Q2 2025 Root Inc Earnings Call

In the listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone requires operator assistance during the conference. Please signal the operator by pressing star and zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host for today, Matt level, My head of Investor Relations and corporate development. Please go ahead.

Thank you for joining us.

<unk> is hosting this call to discuss its second quarter 2025 earnings results.

Dissipating on today's call are Alex Tim Co founder and Chief Executive Officer, and Megan <unk> Chief Financial Officer.

Earlier today <unk> 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 second quarter of 2025 Form 10-Q, 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 are not obligated to revise this information as a result of new developments that may occur.

Speaker #3: Ladies and gentlemen, greetings and welcome to the Root Inc. 2025 second quarter earnings conference call. At this time, all participants are in the listen-only mode.

We're 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 a more detailed description of our risk factors. Please review our most recent 10-K 10-Q and shareholder letter.

Speaker #3: A brief question-and-answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please signal the operator by pressing star and zero on your telephone keypad.

A replay of this conference call will be available on our website under the Investor Relations section.

I'd also like to remind you that during the call we will discuss some non-GAAP measures while talking about routes performance.

Speaker #3: As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Matt LaMalva, head of investor relations and corporate development.

You can find reconciliations of these historical measures to the nearest comparable GAAP measures in our financial disclosures all of which are posted on our website at IR that joined route Dot com.

I will now turn the call over to Alex Tim roots co founder and CEO.

Speaker #3: Please go head.

Speaker #4: Thank you for joining us. Root is hosting this call to discuss its second quarter 2025 earnings results. Participating on today's call are Alex Timm, co-founder and chief executive officer, and Megan Binkley, chief financial officer.

Thanks, Matt the second quarter was another impressive quarter for route.

We delivered strong financial results setting a record on revenue with $371 million in gross earned premiums and generated net income of $22 million.

Speaker #4: Earlier 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.

Speaker #4: today, Root issued shareholder letter announcing its financial results. While this call will reflect items discussed in that document, for more complete information about our financial performance, we also encourage you to read our second quarter 2025 Form 10-Q, which was filed with the Securities and Exchange Commission earlier today.

These results are the culmination of consistent execution of our strategy, allowing us to create great experiences and great prices for our customers.

Beyond financial results, we continued to advance our strategy releasing our next gen pricing model continuing to rapidly grow our partnerships channel and making meaningful progress on our path to becoming national.

Building AI and machine learning to better price insurance is the bedrock of our strategy, our new pricing model substantially improves our risk selection, increasing customer lifetime values by 20% on average.

Speaker #4: 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.

This impact could be even larger in some states and allows us to grow faster collect more data and continue to build even more predictive models for.

Speaker #4: Forward-looking statements are subject to various risks and uncertainties and other factors that could cause our actual results to differ materially from those expected and described today.

For context, our WAF model update was released at the end of 2024.

Our foundation in artificial intelligence, namely machine learning has allowed us to iterate on our models not only rapidly, but also with big improvements to segmentation.

Speaker #4: For 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.

These results show the power of this technology and our strategy.

Speaker #4: I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root's performance. You can find nearest comparable GAAP measures in our financial disclosures.

Our partnerships channel has seen quarterly new writing nearly tripled year over year and we are seeing strong early wins with independent agents driven by our technology platform that makes it incredibly easy for agents to deliver great prices quickly to their clients.

Speaker #4: All of which are posted on our website at ir dot join root dot com. I will now turn the call over to Alex Timm, Root's -founder and CEO.

We are now available through the industry's two largest comparative raters easy links MPL rating.

Speaker #5: Thanks, Matt. The second quarter was another impressive quarter for Root. We delivered strong financial results, setting a record on revenue with $371 million in gross earned ums, and generated net income of $22 million.

Now live in more than 20 states early traction on these platforms has been strong and we are working to expand within our geographic footprint by year end.

Through these platforms reach significantly expands its reach meeting agents, where they are with an embedded technology that provides increased efficiency to their quote and buying process.

Speaker #5: These results are the culmination of consistent execution of our

Speaker #5: strategy, allowing us to create great experiences and great prices for our ustomers. Beyond financial results, we continue to advance our strategy, reconciliations of these historical measures to releasing our next-gen pricing model, continuing to rapidly grow our partnerships channel, and making meaningful progress on our path to becoming national.

As anticipated we saw competition increase in our direct channel and our data science machine reacted exactly as designed reducing marketing spend when appropriate.

To date, we have largely focused on performance marketing channels, combining the data rich nature of these channels with our machine learning prowess allows for a competitive advantage among high intent customers.

Speaker #5: Building AI and machine learning to better price insurance is the bedrock of our strategy. Our new pricing model substantially improves our risk selection, increasing customer lifetime values by 20% on average.

We have proven that we can win in this segment and believe the next leg of our growth will come from ongoing R&D investments as we leverage this competitive advantage across additional data rich marketing channels.

Speaker #5: This impact could be even larger in some states and allows us to grow faster, collect more data, and continue to build even more predictive models.

Given the size of these untapped marketing channels and the opportunity to build a competitive advantage based on data in these channels. We believe this opportunity is substantial and well worth the wait.

Speaker #5: For context, our last model update was released at the end of 2024. Our foundation in artificial intelligence, namely machine learning, has allowed us to iterate on our models not only rapidly but also with big improvements to segmentation.

As mentioned last quarter, we believe we will react swiftly and appropriately to potential tariffs.

Speaker #5: These results show the power of this technology and our strategy. Our partnerships channel has seen quarterly new writings nearly triple year over year, and we are seeing strong early wins with independent agents.

To date, we have not seen a meaningful impact from tariffs.

Given that our current loss ratios remain below our long term target of 60% to 65%.

Speaker #5: Driven by our technology platform that makes it incredibly easy for agents to deliver great prices quickly to their clients. We are now available through the industry's two largest comparative raters, EZLinx and PL Rating.

We're in position to absorb some impact without raising rates or sacrificing our long term unit economic targets.

We are pleased with our progress in the quarter, but are far from satisfied as our goal remains to be the largest most profitable personal lines insurance carrier in the United States. We will continue to invest in our business technology and growth, which we expect will impact near term profitability in the back half of 2025.

Speaker #5: Now live in more than 20 states, early traction on these platforms has been strong, and we are working to expand within our geographic footprint by year-end.

Speaker #5: Through these platforms, Root significantly expands its reach, meeting agents where they are with an embedded technology that provides increased efficiency to their, quote, inbound process.

As we have made clear at route it's all about the long term.

That means we invest our capital to drive intrinsic value creation, not near term calendar period results.

Speaker #5: As anticipated, we saw competition increase in our direct channel, and our data science machine reacted exactly as designed, reducing marketing spend when appropriate. To date, we have largely focused on performance marketing channels.

We believe a disciplined adherence to this framework creates a tremendous opportunity for long term investors and we are excited to continue to invest in the opportunity ahead.

Speaker #5: Combining the data-rich nature of these channels with our machine learning prowess allows for a competitive vantage among high-intent customers. We have proven that we can win in this segment, and believe the next leg of our growth will come from ongoing R&D investments as we leverage this competitive advantage across additional data-rich marketing channels.

I will now hand, the call over to Meghan to discuss our second quarter operating results in more detail.

Thanks, Alex overall, we experienced another quarter of strong performance.

In the second quarter, we delivered net income of $22 million, a 30 million dollar improvement year over year.

We also generated operating income of $27 million and adjusted EBITDA of $38 million improvements of $24 million and $26 million year over year, respectively.

Speaker #5: Given the size of these untapped marketing channels and the opportunity to build a competitive advantage based on data in these channels, we believe this opportunity is substantial and well worth the wait.

Speaker #5: As mentioned last quarter, we believe we will react swiftly and appropriately to potential tariffs. To date, we have not seen a meaningful impact from tariffs.

In the second quarter, we saw increases in policies in force gross written premium and gross earned premium when compared to the second quarter of 2024.

Speaker #5: Given that our current loss ratios remain below our long-term target of 60 to 65%, we are in the position to absorb some impact without raising rates or sacrificing our long-term unit economic targets.

Our growth in the quarter was driven primarily by our partnership channel as we continue to expand our pipeline with a differentiated insurance offering.

We not only grew but did so profitably as evidenced by our gross accident period loss ratio of 60%.

Speaker #5: We are pleased with our progress in the quarter, but are far from satisfied as our goal remains to be the largest, most profitable personal lines insurance carrier in United States.

We also achieved a net combined ratio of 95% in the quarter and eight point improvement on a year over year basis, reinforcing the ongoing discipline and how we manage the business and deploy capital.

Speaker #5: We will continue to invest in our business, technology, and growth, which we expect will impact near-term profitability in the back half of 2025. As we have made clear at Root, it's all about the long term.

None of this is possible without continued investment into our business and disciplined execution against our strategy.

Speaker #5: That means we invest our capital to drive intrinsic value creation, not near-term calendar period results. We believe a disciplined adherence to this framework creates a tremendous opportunity for long-term investors, and we are excited to continue to invest in the opportunity ahead.

We remain well capitalized and positioned to pursue the most attractive opportunities ahead of us.

At the end of the quarter, we had $314 million in unencumbered capital and we continue to maintain excess capital across our insurance subsidiaries.

Speaker #5: I will now hand the call over to Megan to discuss our second quarter operating results in more detail.

This financial flexibility enables us to optimize our operating structure and deploy growth capital dynamically where do we see the greatest long term return potential.

Speaker #6: Thanks, Alex. Overall, we experienced another quarter of strong performance. In the second quarter, we delivered net income of $22 million, a $30 million improvement year over year.

Looking ahead to the second half of the year, we plan to continue investing in key strategic areas.

Speaker #6: We also generated operating income of $27 million and adjusted EBITDA of $38 million, improvements of $24 million and $26 million year over year respectively.

Expanding our national footprint, enhancing our product suite and deepening our data science and technology capabilities. These investments are foundational to driving long term growth scale and sustained value creation.

Speaker #6: In the second quarter, we saw increases in policies enforced, gross written premium, and gross earned premium when compared the second quarter of 2024. Our growth in the quarter was driven primarily by our partnership channel, as we continue to expand our pipeline with a differentiated insurance offering.

We do expect these investments combined with typical seasonal loss ratio pressure in H. Two to result in increased pressure on net income profitability in the near term.

Separately as we've disclosed assuming the carvana short term warrants expire on exercised on September 1st we would recognize accumulative warrant expense catch up.

Speaker #6: We not only grew, but did so profitably, as evidenced by our gross accident period loss ratio of 60%. We also achieved a net combined ratio of 95% in the quarter and eight-point improvement on a year-over-year basis.

We expect to incur approximately $16 million to $18 million and noncash expense in Q3 related to the outstanding warrant structure.

Speaker #6: Reinforcing the ongoing discipline and how we manage the business and deploy capital. None of this is possible without continued investment into our business and disciplined execution against our strategy.

Of which approximately $15 $5 million reflects a cumulative catch up tied to the transition to long term warrants, which vest based on policy sales.

Speaker #6: We remain well capitalized and positioned to pursue the most attractive opportunities ahead of us. At the end of the quarter, we had $314 million in unencumbered capital, and we continue to maintain excess capital across our insurance subsidiaries.

This is expected to result in a net loss for the quarter, but we expect to maintain positive adjusted EBITDA.

Sure. This reflects the success of our partnership with Carvana and the value we're creating together.

Finally, as always we'll continue to take a disciplined and opportunistic approach to direct marketing investment adjusting quarter by quarter based on performance and competitive dynamics.

Speaker #6: This financial flexibility enables us to optimize our operating structure and deploy growth capital dynamically where we see the greatest long-term return potential. Looking ahead to the second half of the year, we plan to continue investing in key strategic areas, expanding our national footprint, enhancing our product suite, and deepening our data science and technology capabilities.

On the partnership side, while we're still early in scaling this channel we expect it to continue increasing as a percentage of our overall book and the back half of the year.

As we've consistently stated we remain focused on growing in a thoughtful and disciplined manner through expanding our footprint and distribution channels and investing in opportunities for the business that present high return potential over the long term.

Speaker #6: These investments are foundational to driving long-term growth, scale, and sustained value creation. We do expect these investments combined with typical seasonal loss ratio pressure and H2 to result in increased pressure on net income profitability in the near term.

We're excited for our future and appreciate your continued support with that Alex and I look forward to your questions.

Thank you.

Speaker #6: Separately, as we've disclosed, assuming the Carvana short-term warrants expire on exercise on September 1st, we would recognize a cumulative warrant expense catch-up. We expect to incur approximately $16 to $18 million in non-cash expense in Q3, related to the outstanding warrant structure, of which approximately $15.5 million reflects a cumulative catch-up tied to transition to long-term warrants which vests based on policy sales.

Ladies and gentlemen, we will now begin the question and answer session.

If you would like to ask a question. Please press star and one on your telephone keypad.

Confirmation tone will indicate your line is in the question queue.

You May press Star two.

If you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.

Ladies and gentlemen, we will wait for a moment when we poll for questions.

Speaker #6: This is expected to result in a net loss for the quarter, but we expect to maintain positive adjusted EBITDA. In short, this reflects the success of our partnership with Carvana and the value we're creating together.

Question comes from Tommy Mick joined with Gabe BW. Please go ahead.

Okay.

Speaker #6: Finally, as always, we'll continue to take a disciplined and opportunistic approach to direct marketing investment. Adjusting quarter by quarter based on performance and competitive dynamics.

Okay.

Hey, good afternoon, guys. Thanks for taking.

Taking our questions here.

The first one I wanted to talk about is just the direction of your expectations for policies in force growth. It seems that we saw a little bit of a deceleration this quarter and you guys noted some some and the commentary around the competitive state of the direct channel of marketing.

Speaker #6: On the partnership side, while we're early in scaling this channel, we expect it to continue increasing as a percentage of our overall book in the back half of the year.

Speaker #6: As we've consistently stated, we've remained focused on growing in a thoughtful and disciplined manner through expanding our footprint and distribution channels, and investing in opportunities for the business that present high return potential over the long term.

So can you talk about your appetite to lean into growth in the direct side and you know what that could mean for your potential tiff growth and your appetite for that going forward.

Yeah.

Yeah. Thanks Tommy.

First I'd note.

Speaker #6: We are excited for our future and appreciate your continued support. With that, Alex and I look forward to your questions.

We have seen modest growth in our pits.

Quarter to date in Q3, and so we do believe that there is.

Certainly opportunity to grow the business, we did see in Q2, the direct channel become more competitive and we're not going to chase a soft market and so if we're not necessarily expecting that to change in the near term, but we also have been growing our partnership channel very rapidly that grew three <unk> year over year in your writings.

Speaker #2: Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star and one on your telephone keypad.

Speaker #2: A confirmation tone will indicate your line is in the question queue. You may press star and two if you would like remove your question from the queue.

And you know, we're doing that and we're still only appointed and fewer than 4% of all independent agents nationwide. So we think that the long term growth opportunity. There is really significant we also as you saw in the quarter just received approval for our product filings in the state of Washington.

Speaker #2: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll for questions.

So that's a meaningful step towards continuing our march to be national and we believe that that's also going to add material opportunity for growth in the long term and then the third thing I'd highlight is we're continuing to test mid to upper level.

Speaker #2: The first question comes from Tommy McJoint, with KBW. Please go head.

Final marketing channels that is in R&D, it's going to be lumpy, you're going to see some of that expense hit in Q3.

Speaker #7: Hey, good noon, guys. Thanks for, taking our our questions here. the first one, I want to talk about is, just the direction of your expectations for policies enforced growth.

As we test more of those channels and that will be a longer term growth lever for us. So.

We've seen modest pip growth quarter to date, and we think that Theres a lot of room ahead of us to continue to grow and what does it really massive industry.

Speaker #7: It seems that we saw a little bit of a deceleration this quarter, and you guys noted some in the commentary around the competitive state of the direct channel of marketing.

Right.

Got it and.

And we have seen that that partnership channel scale up.

Speaker #7: So can you talk about your appetite to lean into growth in the direct side and, you know, what that could mean for your potential PIF growth and your appetite for that going forward?

Do you have a sense now that its large enough to enable you to continue growing path.

Throughout a soft market even at the time, where you might be pulling back on the direct side basically I'm asking is the partnership that partnership channel big enough to offset a an intentional pullback in the direct side to still grow through it through a soft market cycle.

Speaker #8: Yeah. Thanks, Tommy. Yeah. First, I'd note we have seen modest growth in our PIF quarter to date in Q3, and so we believe that there's certainly opportunity to grow the business.

Speaker #8: We did see in Q2 the direct channel become more competitive, and we're going to chase a soft market. So, if, you know, we're not necessarily expecting that to change in the near term.

Yes, I think youre going to see modest growth, particularly in the near term as that channel continues to scale.

But longer term, particularly after a couple of quarters I do think that youre going to start to see that channel continue to games gained steam and momentum and will be a sizable portion of our business and that channel again, because we have really built a lot of that really a moat around our customers in that business and.

Speaker #8: But we also have been growing our partnerships channel very rapidly. That grew 3x year over year in new writings. And, you know, we're doing that, and we're still only appointed in fewer than 4% of all independent agents nationwide.

Speaker #8: So we think that the long-term growth opportunity there is really significant. We also, as you saw on the quarter, just received approval for our product filing in the state of Washington.

And differentiated access to customers even through soft markets. We believe that we can continue to grow so.

Yes, absolutely that channel is going to continue to be meaningful.

Speaker #8: So that's a meaningful step towards continuing our march to be national. And we believe that that's also going to add material opportunity for growth in the long term.

Great and then just last one around a similar topic do you guys have a a budget for what you guys plan to spend on growth spend or sales and marketing.

Speaker #8: And then the third thing I'd highlight is we're continuing to test mid to upper level funnel marketing channels. That is in R&D. It's going to lumpy.

For at least the rest of this year and over a longer able to think about providing that forecast for.

Speaker #8: You're going to see some of that expense hit in Q3. As we test more of those channels, and that will be a longer-term growth lever for us.

Yeah, Hey, Tom it's Megan.

Good question, you know as we look at spend throughout the rest of the year.

Speaker #8: So again, you know, we've seen modest PIF growth quarter to date. And we think that there's a lot of room ahead of us to continue to grow in what is a really massive industry.

On the direct side, you know what we're going to continue to be opportunistic there we're going to continue monitoring the competitive environment and were really only going to invest there.

Speaker #7: Got it. And we have seen that partnership channel scale up. Do you have a sense now that it's large enough to enable you to continue growing PIF throughout a soft market, even at the time where you might be pulling back on the direct side?

As long as we're meeting our return thresholds.

As Alex mentioned, we're also investing in the R&D channels and in the back half of the year and so as I think about just the level of spend overall I think you can expect it to be slightly elevated compared to where we were in in Q2.

Speaker #7: Basically, 'm asking, is the partnership channel big enough to offset an intentional pullback in the direct side to still grow through a soft market cycle?

But that also just depends on the competitive environment and in the timing in terms of where we see some of those R&D investments hit and keep in mind. Those R&D investments are gonna be upfront upfront investment and it's going to take a while for those to to really scale through through the top line.

Speaker #8: Yeah. I think you're going to see modest growth. Particularly in the near term, as that channel continues to scale, but longer term, particularly after a couple of quarters, you know, I do think that you're ing to start to see that channel continue to gain steam and momentum.

Speaker #8: And we'll be a sizable portion of our . And that channel, again, because we have really built a lot of really a moat around our ustomers in that business, and differentiated access to customers, even through soft markets, we believe that we can continue to grow.

Great. Thanks for taking thanks, Alex.

Thank you.

The next question comes from Andrew <unk> with TD Securities. Please go ahead.

Hey, good afternoon.

Speaker #8: So yes, absolutely, that channel is going to continue be meaningful.

My first question is around pricing.

Speaker #7: Great. And then just last one around a similar topic. Do you ys have a budget for what ou guys plan to spend on growth spend or sales and marketing for at least the rest of this year and however long you're able think about providing that forecast for?

Just eyeballing the figures gross written premium up.

12% year over year.

Policies in force up 12% year over year.

Should I.

Corporate that to mean that pricing was was kind of flattish and maybe.

Speaker #6: Yeah. Hey, Tommy. It's Megan. That's a good estion. You know, as we look at spend throughout the rest of the year, on the direct side, you ow, we're going to continue to be opportunistic there.

From that answer you could extrapolate a little bit into.

What what types of autos.

Speaker #6: We're going to continue monitoring the competitive environment. And we're really only going to invest there as long as we're meeting our return thresholds. As Alex mentioned, we're investing in the R&D channels in the back half of the year.

Youre writing the most of you know is it mostly standard are you getting any preferred.

Not non standard and how is the pricing.

Breaking out there maybe even regionally if you could talk about that.

But the first parties.

Speaker #6: And so as I think about just the level of spend overall, I think you can expect it to be slightly elevated compared to where we were in in Q2.

Whats your general pricing is it is it flat.

Yeah, Yeah. Thanks, Andrew.

We are price adequate I think right now we are trending a little below our long term loss ratio targets and so on.

Speaker #6: But that also just depends on the competitive environment and the timing in s of where we see some those R&D investments hit and keep in mind those R&D investments are going to be upfront.

We are letting trend catch up with us a little bit so that our loss ratio will be more than our target. Our long term target range of 60 to 65, but we're we're very pricing adequate and so we're not we're not taking a lot of rate. There is we still are seeing some trend, but again with with where our loss ratio is right now it's in a very strong position and so we're not looking to take a lot of freight.

Speaker #6: Upfront investment. And it's going to take a while for those to really scale through the top line.

Speaker #7: Great. Thanks, Megan. Thanks, Alex.

Speaker #2: Thank ou. The next question comes from Andrew Clegman, with TD Securities. Please go head.

Okay, and maybe just more more where are you writing and any segmentation.

Speaker #9: Hey, good noon. My first question is around pricing. You know, just eyeballing the figures, gross written premium up 12% year over year. Policies enforced up 12% year over year.

Around price out there.

Yes, I'd say.

First big.

Proof point on segmentation I think this is hard to overstate is just the massive advancement that we've taken through our new algorithm that we just shifted that actually has increased our expectations actually over.

Speaker #9: Should I interpret that to mean that pricing was was kind flattish? And maybe from that answer, you could extrapolate a little bit into what types of autos that you're writing the most of.

20%.

We're going to increase Ltvs are customer LTV is about over 20%.

And that's material to the business obviously.

And that segmentation really is improving across pretty much virtually every customer segments, you can imagine and so we get abroad.

Speaker #9: You know, is it mostly standard? Are you getting any preferred? Not non-standard. And how is the pricing breaking out there? Maybe even regionally, if you could talk about that.

We get a broad swath of the U S population and so we write standard rewrite nonstandard rewrite preferred in part of the.

The Specialness of route and what we felt is that our algorithms are able to adequately price across all of those customer segments. There is some <unk>.

Speaker #9: But the first part is just what's your general pricing? Is it flat?

Areas of course that we do better and in some areas that we want to fine tune and continue to fine tune and we think that that.

Speaker #8: Yeah. Yeah. Thanks, Andrew. We are price adequate. I think right now, you know, we are trending a little below our long-term loss ratio targets.

Ah represents upside for us going forward, but we're broadly competitive across the spectrum of different customer segments and across all geographies right now.

Speaker #8: And so you know we are letting trend catch up with us a little bit so that our s ratio will be more in our target our long-term target range of 60 to 65.

And Alex maybe the follow up is could you share with us anything about these algorithms that that's unique to route and gives you that competitive advantage to find at a 20% LTV improvement.

Speaker #8: But we're we're very pricing adequate. And so we're not we're not taking a lot of write-throughs. We still are seeing some trend. But again, with with where our s ratio is right now, it's in a very strong position.

Speaker #8: And so we're looking to take a lot of write.

I think the most important thing is that we've really this company was born in a time of modern quantitative methods that have allowed us to use AI and machine learning and a real native sense since the inception of the company and that's allowed us to really create a machine that can suck in data from a variety of <unk>.

Speaker #9: And maybe just more more where are you writing and and and and any segmentation around pricing there?

Speaker #8: Yeah. I'd say you know the first big proof point on segmentation, and I think this is hard to to overstate, is just the massive advancement that we've taken through our new algorithm that we just shipped that actually has increased our expectations actually over 20% of our where we're going to increase LTVs, our customer LTVs, by over 20%.

Current sources and rapidly be retrained and continually get better and better at predicting who is going to get into a car accident. What are those corrections is going to cost.

And how is that going to change over time, and if data is only proliferating and so the ability to continue to ingest this data and quickly respond and understand what it means in terms of matching price to risk. It is fundamental to the industry and that's exactly why we built the company and we're seeing it drive again, the most fundamental of economics in the business.

Speaker #8: And that's material to the business, obviously. And that segmentation really is improving across pretty much virtually every customer segment you can imagine. And so we get a broad we get a broad swath of the US population.

In terms of our customer lifetime values, increasing by double digits, Shirley through creating better algorithms.

Speaker #8: And so we write standard. We write non-standard. We write preferred. In part of the the specialness of Root and what we've built is that our algorithms are able to adequately price across all of those customer segments.

That's really interesting if I could sneak one last one in.

Net expense ratio.

29, 1% versus 30% year over year, 31% 31, six Q over Q, so it's down quite a bit and in and following up on your commentary.

Speaker #8: There's some areas, of course, that we do better in and some some areas that we want to fine-tune and continue to fine-tune. And we think that that's represents upside for us going forward.

Speaker #8: But we are broadly competitive across the spectrum of different customer segments and across all geographies right .

About investing in R&D and other areas too to improve performance and grow.

Speaker #9: And Alex, maybe the follow-up is could you share with us anything about these algorithms that's unique to Root and gives you that competitive advantage to find it a 20% LTV improvement?

Should we think and I know it was asked a different way in the prior question, but how should we think about that $29. One is it is it more likely to be closer to $31 32 like last quarter.

Speaker #8: I think the most important thing is that we've really this company was born in a time of modern quantitative methods that have allowed us to use AI and machine learning in a real native sense since the inception of the company.

Okay.

Yes, Thanks, Andrew.

As you look at the the gross expense ratio you know one thing to keep in mind is that Scott your acquisition expense and and fixed expense and in the quarter.

Speaker #8: And that's allowed us to really create a machine that can suck in data from a variety of different sources and rapidly be retrained and continually get better and better at predicting who's going to get into a car accident, what are those car accidents going to , and how is that going to ange over time?

As we think about acquisition expense you know, we continue to be opportunistic and indirect so that ratio may fluctuate a bit on a quarter over quarter basis, just given that when we deploy capital in the direct marketing space. We are expensing all of that upfront.

Speaker #8: And you know data is only proliferating. And so the ability to continue to ingest this data and quickly respond and understand what it means in terms matching price to risk, it's fundamental to the industry.

And then when I think about the fixed expense investment and we've been talking about this for for a couple of quarters now we are making targeted investments in our product and our technology and we're making those investments to really scale, our proprietary pricing models as Alex talked about and also our distribution.

Speaker #8: And that's exactly why we built the company and we're seeing it drive again the most fundamental of economics in the business in s of our customer lifetime values increasing by double digits, creating better algorithms.

Channels and that does not mean that we are not maintaining discipline on on fixed expense, but were also not overly focused on preserving every single point of operating leverage in the near term, especially if it means unlocking meaningful long term value and a good example of that.

Speaker #9: That's really interesting. If I could speak one last one in, net

Speaker #9: expense ratio 29.1% versus 30% year over year, 31% 31.6. Q over Q. So it's down quite a bit. And in following up on your commentary about investing in R&D, and other areas to improve surely through performance and grow, how should we think and I know it was asked a different way in prior question, but how should we think about that 29.1?

Is the latest pricing model that that Alex just walked through that's already driving more than a 20% lift in end customer lifetime values. So we feel really good about the return on those investments and in the near term you know as a percentage of of GDP. You can think about some of these investments.

Speaker #9: Is it more likely to be closer to 31, 32, like last quarter?

We're making really be just a couple of points of gross earned premium.

Speaker #6: Yeah. Thanks, Andrew. You know, as you ok at the gross expense ratio, you know one thing to keep in mind is that's got your acquisition expense and fixed expense.

Okay. Thank you.

Thank you.

The next question comes from Christian get so.

With Wells Fargo. Please go ahead.

Speaker #6: And in the quarter, as we think acquisition expense, ou know we continue to be opportunistic and direct. So that ratio may fluctuate a bit on a quarter over quarter basis, just given that when we deploy capital in the direct marketing space, we are expensing all of that upfront.

Hi, Good afternoon, you mentioned youre able to absorb some tariff impact if those materialize in the second half, but as we kind of think about premium growth potentially slowing in the back half that are premium catching up with the written premium slowdown like technically that should push loss ratios up and we have seen a lot of favorable frequency year to do.

Speaker #6: And then when I think about you know the fixed expense investment, and 've been talking about this for for a couple of quarters now, we are making targeted investments in our product and our technology.

Date, and you know that could potentially turn maybe not but so how do you guys balance all of those moving parts when you're pricing products currently and thinking about growth in the second half and onward.

Speaker #6: And we're making those investments to really scale our proprietary pricing models as Alex talked about, and also our distribution channels. That does not mean that you know we are not maintaining discipline on fixed expense, but we're also not overly focused on preserving every single point of operating leverage in the near term, especially if it means unlocking meaningful long-term value.

Okay.

I mean.

We are constantly monitoring the environment and we haven't seen any impact.

Impact yet from the implementation of tariffs, we've got a lot of technology in our claims systems and in our reserving functions that really alert us that are very leading indicators as to what's happening with claim cost and as you saw in 2020. One we react very quickly properly we believe the quickest and the industry to those sorts of trends and it's been a competitive.

Speaker #6: And a good example of that is the latest pricing model that Alex just walked through that's already driving more than a 20% lift in customer lifetime value.

Advantage of ours.

For some time, so when we're looking at that though we are not seeing any.

Material signs of of increase.

Speaker #6: So we feel really good about the return on those investments. And in the near term, you ow as a percentage of GEP, you can think about some of these investments that we're ing really be just a couple of points of gross earned premium.

Trend. So we think that it's it's given where our loss ratios are we definitely are well positioned to absorb that I'll, let Megan talk a little bit about our loss ratio expectations for the back half of the year, Yeah. Christian It's a good question and on the loss ratio you know Alex as Alex mentioned, we have been operating below our long term target of 60 to 65 four.

Speaker #9: Okay. Thank ou.

Speaker #2: Thank you. The next question comes from Christian Getso. With Wells Fargo. Please go head.

For several quarters that at this point and as we look towards the second half of the year, we do expect loss ratios to pick up a couple of points just due to typical seasonality in those periods.

Speaker #10: Hi. Good afternoon. You mentioned you're able to absorb some tariff impacts if those materialize in the second half, but as we kind of think about premium growth potentially slowing in back half and earned premium catching up with the written premium slowdown, like technically that should push loss ratios up.

Thank you and then do your writings through your partnership channel do they have different loss ratios versus on the direct side, because what I'm trying to understand is if there is a bigger mix towards partnerships versus direct in the short to intermediate term with that technique.

Speaker #10: And we have seen a lot of favorable frequency year to date and you know that could potentially turn maybe not. But so how do you ys balance all of those moving parts when you're pricing products currently and thinking about growth in the second half and onward?

Technically drive their loss ratio lower and then sticking on that have you ever quantified how much the.

Carvana partnership accounts for your partnership revenue.

Speaker #8: Thanks. We I mean, we are constantly monitoring the environment, and we haven't seen any impact yet from the implementation of tariffs. We've got a lot of technology in our claims systems and our reserving functions that really alert us that are very leading indicators as to what's happening with claim costs.

Well first on the loss ratio.

We have channel factors and pricing and so we actually can make sure that all of our channels are running appropriate.

Loss ratios and we really price all of our business to the same return and so we try to make sure that each channel is appropriately priced and so you shouldn't expect material differences in unit economics really across channels.

Speaker #8: And you know as you saw in 2021, we react very quickly, probably we believe the quickest in the industry, to those sorts of trends.

Second on Carvana and our partnership Shelly you were very happy with the Carvana partnership its been a huge success for us.

Speaker #8: And it's been a competitive advantage of ours for some time. So you know when we're looking at that, though, we are not seeing any you ow material signs of increased trend.

And we think that that product is really special and market.

That said there is no single partner that has the majority of our of our partnerships volumes and.

Speaker #8: So we think that it's given where our loss ratios are, we definitely are well positioned to absorb that. I'll let Megan talk a ittle bit about our loss ratio expectations for the back half of the year.

And that's as much as we've disclosed.

Got you and then just if I could sneak one more.

Speaker #6: Yeah. Christian, it's a good question. And on the loss ratio, you know Alex, as Alex mentioned, we have been operating below our -term target of 60 to 65.

In terms of the competitive pressures in the direct channel did that get worse as we kind of went through the Q2 or it's kind of been spread across since.

At the start of the year.

Speaker #6: For several quarters, at this point, and as we look towards the second half of the year, we do expect loss ratios to tick up a couple of points just due to typical seasonality in those periods.

Okay.

I'd say, we saw favorable Q1.

Definitely saw some pull forward, particularly from the tariff announcements and so we did see some strong demand that would sort of pulled forward from Q2 into Q1.

Speaker #10: Thank you. And then do your writings through your partnership channel, do they have different loss ratios versus on the direct side? Because what I'm trying to understand is if there is a bigger mix towards partnerships versus direct in the short to intermediate term, would that technically drive your loss ratio lower?

But other than that we really probably post April saw.

It's a pretty competitive environment more broadly and since then it's been pretty flat.

Got it thank you.

Thank you.

Our next question comes from Andrew Anderson with Jefferies. LLC. Please go ahead.

Speaker #10: And then sticking on that, have you ever quantified how much the Carvana partnership accounts for your partnership revenue?

Hi, guys. Good afternoon. This is Charlie on for Andrew.

Speaker #8: Yeah. Well, first on the loss ratio, we have channel factors in pricing, and so we actually can make sure that all of our channels are running appropriate.

So I have kind of a follow up question on on the loss ratios between the two channels I think in the past you guys have talked about the partnership channel being a bit more preferred.

Speaker #8: Loss ratios. And we really price all of our business to the same return. And so we try to make sure that each channel's appropriately priced.

Maybe having a bit more of an impact from severity, but less frequency.

What im trying to understand is I guess number one what is the difference if any between new business penalty and the two channels just trying to think through.

Speaker #8: And so you shouldn't expect material differences in unit economics really across channels. Second, on Carvana and our partnerships channel, we're very happy with the Carvana partnership.

<unk> gross and one versus the other way, we should think about in terms of the loss ratio there.

Speaker #8: It's been a huge success for us. And we think that that product is really special in market. That said, there is no single partner that is the majority of our partnership's volume.

And then.

Number two just the impact on them.

From a frequency or severity on me two.

Speaker #8: And that's as much as we've closed.

Yes, Thanks Charlie.

Yes, I'd say in terms of the new business penalty and you see a little bit more new business penalty indirect than you do in the partnerships channel it's not.

Speaker #10: Gotcha. And then just if I could speak one more in, in terms of the competitive pressures in the direct channel, did that get worse as we kind of went through the Q2, or it's kind been spread across since you know the start of like the year?

Massive and it is different by partner it's different for independent agents for example than it is for automotive partners.

So there is some variance there, but I wouldn't expect it to be huge.

Speaker #8: I'd say we saw favorable Q1. I mean, we definitely saw some pull forward, particularly from the tariff announcements. And so we did see some strong demand that was sort of pulled forward from Q2 into Q1.

And it's a similar story on severity and frequency we are at the mix coming through the partnership channel is more preferred and so you will see slightly elevated severity trends, but again not something that we would expect it to really drive material differences in our blended loss ratio.

Speaker #8: But other than that, you know we really probably post-April saw you know just a pretty competitive environment, more broadly. And since then, it's been pretty flat.

Okay.

Speaker #10: Got it. Thank you.

I think you guys just touched on it but the pull forward in demand that you were seeing in the first quarter related to tariffs did you see.

Speaker #2: Thank ou. Our next question comes from Andrew Anderson, with Jeffries LLC. Please go head.

See like a material reversal of that in second quarter or was it just more steady state.

Speaker #11: Hi, guys. Good afternoon. This is Charlie on for Andrew. So I have kind of a follow-up question on the loss ratios between the two channels.

I'd say, we saw some headwinds in the second quarter from that for sure and so that was partially.

Speaker #11: I think in the past, you guys have talked about the partnership channel being a bit more preferred. Maybe having a bit more of an impact from severity, but less frequency.

That partially drove Q2.

Okay.

And then last one if I could.

So you guys are now live in Washington could you remind us what other states are pending and what we should look for in terms of announcements there next.

Speaker #11: What I'm trying to stand is, I guess, number one, what is the difference, if any, between new business penalty and the two channels? Just trying to think through, you know, as you toggle growth in one versus the other, what we should think about in terms of the loss ratio there.

Yes, just to clarify we did not launch Washington, yet, we just received our product filing approval.

Speaker #11: And then number two, just the impact on from frequency or severity on the two.

And then yes.

There's a host of other states that we currently have filings pending.

And there are out there in the public domain.

Speaker #8: Yeah. Thanks, Charlie. Yeah. I'd say in terms of the new business penalty, you see a little bit more new business penalty in direct than you do in the partnerships channel.

Okay got it thanks for the questions guys.

Thank you.

Ladies and gentlemen, this concludes the question and answer session and the conference of route in Corp.

Speaker #8: It's not massive, and it is different by partner. It's different for independent agents, for example, than it is for automotive partners. And so there's some variance there, but I wouldn't expect it to be huge.

Thank you for your participation you may now disconnect your lines.

Speaker #8: And it's a similar story on severity and frequency. Yeah, we are at the mix coming through the partnership channel is more preferred. And so you will see slightly elevated severity trends.

Speaker #8: But again, not something that we would expect to really drive material differences in our blended loss ratio.

Speaker #11: Okay. And I think you guys just touched on it, but the pull forward in demand that you were seeing in the first quarter related to tariffs, did you see like material reversal of that in the second quarter?

Speaker #11: Or was it just more steady state?

Speaker #8: I'd say we saw some headwinds in the second quarter from that, for sure. And so that was partially but that, you know, drove Q2.

Speaker #11: Okay. And then last one, if I could, so you guys are now live in Washington. uld you remind us what other states are pending and what we should look for in terms of announcements there next?

Speaker #8: Yes. Just to clarify, we did not launch Washington yet. We just received our product filing approval. and then you know there's a host of other states that we currently have filings pending in.

Speaker #8: and there are out there in the in public domain.

Speaker #11: Okay. Got it. Thanks for questions, guys.