Q1 2024 Root Inc Earnings Call
Regina: Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Root, Inc. First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the route Inc. First quarter 'twenty 'twenty four earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question.
Regina: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star 1 again. I would now like to turn the conference over to Matt LaMalva, Head of Investor Relations. Please go ahead.
And the answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad, if you'd like to withdraw your question Press Star One again I would now like to turn the conference over to Matt <unk> head of Investor Relations. Please go ahead.
Matt: Good afternoon, and thank you for joining US route is hosting this call to discuss its first quarter 2024 earnings result participating.
Matthew Patrick LaMalva: Good afternoon, and thank you for joining us. Root is hosting this call to discuss its first quarter 2024 earnings results. Participating on today's call are Alex Timm, Co-Founder and Chief Executive Officer, and Megan Binkley, Chief Financial Officer. Root recently 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 first quarter 2024 Form 10-Q.
Matt: On today's call are Alex Tim Co founder and Chief Executive Officer, and Megan <unk> Chief Financial Officer.
Matt: Recently issued a shareholder letter announcing our financial results.
Matt: 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 first quarter 2020 for Form 10-Q.
Matthew Patrick LaMalva: Before we begin, I want to remind you that the matters discussed on this 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 will 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.
Speaker Change: Before we begin I want to remind you that matters discussed on this 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.
Matthew Patrick 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 most recent 10-K, 10-Q, and shareholder letter. A replay of this conference call will be available on our website under investor relations. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Roots performance.
Speaker Change: Please note that these forward looking statements will reflect our opinions. After the date of this call and we undertake no obligation to revise this information as a result of new developments that may occur.
Speaker Change: 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.
Speaker Change: For a more detailed description of our risk factors. Please review our most recent 10-K 10-Q and shareholder letter a replay of this conference call will be available on our website under the Investor Relations section.
Speaker Change: I would also like to remind you that during the call. We will discuss some non-GAAP measures while talking about its performance you can find reconciliations of those historical measures to the nearest comparable GAAP measures in our financial disclosures all of which are posted on our website at IR Dot joined route Dot com.
Matthew Patrick LaMalva: You can find reconciliations of those historical measures to the nearest comparable gap measures in our financial disclosures, all of which are posted on our website at ir.joingroup.com. I will now turn the call over to Alex Timm, Roots co-founder and CEO.
Speaker Change: I will now turn the call over to Alex Tim <unk> co founder and CEO.
Alexander Edward Timm: Thanks, Matt for those new New route welcome I'd love to take a minute to tell you a little bit more about the company before I jump into our results.
Alexander Edward Timm: Thanks, Matt. For those new to Root, welcome. I'd love to take a minute to tell you a little bit more about the company before I jump into our results. We believe drivers should have more control and understanding of their insurance, so we've built car insurance that is transparent, easy to understand, and offers a great price. We do this through the Root app, where customers can see how they are driving, manage their policy, and file a claim in seconds.
We believe drivers should have more control and understanding of their insurance. So we felt car insurance that is transparent.
Alexander Edward Timm: Is it I understand and offers great prices, we do this through the route App, where customers can see how they are driving manage their policy and file a claim in seconds.
Alexander Edward Timm: We also do this through our partnership channel, where we meet customers where they are in their moment of need. This includes, for example, embedding our insurance product at the point of vehicle sale. This is all enabled through our data science and technology, which allows us to create seamless, flexible customer experiences at what we believe to be some of the best prices. With that in mind, I'd like to talk a little bit about the quarter.
Alexander Edward Timm: We also do this through our partnership channel, where we meet customers where they are in their moment of need.
Alexander Edward Timm: This includes for example, embedding our insurance product at the point of vehicle sale.
Alexander Edward Timm: This is all enabled through our data science and technology.
Alexander Edward Timm: Which allows us to create seamless flexible customer experiences and what we believe to be some of the best prices.
Speaker Change: With that I'd like to talk a little bit about the quarter.
Alexander Edward Timm: The first quarter of 2024 was an excellent quarter. For the first time in the company's history, we generated operating income and positive adjusted EBITDA. We did this while doubling gross written premiums and policies in force year over year. These results are a testament to our strong product offering, disciplined execution, and the power of our technology. While pleased with this performance, we are far from achieving what we believe we can as a company.
The first quarter of 2024, it was an excellent quarter for the first time in the company's history, we generated operating income and positive adjusted EBITDA.
Did this while doubling gross written premiums and policies in force year over year.
Speaker Change: These results are a testament to our strong product offering disciplined execution and the power of our technology.
Speaker Change: While pleased with this performance we are far from achieving what we believe we can as a company.
Alexander Edward Timm: Over the long term, we believe data science and technology will fundamentally change the way insurance is priced, and in the first quarter, we continued to significantly improve the predictive accuracy of our pricing and underwriting model. As we grow, our data set grows, which allows us to retrain our models and deliver better prices to customers. In turn, with better prices, we are able to grow more efficiently, leading to a virtuous cycle.
Speaker Change: Over the long term, we believe data science and technology will fundamentally change the way insurance is priced.
Speaker Change: And in the first quarter, we continued to significantly improve the predictive accuracy of our pricing and underwriting models.
Speaker Change: As we grow our dataset grows which allows us to retrain, our models and deliver better prices to customers.
Speaker Change: In turn with better prices, we were able to grow more efficiently leading to a virtuous cycle.
Alexander Edward Timm: Also core to our strategy is continuing to build differentiated access to customers through our partnerships channel. Offering a three-click purchase experience via our partner platform continues to drive differentiated access to customers, and we're pleased to have grown new writings in our partnership channel 68% year-over-year. The expansion of this channel is foundational to our long-term growth strategy. Our direct channel also continued to show impressive growth in the quarter. We leverage advanced machine learning-based algorithms to optimize for our return targets.
Speaker Change: Also core to our strategy is continuing to build differentiated access to customers through our partnerships channel.
Speaker Change: Offering a three click purchase experienced by our partner platform continues to drive differentiated access to customers and we're pleased to have grown new writings in our partnership channel, 68% year over year.
Speaker Change: The expansion of this channel is foundational to our long term growth strategy.
Speaker Change: Our direct channel also continued to have impressive growth in the quarter, we leveraged advanced machine learning based algorithms to optimize for our return targets.
Alexander Edward Timm: Our data science machine is constantly looking to see how the competitive environment is evolving. As such, this channel fluctuates due to seasonality and competitive dynamics, and, as anticipated, we saw competition increase in the direct channel this quarter. We continue to optimize for target unit economics and believe being responsive to the changing environment is a smart way to profitably grow this business over the long term, even though it may lead to quarter over quarter variability.
Speaker Change: Our data science machine is constantly looking to see how the competitive environment is evolving.
Speaker Change: As such this channel fluctuate due to seasonality and competitive dynamics and as anticipated we saw competition increase in the direct channel this quarter.
Speaker Change: We continue to optimize for target unit economics, and belief being responsive to the changing environment as a smart way to profitably grow this business over the long term, even though it may lead to quarter over quarter variability.
Alexander Edward Timm: In the first quarter, the path to gap profitability looks stronger than ever. We continue to be excited by the long-term growth potential of the business by adding additional partners, expanding our footprint, and continuing to improve our prices and products. I am proud of our entire team for the dedication toward driving our success on this path. I'll now turn the call over to Megan to discuss our operating results in more detail.
Speaker Change: In the first quarter, the path to GAAP profitability looks stronger than ever.
Speaker Change: We continue to be excited by the long term growth potential of the business by adding additional partners expanding our footprint and continuing to improve our prices and products.
Speaker Change: I am proud of our entire team for their dedication to driving our success in this quarter.
Speaker Change: I'll now turn the call over to Megan to discuss our operating results in more detail.
Megan: Thanks, Alex overall, it was an excellent start to 2024 with further improvements across nearly all of our key financial metrics.
Megan Binkley: Thanks, Alex. Overall, it was an excellent start to 2024 with further improvements across nearly all of our key financial metrics. For the first quarter, our net loss was $6 million, an 85% improvement year over year. We are pleased to report for the first time a positive quarterly operating income of $5 million and positive adjusted EBITDA of $15 million. These metrics improved $35 million and $26 million year-over-year, respectively. This strong progress continues to be driven primarily by growth and net earned premium, continued loss ratio performance, a sustained fixed expense base, and responsible deployment of marketing investment. As we've consistently noted, we do not defer the majority of customer acquisition costs over the life of our customers, which leads to accelerated expense recognition relative to earned premiums.
Megan: For the first quarter, our net loss was $6 million and 85% improvement year over year. We are pleased to report for the first time, a positive quarterly operating income of $5 million and positive adjusted EBITDA of $15 million. These.
Megan: These metrics improved $35 million and $26 million year over year, respectively. This strong progress continues to be driven primarily by growth in net earned premium continued loss ratio performance.
Megan: Sustained fixed expense base and responsible deployment of marketing investment.
Megan: As we've consistently noted 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.
Megan Binkley: We grew new writings fourfold, and we more than doubled policies in force, gross written premium, and gross earned premium compared to the first quarter of 2023. We achieved this growth while delivering a growth combined ratio of 99.7%, marking the company's first growth combined ratio less than 100% and a 23 point improvement year over year. The gross accident period loss ratio was 61%, a four-point improvement year-over-year, driven by our continued investment in data science and technology.
Megan: We grew new writing four fold and we more than doubled with policies in force gross written premium and gross earned premiums compared to the first quarter of 2023.
Megan: We achieved this growth while delivering a growth combined ratio of 99, 7%, marking the companys first gross combined ratio less than 100%.
Megan: And a 23 point improvement year over year.
Megan: The gross accident period loss ratio was 61%.
Megan: <unk> four point improvement year over year, driven by our continued investment in data science and technology.
Megan Binkley: Note that we benefit from a favorable seasonality trend in Q1, as there are fewer miles driven in the winter months and also higher purchasing power resulting from tax season refunds. In the first quarter of 2024, we seeded 16 percent of our growth earned premium and reduced the difference between our growth and net loss in LEE ratios to two points for the quarter, reflecting a reduction of 21 points year over year. Our improvements in reinsurance costs were made possible through our continued improvement in operating results.
Megan: Note that we benefit from a favorable seasonality trend in Q1 as there are fewer miles driven in the winter months and also higher purchasing power, resulting from tax season refunds in the first quarter of 2024, we seeded 16% of our gross earned premium and reduce the difference between our gross and net loss in la.
Megan: E ratios to two points for the quarter, reflecting a reduction of 21 points year over year, our improvements in reinsurance costs were made possible through our continued improvement in operating results.
Megan Binkley: Overall, our results for the first quarter of 2024 continue to reflect the sustained momentum towards management's top priority of reaching profitability with our existing capital. The first quarter also marked the third consecutive quarter of positive operating cash flow. This is a result of improved net loss, continued growth, and loss ratio performance, even though the first quarter is consistently a high relative cash outflow quarter. As Alex noted in his remarks, it was a strong start to 2024 as we maintain the disciplined execution of our strategy and continue to build upon the momentum we achieved in 2023.
Megan: Overall, our results for the first quarter 2024 continue to reflect the sustained momentum towards management's top priority of reaching profitability with our existing capital. The first quarter also marked the third consecutive quarter of positive operating cash flow. This is a result of improved net loss continued.
Megan: And loss ratio performance, even though the first quarter is consistently high relative cash outflow quarter.
Megan: As Alex noted in his remarks, it was a strong start to 2024 as we maintain the disciplined execution of our strategy and continued to build upon the momentum we achieved in 2023 as.
Megan Binkley: As our market value appreciates, we will incur incremental expenses related to tax liabilities from the Vesting of Employee Equity Award. The second quarter typically encompasses the largest proportion of vesting equity awards per year. As such, we expect to incur approximately $10.6 million in cash expenses in the second quarter to satisfy this tax liability. Moving forward, we intend to remain focused on thoughtful and disciplined growth and expect to continue investing in customer acquisition as long as targeted unit economics are achieved. We expect gross written premium levels in the second quarter to decrease relative to the first quarter due to seasonality and changes in the competitive landscape.
Megan: As our market value appreciates, we will incur incremental expenses related to tax liabilities from the vesting of employee equity awards the.
Megan: The second quarter typically encompasses the largest proportion of vesting equity awards per year as such we expect to incur approximately $10 6 million in cash expenses in the second quarter to satisfy this tax liability.
Megan: Moving forward, we intend to remain focused on thoughtful and disciplined growth and expect to continue investing in customer acquisition as long as targeted unit economics are achieved.
Megan: We expect gross written premium levels in the second quarter to decrease relative to the first quarter due to seasonality and changes in the competitive landscape.
Megan Binkley: Achieving gap net income profitability with our existing capital continues to be our primary objective, and this quarter's results show that we are well on our way. We are excited for our future, appreciate your time, and look forward to your questions.
Megan: <unk> GAAP net income profitability with our existing capital continues to be our primary objective. This quarter's results show that we are well on our way.
Speaker Change: We are excited for our future appreciate your time and look forward to your questions.
Regina: At this time, I would like to remind everyone that if you would like to ask a question, press star, then the number one on your telephone keypad. We ask that you please limit your questions to one and one follow-up. You may re-enter the queue for any additional questions that you might have. Our first question will come from the line of Tommy Mcjoynt with KBW. Please go ahead.
Speaker Change: At this time I would like to remind everyone. If you would like to ask a question Press Star then the number one on your telephone keypad. We ask that you. Please limit your questions to one and one follow up you may reenter the queue for any additional questions that you might have our first question will come from the line of Tommy Mick joined with K B W.
Tommy Mick: Please go ahead.
Tommy Mick: Hey, good afternoon, guys. Thanks for taking my questions.
Thomas Patrick Mcjoynt: Hey, good afternoon, guys. Thanks for taking my questions.
Tommy Mick: So you've demonstrated some really robust growth here in <unk>.
Tommy Mick: <unk> count over the last few quarters.
Tommy Mick: With that growth, having started really in the third quarter of 2023.
Speaker Change: So assuming most of those were six month policies can you talk about the retention.
Speaker Change: Youre seeing on those policies that were kind of recently acquired over the past nine months.
Speaker Change: Yes, Thanks Tommy.
Thomas Patrick Mcjoynt: So you've demonstrated some really robust growth here and a policy count over the last few quarters, with that growth having started really in the third quarter of 2023. So assuming most of those were six-month policies, can you talk about the retention that you're seeing on those policies that were kind of recently acquired over the past nine months?
Speaker Change: We're continuing to see retention improve big driver of retention is price and as we've continued we were very early.
Alexander Edward Timm: Yeah, thanks, Tommy. We're continuing to see retention improve. A big driver of retention is price. And as we've continued, you know, we were very early, thanks to a lot of our technology, in identifying a changing cost environment, which allowed us to take a lot of our rate increases early. So what we've been seeing because of that is as our price has really stabilized over the last year or so, we're continuing to see improvements in retention year over year.
Speaker Change: Thanks, So a lot of our technology, we're very early in identifying changing cost environment, which allowed us to take a lot of our rate increases early so what we've been seeing because of that as our price is really stabilized over the last year or so we're continuing to see improvements in retention year over year.
Speaker Change: Okay got it.
Alexander Edward Timm: Okay, got it. And given some, you know, good visibility into the broadly improving outlook across, you know, both you and your competitors, that certainly suggests that the competitive landscape will be intensifying, as you've noted. So how do you anticipate your sales and marketing spend trending over the coming quarters, perhaps on an absolute basis would be most helpful?
Speaker Change: And given some good visibility into really the broadly improving outlook across both.
Speaker Change: Both you and your competitors now that certainly suggests that the competitive landscape will be intensifying as you've noted.
Speaker Change: How do you envision your sales and marketing spend trending over the coming quarters, perhaps on an absolute basis would be most helpful.
Alexander Edward Timm: Thanks, Tommy. First, I think we're very happy with our growth and where we've been year over year with doubling the number of customers that we've gotten, and doubling our PIF as well as revenue. You know, I'd say we are always looking at the competitive environment and monitoring the competitive environment, as well as seasonality. And we do know that in the first quarter, you see more auto insurance shopping. And so you should expect that to sort of accelerate sales and marketing spend in the first quarter relative to the other quarters.
Speaker Change: Thanks Tommy.
Tommy Mick: First I'd say, we're very happy with our growth and where we've been year over year with doubling the count of customers that we've got in doubling our path as well as revenue.
Speaker Change: Say, we are always looking at the competitive environment in monitoring the competitive environment as well as seasonality and we do know that the first quarter you see more auto insurance shopping and so you should expect that.
Speaker Change: Sort of accelerate sales and marketing spend in the first quarter relative to other quarters.
Alexander Edward Timm: And then, like we said, we've also seen competition come back. And one of the things that we do at Root is we are always looking at profitability and making sure that we are optimizing for profitability. And so, as you see competition return or enter, you will see us pull back so that we're constantly and diligently driving the company towards profitability. I think you saw that this quarter and it is evidenced by our operating income trends as well.
Speaker Change: And then like we said we've also saw competition come back in and one of the things that we do at root as we are always looking at profitability and making sure that we're optimizing for profitability and so as you see competition return or enter increase you will see us pull back so that we're constantly and diligently.
Speaker Change: Driving the company towards profitability I think you saw that this quarter and as evidenced by our operating income trends as well.
Megan Binkley: Yeah, and tell me if I could, I mean, just to reiterate, you know, what Alex stated. Q1 is just, you know, another strong proof point that our model is working, right? We've delivered the best results in Q1 and in company history, right? And when you look year over year, we've more than doubled our GWP, our GEP, and our PIF count on a year over year basis. So we are confident that we can continue to grow.
Speaker Change: Yeah, and Tom if I could I mean, just to reiterate you know what what Alec stated I mean Q1 is just you know them.
Speaker Change: Another strong proof point that our model is working right.
Speaker Change: Delivered the best results and in Q1 and in company history, right and when you look year over year, we've more than doubled our GW P. R. J P and our pits count on a year over year basis. So we are confident that we can continue to grow but I want to make sure that it's clear that you know the growth going forward.
Megan Binkley: But I want to make sure that it's clear that, you know, the growth going forward will moderate if we're not reaching our unit economic profitability targets, right? Our growth will continue to be very prudent and disciplined. We're not sacrificing our capital position for unprofitable growth. So while we do expect that sales and marketing will be less in subsequent quarters based on seasonality, we'll continue to be opportunistic with respect to direct marketing spend.
Speaker Change: Moderate if we're not reaching our our unit economic profitability returns rate our growth will continue to be very prudent and disciplined we're not sacrificing our our capital position for unprofitable growth. So while we do expect that sales and marketing will be lessen in.
Speaker Change: And in quarters based on seasonality and we will continue to be opportunistic with respect to direct marketing spend and we're actively focused on optimizing our marketing betting strategy, both within our existing channels and also testing new channels.
Megan Binkley: And we're actively focused on optimizing our marketing bidding strategy, both within our existing channels and also testing new channels. And we believe that we've got, you know, ample growth levers that we can pull. Currently, we're only in 34 states.
Speaker Change: We believe that we've got ample growth levers that we can pool. Currently we're only in 34 states, we would like to be national and at some point and we're continuing to invest in our differentiated distribution. So our partnership channel does continue to grow it's been growing where we're continuing to onboard and launched <unk>.
Megan Binkley: We would like to be national at some point, and we're continuing to invest in our differentiated distribution. So our partnership channel does continue to grow. It has been growing. We're continuing to onboard and launch new partners. So we're consistently focused on gaining profitable market share.
Speaker Change: Partner, so working system focused on gaining profitable market share.
Speaker Change: Yeah.
Speaker Change: I appreciate the thoughts thanks.
Thomas Patrick Mcjoynt: I appreciate the thoughts.
Speaker Change: Thanks, a lot. Our next question will come from the line of Andrew <unk> with TD Securities. Please go ahead.
Regina: Our next question will come from the line of Andrew Kligerman with TD Securities. Please go ahead.
Andrew Kligerman: Hey, good evening, and congratulations on another great quarter. I guess my first question is around renewal premium as a percent of gross premium declining to 39%. As that happens, you know, and you're writing a lot more new business, should we be thinking, you know, for most of the companies we cover, we think about a new business panel, So, should we be thinking that... that, you know, that terrific gross accident period loss ratio of 61% could rise a bit, a few percentage points, and if so, maybe a little guidance if you could.
Speaker Change: Okay.
Andrew: Good evening and congrats on another great quarter.
Andrew: I guess my first question is around renewal premium as a percent of gross premium declining to 39%.
Andrew: As that happens.
Andrew: And you're writing a lot more new business.
Andrew: Yeah.
Speaker Change: Should we be thinking.
Speaker Change: For most of the companies we cover we think about a new business penalty.
Speaker Change: So should we be thinking that.
Speaker Change: Right.
Speaker Change: Terrific gross accident period loss ratio of 61% that could rise up a bit.
Speaker Change: A few percentage points and if so maybe maybe a little guidance if you could.
Speaker Change: Yeah, I would say, we absolutely have we see similar things and there is a new business penalty where loss ratio on new business in that first six months term is is higher than renewal business. We're very pleased with our loss ratio and where it is.
Alexander Edward Timm: Yeah, you know, I'd say we absolutely have, we see similar things, and there is a new business penalty where the loss ratio on new business in that first six month term is higher than renewal business. You know, we're very pleased with our loss ratio and where it is. And we think we've been very diligent in pricing the business, and so we feel good about where that loss ratio is, and again, we've been growing now pretty significantly for many quarters. So a lot of that new business loss ratio penalty that you, you're already seeing that in our current quarterly results.
Speaker Change: And we think we've been very diligent in pricing the business and so so we feel good about where that loss ratio is in and again, we've been growing now pretty significantly for many quarters. So a lot of that new business loss ratio penalty that you will.
Speaker Change: You're already seeing that really in our current quarterly results.
Speaker Change: Oh I see thank you for that Alex and then with regard to the competitive environment.
Andrew Kligerman: Thank you for that, Alex. And then with regard to the competitive environment, as you cited earlier in the call, in the last month of the first quarter, you saw a little dip in premium growth. And then Megan added later on that, you know, that gross written premium sequentially would probably decrease in the second quarter. Could you give us a sense of what we might expect in the second quarter? You know, any sense of how it's shaped up so far and how it might compare with the first quarter?
Speaker Change: As you cited in earlier in the call.
Speaker Change: But the last months of the first quarter you saw a little a little dip in the premium growth and then Megan added later on that.
Speaker Change: The gross written premium sequentially would probably decrease in the second quarter.
Speaker Change: Could you give us a sense of.
Speaker Change: What you what you might what we might expect in the second quarter.
Speaker Change: Any sense of how it shaped up so far and how it might compare with the first quarter.
Alexander Edward Timm: Thanks, Andrew. Yeah, you know, I think from both seasonality and seasonality and from competitive dynamics in these channels, you will see more new writing generally in the first quarter than you will in the second quarter. And that then will lead to, you know, a higher written amount of written premium in our first quarter than in our second quarter. That said, obviously, with the material growth in PIF, you're still going to see very strong earned premium growth and definitely year over year growth.
Speaker Change: Yes, Thanks, Andrew.
Speaker Change: I think from both seasonality from <unk>.
Speaker Change: Both seasonality and from a competitive dynamics in these channels you will see more new writings generally in the first quarter than you will in the second quarter and that then will lead to a higher written amount of written premium in our first quarter than in our second quarter.
Speaker Change: That said, obviously with the material growth in past years.
Speaker Change: Still going to see very strong earned premium growth and definitely year over year growth and so we feel good retention is strong as well. So we feel good with where we are but you should expect sort of second quarter. There always be some seasonality impacts I think particularly with where we are now.
Alexander Edward Timm: And so, you know, we feel good. Retention is strong as well. So we feel good with where we are, but you should expect, sort of, the second quarter for there always to be some seasonality impacts, I think, particularly with where we are now, some competitive returns, which will cause, in the second quarter, that written premium to be lower than it was in the first quarter.
Speaker Change: <unk> returns, which will cause in the second quarter that written premium to be lower than it was in the first quarter.
Andrew Kligerman: But it doesn't sound dramatic, though, right Alex? Is that what I should read into it?
Speaker Change: But it doesn't sound dramatic right, Alex is that what I should read into it.
Speaker Change: Okay.
Alexander Edward Timm: You know, Andrew, we're not putting a quantification on it at this point. I mean, we're continuing to be opportunistic in terms of how we deploy direct marketing spend. And look, we're laser focused on profitability and protecting the business long term. So we're not in a position where we're going to write policies for the sake of growth. And we think this is a smart way to grow the business over the long term and not lose focus to really drive quarterly fluctuations.
Alexander Edward Timm: You know Andrew we're not putting a quantification at this on on it at this point I mean, we're.
Alexander Edward Timm: Continuing to be opportunistic in terms of how we deploy a direct marketing spend then and look where we're laser focused on profitability and protecting the business long term. So we're not in a position where we're going to write policies for the sake of growth and we think this is a smart way to grow the business.
Andrew Kligerman: That makes sense. Thank you.
Alexander Edward Timm: Over the long term and not lose focus to really drive quarter over quarter fluctuations.
Speaker Change: Makes sense. Thank you.
Qunar: Your next question comes from the line of ear on Qunar with Jefferies. Please go ahead.
Regina: Your next question comes from the line of Yaron Kinar with Jeffries. Please go ahead.
Alexander Edward Timm: Yeah.
Charlie Lederer: Hi guys, this is Charlie on for your own.
Alexander Edward Timm: Hi, guys. This is Charlie on for your own congrats.
Charlie Lederer: Congratulations on the quarter. I was just curious if you guys were able to achieve $15 million in positive adjusted EBITDA this quarter. Conceptually thinking through it, should we anticipate this to be a step change, or should we expect the potential for EBITDA to be negative quarter over quarter, or here and there going forward?
Charlie: Congrats on the quarter.
Charlie: I was just curious if you guys were able to achieve $15 million in positive adjusted EBITDA. This quarter conceptually thinking for which should we anticipate this to be a step change or should we expect the potential for EBITDA to be negative.
Charlie: Quarter over quarter or here and there going forward.
Speaker Change: Thanks, Charlie that's a good question. So as we sit here today I mean Q1 was a really a material milestone for the business for us to to print both positive operating income and positive adjusted EBITDA of $15 million in the quarter and look this is really been several years in the making.
Megan Binkley: Thanks, Charlie. That's a good question.
Megan Binkley: So, you know, as we sit here today, Q1 was really a material milestone for the business for us to print both, you know, positive operating income and positive adjusted EBITDA of $15 million in the quarter. And look, this has really been several years in the making, right? We've had relentless focus on pricing and underwriting, and that's led to material improvements in our loss ratio. Our loss ratio is in a healthy spot, and we're going to continue to focus on driving profitable growth.
Charlie: You're right, we've had a relentless focus on pricing and underwriting and that's led to material improvements in our loss ratio our loss ratios in a healthy spot and we're going to continue to focus on driving profitable growth and as we mentioned earlier I mean, we remain opportunistic in terms of how.
Megan Binkley: And as we mentioned earlier, we've remained opportunistic in terms of how we will deploy marketing investment going forward. And as we see opportunities to continue to grow share profitably, we'll continue to do that in a prudent and very disciplined manner. On the expense side, you know, we've been very diligent in rightsizing that spend. We'll continue to scale on fixed expenses.
Charlie: We will deploy marketing investment going forward and as we see opportunities to continue to grow share profitably well, we'll continue to do that and in a prudent and very disciplined manner.
Charlie: On the expense side, we've been very diligent and right sizing that spend will continue to scale on fixed expense and we are making modest investments in certain areas of the business and in 2020 for them both to support the growth that we've seen over the last 12 months.
Megan Binkley: And we are making modest investments in certain areas of the business and in 2024, both to support the growth that we've seen over the last 12 months and to continue advancing our product and driving profitable unit economics. So I guess to more directly answer your question, I mean, we've remained confident in our path towards GAAP profitability in the near term, but as we noted in our opening remarks, there are three things that we really want to make sure that you keep in mind for Q2. One we've already covered, right?
Charlie: And to continue advancing our product and in driving profitable unit economics.
Charlie: So I guess to more directly answer your question I mean, we remain confident in our path towards GAAP profitability in the near term, but as we as we noted in our opening remarks. There are three things that we really want to make sure that you keep in mind for Q2, one we've already covered right we expect growth to.
Megan Binkley: We expect growth to be softer in Q2 versus Q1 due to seasonality and due to competitive landscape changes. So that means we are expecting sales and marketing expense to be lower in the second quarter. Secondly, on the loss ratio, you know, as expected, we do expect that Q2's loss ratio will be elevated compared to Q1, and that's really driven by seasonality. I mean, every year we see the loss ratio tick up a bit in Q2, and that's really because people are driving more, right, as we get into the spring and summer months.
Charlie: Softer in Q2 versus Q1 due to seasonality and due to competitive landscape changes. So that means we are expecting sales and marketing expense to be lower and in the second quarter.
Charlie: And secondly on on the loss ratio you know as expected. We do expect that Q2's loss ratio will be elevated compared to Q1.
Charlie: That's really driven by seasonality I mean every year, we see the loss ratio tick up a bit in Q2, and that's really because people are driving more rate as we get into the spring and summer months.
Charlie: And then lastly, we informed you of our high quality cash expense.
Charlie: That we incurred at the beginning of April whereby because of our our stock price appreciation.
Charlie: We incurred around $10 6 million of tax liability related to the vesting of our Skus and N. Psus. So April is is the highest best thing month that we have on an annual basis.
Megan Binkley: And then lastly, you know, we informed you of a high-quality cash expense that we incurred at the beginning of April, whereby, because of our stock price appreciation, we incurred around $10.6 million in tax liability related to the vesting of RSUs and PSUs. So, April is the highest vesting month that we have on an annual basis, and the bulk of that tax liability, around 75 or 70% of that, is going to run through your GNA line item on the P&L, and the remaining will hit T&D.
Charlie: The bulk of that tax liability around 75, or 70% of that is going to run through your G&A line item on the P&L in the the remaining well will hit T. N. D. So we've included some more information in our 10-Q disclosures so to really help the users of the financial statements really understand what the magna.
Megan Binkley: So, we've included some more information in our 10-Q disclosures to really help the users of the financial statements really understand what the magnitude of what that could be for the remainder of the year, but we do remain confident in our trajectory toward GAAP net income profitability in the near term.
Charlie: Students of what that could be for for the remainder of the year, but we do remain confident in our trajectory towards GAAP net income profitability in the near term.
Charlie: Okay.
Charlie Lederer: Great, and thanks for breaking that out by line item on the vesting expense there. So another question, if you guys have had two consecutive quarters now where sessions have been kind of below that 20% watermark, I think 16 and 18%, how should we think about that going forward?
Speaker Change: Great and thanks for breaking that out by line item on the.
Speaker Change: The vesting expense there so.
Speaker Change: Another question.
Charlie: You guys have had two consecutive quarters now where its sessions have been.
Charlie: Kind of below that 20% watermark, I think 16 and 18% how should we think about that going forward.
Speaker Change: Yes, Thanks Charlie.
Megan Binkley: Yeah, thanks, Charlie. Good. An excellent question.
Speaker Change: Excellent question you know we.
Speaker Change: We continue to focus on our reinsurance strategy over over the long term you know I think anytime we talk about reinsurance I think it's important to keep in mind, though we do anticipate continuing to purchase the per risk and cat reinsurance covers to really protect the business from from volatility, but as we look forward.
Speaker Change: If we see something opportunistic in the reinsurance market, we will want to take advantage of that rate. We as we sit here today, we don't intend to seed more than 25% of our G. P. But we want to make sure that we're giving ourselves optionality right. We are constantly looking to optimize our capital structure and as.
Megan Binkley: You know, we continue to, you know, focus on our reinsurance strategy over the long term. I think, anytime we talk about reinsurance, it's important to keep in mind that we do anticipate continuing to purchase the per risk and cat reinsurance covers to really protect the business from volatility. But as we look forward, you know, if we see something opportunistic in the reinsurance markets, we will want to take advantage of that, right? As we sit here today, we don't intend to see more than 25% of our GDP.
Speaker Change: As our results have continued to to improve so we've got multiple decision points throughout the year to either increase or decrease our sessions, depending on both our our appetite for reinsurance and the the external environment. So our goal is really to maintain flexibility across our all of our capital structure options.
Megan Binkley: But we want to make sure that we're giving ourselves optionality, right? We are constantly looking to optimize our capital structure, and as our results have continued to improve. So we've got multiple decision points throughout the year to either increase or decrease our exposure, depending on both our appetite for reinsurance and the external environment. So our goal is really to maintain flexibility across all of our capital structure options.
Charlie Lederer: Okay, thanks. And just one last one, if I could sneak it in.
Speaker Change: Okay. Thanks, and just one last one if I could sneak it in so this is kind of building off of Tommy's question on retention.
Charlie Lederer: So this is kind of building off of Tommy's question on... Looks like you guys are seeing improvement year over year, but how should we think about that relative to pre-IP? Yeah, I would
Speaker Change: It looks like you guys are seeing improvement year over year, but how should we think about that relative to pre IPO levels.
Alexander Edward Timm: I would say that it's continued to improve actually, so if you think about the history of the company going back longer, I would say it's modestly improved since sort of that time period. And the reason for that is when you think about the areas that we went through, when we saw a lot of inflation occur, we had to take a significant rate that then caused obviously retention to come down significantly.
Speaker Change: Yeah, I would say that it's continued to improve actually if you think about.
Speaker Change: The history of the company going back longer term I would say, it's modestly improved since since.
Speaker Change: Out of that that time period and the reason for that is you know when you think about the areas that we went through all right. When we saw a lot of inflation occur.
Speaker Change: <unk> had to take significant rate that then cause obviously retention to come down significantly and then as again, we've seen more normalized levels, we're seeing that come up and we are actually shifting our mix towards a higher retaining customer segment, that's driven by both improved pricing models and then also our partnership channel and so you should expect actually modestly better retention even.
Alexander Edward Timm: And then again, we've seen more normalized levels; we're seeing that come up. And we are actually shifting our mix towards a higher-retention customer segment that's driven by both improved pricing models and then also our partnerships channel. And so you should expect actually modestly better retention even than pre-IPO.
Speaker Change: Our pre IPO.
Speaker Change: Great. Thank you guys.
Speaker Change: Thanks, Charlie.
Speaker Change: Your next question will come from the line of Christian get solved with Wells Fargo. Please go ahead.
Regina: Your next question will come from the line at Hristian Getsov with Wells Fargo. Please go ahead.
Hristian Getsov: Hi, good afternoon. I had a question about the extra competition in the direct channel, I guess, does that incentivize you guys to kind of be a little bit more aggressive on the partnership side, just, you know, potentially kind of looking for a few more partners and, and I'm guessing kind of like the unit economics, just given that there's not really as much, I mean, I guess maybe there is some sort of marketing on it, but for the Does that kind of like incentivize you to kind of like build that channel a little quicker versus kind of like waiting for the direct channel to kind of clear up from all the competition?
Christian: Hi, Good afternoon, I had a question on the so the extra competition in the direct channel I guess does that incentivize you guys to kind of be a little bit more aggressive on the partnership side, just you know potentially.
Christian: Potentially you're kind of looking for a few more partners in and I'm guessing kind of like the unit economics, just given that there's not really I mean, I guess, maybe there is some sort of marketing on it but for the most part it's kind of just directly through their channel does that kind of like incentivize you to kind of build that channel a little quicker versus kind of like waiting for.
Christian: The direct channel that kind of clear up from all the competition.
Alexander Edward Timm: I'd say we really like our partnerships channel, and the way we think about it is that we're going to continue to build that channel. We know, through our technology and ability to offer a seamless embedded quote, that we believe that's very differentiated, and we have seen that channel grow, you write 68% year over year. That's from a smaller base than direct, so sometimes it's a little harder to see, but that's been very consistent growth, and we sort of anticipate that to continue into the future, and we really like that channel because of that consistency.
Speaker Change: I'd say, we really like our partnerships channel and the way we think about it is that.
Speaker Change: We're going to continue to build that channel, we know through our technology and ability to offer a seamless embedded quote that we believe that is very differentiated and we have seen that channel grow.
Speaker Change: Writing, 68% year over year, that's from a smaller base and interact so sometimes it's a little harder to see but that's been very consistent growth and we sort of anticipate that to continue into the future and we really liked that channel because of that consistency.
Alexander Edward Timm: On direct, we think the most intelligent way to manage that business is to constantly look at any sort of change, whether that's competitive dynamics, seasonality, what have you, and constantly make sure that our data science models are never overpaying for a customer and that we're always paying the right price and making sure that we're always hitting our return targets. I think direct will continue to grow long term, but it just may be a little bit more exposed to quarterly fluctuations, and we accept those fluctuations because we think that's the right thing to do for the long term of the business. But make no mistake; we are very passionate about growing both of these channels for a long time.
Christian: On direct we think the most intelligent way to manage that business is to constantly look at any sort of changes and whether that's competitive dynamics seasonality, but have you and constantly making sure that our data science models are never overpaying for a customer and that we're always paying the right price and making sure that we're always hitting our return targets and so.
Christian: I think direct will continue to grow long term, but it just may be a little bit more exposed to quarterly fluctuations and we accept those fluctuations because we think that's the right thing to do for the long term of the business.
Christian: But make no mistake, we are very passionate about growing both of these channels long term.
Speaker Change: Got you and then for my second question I guess with the significant kind of growth in the pits count over the last like.
Hristian Getsov: Gotcha. And then for my second question, I guess with the significant kind of growth in the PIF count over the last like two, three quarters, has there been any like dramatic shift in terms of like your demographic built within the portfolio as like, I don't know if you have like a little bit more outsized exposure to like certain states or a certain age group, like has anything shifted over the last couple of quarters, just given the huge growth?
Christian: Two to three quarters is that has there been any dramatic shift in terms of like your demographic.
Christian: Built like within the portfolio has like.
Christian: I don't know if you have like a little bit more outsized exposure to like certain states or certain age group like has anything shifted over the last couple of quarter, just given the huge growth.
Alexander Edward Timm: I'd say we've continued to iterate on underwriting and pricing. And so when you look at the mix shift, it's, it's subtle, but I would say it's probably more towards what would classically be defined as a preferred customer segment, slightly higher retention, slightly higher credit, sort of as we continue to iterate on our pricing models, we are starting to pick up more and more of that customer segment. But that's, that's really the big change, I would say, in the demographic.
Christian: I would say, we've continued to iterate on underwriting and pricing and so when you look at the mix shifted it's subtle, but I would say, it's probably more towards what would classically be defined as a preferred customer segments slightly higher retaining slightly.
Christian: Slightly higher credit.
Christian: As we continue to iterate on our pricing models, we are starting to pick up more and more of that customer segment.
Christian: That's really.
Christian: The big changes I would say in the demographic mix.
Hristian Getsov: Gotcha, and just one more quick clarification one on the growth will slow in Q2 versus Q1, but in terms of PIF count, I'm guessing you guys are still looking for some growth there maybe not the 20 to 30 percent we saw in the back half of last year, but you know you guys are still expecting to see some growth, right?
Speaker Change: Gotcha, and just one more quick clarification, one on the so I understand like the growth will slow in the Q2 versus Q1, but in terms of discount I'm guessing you guys are still looking for for some growth there maybe not the <unk>.
Christian: 20% to 30% we saw in the back half of last year, but.
Christian: We're still expecting to see some growth rate.
Alexander Edward Timm: You know, we're really happy with our PIF growth year to date. And again, we're going to constantly monitor the environment to look at, you know, how that evolves. And if the right thing for the business is to keep PIF flat, that's what we will be doing. You know, we certainly believe that we can grow the business long term and are going to continue to look to do that. But, you know, we're not going to be providing any sort of quarterly PIF guidance. Okay.
Christian: We're really happy with our Pf growth year to date and again, we're going to constantly monitor the environment to look at.
Christian: How that evolves and if the right thing for the business is to keep it flat. That's what we will be doing we certainly believe that we can grow the business long term.
Christian: And we're going to continue to look to do that but we're not going to be providing sort of quarterly guidance.
Hristian Getsov: Okay. I appreciate it. Congratulations on the quarter.
Speaker Change: Okay I appreciate it congrats on the quarter.
Speaker Change: Thanks.
Regina: Again, for any questions, press star 1, and your next question comes from the line of Matt Carletti with Citizen JMP. Please go ahead.
Speaker Change: Again for any questions Press Star one on your next question comes from the line of Matt <unk> with citizen JMP. Please go ahead.
Matt Carletti: Hey, thanks. Good afternoon.
Matt: Hey, Thanks, good afternoon.
Matt: I just had a question on the fee income line, it's grown really nicely over.
Matt: Over the past five six quarters.
Matt: Multiples.
Matt: And if you look even if you look at it on a percentage of premium it's kind of done the same might become a bigger and bigger percentage of premiums can you just kind of peel back the onion, a little bit and kind.
Matt Carletti: I just had a question on the fee income line. It's grown really nicely over the past, you know, five, six quarters, you know, multiples. And if you look, even if you look at it as a percentage of premium, it's kind of done the same, right, becoming a bigger and bigger percentage of premiums. Can you just kind of peel back the onion a little bit and kind of tell us what's happening there and what we might expect going forward?
Matt: Kind of tell us what's happening there and what we might expect going forward.
Speaker Change: Yeah sure Yeah, I would say.
Alexander Edward Timm: Yeah, sure. Yeah, I'd say If you go back a year or so ago, when we started to re-look at our forms and look at our filings, we were off the market in terms of fees. There were lots of fees that we just weren't charging that the market was charging. We began to introduce those. We think that that's really beneficial because as we move more towards fee revenue and out of premium revenue, as we do that, there are a lot of benefits to that.
Speaker Change: When you go back a year or so ago. When we started to re look at our forums.
Speaker Change: And look at our filings.
Speaker Change: We really had a.
Speaker Change: We were off the market in terms of fees. There is lots of fees that we just weren't charging that.
Speaker Change: The market was and so we began to introduce us and we think that that's really beneficial.
Speaker Change: Because as we move more towards fee revenue in and out of premium revenue as we do that there's a lot of benefits to that theres lower premium tax et cetera on that so I think we've largely.
Alexander Edward Timm: There's lower premium tax, etc. on that, etc., so I think we're largely at where you're going to see us stay. I don't think there's any other big movements up as a percentage of premium in that line item. But I do think this is roughly at a new normal.
Matt Carletti: Great. Very helpful. Thank you.
Speaker Change: All of those filings. So I think we're largely at where where youre going to see us stay I don't know.
Speaker Change: If there's any other big movements up as a percentage of premium in that line item, but I do think this is roughly at a new normal.
Speaker Change: Great very helpful. Thank you.
Speaker Change: Thanks.
Alexander Edward Timm: With that, I'll hand the call back to Alex for any closing remarks.
Speaker Change: And with that I'll hand, the call back to Alex for any closing remarks.
Speaker Change: Okay.
Alexander Edward Timm: Thank you everybody for joining today. We look forward to continuing to execute and to continue to talk to you guys about the future of our company. I appreciate it. That will conclude today's meeting. Thank you all for joining. You may now disconnect.
Alexander Edward Timm: Thank you everybody for joining today, we look forward to continue to execute and to continue to talk to you guys about the future of our company I appreciate it.
Speaker Change: That will conclude today's meeting. Thank you all for joining you may now disconnect.
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