QV Alert – Root Dreams Big

This is a strong chart. All the moving averages are rising, there is a recent chart breakout, and Coppock has nothing to say. It is at an elevated level, but this is hardly surprising for a share that has risen from a low point of $3.31 in March 2023 to over $150 currently.

Root is attempting to disrupt the insurance industry, which generated over $1 trillion in premium income last year They are presently tiny but doing well after a testing time in 2022.

2024 was a landmark year for Root. Within 10 years of our founding, we achieved a gross combined ratio of 94.7pc on $1.3bn of gross premiums written, generating GAAP net income of $31m and adjusted EBITDA of $112m. In 2024, we delivered our first profitable year in our company’s history. We grew policies in force 21pc. We more than doubled our new writings in our Partnerships channel. We delivered a best-in-class gross loss ratio of 58.9pc. We dramatically reduced our reinsurance costs and we cut our interest expense approximately 50pc on a run rate basis. This was an excellent year.

Root shareholders letter, Q4 2024, 26 February 2025

Understanding the key ratios.

• Interpreting the gross combined ratio:
  • Below 100pc: Indicates that the insurer is making an underwriting profit, meaning it’s collecting more in premiums than it’s paying out in claims and expenses. 
  • 100pc: Represents a break-even scenario, where premiums collected equal claims and expenses. 
  • Above 100pc: Indicates that the insurer is losing money on its underwriting operations, meaning it’s paying out more in claims and expenses than it’s collecting in premiums. 

• The gross loss ratio is a key indicator of an insurance company’s claims experience and profitability. 
• How it’s calculated: It’s calculated by dividing the total incurred losses (claims paid plus loss adjustment expenses) by the total premiums earned and then multiplying by 100 to express it as a percentage.
  • Formula: Loss Ratio = ((Incurred Losses + Loss Adjustment Expenses) / Earned Premiums) * 100 
• What it means:
  • A loss ratio of 100pc means the insurer is spending exactly what it collects in premiums to cover claims and expenses. 
  • A loss ratio below 100pc indicates the insurer is making an underwriting profit, meaning it’s retaining more than it’s paying out. 
  • A loss ratio above 100pc means the insurer is spending more than it collects in premiums, which could indicate financial issues. 

• Reinsurance is essentially “insurance for insurance companies”. It’s a way for an insurance company (the “cedent” or “primary insurer”) to transfer some of its risk to another company (the “reinsurer”). 
• Why it’s used: Reinsurance helps insurers:
  • Manage risk: By spreading risk, insurers can better handle large or catastrophic losses. 
  • Stabilize underwriting results: Reinsurance can help insurers avoid significant fluctuations in their profits or losses. 
  • Expand capacity: Reinsurance allows insurers to take on more business than they might otherwise be able to, as they are not solely reliant on their capital to cover potential losses. 
  • Provide catastrophe protection: Reinsurance can help insurers protect themselves from the financial impact of major disasters or events. 

Many insurance companies don’t make underwriting profits. They use their lossmaking insurance business to build a cash float on which they earn interest. They can do this because premiums come in ahead of claims. This also means that higher interest rates justify even bigger losses on the insurance side.

Root is not run like this but aims to be a tightly managed company making profits from its insurance business and is more likely to plough insurance profits into lower premiums to grow market share. Hence a need to have strong ratios and not pay away all its profits in reinsurance.

Walking the talk with big plans ahead.

Ten years ago, we believed that modern quantitative methods would allow us to grow at better loss ratios than the industry. Today our loss ratio is among the best in the industry, and our pricing algorithms are increasingly predictive, allowing us to accelerate profitable growth across distribution channels.
Ten years ago, we believed that engineering and automation would allow us to reduce prices for customers by operating more efficiently. Today, our proprietary technology has propelled us to net income profitability, with a lot of room for growth given we still operate in a small portion of the overall market. Ten years ago, we believed that by meeting consumers where they were with delightful experiences —either through a mobile phone or an embedded experience —we would create the most loved car insurance in the nation. Today, we benefit from an enviable telematics adoption rate and can offer a 3-click binding purchase experience. Now, we have a goal to become the largest and most profitable company in the industry. We are in the early days, but we are ready to steadfastly pursue our vision. Our convictions have been tested, no doubt, along the first ten years of our journey. These trials have only made us stronger, and this grit is what we lean on to carry us through to victory

Shareholders letter, Q4 2024, 26 February 2025

Share Recommendations

Root Inc. ROOT

I was excited about Root when I first encountered the company. The shares have had a bumpy ride. But, as they say, these trials have made them stronger. If a company is to become a massive success they need to be a disruptor.

The big breakthrough for Root was to become profitable. Otherwise, they faced massive dilution to keep the business solvent. You can see from the chart that rising interest rates, for the reasons discussed above, posed a particular threat to Root. They have passed the test and can concentrate on the opportunity.

The events of 2022 were a baptism of fire for Root.

This year was only possible because of the hard decisions we made in 2022 and 2023 to control our own financial destiny. These years created the foundation for 2024’s incredible results. With this foundation in place, we drove significant growth at our target unit economics while accelerating our investments in our pricing and underwriting technology and delivering increased operating efficiency. This has created momentum that we intend to continue.

Shareholders letter, Q4 2024, 26 February