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RI

Root, Inc. (ROOT)·Q3 2025 Earnings Summary

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 .

Financial Results

MetricQ1 2025Q2 2025Q3 2025
Total Revenues ($USD Millions)$349.4 $382.9 $387.8
Operating Income ($USD Millions)$23.7 $27.3 $0.3
Net (Loss) Income ($USD Millions)$18.4 $22.0 $(5.4)
Diluted EPS ($USD)$1.07 $1.29 $(0.35)
Adjusted EBITDA ($USD Millions, non‑GAAP)$31.9 $37.6 $33.7
Margins/ratiosQ1 2025Q2 2025Q3 2025
Net loss & LAE ratio (%)64.0% 66.1% 66.5%
Net expense ratio (%)31.6% 29.1% 35.6%
Net combined ratio (%)95.6% 95.2% 102.1%
Gross accident period loss ratio (%)57.9% 59.6% 59.5%
KPIsQ1 2025Q2 2025Q3 2025
Policies in force453,800 455,493 466,320
Premiums per policy$1,614 $1,616 $1,581
Gross premiums written ($USD Millions)$410.8 $346.2 $387.2
Gross premiums earned ($USD Millions)$344.4 $371.3 $373.1
Direct contribution ($USD Millions, non‑GAAP)$127.1 $125.8 $127.4
Estimates vs ActualsQ1 2025Q2 2025Q3 2025
Revenue Consensus* ($USD)$306.8M*$338.3M*$366.7M*
Revenue Actual ($USD)$349.4M $382.9M $387.8M
Primary EPS Consensus* ($USD)$0.467*$0.681*$(0.545)*
Diluted EPS Actual ($USD)$1.07 $1.29 $(0.35)

Note: Values marked with * retrieved from S&P Global.

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Direct R&D marketing investmentQ4 2025Not quantifiedIncrease by ~+$5M in Q4Raised
Accident period loss ratio seasonalityQ4 2025Typical seasonal headwind (qualitative)Expect ~5ppt headwind vs normalized quarterMaintained/Specified
Geographic footprintFY 202535 states (Q2)Launched Washington; now 36 states (~80% US population)Expanded
Partnership mix trajectoryMedium/long termExpected to riseContinues to scale; IA ~50% of new writings; still earlyMaintained

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 & Q2)Current Period (Q3)Trend
AI/technology pricingNew pricing model increased LTVs ~20%; ML speed-to-market emphasized Deployed latest pricing algorithm (+~20% LTV) and new UBI model (~10% more predictive) Strengthening tech moat
Distribution/independent agentsIA penetration ~4% of agents; launched EZLynx/PL Rating; partnership new writings nearly tripled YoY IA new writings tripled YoY; ~50% of partnership new writings; active in <10% of agents Accelerating IA scale
Direct channel competitivenessQ2 direct spend opportunistic amid competition; modest PIF growth Q3‑to‑date New writings increased high‑single digits QoQ despite intense competition Executing through competition
Tariffs/macroNo material impact seen; can absorb low‑mid single digit severity; nimble rate-taking capacity No tariff impact observed; expect Q4 seasonal LR headwind; broadly rate adequate Neutral; vigilance on seasonality
State expansionFiled in WA; pending MI/NJ/MA; 35 states Launched Washington; footprint 36 states (~80% US population) Expanding footprint
Capital and profitabilityUnencumbered capital $347M in Q1; $314M in Q2; sequential profitability Unencumbered capital $309M; YTD net income $35M despite Q3 warrant catch‑up Solid capital; GAAP noisy due to warrants

Management Commentary

  • “It was a record quarter for policies in force and revenue… we deployed our newest pricing algorithm… improving customer LTVs by 20% on average” .
  • “We launched our new UBI model… ~10% more predictive than its predecessor and… one of the most meaningful variables in our broader pricing engine” .
  • “Independent agents accounted for roughly 50% of overall Partnership new writings, reflecting a 3x year‑over‑year increase” .
  • “Our net loss in the quarter was primarily driven by $17 million of non‑cash expense related to our outstanding warrant structure with Carvana, of which $15.5 million reflects a cumulative expense catch‑up… Even with this charge, we have generated $35 million of net income on a year‑to‑date basis” .
  • “We anticipate a headwind to our loss ratio from typical seasonality in the fourth quarter… roughly 5 percentage points of the accident period loss ratio” .

Q&A Highlights

  • Direct channel remained highly competitive; Root still achieved sequential new writings growth via pricing algorithm gains and real‑time bidding enhancements .
  • Severity was +9% QoQ, driven more by property damage; management deemed it within normal variation and maintained rate adequacy stance .
  • IA penetration remains <10% of agents nationally (up from <4% prior), with active onboarding and comparative rater integrations; IA is a major growth lever .
  • Average premium per policy decline tied to proactive double‑digit rate decrease in Florida; management prioritizes correct pricing over refunds and sees strong loss ratio footing .
  • October PIF growth accelerated versus Q3 trend; tariffs not impacting inflation in data; expect seasonal LR increase in Q4, not tariff‑driven .

Estimates Context

  • Q3: revenue beat ($387.8M actual vs $366.7M* consensus), EPS beat (-$0.35 actual vs -$0.545* consensus); EBITDA mix impacted by non‑cash warrant expense timing .
  • Prior quarters also showed beats on revenue and EPS versus consensus (Q1, Q2), underpinning estimate momentum. Expect Street to adjust near‑term profitability modeling for Q4 seasonality and higher Q4 marketing investment (~+$5M) .

Note: Values marked with * retrieved from S&P Global.

Key Takeaways for Investors

  • Revenue and EPS beats demonstrate topline strength and underwriting discipline; GAAP net loss was a function of non‑cash warrant expense, not core economics .
  • Technology edge (pricing + UBI) is translating into better unit economics and growth despite peak competition—key to the medium‑term thesis .
  • Distribution diversification is working: IA scaling (3x YoY; 50% of partnership new writings) with less than 10% penetration suggests significant runway .
  • Expect Q4 seasonality to pressure accident period loss ratio by ~5ppt and near‑term net income given ~+$5M increased direct R&D marketing; watch for sustained adjusted EBITDA and PIF acceleration .
  • Capital remains strong ($309M unencumbered), enabling opportunistic growth investment and underwriting resilience through cycles .
  • Trading implications: Short‑term, stock may react to headline GAAP loss vs beats; medium‑term, focus on IA penetration, state expansions (now 36 states), and continued estimate revisions on revenue/EPS as Street incorporates tech‑driven growth .
  • Monitor Florida pricing dynamics and severity trends; management asserts rate adequacy and normal variation, but continued discipline is crucial .