Root, Inc.
Q3 2021 Earnings Call Transcript

Published: 11 Nov 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Root Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers presentation, there will be a question-and-answer session. . Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker to day, Christine Patrick, Vice President of Investor Relations, please go ahead.

[Christine Patrick:]

Good morning. And thank you for joining us today. Root is hosting this call to discuss its Third Quarter 2021 Earnings Results. Participating on today's call are Alex TImm, Co-Founder and Chief Executive Officer, and Dan Rosenthal, Chief Operating Officer, Chief Revenue Officer, and Chief Financial Officer. During the question-and-answer portion of this call, our presenters will be joined by Matt Bonakdarpour, Chief Data Science and Analytics Officer, and Frank Palmer, Chief Insurance Officer. Last evening, 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 10Q as well as our 2020 Form 10-K. 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 undertake no obligation 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. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our Form 10-K, where you will see a discussion of factors that could cause the Company's actual results to differ materially from these statements as well as our shareholder letter released last evening. A replay of this conference call will be available on our website under the Investor Relations section. I would like to also remind you that during the call, we are discussing some non-GAAP measures in talking about Root 's performance. You can find the reconciliation of those historic measures to the nearest comparable GAAP measures in our shareholder letter released last evening, and our filings with the SEC, each of which will be posted on our website at ir.joinRoot.com. I will now turn the call over to Alex TImm, Root 's Founder and CEO.

[Alex TImm:]

Thank you, Christine. Good morning, everyone, and thank you for joining us on our third quarter call. During the quarter, we made progress on many of our key initiatives and deepened our founding commitment to building world-class technology that addresses the long-standing inefficiencies and unfairness in the auto insurance industry. We're seeing the movement toward fairness grow as evidenced by some of the largest incumbents following our lead and questioning the use of credit scores and pricing. We're excited to be leading this charge in the industry and bringing others along with us. This quarter, we placed the Chief Revenue and Chief Operating Officer responsibilities under Dan Rosenthal. In his new role, Dan oversees 3 critical areas of Root, marketing, insurance, and business growth development. This gives him the ability to drive profitable top-line growth, and streamline operations. With Dan's history of entrepreneurial success, I think he is the perfect person to lead this charge for our organization. I'd now like to walk you through highlights of the third quarter. We made progress toward diversifying our distribution channels, an initiative we detailed on last quarter's call. Root technology enabled us to offer quote in under a minute providing meaningful opportunities to build differentiated access to customers and broaden our distribution. By embedding our product offering in moments that meet consumers when they need us most opens up a sizable and largely untapped opportunity in adjacent industries. This also creates a vastly superior customer experience. To bring this to life, we focused on building an embedded product that powers our exclusive partnership with Carvana. Since announcing our partnership in mid-August, cross-functional Root and Carvana teams have been hard at work developing a fully integrated point-of-sale offering. We are currently testing the first iteration in 12 states. Early signs are positive and we look forward to providing additional detail on results in the months ahead. We have made investments to bring the speed and ease-of-use powered by our technology to the independent agency channel, giving Root access to a larger demographic of consumers. We have developed a quote-and-buying process that takes a fraction of the time required compared to other carriers platforms. This increases productivity for our agency partners. We're currently testing this product in five states with largely positive feedback to date. While investing in the diversification of our distribution channels, we have significantly dialed back our spend in performance marketing reducing sales and marketing spend by 40 %. This move has greatly reduced our customer acquisition costs, which can be seen in a $45 million improvement to our operating loss compared to the second quarter of this year. This is a prudent use of capital, particularly given the current inflationary loss environment we find ourselves in. We believe the diversified channel approach will enable us to further lower customer acquisition costs, attract customers with higher lifetime values, and provide additional levers to deliver strong, profitable, top-line growth. We have substantially improved our pricing and underwriting models. We continue the rollout of UBI 4.0, our latest and greatest telematics model, and McModel 4.1, our national pricing model. UBI 4.0 is currently active in 20 of our 31 states, representing roughly 70 % of our addressable market. This model enables a precise telematics quote, improves overall segmentation and does more with less data. Since the roll out of this model, we have been able to extend quotes to an additional 10 % of users. We are also in the process of ruling out McModel 4.1, which leverages Root's, growing dataset to expand modeled coverages, improve segmentation, and better predict the lifetime value of a customer. As I stated previously, by growing the dataset, we can accelerate the momentum of our flywheel. As our pricing algorithms improve, we bring down the cost of insurance for good drivers, which allows us to attract and retain a more profitable mix of business. In addition to the segmentation improvements driven by model enhancements, we're also tightening our underwriting by refining contracts and endorsements and leaning on our state management group to unlock state level efficiencies. We will see the results of these improvements in the quarters to come. The actions we've taken this quarter demonstrate our awareness of deploying your capital thoughtfully, and balancing growth and profitability. We still have work to do, but we know what we need to do to positively impact our bottom line. This is an ongoing process and we will continue to find ways to drive toward profitability. I'm thankful for the continued support and trust of our customers, team members, and investors. With that, I'll turn the call over to Dan.

[Dan Rosenthal:]

Thanks, Alex. Our results for the third quarter of 2021 reflected a decrease in our marketing spend and continued pressure from the loss environment. You will find our full GAAP financial results contained in the shareholder letter we published yesterday evening, but we wanted to give a few of the key highlights. On the top line, we grew gross written premium 24 % year-over-year to $205 million. Our gross earned premium increased 23 % year-over-year to $189 million. Our gross earned premium from season states increased to 76 % of total earned premiums. The top line's out performance was driven by the tail effect from performance marketing dollars previously committed. Overall for the quarter, sales and marketing expense declined 40 % as we took action to reduce cash burn, especially in the face of the surge and performance marketing cost and the current inflationary environment. We continue to expect gross written premium to reflect year-over-year declines in the fourth quarter and first half of 2022, as we take active steps to reposition our marketing investments, pursue more cost efficient distribution channels, and otherwise reduce our customer acquisition costs and operating loss. Shifting to profitability, gross accident period loss ratio was 91 % for the third quarter. A 12-point increase year-over-year against Q3 2020 when compared with the low loss environment last year. More importantly, we recorded a 9-point improvement from Q3, 2019, demonstrating improved performance when stripping away the impact of the pandemic, which is partially offset by the current loss cost environment. The year-over-year increase in the loss ratio was primarily driven by 8 points of severity, and points of frequency, as inflationary pressures increase costs and miles-driven remained above pre -pandemic levels in our book. Leveraging our technology, rating engine and data architecture has allowed us to respond faster than industry norms with 13 rate increases taken during the third quarter and more planned in the coming months. Direct contribution was a $10 million loss for the quarter. The decline in direct contribution and related margin was driven primarily by direct loss ratio as I covered above. Operating loss was $127 million. A $45 million improvement when compared with the second quarter driven by the aforementioned reduction in performance marketing spend. Following quarter close, we repaid both our term loan A and term loan B. We have signed an exclusive term sheet with BlackRock Financial Management, Inc. on behalf of funds and accounts under its management to put in place a larger term loan facility with a longer maturity than our previous structure. We expect to work in good faith with BlackRock to close the facility before year-end subject to negotiation and documentation of final terms and the terms and conditions contained in the definitive documentation. Turning to our outlook, we remain on the path we laid out last quarter. We have reined in customer acquisition costs in an inflationary environment and are actively laying the foundation for profitable growth. The work we are doing around cost management is a critical step forward to create the flexibility necessary to invest in and grow our business over the long term. These actions have also given us a more optimistic view of full-year operating income. We now expect to close the year on the favorable side of the midpoint of our original guidance of a loss of $555 million to $505 million. I would like to echo Alex 's statement that we have taken a handful of actions that demonstrate our thoughtfulness around deploying capital. It is something we take very seriously and the effort to improve our bottom line is ongoing. In my new role as Chief Revenue and Chief Operating Officer, I'm tasked with aligning our customer experience, products, and market opportunities to drive profitable growth giving further focus to these key drivers of our customer - centric business. I am excited to continue the work around securing our future. We're excited about the opportunities before us and appreciate your continued support. With that Alex, Frank, Matt and I look forward to your questions.

[Operator:]

Thank you. . Our first question comes from Michael Phillips with Morgan Stanley. Your line is open.

[Michael Phillips:]

Hey, thanks. Good morning. Have you seen any change in the auto loss in the trend environment from last quarter? It looks like maybe you're numbers can be out a bit. I wonder if that's true, what's driving that and

[Frank Palmer:]

Sure. This is Frank. Your question was on the loss trends. I'd say that we're seeing a number of Yeah, so we are seeing a number of factors there. First, is we see higher miles driven, which in -- which translates into increased frequency. We've seen that in a number of different reports across the industry, so I believe that that's an industry thing, not just a Root thing. As we've seen, there's inflation across the U.S. which increases overall costs, but in particular in the cost of used cars, used car parts, which is causing a super normal increase in severity, especially in the