Root, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 83 Consolidated Balance Sheets 85 Consolidated Statements of Operations and Comprehensive Loss 86 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity 87 Consolidated Statements of Cash Flows 88 Notes to Consolidated Financial Statements 89 Schedule II: Condensed Combined Financial Information of Registrant 128 Schedule V: Valuation and Qualifying Accounts 133 Schedules other than those listed above are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the consolidated financial statements or notes thereto or elsewhere herein. 82 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Root, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Root, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the related notes and the schedules listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2023, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Loss and Loss Adjustment Expense Reserves – Refer to Notes 2 and 5 to the financial statements Critical Audit Matter Description As of December 31, 2022, loss and loss adjustment expense reserves were $ 287.4 million. The Company’s loss and loss adjustment expense reserves are determined by the Company using actuarial methods, models, assumptions, and judgment to estimate the reserves required to cover the amount required to settle insured losses as of the financial statement date. 83 Loss and loss adjustment expense reserves are inherently uncertain as to timing and amount and the recorded loss and loss adjustment expense reserves may vary materially from the actual ultimate cost of claims, particularly related to those reserves where there is a longer time span between the incidence of a loss and the settlement of a claim. Given the subjectivity in estimating the ultimate loss and loss adjustment expense reserves, due to input variables such as historical and statistical information, inflation, contract interpretation, weather catastrophe impacts, regulatory environment, and economic conditions, among other factors, auditing loss and loss adjustment expense reserves, particularly related to those reserves over a longer periods of time, involved an especially high degree of auditor judgment, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to loss and loss adjustment expense reserves included the following, among others: • We tested the effectiveness of controls related to loss and loss adjustment expense reserves, including those over the Company’s actuarial estimate. • We tested the completeness and accuracy of the underlying key data inputs that served as the basis for the actuarial estimate. • With the assistance of our actuarial specialists, we used the Company’s claims data to develop a range of independent estimates for the loss and loss adjustment expense reserves, particularly related to those over a longer period of time. We used these independent estimates to assess the reasonableness of the Company’s reserves by comparing our estimates to the Company’s recorded loss and loss adjustment expense reserves. • We compared the Company’s prior year estimates of expected loss and loss adjustment expense reserves to actual experience during the current year to identify potential bias in the determination of loss and loss adjustment expense reserves. /s/ DELOITTE & TOUCHE LLP Columbus, Ohio February 22, 2023 We have served as the Company's auditor since 2017. 84 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2022 AND 2021 2022 2021 (in millions, except par value) Assets Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $ 134.2 and $ 129.5 at December 31, 2022 and December 31, 2021, respectively) $ 128.4 $ 129.9 Short-term investments (amortized cost: $ 0.4 and zero at December 31, 2022 and December 31, 2021, respectively) 0.4 — Other investments 4.4 4.7 Total investments 133.2 134.6 Cash and cash equivalents 762.1 706.0 Restricted cash 1.0 1.0 Premiums receivable, net of allowance of $ 2.8 and $ 5.4 at December 31, 2022 and December 31, 2021, respectively 111.9 148.1 Reinsurance recoverable and receivable, net of allowance of $ 0.2 at December 31, 2022 and December 31, 2021 148.8 155.0 Prepaid reinsurance premiums 74.2 100.8 Other assets 81.7 73.8 Total assets $ 1,312.9 $ 1,319.3 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity Liabilities: Loss and loss adjustment expense reserves $ 287.4 $ 320.2 Unearned premiums 136.5 180.1 Long-term debt and warrants 295.4 — Reinsurance premiums payable 119.8 101.6 Accounts payable and accrued expenses 39.7 29.1 Other liabilities 45.0 39.9 Total liabilities 923.8 670.9 Commitments and Contingencies (Note 13) Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2022 and December 31, 2021 (liquidation preference of $ 126.5 ) (Note 11) 112.0 112.0 Stockholders’ equity: Class A common stock, $ 0.0001 par value, 9.2 and 7.9 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (Note 11) (1) — — Class B common stock, $ 0.0001 par value, 5.0 and 6.1 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (Note 11) (1) — — Additional paid-in capital 1,850.7 1,806.1 Accumulated other comprehensive (loss) income ( 5.8 ) 0.4 Accumulated loss ( 1,567.8 ) ( 1,270.1 ) Total stockholders’ equity 277.1 536.4 Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 1,312.9 $ 1,319.3 ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” See Notes to Consolidated Financial Statements 85 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 2022 2021 2020 (in millions, except per share data) Revenues: Net premiums earned $ 285.9 $ 310.3 $ 322.5 Net investment income 6.2 5.0 5.4 Net realized gains on investments 0.5 2.4 0.3 Fee income 16.5 20.9 17.4 Other income 1.7 6.8 1.2 Total revenues 310.8 345.4 346.8 Operating expenses: Loss and loss adjustment expenses 351.0 392.3 362.8 Sales and marketing 48.0 270.2 139.7 Other insurance (benefit) expense ( 8.0 ) 5.0 ( 1.8 ) Technology and development 55.5 65.5 52.9 General and administrative 127.4 97.6 78.5 Total operating expenses 573.9 830.6 632.1 Operating loss ( 263.1 ) ( 485.2 ) ( 285.3 ) Interest expense ( 34.6 ) ( 20.0 ) ( 77.7 ) Loss on early extinguishment of debt — ( 15.9 ) — Loss before income tax expense ( 297.7 ) ( 521.1 ) ( 363.0 ) Income tax expense — — — Net loss ( 297.7 ) ( 521.1 ) ( 363.0 ) Other comprehensive (loss) income: Changes in net unrealized (losses) gains on investments ( 6.2 ) ( 5.2 ) 5.0 Comprehensive loss $ ( 303.9 ) $ ( 526.3 ) $ ( 358.0 ) Loss per common share: basic and diluted (both Class A and B) (1) $ ( 21.11 ) $ ( 37.76 ) $ ( 86.43 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) (1) 14.1 13.8 4.2 ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” See Notes to Consolidated Financial Statements 86 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 Redeemable Convertible Preferred Stock Class A and Class B Common Stock (1) Treasury Stock (1) Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Loss Total Stockholders' Equity (Deficit) Shares Amount Class A Shares Class B Shares Amount Shares Amount (in millions) Balance—January 1, 2020 158.9 $ 560.4 — 2.5 $ — 0.3 $ ( 0.1 ) $ 10.5 $ 0.6 $ ( 385.0 ) $ ( 374.0 ) Net loss — — — — — — — — — ( 363.0 ) ( 363.0 ) Other comprehensive income — — — — — — — — 5.0 — 5.0 Tender offer and subsequent conversion (Note 12) 2.9 — — ( 0.2 ) — — — 25.1 — — 25.1 Conversion of redeemable convertible preferred stock to common stock from IPO ( 161.8 ) ( 560.4 ) — 9.0 — — — 560.4 — — 560.4 Common stock—issuance of shares from IPO and concurrent private placement, net of issuance costs — — 2.4 — — — — 1,098.1 — — 1,098.1 Conversion of Class B to Class A common stock — — 0.9 ( 0.9 ) — — — — — — — Warrants exercise — — — 0.2 — — — 75.2 — — 75.2 Common stock—option exercises — — — 0.1 — — — 1.9 — — 1.9 Reclassification of early-exercised stock option to liabilities — — — — — — — 0.2 — — 0.2 Common stock—share-based compensation expense — — — — — — — 3.7 — — 3.7 Settlement of related party loan — — — — — — ( 0.7 ) 0.5 — — ( 0.2 ) Balance—December 31, 2020 — $ — 3.3 10.7 $ — 0.3 $ ( 0.8 ) $ 1,775.6 $ 5.6 $ ( 748.0 ) $ 1,032.4 Cumulative-effect of change in accounting principle (ASU 2016-13), net of tax — — — — — — — — — ( 1.0 ) ( 1.0 ) Balance at January 1, 2021 (as adjusted for change in accounting principle) — $ — 3.3 10.7 $ — 0.3 $ ( 0.8 ) $ 1,775.6 $ 5.6 $ ( 749.0 ) $ 1,031.4 Net loss — — — — — — — — — ( 521.1 ) ( 521.1 ) Other comprehensive loss — — — — — — — — ( 5.2 ) — ( 5.2 ) Conversion of Class B to Class A common stock — — 4.5 ( 4.5 ) — — — — — — — Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.1 — — — — 4.4 — — 4.4 Reclassification of early-exercised stock option to liabilities — — — ( 0.1 ) — — — ( 0.2 ) — — ( 0.2 ) Common stock—share-based compensation expense — — — — — — — 19.3 — — 19.3 Warrant compensation expense — — — — — — — 8.8 — — 8.8 Retirement of treasury shares — — — — — ( 0.3 ) 0.8 ( 0.8 ) — — — Preferred stock issued 14.1 126.5 — — — — — — — — — Preferred stock and related warrants issuance costs — ( 14.5 ) — — — — — ( 1.0 ) — — ( 1.0 ) Balance—December 31, 2021 14.1 $ 112.0 7.9 6.1 $ — — $ — $ 1,806.1 $ 0.4 $ ( 1,270.1 ) $ 536.4 Net loss — — — — — — — — — ( 297.7 ) ( 297.7 ) Other comprehensive loss — — — — — — — — ( 6.2 ) — ( 6.2 ) Conversion of Class B to Class A common stock — — 1.1 ( 1.1 ) — — — — — — — Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.2 — — — — 0.4 — — 0.4 Reclassification of early-exercised stock option to liabilities — — — — — — — 0.2 — — 0.2 Common stock—share-based compensation expense — — — — — — — 30.5 — — 30.5 Warrant compensation expense — — — — — — — 14.5 — — 14.5 Warrants issuance costs — — — — — — — ( 1.6 ) — — ( 1.6 ) Term Loan warrants issued — — — — — — — 0.6 — — 0.6 Balance—December 31, 2022 14.1 $ 112.0 9.2 5.0 $ — — $ — $ 1,850.7 $ ( 5.8 ) $ ( 1,567.8 ) $ 277.1 ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” See Notes to Consolidated Financial Statements 87 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2022, 2021 AND 2020 2022 2021 2020 (in millions) Cash flows from operating activities: Net loss $ ( 297.7 ) $ ( 521.1 ) $ ( 363.0 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation 30.5 19.3 3.7 Warrant compensation expense 14.5 8.8 — Tender offer — — 25.1 Depreciation and amortization 13.8 16.6 15.6 Bad debt expense 17.4 20.9 23.6 Loss on early extinguishment of debt — 15.9 — Warrants fair value adjustment — — 54.7 Paid-in-kind interest expense — 10.6 9.1 Paid-in-kind interest paid — ( 20.5 ) — Net realized gains on investments ( 0.5 ) ( 2.4 ) ( 0.3 ) Gain on lease modification ( 0.9 ) — — Change in fair value of equity securities — ( 3.8 ) — Changes in operating assets and liabilities: Premiums receivable 18.8 ( 39.7 ) ( 31.0 ) Reinsurance recoverable 6.2 ( 30.4 ) ( 99.5 ) Prepaid reinsurance premiums 26.6 12.0 ( 95.4 ) Other assets ( 7.5 ) 0.8 ( 21.7 ) Losses and loss adjustment expenses reserves ( 32.8 ) 83.0 96.5 Unearned premiums ( 43.6 ) 23.0 11.7 Reinsurance premiums payable 18.2 12.5 63.4 Accounts payable and accrued expenses 17.9 ( 19.2 ) 18.2 Other liabilities 8.5 10.3 2.1 Net cash used in operating activities ( 210.6 ) ( 403.4 ) ( 287.2 ) Cash flows from investing activities: Purchases of investments ( 47.7 ) ( 17.0 ) ( 158.4 ) Proceeds from maturities, call and pay downs of investments 34.1 34.7 42.5 Sales of investments 7.1 70.4 17.9 Purchases of indefinite-lived intangible assets and transaction costs ( 1.3 ) — ( 8.9 ) Capitalization of internally developed software ( 8.8 ) ( 6.6 ) ( 5.4 ) Purchases of fixed assets — ( 4.6 ) ( 1.8 ) Net cash (used in) provided by investing activities ( 16.6 ) 76.9 ( 114.1 ) Cash flows from financing activities: Proceeds from exercise of stock options and restricted stock units, net of tax proceeds/(withholding) 0.3 3.2 2.1 Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance costs — — 1,098.1 Proceeds from issuance of preferred stock and related warrants — 126.5 — Payment of preferred stock and related warrants issuance costs ( 3.0 ) ( 10.5 ) — Proceeds from issuance of debt and related warrants, net of issuance costs 286.0 — 12.0 Repayments of long-term debt — ( 199.5 ) ( 13.5 ) Purchases of treasury stock — — ( 0.2 ) Net cash provided by (used in) financing activities 283.3 ( 80.3 ) 1,098.5 Net increase (decrease) in cash, cash equivalents and restricted cash 56.1 ( 406.8 ) 697.2 Cash, cash equivalents and restricted cash at beginning of year 707.0 1,113.8 416.6 Cash, cash equivalents and restricted cash at end of year $ 763.1 $ 707.0 $ 1,113.8 See Notes to Consolidated Financial Statements 88 ROOT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Root, Inc. is a holding company which, directly or indirectly, maintains 100 % ownership of each of its subsidiaries, including, among others, Root Insurance Company, an Ohio-domiciled insurance company; Root Property & Casualty Insurance Company, a Delaware-domiciled insurance company; and Root Reinsurance Company, Ltd., a Cayman Islands-domiciled reinsurance company, together with Root, Inc., “we,” “us” or “our.” We were formed in 2015 and began writing personal auto insurance in July 2016. We are a technology company operating a primarily direct-to-consumer model with the majority of our personal insurance customers acquired through mobile applications and our embedded platform. We offer auto and renters insurance products underwritten by Root Insurance Company and Root Property & Casualty Insurance Company. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation — The consolidated financial statements include the accounts of Root, Inc. and its subsidiaries, all of which are wholly owned. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. All intercompany accounts and transactions have been eliminated. Use of Estimates —The preparation of consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in our consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, or LAE, premium write-offs, fair value of warrants and valuation allowance for income taxes. Revision of Previously Issued Financial Statements —During the fourth quarter of 2022, we identified immaterial errors in our first, second and third quarterly filings of 2022 in the recognition of prepaid marketing expense in other assets on our condensed consolidated balance sheets and the presentation of certain sales and marketing and general and administrative expenses on our condensed consolidated statements of operations and comprehensive loss related to the purported misappropriation of funds by a senior marketing employee. We recognized $ 10.2 million in general and administrative expenses related to the write-off of prepaid marketing expense and reclassifications of certain sales and marketing expenses during the year-ended December 31, 2022. The errors did not impact periods prior to 2022. In accordance with SEC Staff Accounting Bulletin, or SAB, No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , we assessed the materiality of these errors on our financial statements for the year ended December 31, 2022 and concluded the errors were not material to the unaudited interim financial statements for the periods ended March 31, 2022, June 30, 2022 and September 30, 2022. Reverse Stock Split — In August 2022, an authorized 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. On August 12, 2022, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-18 reverse stock split of our Class A and Class B common stock. As a result of the reverse stock split, every 18 shares of our issued or outstanding pre-reverse split common stock of each class were combined into one share of common stock of such class. No fractional shares were issued upon the reverse stock split. On August 15, 2022, our Class A common stock began trading on a split-adjusted basis on the Nasdaq Stock Market. 89 In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of $ 0.0001 . In addition, there was no change to the number of shares issued or outstanding for our Series A Preferred Stock. The conversion price for our Series A Preferred Stock was adjusted to $ 162.00 and the exercise price and number of warrant shares for each of our outstanding warrants were also proportionately adjusted. Accordingly, all historical per share data, number of shares outstanding and other common stock equivalents for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. COVID-19 —In March 2020, the World Health Organization declared COVID-19 to be a global pandemic. 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 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. As the COVID-19 pandemic continues, there is uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance. Accordingly, we cannot predict the impact that it may have on our future results of operations and financial condition. Legal Contingencies— From time to time, we are party to litigation and legal proceedings relating to our business operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves. In the ordinary course of business we also face certain lawsuits that seek damages beyond policy limits, or extra-contractual claims. We continually evaluate potential liabilities and reserves for litigation using the guidance issued in Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 450, Contingencies . Under this guidance, we may only record reserves for a loss if as of the date the financial statements are issued or available to be issued, the likelihood of occurrence is deemed probable and we can reasonably estimate the amount of the loss. When disclosing litigation or claims where a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each legal action using this guidance and record reserves for losses as warranted by establishing a reserve in loss and loss adjustment expense reserves for extra-contractual claims and other liabilities for class action and other non-claims related lawsuits in our consolidated balance sheets. Any non-reinsurance related recoveries are recognized as other assets in our consolidated balance sheets. We record amounts within loss and loss adjustment expenses for extra-contractual claims and general and administrative for class action and other non-claims related lawsuits in our consolidated statements of operations and comprehensive loss. Further details are discussed in Note 13, "Commitments and Contingencies." Debt and Equity Issuance Costs —Debt and equity issuance costs, which primarily consist of advisor, legal, accounting, and other third-party fees directly related to issuing debt and equity instruments, are capitalized as other assets in our consolidated balance sheets as incurred. We incurred such costs in connection with our investment agreement we entered into with Carvana Group, LLC, or Carvana, on August 21, 2021, or the Investment Agreement, and our $ 300.0 million five-year term loan maturing we entered on January 26, 2022, or the Term Loan. Upon close of the related transaction, these deferred issuance costs are generally offset against the related proceeds. Debt issuance costs are subsequently amortized over the term of the financing agreement as interest expense on the consolidated statements of operations and comprehensive loss. 90 Indefinite-Lived Intangible Assets — In March 2022, we purchased the Root.com domain and recognized $ 1.3 million, including transaction costs, as of December 31, 2022 in other assets in our consolidated balance sheets. We also had insurance licenses of $ 8.9 million, including transaction costs, as of December 31, 2022 and 2021 in other assets in our consolidated balance sheets. We incur a minimal fee to renew each license. These intangible assets are not amortized, but instead are tested for impairment annually or when indicators of impairment exist. The impairment test for indefinite-lived intangibles involves first assessing qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If so, then a quantitative test is performed to compare the estimated fair value of the indefinite-lived intangible asset to the respective asset's carrying amount. The evaluation requires the use of estimates and significant judgments and considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. No impairment was recognized for 2022, 2021, or 2020 related to indefinite-lived intangible assets. Segment Information —Our chief operating decision maker is the Chief Executive Officer. The chief operating decision maker manages operations, allocates resources, and evaluates financial performance on a company-wide basis. We operate in one reporting segment providing direct-to-consumer insurance products to customers. Statement of Cash Flows — The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2022, 2021 and 2020 are as follows: 2022 2021 2020 (in millions) Supplemental disclosures: Interest paid $ 24.5 $ 23.9 $ 4.5 Federal income taxes paid — — — Leasehold improvements - non-cash 0.9 1.5 — Conversion of preferred stock to common stock - non-cash — — 560.4 Conversion of warrants to common stock - non-cash — — 75.0 Lease liabilities arising from obtaining right-of-use asset — 9.9 — Investment Agreement issuance costs - non-cash — 9.1 — Purchases of treasury stock - non-cash — — 0.5 Cash, Cash Equivalents and Restricted Cash —Cash consists of cash on deposit. Cash equivalents are short-term, highly liquid investments that on average matures within three months from the date of origination and are principally stated at amortized cost, which approximates their fair value. Restricted cash consists of amounts held by a financial institution to satisfy letter of credit requirements for certain property leases. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount in the consolidated statements of cash flows: 2022 2021 (in millions) Cash and cash equivalents $ 762.1 $ 706.0 Restricted cash 1.0 1.0 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 763.1 $ 707.0 91 Book Overdraft —If checks are issued in excess of the amount of cash on hand, a book overdraft shall be reclassified to accounts payable on the consolidated balance sheets. When a check is issued whereby a disbursement account is used to write the check, but the account is not funded until the check is presented for payment this "negative cash" balance is included in cash and cash equivalents on the consolidated balance sheets, if the funding account has sufficient funds. Investments —Investments in debt securities are classified as short-term and available-for-sale securities and are carried at fair value with any unrealized gains and losses, net of taxes, recorded as a component of accumulated other comprehensive income. Management regularly reviews our securities for signs of impairment, an assessment requiring significant management judgment. Beginning with our adoption of FASB Accounting Standard Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments as of January 1, 2021, the criteria that management considers are the financial condition of the issuer, including receipt of scheduled principal and interest cash flows, fair value of a security that has fallen below the amortized value, maturity dates, current economic conditions and intent to sell, including if it is more likely than not that we will be required to sell the security before recovery. We then assess whether the decline in value is due to non-credit related or credit related factors. Non-credit related declines in market value are recorded as unrealized losses in accumulated other comprehensive income. If we determine that the decline is credit related, we establish an allowance for credit losses equal to the difference between the discounted cash flow model and the amortized value, which is recorded in net realized gains on investments in our consolidated statements of operations and comprehensive loss. This allowance may be subsequently adjusted for recoveries or further credit losses. Prior to January 1, 2021, we were under an incurred loss model whereby we reviewed our securities for signs of other than temporary impairment. The criteria were similar to those noted above, except we also considered the length of time a security was in an unrealized loss position. When a debt security was determined to have an other than temporary impairment, the impairment charge was separated into an amount representing the credit loss, which would be recognized in earnings as a realized loss and the amount related to non-credit factors, which would be recognized in other comprehensive income. Subsequent recoveries of other than temporary impairment were not recognized. No such credit losses were recognized in 2022 and 2021, nor were there other than temporary impairments recognized in 2020. Other investments primarily consist of private equity investments without a readily determinable fair value. We elected to account for these investments at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. Such changes are accounted for within net investment income in our consolidated statements of operations and comprehensive loss. We also invest in Low Income Housing Tax Credits, or LIHTC, projects by way of investing in a limited liability entity to offset Georgia premium taxes. The purpose of these investments is to encourage private capital investments into regions within Georgia that are in need of economic development, while providing tax credits and operating loss tax benefits to investors. We account for this investment using the cost method because our interest in the limited liability entity is minor and we have virtually no influence over the entity’s operating and financial policies. When we utilize the tax credits, the associated investment becomes impaired. Impairment of the investment is recognized within net investment income in our consolidated statements of operations and comprehensive loss. Fair Value Measurements —Fair value is defined as the price that would be received upon selling an asset or the price paid to transfer a liability on the measurement date in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants. A three-tier hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are: Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices in active markets for identical assets and liabilities. 92 Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data. Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Leases —On January 1, 2021, we adopted ASU No. 2016-02, Leases (Topic 842) which requires the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. We elected various practical expedients which include: not applying the amended lease accounting guidance to comparative periods; including the carry forward of our leases without reassessing whether any contracts are leases or contain leases, lease classification and initial direct costs; and excluding leases with a term of 12 months or less from lease liability and right-of-use asset recognition. We did not elect the hindsight practical expedient. Our lease agreements contain lease components and non-lease components, both of which we have elected to account for as a single lease component for our real estate asset class. Operating lease expense for operating lease right-of-use assets is recognized on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain to do so and there is a significant economic incentive to exercise that option. For additional information refer to Note 8, “Leases.” Premiums, Premiums Receivable and Premium Write-offs —Premiums written are deferred and earned pro rata over the policy period. Unearned premium is established to cover the unexpired portion of premiums written. A premium deficiency, as measured on a gross basis, is recorded when the sum of expected losses, LAE, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. A premium deficiency reserve is recognized as a reduction of deferred acquisition costs and, if necessary, by accruing an additional liability for the deficiency, with a corresponding charge to operations. We did not record a premium deficiency reserve in 2022, 2021 or 2020. In August 2021, we commenced a fronting arrangement with an unaffiliated Texas county mutual insurance company, or the fronting carrier. We route all of our new auto policies, and, over time, expect to route certain renewal auto policies, in Texas through the fronting carrier whereby we assume 100% of the related premium and losses on those policies. The fronting arrangement allows us to have greater rating and underwriting flexibility. Premiums assumed are deferred and earned pro rata over the policy period. Unearned premium is established to cover the unexpired portion of premiums assumed. Premiums receivable represents premiums written but not yet collected. Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk. 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 considered past due on the first day after its due date and policies greater than 90 days past due are written-off. We recognized 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. Fee Income —Fee income consists of the flat fee we charge to those policyholders who pay premiums on an installment basis. The fee relates to the additional administrative costs associated with processing more frequent billings. We recognize this fee income in the period in which we process each installment. Other Income —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 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. 93 Sales and Marketing —Sales and marketing expenses includes spend related to performance and embedded channels, channel media, advertising, branding, public relations, sponsorship, consumer insights and referral fees. These expenses also include related employee costs including salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based compensation expense, or Personnel Costs, and overhead allocated based on headcount, or Overhead. It also includes certain warrant compensation expense related to our embedded channel. We incur sales and marketing expenses for all product offerings. Sales and marketing costs are expensed as incurred. Certain warrant compensation expense is recognized on a pro-rata basis considering progress toward completing the integrated automobile insurance solution for Carvana’s online car buying platform, or Integrated Platform, under the Carvana commercial agreement 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. 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. These expenses are also recognized net of ceding commissions earned from our quota share reinsurance agreements. The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance (benefit) expense. Technology and development —Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems; third-party services related to infrastructure support; Personnel Costs and Overhead for engineering, product, technology, and certain data science activities; and amortization of internally developed software. 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. General and Administrative —General and administrative expenses primarily relate to external professional service expenses; Personnel Costs and Overhead for corporate functions; and depreciation expense for computers, furniture and other fixed assets; write-offs; 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, or Employee costs, real estate exit costs and software costs. General and administrative expenses are expensed as incurred. Policy Acquisition Costs —Acquisition costs consist primarily 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. 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. 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. Any portion of the ceding commission that exceeds the acquisition costs of the business ceded is recorded as excess ceding commission, a deferred liability, and amortized over the same period in which the related premiums are earned. Deferred acquisition costs, net of accumulated amortization, was $ 6.7 million and $ 2.8 million as of December 31, 2022 and 2021, respectively. We amortized deferred acquisition costs of $ 22.5 million, $ 26.4 million and $ 17.1 million for the years ended December 31, 2022, 2021 and 2020, respectively. 94 Loss and Loss Adjustment Expense and Reserves —Loss and LAE reserves 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. These reserves are a liability established to cover the estimated ultimate cost to settle insured losses. The estimation of the liability for loss and LAE reserves is complex and includes subjective considerations and management’s judgement. The actuarial methods to determine unpaid loss es timates consider loss trends, contract interpretation, mix of business, regulatory environment, economic conditions, inflation and other risk factors impacting claims settlement. 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. There is considerable uncertainty associated with the actuarial estimates, and therefore no assurance can be made that the ultimate unpaid claim liability will not vary materially from such estimates. These loss estimates are continually reviewed by management and adjusted as necessary, with adjustments included in the period determined and recorded in loss and LAE in our consolidated statements of operations and comprehensive loss. As such, loss and LAE reserves represent management’s best estimate of the ultimate liability related to reported and unreported claims. Our loss and LAE reserves are recorded gross of reinsurance and net of amounts expected to be received from salvage (the amount recovered from a total loss claims expense) and subrogation (the right to recover payments from third parties). Loss and LAE is recorded 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. 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. Loss and LAE may be paid out over a period of years. Various other expenses incurred during claims processing are allocated to LAE. These amounts include claims Personnel Costs, software expense, internally developed software amortization, and Overhead. Reinsurance —In the ordinary course of business, we cede and retrocede a portion of our business written and assumed, respectively, to reinsurers to limit the maximum net loss potential arising from large risks and catastrophes. These arrangements, known as treaties, provide for reinsurance coverage on quota-share and excess-of-loss basis. All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance. Although the ceding of reinsurance does not discharge us from our primary liability to the policyholder, the insurance company that assumes the coverage assumes the related liability. Amounts recoverable from and payable to reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Reinsurance premiums, commissions and expense reimbursements related to reinsured business are accounted for on a basis consistent with the basis used in accounting for the original policies issued and the terms of the reinsurance contracts. 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.” 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. 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. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, we would be liable for such defaulted amounts. We evaluate and monitor the financial condition associated with our reinsurers in order to minimize our exposure to significant losses from reinsurer insolvencies. We obtain our reinsurance from a diverse group of reinsurers and monitor concentration as well as financial strength ratings of the reinsurers to minimize counterparty credit risk. 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 as of December 31, 2022 and 2021, respectively. 95 Income Taxes —For the 2022 tax year, Root, Inc. will file a consolidated federal income tax return with Caret Holdings, Inc., Root Insurance Company, Root Property & Casualty, Root Lone Star Insurance Agency, Inc, and Root Reinsurance Company, Ltd. The consolidated return also includes Root Insurance Agency, LLC, Root Enterprise, LLC and Root Scout, LLC, which are disregarded entities under Caret Holdings, Inc. for federal income tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized as allowed under ASC 740, Income Taxes . We establish a valuation allowance when there is more likely than not insufficient evidence to support the recoverability of the deferred tax asset under ASC 740. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If it is determined that the deferred tax assets would be realizable in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. A valuation allowance of $ 322.3 million and $ 255.0 million was established as of December 31, 2022 and 2021, respectively. Further details are discussed in Note 9, "Income Taxes." We recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on our reserve for uncertain tax positions are recognized as a component of tax expense. As of December 31, 2022 and 2021, we did not have any unrecognized tax benefits for uncertain tax positions and had no accrued interest or penalties related to uncertain tax positions. Internally Developed Software —We review our software development activity and capitalize costs during the application development phase under ASC 350-40, Internal-Use Software. These costs are amortized on a straight-line basis over a five-year period. Internally developed software costs are assessed for impairment at least quarterly, which also ensures that the assets are still in service. If there are assets identified as no longer in use, the remaining unamortized costs will be fully amortized. We amortized internally developed software of $ 5.0 million, $ 3.7 million and $ 2.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. The capitalized cost and accumulated amortization of internally developed software in other assets in our consolidated balance sheets at December 31, 2022 and 2021 are as follows: 2022 2021 (dollars in millions) Internally developed software $ 29.3 $ 20.5 Accumulated amortization ( 13.0 ) ( 8.0 ) Internally developed software, net $ 16.3 $ 12.5 96 Fixed Assets —Fixed Assets are carried at cost, net of accumulated depreciation. We capitalize purchases of certain fixed assets, including computers, furniture, and leasehold improvements. Depreciation on computers and furniture is recognized on a straight-line basis over a useful life of three years and five years , respectively. Depreciation on leasehold improvements is recognized on a straight-line basis over the shorter of their useful life or the life of the lease. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts. For the years ended December 31, 2022, 2021 and 2020, depreciation expense was $ 2.1 million, $ 4.6 million and $ 3.1 million, respectively. The capitalized cost and accumulated depreciation of fixed assets in other assets in our consolidated balance sheets at December 31, 2022 and 2021 are as follows: 2022 2021 (dollars in millions) Computers $ 6.8 $ 7.0 Furniture 2.6 3.4 Leasehold improvements 8.9 9.8 Total fixed assets, at cost $ 18.3 $ 20.2 Accumulated depreciation ( 12.8 ) ( 9.9 ) Fixed assets, net $ 5.5 $ 10.3 Employee Share-Based Compensation —We award share-based compensation, including stock options with only a service condition, stock options with service and performance conditions, restricted stock units, or RSUs, and restricted stock, to our officers, directors, employees, and certain advisors through approval from the Compensation Committee of the board of directors. Share-based compensation expense is recognized based on the grant date fair value of the awards, which is determined using the Black-Scholes Merton, or BSM, option-pricing model. The BSM option pricing model requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the options, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. The fair value of common stock underlying the stock options, restricted stock and RSUs granted before our initial public offering, or IPO, had historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock. Because there had been no public market for our common stock, our board of directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors. Our board of directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances. In connection with our IPO, our common stock became listed on the Nasdaq Global Select Market and we use these market prices for the fair value of our common shares. Stock options are generally exercisable for a period up to ten years from the grant date. We recognize forfeitures as they occur, which generally results in the reversal of previously recognized expense for nonvested awards. In the event of an involuntary termination that results in the cancellation of an award, the remaining unrecognized compensation cost for the entire award is recognized in the period of cancellation. If the award is cancelled and concurrently replaced upon termination, it follows modification accounting, typically as a Type III improbable-to-probable modification whereby it is effectively treated as a forfeiture and new grant as of the date of termination. 97 Stock options with only a service condition generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter. Stock options with service and performance conditions generally vest ratably over a four-year period assuming achievement of the performance conditions. The compensation expense associated with nonvested stock options that have performance conditions is dependent on our periodic assessment of the probability of the performance conditions being achieved. If deemed probable, we recognize compensation expense on a straight-line basis over the requisite service period. If a performance condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized. RSUs generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter. Certain other RSUs vest in accordance with one of the following patterns: over four years - 25 % cliff vests after one year and in equal increments quarterly over three years thereafter, over four years in equal quarterly increments, or fully cliff vest after one year . We generally recognize share-based compensation expense ratably over the respective vesting period. Warrant Compensation —In October 2021, we closed the Investment Agreement with Carvana that included the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Convertible Preferred Stock and the issuance of eight tranches of warrants to purchase shares of the Company’s Class A common stock. As part of the investment agreement, we and Carvana also entered into a five-year commercial agreement whereby our auto insurance products will be embedded into the Integrated Platform. The commercial agreement provides for agent commissions payable to Carvana for policy origination and an enterprise total loss replacement vehicle solution. The Carvana warrants compensation expense is recognized based on the grant date fair value of the award, which was determined using a Monte Carlo simulation in a risk-neutral framework, as contemplated in the Income Approach of valuation. Specifically, future equity is simulated in each period assuming a Geometric Brownian Motion. We considered the features of the warrants and the interdependency of exercise decisions between the Short-Term Warrants and the Long-Term Warrants in using the Monte Carlo simulation in order to determine the optimum exercise decision. The optimum exercise decision was made by choosing the option which would give the highest aggregate expected value to the holder in each of the 100,000 simulated paths. The payoff of each path is then calculated based on the simulated equity and discounted back to time zero using the applicable risk-free rates. The fair value of the warrants are then calculated as the average value from all simulation paths. Employing a Monte Carlo simulation with Geometric Brownian Motion requires a range of inputs for each uncertain variable, and establishing linkage between the assumptions, if necessary. Inputs and assumptions used in our analysis included our stock price at grant date, exercise prices, the term of the warrants, equity volatility, risk-free rate and dividend yield. Additional considerations included a discount for lack of marketability resulting from Carvana’s five-year lock-up period. These warrants vest as the parties develop an integrated automobile insurance solution for the Integrated Platform and insurance sales through the Integrated Platform. The associated compensation expense is dependent on our periodic assessment of the probability of the milestones being achieved. If deemed probable, we recognize compensation expense on a pro-rata basis considering progress toward achieving the milestones. If a performance condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized. In determining the classification as equity, we followed guidance issued within FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. For additional information refer to Note 12, “Share-Based Compensation.” 98 Net Loss Per Share —Net loss per share, or EPS, results are a key indicator of the overall performance relative to each share of our outstanding common stock. Basic EPS share for both Class A and Class B common stock is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares vested and outstanding during the period. In addition to common shares outstanding, the computation of basic EPS includes instruments for which the holder is deemed to have the present rights to share in current period earnings (loss) with common stockholders. Accordingly, the warrants issued in connection with our $ 100.0 million term loan entered on November 25, 2019, or Term Loan B, were included in the 2020 weighted-average number of common shares outstanding because they had an insignificant exercise price of $ 0.0001 per share and were therefore considered outstanding common shares for computation of basic EPS. Diluted EPS for both Class A and Class B common stock includes all the components of basic EPS, plus the dilutive effect of common stock equivalents, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive. Notable dilutive securities relevant to our operations are stock options, performance stock options, nonvested shares subject to repurchase, restricted stock units, warrants and redeemable convertible preferred stock. We have operated at a loss for the years ended December 31, 2022, 2021 and 2020. Therefore, the conversion of common stock equivalents would increase the denominator of the EPS calculation and create a lower loss per share. Therefore, these common stock equivalents are considered antidilutive and diluted EPS is equal to basic EPS. Losses are allocated equally between both classes of common stock because they are entitled to the same liquidation and dividend rights. Recently Adopted Accounting Pronouncements —There were no accounting standards adopted in 2022 that had a material impact in our consolidated financial statements. Recently Issued Financial Accounting Standards Not Yet Adopted —We assess the adoption impacts of recently issued accounting standards by the FASB in our consolidated financial statements as well as material updates to previous assessments, if any from our 2021 Form 10-K. There were no accounting standards issued in 2022 that are expected to have a material impact in our consolidated financial statements. 99 3. INVESTMENTS The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at December 31, 2022 and 2021 are as follows: 2022 Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 11.3 $ — $ — $ ( 0.3 ) $ 11.0 Municipal securities 21.4 — — ( 1.2 ) 20.2 Corporate debt securities 60.5 — — ( 2.7 ) 57.8 Residential mortgage-backed securities 5.5 — — ( 0.3 ) 5.2 Commercial mortgage-backed securities 24.4 — — ( 1.2 ) 23.2 Other debt obligations 11.1 — 0.1 ( 0.2 ) 11.0 Total fixed maturities 134.2 — 0.1 ( 5.9 ) 128.4 Short-term investments 0.4 — — — 0.4 Total $ 134.6 $ — $ 0.1 $ ( 5.9 ) $ 128.8 2021 Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 23.7 $ — $ — $ ( 0.4 ) $ 23.3 Municipal securities 20.4 — 0.3 ( 0.1 ) 20.6 Corporate debt securities 48.2 — 0.7 ( 0.2 ) 48.7 Residential mortgage-backed securities 3.5 — — — 3.5 Commercial mortgage-backed securities 30.2 — 0.2 ( 0.1 ) 30.3 Other debt obligations 3.5 — — — 3.5 Total $ 129.5 $ — $ 1.2 $ ( 0.8 ) $ 129.9 Management reviewed the available-for-sale securities at each balance sheet date to consider whether it was necessary to recognize a credit loss as of December 31, 2022 and 2021. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the security before recovery. Management concluded that the available-for-sale securities’ unrealized losses were due to non-credit related factors and, therefore, there was no allowance for credit loss as of December 31, 2022 and 2021. 100 The following tables reflect the gross unrealized losses and fair value of short-term investments and available-for-sale fixed maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2022 and 2021: 2022 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 6.9 $ ( 0.1 ) $ 4.1 $ ( 0.2 ) $ 11.0 $ ( 0.3 ) Municipal securities 11.5 ( 0.5 ) 8.2 ( 0.7 ) 19.7 ( 1.2 ) Corporate debt securities 45.3 ( 1.6 ) 11.5 ( 1.1 ) 56.8 ( 2.7 ) Residential mortgage-backed securities 2.2 — 1.9 ( 0.3 ) 4.1 ( 0.3 ) Commercial mortgage-backed securities 18.3 ( 0.8 ) 4.6 ( 0.4 ) 22.9 ( 1.2 ) Other debt obligations 6.8 ( 0.2 ) — — 6.8 ( 0.2 ) Total fixed maturities 91.0 ( 3.2 ) 30.3 ( 2.7 ) 121.3 ( 5.9 ) Short-term investments 0.1 — — — 0.1 — Total $ 91.1 $ ( 3.2 ) $ 30.3 $ ( 2.7 ) $ 121.4 $ ( 5.9 ) 2021 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 7.5 $ — $ ( 0.1 ) $ 14.0 $ ( 0.3 ) $ 21.5 $ ( 0.4 ) Municipal securities 8.9 ( 0.1 ) — — 8.9 ( 0.1 ) Corporate debt securities 12.7 ( 0.1 ) 1.6 ( 0.1 ) 14.3 ( 0.2 ) Residential mortgage-backed securities 1.9 — 0.5 — 2.4 — Commercial mortgage-backed securities 8.7 ( 0.1 ) — — 8.7 ( 0.1 ) Total $ 39.7 $ ( 0.4 ) $ 16.1 $ ( 0.4 ) $ 55.8 $ ( 0.8 ) Other Investments As of December 31, 2022 and 2021, other investments related to our private equity investments were $ 4.4 million and $ 4.7 million, respectively. We recognized $ 1.2 million and zero of realized gains in December 31, 2022 and 2021, respectively. We recorded the sale of one of our private equity investments within net realized gains on investments in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2022. There were no impairment losses recognized on private equity investments for the years ended December 31, 2022 and 2021. 101 The following table reflects the gross and net realized gains and losses on short-term investments, available-for-sale fixed maturities and other investments that have been included in the consolidated statements of operations and comprehensive loss for the years ended December 31, 2022, 2021 and 2020: 2022 2021 2020 (dollars in millions) Realized gains on investments $ 1.2 $ 2.5 $ 0.5 Realized losses on investments ( 0.7 ) ( 0.1 ) ( 0.2 ) Net realized gains on investments $ 0.5 $ 2.4 $ 0.3 The following table sets forth the amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities by contractual maturity at December 31, 2022: 2022 Amortized Cost Fair Value (dollars in millions) Due in one year or less $ 27.1 $ 26.7 Due after one year through five years 80.2 76.2 Due five years through 10 years 15.4 14.6 Due after 10 years 11.9 11.3 Total $ 134.6 $ 128.8 The following table sets forth the components of net investment income for the years ended December 31, 2022, 2021 and 2020: 2022 2021 2020 (dollars in millions) Interest on bonds $ 2.4 $ 2.4 $ 4.2 Interest on deposits and cash equivalents 5.7 1.1 1.7 Other investments (1) — 3.8 — Total 8.1 7.3 5.9 Investment expense ( 1.9 ) ( 2.3 ) ( 0.5 ) Net investment income $ 6.2 $ 5.0 $ 5.4 ______________ (1) Unrealized gains resulting from observable price changes related to our private equity investments. 102 The following tables summarize the credit ratings of short-term investments and available-for-sale fixed maturity securities at December 31, 2022 and 2021: December 31, 2022 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 62.5 $ 59.9 46.5 % AA+, AA, AA-, A-1 19.9 19.1 14.8 A+, A, A- 38.4 36.5 28.3 BBB+, BBB, BBB- 13.8 13.3 10.4 Total $ 134.6 $ 128.8 100.0 % December 31, 2021 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 70.9 $ 70.8 54.5 % AA+, AA, AA-, A-1 14.7 14.8 11.4 A+, A, A- 33.4 33.6 25.9 BBB+, BBB, BBB- 10.5 10.7 8.2 Total $ 129.5 $ 129.9 100.0 % Pursuant to certain regulatory requirements, we are required to hold assets on deposit with various state insurance departments for the benefit of policyholders. These special deposits are included in fixed maturities available-for-sale on the consolidated balance sheets. As of December 31, 2022 and 2021, these required deposits had an amortized cost of $ 11.7 million and $ 13.4 million, respectively, and fair value of $ 11.3 million and $ 13.8 million, respectively. 103 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The following tables provide information about our financial assets measured and reported at fair value as of December 31, 2022 and 2021: 2022 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 9.2 $ 1.8 $ — $ 11.0 Municipal securities — 20.2 — 20.2 Corporate debt securities — 57.8 — 57.8 Residential mortgage-backed securities — 5.2 — 5.2 Commercial mortgage-backed securities — 23.2 — 23.2 Other debt obligations — 11.0 — 11.0 Total fixed maturities 9.2 119.2 — 128.4 Short-term investments — 0.4 — 0.4 Cash equivalents 487.3 — — 487.3 Total assets at fair value $ 496.5 $ 119.6 $ — $ 616.1 2021 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 22.6 $ 0.7 $ — $ 23.3 Municipal securities — 20.6 — 20.6 Corporate debt securities — 48.7 — 48.7 Residential mortgage-backed securities — 3.5 — 3.5 Commercial mortgage-backed securities — 30.3 — 30.3 Other debt obligations — 3.5 — 3.5 Total fixed maturities 22.6 107.3 — 129.9 Cash equivalents 127.0 — — 127.0 Total assets at fair value $ 149.6 $ 107.3 $ — $ 256.9 We estimate the fair value of all our different classes of Level 2 fixed maturities and short-term investments by using quoted prices from a combination of an independent pricing vendor or broker/dealer, pricing models, quoted prices of securities with similar characteristics or discounted cash flows. All significant inputs were observable in the active markets. Private Equity Investments Measured at Fair Value on a Non-Recurring Basis Private equity investments that have been remeasured during the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. See Note 3, “Investments,” for further information on our private equity investments. 104 Fair Value of Long-Term Debt The carrying amount of long-term debt is recorded at the unpaid balance, net of discount and debt issuance costs. The fair value of outstanding long-term debt as of December 31, 2022 was classified within Level 2 of the fair value hierarchy. The fair value was based on a model referencing observable interest rates and spreads to project and discount cash flows to present value. As of December 31, 2022 and 2021, the carrying amounts and fair values of these financial instruments were as follows: Carrying amount as of December 31, 2022 Estimated Fair Value as of December 31, 2022 Carrying amount as of December 31, 2021 Estimated Fair Value as of December 31, 2021 (dollars in millions) Long-term debt $ 295.4 $ 309.7 $ — $ — The carrying amounts of other short-term financial instruments approximates their fair value due to their short-term nature. 5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The following provides a reconciliation of the beginning and ending reserve balances for loss and LAE, net of reinsurance: 2022 2021 2020 (dollars in millions) Gross loss and LAE reserves, January 1 $ 320.2 $ 237.2 $ 140.7 Reinsurance recoverable on unpaid losses ( 79.5 ) ( 79.6 ) ( 18.9 ) Net loss and LAE reserves, January 1 240.7 157.6 121.8 Net incurred loss and LAE related to: Current year 348.1 405.9 341.9 Prior years 2.9 ( 13.6 ) 20.9 Total incurred 351.0 392.3 362.8 Net paid loss and LAE related to: Current year 215.6 226.4 216.3 Prior years 165.1 82.8 110.7 Total paid 380.7 309.2 327.0 Net loss and LAE reserves, December 31 211.0 240.7 157.6 Plus reinsurance recoverable on unpaid losses 76.4 79.5 79.6 Gross loss and LAE reserves, December 31 $ 287.4 $ 320.2 $ 237.2 Incurred losses and LAE attributable to prior accident years was an increase of $ 2.9 million, a decrease of $ 13.6 million and an increase of $ 20.9 million during 2022, 2021 and 2020, respectively. The increase to incurred losses for prior accident years in 2022 of $ 2.9 million was primarily driven by higher-than-expected reported losses from accident year 2021 material damage claims due to higher replacement parts cost and growth in used car values. The decrease to incurred losses for prior accident years in 2021 of approximately $ 13.6 million was primarily due to lower-than-expected reported losses on bodily injury claims, and higher than expected subrogation and salvage recoveries from accident year 2020 material damage claims. 105 The increase to incurred losses for prior accident years in 2020 of approximately $ 20.9 million was primarily due to higher than estimated reported losses for bodily injury claims, as well as higher loss emergence on collision claims from prior accident years due to a slower cycle time for reported claims. The year ended December 31, 2020 also included development of incurred losses related to accident years 2019 and prior as a result of a change in estimate. The adjustments recorded in the year ended December 31, 2020 were necessary in order to effectuate management’s best estimate for determining the estimated ultimate cost of settling claims using our knowledge and experience about past and current events and developments. The following table shows incurred and paid losses and allocated loss adjustment expenses, or ALAE, development by accident year for private passenger auto in aggregate, cumulative claim frequency is defined as the number of reported claims at the claim level which includes reported claims that do not result in a liability: Incurred Losses and ALAE—Net of Reinsurance Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021 (unaudited) 2022 IBNR Reported Claims (1) (dollars in millions) 2017 $ 1.2 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ 1.1 $ — 556 2018 42.3 48.3 49.6 48.7 48.3 0.2 18,111 2019 287.3 306.3 304.7 306.0 1.5 90,167 2020 295.9 287.7 286.2 3.9 117,343 2021 341.6 348.1 14.3 151,988 2022 296.0 50.1 115,312 Total $ 1,285.7 $ 70.0 493,477 Cumulative Paid Losses and ALAE—Net of Reinsurance Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021 (unaudited) 2022 (dollars in millions) 2017 $ 0.6 $ 0.9 $ 1.0 $ 1.1 $ 1.1 $ 1.1 2018 20.6 44.6 48.1 48.1 47.7 2019 177.0 277.7 296.2 302.1 2020 182.0 238.5 269.9 2021 179.4 294.6 2022 175.3 Total 1,090.7 Loss and ALAE reserves—net of reinsurance $ 195.0 _______________ (1) Reported by claim event. The following table sets forth the reconciliation of the claims development tables to the balance sheet losses and ALAE reserves, with separate disclosure of unallocated LAE, or ULAE, and reinsurance recoverable on unpaid losses for the years ended December 31: 2022 2021 (dollars in millions) Loss and ALAE reserves—net of reinsurance $ 195.0 $ 220.5 ULAE reserves—net of reinsurance 16.0 20.2 Reinsurance recoverables on unpaid losses 76.4 79.5 Total loss and LAE reserves—gross of reinsurance $ 287.4 $ 320.2 106 The following table sets forth the historical average annual percentage payout of incurred losses and ALAE (claims duration), net of reinsurance, as of December 31, 2022: Year 1 2 3 4 5 6 Incremental Paid (1) 54.9 % 32.5 % 8.3 % 3.7 % ( 0.4 ) % — % _______________ (1) Supplemental information and unaudited . 6. REINSURANCE The following table reflects amounts affecting the consolidated balance sheets and statements of operations and comprehensive loss for reinsurance as of and for the years ended December 31: 2022 2021 2020 (dollars in millions) Loss and LAE reserves: Direct $ 269.3 $ 313.2 $ 237.2 Assumed 18.1 7.0 — Ceded ( 76.4 ) ( 79.5 ) ( 79.6 ) Net loss and LAE reserves $ 211.0 $ 240.7 $ 157.6 Unearned premiums: Direct $ 125.8 $ 170.6 $ 157.1 Assumed 10.7 9.5 — Ceded ( 74.2 ) ( 100.8 ) ( 112.8 ) Net unearned premiums $ 62.3 $ 79.3 $ 44.3 Premiums written: Direct $ 556.8 $ 725.9 $ 616.8 Assumed 43.2 16.7 — Ceded ( 331.2 ) ( 397.3 ) ( 378.0 ) Net premiums written $ 268.8 $ 345.3 $ 238.8 Premiums earned: Direct $ 601.6 $ 712.3 $ 605.2 Assumed 42.0 7.3 — Ceded ( 357.7 ) ( 409.3 ) ( 282.7 ) Net premiums earned $ 285.9 $ 310.3 $ 322.5 Losses and LAE incurred: Direct $ 549.8 $ 683.9 $ 557.6 Assumed 44.9 10.9 — Ceded ( 243.7 ) ( 302.5 ) ( 194.8 ) Net losses and LAE incurred $ 351.0 $ 392.3 $ 362.8 If our reinsurance was cancelled at December 31, 2022 and 2021, the maximum amount of return ceded commissions due with the return of unearned premiums would have been $ 19.0 million and $ 26.5 million, respectively. Our reinsurance recoverable on unpaid losses gross of the provision for loss corridor, loss ratio caps and allowance for credit losses was $ 143.3 million and $ 160.7 million as of December 31, 2022 and 2021, respectively. As of December 31, 2022 and 2021, a provision for loss corridor of $ 66.2 million and $ 80.4 million, respectively, was recorded as a contra-asset in reinsurance recoverable on the consolidated balance sheets. 107 7. LONG-TERM DEBT In January 2022, we entered into the Term Loan, with the full principal amount due and payable upon maturity on January 27, 2027. Interest is payable quarterly and is determined on a floating interest rate currently calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0 % floor, plus 9.0 %, plus 0.26161 % per annum. As part of the loan agreement, we issued warrants to the lender to purchase approximately 0.3 million shares of our Class A common stock at a strike price of $ 162.00 per share. Such warrants will expire on the later of the repayment in full of the Term Loan or January 27, 2027. The total fair value of these warrants at January 27, 2022 was $ 0.6 million. The Term Loan contains debt covenants which, among other things, 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 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. Under the latter set of circumstances, we must issue additional warrants to purchase shares of our Class A common stock equal to 1.0 % of the aggregate number of issued and outstanding shares of Class A common stock on a fully-diluted basis as of the date the threshold is reduced. The additional warrants, if issued, would have an exercise price equal to the 30 -trading day volume weighted average price of the Class A common stock as of the trading day immediately prior to the triggering date. The additional warrants will expire on the later of the repayment in full of the Term Loan, January 27, 2027 or the date that falls 12 months after the issuance of these warrants. As of December 31, 2022, the fair value of these 1.0 % warrants was immaterial to our consolidated financial statements. On November 8, 2021, we extinguished Term Loan B for $ 120.9 million, consisting of $ 100.0 million principal balance and $ 20.9 million of accrued interest, including paid-in-kind interest, and fees. We also amortized the remaining unamortized discount and debt and warrant issuance costs, all of which resulted in a loss on early extinguishment of debt of $ 15.9 million that was recognized in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2021 In October 2021, upon maturity of our $ 100 million term loan, or Term Loan A, we repaid the outstanding principal balance of $ 98.8 million and accrued interest and fees of $ 0.2 million. We had no letters of credit outstanding or amounts drawn against the revolving loan on the date of the termination. The following summarizes the carrying value of long-term debt and warrants as of December 31, 2022 and 2021: 2022 2021 (dollars in millions) Term Loan $ 300.0 $ — Accrued interest payable 7.3 — Unamortized discount and debt issuance costs and warrants ( 11.9 ) — Total $ 295.4 $ — 8. LEASES We primarily have operating leases for offices that support our corporate, claims and customer service functions. We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease right-of-use assets and corresponding operating lease liabilities are recognized upon the commencement date based primarily on the present value of lease payments over the lease term. We use the implicit 108 rate of the lease, if it is readily determinable, in determining the present value of lease payments. Our leases generally do not provide an implicit rate. Therefore, we use a collateralized incremental borrowing rate that incorporates information available at commencement date, including our company-specific interest rates from recent debt issuances, which we adjusted to obtain our company-specific interest rate risk. We also leverage commercial mortgage-backed securities, or CMBS, rates, for transactions with similar values, origination dates, geographies and property types as the respective lease, which are adjusted using linear interpolation if the lease term falls between the published CMBS terms. The following table summarizes supplemental balance sheets information related to leases at December 31, 2022 and 2021: 2022 2021 Operating leases: (dollars in millions) Operating lease right-of-use liabilities $ 10.5 $ 14.1 Operating lease right-of-use assets $ 4.3 $ 5.1 Operating lease liabilities are included in other liabilities and operating lease right-of-use assets are included in other assets in our consolidated balance sheets. The components of lease costs for the years ended December 31, 2022 and 2021, are as follows: Years Ended December 31, 2022 2021 Lease cost components: (dollars in millions) Operating lease costs (1) $ 2.1 $ 5.0 ______________ (1) Variable lease expense and short-term lease expense recognized during the years ended December 31, 2022 and 2021 were not material. Supplemental cash flow information for the years ended December 31, 2022 and 2021, are as follows: 2022 2021 (dollars in millions) Operating cash flows paid for amounts included in the measurement of lease liabilities $ 3.9 $ 3.8 In October 2022, we reduced our square footage at one of our offices. The amendment triggered a remeasurement of the operating lease assets and liabilities at the modification date, resulting in a decrease of $ 0.9 million as of December 31, 2022. The modification also resulted in a $ 0.9 million gain for the year ended December 31, 2022. The gain is a contra-expense in general and administrative expenses on the consolidated statements of operations and comprehensive loss. In August 2022, we ceased using a portion of our corporate headquarters and extended the lease term on the remaining portion to December 31, 2027. The amendment triggered a change in estimate to the respective useful lives, which has been accounted for as a lease modification. The operating lease assets and liabilities were remeasured at the modification date, resulting in an increase of $ 1.4 million as of December 31, 2022. During evaluation of our office space needs in 2021, we determined our Easton facility in Columbus, Ohio had no future economic benefit, so we determined the cease-use date occurred in December 2021. Accordingly, we accelerated the amortization of the remaining right-of-use asset and recognized $ 2.0 million of lease expense within general and administrative expenses in our consolidated statements of operations and comprehensive loss for the year ended December 31, 2021. 109 We also sublease certain office space, resulting in sublease income. Sublease income and the related assets and cash flows are not material to our consolidated financial statements as of and for the years ended December 31, 2022 and 2021. Sublease income is recognized as a reduction to operating lease expense in our consolidated statements of operations and comprehensive loss. The weighted average remaining lease term and weighted average operating lease discount rate, for the years ended December 31, 2022 and 2021 are as follows: 2022 2021 Weighted average of remaining operating lease term (years) 4.6 4.4 Weighted average operating lease discount rate 11.8 % 10.8 % Future lease payments as of December 31, 2022 were as follows: Operating Leases (dollars in millions) 2023 $ 3.2 2024 3.2 2025 2.2 2026 2.3 2027 2.4 2028 and thereafter 0.2 Total future lease payments 13.5 Less: imputed interest ( 3.0 ) Total lease liabilities $ 10.5 110 9. INCOME TAXES We had no income tax expense (benefit) for the years ended December 31, 2022, 2021 and 2020: 2022 2021 2020 (dollars in millions) Current: Federal $ — $ — $ — State — — — Total current — — — Deferred: Federal — — — State — — — Total deferred — — — Total income tax expense (benefit) $ — $ — $ — The income tax expense (benefit) differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21 % in 2022, 2021 and 2020 to pretax income as a result of the following: 2022 2021 2020 (dollars in millions) Loss before income taxes $ ( 297.7 ) $ ( 521.1 ) $ ( 363.0 ) Statutory U.S. federal income tax benefit ( 62.5 ) 21.0 % ( 109.4 ) 21.0 % ( 76.2 ) 21.0 % Valuation allowance on deferred tax assets 65.8 ( 22.1 ) 116.7 ( 22.4 ) 61.5 ( 16.9 ) Warrants fair value adjustment — — — — 11.5 ( 3.2 ) Share-based compensation 4.9 ( 1.6 ) ( 3.3 ) 0.6 5.0 ( 1.4 ) Nondeductible compensation 1.3 ( 0.4 ) 1.8 ( 0.3 ) — — Return to provision permanent adjustments ( 3.5 ) 1.2 ( 0.5 ) 0.1 — — State net operating loss ( 7.1 ) 2.4 ( 4.9 ) 0.9 ( 3.1 ) 0.9 Other 1.1 ( 0.5 ) ( 0.4 ) 0.1 1.3 ( 0.4 ) Income tax expense (benefit) $ — — % $ — — % $ — — % 111 The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021: 2022 2021 (dollars in millions) Deferred tax assets: Unpaid losses and loss adjustment expenses $ 1.9 $ 2.5 Unearned premium reserves 2.7 3.8 Nondeductible accruals 0.4 0.5 Deferred rent 1.5 2.0 Research and development credits 0.9 0.9 Disallowed interest carryforward 16.5 9.6 Bad debt expense 0.7 1.2 Excess ceding commission 2.8 2.2 Deferred compensation 6.1 2.5 Stock and warrant compensation 9.5 5.4 Unrealized losses 1.4 — Other 0.1 2.6 State net operating loss carryforward 17.4 10.2 Net operating loss carryforward 266.4 217.4 Gross deferred assets 328.3 260.8 Less valuation allowance ( 322.3 ) ( 255.0 ) Total deferred tax assets, less valuation allowance 6.0 5.8 Deferred tax liabilities: Internally developed software 2.0 2.7 Fixed assets 1.3 2.2 Deferred acquisition costs 1.5 0.6 Unrealized gains — 0.1 Other 1.2 0.2 Deferred tax liabilities 6.0 5.8 Net deferred tax asset $ — $ — The above amounts were calculated in accordance with ASC 740, Income Taxes . 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 which 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 include 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. Although lack of realization is not assured, we believe it is more likely than not that the deferred tax assets will not be realized. As such, a valuation allowance of $ 322.3 million has been established. 112 We have experienced an ownership change under Section 382 of the Internal Revenue Code, or the Code. Accordingly, use of a portion of our net operating losses, or NOLs, and tax credit carryforwards are subject to an annual limitation under Section 382 of the Code. We do not expect any of our deferred tax assets related to our NOLs or tax credit carryforwards to expire unutilized as a result of this limitation. The following table sets forth carryforwards related to NOLs and tax credits: Carryforward with Expiration Carryforward Indefinitely Total Years of Expiration (dollars in millions) Federal $ 640.7 $ 628.2 $ 1,268.9 2035 - 2042 State (gross, apportioned) 238.4 55.7 294.1 2024 - 2042 Research and development credits 0.9 — 0.9 2036 - 2038 Total $ 880.0 $ 683.9 $ 1,563.9 We file a consolidated federal income tax return and certain state income tax returns. Tax years 2019 and forward are still subject to U.S. federal examinations. The federal statute of limitations is generally three years. Currently all state income and franchise tax returns are within each taxing authorities statute of limitations and are subject to examination. 10. RESTRUCTURING COSTS In November 2022, we initiated a company-wide involuntary workforce reduction 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, or November 2022 Restructuring. As a result of the November 2022 Restructuring, we incurred severance, benefits, share-based compensation, employee compensation expense dependent upon continuous employment for certain employees, and related employee costs, or Employee costs. 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. We do not expect to incur any material additional expenditures related to real estate exit costs or software costs in future periods. In January 2022, we instituted an organizational realignment, which included an involuntary workforce reduction, due to inflation and loss cost trends and to further drive efficiency and increased focus on our strategic priorities, or January 2022 Restructuring. As a result of the January 2022 Restructuring, we incurred Employee costs and accelerated expense for software that no longer has economic benefit. Additionally, we incurred real estate exit costs related to certain floors of our corporate headquarters in Columbus, Ohio that we ceased using. To the extent we had no intent or ability to sublease the space, we accelerated the amortization of the related right-of-use assets, leasehold improvements and furniture and fixtures. For subleased space, we recognized sublease income as an offset to amortization of the right-of-use asset. As of December 31, 2022, we do not expect to incur any material additional expenditures in future periods related to the January 2022 Restructuring. The following table displays restructuring costs recorded in general and administrative expenses on the consolidated statements of operations and comprehensive loss: Years Ended December 31, 2022 2021 2020 Restructuring costs: (dollars in millions) Employee costs $ 15.5 $ — $ — Real estate exit costs 2.1 — — Software costs 1.0 — — Total restructuring costs $ 18.6 $ — $ — 113 The following table displays a rollforward of the accrual for restructuring costs recorded in other liabilities on the consolidated balance sheets: Employee costs Software costs Total liability Restructuring activity: (dollars in millions) Restructuring liability as of December 31, 2021 $ — $ — $ — Expense incurred 10.2 1.0 11.2 Payments ( 7.1 ) ( 0.9 ) ( 8.0 ) Restructuring liability as of December 31, 2022 $ 3.1 $ 0.1 $ 3.2 11. CAPITAL STOCK In August 2022, an authorized 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 common stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented. Our total authorized shares consist of 1,000.0 million of Class A common stock, 269.0 million shares of Class B common stock and 100.0 million shares of preferred stock. All classes of stock have a par value of $ 0.0001 per share. For additional information related to the reverse stock split, see Note 2, “Basis of Presentation and Significant Accounting Policies.” As of December 31, 2022, the Company has issued and outstanding: 9.2 million shares of Class A common stock, 5.0 million shares of Class B common stock, and 14.1 million shares of preferred stock that have a redemption value of $ 126.5 million. In October 2021, we issued redeemable convertible preferred stock to Carvana pursuant to the Investment Agreement. We received $ 126.5 million of gross proceeds from the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Preferred Stock and issued Carvana eight tranches of warrants to purchase shares of the Company’s Class A common stock. Further details on the warrants are discussed in Note 12, "Share-Based Compensation." In connection with the Investment Agreement, we incurred issuance costs of $ 19.6 million, $ 9.0 million of which were contingent upon the success of the Investment Agreement as measured by achievement of certain warrant vesting milestones. We allocated the issuance costs between the preferred stock and the warrants based on their relative fair values. The warrants are recognized on a pro-rata basis considering Carvana’s progress toward achieving the milestones, and the allocated issuance costs are reclassified from other assets to contra-equity on that same pro-rata basis. As of December 31, 2022, issuance costs were recognized in our consolidated balance sheets as follows: $ 14.5 million as contra-redeemable convertible preferred stock; $ 2.7 million as contra-additional paid-in capital; and $ 2.4 million as other assets. The carrying value of our preferred stock was $ 112.0 million as of December 31, 2022. In October 2021, our board of directors approved the retirement of 0.3 million shares of Class A common stock that were held in treasury at $ 0.8 million. In October 2020, we completed our 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 . Concurrently, we issued and sold 1.0 million shares of our Class A common stock in private placements. We received net proceeds of $ 1.1 billion after deducting certain underwriting discounts and commissions and other offering costs of $ 57.5 million. All shares of our common stock and redeemable convertible preferred stock outstanding immediately prior to our IPO were converted into shares of our Class B common stock, and all warrants were exercised into shares of Class B common stock. The voting, dividend and liquidation rights of the holders of our Class A and Class B common stock are subject to and qualified by the rights, powers, and preferences of the holders of the preferred stock. Other rights, privileges, and preferences of our capital stock are as follows: 114 Dividends —Class A and Class B common stock are entitled to the same dividend rights. We are not permitted to declare, pay, or set aside any dividends on shares of any other class or series of capital stock unless the holders of the preferred stock then outstanding first receive, or simultaneously receive, a dividend. Beginning after the fifth anniversary of the Integrated Platform becoming available to customers, Series A Preferred Stockholders are entitled to receive, when, as and if declared by the board of directors, a dividend at an annual rate of 5 % of the liquidation preference per share of Series A Preferred Stock, if our 90-day volume-weighted average price, or VWAP, per share of Class A common stock is below the conversion price at that time. Voting Rights —Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Holders of preferred stock are entitled to vote, together with the holders of Class A common stock and Class B common stock, on an as-converted basis on all matters submitted to a vote of the holders of Class A common stock and Class B common stock. Liquidation Preferences —In the event of any voluntary or involuntary liquidation, dissolution, or winding up of our business, after payment or provision for payment of the debts and other liabilities of the Company, the holders of Series A Preferred Stock are entitled to receive, before any distribution out of the assets of the Company may be made to or set aside for the holders of any common stock, an amount per share equal to the greater of (i) $ 9.00 per share plus the amount of any accrued but unpaid dividends thereon as of such date and (ii) the amount such preferred stockholders would have received had they, immediately prior to such an event, converted such shares of Series A Preferred Stock into Class A common stock. Thereafter, holders of Class A and Class B common stock are entitled to any remaining proceeds on a pro-rata basis. Class A and Class B common stock are entitled to the same liquidation rights. Conversion and Transfer —Each share of Class B common stock is convertible at any time into one share of Class A common stock. Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for tax or estate planning purposes. Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, or from time to time, into shares of Class A common stock at a conversion rate equal to the liquidation preference divided by the conversion price. As of December 31, 2022, the conversion price was $ 162.00 per share and the Series A Preferred Stock was convertible into 0.8 million shares of Class A common stock. To the extent that such conversion would cause the holder to hold in excess of 9.9 % of the voting stock, such conversion would be subject to approval from (a) the Delaware Insurance Commissioner and (b) the Ohio Director of Insurance. Redemption and Balance Sheet Classification —The redeemable convertible preferred stock is classified as mezzanine equity because while it is not mandatorily redeemable, it will become convertible or redeemable at the option of the preferred stockholder in connection with any change of control of the Company, which is considered not solely within our control. 12. SHARE-BASED COMPENSATION In August 2022, an authorized 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. Warrants As part of the Investment Agreement discussed in Note 11, “Capital Stock,” we issued Carvana eight tranches of warrants, comprised of three tranches of “short-term warrants” and five tranches of “long-term warrants.” However, the exercisability of certain tranches are subject to Carvana’s decision to exercise certain other tranches. If Carvana exercises short-term tranches, then long-term tranche 1 warrants are cancelled and the remaining long-term tranches would be reduced such that Carvana will have the opportunity to purchase a maximum of 7.2 million shares of Class A common stock. 115 As of December 31, 2022, we determined the remaining unvested short-term warrants were probable of vesting. Under that scenario, it is not a possible outcome for the long-term warrants to also vest, so they are considered not probable of vesting. We recognized warrant compensation expense related to these equity-classified warrants based on progress toward completing the Integrated Platform, and policies originating through the Integrated Platform. In September 2022, the Integrated Platform launched and as a result, tranche 1 of our short-term warrants vested. There were no exercises upon vesting and all warrants remain outstanding. All of these warrants are out-of-the-money and therefore have no intrinsic value as of December 31, 2022. The following table displays warrant compensation expense recorded in the consolidated statements of operations and comprehensive loss: Years Ended December 31, 2022 2021 2020 (dollars in millions) Warrant compensation expense: Sales and marketing $ 8.8 $ 8.8 $ — Other insurance (benefit) expense 5.7 — — Total warrant compensation expense $ 14.5 $ 8.8 $ — The short-term warrants will expire September 1, 2025 and the long-term warrants will expire September 1, 2027. The following table provides other key terms of the warrants: Warrants Exercise Price Shares Issued (in millions) Grant Date Fair Value per Share Vesting Condition Short-Term Tranche 1 $ 180.00 2.4 $ 0.42 Completing the Integrated Platform Tranche 2 $ 198.00 3.2 $ 0.37 50,000 policy originations Tranche 3 $ 216.00 1.6 $ 0.18 75,000 policy originations Total Short-Term 7.2 Long-Term Tranche 1 $ 180.00 1.4 $ 0.42 100,000 policy originations Tranche 2 $ 225.00 1.5 $ 0.35 200,000 policy originations Tranche 3 $ 270.00 1.5 $ 0.24 300,000 policy originations Tranche 4 $ 405.00 1.5 $ 0.09 400,000 policy originations Tranche 5 $ 540.00 1.3 $ 0.04 500,000 policy originations Total Long-Term 7.2 The fair value of the warrants is estimated on the date of grant using a Monte Carlo simulation with Geometric Brownian Motion that uses certain inputs, assumptions and estimates, as follows: expected term of five years , based on the contractual term of the warrants; risk-free interest rate of 0.9 %, based on U.S. Constant Maturity Yield Curve over a similar term; dividend rate of 0.0 %, based on our historical and expected future dividend payouts, which may be subject to change in the future; and volatility of 45 %, based on historical and implied volatility of comparable publicly held companies, because we did not have sufficient company-specific volatility at the time of grant, and other factors. As of December 31, 2022, there was $ 21.1 million of unrecognized compensation cost related to the warrants. The remaining costs are expected to be recognized over a period of approximately two years . 116 Employee Share-Based Compensation 2020 Equity Incentive Plan We maintain an equity incentive plan, the 2020 Equity Incentive Plan, or the 2020 Plan, for the issuance and grant of equity awards (restricted stock, RSUs, and incentive and nonqualified stock options) to our officers, directors, employees and certain advisors. As of December 31, 2022, the number of shares authorized under the 2020 Plan was 3.2 million shares of Class A common stock, inclusive of available shares previously reserved for issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, and subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. In addition, this reserve will automatically increase on January 1 of each year, which commenced on January 1, 2021 and will end on (and including) January 1, 2030, in an amount equal to 4 % of the total number of shares of capital stock outstanding on December 31 of the preceding year. However, the board of directors may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of Class A common stock. The aggregate maximum number of shares of Class A common stock that may be issued pursuant to the exercise of incentive stock options is 6.7 million shares. As of December 31, 2022, the number of shares available for issuance under the 2020 Plan was 1.8 million. In August 2022, our board of directors approved the First Amendment to our 2020 Employee Stock Purchase Plan, or ESPP. The number of shares of Class A common stock initially reserved for issuance under the ESPP is limited to 0.3 million shares. In addition, the number of shares reserved for issuance under the ESPP is subject to an annual increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, in an amount equal to the lesser of (i) 1 % of the total number of shares of capital stock outstanding on December 31 of the preceding year and (ii) 0.4 million shares of Class A common stock. Our board of directors may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of Class A common stock. 2015 Equity Incentive Plan In 2015, the board of directors of the Company adopted the 2015 Plan under which the Company could grant equity awards (restricted stock, and incentive and nonqualified stock options) to its officers, directors, employees and certain advisors. In October 2020, this plan was superseded by the 2020 Plan and all reserved shares under the 2015 Plan were transferred to the 2020 Plan. The following table displays employee share-based compensation expense recorded in the consolidated statements of operations and comprehensive loss: Years Ended December 31, 2022 2021 2020 (dollars in millions) Share-based compensation expense: Loss and loss adjustment expenses $ 0.7 $ 1.5 $ 0.6 Sales and marketing 0.8 1.0 1.0 Other insurance (benefit) expense 0.8 1.6 1.0 Technology and development 3.3 4.5 5.8 General and administrative 24.9 10.7 20.4 Total share-based compensation expense $ 30.5 $ 19.3 $ 28.8 117 The following table provides total employee share-based compensation expense by type of award: Years Ended December 31, 2022 2021 2020 (dollars in millions) Share-based compensation expense: Restricted stock unit expense $ 28.8 $ 14.9 $ 0.6 Stock option expense 1.7 4.4 28.2 Total share-based compensation expense $ 30.5 $ 19.3 $ 28.8 In March 2020, a current investor completed a tender offer for common stock from vested shareholders, many of whom were employees or members of the board of directors. To encourage participation, the tender offer was made at a price in excess of the fair value of our common stock. As a result, we recognized $ 25.1 million of share-based compensation expense related to these tender offers during the year ended December 31, 2020. As of December 31, 2022, there was $ 2.2 million and $ 40.2 million of unrecognized compensation cost related to unvested stock options and RSUs, respectively. The remaining costs are expected to be recognized over a period of four years for unvested stocks options and RSUs. Restricted Stock Units A summary of RSU activity for the year ended December 31, 2022 and 2021 is as follows: Restricted Stock Units Number of Shares Weighted-Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in millions, except per share amounts) Nonvested at January 1, 2021 — $ 331.38 $ 6.2 Granted 0.7 165.06 Vested — 325.62 1.0 Forfeited, expired or canceled ( 0.2 ) 184.32 Nonvested at December 31, 2021 0.5 162.36 $ 27.4 Granted 1.1 31.34 Vested ( 0.1 ) 135.25 3.3 Forfeited, expired or canceled ( 0.4 ) 81.38 Nonvested at December 31, 2022 1.1 $ 51.81 $ 5.0 118 Stock Options A summary of option activity for the years ended December 31, 2022 and 2021 is as follows: Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in millions, except exercise price and term amounts) Outstanding at January 1, 2021 0.6 $ 43.02 7.75 $ 137.7 Granted — 194.76 Exercised ( 0.2 ) 30.24 24.1 Forfeited, expired or canceled — 79.92 Outstanding at December 31, 2021 0.4 $ 42.48 6.12 $ 9.5 Granted — 21.42 Exercised ( 0.1 ) 6.60 1.9 Forfeited, expired or canceled ( 0.1 ) 83.89 Outstanding at December 31, 2022 0.2 $ 38.15 5.63 $ 0.2 A summary of total options outstanding and exercisable at December 31, 2022: Options Outstanding and Exercisable Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) (in millions, except exercise price and term amounts) Range of Exercise Prices: $ 0.06 - $ 21.42 0.1 $ 5.06 4.84 $ 21.42 - $ 130.50 0.1 $ 51.97 6.34 $ 130.50 - $ 231.66 — $ 150.11 7.00 The 2020 Plan permits the optionee to early exercise options to obtain preferred tax treatment before the completion of the award’s requisite service or vesting period. If the employee terminates employment before the end of this period, the 2020 and 2015 Plans allow us to repurchase the shares, at our option, at the exercise price of the award. The repurchase feature is used to incentivize the employee to remain through the requisite service or vesting period to receive the full economic benefit of the award. As of December 31, 2022 and 2021, share repurchase obligations were immaterial to our consolidated financial statements. 119 13. COMMITMENTS AND CONTINGENCIES During the normal course of business, we enter into various agreements to purchase services, primarily data and information technology based services, that are enforceable and legally binding. Certain supply contracts contain penalty provisions for early termination, in addition to variable costs that are based on volume and usage. We do not expect to incur penalty payments under these provisions that would materially affect our financial position, results of operations or cash flows. The following table summarizes, by remaining maturity, future commitments related to other arrangements as of December 31, 2022: Purchase Obligations (dollars in millions) 2023 $ 11.7 2024 14.4 2025 11.7 2026 10.0 2027 and thereafter — Total $ 47.8 From time to time, we are party to litigation and legal proceedings relating to our business operations. Except as disclosed below, we do not believe that we are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on our financial condition or results of operations and cash flow. On February 9, 2023, a purported class action complaint was filed against the Company’s subsidiary, Root Insurance Company, in the U.S. District Court for the Middle District of Louisiana (Case No. 3:23-cv-00089-JWD-RLB) by an individual on her behalf and further claiming to represent a putative class of insureds. The complaint alleges that the defendant breached its insurance contract and violated specific provisions of the Louisiana law in settling her vehicle total loss claim. The complaint seeks damages to include payment of alleged benefits owed under the policy, in addition to pre- and post-judgment interest, statutory penalties, attorneys fees and costs, and injunctive relief on behalf of the named plaintiff and the putative class members. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in its early stages. Therefore, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency. On December 19, 2022, a purported class action complaint was filed against the Company’s subsidiary, Root Insurance Company, in the U.S. District Court for the Western District of Texas (Case No. 1:22-cv-01328-LY) by an individual on her behalf and further claiming to represent a putative class of insureds. The complaint alleges that the defendant breached its insurance contract and violated specific provisions of the Texas Prompt Payment of Claims Act for an alleged failure to include sales tax in total loss vehicle settlements. The complaint seeks damages to include payment of alleged benefits owed under the policy, in addition to pre- and post-judgment interest and attorneys fees on behalf of the named plaintiff and the putative class members. The defendant has moved to dismiss the claims set forth in the complaint. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in its early stages. Therefore, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency. On June 27, 2022, a verified shareholder derivative complaint was filed against certain of the Company’s current and former officers and directors in the U.S. District Court for the District of Delaware (Case No. 1:22-cv-00865). The Company was named as a nominal defendant. The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, breached their fiduciary duties and/or aided and abetted the breach of fiduciary duties, were unjustly enriched, wasted corporate assets, and are liable under Section 11(f) of the Securities Act, in connection with and following the Company’s IPO. The complaint seeks unspecified damages. The Company 120 believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is currently stayed pending resolution of the motion to dismiss filed by the defendants in the below matter and, at this time, we are unable to predict the outcome and we cannot estimate the likelihood or magnitude of our possible or potential loss contingency. On March 19, 2021, a purported class action complaint was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Southern District of Ohio (Case No. 2:21-cv-01197) on behalf of certain Root shareholders. The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, or the Exchange Act, and Rule 10b-5 thereunder, and of Sections 11 and 15 of the Securities Act of 1933, or the Securities Act, in connection with and following the Company’s IPO. The complaint seeks unspecified damages. The defendants have moved to dismiss the claims set forth in the complaint. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in the early stages and, at this time, we are unable to predict the outcome and we cannot estimate the likelihood or magnitude of our possible or potential loss contingency. We are contingently liable for possible future assessments under regulatory requirements for insolvencies and impairments of unaffiliated insurance companies. 14. OTHER COMPREHENSIVE (LOSS) INCOME AND ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table presents the changes in our accumulated other comprehensive (loss) income, or AOCI, for the years ended December 31, 2022, 2021 and 2020: For the Years Ended December 31, 2022 2021 2020 (dollars in millions) Beginning balance $ 0.4 $ 5.6 $ 0.6 Other comprehensive (loss) income before reclassifications ( 6.9 ) ( 2.8 ) 5.3 Net realized losses (gains) on investments reclassified from AOCI to net loss 0.7 ( 2.4 ) ( 0.3 ) Other comprehensive (loss) income ( 6.2 ) ( 5.2 ) 5.0 Ending balance $ ( 5.8 ) $ 0.4 $ 5.6 15. LOSS PER SHARE In August 2022, an authorized 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. The following table displays the computation of basic and diluted loss per share for both Class A and Class B common stock for the years ended December 31, 2022, 2021 and 2020: For the Years Ended December 31, 2022 2021 2020 (in millions, except per share amounts) Net loss $ ( 297.7 ) $ ( 521.1 ) $ ( 363.0 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) 14.1 13.8 4.2 Loss per common share: basic and diluted (both Class A and B) $ ( 21.11 ) $ ( 37.76 ) $ ( 86.43 ) 121 We excluded the following potentially dilutive common stock equivalents, presented based on amounts outstanding at each year end, from the computation of diluted EPS attributable to common stockholders for the years indicated because including them would have had an anti-dilutive effect: As of December 31, 2022 2021 2020 (in millions) Options to purchase common stock 0.2 0.4 0.6 Nonvested shares subject to repurchase 0.1 0.1 0.3 Restricted stock units 1.1 0.5 — Redeemable convertible preferred stock (as converted to common stock) 0.8 0.8 — Warrants to purchase common stock 7.7 7.2 — Total 9.9 9.0 0.9 16. STATUTORY FINANCIAL INFORMATION Root Insurance Company and Root Property & Casualty, or our insurance subsidiaries, are required to prepare statutory financial statements in conformity with the basis of accounting practices prescribed or permitted by the Ohio DOI and Delaware DOI, respectively. Ohio and Delaware have adopted the NAIC Accounting Practices and Procedures Manual as the basis of their statutory accounting practices. Root Insurance Company and Root Property & Casualty maintained statutory capital and surplus as of December 31, 2022 and 2021 and had statutory net loss for the years ended December 31, 2022, 2021 and 2020 as follows: Statutory Net Loss Statutory Capital and Surplus 2022 2021 2020 2022 2021 (in millions) Root Insurance Company $ ( 125.7 ) $ ( 126.9 ) $ ( 123.8 ) $ 77.0 $ 91.5 Root Property & Casualty ( 30.8 ) ( 33.4 ) ( 25.5 ) 20.3 21.8 Total $ ( 156.5 ) $ ( 160.3 ) $ ( 149.3 ) $ 97.3 $ 113.3 The payment of dividends by Root Insurance Company and Root Property & Casualty are subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws. The insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory-basis policyholders' surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer as of the prior December 31. During the years ended December 31, 2022, 2021 and 2020, Root Insurance Company and Root Property & Casualty did not pay any dividends. The insurance laws also require domestic insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the insurance laws as the amount equal to our unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses. Additionally, following any dividend, an insurers policyholder surplus must be reasonable in relation to the insurer's outstanding liabilities and adequate for its financial needs. The NAIC Risk-Based Capital, or RBC, model law requires every insurer to calculate its total adjusted capital and RBC requirement to ensure insurer solvency. Regulatory guidelines provide for an insurance commissioner to intervene if the insurer experiences financial difficulty, as evidenced by a company's total adjusted capital falling below established relationships to required RBC. The model includes components for asset risk, underwriting risk, credit risk and other factors. The State of Ohio and the State of Delaware impose minimum RBC requirements that are developed by the NAIC. The formulas in the model for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC, as 122 defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action. The statutory surplus for Root Insurance Company and Root Property & Casualty exceeded the minimum RBC requirements for the years ended December 31, 2022 and 2021. 17. GEOGRAPHICAL BREAKDOWN OF GROSS PREMIUMS WRITTEN Gross premiums written by state is as follows for the years ended December 31, 2022, 2021 and 2020: For the Years Ended December 31, 2022 2021 2020 Amount % of Total Amount % of Total Amount % of Total State (dollars in millions) Texas $ 109.3 18.2 % $ 152.3 20.5 % $ 132.5 21.5 % Georgia 62.3 10.4 79.2 10.7 72.4 11.7 Colorado 40.6 6.8 33.5 4.5 20.2 3.3 Pennsylvania 34.9 5.8 39.8 5.4 30.2 4.9 Louisiana 33.1 5.5 42.2 5.7 28.0 4.5 Utah 30.9 5.2 33.8 4.6 26.0 4.2 Nevada 28.4 4.7 33.6 4.5 19.1 3.1 South Carolina 20.1 3.4 26.3 3.5 9.6 1.6 Oklahoma 19.8 3.3 22.5 3.0 18.6 3.0 Indiana 17.8 3.0 21.7 2.9 18.1 2.9 All others states 202.8 33.7 257.7 34.7 242.1 39.3 Total $ 600.0 100.0 % $ 742.6 100.0 % $ 616.8 100.0 % 123 18. REVISION OF PREVIOUSLY ISSUED QUARTERLY FINANCIAL STATEMENTS (UNAUDITED) Presented below are the revisions to the previously issued quarterly financial statements for immaterial errors in 2022 related to the purported misappropriation of funds by a former senior marketing employee as disclosed in Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” The following tables present the effect of the revision on the condensed consolidated statements of operations and comprehensive loss, condensed consolidated statements of redeemable convertible preferred stock and stockholders' equity and condensed consolidated statements of cash flows. Three Months Ended March 31, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of operations and comprehensive loss data: (in millions, except per share amounts) Sales and marketing $ 14.7 $ 0.6 $ 15.3 General and administrative 30.0 0.5 30.5 Total operating expenses 156.3 1.1 157.4 Operating loss ( 70.9 ) ( 1.1 ) ( 72.0 ) Loss before income tax expense ( 76.4 ) ( 1.1 ) ( 77.5 ) Net loss ( 76.4 ) ( 1.1 ) ( 77.5 ) Comprehensive loss $ ( 80.1 ) $ ( 1.1 ) $ ( 81.2 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) (1) 14.0 14.0 Loss per common share: basic and diluted (both Class A and B) (1) $ ( 5.46 ) $ ( 5.54 ) ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” Three Months Ended June 30, 2022 (unaudited) Six Months Ended June 30, 2022 (unaudited) As reported Adjustments As Corrected As reported Adjustments As Corrected Condensed consolidated statements of operations and comprehensive loss data: (in millions, except per share amounts) (in millions, except per share amounts) Sales and marketing $ 25.4 $ ( 4.0 ) $ 21.4 $ 40.1 $ ( 3.4 ) $ 36.7 General and administrative 29.9 9.6 39.5 59.9 10.1 70.0 Total operating expenses 161.1 5.6 166.7 317.4 6.7 324.1 Operating loss ( 80.7 ) ( 5.6 ) ( 86.3 ) ( 151.6 ) ( 6.7 ) ( 158.3 ) Loss before income tax expense ( 89.9 ) ( 5.6 ) ( 95.5 ) ( 166.3 ) ( 6.7 ) ( 173.0 ) Net loss ( 89.9 ) ( 5.6 ) ( 95.5 ) ( 166.3 ) ( 6.7 ) ( 173.0 ) Comprehensive loss $ ( 91.2 ) $ ( 5.6 ) $ ( 96.8 ) $ ( 171.3 ) $ ( 6.7 ) $ ( 178.0 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) (1) 14.1 14.1 14.0 14.0 Loss per common share: basic and diluted (both Class A and B) (1) $ ( 6.38 ) $ ( 6.77 ) $ ( 11.88 ) $ ( 12.36 ) ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” 124 Three Months Ended September 30, 2022 (unaudited) Nine Months Ended September 30, 2022 (unaudited) As reported Adjustments As Corrected As reported Adjustments As Corrected Condensed consolidated statements of operations and comprehensive loss data: (in millions, except per share amounts) (in millions, except per share amounts) Sales and marketing $ 5.7 $ 2.4 $ 8.1 $ 45.8 $ ( 1.0 ) $ 44.8 General and administrative 26.4 — 26.4 86.3 10.1 96.4 Total operating expenses 128.4 2.4 130.8 445.8 9.1 454.9 Operating loss ( 54.7 ) ( 2.4 ) ( 57.1 ) ( 206.3 ) ( 9.1 ) ( 215.4 ) Loss before income tax expense ( 64.0 ) ( 2.4 ) ( 66.4 ) ( 230.3 ) ( 9.1 ) ( 239.4 ) Net loss ( 64.0 ) ( 2.4 ) ( 66.4 ) ( 230.3 ) ( 9.1 ) ( 239.4 ) Comprehensive loss $ ( 66.3 ) $ ( 2.4 ) $ ( 68.7 ) $ ( 237.6 ) $ ( 9.1 ) $ ( 246.7 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) (1) 14.1 14.1 14.0 14.0 Loss per common share: basic and diluted (both Class A and B) (1) $ ( 4.54 ) $ ( 4.71 ) $ ( 16.45 ) $ ( 17.10 ) ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” As of March 31, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data: (in millions) Accumulated loss $ ( 1,346.5 ) $ ( 1.1 ) $ ( 1,347.6 ) Total stockholders’ equity $ 468.7 $ ( 1.1 ) $ 467.6 As of June 30, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data: (in millions) Accumulated loss $ ( 1,436.4 ) $ ( 6.7 ) $ ( 1,443.1 ) Total stockholders’ equity $ 388.0 $ ( 6.7 ) $ 381.3 As of September 30, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of redeemable convertible preferred stock and stockholders equity data: (in millions) Accumulated loss $ ( 1,500.4 ) $ ( 9.1 ) $ ( 1,509.5 ) Total stockholders’ equity $ 330.9 $ ( 9.1 ) $ 321.8 125 Three Months Ended March 31, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of cash flows data: (in millions) Net loss $ ( 76.4 ) $ ( 1.1 ) $ ( 77.5 ) Other assets 4.9 1.1 6.0 Net cash used in operating activities $ ( 51.2 ) $ — $ ( 51.2 ) Six Months Ended June 30, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of cash flows data: (in millions) Net loss $ ( 166.3 ) $ ( 6.7 ) $ ( 173.0 ) Other assets ( 10.5 ) 6.7 ( 3.8 ) Net cash used in operating activities $ ( 104.9 ) $ — $ ( 104.9 ) Nine Months Ended September 30, 2022 (unaudited) As reported Adjustments As Corrected Condensed consolidated statement of cash flows data: (in millions) Net loss $ ( 230.3 ) $ ( 9.1 ) $ ( 239.4 ) Other assets ( 11.1 ) 9.1 ( 2.0 ) Net cash used in operating activities $ ( 163.9 ) $ — $ ( 163.9 ) 126 19. QUARTERLY FINANCIAL DATA (UNAUDITED) The interim financial statements for the quarterly periods in 2022 are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the periods presented. Information for the three months ended March 31, 2022, June 30, 2022 and September 30, 2022 have been adjusted to correct immaterial errors. For additional information, refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” and Note 18, “Revision of Previously Issued Financial Statements.” For the 2022 Quarter Ended March 31 June 30 September 30 December 31 (in millions, except per share data) Revenue: Net premiums earned $ 78.3 $ 74.7 $ 68.6 $ 64.3 Net investment income 0.6 0.7 0.9 4.0 Net realized gains (losses) on investments 1.2 ( 0.1 ) — ( 0.6 ) Fee income 4.9 4.4 3.8 3.4 Other income 0.4 0.7 0.4 0.2 Total revenue 85.4 80.4 73.7 71.3 Operating expenses: Loss and loss adjustment expenses 96.7 95.7 80.9 77.7 Sales and marketing 15.3 21.4 8.1 3.2 Other insurance expense (benefit) 1.0 ( 7.8 ) 1.1 ( 2.3 ) Technology and development 13.9 17.9 14.3 9.4 General and administrative 30.5 39.5 26.4 31.0 Total operating expenses 157.4 166.7 130.8 119.0 Operating loss ( 72.0 ) ( 86.3 ) ( 57.1 ) ( 47.7 ) Interest expense ( 5.5 ) ( 9.2 ) ( 9.3 ) ( 10.6 ) Loss before income tax expense ( 77.5 ) ( 95.5 ) ( 66.4 ) ( 58.3 ) Income tax expense — — — — Net loss ( 77.5 ) ( 95.5 ) ( 66.4 ) ( 58.3 ) Other comprehensive loss: Changes in net unrealizes (losses) gains on investments ( 3.7 ) ( 1.3 ) ( 2.3 ) 1.1 Comprehensive loss $ ( 81.2 ) $ ( 96.8 ) $ ( 68.7 ) $ ( 57.2 ) Loss per common share: basic and diluted (both Class A and B) (1) $ ( 5.54 ) $ ( 6.77 ) $ ( 4.71 ) $ ( 4.13 ) Weighted-average common shares outstanding: basic and diluted (both Class A and B) (1) 14.0 14.1 14.1 14.1 ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” 127 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Balance Sheets (Parent Company) (in millions, except par value) As of December 31, 2022 2021 Assets Other investments $ 4.4 $ 4.7 Cash and cash equivalents 551.8 432.3 Restricted cash 1.0 1.0 Investments in subsidiaries 97.6 — Other assets 46.8 49.3 Intercompany receivable 22.1 261.8 Total Assets $ 723.7 $ 749.1 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity Liabilities: Long-term debt and warrants $ 295.4 $ — Investments in subsidiaries — 58.5 Accounts payable and accrued expenses 16.6 8.8 Other liabilities 17.8 24.5 Intercompany payable 4.8 8.9 Total liabilities 334.6 100.7 Commitments and Contingencies Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2022 and December 31, 2021 (liquidation preference of $ 126.5 ) 112.0 112.0 Stockholders’ equity: Class A common stock, $ 0.0001 par value, 9.2 and 7.9 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (1) — — Class B common stock, $ 0.0001 par value, 5.0 and 6.1 shares issued and outstanding at December 31, 2022 and December 31, 2021, respectively (1) — — Additional paid-in capital 1,850.7 1,806.1 Accumulated other comprehensive income ( 5.8 ) 0.4 Accumulated loss ( 1,567.8 ) ( 1,270.1 ) Total stockholders’ equity 277.1 536.4 Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 723.7 $ 749.1 ______________ (1) Reflects the 1-for-18 reverse stock split that became effective August 12, 2022. Refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” See Notes to Condensed Combined Financial Statements 128 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Operations and Comprehensive Loss (Parent Company) (in millions) For the Years Ended December 31, 2022 2021 2020 Revenue: Net investment income $ 4.5 $ 4.6 $ 0.9 Net realized gains on investments 1.2 — — Total revenue 5.7 4.6 0.9 Operating expenses: Sales and marketing 11.9 10.0 — Other insurance expense 6.6 2.9 — Technology and development 33.4 42.5 19.5 General and administrative 18.3 5.3 37.8 Total operating expenses 70.2 60.7 57.3 Operating loss ( 64.5 ) ( 56.1 ) ( 56.4 ) Interest expense ( 34.6 ) ( 20.0 ) ( 77.7 ) Loss on early extinguishment of debt — ( 15.9 ) — Loss before income tax expense ( 99.1 ) ( 92.0 ) ( 134.1 ) Income tax expense — — — Net loss before equity net loss of subsidiaries ( 99.1 ) ( 92.0 ) ( 134.1 ) Net loss of subsidiaries ( 198.6 ) ( 429.1 ) ( 228.9 ) Net loss ( 297.7 ) ( 521.1 ) ( 363.0 ) Other comprehensive (loss) income: Other comprehensive (loss) income of subsidiaries ( 6.2 ) ( 5.2 ) 5.0 Comprehensive loss $ ( 303.9 ) $ ( 526.3 ) $ ( 358.0 ) See Notes to Condensed Combined Financial Statements 129 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Cash Flows (Parent Company) (in millions) For the Years Ended December 31, 2022 2021 2020 Cash flows from operating activities: Net cash provided by (used in) operating activities $ 205.9 $ ( 257.1 ) $ ( 62.9 ) Cash flows from investing activities: Purchases of investments — ( 0.4 ) ( 0.5 ) Sales of investments 1.3 — — Purchases of indefinite-lived intangible assets and transaction costs ( 1.3 ) — — Capitalization of internally developed software ( 8.8 ) ( 6.6 ) ( 5.4 ) Purchases of fixed assets — ( 4.6 ) ( 1.8 ) Investment in subsidiaries ( 360.9 ) ( 261.8 ) ( 201.9 ) Net cash used in investing activities ( 369.7 ) ( 273.4 ) ( 209.6 ) Cash flows from financing activities: Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance cost — — 1,098.1 Proceeds from exercise of stock options and restricted stock units, net of tax proceeds/(withholding) 0.3 3.2 2.1 Proceeds from issuance of preferred stock and related warrants — 126.5 — Payment of preferred stock and related warrants issuance costs ( 3.0 ) ( 10.5 ) — Proceeds from debt and warrants issuance, net of issuance cost 286.0 — 12.0 Repayments of long-term debt — ( 199.5 ) ( 13.5 ) Purchases of treasury stock — — ( 0.2 ) Net cash provided by (used in) financing activities 283.3 ( 80.3 ) 1,098.5 Net increase (decrease) in cash and cash equivalents 119.5 ( 610.8 ) 826.0 Cash, cash equivalents and restricted cash at beginning of year 433.3 1,044.1 218.1 Cash, cash equivalents and restricted cash at end of year $ 552.8 $ 433.3 $ 1,044.1 See Notes to Condensed Combined Financial Statements 130 ROOT, INC. and CARET HOLDINGS, INC. Notes to Condensed Combined Financial Statements (Parent Company) 1. Business Caret Holdings, Inc. is a holding company which was formed in 2015 to develop and launch a direct-to-consumer personal automobile insurance and mobile technology company. In August 2019 a new holding company, Root, Inc. was formed, which became the parent of Caret Holdings, Inc. and maintains 100% ownership of Caret Holdings, Inc. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Combination —The condensed combined financial statements include the accounts of Root, Inc. and its wholly owned subsidiary, Caret Holdings, Inc., and are prepared in accordance with accounting principles generally accepted in the United States. All intercompany accounts and transactions have been eliminated. These financial statements have been combined in order to present comparative parent company financial statements for 2022, 2021 and 2020 and should be read in conjunction with our consolidated financial statements. Use of Estimates —The preparation of condensed combined financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Reverse Stock Split — In August 2022, an authorized 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. On August 12, 2022, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-18 reverse stock split of our Class A and Class B common stock. As a result of the reverse stock split, every 18 shares of our issued or outstanding pre-reverse split common stock of each class were combined into one share of common stock of such class. No fractional shares were issued upon the reverse stock split. On August 15, 2022, our Class A common stock began trading on a split-adjusted basis on the Nasdaq Stock Market. In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of $ 0.0001 . In addition, there was no change to the number of shares issued or outstanding for our Series A Preferred Stock. The conversion price for our Series A Preferred Stock was adjusted to $ 162.00 and the exercise price and number of warrant shares for each of our outstanding warrants were also proportionately adjusted. Accordingly, all historical per share data, number of shares outstanding and other common stock equivalents for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. Statement of Cash Flows —The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2022, 2021 and 2020 are as follows: 2022 2021 2020 (in millions) Supplemental disclosures: Interest paid $ 24.5 $ 23.9 $ 4.5 Federal income taxes paid — — — Leasehold improvements - non-cash 0.9 1.5 — Conversion of preferred stock to common stock - non-cash — — 560.4 Conversion of warrants to common stock - non-cash — — 75.0 Lease liabilities arising from obtaining right-of-use asset — 9.9 — Carvana investment agreement issuance costs - non-cash — 9.1 — Purchases of treasury stock - non-cash — — 0.5 131 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed combined balance sheets that sum to the total of the same such amount in the condensed combined statements of cash flows: 2022 2021 (in millions) Cash and cash equivalents $ 551.8 $ 432.3 Restricted cash 1.0 1.0 Total cash, cash equivalents and restricted cash shown in the condensed combined statements of cash flows $ 552.8 $ 433.3 Investments in Subsidiaries —As of December 31, 2021, Caret Holdings, Inc. had a negative investment in subsidiaries balance of $ 58.5 million primarily related to accumulated losses from subsidiaries. In accordance with applicable accounting guidance, we reclassified the negative investment in subsidiaries balance to the liabilities section of our combined balance sheet. 3. Guarantees Root, Inc. entered into an agreement with the Superintendent of Insurance, State of Ohio, (the “Superintendent”) guaranteeing that Root Insurance Company will maintain certain capital and surplus requirements or risk-based capital levels, whichever is greater, and such additional surplus as the Superintendent requires. The guarantee remains in effect until such time as the Superintendent may release Root, Inc. in writing. 132 ROOT, INC. AND SUBSIDIARIES Schedule V: Valuation and Qualifying Accounts For the Years Ended December 31, 2022, 2021 and 2020 (in millions) Additions Balance at beginning of period Charged to costs and expenses Charge to other accounts Deductions Balance at end of period Year Ended December 31, 2020 Valuation allowance for deferred tax assets $ 76.8 $ 61.5 $ ( 1.0 ) $ — $ 137.3 Allowance for premium receivables $ 2.0 $ 23.6 $ — $ ( 22.1 ) $ 3.5 Year Ended December 31, 2021 Valuation allowance for deferred tax assets $ 137.3 $ 116.7 $ 1.0 $ — $ 255.0 Allowance for premium receivables $ 3.5 $ 20.9 $ 0.8 $ ( 19.8 ) $ 5.4 Allowance for reinsurance recoverables $ — $ — $ 0.2 $ — $ 0.2 Year Ended December 31, 2022 Valuation allowance for deferred tax assets $ 255.0 $ 65.8 $ 1.5 $ — $ 322.3 Allowance for premium receivables $ 5.4 $ 17.4 $ — $ ( 20.0 ) $ 2.8 Allowance for reinsurance recoverables $ 0.2 $ — $ — $ — $ 0.2 133 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 134