Root shares rise around 30% after better-than-expected Q4 results in 'landmark' year

By David Bull

Feb 27 - (The Insurer) - Root’s share price surged by nearly 30% on Thursday after the auto insurtech reported a second consecutive quarter of net profitability and outperformed expectations across a number of key metrics, with its CEO Alex Timm hailing a “landmark year”.

The post-earnings rise in the company's stock price means it is now up 389% over the past 12 months.

As previously reported, the Ohio-based company posted net income of $22 million in the fourth quarter, an improvement of $46 million year on year.

Operating income of $35 million and adjusted Ebitda of $43 million for the quarter were significant improvements from the prior-year period, according to the company, while its gross and net combined ratios improved by 19 points to 90.6% and 20 points to 91.5%, respectively.

Gross premiums written increased 18% to $331 million and gross premiums earned rose 54% to $331 million.

Root’s gross accident period loss ratio improved by 2 points to 61.4% while the gross loss adjustment expense ratio improved by 2 points to 6.9%, with the company attributing the improvement primarily to favourable prior-year reserve development.

In a note published after the earnings release, JMP analyst Matt Carletti said: “The progression across 2H23, 1H24, and now through 2H24 with respect to sustained improvement in loss ratios, alongside a rebound in top-line growth gives us confidence Root has firmly exited the turnaround phase and moved into one we believe will see the company continue its progression toward sustained profitability.”

He attributed this to management quickly pulling back on marketing expenses, driving “significant” pricing increases and reining in operating costs.

Carletti suggested the path forward for Root will continue to evolve over the coming quarters in a dynamic market environment.

“We expect management to lean into growth in the near term, as it has ample profitable growth opportunities across geographic expansion, further penetration of its direct channel, and a growing number of partnerships (across automotive, financial services, and agent sub-channels).

“While this could pressure EBITDA and net income in the near term (we expect EBITDA to remain positive but could envision NI being negative in some periods), we believe it is the right decision for the long term,” said the analyst.

On Root’s earnings call on Wednesday, Timm noted that the fourth quarter contributed to the company’s first full year of net income profitability after it “delivered in every facet” of its operations.

Root's full-year results included a gross combined ratio of 95% on $1.3 billion of gross premiums written, with net income of $31 million and adjusted EBITDA of $112 million.

“Additional accomplishments for the year include growing policies in force, delivering what we believe is one of the best loss ratios in the industry; continued investments in our pricing and underwriting technology; reducing run rate interest expense; and making significant strides to diversify our distribution.

“Best of all, 2024 was just the beginning for Root. We are excited for the year ahead as we accelerate our growth trajectory, further expand our partnerships channel and reinvest in our business to drive long-term returns,” said Timm.

The Root co-founder said the progress in 2024 was possible because of the foundation built by the company in previous years, which he said will continue to drive momentum in the business “for years to come”.

Policies in force grew by 21% year on year to more than 414,000.

“We deployed our latest pricing and underwriting models, further enhancing our predictive power and allowing us to continually offer the best prices to the best drivers,” said Timm.

He added that Root was also able to “dramatically reduce” its reinsurance costs, which validated its progress and has provided a tailwind going into 2025.

On the call, Timm told analysts that Root more than doubled new writings in 2024 and that in the fourth quarter new writings through its partnership channel accounted for around a third of overall new business, which he said was driven by its proprietary technology stack that can “seamlessly” integrate into existing partner platforms.

He added that Root’s partnerships pipeline remains strong over its three channels of automotive, financial services and independent agents.

“Along with further growing the partnership channel in 2025, we expect to continue to graduate current partners to fully embedded experiences and eliminate friction from the purchase experience.

“A great example of that is Carvana Insurance built with Root, which offers a 3-click bindable purchase experience on a partner platform that our customers have come to know and trust,” said Timm.