Root(ROOT) - 2023 Q3 - Quarterly Report

Part I. Financial Information This section provides Root, Inc.'s unaudited condensed consolidated financial statements and related disclosures Item 1. Financial Statements This section presents Root, Inc.'s unaudited condensed consolidated financial statements, highlighting key financial position and performance Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Summary (Unaudited) | Account | Sep 30, 2023 (in millions) | Dec 31, 2022 (in millions) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $635.3 | $762.1 | | Total investments | $171.5 | $133.2 | | Total assets | $1,240.2 | $1,312.9 | | Liabilities & Equity | | | | Loss and loss adjustment expense reserves | $256.5 | $287.4 | | Unearned premiums | $218.9 | $136.5 | | Long-term debt and warrants | $298.3 | $295.4 | | Total liabilities | $951.1 | $923.8 | | Total stockholders' equity | $177.1 | $277.1 | Condensed Consolidated Statements of Operations and Comprehensive Loss Condensed Consolidated Statement of Operations Summary (Unaudited) | Account | Three Months Ended Sep 30, 2023 (in millions) | Three Months Ended Sep 30, 2022 (in millions) | Nine Months Ended Sep 30, 2023 (in millions) | Nine Months Ended Sep 30, 2022 (in millions) | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $115.3 | $73.7 | $260.2 | $239.5 | | Loss and loss adjustment expenses | $85.8 | $80.9 | $208.6 | $273.3 | | Total operating expenses | $149.3 | $130.8 | $349.2 | $454.9 | | Operating loss | $(34.0) | $(57.1) | $(89.0) | $(215.4) | | Net loss | $(45.8) | $(66.4) | $(123.4) | $(239.4) | | Loss per common share | $(3.16) | $(4.71) | $(8.57) | $(17.10) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statement of Cash Flows Summary (Unaudited) | Cash Flow Activity | Nine Months Ended Sep 30, 2023 (in millions) | Nine Months Ended Sep 30, 2022 (in millions) | | :--- | :--- | :--- | | Net cash used in operating activities | $(79.7) | $(163.9) | | Net cash used in investing activities | $(46.2) | $(5.7) | | Net cash (used in) provided by financing activities | $(0.9) | $283.3 | | Net (decrease) increase in cash | $(126.8) | $113.7 | | Cash at beginning of period | $763.1 | $707.0 | | Cash at end of period | $636.3 | $820.7 | Notes to Condensed Consolidated Financial Statements - In Q3 2023, the company commuted certain reinsurance agreements, resulting in the recognition of $4.4 million in net premiums earned, $4.2 million in loss and LAE, and $5.8 million in other insurance expenses[47] - Restructuring costs related to workforce reductions and other initiatives totaled $9.4 million for the nine months ended September 30, 2023, compared to $8.4 million in the prior year period[53] - An additional $1.7 million in employee compensation expense is expected through Q4 2023[55][56] - Total share-based compensation expense for the nine months ended September 30, 2023 was $12.4 million, a decrease from $21.8 million in the same period of 2022[61] - As of September 30, 2023, there was $28.7 million of total unrecognized compensation cost related to unvested equity awards[61] - The company is party to several legal proceedings, including a class action complaint and a shareholder derivative complaint[67][69] - Management believes the claims are without merit and intends to defend against them vigorously, but cannot predict the outcome or estimate potential loss at this time[70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes improved financial performance to strategic actions, rate increases, reduced reinsurance, and expense control Key Performance Indicators Key Performance Indicators Summary | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Policies in force | 259,522 | 255,279 | 259,522 | 255,279 | | Gross premiums written | $224.2M | $150.7M | $503.9M | $478.0M | | Gross profit/(loss) | $11.2M | $(8.3)M | $29.4M | $(28.1)M | | Net loss | $(45.8)M | $(66.4)M | $(123.4)M | $(239.4)M | | Direct contribution | $37.0M | $11.5M | $84.9M | $17.7M | | Adjusted EBITDA | $(19.4)M | $(46.4)M | $(42.6)M | $(161.4)M | | Net combined ratio | 143.1% | 185.1% | 150.1% | 199.3% | | Gross combined ratio | 118.7% | 130.4% | 119.9% | 139.5% | Results of Operations - Q3 2023 vs Q3 2022: - Net Premiums Earned: Increased 45.8% to $100.0 million, primarily due to reduced reinsurance cessions (37.4% in Q3'23 vs 55.8% in Q3'22) and higher premium per policy from rate actions[127][128] - Loss and LAE: Increased 6.1% to $85.8 million, driven by reduced reinsurance cessions, partially offset by better loss experience[132] - Gross Accident Period Loss Ratio: Improved to 68.0% from 79.3%, mainly due to rate actions outpacing increased claim severity[133] - Operating Expenses: Total operating expenses increased 14.1% to $149.3 million, driven by higher sales & marketing and other insurance expenses, but offset by decreases in technology and G&A costs[133] - Nine Months 2023 vs Nine Months 2022: - Net Premiums Earned: Increased 1.0% to $223.9 million, as reduced reinsurance cessions and rate actions offset a 15.9% decline in Gross Premiums Earned[139][140] - Loss and LAE: Decreased 23.7% to $208.6 million due to better loss experience[143] - Gross Accident Period Loss Ratio: Improved significantly to 67.9% from 81.3% due to rate actions[144] - Operating Expenses: Total operating expenses decreased 23.2% to $349.2 million, reflecting broad cost reductions, particularly in Sales & Marketing, Technology, and G&A, following 2022 workforce reductions[144] Liquidity and Capital Resources - As of September 30, 2023, the company had $635.3 million in cash and cash equivalents, with $502.2 million held outside of regulated insurance entities, and $167.1 million in marketable securities[165] - The company believes existing cash, marketable securities, and operating cash flow will be sufficient to support working capital and capital expenditure needs for at least the next 12 months[167] - Net cash used in operating activities improved to $79.7 million for the first nine months of 2023, compared to $163.9 million for the same period in 2022, primarily due to a lower net loss and reduced operating costs[172] - The company is subject to debt covenants requiring a minimum of $200.0 million in cash and cash equivalents to be held in entities other than its insurance subsidiaries[170] Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes in market risk disclosures from the 2022 Annual Report on Form 10-K are reported - There have been no material changes in the quantitative and qualitative market risk disclosures from the 2022 10-K[180] Item 4. Controls and Procedures Disclosure controls and procedures were ineffective due to a material weakness in monitoring and control circumvention - As of September 30, 2023, management concluded that disclosure controls and procedures were not effective due to a previously identified material weakness[182] - The material weakness relates to inadequate senior leadership hiring practices and ineffective controls over vendor management, contracts, and payments, which were circumvented by a former employee[183] - Remediation efforts are in progress, including enhanced hiring policies and improved vendor management processes, but the new controls have not operated for a sufficient period to demonstrate effectiveness[184][185][187] Part II. Other Information This section provides additional information including legal proceedings, risk factors, and equity security disclosures Item 1. Legal Proceedings The company is involved in various legal proceedings, but management does not expect a material adverse financial effect - The company is party to litigation and legal proceedings from time to time[190] - Except as disclosed in Note 11, management does not believe any pending action will have a material adverse effect on its financials[190] Item 1A. Risk Factors No material changes to risk factors previously disclosed in the 2022 Annual Report on Form 10-K are reported - There have been no material changes in risk factors from those disclosed in the 2022 10-K[192] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities The company made no equity security purchases and does not anticipate paying cash dividends due to business needs and restrictions - The company made no purchases of its equity securities during the quarter[194] - The company has never paid cash dividends and does not anticipate paying any in the foreseeable future, intending to retain earnings for business expansion[195] - Dividend payments are restricted by state insurance regulations for its subsidiaries and by covenants in its Term Loan agreement[196][199] Item 3. Defaults Upon Senior Securities This item is not applicable as the company has not defaulted upon any senior securities - Not applicable[200] Item 4. Mine Safety Disclosures This item is not applicable to the company's business - Not applicable[202] Item 5. Other Information There is no other information to report for this item - None[204] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications - Lists exhibits filed with the report, including CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906[207]