Q4 2023 Root Inc Earnings Call
Operator: www.caret-holdings.com Good afternoon, and welcome to the Root, Inc. 4th Quarter 2023 Earnings Conference Call. Please note that this call is being recorded. All lines have been placed on mute to prevent any background noise.
Good afternoon, and welcome to the route Inc. Fourth quarter 2023 earnings conference call.
Please note that this call 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 would like to ask a question. Please press star followed by the number one on your telephone keypad.
Operator: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question, please press star followed by the number 1 on your telephone keypad. To withdraw your question, simply press star 1 again.
Withdraw your question simply press Star one again.
Matt LaMalva: I will now turn the call over to Matt LaMalva, Head of Investor Relations. You may begin your conference. Good afternoon, and thank you for joining us today.
I will now turn the call over to Matt <unk> head of Investor Relations you May begin your conference.
Good afternoon, and thank you for joining us today is hosting this call to discuss its fourth quarter and full year 2023 earnings result, participating on today's call are Alex Tim Co founder and Chief Executive Officer, and Megan <unk> Chief Financial Officer earlier today, we issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document.
Matt LaMalva: Root is hosting this call to discuss its fourth quarter and full year 2023 earnings results. Participating on today's call are Alex Timm, co-founder and chief executive officer, and Megan Binkley, chief financial officer. Earlier today, Root issued a shareholder letter announcing its financial results.
Matt LaMalva: 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 full year 2023 Form 10-K, which was filed with the Securities and Exchange Commission earlier. 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 these statements as a result of new developments that may arise. 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.
For more complete information about our financial performance. We also encourage you to read our full year 2023 Form 10-K, which was filed with the Securities and Exchange Commission earlier today.
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.
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 2023.
Matt LaMalva: 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, 2023, as well as our shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section.
As well as our shareholder letter.
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 the historical measures to the nearest comparable GAAP measures in our shareholder letter and our Form 10-K filed with the SEC both of which are posted on our website at <unk>.
Matt LaMalva: I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Roots' performance. You can find reconciliations of these historical measures to the nearest comparable gap measures in our shareholder letter and in our Form 10-K filed with the SEC, both of which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex Tim, Root's co-founder and CEO. Thank
That join route Dot Com I will now turn the call over to Alex Tim roots co founder and CEO.
Thank you, Matt we closed out 2023 with another quarter of significant increases in gross written premiums and direct contribution along with continued excellent loss ratio performance, resulting in the first quarter. The company has ever produced across almost every metric in the business.
Alex Timm: We closed out 2023 with another quarter of significant increases in gross written premiums and direct contribution, along with continued excellent loss ratio performance, resulting in the best quarter the company has ever produced across almost every metric in the. I want to take a couple of minutes to walk you through the transformation RUTA has successfully undergone over the past couple of years and why this transformation has us very excited. Just over two years ago, we underwent a crisis as we saw used car prices soar and observed the worst inflationary environment in recorded history. It was clear that we needed to pivot our business. This entailed making a number of decisions that, while difficult in the near term, were ultimately the necessary and correct decisions to ensure we evolved our company and positioned ourselves to be able to fully disrupt the auto insurance industry. To do this, we crafted a three-step plan.
I want to take a couple of minutes to walk you through the transformation of <unk> to successfully undergone over the past couple of years and why this transformation has us very excited for the future.
Just over two years ago, we underwent a crisis as we saw used car prices soar and observe the worst inflationary environment in recorded history.
It was clear that we needed to pivot our business.
This entailed making a number of decisions that while difficult in the near term, but ultimately the necessary incorrect decisions to ensure we evolved our company and positioned ourselves to be able to fully disrupt the auto insurance industry to do this we crafted a three step plan one drive toward healthy margins on our business by hitting our target loss ratios.
Alex Timm: One, drive toward healthy margins on our business by hitting our target loss ratio to materially lower our fixed expenses, and three, efficiently grow to scale in order to drive profitability. Fast forward two years, and we believe the transformation is remarkable. For the full year 2023, we restarted our growth engines, increasing gross written premiums by 31% and policies enforced by 55%. We generated a direct contribution of $151 million.
To materially lower our fixed expenses and three efficiently grow to scale in order to drive profitability fast forward two years and we believe the transformation is remarkable for the full year 2023, we restarted our growth engines increase in gross written premiums by 31% and policies enforced by 55%.
We generated a direct contribution of $151 million, that's nearly a 20 ex expansion from just two years ago.
Alex Timm: That's nearly a 20x expansion from just two years. We recorded a growth accident period loss ratio of 66% and a growth combined ratio of approximately 116%, both major improvements while also validating our efforts to enhance our tech and data kit. To that point, for the past three quarters, our loss ratios have been among the best in the entire auto insurance industry. And, most importantly, we have invested considerably in our technology and data science to significantly enhance our underwriting and pricing capabilities. As a result, we enter 2024 believing we have achieved scale in our business, which provides us with the ability to make decisions for long-term success. Specifically, we plan to look for opportunities to profitably gain market share or quickly shift our focus if we determine that growth may not achieve our target return. We could not be more excited for the long-term potential of Root, and here's what you should expect to see from us in the new year.
We recorded a gross accident period loss ratio of 66% and our gross combined ratio of approximately 116%.
Major improvements, while also validating our efforts to enhance our tech and data capabilities.
To that point for the past three quarters, our loss ratios have been among the best in the entire auto insurance industry.
Most importantly, we invested considerably in our technology and data science to significantly enhance our underwriting and pricing capabilities. As a result, we enter 2020 for believing we have achieved scale in our business, which provides us the ability to make decisions for the long term success of root.
Specifically, we plan to look for opportunities to profitably gain market share or quickly shift our focus if we determine that growth may not achieve our target returns.
We could not be more excited for the long term potential of route and here's what you should expect to see from us as the new year progresses.
First we see the opportunity to continue growth in 2024 and expand our market share.
Alex Timm: First, we see the opportunity to continue growth in 2024 and expand our market share. We expect the Direct Channel to continue to benefit from our machine learning approach to targeted and automated customer acquisition, as well as our significant advancements in pricing and underwriting. We will continue to invest our marketing dollars to achieve target returns and respond as we see changes in the competitive landscape. We also expect to grow through our partnership channel, where we will continue to focus on launching additional partners in 2024. The partnership channel provides potential customers with a differentiated experience at contextually relevant times, which we believe will ultimately be foundational to our long-term diversified growth strategy. As we have achieved our target loss ratio and established a scalable expense base, we believe our ability to reach profitability is now largely dependent on the level of our investments in discretionary markets.
We expect the direct channel to continue to benefit from a machine learning approach to targeted an automated customer acquisition as well as our significant advancements in pricing and underwriting will continue to invest our marketing dollars to achieve target returns and respond as we see changes in the competitive landscape.
We also expect to grow through our partnership channel, where we will continue to focus on launching additional partners in 2024. The partnership channel provides potential customers with a differentiated experience that contextually relevant times, which we believe will ultimately be foundational to our long term diversified growth strategy.
As we have achieved our target loss ratio and establish a scalable expense base. We believe our ability to reach profitability is now largely dependent on the level of our investments and discretionary marketing route future looks brighter than ever as we continue to profitably and efficiently grow and scale. Our business. We continue to build an enduring company and are making excellent progress in.
Our mission to Unbrake insurance through our data science and technology, we knew when we started it was going to be a long journey targeting new approach into an industry that has been untouched for almost 100 years as harden the challenges of the past two years has galvanized our team who believe in our mission envision more than ever we are.
Alex Timm: The future of Roots looks brighter than ever as we continue to profitably and efficiently grow and scale our business. We continue to build an enduring company and are making excellent progress in our mission to unbreak insurance through our data science and technology. We knew when we started Roots it was going to be a long journey; carving a new approach into an industry that has been untouched for almost a hundred years is hard.
Our disciplined focused and above all passionate about constantly delivering value to our customers. We remain grateful to our customers employees and our shareholders for their continued support and I'll now turn the call over to Megan to discuss our operating results in more detail.
Thanks, Alex overall, it was a very strong end to 2023 with further improvements on both our top and bottom lines. Our growth continued with total new writings and policies enforced higher on both a quarter over quarter and year over year basis.
Megan Binkley: The challenges of the past two years have galvanized our team, who believe in our mission and vision more than ever. We are disciplined, focused, and, above all, passionate about constantly delivering value to our community. We remain grateful to our customers, employees, and our shareholders for their continued support. I'll now turn the call over to Megan to discuss our operating results and more. Thanks, Alex.
Written premium was $279 million or 25% increase quarter over quarter, and 129% increase year over year.
Earned premium was $214 million, a 34% increase quarter over quarter, and a 50% increase year over year.
We achieved this growth while also posting a growth accident period loss ratio of 66% for the fourth quarter. Once again steady on a quarter over quarter basis, and an 11 point improvement year over year. This was predominantly driven by our pricing and underwriting advancements.
Megan Binkley: Overall, it was a very strong end to 2023 with further improvements on both our top and bottom lines. Our growth 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 $279 million, a 25% increase quarter over quarter and a 129% increase year over year.
Our evolved reinsurance strategy continues to benefit net results through increased retention and lower reinsurance costs.
Distant with prior guidance and Q4 of 2023, our gross earned premiums session rate was 18% and the gap between gross and net loss and LAE ratios was reduced to single digits. During the fourth quarter, our net loss was $24 million or 59% improvement year over year adjusted.
EBITDA improved 99% over the prior year to a near break even loss of $300000.
Megan Binkley: Earned premium was $214 million, a 34% increase quarter over quarter and a 50% increase year over year. We achieved this growth while also posting a Gross Accident Period Loss Ratio of 66% for the 4th Court. Once again, steady on a quarter-over-quarter basis and an 11-point improvement year-over-year. This is predominantly driven by our pricing and underwriting. Our evolved reinsurance strategy continues to benefit net results through increased retention and lower re-insurance costs. Consistent with prior guidance, in Q4 2023, our growth earned premium session rate was 8.5%, and the gap between growth and net loss in LAE ratios was reduced to zero. During the fourth quarter, our net loss was $24 million.
Compared to the third quarter, our net loss improved 48% and our adjusted EBITDA loss also improved 99%. These improvements were mostly the result of the growth in net earned premium as well as favorable loss development recorded in the quarter. The favorable loss development was primarily driven by better than expected emergence on it.
Injury coverages for the 2023 accident year, and we don't expect this degree of favorable prior period development going forward. These impacts were partially offset by higher acquisition investment during the quarter and as we've noted we do not defer the majority of our customer acquisition costs over the life of the customer which leads to accelerated.
Expense recognition relative to earned premiums.
Overall, our results for the fourth quarter and for the full year of 2023 continue to reflect the sustained momentum towards management's top priority of reaching profitability with our existing capital unencumbered cash was $507 million as of the end of 2023 compared with $559 million.
As of the end of 2022, reflecting an annual usage of $52 million.
Our unencumbered cash consumption rate improved on a year over year basis, following our continuous pricing and segmentation improvements and the 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 stated 2023 was a transformative year for Ruth as we returned to growth recorded sustained improvements in our loss ratio appropriately aligned our fixed expense structure and pivoted, our reinsurance strategy going forward.
Megan Binkley: 59% improvement year; adjusted EBITDA improved 99% over the prior year to a near break-even loss. Compared to the third quarter, our net loss improved 48%, and our adjusted EBITDA loss also improved. These improvements were mostly the result of the growth in net earned premium as well as favorable loss development recorded in the. The favorable loss development was primarily driven by better than expected emergence on injury coverages for the 2023, and we don't expect this degree of favorable prior period development going forward. These impacts were partially offset by higher acquisition investment during the quarter. As we've noted, we do not defer the majority of our customer acquisition costs over the life of the policy, Overall, our results for the fourth quarter and for the full year 2023 continue to reflect the sustained momentum towards management's top priority of reaching profitability with our existing. Unencumbered cash was $507 million as of the end of 2020, compared with $559 million as of the end of 2020, reflecting an annual usage of 52 million.
As a result, we are entering 2024 and a position of strength and we will continue to be mindful of our underwriting and expense management in order to remain on the path to profitability. We are excited for the future. We appreciate your time and look forward to your questions.
At this time I would like to remind everyone in order to ask a question. Please press star one.
Your first question comes from Josh <unk> with Cantor Fitzgerald. Please go ahead.
Yeah, Hi, guys. Thanks for taking my question.
Nice results here.
First can you give any insight into what trends youre seeing year to date, specifically around severity and frequency and how you're really expecting loss ratios the trend in the beginning of the clients looking for thanks.
Yeah. Thanks, Josh.
We're continuing to see our loss ratio really progressed nicely.
Yes, we are seeing severity.
<unk> continually this quarter and some improvements in frequency trends as well.
And severity, we're seeing used car prices they've started to come down a bit but really used car.
Car parts labor medical we're still seeing some healthy inflation there on the severity side.
Frequency, we continue to get better at segmentation and pricing and we continue to iterate on our data science platform and we've seen and you can see this historically, we've seen really nice trends in our frequency.
As we continue to to do better at Segmenting, our book and so we're very happy with where our loss ratio as it is.
One of the best in the industry at this point.
So we believe we can continue in 2024 at the sustained levels.
Megan Binkley: Our unencumbered cash consumption rate improved on a year-over-year basis, following our continuous pricing and segmentation efforts in the reset of our fixed expenses, and was partially offset by an increase in customer acquisition costs as we continue to position the business for profit. As Alex stated, 2023 was a transformative year for Root as we returned to growth, recorded sustained improvements in our loss ratio, appropriately aligned our fixed expense structure, and pivoted our reinsurance strategy going forward. As a result, we are entering 2024 in a position of strength, and we will continue to be mindful of our underwriting and expense management in order to remain on the path to profit. We are excited about the future. We appreciate your time and look forward to seeing you. At this time, I would like to remind everyone, in order to ask a question, please press star 1. Your first question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.
Got it that's helpful and as a follow up to that with these healthy loss ratios, even amongst new cohorts. It sounds like they are in growth mode. Right now or are you thinking about accelerating that growth as we start the new year in 2024, and what would have to happen for you to change your mind, there really shift towards that profitability ankle.
Yeah, well I'd say.
We are constantly focused on gaining profitable market share. So for us we don't think it's growth or profit.
We are really focused on driving new business at our target return levels.
And so we're going to continue to do that and what our machine does is constantly looking to see.
How how the competitive environment is evolving.
We have seen some competition come back into the market year to date, and we're still growing so we're and we continue to invest to and lots of other growth levers in the business. We've added multiple additional partners now already this quarter in the business. We're very excited about our partnership channels and our embedded product, we're going to continue to improve.
Josh Siegler: Yeah. Hi, guys. Thanks for taking my question. Nice results. First, can you give any insight into what trends you're seeing in your data, specifically around severity, frequency, and how you're really expecting loss ratios to trend in the beginning of 2024? Thanks. Thanks, Josh.
Pricing and underwriting, which we believe ultimately will allow us to have a pricing advantage in the market and continue to grow.
We're now looking at marketing channel expansion as well as expanding our state footprint. So we are definitely focused on growth, but it's definitely profitable growth. If we see anything that gives us any pause on the profitability of the business that we're adding to our to our book of business.
Alex Timm: You know, we're continuing to see our loss ratio really progress nicely. And you know, we are seeing severity up continually this quarter and some improvements in frequency trends as well. You know, on severity, we're seeing used car prices have started to come down a bit, but really used car parts, labor, and medical, we're still seeing some healthy inflation there on the severity side.
We will certainly pull back and that's what would cause us to shift towards driving more towards near term profitability.
Perfect really appreciate the answers and congrats again on the results really strong quarter here.
Thanks, Josh.
Your next question comes from <unk> <unk> with Jefferies. Please go ahead.
Alex Timm: Frequency, you know, we continue to get better at segmentation and pricing, and we continue to iterate on our data science platform. And we've seen, and you can see this historically, we've seen really nice trends in our frequency as we continue to do better at segmenting our book. And so we're very happy with where our loss ratio is. It is, you know, one of the best in the industry at this point. And so we believe we can continue in 2024 at a sustained level. Got it.
Sorry are you able to hear me.
Yes, we can hear you okay great.
Good afternoon, and congrats on a good quarter here.
So my first question.
B.
Strong loss ratio clearly can you maybe talk about.
The the rate adequacy or are there still pockets, where maybe you feel like you need a little more rate.
What's your expectation for rate increases will be for the coming year.
Yeah.
Alex Timm: That's helpful. And as a follow-up to that, you know, with these healthy loss ratios, even amongst new cohorts, it sounds like you're in growth mode right now. Are you thinking about accelerating that growth as we start the new year in 2024? And what would have to happen for you to change your mind and really shift towards that profitability angle instead?
Currently pricing to sort of a high single digit trend and we're prepared to respond we're always monitoring the inflationary environment clearly I think as 2023 as shown in a high inflationary environment.
How to respond and react in and certainly deliver on loss ratios, yes, if there is.
And then in the inflationary environment, we think that could certainly.
Alex Timm: Now I'd say, you know, we are constantly focused on gaining profitable market share. So for us, you know, we don't think about growth or profit. We are really focused on driving new business at our target return levels, and so we're going to continue to do that. And what our machine does is it's constantly looking to see, you know, how the competitive environment is evolving. We have seen some competition come back into the market this year. And we're still growing.
B B, a tailwind to the business as well right now broadly, though we believe we're rate adequate across the vast majority of our footprint.
And so we feel very good about where we're positioned today.
Got it.
And then I guess my my second question.
Obviously, we saw very significant loss ratio improvement at the same time that we're seeing new business as a percentage of the overall earned.
Earned premium increased.
Alex Timm: So, you know, we're investing in lots of other growth levers in the business. We've added multiple additional partners now this quarter in the business. We're very excited about our partnership channels and our embedded product.
I, often think about a new business penalty that we often see in the industry can you maybe comment on that.
Can you try and quantify it.
And May I.
I guess, what I'm trying to get at here is the level of improvement is even more impressive considering the amount of new business that you achieved.
Alex Timm: We're going to continue to improve pricing and underwriting, which we believe ultimately will allow us to have a pricing advantage in the market and continue to grow. We're now looking at marketing channel expansion as well as expanding our state footprint. So we are definitely focused on growth, but it's definitely profitable growth. If we see anything that gives us any pause on the profitability of the business that we are adding to our book of business, we will certainly pull back. And that's what would cause us to shift towards driving more towards near-term profitability. Perfect. I really appreciate the answers, Alex, and congrats again on the results.
Thanks, John Yeah, I would say we definitely that.
The mix of our business being our new and renewal and even that our renewal business is actually relatively younger than what you might see generally in the industry.
Definitely as a headwind to our loss ratios because we do see some.
As you referred to at the new business penalty.
It's not huge.
Single digits, right now and really as we've continued to progress, particularly on our machine learning underwriting models and really has started to also improve our our segmentation, we've really been able to bring that first term loss ratio down fairly materially and so we feel good about that it certainly has.
Yaron Kinar: Really strong quarter. Thanks Josh. Your next question comes from Yaron Kinar with Jeffries. Please go ahead. Sorry, are you able to hear me?
Wowed us to scale much more efficiently.
Got it and then one final one if I could.
The prioritization of growth into 'twenty four it sounds like you are prioritizing direct or the embedded.
Operator: Yeah, we can hear you. Okay, great. So good afternoon, and congratulations on a good quarter here. So my first question, just looking at the strong loss ratio clearly, can you maybe talk about the rate adequacy? Are there still pockets where maybe you feel like you need a little more rate? What is your expectation for rate increases for the coming year? Yeah, we're currently pricing to sort of a high single-digit trend, and we're prepared to respond; we're always monitoring the inflationary environment.
Channel and I guess, one is that fair.
Assessment and two maybe you can talk about the strategy of why the strategic prioritization of direct over embedded here.
Yes, that's a good question.
First I would say.
The direct channel and we love the embedded in partnerships channel really.
We want to grow both channels.
As fast as we can provided that again, we are hitting our profitability targets and our product shows up a bit different in both channels right. Our ease of doing business, our ability to generate a quote and bind in under a minute right. We know that that is very valuable for customers when they show up on our website or when they show up in there at all.
Alex Timm: Clearly, I think, as 2023 has shown, in a highly inflationary environment, we know how to respond and react and, certainly, deliver on loss ratios. You know, if there is an abatement in the inflationary environment, we think that could certainly be a tailwind to the business as well. Right now, broadly, though, we believe we're rate adequate across the vast majority of our footprint. And so we feel very good about where we're positioned today. I got it.
Also turns out that's very valuable for embedded partners. When you want to offer insurance to your customers in a seamless.
Experience it in as little as two or three three clicks.
Alex Timm: And then I guess my second question, obviously, we saw a very significant loss ratio improvement at the same time that we're seeing new business percentage of the overall earned premium increase. I often think about a new business penalty that we often see in the industry. Can you maybe comment on that?
So for US we are prioritizing diversified distribution, we are continuing to build and are very excited about the long term potential of our partnership and embedded platform. We do believe we have product differentiation. There as has been evidenced by the material improvement in attach rates that we have seen on the carvana platform and we're going to continue to scale.
Alex Timm: Can you try and quantify it? And I guess what I'm trying to get at here is the level of improvement, which I guess is even more impressive considering the amount of new business that you achieved. Thanks, Jaron. Yeah, I would say the mix of our business being more new and less renewal, and even that our renewal business is actually relatively younger than what you might see generally in the industry, definitely is a headwind to our loss ratios because we do see some, as you referred to it, the new business penalty. You know, it's not huge.
All of that.
<unk> direct is.
Large started from a much larger base and the Internet is a big place and we don't think the direct channel is going to go away overnight and so for US I wouldn't say that we're prioritizing direct over embedded or partnerships by any means I would say that.
We are really pursuing diligent growth in both channels simultaneously.
Thank you and congrats again on the quarter.
Thanks. Your next question comes from Tommy Moll join with <unk>. Please go ahead.
Yes.
Alex Timm: It's single digits right now, and really, as we've continued to progress, particularly with our machine learning underwriting models and really have started to also improve our segmentation, we've really been able to bring that first-term loss ratio down fairly materially. And so we feel good about that. It certainly has allowed us to scale much more efficiently. Got it. And then one final one, if I could, the prioritization of growth into 24 sounds like you are prioritizing direct over the embedded channel. And I guess one question: is that a fair assessment?
Hey, good afternoon, Thanks, guys for taking my questions.
First one here you know we have heard some commentary from several of the sort of customer acquisition solution providers.
And it sounds like the reset of the calendar year in January resulted in a number of auto insurers re engaging in their customer acquisition spend goals.
You know routes, obviously, you've been very successful in the second half of 2023 with they are pretty efficient customer acquisition.
Alex Timm: And two, maybe you can talk about the strategy or why the strategic prioritization of direct over embedded here. Yeah, that's a good question. First, I would say we love the direct channel, and we love the embedded in partnerships channel. Really, we want to grow both channels as fast as we can, provided that, again, we are hitting our profitability targets. And you know, our product shows up a bit differently in both channels, right? Our ease of doing business, our ability to generate a quote and sign in under a minute, right? We know that it's very valuable for customers when they show up on our website or when they show up in our app.
But have you noticed any sort of step change in that efficiency in January and February just for a matter of competition from some of the other auto insurers out there and just is there a way to track your acquisition cost per policy that you've seen acquired.
Yeah, I would say you're right we have seen.
Competition return into the direct space and we have seen that from a few competitors, particularly starting to ramp up in the first quarter that said in 2023, we made material improvements to our marketing machine and we are actually still seeing growth through this year to day.
Alex Timm: It turns out that it's very valuable for embedded partners when you want to offer insurance to your customers in a seamless experience in as little as two or three, three clicks. So for us, we are prioritizing diversified distribution, we are continuing to build, and we are very excited about the long-term potential of our partnership and embedded platform. We do believe we have product differentiation there, as evidenced by the material improvement and attach rates that we have seen on the Carvana platform. And we're going to continue to scale that. That said, direct is, large started from a much larger base, and the Internet is a big place, and we don't think the direct channel is going to go away overnight.
In past, so even with the increased competitive environment, we're still able to grow and we are actually beating our efficiency targets still when we measure for us what we really focus on is our return on marketing spend and we are still actually hitting and exceeding that target even with the competition coming back.
Okay.
Okay got it.
And then my second question your unencumbered capital has trended pretty flat at just about $500 million for most of 2023.
And that's obviously been at a time when you saw your net earned premium almost triple from the first quarter to the fourth quarter have you had to invest or inject any capital into your regulated insurance subsidiaries.
Alex Timm: And so for us, you know, I wouldn't say that we're prioritizing direct over embedded or partnerships by any means. I would say that we are really pursuing diligent growth in both channels simultaneously. Thank you and congrats again on the quarter. Your next question comes from Tommy McJoint with KBW. Please go ahead. Hey, good afternoon.
If not is there a level of net earned premium that those insurance subsidiaries can support just based on either statutory or rating agency guidelines.
Tommy McJoint: Thanks, guys, for taking my questions. The first one here, you know, we have heard some commentary from several of the sort of customer acquisition solution providers. And it sounds like the reset of the calendar year in January resulted in a number of auto insurers reengaging in their customer acquisition spend goals. You know, Roots obviously have been very successful in the second half of 2023 with their pretty efficient customer acquisition. But have you noticed any sort of step change in that efficiency in January and February, just, you know, due to more competition from some of the other auto insurers out there? And is there a way to track your, you know, acquisition cost per policy that you've acquired?
Yes, Hi, Tom I appreciate the question so you're right. Our our unencumbered cash has has been around $500 million four for the last couple of quarters and I think if you take a step back and you look at our consolidated Q4 total cash and investments you know that was up 45.
Over over Q3, and that's really been primarily attributed to the growth that we'd seen rate the increase in premium and fees that we've collected as well as you know we're investing not that unencumbered cash. So we've been taking advantage of the rate environment.
And we've been able to generate some some investment returns and so when you. When you look at our results from 2023 perspective, I mean, we have made material improvements in our underlying results and not really puts us in a situation where we're at.
Alex Timm: Yeah, I would say you're right, we have seen competition return to the direct space, and we have seen that from a few competitors, particularly starting to ramp up in the first quarter. That said, in 2023, we made material improvements to our marketing machine, and we are actually still seeing growth through this year to date in PIFS. So even with the increased competitive environment, we're still able to grow, and we are actually beating our efficiency targets still.
Not contributing as much capital down to our insurance subsidiaries as we would have been in in 2022, and we believe that we're in a good capital position as of the end of 2023 are regulated and insurance companies has more.
And then the required capital either appropriately capitalized and we're continuing to see book value growth and in our insurance subsidiaries.
Alex Timm: When we measure, you know, for us, what we really focus on is our return on marketing spend. And we are still actually hitting and exceeding that target, even with the competition coming back. Okay.
Yeah.
Okay. Thanks, and then if I could just sneak one last one in.
Do you have what the session rate.
We will be for what Youll be writing in 2024, I know in the third quarter was 10%, but I think there was some commutation impact there in the fourth quarter was 18%.
Megan Binkley: And then my second question: your unencumbered capital has trended pretty flat at just about $500 million for most of 2023, and that's obviously been at a time when you saw your net earned premium almost triple from the first quarter to the fourth quarter. Have you had to invest or inject any capital into your regulated insurance subsidiaries? And, if not, is there a level of net earned premium that those insurance subsidiaries can support just based on either statutory or rating agency guidelines?
What's your expectation for 2024, and then is that subject to change I forget when you are.
Reinsurance contracts come up for renewal.
Yeah, Great question Tommy.
I'd take a step back we did commute several of our in force multi year reinsurance treaties between the span of Q2 and Q3 with the goal of retaining more profits or you are seeing a bit of a shift compared to where we were in Q3, but as I take a step back I mean R. R.
Megan Binkley: Yeah, hi, Tommy. I appreciate the question. So you're right, our unencumbered cash has been around $500 million for the last couple of quarters. And I think if you take a step back and you look at our consolidated Q4 total cash and investments, you know, that was up $45 million over Q3. And that's really been, you know, primarily attributed to the growth that we've seen, right, the increase in premium and fees that we've collected as well as, you know, investing that unencumbered cash that we've been taking advantage of the rate environment, So, when you look at, you know, our results from a 2023 perspective, I mean, we have made just material improvements in our underlying results, and that really puts us in a situation where we're not contributing as much capital down to our insurance subsidiaries as we would have been in 2022. We believe that we will be in a good capital position as of the end of 2023. Our regulated insurance companies have more than the required capital. They're appropriately capitalized, and we're continuing to see book value growth in our insurance subsidiaries. Okay, thanks.
Approach to reinsurance really continues to be a key focus for us we're going to continue to buy the true risk reduction cover so that's our cat and ex ol, we're going to continue purchasing those covers to protect the business from large losses and tail risk events.
And on the quota share side, we do plan to continue reducing our quota share sessions from from where they were for the full year 2023 ended 2024 and as we guided to actually during the Q3 call. We do expect to cede less than 25% of our our.
Gross written premium are going forward, and therefore, youre going to see a reduction of our reinsurance costs.
You know this quarter you actually started to see as a result of our reduced sessions and the better terms that that we've gotten on our 10, one cohort deal youre seeing greater convergence of our gross and net loss and LAE ratios. So we do continue.
Do you expect to see less than 25% of GWG going forward and in the event that conditions change, we do want to maintain the flexibility to make changes to our reinsurance program as as needed you alluded to this in your question, but we do have multiple decision points there.
Megan Binkley: And then, if I could just sneak one last one in, do you have any idea what the session rate will be for what you'll be writing in 2024? I know in the third quarter it was 10%, but I think there was some commutation impact there, and the fourth quarter was 18%. What's the expectation for 2024? And then is that subject to change? I forget when your reinsurance contracts come up for renewal. Yeah, great question, Tommy.
The year, where we can decide to increase or decrease our sessions, but overall, we believe that the reinsurance strategy changes that we've made really further support our underwriting profitability for the long term.
Got it thanks for taking.
Megan Binkley: I mean, you know, I take a step back. We did commute several of our Enforce multi-year reinsurance treaties between the span of Q2 and Q3, with the goal of retaining more profits. So you are seeing a bit of a shift compared to where we were in Q3. But as I take a step back, I mean, our approach to reinsurance really continues to be a key focus for us. We're going to continue to buy the true risk reduction cover. So that's our CAT and XOL.
Again, if you would like to ask a question. Please press star one.
Your next question comes from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks. Good evening. My first question is just on the frequency side. So you know in your shareholder letter right you guys alluded to frequency declining by 4% in the fourth quarter, which is an improvement from where things were trending into Q3, I think some other carriers did point to favorable.
Megan Binkley: We're going to continue purchasing those insurance policies to protect the business from, you know, large losses and tail risk events. And on the quota share side, we do plan to continue reducing our quota share sessions from where they were for the full year 2023 into 2024. As we guided to, actually during the Q3 call, we do expect to see less than 25% of our gross written premium going forward, and therefore, you're going to see a reduction in our reinsurance costs. You know, this quarter, you actually started to see, as a result of our reduced sessions and, you know, the better terms that we've gotten on our 10-1 cohort deal, you're seeing greater convergence of our gross and net loss and LAE ratios.
Frequency.
Firstly to end the year do you guys have a sense of you know.
The favorable frequency trends that might have benefited you.
Your results in the fourth quarter.
Yes, Thanks Elyse.
I would say the fourth quarter is a lower frequency quarter generally driving us down in the winter months, and then sort of up in summer months.
That the frequency trend that we saw was also year over year and so we think a lot of it is our mix of business as we continue to improve and train our models and rapidly deploy our models both on underwriting on telematics and on our loss cost models that we can continue to effectively drive.
Megan Binkley: So we do continue to expect to see less than 25% of GWP going forward, and in the event that, you know, conditions change, we do want to maintain the flexibility to make changes to our reinsurance program as needed. You alluded to this in your question, but we do have multiple decision points throughout the year where we can decide to increase or decrease our exposure, but overall, we believe that the reinsurance strategy changes that we've made really further support our underwriting profitability for the long term. I got it.
A better mix of business and so we have seen frequencies continue to come down even on a year over year basis. So I don't think what you are just seeing there is seasonality.
And then in terms of are you guys talking about a path to profitability right with with your current capital position could you help us just think about the glide path from no. The result in 'twenty three to getting to profitability and you know in terms of number of years or some kind of time.
Megan Binkley: Thanks, Megan. Again, if you would like to ask a question, please press star 1. Your next question comes from Elyse Greenspan with Wells Fargo. Please go ahead. Hi, thanks. Good evening.
Frame that you want to put out there and then.
What do you think about in terms of you know.
Elyse Greenspan: My first question is just on the frequency side. So, you know, in your shareholder letter, you guys alluded to frequency declining by 4% in the fourth quarter, which is an improvement, right, from where things were trending in Q3. I think some other carriers did point to, you know, favorable frequency trends, especially to end the year. Do you guys have a sense of, you know, the favorable frequency trends that might have benefited your results in the fourth quarter? Thanks, Elise. I would say the fourth quarter is a lower-frequency quarter. Generally, driving is down in the winter months and then sort of up in the summer months.
You know what type of loss might lead you might we expect to see in 'twenty four based on your rate and growth outlook today.
Okay.
Thanks Luis.
So as we noted in our opening remarks, our results than in 2023 are really a testament to the improvements that we've made in pricing and underwriting and the work that we've done to optimize our expense base over the past two years Youre seeing really significant results.
From us on a on a year over year basis, and you know that puts us in a situation, where if we were to stop investing in discretionary marketing spend tomorrow.
Alex Timm: But the frequency trend that we saw was also year-over-year, and so we think a lot of it is our mix of business, as we continue to improve and train our models and rapidly deploy our models both on underwriting, on telematics, and on our lost-cost models, we can continue to effectively drive a better mix of business. And so we have seen frequencies continue to come down, even on a year-over-year basis. So I don't think what you're just seeing there is seasonality. And then, in terms of, you know, you guys talking about, you know, a path to profitability, right, with your current capital position, can you help us just think about the glide path, you know, from, you know, the results in 23 to getting to profitability and, you know, in terms of number of years or some kind of, you know, timeframe that you want Thanks, Elise.
We believe we would be profitable in the very short term. However, we don't think that that's really the right answer for the long term success of the business or for our shareholders and so as we continue to see opportunities to grow share profitably, where we're going to continue to execute.
On that this next year.
And our timing to profitability is heavily dependent on one the competitive landscape and to our our appetite for growth. So the improved underwriting results that that we've seen.
I've also translated into a reduction of our reinsurance costs on a current basis and also enter into 2024, you saw those changes that we made to our quota share reinsurance program really flow through results for the first time in Q4, and you're seeing our gross loss in la.
And net loss and LAE ratio is really begin to converge with any single digits and we expect that this is going to have a material impact on our timeline for reaching profitability.
Megan Binkley: You know, as we noted in our opening remarks, our results in 2023 are really a testament to the improvements that we've made in pricing and underwriting and in the work that we've done to optimize our expense base over the past two years. You're seeing really significant results from us on a year-over-year basis. And, you know, that puts us in a situation where, you know, if we were to stop investing in discretionary marketing spend tomorrow, we believe we would be profitable in the very short term. However, we don't think that's really the right answer for the long-term success of the business or for our shareholders.
And just to be clear as well you know when we say profitability, we do mean GAAP net income.
And as we look to 2024, we do expect that on a full year basis that our net combined ratio is going to continue to improve compared to full year 2023.
So I would say in summary, we we haven't pinpointed.
Specific quarter on on our profit timeline, but we don't expect that it's multiple years from now.
We believe that we've pulled very meaningful levers in the business to accelerate that that path to profit and build long term value for the business and for our shareholders. We've got a very positive outlook on our path to profitability, which is really our top priority with with our existing capital.
Megan Binkley: And so as we continue to see opportunities to grow share profitably, we're going to continue to execute on that this next year. And our timing to profitability is heavily dependent on, one, the competitive landscape, and two, our appetite for growth. So the improved underwriting results that we've seen have also translated into a reduction in our reinsurance costs on a current basis and also into 2024. You saw those changes that we made to our quota share reinsurance program really flow through results for the first time in Q4.
Okay.
And then maybe just one more right you guys saw a good pickup in policy growth sequentially in the quarter. How are you thinking just about shopping some of the earlier questions right in AD spend kind of picking up to start the year. How are you thinking about policy growth.
Now trending you know and in the first quarter and then really throughout all of 2024.
Okay.
Megan Binkley: And you're seeing our gross loss in LEE and net loss in LEE ratios really begin toconverge within single digits. And we expect that this is going to have a material impact on our timeline for reaching profitability. And just to be clear as well, when we say profitability, we do mean gap net income.
Yes.
Really through first quarter. We've continued the first quarter to date, we've actually continued to increase path.
So we are still growing and we feel very good about our ability to continue to grow.
And it's not again, it's not just the direct channel and it's not just our ability to deploy marketing, although we do feel good there. We believe theres. Many long term level levers a big one being our partnership and embedded strategy and continuing to add those partners like I said, we've we've actually added multiple new partners already this quarter.
Megan Binkley: And as we looked at 2024, we do expect that on a full year basis, our net combined ratio is going to continue to improve compared to full year 2023. So I would say, in summary, we haven't pinpointed a specific quarter on our profit timeline, but we don't expect that it's multiple years from now. We believe that we've pulled very meaningful levers in the business to accelerate that path to profit and build long-term value for the business and for our shareholders. We've got a very positive outlook on our path to profitability, which is really our top priority with our existing capital. And then maybe just one more, right?
And we we also continue to iterate on our pricing and underwriting and continuing to get more competitive prices and then lastly, we're looking for a state expansion and continued marketing channel expansion. So we think we have a lot of levers at our disposal to continue to drive growth and we think we're just in the very beginnings of growth and really sell relatively small insurance company. When you look at the <unk>.
Alex Timm: You guys saw a good, you know, pickup in policy growth sequentially in the quarter. How are you thinking just about, you know, shopping for some of the earlier questions, right? And ad spend, you know, is kind of picking up to start the year. How are you thinking about policy growth, you know, trending, you know, in the first quarter and then really throughout all of 2024? You know, really through the first quarter, we've continued, you know, first quarter to date, we've actually continued to increase PIF, and so we are still growing, and we feel very good about our ability to continue to grow. You know, and it's not, again, it's not just the direct channel and it's not just our ability to deploy marketing, although we do feel good there. We believe there are many long-term levers, a big one being our partnership and embedded strategy and continuing to add those partners.
Market.
So I think we're going to continue to see see growth and we feel good about our path. There I think it will be diligent growth that you see from us in 'twenty 'twenty four.
Thank you.
Your next question comes from Mike Ward with Citi. Please go ahead.
Thanks, guys.
So maybe just on retention.
It seems like you've been kind of gradually turning back up ad spend.
Last couple of quarters, So just wondering.
What youre seeing in terms of.
Early retention stats.
New business and maybe specifically the some of the direct.
<unk> written last year.
That's come up for renewal there.
Yeah. That's a good question, we're continuing to see retention rates actually up year over year.
Alex Timm: Like I said, we've actually added multiple new partners already this quarter, and we also continue to iterate on our pricing and underwriting, and we continue to get more competitive prices. And then lastly, we're looking at state expansion and continued marketing channel expansion. So we think we have a lot of levers at our disposal to continue to drive growth, and we think we're just in the very beginnings of growth, and we're still a relatively small insurance company when you look at the market. So, you know, I think we're going to continue to see growth, and we feel good about our path there. I think it will be diligent growth that you will see from us in 2024. Thank you. Your next question comes from Mike Ward with Citi. Please go ahead.
And that's both.
Function of our prices. It's also a function of our ability to target higher retaining customers. So we're seeing nice trends in retention.
Okay.
So maybe.
On kind of like the demographic breakup I was curious how your sort of customer profile today differs from where it's been historically.
I'd say that.
Really we still really target younger folks usually between the ages of $25 to 35 is our primary target audience. We.
We do still skew mono line auto.
And so we are still seeing you know that really be our bread and butter, we are shifting a bit more towards a preferred customer mix so higher credit.
Mike Ward: Thanks, guys. So maybe just on retention, it seems like you've been kind of gradually turning back up ad spend the last couple of quarters. So just wondering what you're seeing in terms of, you know, early retention stats on new business, and maybe specifically some of the direct business written last year come up for renewal too. That's a good question.
Some other demographic variables, but in general we.
We really are seeing our customer demographics stayed pretty consistent.
Got it thanks, and then maybe just somewhat open ended but.
For 2024.
Just kind of wondering what you see if you see any risks to margins this year.
Alex Timm: We're continuing to see retention rates actually go up year over year, and that's both a function of our prices, but it's also a function of our ability to target higher retention customers. So we're seeing nice trends in retention. Okay, and so maybe on kind of like the demographic breakup, curious how your sort of customer profile today differs from where it's been historically. I'd say that, you know, really, we still really target younger folks; usually, between the ages of 25 and 35 is our primary target audience. We do still skew the model line auto.
I'd say we're.
We're constantly monitoring the environment, particularly the inflationary environment.
We have seen used car prices steady out to actually declined somewhat and.
And we've seen.
But we still see a healthy inflation in many other areas. So we're constantly monitoring that and we're prepared to take rate appropriately as we see that come through.
And if we do see that come through you know you may expect us to pull back on growth.
But really we feel good about where we're positioned today.
Alex Timm: And so we are still seeing, you know, that really is our bread and butter. We are shifting a bit more towards a preferred customer mix, so higher credit and some other demographic variables. But, in general, you know, we really are seeing our customer demographics stay pretty consistent. Thanks.
Awesome. Thank you guys.
There are no further questions at this time this will conclude today's conference call. Thank you for joining US today you may now disconnect.
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Yeah.
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Mhm.
Alex Timm: And then maybe somewhat open-ended, but for 2024, I'm just kind of wondering what you see, if you see any risks to margins this year? I'd say we're constantly monitoring the environment, particularly the inflationary environment. We have seen used car prices steady out to actually decline somewhat, but we still see healthy inflation in many other areas.
Yeah.
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Yeah.
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Yes.
Uh huh.
Okay.
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Alex Timm: So we're constantly monitoring that, and we are prepared to take rates appropriately as we see that come through. And if we do see that come through, you may expect us to pull back on growth. But really, we feel good about where we're positioned today.
Yeah.
Alex Timm: Awesome, thank you guys. There are no further questions at this time. This will conclude today's conference call. Thank you for joining us today. You may now disconnect.
Okay.
Yes.