million or 55% increase quarter over quarter, and a 49% increase year over year.
Gross earned premium was $160 million or 22% increase quarter over quarter, and a 3% increase year over year.
We achieved this growth while also posting a gross loss ratio of 66%, which is flat quarter over quarter and a 12 point improvement year over year. This is a testament to the power of our technology and data science.
During the third quarter, our net loss was $46 million or 31% improvement year over year.
Adjusted EBITDA improved 58% over the prior year to a loss of $19 million.
Compared to the second quarter, our net loss and adjusted EBITDA loss increased $9 million and $8 million respectively.
This increase was primarily the result of higher acquisition expenses, and one time reinsurance costs of $6 million associated with Commutations executed during the quarter.
Our higher acquisition expenses were largely concentrated in the direct marketing channel.
It's important to know that we do not defer the majority of customer acquisition costs over the life of our customer which leads to accelerated expense recognition relative to earned premiums.
Overall results for the third quarter reflect the sustained momentum towards management's top priority of reaching profitability with our existing capital and to that end, we are vigilantly managing our capital position.
Unencumbered cash was $502 million as of the end of Q3 compared with $520 million as of the end of Q2 are.
Our unencumbered cash consumption rate continues to improve on a year over year basis. Following a reset of our fixed expense base and was partially offset by an increase in customer acquisition costs as we continue to position the business for profitable growth.
As Alex outlined we have improved the loss ratio reduced fixed expenses and are now scaling the business.
This execution allows us the opportunity to optimize our quota share reinsurance strategy.
We have been reducing our sessions to third party reinsurers on new treaties and commuting existing treaties. These actions reduce the overall session person edge and result in further retention of underwriting results on a net basis.
We believe the resulting reduction in reinsurance costs going forward as a pivotal component in driving the company to profitability and in the near term, we expect to narrow the gap between the gross and net loss and LAE ratios to single digits, we expect to continue managing volatility and our loss ratio through a catastrophe and excess of.
Loss reinsurance programs when considering our improved underwriting results careful expense management and strong capital position. We believe there is a bright future ahead and we appreciate your time and look forward to your questions.
As a reminder, if you would like to ask a question. Please press Star then one on your telephone keypad.
Our first question is from Josh <unk> with Cantor Fitzgerald. Your line is open.
Yes, hi, good morning, Thanks for taking my call as you pivot back towards expanding direct marketing channels and turning back on growth I was wondering if you could give us any insight into the payback period for some of the new policies brought in especially at these lower loss ratios.
Yeah.
Thanks, Josh.
What we're seeing particularly driven by these lower loss ratios is really.
A very large improvement.
We are in our payback periods and so we are seeing very tight payback periods. We are monitoring that and that's really driven by the large improvement in in our in our loss ratios as well as very favorable customer acquisition costs and so so the improvement is really been encouraging for us.
Great glad to hear that and then I was curious you know what have you seen that persisted through the beginning of <unk> that gives you confidence in maintaining these lower loss ratios are there any notable trends in accident.
Frequency or severity.
Okay.
I think we're still seeing Ah yeah, we were seen on the map and the macro environment some of the indicators there manheim.
And others really begin to level off.
We still are assuming fairly significant trend.
And don't believe that we're back into normal trend environment.
So we're pricing to that we're still we're still pricing to a high single digit low double digit net trend and so we're.
We're certainly not banking on inflation really abating at this moment in time, we have seen and continue to see our unit economics and so that's the loss ratio.
All come in more favorably than what we had anticipated and that's one of the reasons why you continue to see us accelerate our growth as.
As we continue to see these cohorts come through.
In performed more favorably than what our initial expectations were and that's been very consistent really over the last nine months and we're seeing that continue.
Uh-huh understood. Thanks for taking my questions today.
Thanks, Josh.
The next question is from Italian joined with <unk>. Your line is open.
Hey, good morning, guys. Thanks for taking the questions.
Can you start off by just walking through the components of the other insurance expense and perhaps it would be helpful. Just to bridge the.
The change it on a quarter over quarter basis or year over year basis Jeopardy, you think is more helpful.
Yeah. Thanks, Tony I. Appreciate the question I think you know what what you're getting at is and what you're seeing and in terms of other insurance expense during the quarter a lot of the change quarter over quarter, it's really driven by changes and reinsurance.
So over the past 18 months, we've been constantly evaluating our reinsurance structures.
Just to make sure that we've got the right terms for for the business. You know this is certainly not new we've been decreasing our external quota share percentage does as the underlying business has improved historically, we've been seeing a lot of our business through quota share reinsurance and we've been.
Yeah, we're reducing those sessions over time so.
So we took several actions during the quarter, which we believe are very positive.
After strict underwriting and pricing discipline, you know, where we are sitting here today with with a fundamentally an improved book. So those improvements are really open the door for us to further our reinsurance strategy to reduce benefit and so what you're seeing come through this quarter and it was really a result of us reducing our.
Our quota share sessions over time I'm on a net basis, we did well we commuted several agreements during the quarter and and really what that involves is a settling for an amount today and what we're getting in return is as future underwriting profits as we take that business back onto our books.
So you're going to see less ceding commission going forward and what you see come through this quarter is really a one time hit to our P&L relate primarily.
Narrowly related to one commutation so given the improvement that we're seeing in the underlying business. We do believe this is a necessary part of our strategy and it's going to significantly improve.
Net income next year.
Can you talk about how much statutory capital you have and how much net written premium that allows it right.
Yeah. Thanks, Tony further question I mean, you know as as we sit here today. We've got you know about a half a billion and and unencumbered capital plus surplus across our insurance subsidiaries supporting you know roughly 600 million of of trailing 12 months gross written premium.
That premium is and continues to be supported by our volatility covers which protect us from large losses and tail events I.
I want to make sure. It's clear that will will continue to purchase those covers going forward.
We believe we're in a good capital position or are regulated insurance companies are are more than capital adequately capitalize our subs continue to exceed the minimum required capital levels and we are monitoring these capital levels constantly.
Of course, you know growth does require a capital and our first priority is maintaining capital adequacy second priority is driving the business to profitability and our third priority is growth.
And those are our priorities in order. We we believe that we are on the path to execute on all three of these priorities.
We have put in significant work over the past 18 to 24 months to really right size the business execute on pricing and underwriting improvements and execute disciplined expense management initiatives. So you're seeing that really reflected in our year over year operating improvement.
I think it's also important to note that the majority of the business that is returning to US net from these commutation. So we executed. This quarter is is really season renewal business that has more favorable loss ratios and also business that we've underwritten recently with improved pricing and.
And segmentation, so we're ready and able to take this profitable business back onto our books, we believe that the strategy further supports our underwriting profitability over over the long term.
You also mentioned growth in in your question. So I also wanted to make sure. It's clear that you know the capital that that we are deploying right now for growth that that is purposeful. We are attracting business that we believe is accretive two or a longterm profitability in and goes for for scale again, you know anchormen.
Broke does require capital, but R. Capital requirements are also contemplating b favorability that we've seen and the loss ratio and the expense ratio. So we're constantly modeling these capital needs and we do not intend to sacrifice capital adequacy and profitability for growth.
Thank you.
The next question is from your own or with Jeffries. Your line is open.
Hi, guys. Good morning. This is Charlie on for your own I recognize that this is gonna be a bit of a generalization, but could you guys. Just discuss you know a little bit more detail what the risk profiles of the customers coming through D to see what quake relative to your embedded partnerships.
Yeah, that's a good question.
So yeah, I'd say that in general when you look at our direct business, we tend to obviously attract very good drivers and so our number one target is safe drivers and good drivers we have you know.
The vast majority of our direct business is telematics has telematics incorporated in the pricing and underwriting.
And so we know that that really serves that target customer well that tends to be younger.
Tend to be more male I think the average ages and in the mid thirties, when we look at our embedded.
Are embedded channels those customer segments are get a really whatever the partners customer segment, maybe you know the the beauty of our technology is that a lot of the benefits that it provides seamless an instant quote to bonds.
Really great pricing via pricing and automation flexibility and for the customer transparency for the customer all of those things are really extend quite nicely to lots of customer segments and so we really have a diverse set of customers across lots of different demographics and and really fit.
With most all of our partners regardless of what their customer demographic me maybe.
Okay. Thank you.
The next question is from <unk> Greenspan with Wells Fargo.
Hi, Thanks. Good morning. My first question you know I was hoping to get a sense and you're thinking about going forward and your views are surrounding <unk>. How much price are you looking to take across your book of business I know in response to your question you said.
You.
Expect it you know that last train right remained in the high single double double digit so what does that mean for your pricing needs from here.
Yeah, Thanks at least.
Are the vast majority of our footprint right. Now we believe is is right adequate however, as we did comment earlier you know we are seeing some of the macro trends and signals and inflation abate somewhat.
But we are still planning for that high single digit low double digit trend, which means you should anticipate that will continue to take that right on a go forward basis, if we see trend.
Lower that that means we will back off right, but right now that's.
We certainly are conservative in our trend selections and are still assuming that we're not.
In a normal trend low single digit environment, we're still assuming a healthy trend.
[noise]. Okay. Thanks, and then you know within the shareholder letter when you guys talk about <unk> right you called out that accident periods Verde was 10% in the queue. Three I think that had been about eight per cent in the queue to.
And so and I think you also said frequency was flat, whereas it it went down around six per cent in the queue to so what did you notice sequentially from from a loss trend perspective, if both severity and frequency you know went up to three verses Q too.
Yeah, I think yeah.
One I'd say, it's still very early on an accident period severity trend for Q3, Yeah. We we are so a lot of that is still forecasted I think we saw paid severities quarter over quarter roughly flat. However, what we are still projecting is that we're going to be seen healthy severity trends in bodily injury.
<unk> and and collision P D and so we were still have we're still forecasting again that that severity trend to be pretty healthy I would say that the quarter over quarter differences in that severity trended well within the bounds of normal variation in so I don't think there's anything that we particularly sore in Q3.
Versus Q too that was really statistically significant in terms of believing that we saw something out of the realm of normal for the severity trend given her current levels.
And I would say the same thing about frequency you know frequency was roughly flat on a year over year basis again, that's tenure adjusted so we look at the age of the business that we're bringing on and again I would say that's probably within the within the the band of normal variation.
Okay.
Thank you.
The next question is from Ellison <unk> with <unk>.
Hi, Thanks, I'm here for Brian.
A couple of questions I was wondering if you could talk about your marketing spin and how your thinking about that over the next.
Quarters and into 2004, you know how might we see that accelerating and then to follow up on a leash question. You said the vast majority of your footprint is right adequate.
What are your are not <unk>, you know what hot spots are there and how big are they to you and how are you tackling that.
Yeah, Yeah first off on right I would say, there's probably a couple of states that we have rate filings and we're looking to get approved and there's just some small delays they're not huge there. There's there's certainly not where we're writing the majority of our business and we expect that those were.
Windows rate changes are approved that then we'll be right adequate.
Terms of marketing I think it's important to note we are seeing a very favorable marketing environment and the way that our direct marketing works and functions is really.
Is not that we spend up to a certain budget overview budgets and then say, let's go spend up to that that number but what we do is we set a profit goal for the machine and as long as we are attaining those unit profitability levels will continue to spend if we see anything change in the environment and increased competitive or.
Competitive landscape and marketing degradation and loss ratios Ah anything change we are fully prepared to pull back on the growth and then Oh Wow really the company to to go profitable.
With with the book of business that are currently houses. So although we saw you know very strong growth. This quarter. We we don't necessarily expect that level of growth to continue and we're always monitoring the environment and are ready to react as as needed.
Megan Passover to you for some more comments on the what we're anticipating maybe through the end of the year. Yeah. Thanks, Alex So elephant I I think it's also key for us right.
T for us continues to be not sacrificing profitability for for growth you know add Alec said, we do continue to see a favorable environment for us to deploy our our capital at at at higher returns.
We have identified opportunities and in the market to invest up to 50 million and Q4 that 50 million again is is dependent on continued favorable development in our unit economics and the the marketing environment.
One point to clarify too.
50 million, that's overall acquisition expense around half of that is expected to be in in performance marketing and then the remaining 25 would be across embedded commissions and and report Cos I'm from a comparison purposes perspective, you know we increased our acquisition.
Stand to 27 million and and Q3 and that's again in light of the favorable unit economics that that we're experiencing Alex said you know we are optimizing for profits. So the amount of investment that we deploy in Q4 is gonna.
Gonna continue to be dictated by the competitive landscape and most importantly, our internal profitability metrics.
As we look to 2024 you know at this point, we we are not giving 2024 guidance, but you know what I can say is you know our our growth appetite and 2024 is going to be highly dependent on the competitive landscape you know as Alex mentioned as as we see opportunities for growth was strong.
Economics, we will continue to invest in a in a disciplined manner.
Thank you.
Again, as a reminder of a star one if you'd like to ask a question.
And it appears that we have no further questions and this will conclude today's conference call. Thank you everyone for participating.
You may not disconnect.
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