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Item 7. Management’s Discussion and Analysis

2023-02-22 compared with 2022-02-23 · 290 added, 326 removed, 341 unchanged (64% of the section changed)

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Our actual results could differ materially from such forward-looking statements.

Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report.

Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future.

This Management’s Discussion and Analysis does not discuss 2020 performance or a comparison of 2021 versus 2020 performance for select areas where we have determined the omitted information is not necessary to understand our current period financial condition, changes in our financial condition, or our results.

The omitted information may be found in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission, or the SEC, on March 4, 2021.

Root is a technology company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience.

The omitted information may be found in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission, or the SEC, on February 23, 2022.

Root is a tech-enabled insurance company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience.

We operate primarily a direct-to-consumer model in which we currently acquire the majority of our customers through mobile applications.

We believe the Root advantage is derived from our unique ability to efficiently and effectively bind auto insurance policies quickly, aided by segmenting individual risk based on complex behavioral data and proprietary telematics, a customer experience built for ease of use and a product offering made possible with our full-stack insurance structure.

We are also focused on expanding our embedded insurance platform, where we acquire customers through strategic partnerships.

We believe the Root advantage is derived from our unique ability to efficiently and effectively bind auto insurance policies quickly, through direct and embedded channels, aided by segmenting individual risk based on complex behavioral data and proprietary telematics.

Our customer experience is built for ease of use and a product offering made possible with our full-stack insurance structure.

These are all uniquely integrated into a single cloud-based technology platform that captures the entire insurance value chain—from customer acquisition to underwriting to claims and administration to ongoing customer engagement.

Our model benefits from portfolio maturity.

As we scale the business, our results are disproportionately weighted towards new customers compared to traditional insurance carriers.

As we scale the business and develop our embedded products, our results are disproportionately weighted towards new customers compared to traditional insurance carriers.

As we build an underlying base of recurring customers, we expect the following financial impacts:

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As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals and drive down the loss ratio across our portfolio.

We also continue to revise contracts to tighten underwriting and implement rate increases to control the impact of increased loss costs.

• Reduced marketing as a percentage of premium .

Recurring customer premiums have no associated customer acquisition costs and minimal underwriting costs, driving profitability.

Certain recurring customer premiums have no associated customer acquisition costs and minimal underwriting costs, driving profitability.

As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals without associated marketing costs.

• Improved retention.

As a young insurance carrier weighted towards new customers, we naturally have a higher percentage of more frequent shoppers.

As our business tenures and our flywheel spins, allowing us to increase our pricing advantage, we will have the opportunity to acquire more long-standing customers and retain those that might naturally shop frequently.

In addition to our pricing advantage, we anticipate our expanding relationships with customers through product bundling will demonstrate further improvement in retention.

• Increased revenue per customer.

Our product expansion provides an opportunity to generate additional premium and fee income per customer without material incremental marketing cost.

Over time we expect to refine our fee schedules to be more consistent with industry norms.

This, paired with strengthened underwriting, will facilitate the opportunity to generate additional fee revenue per customer.

We use technology to drive efficiency across all functions, including distribution, underwriting, policy administration and claims in particular.

We believe this allows us to operate with a cost to acquire and cost to serve advantage.

We continue to develop machine learning loss models, which allows us to respond more quickly to changes in the market, improve pricing segmentation through enhancements to our UBI model and take appropriate rate actions.

We efficiently acquire customers directly through multiple channels, including embedded, digital

(performance), channel media, referrals and agency.

Our marketing costs have historically been well below industry averages, although in any given period, these costs can vary by channel mix, by state, or due to seasonality or due to the competitive environment.

Today, we acquire the vast majority of our customers through our mobile app and mobile website.

We believe that through prudent investment in and diversification of our marketing channels, including a focus on embedded insurance through our exclusive partnership with Carvana, and leveraging proprietary data science and technology to build out independent agent products and relationships, will position us for more sustainable, long-term and profitable growth.

Additionally, we are realizing operating efficiencies as we scale against our fixed expense base.

Our claims management expenses, as represented by our loss adjustment expenses, or LAE, are in line with peers within only three years of bringing claims management in-house and we expect to improve as we further embed machine learning into our processes.

We also use our proprietary technology to measure long-term benefits to our business.

When a state reaches certain maturation thresholds, we refer to it as a seasoned state.

A seasoned state is defined as a state where (1) the regulator has approved our data science-driven telematics and pricing models and (2) we have been writing policies in the state for a minimum of one year with a minimum of two pricing filings.

As a full-stack insurance company, we currently employ a “capital-light” model, which utilizes a variety of reinsurance structures at elevated levels of reinsurance.

We continue to develop machine learning loss models, which allows us to respond more quickly to changes in the market, improve pricing segmentation and take appropriate and timely rate actions.

We efficiently acquire customers directly through multiple channels, including embedded, digital (performance), channel media, referrals and agency.

Our evolving acquisition strategy includes utilizing our embedded platform through current and future embedded partners.

Traditionally, our marketing costs have historically been well below industry averages, although in any given period, these costs can vary by acquisition strategy, channel mix, by state, or due to

seasonality or due to the competitive environment.

Today, we acquire the vast majority of our customers through the embedded platform, mobile app and mobile website.

We believe that through prudent investment in and diversification of our marketing channels, including a focus on embedded insurance through our current and future strategic partners, and leveraging proprietary data science and technology will position us for more sustainable, long-term and profitable growth.

As a full-stack insurance company, we currently employ a “capital-efficient” model, which utilizes a variety of reinsurance structures at elevated levels of reinsurance.

These reinsurance structures deliver three core objectives (1) top-line growth without a commensurate increase in regulatory capital requirements, (2) support of customer acquisition costs and (3) protection from outsized losses or tail events .

We expect to maintain an elevated level of third-party quota share reinsurance while rapidly growing our business in order to operate a capital-light business model.

We expect to maintain an elevated level of third-party quota share reinsurance while scaling our business in order to operate a capital-efficient business model.

As our business scales, we expect to have the flexibility to reduce our quota share levels to maximize the return to shareholders.

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas county mutual insurance company, or the fronting carrier.

Pursuant to this arrangement, we route all of our new auto policies and, over time, expect to route certain renewal auto policies, in Texas through the fronting carrier.

In exchange for a commission paid to the fronting carrier, we assume 100% of the related premium and losses on those policies.

Through this fronting arrangement, we have greater rating and underwriting flexibility that we believe will allow us to more accurately segment risk in Texas to improve profitability.

We have included net loss and LAE ratio, net expense ratio, and net combined ratio as key performance indicators, which include the impact of reinsurance.

These net metrics are useful to help illustrate the underwriting and operating expense performance and operating health of the overall business.

A combined ratio under 100% indicates an underwriting profit while a combined ratio over 100% indicates an underwriting loss.

Given the significant impact of reinsurance on our results of operations, we use certain gross basis key performance indicators to manage and measure our business operations and enhance investor understanding of our business model prior to reinsurance.

We believe our long-term success will be apparent through the progression of our gross metrics.

Results of operations on a gross basis alone are not achievable under our regulatory landscape given our top-line growth and resulting capital requirements, which are relieved, in part, by obtaining reinsurance.

The gross metrics include gross written premium, gross earned premium, direct contribution, ratio of direct contribution to gross earned premium, gross loss ratio, gross LAE ratio and gross accident period loss ratio.

For additional information, including definitions of these key metrics, see “— Key Performance Indicators” and for a reconciliation of direct contribution to the most directly comparable generally accepted accounting principles in the United States, or GAAP, metric, see “— Non-GAAP Financial Measures.”

Results of operations on a gross basis alone are not achievable under our regulatory landscape given our historical top-line growth and resulting capital requirements, which are relieved, in part, by obtaining reinsurance.

The gross metrics have historically included gross premiums written, gross premiums earned, direct contribution, gross loss ratio, gross LAE ratio and gross accident period loss ratio.

We have added gross expense ratio and gross combined ratio as key performance indicators and we believe these metrics provide useful insight to illustrate the expense and operating health of the business, prior to reinsurance.

A gross combined ratio under 100% indicates an underwriting profit, prior to reinsurance, while a gross combined ratio over 100% indicates an underwriting loss, prior to reinsurance.

In addition to our gross basis metrics, management uses adjusted earnings before interest, tax, depreciation, amortization, or adjusted EBITDA, as an integral part of managing our business.

We believe adjusted EBITDA provides investors with useful insight into our business because such measure eliminates the effects of certain charges that are not directly attributable to our underlying operating performance.

For additional information, including definitions of these key metrics, see “— Key Performance Indicators” and for reconciliations of Direct Contribution and adjusted EBITDA to the most directly comparable generally accepted accounting principles in the United States, or GAAP, metric, see “— Non-GAAP Financial Measures.”

Key Factors and Trends Affecting our Operating Performance

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Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform.

We intend to continue to drive new customer growth by leveraging our differentiated consumer experience, machine learning loss models and our telematics-based pricing.

We intend to continue to drive new customer growth by leveraging our differentiated consumer experience, our embedded channel, machine learning loss models and our telematics-based pricing.

Additionally, our proprietary dataset will continue to scale as we grow, enabling us to enhance our predictive models to further improve pricing and attract potential new customers.

We will also continue to target attractive potential customer segments through our embedded experience and digital marketing channels.

Our ability to attract new customers will depend on a number of factors, including the pricing of our products, offerings of our competitors, our ability to expand into new markets, and the effectiveness of our marketing efforts.

Our ability to attract and retain customers depends on maintaining and strengthening our brand by providing superior customer experiences and competitive pricing.

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Today, we are currently licensed in 50 states (48 states for personal auto) and the District of Columbia and operate in 34 of those states.

Our continuous state expansion has unlocked a large total addressable market for sustained growth, made our direct targeted marketing more efficient and created an opportunity to build a national brand, supporting our marketing holistically.

To expand our geographic footprint, in November 2020, we acquired all of the authorized, issued and outstanding shares of Catlin Indemnity Company, subsequently renamed Root Property & Casualty Insurance Company, or Root Property & Casualty.

Our Ability to Expand Premiums and Fee Income Per Policy Through Cross-Sell

Our state expansion has unlocked a large total addressable market for sustained growth, made our direct targeted marketing more efficient and created an opportunity to build a national brand, supporting our marketing holistically.

Our Ability to Expand Premiums Through Cross-Sell and Fee Income Per Policy

We are in the early stages of cross-selling non-auto products across our customer base.

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We have also observed that bundling products with auto insurance improves retention as the relationship with our customer expands.

Our success in expanding revenues through cross-sales depends on our marketing efforts with new products, continuous state expansion of these offerings and the pricing of our bundled products.

Our success in expanding revenues through cross-sales and greater fee income per policy depends on our marketing efforts with new products, continuous state expansion of these offerings and the pricing of our bundled products and continuing to refine the fee schedules in our policyholder contracts to be more consistent with industry norms.

The success of our renters insurance offering is also subject to our ability to develop underwriting capabilities to adequately price renters risk.

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In March 2020, the World Health Organization declared COVID-19 a global pandemic.

The pandemic and related measures taken to contain the spread of COVID-19, such as government-mandated business closures,

“shelter in place” orders, or SIPs, and travel and transportation restrictions, have negatively affected the U.S.

and global economies, disrupted global supply chains and led to unemployment.

We, and other businesses within the insurance industry, have been impacted by certain individual state bulletins that were issued in 2020 and outlined COVID-19 premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requirements to defer insurance premium payments for up to 60 days and restrictions on increasing policy premiums.

The COVID-19 pandemic and governmental responses thereto have impacted and may further impact the broader economic environment, including creating or exacerbating supply chain disruptions and inflation and negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates.

As a result of the SIPs that started to occur toward the end of March 2020, our customers drove less and we had a resulting decline in loss costs during the first quarter of 2020.

Most parts of the country eased COVID-19-related restrictions and began to return to customary levels of business activity during the second quarter of 2021.

We are now seeing miles driven exceed pre-COVID-19 levels.

As a result of the increase in average miles driven, claims frequency has rebounded proportionally.

In addition, the economic instability caused by the COVID-19 pandemic has led to acute inflationary pressures and supply chain disruptions, which have increased the value of used vehicles and replacement parts in 2021.

These cost increases have resulted in greater claims severity while being partially offset by higher salvage and subrogation recoveries on damaged vehicles.

As a result of certain factors related to the COVID-19 global pandemic, we continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends.

The American Rescue Plan Act became law in March 2021 and provided a third round of stimulus payments from the federal government to many American consumers.

The easing of COVID-19 SIPs and these stimulus payments led to an unexpected surge in interest in vehicle and auto insurance purchases.

This elevated interest resulted in a significant increase in customer acquisition and advertising campaigns in digital channels on the part of our competitors, increasing our customer acquisition costs during 2021.

With the recent surge of the Delta and Omicron variants of COVID-19 across the United States and increasing rates of COVID-19 cases and hospitalizations, it is unclear what the impact of the pandemic will be on future operations.

The economic instability caused by the COVID-19 pandemic has led to acute inflationary pressures, supply chain disruptions, rising interest rates and a downturn in equity markets.

There is a risk of inflation remaining elevated for an extended period, which could cause claims and claim expenses to increase, impact the performance of our investment portfolio or have other adverse effects.

Rising interest rates and reduced equity values have increased the cost of capital and may limit our ability to raise additional capital.

In addition, we have seen an increase in the value of used vehicles and replacement parts.

These cost increases have resulted in greater claims severity while being partially offset by higher subrogation recoveries on damaged vehicles.

We continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends.

As the COVID-19 pandemic continues, there is ongoing uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance.

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Comprehensive Reinsurance

We expect to continue to utilize reinsurance in the future, and our diversified approach to reinsurance allows us to be flexible in response to changes in market conditions or our own business changes, which allows us to strategically fuel growth and technology investment by optimizing the amount of capital required.

We expect to continue to utilize reinsurance in the future, and our diversified approach to reinsurance allows us to be flexible in response to changes in market conditions or our own business changes, which allows us to strategically fuel profitable growth and technology investment by optimizing the amount of capital required.

Key Performance Indicators

We regularly review a number of metrics, including the following key performance indicators, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.

We believe these non-GAAP and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP.

See the section titled “— Non-GAAP Financial Measures” for additional information regarding our use of adjusted gross profit/(loss) and direct contribution and their reconciliations to the most directly comparable GAAP measures.

There were certain key performance indicators that management no longer utilized to actively monitor the performance of the business and we believe are no longer useful metrics to provide as key performance indicators.

These metrics include the renters policies in force, renters premiums per policy, renters premiums in force, adjusted gross profit/(loss), gross margin, ratio of adjusted gross profit/(loss) to total revenue, ratio of adjusted gross profit/(loss) to gross premiums earned, ratio of direct contribution to total revenue and ratio of direct contribution to gross premiums earned.

We believe the non-GAAP and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP.

See the section titled “— Non-GAAP Financial Measures” for additional information regarding our use of direct contribution and adjusted EBITDA and their reconciliations to the most directly comparable GAAP measures.

Years Ended December 31,

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Policies in force 220,354 354,371 322,759

Auto 354,371 322,759 281,310

Renters 8,802 7,739 1,747

Premiums per policy $ 1,220 $ 1,006 $ 939

Auto $ 1,006 $ 939 $ 904

Renters $ 140 $ 140 $ 127

Premiums in force $ 537.7 $ 713.0 $ 606.1

Auto $ 713.0 $ 606.1 $ 508.6

Renters $ 1.2 $ 1.1 $ 0.2

Gross written premium (1)

$ 742.6 $ 616.8 $ 451.1

Gross earned premium (1)

$ 719.6 $ 605.2 $ 352.9

Gross premiums written $ 600.0 $ 742.6 $ 616.8

Gross premiums earned $ 643.6 $ 719.6 $ 605.2

Gross profit/(loss) $ (32.2) $ (51.9) $ (14.2)

Gross margin (15.0) % (4.1) % (28.8) %

Adjusted gross profit/(loss) $ (3.3) $ 21.0 $ (54.2)

Net loss $ (297.7) $ (521.1) $ (363.0)

Direct contribution $ 27.6 $ 8.1 $ 18.9

Ratio of adjusted gross profit/(loss) to total revenue (1.0) % 6.1 % (18.7) %

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of direct contribution to total revenue 2.3 % 5.4 % (19.8) %

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

Adjusted EBITDA $ (185.9) $ (446.1) $ (249.5)

Net loss and LAE ratio 122.8 % 126.4 % 112.5 %

Net expense ratio 72.2 % 134.5 % 78.1 %

Net combined ratio 195.0 % 260.9 % 190.6 %

Gross loss ratio 82.1 % 86.0 % 82.0 %

Gross LAE ratio 10.3 % 10.5 % 10.1 %

Gross expense ratio 45.4 % 71.3 % 56.5 %

Gross combined ratio 137.8 % 167.8 % 148.6 %

Gross accident period loss ratio 80.9 % 88.7 % 76.1 %

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(1) Includes premiums assumed from the fronting carrier that commenced in August 2021.

Assumed written premium and assumed earned premium for the year ended December 31, 2021 were $16.7 million and $7.3 million, respectively.

Prior to the fronting carrier commencement, we did not assume any premiums.

Policies in Force

We define policies in force as the number of current and active policyholders underwritten by us as of the period end date.

We define policies in force as the number of current and active auto insurance policyholders underwritten by us as of the period end date.

We view policies in force as an important metric to assess our financial performance because policy growth drives our revenue growth, expands brand awareness, deepens our market penetration, and generates additional data to continue to improve the functioning of our platform.

Premiums per Policy

We define premiums per policy as the ratio of gross written premium on policies in force divided by policies in force.

We define premiums per policy as the ratio of gross premiums written on auto insurance policies in force at the end of the period divided by policies in force.

We view premiums per policy as an important metric since the higher the premiums per policy the greater the amount of earned premium we expect from each policy.

As discussed below in gross written premium, this key

performance indicator has been updated to include assumed written premiums beginning during the third quarter of 2021.

There is no impact to any prior periods for this change.

Premiums in Force

We define premiums in force for our auto policies as premiums per policy multiplied by policies in force multiplied by two.

We view premiums in force as an estimate of annualized run rate of gross written premium as of a given period.

We define premiums in force as premiums per policy multiplied by policies in force multiplied by two.

We view premiums in force as an estimate of annualized run rate of gross premiums written as of a given period.

Since our auto policies are six-month policies, we multiply this figure by two in order to determine an annualized amount of premiums in force.

We define premiums in force for our renters policies as premiums per policy multiplied by policies in force.

We view this as an important metric because it is an indicator of the size of our portfolio of policies as well as an indicator of expected earned premium over the coming 12 months.

Premiums in force is not a forecast of future revenue nor is it a reliable indicator of revenue expected to be earned in any given period.

We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of growth in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals.

Gross Written Premium

We define gross written premium, as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations.

Gross written premiums includes direct premiums and assumed premiums.

We began assuming premium during the third quarter of 2021 in connection with our entry into an arrangement with a fronting carrier in Texas;

therefore, there is no impact to this key performance indicator for any prior periods.

We view gross written premium as an important metric because it is the metric that most closely correlates with our growth in gross earned premium.

We use gross written premium, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of fluctuations in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals.

Gross Premiums Written

We define gross premiums written, as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations.

Gross premiums written includes direct premiums and assumed premiums.

We view gross premiums written as an important metric because it is the metric that most closely correlates with changes in gross premiums earned.

We use gross premiums written, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

Additionally, premiums ceded to reinsurers can change significantly based on the type and mix of reinsurance structures we use, and, as such, we have the optionality to fully retain the premiums from customers acquired in the future.

Gross Earned Premium

We define gross earned premium as the amount of gross premium that was earned during the period.

Gross Premiums Earned

We define gross premiums earned as the amount of gross premium that was earned during the period.

Premiums are earned over the period in which insurance protection is provided, which is typically six months.

Gross earned premium includes direct premiums and assumed premiums.

We began assuming premium during the third quarter of 2021 in connection with our entry into an arrangement with a fronting carrier in Texas;

therefore, there is no impact to this key performance indicator for any prior periods.

We view gross earned premium as an important metric as it allows us to evaluate our growth prior to the impacts of reinsurance.

Gross premiums earned includes direct premiums and assumed premiums.

We view gross premiums earned as an important metric as it allows us to evaluate our premium levels prior to the impacts of reinsurance.

It is the primary driver of our consolidated GAAP revenues.

As with gross written premium, we use gross earned premium, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

As with gross premiums written, we use gross premiums earned, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.

Gross Profit/(Loss)

We define gross profit/(loss) as total revenue minus net loss, and LAE expense and other insurance expense (benefit) inclusive of depreciation and amortization.

We define gross profit/(loss) as total revenue minus net loss and LAE and other insurance (benefit) expense.

We view gross profit/(loss) as an important metric because we believe it is informative of the financial performance of our core insurance business.

Gross profit/(loss) margin is equal to gross profit/(loss) divided by revenue.

Adjusted Gross Profit/(Loss)

We define adjusted gross profit/(loss), a non-GAAP financial measure, as gross profit/(loss) excluding net investment income, net realized gains (losses) on investments, report costs, Personnel Costs, allocated Overhead, licenses, professional fees and other expenses, which are included in other insurance (benefit) expense.

After these adjustments, the resulting calculation is inclusive of only those variable costs of revenue incurred on the successful acquisition of business.

We view adjusted gross profit/(loss) as an important metric because we believe it measures our progress towards profitability for our core insurance business.

The ratio of adjusted gross profit/(loss) to total revenue is equal to adjusted gross profit/(loss) divided by total revenue.

See the section titled “— Non-GAAP Financial Measures” for a reconciliation of total revenue to adjusted gross profit/(loss).

Direct Contribution

We define direct contribution, a non-GAAP financial measure, as adjusted gross profit/(loss) excluding ceded earned premium, ceded loss and LAE, and net ceding commission and other.

Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by related sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance ceded which are included in other insurance (benefit) expense.

After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business, but exclusive of net ceding commission, ceded loss and LAE and other impacts of reinsurance ceded.

We define direct contribution, a non-GAAP financial measure, as gross profit/(loss) excluding net investment income, net realized gains (losses) on investments, report costs, salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based compensation expense, allocated overhead, licenses, net commissions, professional fees and other expenses, ceded earned premium, ceded loss and LAE, and net ceding commission and other.

Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by amortization of excess ceding commission, and other impacts of reinsurance ceded which are included in other insurance (benefit) expense.

After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business.

We view direct contribution as an important metric because we believe it measures progress towards the profitability of our total policy portfolio prior to the impact of reinsurance.

The ratio of direct contribution to total revenue is equal to direct contribution divided by total revenue.

See the section titled “— Non-GAAP Financial Measures” for a reconciliation of total revenue to direct contribution.

Ratio of Adjusted Gross Profit/(Loss) to Gross Earned Premium

The ratio of adjusted gross profit/(loss) to gross earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other.

We rely on this measure, which supplements our gross profit/(loss) ratio as calculated in accordance with GAAP, because it provides management with insight into our underlying profitability trends with respect to our customer base.

We use gross earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital-light choices related to our reinsurance programs.

As discussed above in gross written premium, this key performance indicator has been updated to include assumed earned premiums in the calculation of ratio of adjusted gross profit/(loss) to gross earned premium during the third quarter of 2021.

There is no impact to any prior periods for this change.

Years Ended December 31,

2021 2020 2019

(dollars in millions)

adjusted gross profit/(loss) $ (3.3) $ 21.0 $ (54.2)

total gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of Direct Contribution to Gross Earned Premium

The ratio of direct contribution to gross earned premium measures the relationship between the underlying business volume and gross economic benefit generated by our underwriting operations, on the one hand, and our underlying profitability trends, on the other, without contemplating the impacts of reinsurance.

We rely on this measure, which supplements our gross margin as calculated in accordance with GAAP, because it provides

management with insight into our underlying profitability trends with respect to our total policy portfolio.

We use gross earned premium as the denominator in calculating this ratio because it reflects business volume free of elective capital-light cession or commission structures choices from our reinsurance ceded programs.

As discussed above in gross written premium, this key performance indicator has been updated to include assumed earned premiums in the calculation of ratio of direct contribution to gross earned premium during the third quarter of 2021.

There is no impact to any prior periods for this change.

Years Ended December 31,

2021 2020 2019

(dollars in millions)

direct contribution $ 8.1 $ 18.9 $ (57.4)

total gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

Adjusted EBITDA

We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, warrant compensation expense, restructuring charges, and write-off of prepaid marketing expense and reclassifications of certain sales and marketing expenses, and related legal and other fees, net of anticipated insurance recovery.

After these adjustments, the resulting calculation represents expenses directly attributable to our operating performance.

We use adjusted EBITDA as an internal performance measure in the management of our operations because we believe it provides management and other users of our financial information useful insight into our results of operations and underlying business

Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define adjusted EBITDA differently.

See the section titled “— Non-GAAP Financial Measures” for a reconciliation of net loss to adjusted EBITDA.

Net Loss and LAE Ratio

We define net loss and LAE ratio expressed as a percentage, as the ratio of net loss and LAE to net premiums earned.

We view net loss and LAE ratio as important metric because it allows us to evaluate loss trends as a percentage of net premiums and believe it is useful for investors to evaluate those separately from other operating expenses.

Net Expense Ratio

We define net expense ratio expressed as a percentage, as the ratio of all operating expenses less loss and LAE and less fee income to net premiums earned.

We view net expense ratio as important because it allows us to analyze our expense and acquisition trends, net of fee income, and allows investors to evaluate these expenses exclusive of our loss and LAE expenses.

Net Combined Ratio

We define net combined ratio expressed as a percentage, as the sum of net loss and LAE ratio and net expense ratio.

We view net combined ratio as important because it allows us to analyze our underwriting result trends and is a key indicator of overall profitability and health of the overall business.

We believe it is useful to investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance.

A net combined ratio under 100% indicates an underwriting profit, while a net combined ratio greater than 100% indicates an underwriting loss.

Gross Loss Ratio

We define gross loss ratio expressed as a percentage, as the ratio of gross losses to gross earned premium.

We define gross loss ratio expressed as a percentage, as the ratio of gross losses to gross premiums earned.

Gross loss ratio excludes LAE.

We view gross loss ratio as an important metric because it allows us to evaluate incurred losses and LAE separately prior to the impact of reinsurance.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed losses and assumed earned premiums in the calculation of gross loss ratio beginning during the third quarter of 2021.

There is no impact to any prior periods for this change.

Gross LAE Ratio

We define gross LAE ratio expressed as a percentage, as the ratio of gross LAE to gross earned premium.

We define gross LAE ratio expressed as a percentage, as the ratio of gross LAE to gross premiums earned.

We view gross LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately.

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therefore, we actively monitor LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed LAE and assumed earned premium in the calculation of gross LAE ratio beginning during the third quarter of 2021.

There is no impact to any prior periods from this change.

Gross Expense Ratio

We define gross expense ratio expressed as a percentage as the ratio of gross operating expenses less loss and LAE and less fee income to gross premiums earned.

We view gross expense ratio as important because it allows us to analyze the underlying expense base of the business and establish expense targets, prior to the impact of reinsurance.

We believe gross expense ratio is useful for investors to further evaluate business health and performance, prior to the impact of reinsurance.

Gross Combined Ratio

We define gross combined ratio expressed as a percentage as the sum of the gross loss ratio, gross LAE ratio and gross expense ratio.

We view gross combined ratio as important because it allows us to evaluate financial performance and establish targets that we believe more closely reflects the underlying performance and profitability of the business prior to reinsurance.

Further, we believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our gross underwriting performance.

A gross combined ratio under 100% indicates an underwriting profit while a gross combined ratio greater than 100% indicates an underwriting loss, prior to the impact of reinsurance.

Gross Accident Period Loss Ratio

Gross accident period loss ratio, expressed as a percentage, represents all losses and claims expected to arise from insured events that occurred during the applicable period regardless of when they are reported and finally settled divided by gross earned premiums for the same period.

Changes to our loss reserves are the primary driver of the difference between our gross accident period loss ratio and gross loss ratio.

We believe that gross accident period loss ratio is useful in evaluating expected losses prior to the impact of reinsurance.

As discussed above in gross written premium, this key performance indicator has been changed to include assumed accident period losses and assumed earned premium in the calculation of gross accident period loss ratio beginning during the third quarter of 2021.

There is no impact to any prior periods from this change.

Components of Our Results of Operations

We generate revenue primarily from the sale of auto insurance policies within the United States and, to a lesser extent, from the sale of renters insurance policies.

We have agency operations that generate commission revenue by selling homeowners insurance policies on behalf of a third-party insurance company.

We distribute website and app policy inquiry leads in geographies where we do not have a presence to third parties in exchange for fee revenue.

We also generate revenue through fee income from our customers paying on installment and from net investment income earned on our investment portfolio.

We generate revenue from net premiums earned, net investment income, net realized gains on investments, fee income and other income.

Net Premiums Earned

Premiums written are deferred and earned pro rata over the policy period.

Net premiums earned represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.

Net premiums earned represents the earned portion of our gross premiums written, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.

We expect net premiums earned to decrease in the short-term as our policies in force decrease continues to outpace premiums written from new business.

In the near-term, we expect to grow new writings with our embedded products and greater average premiums per policy to generate growth in net premiums earned.

Net Investment Income

Net investment income represents interest earned from our fixed maturity and short-term investments and cash and cash equivalents less investment expenses, unrealized gains from our private equity investments, and impairment of our Low Income Housing Tax Credits, or LIHTC, project investments.

Net investment income is directly correlated with the overall size of our investment portfolio, market level of interest rates, changes in fair value of our private equity investments and utilization of premium tax credits generated by our LIHTC investment.

Net investment income will vary with both the size of our investment portfolio, market returns and the investment strategy.

Net investment income represents interest earned from our fixed maturity and short-term investments and cash and cash equivalents and unrealized gains from our private equity investments less investment expenses.

Net investment income is directly correlated with the overall size of our investment portfolio, market level of interest rates and changes in fair value of our private equity investments.

Net investment income will vary with the size and composition of our investment portfolio, market returns and the investment strategy.

Net Realized Gains on Investments

Net realized gains on investments represents the net positive difference between the amount received by us on the sale of an investment as compared to the investment’s cost basis.

Net realized gains on investments represents the difference between the amount received by us on the sale of an investment as compared to the investment’s amortized cost basis.

For those policyholders who pay premiums on an installment basis, we charge a flat fee for each installment related to the additional administrative costs associated with processing more frequent billing.

We recognize this fee income in the period in which we process each installment.

Other income primarily comprises revenue earned from distributing website and app policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead;

commissions earned for homeowners policies placed with a third-party insurance company where we have no exposure to the insured risk, recognized on the effective date of the associated policy;

Other income is primarily comprised of revenue earned from distributing website and app policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead;

commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy;

and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed.

Operating Expenses

Our operating expenses consist of loss and LAEs, sales and marketing, other insurance expense (benefit), technology and development, and general and administrative expenses.

Our operating expenses consist of loss and LAE, sales and marketing, other insurance (benefit) expense, technology and development, and general and administrative expenses.

Loss and Loss Adjustment Expenses

Loss and LAE include the costs incurred for claims, payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims, net of amounts ceded to reinsurers.

Loss and LAE include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE.

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The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases.

Loss and LAE is net of amounts ceded to reinsurers.

We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth.

Loss and LAE are net of amounts ceded to reinsurers.

We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity to write more business.

These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks.

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Various other expenses incurred during claims processing are considered LAE.

These amounts include claims salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based

compensation expense, or Personnel Costs;

These amounts include related salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based compensation expense, or Personnel Costs, for claims related employees;

software expense;

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Sales and Marketing

Sales and marketing expense includes spend related to performance and embedded channels, channel media, advertising, branding, public relations, consumer insights and referral fees.

These expenses also include related Personnel Costs, Overhead and warrant compensation expense related to our embedded channel.

Sales and marketing expense includes spending related to performance and embedded channels, channel media, advertising, branding, public relations, sponsorship, consumer insights and referral fees.

These expenses also include related Personnel Costs, Overhead and certain warrant compensation expense related to our embedded channel.

We incur sales and marketing expenses for all product offerings.

Sales and marketing are expensed as incurred.

We plan to continue investing in and diversifying our marketing channels to attract and acquire new customers, increase our brand awareness, and expand our product offerings.

Certain warrant compensation expense is recognized on a pro-rata basis considering progress toward completing Carvana’s online buying platform, or the Integrated Platform, under the Carvana commercial agreement.

We plan to continue investing in and diversifying our marketing channels, including costs incurred related to our embedded channel, to attract and acquire new customers, increase our brand awareness, and expand our product offerings within certain markets.

We expect that in the long-term, our sales and marketing will decrease as a percentage of revenue as the proportion of renewals to our total business increases.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance expense (benefit) also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy.

Other insurance expense (benefit) is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

Other Insurance (Benefit) Expense

Other insurance (benefit) expense includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, certain warrant compensation expense related to our embedded channel, and Personnel Costs and Overhead related to actuarial and certain data science activities.

Other insurance (benefit) expense also includes amortization of deferred acquisition costs like certain commissions, premium taxes, and report costs related to the successful acquisition of a policy.

Other insurance (benefit) expense is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned.

These expenses are also recognized net of ceding commissions earned.

Certain warrant compensation expense is recognized on a pro-rata basis for policies originated from the Integrated Platform towards milestones as defined under the Carvana commercial agreement.

Technology and Development

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Technology and development is expensed as incurred, except for development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life.

We expect technology and development to increase in absolute dollars and as a percentage of total revenue as we continue to devote significant resources to enhance our customer experience and continually improve our integrated technology platform.

Over time, we expect technology and development to decrease as a percentage of revenue.

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and depreciation expense for computers, furniture and other fixed assets;

and restructuring costs associated with the involuntary workforce reductions.

Restructuring costs include severance, benefits, share-based compensation, employee compensation expense, dependent upon continuous employment for certain employees, and related employee costs, real estate exit costs and software costs.

General and administrative expenses are expensed as incurred.

We expect general and administrative expenses to continue to increase in the near term, both in absolute dollars and as a percentage of total revenue, and then decrease as a percentage of revenue over time.

We expect general and administrative expenses to decrease as a percentage of total revenue over time.

Non-Operating Expenses

Interest Expense

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therefore, we include these expenses below operating expenses.

Interest expense primarily relates to interest incurred on our long-term debt, certain fees that are expensed as incurred and the amortization of debt issuance costs.

Interest expense primarily relates to interest incurred on our long-term debt, certain fees that are expensed as incurred and amortization of debt issuance costs.

In addition, changes in the fair value of warrant liabilities that were associated with our long-term debt are recorded as interest expense.

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Sales and marketing 48.0 15.5 % 270.2 78.2 % (222.2) (82.2) %

Other insurance expense (benefit) 5.0 1.4 % (1.8) (0.5) % 6.8 377.8 %

Other insurance (benefit) expense (8.0) (2.6) % 5.0 1.4 % (13.0) (260.0) %

Technology and development 55.5 17.9 % 65.5 19.0 % (10.0) (15.3) %

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Total operating expenses 573.9 184.7 % 830.6 240.5 % (256.7) (30.9) %

Operating loss (485.2) (140.5) % (285.3) (82.3) % (199.9) N.M.

Operating loss (263.1) (84.7) % (485.2) (140.5) % 222.1 (45.8) %

Interest expense (34.6) (11.1) % (20.0) (5.8) % (14.6) 73.0 %

Loss on early extinguishment of debt — — % (15.9) (4.6) % 15.9 (100.0) %

Loss before income tax expense (521.1) (150.9) % (363.0) (104.7) % (158.1) N.M.

Loss before income tax expense (297.7) (95.8) % (521.1) (150.9) % 223.4 (42.9) %

Income tax expense — — % — — % — — %

Net loss (521.1) (150.9) % (363.0) (104.7) % (158.1) N.M.

Other comprehensive (loss) income:

Changes in net unrealized (losses) gains on investments (5.2) (1.5) % 5.0 1.5 % (10.2) (204.0) %

Comprehensive loss $ (526.3) (152.4) % $ (358.0) (103.2) % $ (168.3) N.M.

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- Percentage change not meaningful

Net loss (297.7) (95.8) % (521.1) (150.9) % 223.4 (42.9) %

Other comprehensive loss:

Changes in net unrealized losses on investments (6.2) (2.0) % (5.2) (1.5) % (1.0) 19.2 %

Comprehensive loss $ (303.9) (97.8) % $ (526.3) (152.4) % $ 222.4 (42.3) %

Net Premiums Earned

Net premiums earned decreased $24.4 million, or 7.9%, to $285.9 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily due to greater cessions of gross earned premium as a result of a change in reinsurance structure partially offset by growth in gross earned premium between the periods.

During the years ended December 31, 2021 and 2020, we ceded approximately 56.9% and 46.7% of our gross earned premiums to third-party reinsurers, respectively.

The change in ceding percentage between the periods was driven by our evolving approach to our reinsurance structure, in an effort to produce a capital-light model with reinsurance terms available to us in the market.

The following table presents gross written premium, ceded written premium, net written premium, gross earned premium, ceded earned premium and net earned premium for the years ended December 31, 2021 and 2020:

The decrease was primarily due to lower policies in force throughout the year as a result of reduced marketing expenditures, partially offset by an increase in premium per policy driven by rate actions.

During the years ended December 31, 2022 and 2021, we ceded approximately 55.6% and 56.9% of our gross premiums earned to third-party reinsurers, respectively.

The slight change in ceding percentage between the periods was driven by retaining a marginally larger share of our overall book of business.

The following table presents gross premiums written, ceded premiums written, net premiums written, gross premiums earned, ceded premiums earned and net premiums earned for the years ended December 31, 2022 and 2021:

Years Ended December 31,

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(dollars in millions)

Gross written premium $ 742.6 $ 616.8 $ 125.8 20.4 %

Ceded written premium (397.3) (378.0) (19.3) 5.1 %

Net written premium 345.3 238.8 106.5 44.6 %

Gross earned premium 719.6 605.2 114.4 18.9 %

Ceded earned premium (409.3) (282.7) (126.6) 44.8 %

Net earned premium $ 310.3 $ 322.5 $ (12.2) (3.8) %

Gross earned premium growth was primarily due to a 20.4% increase in gross written premium from deeper market penetration across our U.S.

state footprint.

We also saw a 7.1% increase in premiums per policy for automobile insurance primarily resulting from pricing increases in several states between the periods.

Net Realized Gains on Investments

Net realized gains on investments increased $2.1 million, or 700.0%, to $2.4 million for the year ended December 31, 2021 compared to 2020.

The increase was due to proceeds received from sales of investments in excess of investments’ cost bases.

Fee income increased $3.5 million, or 20.1%, to $20.9 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased customer volumes and an increase in customers paying in installments.

Other income increased $5.6 million, or 466.7%, to $6.8 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased fee revenue from distributing web and app policy inquiry leads in geographies where we do not have a presence to third parties.

Gross premiums written $ 600.0 $ 742.6 $ (142.6) (19.2) %

Ceded premiums written (331.2) (397.3) 66.1 (16.6) %

Net premiums written 268.8 345.3 (76.5) (22.2) %

Gross premiums earned 643.6 719.6 (76.0) (10.6) %

Ceded premiums earned (357.7) (409.3) 51.6 (12.6) %

Net premiums earned $ 285.9 $ 310.3 $ (24.4) (7.9) %

The decrease in gross premiums earned was primarily due to lower gross premiums written as a result of reducing marketing expenditures.

This decrease was partially offset by a 21.3% increase in premiums per policy for automobile insurance primarily attributable to rate actions.

Fee income decreased $4.4 million, or 21.1%, to $16.5 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily due to a decrease in installment fees due to lower policies in force.

Other income decreased $5.1 million, or 75.0%, to $1.7 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily due to a $4.9 million reduction in fee revenue from distributing web and app policy inquiry leads to third parties as a result of reducing marketing expenditures.

Operating Expenses

Loss and Loss Adjustment Expenses

Loss and LAE increased $29.5 million, or 8.1%, to $392.3 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to higher claims volume, increased claim severity and greater

reserves related to the growth in policies in force, partially offset by higher cessions of incurred losses, net of higher loss corridor reserves due to an increase in our loss ratio, as a result of a change in our reinsurance structure.

Gross accident period loss ratios increased to 87.9% from 76.2% for the years ended December 31, 2021 and 2020, respectively.

The change in the loss ratios was driven by higher loss costs due to elevated claims frequency as miles driven during the period exceeded pre-COVID-19 levels and average severity per claim for material damage increased as replacement parts and higher used car prices outpaced expected inflation.

The increases in loss costs were partially offset by growth in average premium per policy.

In addition, loss and LAE for the year ended December 31, 2021 includes a decrease in incurred losses and LAE attributable to accident periods prior to 2021 of $13.6 million.

This decrease is primarily attributed to lower-than-expected reported losses on bodily injury claims from accident year 2020.

In addition, recoveries from subrogation and salvage from 2020 material damage claims were higher than estimated.

Loss and LAE decreased $41.3 million, or 10.5%, to $351.0 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily due to lower policies in force for the year ended December 31, 2022 compared to 2021.

Gross accident period loss ratios decreased to 80.9% from 88.7% for the years ended December 31, 2022 and 2021, respectively.

The change in the loss ratios was driven by growth in average premium per policy primarily attributable to rate actions and improved tenure mix as our book of business matures.

This was offset by higher loss costs from increased severity per claim due to inflation, as the industry experienced higher replacement parts cost and growth in used car values.

We experienced an 11% increase in severity per claim and 6% decrease in claim frequency for the year ended December 31, 2022 compared to 2021.

The claim severity and frequency estimates are based on bodily injury, collision, and property damage coverages.

Sales and Marketing

Sales and marketing increased $130.5 million, or 93.4%, to $270.2 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily due to increased investment in performance marketing of $73.9 million and branding and advertising of $35.6 million as we responded to changes in consumer behavior and increased customer acquisition and advertising campaigns in digital channels on the part of our competitors.

Performance marketing spend declined during the second half of 2021 as we navigated the exposure to significant cost increases we experienced earlier in the year and responded to the elevated loss cost environment.

We have focused on diversifying our marketing investments to reach more customers and drive profitable growth in the states in which we operate.

Additionally, marketing spend was lower through much of the year ended December 31, 2020 due to uncertainty surrounding the ongoing COVID-19 pandemic.

We also recognized $8.8 million of warrant compensation expense related to Carvana’s progress toward an integrated automobile insurance solution for Carvana’s car buying platform, or Integrated Platform.

See Note 11, “Shared-Based Compensation,” in the Notes to Consolidated Financial Statements for further details on these warrants.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) increased $6.8 million, or 377.8%, to an expense of $5.0 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily driven by $6.7 million in greater underwriting costs, premium taxes and payment processing fee expense due to growth in the core insurance business and greater premiums collected on an installment basis and $5.5 million in higher Personnel Costs and Overhead due to headcount growth.

This was partially offset by a $2.7 million decrease in bad debt expense primarily related to delayed cancellation of policies for non-payment stemming from compulsory state issued notices in reaction to the COVID-19 pandemic during 2020 and a $2.4 million increase in ceding commission contra-expense net of sliding scale commission expense due to reinsurance structure changes.

Sales and marketing decreased $222.2 million, or 82.2%, to $48.0 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily due to a decline in performance marketing of $175.9 million and branding and advertising of $39.4 million.

The reduction in sales and marketing expense is due to a shift in direct marketing strategy in response to changing macroeconomic factors and competitive environment.

This was partially offset by $5.4 million increase in content development as we focus on diversifying our marketing channels.

Other Insurance (Benefit) Expense

Other insurance (benefit) expense decreased $13.0 million, or 260.0%, to a benefit of $8.0 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily driven by a $22.8 million decrease in underwriting costs and premium taxes and a $3.5 million decrease in premium write-offs primarily attributable to a decline in gross premiums written.

In addition, we experienced a $3.1 million decrease in personnel costs as a result of a decrease in headcount, primarily attributable to the involuntary workforce reductions.

This was partially offset by a $10.8 million decrease in earned ceding commission contra-expense due to a decrease in gross premiums written and a $5.7 million increase in Carvana warrant expense as a result of policies originating from the Integrated Platform.

Technology and Development

Technology and development increased $12.6 million, or 23.8%, to $65.5 million for the year ended December 31, 2021 compared to 2020.

The increase was primarily driven by incremental investments of $11.5 million in Personnel and Overhead costs as a result of headcount growth of engineering and product teams.

Technology and development decreased $10.0 million, or 15.3%, to $55.5 million for the year ended December 31, 2022 compared to 2021.

The decrease was primarily driven by a $9.7 million decrease in personnel and overhead related costs as a result of a decrease in headcount, primarily attributable to the involuntary workforce reductions.

General and Administrative

General and administrative increased $29.8 million, or 30.5%, to $127.4 million for the year ended December 31, 2022 compared to 2021.

The increase was primarily driven by a $14.6 million increase in Personnel and Overhead costs across finance, legal and administrative teams as a result of an increase in headcount.

In addition, we incurred a $11.1 million increase in professional service expenses to support corporate functions and $1.5 million in higher depreciation and amortization as result of write-offs and more fixed assets in use.

This was partially offset by a decrease in share-based compensation expense of $9.7 million for the year ended December 31, 2021 compared to 2020, primarily related to the completion of a secondary tender offer for common stock in 2020 by an investor.

The increase was driven by $18.6 million of restructuring costs related to the involuntary workforce reductions and a $9.5 million increase in personnel costs primarily attributable to share-based compensation expenses relating to our equity incentive plan.

This was partially offset by a decrease of $4.9 million in professional services and $2.7 million in rent expense as we focused on materially reducing our fixed expenses in 2022 in our drive towards profitability.

In addition, we recognized write-off of prepaid marketing expense and reclassifications of certain sales and marketing expenses to general and administrative expenses of $10.2 million, legal and other fees of $1.2 million, partially offset by an anticipated insurance recovery of $1.9 million, related to the purported misappropriation of funds by a former senior marketing employee.

Non-Operating Expenses

Interest Expense

Interest expense decreased $57.7 million, or 74.3%, to $20.0 million for the year ended December 31, 2021 compared to 2020.

The decrease was primarily due to the warrant fair value adjustment of $54.7 million that we recognized during 2020.

In addition, there was a $2.9 million decrease in amortization of discount and debt and warrants issuance costs primarily attributable to debt modifications and lower average debt balance.

Interest expense increased $14.6 million, or 73.0%, to $34.6 million for the year ended December 31, 2022 compared to 2021.

The increase was primarily due to an increase in debt interest expense as a result of higher average outstanding debt and a greater average interest rate for the year ended December 31, 2022 compared to 2021.

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt increased $15.9 million, or 100.0%, to $15.9 million for the year ended December 31, 2021 compared to 2020.

The increase was driven by $15.9 million of accelerated amortization of unamortized discount and debt and warrant issuance costs from the extinguishment of our Term Loan B.

Other Comprehensive (Loss) Income

Changes in Net Unrealized (Losses) Gains on Investments

Changes in net unrealized (losses) gains on investments decreased $10.2 million, or 204.0%, to a loss of $5.2 million for the year ended December 31, 2021 compared to 2020.

The decrease was primary driven by changes of $8.1 million in net unrealized losses on investments and $2.1 million in net realized gains reclassified to net loss.

Loss on early extinguishment of debt decreased $15.9 million, or 100.0%, to zero for the year ended December 31, 2022 compared to 2021.

The decrease was driven by $15.9 million of accelerated amortization of unamortized discount and debt and warrant issuance costs from the extinguishment of our $100.0 million term loan, or Term Loan B, which was early extinguished in 2021.

Comparison of the Years Ended December 31, 2021 and 2020

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Net realized gains on investments 2.4 0.7 % 0.3 0.1 % $ 2.1 700.0 %

Fee and other income 18.6 5.3 % 9.7 3.3 % $ 8.9 91.8 %

Fee income 20.9 6.1 % 17.4 5.0 % $ 3.5 20.1 %

Other income 6.8 2.0 % 1.2 0.3 % $ 5.6 466.7 %

Total revenue 345.4 100.0 % 346.8 100.0 % (1.4) (0.4) %

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Sales and marketing 270.2 78.2 % 139.7 40.3 % 130.5 93.4 %

Other insurance (benefit) expense (1.8) (0.5) % 52.3 18.0 % (54.1) (103.4) %

Other insurance expense (benefit) 5.0 1.4 % (1.8) (0.5) % 6.8 377.8 %

Technology and development 65.5 19.0 % 52.9 15.3 % 12.6 23.8 %

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Total operating expenses 830.6 240.5 % 632.1 182.3 % 198.5 31.4 %

Operating loss (285.3) (82.3) % (260.1) (89.6) % (25.2) N.M.

Operating loss (485.2) (140.5) % (285.3) (82.3) % (199.9) 70.1 %

Interest expense (20.0) (5.8) % (77.7) (22.4) % 57.7 (74.3) %

Loss before income tax expense (363.0) (104.7) % (282.4) (97.3) % (80.6) N.M.

Loss on early extinguishment of debt (15.9) (4.6) % — — % (15.9) 100.0 %

Loss before income tax expense (521.1) (150.9) % (363.0) (104.7) % (158.1) 43.6 %

Income tax expense — — % — — % — — %

Net loss (363.0) (104.7) % (282.4) (97.3) % (80.6) N.M.

Other comprehensive income:

Changes in net unrealized gains on investments 5.0 1.5 % 0.6 0.2 % 4.4 N.M.

Comprehensive loss $ (358.0) (103.2) % $ (281.8) (97.1) % $ (76.2) N.M.

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- Percentage change not meaningful

Net loss (521.1) (150.9) % (363.0) (104.7) % (158.1) 43.6 %

Other comprehensive (loss) income:

Changes in net unrealized (losses) gains on investments (5.2) (1.5) % 5.0 1.5 % (10.2) (204.0) %

Comprehensive loss $ (526.3) (152.4) % $ (358.0) (103.2) % $ (168.3) 47.0 %

The December 31, 2021 and 2020 results of operations discussion can be found in Part II, Item 7, “Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2021.

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The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results.

In addition, adjusted gross profit/(loss) and direct contribution should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address.

In addition, direct contribution and adjusted EBITDA should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address.

We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions.

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(1) monitor and evaluate the performance of our business operations and financial performance;

(2) facilitate internal comparisons of the historical operating

performance of our business operations;

(2) facilitate internal comparisons of the historical operating performance of our business operations;

(3) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels;

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and (6) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.

Adjusted Gross Profit/(Loss)

For the definition of adjusted gross profit/(loss) and why management believes this measure provides useful information to investors, see “— Key Performance Indicators.”

Direct Contribution

For the definition of direct contribution and why management believes this measure provides useful information to investors, see “— Key Performance Indicators.”

The following table provides a reconciliation of total revenue to adjusted gross profit/(loss) and direct contribution for the years ended December 31, 2021, 2020 and 2019:

The following table provides a reconciliation of total revenue to direct contribution for the years ended December 31, 2022, 2021 and 2020:

Years Ended December 31,

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Loss and loss adjustment expenses (351.0) (392.3) (362.8)

Other insurance (expense) benefit (5.0) 1.8 (52.3)

Other insurance benefit (expense) 8.0 (5.0) 1.8

Gross profit/(loss) (32.2) (51.9) (14.2)

Gross margin (15.0) % (4.1) % (28.8) %

Net investment income (6.2) (5.0) (5.4)

Net realized gains on investments (0.5) (2.4) (0.3)

Adjustments from other insurance (expense) benefit (1)

Adjustments from other insurance benefit (expense) (1)

38.4 56.0 40.9

Adjusted gross profit/(loss) (3.3) 21.0 (54.2)

Ceded earned premium 409.3 282.7 77.6

Ceded premiums earned 357.7 409.3 282.7

Ceded loss and loss adjustment expenses (243.7) (302.5) (194.8)

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Direct contribution $ 27.6 $ 8.1 $ 18.9

Gross earned premium $ 719.6 $ 605.2 $ 352.9

Ratio of adjusted gross profit/(loss) to total revenue

______________

Ratio of adjusted gross profit/(loss) to gross earned premium (0.5) % 3.5 % (15.4) %

Ratio of direct contribution to total revenue 2.3 % 5.4 % (19.8) %

Ratio of direct contribution to gross earned premium 1.1 % 3.1 % (16.3) %

(1) Adjustments from other insurance benefit (expense) includes report costs, personnel costs, allocated overhead, licenses, net commissions, professional fees and other .

(2) Net ceding commission and other is comprised of ceding commissions received in connection with reinsurance ceded, partially offset by amortization of excess ceding commission and other impacts of reinsurance ceded .

Adjusted EBITDA

For the definition of adjusted EBITDA and why management believes this measure provides useful information to investors, see “— Key Performance Indicators.” The following table provides a reconciliation of net loss to adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020:

Years Ended December 31,

2022 2021 2020

(1) Adjustments from other insurance expense includes report costs, personnel costs, allocated overhead, licenses, professional fees and other .

(2) Net ceding commission and other is comprised of ceding commissions received in connection with reinsurance ceded, partially offset by sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance ceded .

(dollars in millions)

Net loss $ (297.7) $ (521.1) $ (363.0)

Interest expense 31.9 14.4 69.1

Income tax expense — — —

Depreciation and amortization 12.1 16.6 15.6

Share-based compensation 25.2 19.3 3.7

Tender offer — — 25.1

Loss on early extinguishment of debt — 15.9 —

Warrant compensation expense 14.5 8.8 —

Restructuring costs (1)

Write-off (2)

Adjusted EBITDA $ (185.9) $ (446.1) $ (249.5)

______________

(1) Restructuring costs consist of severance, benefits, related costs and real estate exit costs comprising of accelerated amortization of certain right-of-use assets, leasehold improvements, furniture and fixtures.

This includes $5.3 million of share-based compensation for the year ended December 31, 2022.

This also includes $1.7 million of depreciation and amortization for the year ended December 31, 2022.

For further information on restructuring costs, see Note 10, “Restructuring Costs,” in the Notes to Consolidated Financial Statements.

(2) Write-off of prepaid marketing expense and reclassifications of certain sales and marketing expenses to general and administrative expenses of $10.2 million, legal and other fees of $1.2 million, partially offset by an anticipated insurance recovery of $1.9 million related to the purported misappropriation of funds by a former senior marketing employee.

Liquidity and Capital Resources

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We are organized as a holding company, but our primary operations are conducted by two of our wholly owned insurance subsidiaries, Root Insurance Company, an Ohio-domiciled insurance company, and Root Property & Casualty Insurance Company, a Delaware-domiciled insurance company.

The payment of dividends by our insurance subsidiaries is subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws.

The payment of dividends by our insurance subsidiaries is subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware.

To date, our insurance subsidiaries have not paid any dividends and as of December 31, 2022, they were not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director.

As our insurance subsidiaries continue to grow, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly.

If our insurance subsidiaries’ business grows, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly.

To comply with these regulations, we may be required to maintain capital in the insurance subsidiaries that we would otherwise invest in our growth and operations.

At December 31, 2021, our insurance subsidiaries maintained a risk-based capital level that is in excess of an amount that would require any corrective actions on our part.

As of December 31, 2022, our insurance subsidiaries maintained a risk-based capital level that is in excess of an amount that would require any corrective actions on our part.

Our wholly owned, Cayman Islands-based reinsurance subsidiary, Root Reinsurance Company, Ltd., or Root Re, maintains a Class B(iii) insurer license under Cayman Islands Monetary Authority, or CIMA.

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Financing Arrangements

On January 26, 2022, we closed on a $300.0 million five-year term loan with BlackRock Financial Management, Inc., or BlackRock.

In August 2022, a subcommittee of our board of directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18, which became effective on August 12, 2022.

Accordingly, all stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented.

On January 26, 2022, we closed on a $300.0 million five-year term loan, or Term Loan.

The maturity of this Term Loan is January 27, 2027.

Interest is payable quarterly and is determined on a floating interest rate calculated on the Secured Overnight Financing Rate, or SOFR, plus 9%.

Concurrently with the term loan, we also issued to the lender warrants to purchase 5,664,193 shares of Class A common stock.

Under certain contingent scenarios, BlackRock may also receive additional warrants to purchase shares of Class A common stock equal to 1.0% of the aggregate number of issued and outstanding shares of our common stock on a fully-diluted basis as of the triggering date.

Interest is payable quarterly and is determined on a floating interest rate calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0% floor, plus 9%, plus 0.26161% per annum.

Concurrently with the Term Loan, we also issued to the lender warrants to purchase approximately 0.3 million shares of Class A common stock.

Under certain contingent scenarios, the lender may also receive additional warrants to purchase shares of Class A common stock equal to 1.0% of the aggregate number of issued and outstanding shares of our Class A common stock on a fully-diluted basis as of the triggering date.

In November 2021, we repaid the outstanding Term Loan B principal balance of $100.0 million and accrued interest, including paid-in-kind, or PIK interest, and fees of $20.9 million.

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We also issued Carvana eight tranches of warrants to purchase shares of our Class A common stock.

In connection with the Investment Agreement, we incurred issuance costs of $19.6 million, $9.0

million of which are contingent upon the success of the Investment Agreement as measured by achievement of certain warrant vesting milestones.

In October 2021, upon maturity of our Term Loan A and expiration of the revolving loan, we repaid the outstanding Term Loan A principal balance of $98.8 million and accrued interest and fees of $0.2 million.

In connection with the Investment Agreement, we incurred issuance costs of $19.6 million, $9.0 million of which are contingent upon the success of the Investment Agreement as measured by achievement of certain warrant vesting milestones.

In October 2021, upon maturity of our $100 million term loan, or Term Loan A, and expiration of the revolving loan, we repaid the outstanding Term Loan A principal balance of $98.8 million and accrued interest and fees of $0.2 million.

In October 2020, we completed our initial public offering, or IPO, which resulted in the issuance and sale of 1.3 million shares of Class A common stock at the IPO price of $486.00.

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As of December 31, 2022, we had $762.1 million in cash and cash equivalents, of which $559.2 million was held outside of regulated insurance entities.

We also had $129.9 million in available-for-sale fixed maturity securities.

We also had $128.8 million in marketable securities.

Our cash and cash equivalents primarily consist of bank deposits and money market funds.

Our available-for-sale fixed maturity securities consist of U.S.

Our marketable securities consist of U.S.

Treasury securities and agencies, municipal securities, corporate debt securities, residential and commercial mortgage-backed securities, and other debt obligations.

We believe that our existing cash and cash equivalents, available-for-sale fixed maturity securities, cash flow from operations, along with the net proceeds from our issuance of redeemable convertible preferred stock and IPO, will be sufficient to support short-term working capital and capital expenditure requirements for at least the next 12 months.

Our long-term capital requirements depend on many factors, including our insurance premium growth rate, renewal activity, including the timing and the amount of cash received from customers, the performance of our embedded product, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, and the ongoing uncertainty in the global markets resulting from the global COVID-19 pandemic.

In the first quarter 2022, in response to inflation and loss cost trends and to further drive efficiency and increased focus on our strategic priorities we instituted an organizational realignment, including an involuntary workforce reduction affecting approximately 330 employees, which represented approximately 20% of our workforce.

In the first quarter of 2022, we have recognized charges of $6.8 million for severance, benefits and related costs as a result of these actions, of which $4.3 million of these charges are expected to result in cash expenditures.

Additionally, we expect to incur real estate exit costs comprising accelerated amortization of certain right of use assets and related leasehold improvements and furniture and fixtures of approximately $2.4 million.

We continue to review the potential impact of the realignment, including additional facility lease exits and employee-related costs, and are unable to estimate any additional restructuring costs or charges at this time.

We expect the annual expense savings related to the organizational realignment to be approximately $30 million annually.

Through prudent deployment of capital we believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.

We believe that our existing cash and cash equivalents, marketable securities and cash flow from operations will be sufficient to support short-term working capital and capital expenditure requirements for at least the next 12 months and the foreseeable future thereafter.

Our long-term capital requirements depend on many factors, including our insurance premium growth rate, rate adequacy, renewal activity, the timing and the amount of cash received from customers, the performance of our products, including the success of our embedded partnerships, loss cost trends, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, operating costs, and the ongoing uncertainty in the global markets resulting from the global COVID-19 pandemic.

During the fourth quarter 2022, we initiated a company-wide involuntary workforce reduction affecting approximately 160 employees, which represented approximately 20% of our workforce at the time.

The action taken as part of our efforts to improve efficiency and operating costs, and prioritize resources to further strengthen our pricing and underwriting foundation and the continued development of our embedded products.

In 2023, we expect to incur approximately $6.6 million of employee compensation expense, dependent upon continuous employment for certain employees, to be recognized ratably through the fourth quarter of 2023.

We expect a cash expenditure related to these employee compensation costs in the first quarter of 2024.

For additional information regarding organizational realignment and involuntary workforce reductions refer to Note 10, “Restructuring Costs,” in the Notes to Consolidated Financial Statements.

Currently, our debt covenants require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $200.0 million at all times.

This threshold may be reduced to $150.0 million under two sets of circumstances:

issuing 62,500 insurance policies through our Carvana embedded product and achieving a ratio of direct contribution to gross earned premium of 12%;

or ceasing any customer acquisition spend outside of the Carvana agreement and reducing our monthly cash burn to no greater than $12 million.

issuing 62,500 insurance policies through our Carvana embedded product and achieving a ratio of direct contribution to gross premiums earned of 12%;

or ceasing any customer acquisition spend outside of the Carvana commercial agreement and reducing our monthly cash burn to no greater than $12.0 million.

Through prudent deployment of capital we believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.

The following table summarizes our cash flow data for the periods presented:

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Net cash used in operating activities $ (210.6) $ (403.4) $ (287.2)

Net cash provided by (used in) investing activities 76.9 (114.1) (114.0)

Net cash (used in) provided by financing activities (80.3) 1,098.5 535.5

Net cash (used in) provided by investing activities (16.6) 76.9 (114.1)

Net cash provided by (used in) financing activities 283.3 (80.3) 1,098.5

Comparison of Years Ended December 31, 2022 and 2021

Net cash used in operating activities for the year ended December 31, 2022 was $210.6 million compared to $403.4 million of net cash used in operating activities for the year ended December 31, 2021.

The increase in cash used in operating activities was primarily due to a greater net loss incurred during the year ended December 31, 2021 compared to the prior year.

Additionally, our evolving reinsurance strategy and timing of related payments and cash receipts, timing of cash payments and accruals related to accounts payable and other expenses and PIK interest paid.

The decrease in cash used in operating activities was due to a decline in net loss incurred primarily as a result of a reduction in sales and marketing expense due to a shift in direct marketing strategy in response to changing macroeconomic factors and competitive environment and lower payroll, employee-related expenditures and facility costs due to an organizational realignment and involuntary workforce reductions.

In addition, timing of premium receipts, timing of

cash receipts and payments related to reinsurance activity, and claims payments contributed to the decrease in cash used in operating activities during the year ended December 31, 2022 compared to the prior year.

Net cash used in investing activities for the year ended December 31, 2022 was $16.6 million, primarily due to purchases of investments, capitalization of internally developed software, and purchases of indefinite-lived intangible assets, partially offset by proceeds from maturities, calls and pay downs, and sales of investments.

Net cash provided by investing activities for the year ended December 31, 2021 was $76.9 million, primarily due to proceeds from sales, maturities, calls and pay downs of investments, partially offset by purchases of investments and other debt obligations.

Net cash used in investing activities for the year ended December 31, 2020 was $114.1 million, primarily due to purchases of corporate debt securities, commercial mortgage-backed securities, residential mortgage-backed securities and other debt obligations, partially offset by sales, maturities, calls and pay downs of investments.

Net cash provided by financing activities for the year ended December 31, 2022 was $283.3 million, primarily due to proceeds from our Term Loan.

Net cash used in financing activities for the year ended December 31, 2021 was $80.3 million, primarily due to the pay down of debt and payment of preferred stock and related warrants issuance costs, partially offset by proceeds from the issuance of preferred stock and related warrants in connection with our partnership with Carvana.

Net cash provided by financing activities for the year ended December 31, 2020 was $1,098.5 million, primarily due to proceeds from the issuance of common stock in connection with our IPO and concurrent private placements.

Comparison of Years Ended December 31, 2021 and 2020

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Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2021, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 12, “Commitments and Contingencies” and operating leases, as discussed in Note 8, “Leases,” in the Notes to Consolidated Financial Statements.

As of December 31, 2022, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 13, “Commitments and Contingencies,”, operating leases, as discussed in Note 8, “Leases,” and a Term Loan, as discussed in Note 7, “Long-Term Debt,” in the Notes to Consolidated Financial Statements.

We believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

Our financial statements are prepared in accordance with GAAP.

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We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and LAE, premium write-offs, and valuation allowance on our deferred tax assets.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the

results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.

Actual results could differ from those estimates.

We believe that the accounting policies described below involve a significant degree of judgment and complexity.

We believe that the accounting estimates described below involve a significant degree of judgment and complexity.

Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

For further information, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements.

For further information, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements.

Loss and LAE Reserves

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The unpaid claim estimates consider loss cost trends, mix of business, and other risk factors impacting claims settlement.

The methods used to estimate ultimate loss reserves by accident month include reported loss development, paid loss development, expected loss ratio, or ELR, frequency-severity, premium based Bornhuetter/Ferguson, or B/F, and exposure based B/F using frequency-severity.

The methods used to

estimate ultimate loss reserves by accident month include reported loss development, paid loss development, expected loss ratio, or ELR, frequency-severity, premium based Bornhuetter/Ferguson, or B/F, and exposure based B/F using frequency-severity.

The method used to estimate unpaid LAE reserves is determined by a transaction-based allocation method where historical claim department activities are measured by their relative effort or cost for handling different claim types.

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• Many of the actuarial estimation methods assume that the speed of claim payments and claim closures, also known as cycle time, remains relatively consistent over time.

While fluctuations and improvements in cycle time

are expected as we grow, these timing changes can be difficult to discern from normal process risk variability in the data.

While fluctuations and improvements in cycle time are expected as we grow, these timing changes can be difficult to discern from normal process risk variability in the data.

• For actuarial methods that rely on case reserve data, there is an implicit assumption that the adequacy of case reserve estimates stays relatively constant over time.

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• Actuarial methods that rely on exposure bases, such as premiums or car years, perform better when the mix of business is relatively stable over time.

Rapid business growth can change the mix of business across several dimensions:

Business growth can change the mix of business across several dimensions:

new business versus renewal, geography profile, and underwriting profile.

As such, prior estimates of claim frequency, claim severity, or loss ratio may not be as predictive of future results when the mix of business changes.

• Broader macro level economics can have a material impact on loss reserve estimates, such as a rapid change in miles driven as was observed with the COVID-19 pandemic;

unanticipated inflation, regulatory restrictions, and legal developments as they relate to contract and coverage interpretation and enforceability.

• Broader macro level economics can have a material impact on loss reserve estimates, such as a rapid change in miles driven, unanticipated inflation, regulatory restrictions, and legal developments as they relate to contract and coverage interpretation and enforceability.

Due to the inherent uncertainty in determining our ultimate cost of settling claims, we evaluate what the potential impact on consolidated results of operations, financial position, and liquidity would be based on a hypothetical 5% and 10% increase or decrease in key assumptions described above.

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Total losses—net of reinsurance $ 161.4 $ 168.4 $ 175.3 $ 182.3 $ 189.2

Our loss and LAE expense reserves are recorded net of external reinsurance and net of amounts expected to be received from salvage (the amount recovered from the damaged property after the we pay for a total loss) and subrogation (the right to recover payments from third parties).

Our loss and LAE reserves are recorded net of external reinsurance and net of amounts expected to be received from salvage (the amount recovered from the damaged property after the we pay for a total loss) and subrogation (the right to recover payments from third parties).

Premium Revenue, Fee Income and Related Expenses

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Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk.

Due to a variety of factors, including certain state regulations related to COVID-19 relief efforts, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based primarily on an analysis of historical collection experience, adjusted for current economic conditions.

Due to a variety of factors, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based primarily on an analysis of historical collection experience, adjusted for current economic conditions.

Allowance for credit losses was $2.8 million and $5.4 million as of December 31, 2022 and 2021, respectively, on the consolidated balance sheets.

A policy is generally considered past due on the first day after its due date and policies greater than 90 days past due are written-off.

We recognized premium write-offs, or bad debt expense, of $20.9 million, $23.6 million and $9.0 million for the periods ended December 31, 2021, 2020 and 2019 respectively.

We recognized premium write-offs, or bad debt expense, of $17.4 million, $20.9 million and $23.6 million for the years ended December 31, 2022, 2021 and 2020 respectively.

We recognize this fee income in the period which we process each installment.

Policy acquisition costs, consisting of premium taxes, certain marketing costs and underwriting expenses, and fronting carrier commissions, net of ceding commissions, related to the successful acquisition of new or renewal business.

They are deferred and amortized over the same period in which the related premiums are earned.

Ceding commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs.

Policy acquisition costs, which consists of premium taxes, certain marketing costs and underwriting expenses, and certain commissions, net of ceding commissions, related to the successful acquisition of new or renewal business, are deferred and amortized over the same period in which the related premiums are earned.

commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs.

The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the gross deferred acquisition costs.

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Premiums ceded to other companies have been reported as a reduction of premiums earned and are recognized over the remaining policy period based on the reinsurance protection provided.

Amounts applicable to reinsurance ceded for unearned premium reserves are reported as a prepaid reinsurance premiums asset in the accompanying consolidated balance sheets and as reduction of unearned premiums in Note 6, “Reinsurance,” in the Notes to Consolidated Financial Statements.

Ceding commissions received in connection with reinsurance ceded have been accounted for as a reduction of other insurance (benefit) expense in the consolidated statements of operations and comprehensive loss.

Some of our reinsurance agreements provide for adjustment of commissions or amount of coverage based on loss experience referred to as sliding scale commissions, loss corridors and loss ratio caps, respectively.

Amounts applicable to reinsurance ceded for unearned premium reserves are reported as a prepaid reinsurance premiums asset in the accompanying consolidated balance sheets and as a reduction of unearned premiums in Note 6, “Reinsurance,” in the Notes to Consolidated Financial Statements.

Ceding commissions earned in connection with reinsurance ceded have been accounted for as a reduction of other insurance (benefit) expense in the consolidated statements of operations and comprehensive loss.

Some of our reinsurance agreements provide for amount of coverage based on loss experience referred to as loss corridors and loss ratio caps.

We recognize the asset or liability arising from these adjustable features in the period the adjustment occurs, which is calculated based on experience to-date under the agreement.

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For our reinsurance partners who are not rated, we require adequate levels of collateral or letters of credit to be available to us in the event of downside scenarios.

To recognize this risk of credit loss, we have established an allowance for credit losses based on the probability of default and the expected loss given default as influenced by factors such as the reinsurer’s credit rating

and average life of our reinsurance recoverables.

Allowance for credit losses was $0.2 million and zero as of December 31, 2021 and 2020, respectively.

New Accounting Pronouncements

See Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements.

Election Under the Jumpstart Our Business Startups Act of 2012

Prior to December 31, 2021, we qualified as an “emerging growth company,” or EGC, under the Jumpstart Our Business Startups Act, or JOBS Act.

We previously elected to adopt new or revised accounting guidance within the same time period as private companies as permitted by our status as an EGC.

We became a large accelerated filer on December 31, 2021 and lost our status as an EGC.

Accordingly, we will follow the adoption criteria of public companies for new accounting pronouncements beginning with this Annual Report on Form 10-K.

Prior to this Annual Report, our financial statements did not reflect adoption of certain amended guidance that public companies generally may have been required to adopt, but we were not required to adopt based on our EGC status.

This includes Accounting Standard Update, or ASU, 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.

We adopted this guidance using a modified retrospective approach which resulted in a cumulative-effect adjustment to opening accumulated loss as of January 1, 2021 since ASU 2016-13 may only be adopted as of the beginning of a fiscal year.

This adoption did not have a material impact on our previously filed quarterly information.

For additional information on the impact of this guidance, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements.

Allowance for credit losses was $0.2 million as of December 31, 2022 and 2021.

Recoverability of Net Deferred Tax Assets

We calculate the tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities in accordance with Accounting Standards Codification 740, Income Taxes, or ASC 740.

The application of ASC 740 requires a company to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the carrying value of the deferred tax asset to an amount that is more likely than not to be realized.

Considerable judgment is required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance.

In evaluating the need for a valuation allowance we consider many factors, including:

(1) the nature of the deferred tax assets and liabilities;

(2) whether they are ordinary or capital;

(3) the timing of expected reversal;

(4) taxable income in prior carry back years as well as projected taxable earnings exclusive of reversing temporary differences and carry forwards;

(5) the length of time that carryovers can be used;

(6) unique tax rules that would impact the utilization of the deferred tax assets;

and (7) any tax planning strategies that we would employ to avoid a tax benefit expiring unused.

We may be unable to fully use our net operating losses, or NOLs, if at all.

Under Section 382 of the Internal Revenue Code, or the Code, if a corporation undergoes an “ownership change” (generally defined as a greater than 50% change, by value, in the corporation’s equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation’s ability to use its pre-ownership change NOLs to offset its post-ownership change income may be limited.

The limitation may be such that it prevents the Company from fully utilizing its NOLs existing at the time of the ownership change prior to their expiration, which could also result in a substantial reduction in the deferred tax asset.

We currently carry a valuation allowance against our entire net deferred tax asset.

As such, any reduction in the deferred tax asset would also result in an offsetting reduction in the valuation allowance.

We have experienced an ownership change.

In connection with this ownership change, we do not expect that the limitation under Section 382 of the Code will result in any material reduction in our ability to use pre-ownership change NOLs in the future nor require a reduction in the associated deferred tax asset (or adjustment to the valuation allowance).

We may still experience additional ownership changes in the future as a result of subsequent shifts in ownership, which could result in additional limitations on our NOL usage.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis