Root - Earnings Call - Q3 2025

Executive Summary

• Q3 delivered record policies in force and total revenue, with revenue of $387.8M, up 27% YoY; diluted EPS was -$0.35 due to a $17M non‑cash Carvana warrant expense catch‑up, while operating income was $0.3M and adjusted EBITDA $33.7M.
• Against consensus, Root posted a revenue beat ($387.8M vs $366.7M*) and an EPS beat (-$0.35 vs -$0.545*); adjusted EBITDA was strong but impacted by the warrant expense timing.
• Management raised near‑term investment, guiding for ~+$5M increase in Q4 direct R&D marketing and flagged typical seasonality with a ~5ppt headwind to the accident period loss ratio in Q4.
• Strategic catalysts: deployment of a new pricing algorithm improving customer LTVs ~20% and launch of a new UBI model ~10% more predictive; independent agents now ~50% of partnership new writings and tripled YoY.

Note: Values marked with * are from S&P Global consensus data.

What Went Well and What Went Wrong

What Went Well

• “We deployed our newest pricing algorithm in the quarter, which is improving customer LTVs by 20% on average” and launched a new UBI model “~10% more predictive,” reinforcing underwriting edge.
• Partnership momentum: independent agents accounted for ~50% of partnership new writings, with IA new writings tripling YoY; Washington launched, expanding to 36 states covering ~80% of the U.S. population.
• Underwriting discipline persisted: gross accident period loss ratio of 59.5% and gross combined ratio of 101.3% amid accelerating growth; unencumbered capital stood at $309M, supporting scalable investment.

What Went Wrong

• GAAP net loss of $5.4M driven by a $17.2M non‑cash warrant compensation expense (incl. ~$15.5M cumulative catch‑up) related to Carvana; adjusted EBITDA declined sequentially to $33.7M from $37.6M.
• Net combined ratio rose to 102.1% (vs 95.2% in Q2) as net loss & LAE ratio increased to 66.5% and net expense ratio to 35.6%, reflecting mix and timing impacts.
• Average premiums per policy declined QoQ ($1,581 vs $1,616) with management citing a double‑digit rate decrease in Florida taken proactively; severity was +9% QoQ within normal variation but a watch item.

Transcript

Speaker 1

Greetings. Welcome to Root's third quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Matt LaMalva, Head of Investor Relations and Corporate Development. Thank you, and you may begin.

Speaker 4

Thank you for joining us. Root is hosting this call to discuss its third quarter 2025 earnings results. Participating on today's call is Alex Timm, Co-founder and Chief Executive Officer. Megan Binkley, our Chief Financial Officer, will be unable to join us this afternoon due to a family medical matter. In her absence, I will be providing our financial results and will also be available for Q&A. 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 third quarter 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. 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 10-K, 10-Q, 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 irr.joinroot.com. I will now turn the call over to Alex Timm, Root's co-founder and CEO.

Speaker 0

Thanks, Matt. The third quarter was another very strong quarter for Root, and we're excited by the momentum we are building. It was a record quarter for policies in force and revenue, driven by accelerating growth in both direct and partnership distribution channels. We achieved this growth while maintaining our exceptional loss ratio performance. As a technology company, we believe we have a structural and durable competitive advantage. This DNA is evident in everything we do, from our customer obsession to our pricing technology to the people we hire. It is what makes us special. You saw that come through in the quarter across our pricing algorithm innovations, our partnership platform expansion, and our direct marketing machine, all combining to generate exceptional performance. As one example, we deployed our newest pricing algorithm in the quarter, which is improving customer LTVs by 20% on average.

This model allowed us to accelerate growth across all channels. We aren't stopping there. In the quarter, we also launched our new UBI model, which we estimate has improved predictive power by 10%. We believe this speed of innovation is unmatched in the industry, and we have no plans of slowing down. Also, in the quarter, you saw our growth strategy at work, more than doubling new writings in our partnership channel, launching Washington state, and launching several experiments in new marketing channels. In our partnerships channel, we are extending our competitive advantage that provides seamless, easy purchase experiences with great prices to customers no matter how or where they shop. This represents a vast growth opportunity. Today, Root is only active in a very small fraction of distribution points in the insurance shopping ecosystem.

This opportunity was on display in the quarter as we more than tripled our new writings year over year from independent agents, which now represents 50% of our partnership distribution. This channel alone is over $100 billion in premium nationally. Although we have made great strides, we are still active in less than 10% of agents, giving us a long and natural runway to rapidly expand our presence in this space. In our direct channel, new writings increased sequentially by high single digits despite increased competition. Combined with our new pricing model, we continue to invest in new real-time bidding algorithms that allow us to optimize for anticipated long-term economics. This machine continues to detect trends and changes in the marketplace and dynamically deploys our investments. We have also begun to see green shoots in a handful of new marketing channels, the focus of our R&D efforts.

We plan to continue to accelerate our investments in these channels given our recent successes and react appropriately as the data emerges. Our success makes us excited and confident to invest further into the business to accelerate our pricing advantage, increase our distribution presence across channels and geographies, and continue to create experiences customers love through product innovation. With a healthy capital position, excellent underwriting results, and a culture of discipline and excellence, we are ideally positioned to accelerate our growth trajectory. Our goal remains to build the largest, most profitable personal lines insurance carrier in the United States, and this quarter represents marked progress toward that goal. I'll now turn the call back over to Matt for more details on the quarter.

Speaker 4

Thanks, Alex. For the third quarter, we recorded a net loss of $5 million, operating income of $300,000, and adjusted EBITDA of $34 million. As previously communicated, our net loss in the quarter was primarily driven by a $17 million non-cash expense related to our warrant structure with Carvana. Of this $17 million, $15.5 million reflects a cumulative expense catch-up. This expense ultimately reflects the success of our partnership as the vesting of warrants depends on achieving policy origination milestones. Even with this expense taken into account, we have generated $35 million of net income on a year-to-date basis. In the third quarter, we accelerated growth while continuing to achieve our target unit economics. Year over year, we delivered double-digit percentage increases in policies in force, written premium, and earned premium while achieving a 59% gross accident period loss ratio.

These strong results were driven by the deployment of our latest pricing model, advancements in our real-time bidding algorithm, and expanded partner integrations. Our capital position remained strong with unencumbered capital of $309 million at the end of the third quarter. Given our exceptional underwriting performance, we also continue to be in a position of excess capital across our insurance subsidiaries. This allows us to optimize our operating structure and deploy growth capital to the highest profit-yielding opportunities. We continue to take a disciplined and opportunistic approach to direct marketing investment, adjusting quarter by quarter based on prevailing competitive dynamics. On the partnership side, we are still early in scaling this channel, and we expect it to continue to increase as a percentage of our overall book over the long term.

Looking ahead, we expect continued acceleration of policies in force growth and are excited to support that growth by increasing our investment in direct R&D marketing by roughly $5 million in the fourth quarter. Further, we anticipate a headwind to our loss ratio from typical seasonality in the fourth quarter, which is driven by elevated animal collisions and bad weather. Last year, the impact of the seasonality was roughly 5 percentage points of the accident period loss ratio, and we expect a similar impact this year. As we close out 2025 with exceptional underwriting performance, a healthy capital position, and a strong culture, we are now focused on accelerating growth at our target unit economics. Put simply, we are optimistic that our superior technology will drive growth despite an increasingly competitive environment. We are just getting started. With that, Alex and I look forward to your questions.

Speaker 1

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A 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 key. Our first question comes from Andrew Anderson with Jefferies. You may proceed with your question.

Speaker 2

Good afternoon. Sounds like some opportunities in the direct channel this quarter with some new writings increasing sequentially, high single digits. Maybe you could just talk about how that opportunity came to be and just the overall level of competitiveness you're seeing on the direct channel.

Speaker 0

Yeah, thanks for the question. Yeah, we are still seeing competition up in the quarter and in the channel. What has happened, and we've continued actually to see that even this quarter to date, is a continued acceleration of new writings and growth in our direct channel, in our partnerships channel, in really every channel overall. A big thing that's driving that is our price. Last quarter, we detailed that we shipped a new pricing algorithm that improved customer LTVs by 20%. That unlocks a lot of opportunity for us to continue to grow. As we do that and we continue to refine pricing, continue to collect more data, and continue to get better at it, you're going to continue to see us be able to grow despite increased competitive pressures.

That is exactly what you saw this quarter, and we are still seeing that quarter to date as well.

Speaker 2

Thanks. On the severity number, plus 9%, it seems to have ticked up a little bit after kind of some sixes and sevens in recent periods. Can you maybe just talk about the change that you saw in severity this quarter and if it requires any change to rate here?

Speaker 0

We're not anticipating any major changes to rate. It's going to be we're broadly rate adequate. There will be some maintenance rate that we take here and there. I think the increase that you saw in the quarter is well within sort of natural variation for those numbers. We did see a little bit more in our property damage line, so in vehicle collisions versus our medical coverages. Again, I think that it was well within the normal range of variation.

Speaker 2

Thank you.

Speaker 1

Our next question comes from Tommy McJoy with KBW. You may proceed with your question.

Speaker 5

Hey, guys. Can you hear me?

Speaker 0

Yeah, we can hear you.

Speaker 5

Awesome. Thank you so much. You mentioned being active with less than 10% of independent agents. Can you just give us some color on how that figure has trended over the last couple of years so we can get a sense of the trajectory of your penetration? What is the process to go live with more agents?

Speaker 0

Absolutely. Independent agents has been one of the most attractive near-term growth levers we've actually seen in the business, and we just are getting started. We really just launched a couple of years ago significantly into independent agents. Last quarter, I believe we had disclosed that we were in less than 4% of all agents nationally. It represents a third of the market still. It was a third of the market a decade ago. It was a third of the market 100 years ago. We do not think the independent agents channel is going anywhere. We are just barely dipping our toe in. As we continue to grow that, we grew at 3X year over year this quarter, and we are not seeing that slow down. We are marketing to agents. We are actively onboarding more agents.

We are continuing to improve the product for agents so that they have more servicing capabilities, better prices for their customers as well. We are seeing that as a really attractive growth channel, and we do not have any plans to slow down on appointing agents.

Speaker 5

Thank you so much. Then my second question is just that you give us the partnership as a percentage of new writings in the quarter. If we wanted to think about partnership as a percentage of earned premium, could we take a trailing 12-month average?

Speaker 4

This quarter, you saw a roughly flat partnership percentage as an overall new writings, and that's because both of our channels grew very strongly. We're still continuing, as Alex mentioned, to see very strong growth in partnership driven by IA, but we have the pricing model that we launched last quarter, which tends to be the tide that lifts all ships. We are seeing very strong growth there. When we look over sort of the medium to longer term, we do expect partnership to continue to grow and to continue to be an increasing proportion of our book over time.

Speaker 0

As a matter of earned premium, you're probably going to see higher average premiums in the partnership channel. They're just larger policies that come through because there's more vehicles per household in that channel, particularly in the independent agency channel where a lot of preferred business shops. I think you're going to see a little bit more, it'll be a little bit more skewed towards earned premium than sort of a trailing 12-month average.

Speaker 5

Great. Thank you.

Speaker 1

Our next question comes from Hristiyan Getsov with Wells Fargo. You may proceed with your question.

Speaker 3

Hi. Good afternoon. My first question is on the average premium per policy. It actually went down quarter over quarter, and I was trying to get a sense of how much was that driven by that new pricing model. Then given you continue to trend well below the 60-65% target loss ratio, do you have more flexibility to maybe give up a little bit more on price to continue to win in this environment? Thank you.

Speaker 0

First, on average premium, you saw us, I believe it was in June, take a fairly sizable rate decrease at the order of, it was a double-digit rate decrease in Florida. Florida is a very big market. I think you saw that some folks had to do some refunds in Florida. We really wanted to make sure that we were giving the right prices to customers upfront. We took that rate decrease proactively. That is why you have seen sort of those average premiums come down, which has actually put us in a really good position for the end of the year. In terms of the ability to give more price back or to potentially lower prices, we are not in the position right now where we are broadly lowering rates, believing that we are overpriced. We really do see a continued very healthy loss ratio.

What that's allowing us to do is to just continue to grow faster. That's what we saw in this quarter. Again, we've seen that quarter to date as well.

Speaker 3

Got it. For my follow-up, any changes in the competitive landscape? Obviously, it remains elevated, but have you noticed anything, I guess, any recent changes? Do you have any color on how October PIF has trended versus the Q3?

Speaker 0

Yeah. October PIF growth has definitely accelerated versus what you saw in Q3. Again, we're not seeing that slow down. We feel good there. The competitive environment, it's still very competitive. You are seeing lower rate, lower pace of rate increases in the market right now. You're also seeing continued high levels of marketing advertising. On the direct channel specifically, you are seeing high degrees of competition. Again, we saw that in Q3, and I think now we've been able to show that we can even grow and we can execute through that cycle. That's really driven by our technology and our new pricing models that are continuing to allow us to grow despite the fact that competition is about as hot as we've ever seen it.

Speaker 3

Got it. If I can sneak one more in, obviously, tariffs were a topic of discussion at the start of the year, and now it's kind of dwindled down. I think people are maybe expecting less of an impact than they originally thought. I guess, have you guys seen any meaningful change in your data, and has your expectation for those impacts changed?

Speaker 0

We have not. We have not seen that come through yet. Right now, it still looks like our expectations are basically right in line with what we'd expect just from natural trend. We don't think that we're seeing any sort of impact to inflation in the data or in the numbers right now from tariffs. We do expect to see loss ratios generally increase in Q4. There's seasonality, and that's usually if you look at 2024, you can see that's usually three to five points. We might see some temporary increases in loss ratios in the fourth quarter, but we don't think that's going to be driven by tariffs.

Speaker 3

Got it. Thank you so much.

Speaker 1

Ladies and gentlemen, this now concludes our question-and-answer session and does conclude today's teleconference as well. Thank you for your participation. Please disconnect your lines and have a wonderful day.