Q1 2025 Root Inc Earnings Call
Speaker Change: Greetings and welcome to the Root Inc. 1st quarter 2025 earnings conference call. At the sign, all participants are in a lesson only mode.
Speaker Change: The brief question and answer session will follow the formal presentation.
Speaker Change: If anyone should require operator assistance during the conference, please raise a star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Matt LaMalva. Thank you, you may begin.
Thank you for joining us.
Speaker Change: Ruth is hosting this call to discuss its first quarter, 2025 earnings results.
Alex Timm: Participating on today's call are Alex Timm, co-founder and chief executive officer and Megan Binkley, chief financial officer.
Speaker Change: Earlier today, rude issued a shareholder letter announcing its financial results.
Speaker Change: 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 2025 Form 10Q, which was filed with the Securities and Exchange Commission earlier today.
Speaker Change: 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 goal and business outlook, which are based on management's current beliefs and assumptions.
Speaker Change: Please note that these forward-looking statements reflect our opinions as of the date of this call and we are not obligated to revise this information as a result of new developments that may occur.
Speaker Change: Forward-looking statements are subject to various risks on certain teas and other factors that could cause our actual results to differ materially from those expected and described today.
Speaker Change: For more detailed description of our risk factors, please review our most recent 10K, 10Q and Shareholder Letter.
Speaker Change: 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-GAAT measures while talking about roots performance.
Speaker Change: I will now turn the call over to Alex Timm, Roots co-founder and CEO .
Alex Timm: Thanks Matt, our momentum from 2024 continued into the new year as we delivered strong results across our operations, producing another profitable quarter. We entered 2025 from a position of strength thanks to our superior technology, strong capitalization and scalable fixed expense base.
Alex Timm: We improved our gross premiums written by 24% from the first quarter of 2024 and generated net income of $18 million, operating income of $24 million, and adjusted EBITDA of $32 million.
Alex Timm: Additional accomplishments for the quarter include growing policies and forests delivering strong loss ratios, continuing investments in our pricing and underwriting technology, and making progress to diversify our distribution.
Alex Timm: Our strong performance in the first quarter was enabled by seasonal favorability, largely driven by tax refunds, elevated shopping behavior, and lower miles driven.
Alex Timm: We tend to see this benefit in the first quarter of every year, and do not expect this tail end to persist until the rest of 2025. Most importantly, we have achieved this growth while maintaining our underwriting discipline, which continues to be our North Star.
Alex Timm: We continue to be excited for the path ahead as we focus on lifetime unit economics, expand our partnerships channel, and reinvest into our business to drive long-term returns.
Alex Timm: The progress achieved over the past few quarters was possible due to the foundation we've fortified in recent years and we believe this foundation will continue to drive a momentum in our business for years to come.
Alex Timm: Within our direct channel, we have found success in data-rich lower funnel channels, and we'll continue to scale these winds while leveraging our expertise to expand into mid to upper funnel strategies.
Alex Timm: These R&D investments are at an early stage as we collect more data, and we only scale those channels that meet or exceed our unit economic targets.
Alex Timm: Our direct channel is supported by our world-class mobile first telematics product, creating delightful customer experiences at better prices.
Alex Timm: Through our partnership channel, building differentiated access to customers remains a core pillar in our long-term growth strategy. This channel has seen quarterly new writings more than double year-over-year as our pipeline continues to expand across the automotive financial services in agent subchannels.
Alex Timm: We have expanded our partner roster to include over 20 total partners launching two new strategic partnerships, one with Hyundai Capital America or HCA and one with experience in this quarter.
Alex Timm: In March, we announced our partnership with Hyundai Capital America to bring data-driven competitive rates in a more connected experience to HCA customers. This partnership aimed to optimize the strengths of both companies to address evolving industry needs and set new benchmarks for customer satisfaction.
Alex Timm: We are in the early stages of this exciting partnership that continues to expand our distribution and look forward to sharing updates as the partnership evolves.
Alex Timm: Our partnership with the Experian offers root insurance through Experian's Insurance Marketplace.
Alex Timm: Providing their members' expanded access to affordable and personalized car insurance options.
Alex Timm: By leveraging our technology, this integration enhances and streamlines the insurance shopping experience, delivering data-driven competitive rates to experience numbers.
Alex Timm: Our progress is driven by a proprietary tech stack that can seamlessly integrate into existing partner platforms, enabling access to potential customers that can textually relevant times.
Alex Timm: We remain confident in our long-term growth avenues across both channels while maintaining a unique focus on national expansion.
Alex Timm: As of the end of the first quarter, we are happy to report that we are in 35 states and also filed our product with Michigan, which is currently pending regulatory approval. This builds on our list of states without standing filings, which also includes Washington, New Jersey, and Massachusetts.
Alex Timm: We are excited to expand our geographic presence in our quest to become national. Above all, providing customers a delightful experience and a great price, no matter what channel they come through, remains our top priority.
Alex Timm: As we invest in our growth, we will maintain our laser-focused mindset on disciplined underwriting, driven by our proprietary technology platform and data science algorithms.
Alex Timm: While we cannot predict the future, we are able to react swiftly and appropriately through rate actions when it comes to changes in loss costs, including implications from imposed
Alex Timm: As we demonstrated previously in the post-pandemic hyperinflationary environment, we leverage automation in our underwriting process, empowering us to quickly identify trends, seek regulatory approval, and ultimately earn rates through our book.
Alex Timm: Particularly in times of high macroeconomic uncertainty, we are able to leverage our frequent actuarial reviews to incorporate changing trends into our pricing algorithms and continually offer the best prices to our best drivers.
Alex Timm: AtRoot, it's all about the long term. That means we invest our capital to drive intrinsic value creation based on an economic framework over the life of the customer. Not calendar period results.
Alex Timm: We believe a disciplined adherence to this framework creates a tremendous opportunity for long-term investors.
Alex Timm: I will now hand the call over to Megan to discuss our first quarter operating results in more detail.
Megan: Thanks, Alex. Overall, it was an excellent start to 2025. We experienced another quarter of strong performance on Unineconomics, underwriting, and expense management.
Megan: For the first quarter, as Alex mentioned, we delivered net income of $18 million, a $25 million improvement year-over-year.
Megan: We also generated operating income of $24 million and adjusted EBITDA of $32 million, improvements of $18 million, and $17 million, year-over-year, respectively.
Megan: Gross Ritten Premium and Gross Earn Premium when compared to the first quarter of 2024 and the fourth quarter of 2024.
Megan: Our growth in the first quarter was driven by both our direct and partnership channels and enabled by the continued discipline deployment of acquisition investment at our lifetime UNIT economic targets.
Megan: As we've consistently noted, we do not defer the majority of our customer acquisition costs over the life of our customer, which leads to accelerated expense recognition relative to earn premium.
Megan: We achieve this growth while delivering a first-quarter gross accident period loss ratio of 58 percent, a strong result that is enabled by our continued investment in data science and technology.
Megan: Note that we benefit from a favorable seasonality trend in the first quarter, as there are fewer miles driven in the winter months and also higher purchasing power resulting from tax season refunds.
Megan: We achieved a net combined ratio of 96% in the quarter, a six-point improvement on a year-over-year basis, reinforcing the ongoing discipline and how we manage the business and deploy capital.
Megan: We are well-capitalized for the opportunities ahead of us. Our unencumbered capital was $347 million at the end of the period. And given our strong underwriting performance, we are also in a position of excess capital across our insurance subsidiaries.
Megan: This allows us to better optimize our operating structure and more flexibly to pull a growth capital for high-return opportunities.
Megan: Q1 was the first quarter to reflect our run rate interest expense savings from the recently amended debt facility with BlackRock.
Megan: The current facility allows for performance-based step-downs in our interest expense tied to our debt-to-capital ratio, the first of which we were able to realize in the first quarter, which reduced our interest rate by 25 basis points.
Megan: This illustrates that as our business continues to perform, we will have opportunities to reduce our cost of capital.
Megan: We've remained focused on growing in a thoughtful and disciplined manner and through expanding our footprint and distribution channels and investing in opportunities for the business that present high return potential over the long term.
Megan: We are excited for our future and appreciate your continued support with that we look forward to your questions.
Speaker Change: Thank you we will now be conducting a question and answer session.
Speaker Change: So I'll ask a question. Please press star and then one on your telephone keypad a.
Speaker Change: The Gulf of measured tone will indicate your line is in the question queue.
Speaker Change: My push Star and then two if you would like to remove your question from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment, please while we poll for questions.
Speaker Change: The first question, we have is from Tony with joint off K B W. Please go ahead.
Tony: Hey, good evening guys. Thanks for taking our questions.
Tony: The first one is looking at the the new business mix. So the partnership mix had been rising pretty significantly on a sequential basis. The last couple of quarters, but was up only two points sequentially in the first quarter here was that a function of unusually strong opportunity on the direct side.
Tony: In the first quarter and then how do you think about that partnership mix, perhaps over the the the rest of the year.
Tony: In the first quarter and then how do you think about that partnership mix, perhaps over the the the rest of the year.
Tony: Okay.
Speaker Change: Thanks Tommy.
Speaker Change: I'd say that that was really a function of you know we saw a very strong quarter indirect growth.
Speaker Change: It's always seasonally very strong we do expect that to abate more going forward and so I think youre going to see the percent from partnerships in terms of the number of new writings that we're generating each quarter increase through the remainder of the year.
Speaker Change: Got it okay.
Speaker Change: And we did see the step up in your your growth spend through the sales and marketing line is as you had previously communicated them can you talk about your expectations for the quarterly cadence of that growth spend for.
Speaker Change: For the rest of this year as well.
Speaker Change: Yeah, I think again, usually Q1, we see really strong seasonality, we did see that again this quarter and that's driven by tax season, and we also saw some pull up of demand we believe.
Speaker Change: Into the quarter and so you know we've kept it as we look forward. For example, you know this quarter to date.
Speaker Change: We've kept half roughly flat you know long term you know I think usually again youre going to see Q1 be.
Speaker Change: B the E. The best quarter, I think in terms of long longer term growth expectations throughout the year, we're continuing to work on state expansion or adding additional partnerships, both HCA and experian that we we've announced this quarter and then on direct we're continuing to experiment to mid upper funnel. So we think long term, there's a lot of growth, but on a quarter by quarter basis.
Speaker Change: We're going to continue to run our marketing machine that optimizes.
Speaker Change: For really the net present value of our business and you know that typically are on the direct channel, particularly occurs in Q1, and so I think that's going to be the highest quarter of it Michael would you say anything else.
Speaker Change: No I think Alex you covered it I mean from a Q1 perspective really proud of the growth that that we saw in Q1, I mean, we've really capitalized on the opportunities to increase our sales and marketing investment in the quarter and as Alex mentioned, you know tax season, we saw was a bit more amplified this quarter than what we've seen previous.
Speaker Change: Asleep.
Speaker Change: Yeah.
Speaker Change: Thanks, and then just last question I'll sneak in here I'm looking at the geographical breakdown disclosure in your Q. It looks like you saw some really strong growth in some select states like like California.
Speaker Change: In Florida can you talk about you know your state your expansion sort of strategy in individual states in terms of how long it takes to deploy marketing dollars in and ramp up.
Speaker Change: On a state by state basis would be helpful. Thanks.
Tommy: Thanks Tommy.
Speaker Change: You know when we launch into new states and we're very very diligent and so we usually launch with pretty conservative pricing and underwriting and then as we observe the data and the loss cost data coming through to ensure that we're hitting our target margins. That's when you'll start to see us open up a little bit and sometimes we have to adjust pricing. There you saw that in <unk>.
Speaker Change: And in a couple of states that we've launched recently for example.
Speaker Change: And so you may see us adjust pricing shortly thereafter, as well and so really we take a very measured approach and then as we gain confidence as that data comes through that's really when you start to see.
Speaker Change: The growth come through it so that can take anywhere from six months to a year.
Speaker Change: Great. Thanks, Alex.
Speaker Change: Thanks Tommy.
Speaker Change: The next question we have is from Elyse Greenspan of Wells Fargo. Please go ahead.
Elyse Greenspan: Hi, Hi, Thanks. Good evening. My first question on you know you were highlighting I think seasonality.
Elyse Greenspan: On the growth side now in terms of you.
Elyse Greenspan: You know I think you mentioned tax refunds I'm not sure. If you have a sense of what the contribution to growth was there.
Elyse Greenspan: Also I don't know if perhaps you saw it impact some pull forward.
Elyse Greenspan: Just given the looming impact of tariffs interest.
Elyse Greenspan: You know both of those kind of contribution to policy growth in the Q1 I was hoping to get more color. There and then how are you thinking about you know policy growth over the balance of the year.
Elyse Greenspan: Yeah.
Elyse Greenspan: Yeah. Thanks, Thanks Louise.
Elyse Greenspan: Yeah, I'd say the tax season that that's always a fairly soon.
Elyse Greenspan: I never do that every year and and we saw that again this year and so that's been pretty consistent on year over year. It was maybe slightly more extreme this year than what we've seen in previous years tariffs, particularly in our in our partnerships channel, where we are selling insurance directly embedded with a vehicle we do believe that.
Speaker Change: Those potentially pulled up some demand and so you also saw that in terms of the remainder of the year and our pet growth trajectory Mega would you like to take that yeah, I think and in terms of what what Alex mentioned I think the only thing that I would would layer on as you know as we enter Q2, I mean, we are saying that Pisses us.
Speaker Change: Flat quarter to date and really that's in line with with our expectations. We did bring on a significant number of new writings and in Q1 and you know typically at least on the direct side, we do see a higher churn associated with that increased growth penalty.
Speaker Change: For some of the early stage cohorts.
Speaker Change: Okay.
Speaker Change: Thanks, and then I guess sticking on the tariff side I think in the prepared remarks right. You guys were you know highlighting how you can react pretty quickly to trends and seek approval.
Speaker Change: For rates if needed.
Speaker Change: Is is your expectation that you guys will need to you know take rates to offset some of the tariff impact and then now we've kind of thought that the impact of tariffs would be about a mid single digit or 5% increase to severity is is that with what you guys are expecting as well.
Speaker Change: Yeah.
Speaker Change: We've run a number of different scenarios, we do believe that it's going to be.
Speaker Change: Low to mid single digit impact.
Speaker Change: On the loss ratio. So when we look at it though our loss ratios have been below our current loss ratio targets and so we believe we have more than enough room to absorb any of the tariffs in the current form given our best estimates.
Speaker Change: Yeah, absolutely I will say, if we need to take rate, we will take rate and we believe that that's been actually a core competitive advantage of the company.
Speaker Change: Is that by being Ryan on a modern tech chassis and having automated rating systems that has allowed us to be in front of them.
Speaker Change: Really we believe almost all of our competitors in terms of being able to take rates very quickly and you saw that in 2023, right, where we were growing and taking significant market share as a as a company while most others were still on the sidelines and so.
Speaker Change: You know also that there may be some near term macroeconomic uncertainty. We believe just by virtue of being nimble in a tech company, we can certainly move much quicker.
Speaker Change: Thanks, and then my last question.
Speaker Change: It's been a few quarters in a row of.
Speaker Change: Positive earnings for you guys and you guys have steered away a bit from giving precise guidance, but just you know how you see that obviously there was the seasonality benefit in the Q1, but still you know you know decently profitable. So how do you guys see yourselves in terms of you know we're meeting.
Speaker Change: Meeting profitable over the balance of the year.
Alex Timm: Yeah. Thanks, Elyse that it's it's a good question and you know what I would say is yes, it's our third consecutive quarter of profitability in.
Alex Timm: Q1, as you mentioned you know does have the seasonal component to it both on on growth and on loss ratio I think we've covered our our expectations on growth than in previous responses, but one thing I do want to highlight is you know the loss ratio is typically.
Alex Timm: Higher than in Q2 and in Q3, driven by Q2 is heavy conductive storm season, and then Q3 is hurricane season. So we do expect that the loss ratio will increase in Q2, and Q3 to align with our long term target, which is between 60 and 65.
Alex Timm: But the only thing I would say too is you know we're not expecting to run rate you know a single quarter extrapolate results into the future. We're going to continue being very opportunistic on our direct marketing side and you'll see us continue to take that approach.
Alex Timm: Thank you.
Speaker Change: Ladies and gentlemen, just a reminder, if you wish to queue for a question you May Press Star and then one.
Speaker Change: The next question we have is from MD Anderson of Jefferies. Please go ahead.
Charlie: How are you guys. This is Charlie on for Andrew.
So anyway, we've been talking about growth on the call so far and I get that we're going to probably see a shift in mix of growth for the balance of the year moved towards the partnership channel.
Charlie: But I guess, how should we think about the contribution of new partnerships I'm thinking like H C. A R.
Charlie: The experian partnership and the potential impacts to Pip growth there.
Charlie: How long do they take to ramp do you expect them to be big contributors this year.
Speaker Change: Thanks, Charlie Yeah, and in terms of new partnerships in general, but I would say typically when we onboard a new partner. It does take us time time to ramp and so we are in the early stages of the partnership and we're going to share more details as that partnership in product continues to progress.
Speaker Change: Okay.
Speaker Change: And then.
Speaker Change: I guess, just on kind of frequency and severity I got that we've talked at length about tariffs, but it seemed like you know 5% benefit from frequency, but there was also a severity was up 7%. So how should we I guess first would be thinking about you know was there anything driving frequency.
Speaker Change: Down that you guys would call out that we should maybe think about it as being nonrecurring or.
Speaker Change: Or perhaps recurring and then on severity are you guys, taking any steps or thinking that you may need to take any steps to adjust pricing there.
Speaker Change: Thanks, Charlie.
Speaker Change: I would say that the trends have been roughly in line with what we've observed and what we sort of anticipated and so I don't think it was in terms of frequency or severity trends a quarter that was outside of the bounds of our our reasonable expectations. We have seen some mix shift so we have shifted more as particularly as we've launched more.
Speaker Change: Ship channels into our more partnerships into a more preferred customer segment that segment typically you will see lower frequency in a bit higher severity, but we also believe that our pricing plans have sort of appropriately accounted for that in our segmentation models. So we feel pretty good about where trend is today.
Speaker Change: Okay, great well, that's all for me thanks, guys.
Charlie: Thanks, Charlie.
Speaker Change: At this time there are no further questions and with that this concludes today's conference call. Thank you for joining US you may now disconnect your lines.
Speaker Change: Oh.
Speaker Change: [music].
Speaker Change: Yes.