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Root(ROOT) - 2022 Q2 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Gross written premium declined 21% year-over-year to $140 million, while gross earned premium decreased 6% year-over-year to $171 million, reflecting higher rates and stricter underwriting [15][16] - Operating loss was $81 million, a 53% improvement over the prior year, and adjusted EBITDA improved by 59% [18] - Operating cash consumption dropped over 54% compared to the first half of 2021, with $696 million of unencumbered capital at the end of Q2 [18][19] Business Line Data and Key Metrics Changes - The gross accident period loss ratio improved by five points to 85% compared to the same quarter in 2021, driven by proactive rate changes and a higher weight of renewal premium [16][17] - New business writings decreased significantly, with renewals making up 75% of gross earned premium this quarter [15] Market Data and Key Metrics Changes - The company has implemented 35 rate filings with an average increase of 28% across 23 states, tightening underwriting rules to reduce premium leakage [10] - The focus on the embedded channel is primarily through the exclusive partnership with Carvana, which is expected to drive growth in that segment [12] Company Strategy and Development Direction - The company is focused on strengthening its underwriting foundation and conserving capital while leveraging technology to build out its embedded product offerings [21] - Continued investment in technology is aimed at enhancing competitive advantage and improving pricing models [11][13] Management's Comments on Operating Environment and Future Outlook - Management expects significant year-over-year declines in gross written premium in the second half of 2022, but anticipates meaningful improvement in operating losses [20] - The company is navigating a challenging environment with inflation and supply chain issues, but proactive measures are expected to yield positive financial results [10][19] Other Important Information - The company has launched a digital agency to service customers not suited for its primary insurance offerings, which is seen as a capital-light revenue stream [12] - Management is refining models and processes to enhance pricing accuracy and speed up model development [13] Q&A Session Summary Question: Outlook for premium and policy decline in the back half of the year - Management expects the back half of the year to resemble Q2, with a year-over-year decline above 25% in both gross written premium and operating loss [24] Question: Expectations for severity and frequency trends - Severity is expected to remain elevated at 6%, while frequency is at 1%, with management anticipating slower trends in the second half of the year [25][26] Question: Marketing spend outlook - The focus remains on profitability, with expectations for muted marketing spend through the rest of the year [27] Question: Clarification on gross accident period loss ratio - Management noted that while rates have been increased, many have not yet earned in, impacting the loss ratio [31][35] Question: Carvana's contribution to new business - Management clarified that Carvana's new business volume is about a third, with excitement about the potential for growth in that channel [36][38] Question: Other potential revenue sources - The company is exploring additional partnerships and expanding its digital agency offering, which is expected to contribute to long-term revenue [40][42] Question: Loss ratios for new versus renewal business - Management indicated that new business loss ratios are expected to be leading indicators due to the timing of rate changes [56] Question: Cash flow trends and future expectations - Management expects cash burn to improve in the second half of the year as efforts to strengthen the business continue [63] Question: Adverse development in reserves - A small unfavorable development in reserves was noted, primarily due to an uptick in severity, but management remains confident in their reserve adequacy [64]