Root - Earnings Call - Q1 2025

Executive Summary

• Root delivered another profitable quarter with total revenue of $349.4M, diluted EPS of $1.07, and net income of $18.4M; EPS and revenue materially beat Wall Street consensus, driven by seasonal shopping/tax refund tailwinds, disciplined underwriting, and lower interest expense under the amended term loan.
• Policies in force rose to 453,800 and gross premiums written climbed 24% YoY to $410.8M, while net combined ratio improved YoY to 95.6% despite heavier growth spend; gross accident-period loss ratio was 57.9% with severity up 7% and frequency down 5%.
• Management highlighted diversification via partnerships (new writings more than doubled YoY) and continued state expansion (35 states; Michigan filing pending), while signaling Q1 seasonality will not persist and loss ratio will seasonally rise in Q2–Q3 toward the 60–65% long-term target.
• Catalysts: sustained profitability streak (third consecutive quarter), strong beats vs consensus, partnership ramp (HCA, Experian), and demonstrated agility to address tariff/severity trends through rapid rate actions on a modern tech stack.

What Went Well and What Went Wrong

• What Went Well
  • “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.”
  • Partnerships: “Quarterly new writings more than double year-over-year…expanded our partner roster to include over 20 total partners, launching 2 new strategic partnerships, one with Hyundai Capital America (HCA) and one with Experian, this quarter.”
  • Cost of capital: “Reduced our interest rate by 25 basis points” under performance-based step-downs in the amended BlackRock facility; highlights future opportunities to further lower cost of capital.
• What Went Wrong
  • Heavier growth spend: Sales and marketing rose to $51.5M (from $30.4M) to capitalize on Q1 seasonality; management cautioned Q1’s tailwind will not persist and PIF is roughly flat quarter-to-date in Q2.
  • Loss ratio seasonality: Expected higher loss ratios in Q2 (convective storms) and Q3 (hurricane season) with long‑term target of 60–65%, implying near-term margin normalization.
  • Mix/Severity: Estimated severity up 7% and frequency down 5% YoY; geographic/state mix shift and growth can pressure offsets, requiring pricing vigilance.

Transcript

Moderator (participant)

Greetings and welcome to the Root First Quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 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.

Matt LaMalva (Head of Investor Relations)

Thank you for joining us. Root is hosting this call to discuss its First Quarter 2025 earnings results. Participating on today's call are Alex Timm, Co-founder and Chief Executive Officer, and Megan Binkley, Chief Financial Officer. Earlier today, Root issued a shareholder letter announcing its financial results. 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. 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. Forward-looking statements are subject to various risks, uncertainties, and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our most recent 10K, 10Q, and shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root's performance. 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 irjoinroot.com.

I will now turn the call over to Alex Timm, Root's Co-founder and CEO.

Alex Timm (CEO)

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. 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. Additional accomplishments for the quarter include growing policies in force, delivering strong loss ratios, continuing investments in our pricing and underwriting technology, and making progress to diversify our distribution. Our strong performance in the first quarter was enabled by seasonal favorability, largely driven by tax refunds, elevated shopping behavior, and lower miles driven.

We tend to see this benefit in the first quarter of every year and do not expect this tailwind to persist into the rest of 2025. Most importantly, we have achieved this growth while maintaining our underwriting discipline, which continues to be our North Star. We continue to be excited for the path ahead as we focus on lifetime unit economics, expand our partnerships channel, and reinvest in our business to drive long-term returns. 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 momentum in our business for years to come. Within our direct channel, we have found success in data-rich, lower-funnel channels and will continue to scale these wins while leveraging our expertise to expand into mid to upper-funnel strategies.

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. Our direct channel is supported by our world-class mobile-first telematics product, creating delightful customer experiences at better prices. 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, and agent sub-channels. 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 Experian this quarter. In March, we announced our partnership with Hyundai Capital America to bring data-driven, competitive rates and a more connected experience to HCA customers.

This partnership aims to optimize the strengths of both companies to address evolving industry needs and set new benchmarks for customer satisfaction. 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. Our partnership with Experian offers Root Insurance through Experian's insurance marketplace, providing their members expanded access to affordable and personalized car insurance options. By leveraging our technology, this integration enhances and streamlines the insurance shopping experience, delivering data-driven, competitive rates to Experian members. Our progress is driven by a proprietary tech stack that can seamlessly integrate into existing partner platforms, enabling access to potential customers at contextually relevant times. We remain confident in our long-term growth avenues across both channels while maintaining a focus on national expansion.

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 with outstanding filings, which also includes Washington, New Jersey, and Massachusetts. We are excited to expand our geographic presence and 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. 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. 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 tariffs.

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 rate through our book. 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. At Root, 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. We believe a disciplined adherence to this framework creates a tremendous opportunity for long-term investors. I will now hand the call over to Megan to discuss our first quarter operating results in more detail.

Megan Binkley (CFO)

Thanks, Alex. Overall, it was an excellent start to 2025. We experienced another quarter of strong performance on unit economics, underwriting, and expense management. For the first quarter, as Alex mentioned, we delivered net income of $18 million, a $25 million improvement year over year. 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. In the first quarter, we saw material increases in policies in force, gross written premium, and gross earned premium when compared to the first quarter of 2024 and the fourth quarter of 2024. Our growth in the first quarter was driven by both our direct and partnership channels and enabled by the continued disciplined deployment of acquisition investment at our lifetime unit economic targets.

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 earned premium. We achieved this growth while delivering a first quarter gross accident period loss ratio of 58%, a strong result that is enabled by our continued investment in data science and technology. 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. 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 in how we manage the business and deploy capital. 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. This allows us to better optimize our operating structure and more flexibly deploy growth capital for high-return opportunities. Q1 was the first quarter to reflect our run rate interest expense savings from the recently amended debt facility with BlackRock. 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. This illustrates that as our business continues to perform, we will have opportunities to reduce our cost of capital.

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. We believe continued investments in our people and technology infrastructure, as well as targeted customer acquisition investment to enable profitable growth, is the right decision to drive long-term success and shareholder value. Running the business in a lifetime unit economic framework may impact the degree of GAAP profitability in any given quarter, but we believe our approach will ultimately translate to strong calendar year results. We are excited for our future and appreciate your continued support. With that, we look forward to your questions.

Moderator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press Star and then One on a telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press Star and then Two if you would like to remove a question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we poll for questions. The first question we have is from Tommy McJoynt of KBW. Please go ahead.

Tommy McJoynt (CFA and CPA)

Hey, good evening, guys. Thanks for taking our questions. The first one is looking at 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 in the first quarter? And then how do you think about that partnership mix, perhaps over the rest of the year?

Alex Timm (CEO)

Yeah, thanks, Tommy. I'd say that that was really a function of, you know, we saw a very strong quarter in direct growth. It's always seasonally very strong. We do expect that to abate more going forward. I think you're 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.

Tommy McJoynt (CFA and CPA)

Got it. Okay. We did see the step-up in your growth spend through the sales and marketing line, as you had previously communicated. Can you talk about your expectations for the quarterly cadence of that growth spend for the rest of this year as well?

Yeah, I think, again, you know, usually Q1, we see really strong seasonality. We did see that again this quarter. That's driven by tax season, and we also saw some pull-up of demand, we believe, into the quarter. You know, we've kept, as we look forward, for example, you know, this quarter to date, we've kept PIF roughly flat. You know, long term, you know, I think usually, again, you're going to see Q1 be the best quarter, I think, in terms of longer-term growth expectations throughout the year. We're continuing to work on state expansion. We're adding additional partnerships, both HCA and Experian, that we've announced this quarter. On direct, we're continuing to experiment to mid-upper funnel.

We think long term, there's a lot of growth, but on a quarter-by-quarter basis, we're going to continue to run our marketing machine that optimizes for really the net present value of our business. You know, that typically on the direct channel particularly occurs in Q1. I think that's going to be the highest quarter. Megan, would you say anything else?

Megan Binkley (CFO)

No, I think, Alex, you covered it. I mean, you know, from a Q1 perspective, really proud of the growth that we saw in Q1. I mean, we really capitalized on the opportunities to increase our sales and marketing investment in the quarter. As Alex mentioned, you know, tax season we saw was a bit more amplified this quarter than what we've seen previously.

Tommy McJoynt (CFA and CPA)

Thanks. And then just last question, I'll sneak in here. Looking at the geographical breakdown disclosure in your queue, looks like you saw some really strong growth in some select states like California and 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 and ramp up on a state-by-state basis would be helpful. Thanks.

Alex Timm (CEO)

Thanks, Tommy. You know, when we launch into new states, we're very, very diligent, and so we usually launch with pretty conservative pricing and underwriting. 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. Sometimes we have to adjust pricing there. You saw that in a couple of states that we've launched recently, for example. You may see us adjust pricing shortly thereafter as well. We take a very measured approach. As we gain confidence as that data comes through, that's really when you start to see the growth come through. That can take anywhere from six months to a year.

Tommy McJoynt (CFA and CPA)

Great. Thanks, Alex.

Alex Timm (CEO)

Thanks, Tommy.

Moderator (participant)

The next question we have is from Elyse Greenspan of KBW. Please go ahead.

Elyse Greenspan (CFA and Managing Director)

Hi. Hi, thanks. Good evening. My first question, you know, you were highlighting, I think, you know, seasonality, you know, on the growth side, you know, in terms of, 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. Also, I don't know if perhaps you saw an impact, you know, of some pull forward, you know, just given the looming impact of tariffs and just, 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?

Alex Timm (CEO)

Yeah, thanks, Elise. I'd say the tax season, that's always a fairly significant event every year. We saw that again this year, and that's been pretty consistent year over year. It was maybe slightly more extreme this year than what we've seen in previous years. Tariffs, particularly in our partnerships channel where we are selling insurance directly embedded with a vehicle, we do believe that those potentially pulled up some demand. You also saw that. In terms of the remainder of the year in our PIF growth trajectory, you know, Megan, would you like to take that?

Megan Binkley (CFO)

Yeah, I think in terms of what Alex mentioned, I think the only thing that I would layer on is, you know, as we enter Q2, I mean, we are seeing that PIF is roughly flat quarter to date. Really, that's in line with our expectations. We did bring on a significant number of new writings in Q1. You know, typically, at least on the direct side, we do see a higher churn associated with that increased growth penalty for some of the early-stage cohorts.

Thanks. I guess sticking on the tariff side, I think in the prepared remarks, you guys were, you know, highlighting how you can react pretty quickly to trend and seek approval, you know, for rates if needed. Is your expectation that you guys will need to, you know, take rates to offset some of the tariff impact? You know, we've kind of thought that the impact of tariffs would be about a mid-single digit or 5% increase to severity. Is that within what you guys are expecting as well?

Alex Timm (CEO)

Yeah, we've run a number of different scenarios. We do believe that it's going to be low to mid-single digit impact on the loss ratio. You know, when we look at it, though, our loss ratios have been below our current loss ratio targets. We believe we have more than enough room to absorb any of the tariffs in the current form, given our best estimates. You know, absolutely, I will say if we need to take rate, we will take rate. We believe that that's been actually a core competitive advantage of the company is that, you know, by being run on a modern tech chassis and having automated rating systems, that has allowed us to be in front of really, we believe, almost all of our competitors in terms of being able to take rates very quickly.

You saw that in 2023, right, where we were growing and taking significant market share as a company while most others were still on the sidelines. You know, although there may be some near-term macroeconomic uncertainty, we believe just by virtue of being nimble in a tech company, we could certainly move much quicker.

Moderator (participant)

Thanks. Then my last question, you know, it's been a few quarters in a row of, you know, positive earnings for you guys. You guys have, you know, steered away a bit from, you know, giving precise guidance, but just, you know, how you see it. Obviously, there was a seasonality benefit in the Q1, but, you know, still, you know, decently profitable. How do you guys, you know, see yourselves in terms of, you know, remaining profitable over the balance of the year?

Elyse Greenspan (CFA and Managing Director)

Yeah, thanks, Elise. It's a good question. You know, what I would say is, yes, this is our third consecutive quarter of profitability. Q1, as you mentioned, you know, does have the seasonal component to it, both on growth and on loss ratio. I think we've covered our expectations on growth in previous responses. One thing I do want to highlight is, you know, the loss ratio is typically higher in Q2 and Q3, driven by Q2 is heavy convective storm season, and Q3 is hurricane season. 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%. The other thing I would say too is, you know, we're not expecting to run rate, you know, a single quarter or 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.

Moderator (participant)

Thank you. Ladies and gentlemen, just a reminder, if you wish to queue for a question, you may press Star and then One. The next question we have is from Andy Anderson of Jefferies. Please go ahead.

Daniel Andersen (Managing Director and Head of Oilfield Services)

Hi, you guys. This is Charlie on for Andrew. I know we've been talking about growth on the call so far, and I get that we're going to probably see the shift in mix of growth for the balance of the year move towards the partnership channel. I guess how should we think about the contribution of new partnerships? I'm thinking like HCA or the Experian partnership and the potential impacts to PIF growth there. Like, how long do they take to ramp? Do you expect them to be big contributors this year?

Alex Timm (CEO)

Thanks, Charlie. Yeah, you know, in terms of new partnerships in general, I would say typically when we onboard a new partner, it does take us time to ramp. We are in the early stages of the partnership, and we're going to share more details as that partnership and product continues to progress.

Daniel Andersen (Managing Director and Head of Oilfield Services)

Okay. And then I guess just on kind of frequency and severity, I get that we've talked at length about tariffs, but it seemed like, you know, 5% benefit from frequency, but there was also severity was up 7%. How should we, I guess, first be thinking about, you know, was there anything driving frequency down that you guys would call out that we should maybe think about as being non-recurring 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?

Alex Timm (CEO)

Thanks, Charlie. You know, I would say that the trends have been roughly in line with what we've observed and what we've sort of anticipated. I don't think it was, in terms of frequency or severity trends, a quarter that was outside of the bounds of our reasonable expectations. We have seen some mix shift. We have shifted more, particularly as we've launched more partnerships channels into or more partnerships into a more preferred customer segment. That segment, typically, you will see lower frequency and a bit higher severity. We also believe that our pricing plans have sort of appropriately accounted for that in our segmentation model. We feel pretty good about where trend is today.

Tommy McJoynt (CFA and CPA)

Okay, great. That's all for me. Thanks, guys.

Alex Timm (CEO)

Thanks, Charlie.

Moderator (participant)

At this time, there are no further questions. With that, this concludes today's conference call. Thank you for joining us. You may now disconnect your line.