What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-21 compared with 2023-02-22 · 203 added, 184 removed, 447 unchanged (46% of the section changed)

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The omitted information may be found in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission, or the SEC, on February 22, 2023.

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

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

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

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

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

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

We are also focused on expanding our partnership channel, where we acquire customers using various means, including through embedded integrations.

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

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

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

Our model benefits from portfolio maturity.

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

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

To scale the business, we aim to drive new customer growth by capitalizing on our two distribution channels:

direct and partnerships.

In both channels we seek to optimize unit economics.

Loss ratios for customers in their initial term are generally higher than in subsequent terms.

Thus, as a young insurance company, our results are disproportionately weighted toward new customers.

We believe our data- and technology-driven approach allows for rapid response to macroeconomic trends through quick, appropriate rate actions.

Our ability to continually enhance our underwriting and segmentation capabilities has contributed to improvement in our gross loss ratios.

Our marketing spend is grounded in a disciplined data-science approach, targeting customers that align with our lifetime expected returns.

Over time we expect to build a base of recurring customers with more favorable loss ratios, resulting in the following financial impacts:

• Improved loss ratio .

Through improvements in our pricing, underwriting and segmentation we have seen improvement to our gross loss ratios.

Renewal premiums, referring to premiums from a customer’s second term and beyond, have lower loss ratios as compared to new premiums in the customer’s first term.

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

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

As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals with lower associated acquisition costs.

• Increased revenue per customer.

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

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

This, paired with targeted marketing, strengthened underwriting and pricing segmentation, will facilitate the opportunity to generate additional fee revenue per customer.

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

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

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

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

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

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

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

seasonality or due to the competitive environment.

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

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

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

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

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

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

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

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

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

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

Our evolving acquisition strategy includes utilizing our embedded insurance offering with current and future strategic partners.

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

Today, we acquire the vast majority of our customers through mobile apps.

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

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

These include excess of loss and quota share reinsurance.

Excess of loss provides us with volatility protection against a portion of large individual losses or an aggregation of losses from catastrophes.

Quota share provides, among other advantages, regulatory surplus relief for growing companies.

These reinsurance structures deliver three core objectives (1) prioritize revenue and targeted profitable customer growth while maintaining regulatory capital requirements, (2) source efficient capital to support customer acquisition costs;

and (3) mitigate impact of large losses or tail events .

We expect to continuously evaluate our utilization of third-party reinsurance while scaling our business in order to operate a capital-efficient business model.

As our gross loss ratios continue to improve and stabilize over the long-term, we expect to maintain the flexibility to modify our reinsurance program.

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

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

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

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

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

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

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

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

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Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:

Our Ability to Manage Risk

Our Ability to Manage and Price Risk

We leverage technology to help manage risk.

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

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

We intend to continue to drive new customer growth by leveraging our differentiated consumer experience, our partnership channel, direct performance marketing driven by dynamic data science models, machine learning loss models and our telematics-based pricing models.

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

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

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

We will also continue to target attractive potential customer segments through diverse distribution strategy, which includes direct and partnership channels.

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

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

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

In 2019, we began offering renters insurance and, in May 2020, we launched our homeowners insurance product in partnership with Homesite Insurance, or Homesite.

In 2019, we began offering renters insurance and, in May 2020, we launched our homeowners insurance product in partnership with Homesite Insurance.

Cross-sales allow us to generate additional premiums (renters) and fee income (homeowners) without material incremental marketing spend, and ultimately higher revenue per customer.

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Recent Developments Affecting Comparability

COVID-19 Impact

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

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

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

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

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

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

General Macroeconomic Factors

Economic instability has led to acute inflationary pressures, supply chain disruptions, changes in interest rates, changes in equity markets and bank failures.

We have seen an increase in vehicle

repair and medical costs.

These cost increases have resulted in greater claims severity.

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

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

See the section titled “Risk Factors” for more details.

Fluctuations in interest rates could impact our cost of capital and may limit our ability to raise additional capital.

Comprehensive Reinsurance

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

During the period we reduced the utilization of reinsurance through a strategic reduction of external quota share.

The changes to the reinsurance program aim to deliver improved economics and capital efficiency.

Our diversified approach to reinsurance allows us to optimize capital requirements while remaining flexible in response to changes in market conditions or changes specific to our own business.

We may choose to amend, commute, and/or non-renew certain third-party reinsurance arrangements in the future, which may result in us retaining more of our business.

To the extent we retain a larger share of our book of business, our capital requirements may increase.

Key Performance Indicators

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

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

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

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

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

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

Years Ended December 31,

For the Years Ended December 31,

2023 2022 2021

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Gross Profit/(Loss)

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

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

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

Direct Contribution

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

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

We define direct contribution, a non-GAAP financial measure, as gross profit/(loss) excluding net investment income, net realized gains on investments, report costs, commission expenses related to our partnership channel, certain warrant compensation expense related to our embedded channel, overhead allocated based on headcount, or Overhead, and salaries, health benefits, bonuses, employee retirement plan-related expenses and employee share-based compensation expense, or Personnel Costs, licenses, professional fees and other expenses, ceded premiums

earned, ceded loss and LAE, and net ceding commission and other.

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

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Adjusted EBITDA

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

We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, warrant compensation expense, restructuring charges, write-off of prepaid marketing expenses, legal fees and other items that do not reflect our ongoing operating performance.

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

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

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

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

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

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

Net Expense Ratio

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

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

Net Combined Ratio

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

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

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

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

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

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

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

Net Investment Income

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

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

Net investment income also includes impairments related to Low Income Housing Tax Credits, or LIHTC, investments in limited liability entities to offset Georgia premium taxes.

These tax credits are recognized when utilized.

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

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

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

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

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

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

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

Fee income consists primarily of the flat fee we charge for installment payments which relates to the additional administrative costs associated with processing more frequent billings.

These fees are recognized in the period in which we process the installment.

We also charge policy fees which are typically nonrefundable fees that are intended to reimburse a portion of the costs incurred to underwrite the policy.

These fees are recognized ratably over the policy coverage period.

Fee income also includes late payment fees that are collected from our policyholders.

These fees are recognized in the period in which we process the late payment.

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

and 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.

Operating Expenses

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

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

Loss and Loss Adjustment Expenses

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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.

This includes an allowance for credit losses based on the probability of default and expected loss given default of a reinsurer.

Loss and LAE may be paid out over a period of years.

Various other expenses incurred during claims processing are considered LAE.

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

These amounts include Personnel Costs for claims-related employees;

vendor expenses;

software expense;

internally developed software amortization;

and overhead allocated based on headcount, or Overhead.

and Overhead.

Sales and Marketing

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

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

Sales and marketing includes expenses related to direct performance marketing, channel media, advertising, sponsorship, referral fees and partnership channel.

These expenses also include related Personnel Costs and Overhead related to our brand strategy, creative and business development activities and certain warrant compensation expense related to our embedded channel.

We incur sales and marketing expenses for all product offerings.

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

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

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

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

Other Insurance (Benefit) Expense

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

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

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

These expenses are also recognized net of ceding commissions earned.

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

Other Insurance Expense (Benefit)

Other insurance expense (benefit) includes underwriting expenses, commission expenses related to our partnership channel, premium taxes, 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.

We amortize a portion of our deferred policy acquisition costs including certain commissions related to our partnership channel, premium taxes, and report costs related to the successful acquisition of a policy.

Other insurance expense (benefit) is expensed as incurred, except for costs related to deferred policy 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 considering progress toward achieving milestones for policies originated through the Integrated Platform as defined under the Carvana commercial agreement.

These expenses are 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 expense (benefit).

Technology and Development

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

and restructuring costs associated with the involuntary workforce reductions.

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

and restructuring costs which include employee costs, real estate exit costs and other costs.

General and administrative expenses are expensed as incurred.

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The following table presents our results of operations for the periods indicated:

Years Ended December 31,

2022 % of Total Revenue 2021 % of Total Revenue $ Change % Change

For the Years Ended December 31,

2023 2022 $ Change % Change

(dollars in millions)

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Net realized gains on investments — 0.5 (0.5) (100.0) %

Fee Income 16.5 5.3 % 20.9 6.1 % (4.4) (21.1) %

23.4 16.5 6.9 41.8 %

Other income 1.5 1.7 (0.2) (11.8) %

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Sales and marketing 49.3 48.0 1.3 2.7 %

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

Other insurance expense (benefit)

47.6 (8.0) 55.6 695.0 %

Technology and development 44.8 55.5 (10.7) (19.3) %

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Interest expense (46.1) (34.6) (11.5) 33.2 %

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

Loss before income tax expense (147.4) (297.7) 150.3 (50.5) %

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Net loss (147.4) (297.7) 150.3 (50.5) %

Other comprehensive loss:

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

Other comprehensive income (loss):

Changes in net unrealized gains (losses) on investments

3.3 (6.2) 9.5 153.2 %

Comprehensive loss $ (144.1) $ (303.9) $ 159.8 (52.6) %

Net Premiums Earned

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

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

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

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

Net premiums earned increased $114.0 million, or 39.9%, to $399.9 million for the year ended December 31, 2023 compared to 2022.

The increase was primarily due to reduced cessions of gross premiums earned to reinsurers between periods and greater premium per policy resulting from rate actions.

This was partially offset by lower gross premiums earned between the periods.

During the years ended December 31, 2023 and 2022, we ceded approximately 37.1% and 55.6% of our gross premiums earned, and 26.8% and 55.2% of our gross premiums written to third-party reinsurers, respectively.

The change in cessions between periods was primarily driven by a strategic reduction of quota share reinsurance and commutations of certain reinsurance agreements.

The following table presents gross premiums written, ceded premiums written, net premiums written, gross premiums earned, ceded premiums earned and net premiums earned for the years ended December 31, 2023 and 2022:

Years Ended December 31,

For the Years Ended December 31,

2023 2022 $ Change % Change

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Net premiums earned $ 399.9 $ 285.9 $ 114.0 39.9 %

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

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

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

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

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

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

Gross premiums written increased due to growth in new writings, particularly in the second half of 2023, compared to contraction of policies in force during 2022, as a result of decreased direct performance marketing spend.

Gross premiums earned decreased primarily due to lower average policies in force for the year ended December 31, 2023 compared to 2022.

This was partially offset by a 16.6% increase in premium per policy for automobile insurance primarily attributable to rate actions.

Net Investment Income

Net investment income increased $24.0 million, or 387.1% to $30.2 million for the year ended December 31, 2023 compared to 2022.

The increase was primarily driven by higher interest and dividends received attributable to investing more in higher yielding investments, as a result of the favorable interest rate environment.

Fee income increased $6.9 million, or 41.8%, to $23.4 million for the year ended December 31, 2023 compared to 2022.

The increase was primarily driven by a $4.1 million increase in policy fees and an $1.3 million increase in late payment fees due to implementation of new fees in 2023 and as a result of refining our fee schedules to policyholders.

In addition, we experienced an $1.0 million increase in installment fees attributable to an increase in collected fees, as a result of increased gross written premium.

Operating Expenses

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Loss and LAE decreased $19.7 million, or 5.6%, to $331.3 million for the year ended December 31, 2023 compared to 2022.

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

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

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

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

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

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

The decrease was primarily due to better loss experience for the year ended December 31, 2023 compared to 2022.

This was partially offset by reduced cessions of losses to reinsurers and commutations of certain reinsurance agreements, which includes an $1.7 million expense related to an allowance for credit losses for the year ended December 31, 2023 compared to 2022.

Gross accident period loss ratios decreased to 66.0% for the year ended December 31, 2023, from 80.2% for 2022.

The change in the ratios was driven by growth in average premium per policy primarily attributable to rate actions.

This was partially offset by business tenure mix and higher loss costs as a result of increased severity per claim due to higher vehicle repair and medical costs.

We experienced a 7% increase in severity per claim and a 5% decrease in claim frequency for the year ended December 31, 2023 compared to 2022.

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

Sales and Marketing

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

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

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

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

Other Insurance (Benefit) Expense

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

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

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

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

Sales and marketing increased $1.3 million, or 2.7%, to $49.3 million for the year ended December 31, 2023 compared to 2022.

The increase was due to a $37.4 million increase in direct performance marketing spend to drive growth, particularly in the second half of 2023 when we experienced a favorable competitive environment for deploying customer acquisition costs, and deeper market penetration in the states in which we operate.

This was partially offset by a $21.4 million decrease in content development, marketing partnership, sponsorship and advertising costs due to a shift in our direct marketing strategy.

In addition, we experienced an $8.8 million decline in warrant compensation expense related to the completion of the Integrated Platform pursuant to the Carvana commercial agreement in 2022.

We also experienced a $6.3 million decrease in Personnel Costs as a result of a decrease in headcount, primarily attributable to the involuntary workforce reductions in 2022.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) increased $55.6 million, or 695.0%, to an expense of $47.6 million for the year ended December 31, 2023 compared to 2022.

The increase was primarily driven by a $22.1 million decrease in net ceding commission contra-expense as a result of a decline in ceded premiums and commutations of certain reinsurance agreements.

We also experienced a $20.4 million increase in report costs due to an increase in customer applications and new writings, and an $11.6 million increase in Carvana warrant compensation expense as a result of policies originating from the Integrated Platform.

In addition, we experienced a $9.9 million increase in amortization of deferred policy acquisition costs for commission expenses related to our partnership channel.

This was partially offset by a $4.9 million decrease in premium write-offs and a $4.0 million decrease in Personnel Costs as a result of a decrease in headcount due to the involuntary workforce reductions in 2022.

Technology and Development

Technology and development decreased $10.7 million, or 19.3%, to $44.8 million for the year ended December 31, 2023 compared to 2022.

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

The decrease was primarily driven by an $8.4 million decrease in Personnel Costs as a result of a decrease in headcount, primarily attributable to the involuntary workforce reductions in 2022.

We also experienced a $3.4 million decrease in software development expense as a result of initiatives to reduce operating costs.

This was partially offset by an $1.3 million increase in amortization of internally developed software.

General and Administrative

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

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

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

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

General and administrative decreased $44.1 million, or 34.6%, to $83.3 million for the year ended December 31, 2023 compared to 2022.

The decrease was driven by a $25.0 million decrease in Personnel Costs and a $7.4 million decrease in restructuring costs as a result of a decrease in headcount, primarily attributable to the involuntary workforce reductions in 2022.

In addition, we experienced a $10.2 million decrease related to the write-off of pre-paid marketing expense recognized in 2022, partially offset by a decrease of $1.9 million in insurance recovery contra-expense related to the misappropriation of funds by a former senior marketing employee recorded in 2022.

Non-Operating Expenses

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Interest expense increased $11.5 million, or 33.2%, to $46.1 million for the year ended December 31, 2023 compared to 2022.

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

Loss on Early Extinguishment of Debt

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

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

The increase was primarily due to a $11.2 million increase in debt interest expense primarily as a result of a greater average interest rate for the year ended December 31, 2023 compared to 2022.

Other Comprehensive Income (Loss)

Changes in Net Unrealized Gains (Losses) on Investments

Changes in net unrealized gains (losses) on investments increased $9.5 million, or 153.2%, to a gain of $3.3 million for the year ended December 31, 2023 compared to 2022.

The increase is primarily attributable to investments being reinvested at maturity in securities that reflect the current interest rate environment.

Comparison of the Years Ended December 31, 2022 and 2021

The following table presents our results of operations for the periods indicated:

Years Ended December 31,

2021 % of Total Revenue 2020 % of Total Revenue $ Change % Change

For the Years Ended December 31,

2022 2021 $ Change % Change

(dollars in millions)

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

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

Other insurance (benefit) expense

(8.0) 5.0 (13.0) (260.0) %

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

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

Other comprehensive (loss) income:

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

Other comprehensive loss:

Changes in net unrealized losses on investments

(6.2) (5.2) (1.0) 19.2 %

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

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The following table provides a reconciliation of total revenue to direct contribution for the years ended December 31, 2023, 2022 and 2021:

Years Ended December 31,

For the Years Ended December 31,

2023 2022 2021

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Loss and loss adjustment expenses (331.3) (351.0) (392.3)

Other insurance benefit (expense) 8.0 (5.0) 1.8

Other insurance (expense) benefit

(47.6) 8.0 (5.0)

Gross profit/(loss) 76.1 (32.2) (51.9)

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

Adjustments from other insurance benefit (expense) (1)

Adjustments from other insurance (expense) benefit (1)

76.3 38.4 56.0

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______________

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

(1) Adjustments from other insurance (expense) benefit includes report costs, commission expenses related to our partnership channel, certain warrant compensation expense related to our embedded channel, Personnel costs, Overhead, licenses, professional fees and other .

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

Adjusted EBITDA

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

Years Ended December 31,

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

The following table provides a reconciliation of net loss to adjusted EBITDA for the years ended December 31, 2023, 2022 and 2021:

For the Years Ended December 31,

2023 2022 2021

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Share-based compensation 16.9 25.2 19.3

Tender offer — — 25.1

Loss on early extinguishment of debt — — 15.9

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Restructuring costs (1)

Write-off (2)

Write-offs and other (2)

Adjusted EBITDA $ (42.9) $ (185.9) $ (446.1)

______________

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

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

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

(1) Restructuring costs consist of employee costs, real estate exit costs, and other.

This includes $0.4 million, $5.3 million and zero of share-based compensation for the years ended December 31, 2023, 2022 and 2021, respectively.

This also includes $0.4 million, $1.7 million and zero of depreciation and amortization for the years ended December 31, 2023, 2022 and 2021, respectively.

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

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

(2) Write-offs and other primarily reflects legal costs, write-off prepaid marketing expense and other items that do not reflect our ongoing operating performance.

This includes write-off of prepaid marketing expenses of zero, $10.2 million and zero for the years ended December 31, 2023, 2022 and 2021, respectively.

Legal and other fees of related to the misappropriation of funds by a former senior marketing employee in 2022 of $3.2 million, $1.2 million and zero for the years ended December 31, 2023, 2022 and 2021, respectively, partially offset by an insurance recovery of $1.9 million in 2022.

Liquidity and Capital Resources

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We are continuously evaluating alternatives for efficiently funding our ongoing operations.

We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of securities.

We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of stock and debt.

Certain events may impact our liquidity such as the economic instability resulting in acute inflationary pressures, supply chain disruptions, changes in interest rates, changes in equity markets, bank failures and our utilization of reinsurance.

Fluctuations in interest rates could impact our cost of capital and may limit our ability to raise additional capital.

We utilize reinsurance arrangements to grow our business in a capital-efficient manner and mitigate risk.

Over time, our strategy continues to evolve and we may choose to amend, commute, and/or non-renew certain third-party reinsurance agreements, which may result in us retaining more of our business in the future.

To the extent we retain a larger share of our book of business, our capital requirements may increase.

Regulatory Considerations

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

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

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

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

To date, our insurance subsidiaries have not paid any dividends and as of December 31, 2023, they were not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director.

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

At December 31, 2022, Root Re was subject to compliance with certain capital levels and a net earned premium to capital ratio of 15:1, which was maintained as of December 31, 2022.

At December 31, 2023, Root Re was subject to compliance with certain capital levels and a net premiums earned to capital ratio of 15:1, which we maintained as of December 31, 2023.

The capital ratio can fluctuate at Root Re’s election, subject to regulatory approval.

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Financing Arrangements

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

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

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

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

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

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

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

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

As a result, we recognized a $15.9 million loss on early extinguishment.

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

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

In October 2021, we consummated the transactions contemplated by the investment agreement with Carvana, or the Investment Agreement, that we entered into on August 11, 2021.

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

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

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

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

Concurrently, we issued and sold 1.0 million shares of our Class A common stock in private placements.

We received total net proceeds of $1.1 billion after deducting underwriting discounts and other offering costs.

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

As of December 31, 2023, there was $3.0 million of unpaid issuance costs contingent upon certain warrant vesting milestones in connection with the Investment Agreement.

As of December 31, 2023, we had $678.7 million in cash and cash equivalents, of which $507.3 million was held outside of regulated insurance entities.

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

Our marketable securities consist of U.S.

Our marketable securities primarily consist of U.S.

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

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

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

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

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

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

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

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

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

A cash expenditure related to employee compensation expense of $8.3 million, which was dependent upon continuous employment for certain employees, occurred in January 2024.

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

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

Years Ended December 31,

For the Years Ended December 31,

2023 2022 2021

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Net cash (used in) provided by investing activities (45.7) (16.6) 76.9

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

Net cash (used in) provided by financing activities (4.1) 283.3 (80.3)

Comparison of Years Ended December 31, 2023 and 2022

Net cash used in operating activities for the year ended December 31, 2023 was $33.6 million compared to $210.6 million of net cash used in operating activities for the year ended December 31, 2022.

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

In addition, timing of premium receipts, timing of

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

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

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

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

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

The decrease in cash used in operating activities was due to a decline in net loss, primarily due to an increase in net premiums earned and initiatives that reduced operating costs, including our prior year organizational realignment and involuntary workforce reductions that reduced payroll, employee-related expenditures and facility costs.

Further, this was impacted by a strategic reduction of quota share reinsurance and commuting certain agreements with reinsurers.

This was partially offset by timing of claims payments and reinsurance payments during the year ended December 31, 2023 compared to the same period in 2022.

Net cash used in investing activities for the year ended December 31, 2023 was $45.7 million, compared to $16.6 million of net used in investing activities for the year ended December 31, 2022.

The increase in cash used in investing activities was primarily due to purchases of investments.

Net cash used in financing activities for the year ended December 31, 2023 was $4.1 million, compared to $283.3 million of net cash provided by financing activities for the year ended December 31, 2022.

The change in net cash (used in) provided by financing activities was primarily due to proceeds from our Term Loan issued in 2022.

Comparison of Years Ended December 31, 2022 and 2021

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The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period.

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

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

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

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

The methods used to

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

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

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

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Total losses—net of reinsurance $ 185.6 $ 192.7 $ 199.7 $ 206.7 $ 213.8

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

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

Premium Revenue, Fee Income and Related Expenses

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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.

A premium deficiency reserve is recognized as a reduction of deferred policy 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 2023, 2022 or 2021.

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

We have 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.

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Unearned premium is established to cover the unexpired portion of premiums assumed.

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

Premiums receivable represents premiums written but not yet collected.

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

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

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

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

We also charge policy fees, which are typically nonrefundable fees that are intended to reimburse a portion of the costs incurred to underwrite the policy.

This fee income is recognized ratably over the policy coverage period.

In addition, we charge late payment fees that are collected from our policyholders.

This fee income is recognized in the period in which we process the late payment.

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

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 policy 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.

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

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

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

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

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

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

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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.

Allowance for credit losses was $1.8 million and $0.2 million as of December 31, 2023 and 2022, respectively.

Recoverability of Net Deferred Tax Assets

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

What changed 10-K

Item 7. Management’s Discussion and Analysis