What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-02-21 · 162 added, 247 removed, 403 unchanged (50% 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, 2023 filed with the Securities and Exchange Commission, or the SEC, on February 21, 2024.

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.

Root is a technology insurance company founded on the idea that car insurance rates should be based primarily on driving behaviors, not demographics.

We are revolutionizing the archaic car insurance industry using mobile technology and data science to offer drivers fair, personalized rates.

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 administration to ongoing customer engagement.

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.

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

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

• Reduced marketing as a percentage of premium.

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

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

direct and partnership.

The direct channel efficiently drives volume for high intent customers, meeting customers in platforms that they use extensively such as search engines or select marketplace platforms while actively shopping for insurance.

The data science model seeks to optimize bidding strategies that fine tunes our prices to strike a balance between offering a competitive price and achieving target unit economics.

The partnership channel provides differentiated access to high intent customers, primarily in the automotive, financial services, and independent agent sectors.

We build upon or within the mobile and web customer experiences of distribution partners to reach a captive customer base with an embedded solution, which can even remove the need for the customer to ever visit a Root website to purchase and bind a policy.

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

Through continued development of machine-learning loss models, which allow us to respond more quickly to changes in the market, we expect improvement in pricing segmentation.

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

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.

We believe that through prudent investment in and diversification of our distribution channels, including leveraging proprietary data science and technology and a focus on partnerships with automotive, financial services, and independent agents, will position us for 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.

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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 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.

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

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

We primarily utilize reinsurance to mitigate impact of large losses or tail events .

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

As our gross loss ratios have stabilized we strategically reduced the utilization of external quota share to balance the cost of reinsurance with capital-efficiency.

Over the long-term, we expect to maintain the flexibility to modify our reinsurance program.

Key Factors and Trends Affecting our Operating Performance

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Our ability to derive significant lifetime value from our customer relationships depends, in part, on our ability to retain our customers over time.

Strong retention allows us to build a recurring revenue base, generating additional premiums term over term without material incremental marketing costs.

Strong retention allows us to build a recurring revenue base, generating additional premiums term over term without material incremental marketing and underwriting costs.

As we broadly retain customers and our book of business evolves to be more weighted towards renewals versus new business, as is the case with our mature competitors, we will benefit from the inherently lower loss ratios that characterize renewed premiums.

Our ability to retain customers will depend on a number of factors, including our customers’ satisfaction with our products, offerings of our competitors and pricing of products.

Our Ability to be Licensed in all States in the United States

Our long-term growth opportunity will benefit from our ability to provide insurance across more states in the United States.

Our Ability to be Licensed in All States in the U.S.

Our long-term growth opportunity will benefit from our ability to provide insurance across more states in the U.S.

Today, we are currently licensed in 50 states (48 states for personal auto) and the District of Columbia and operate in 35 of those states.

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

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

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

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.

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

Cross-sales of renters policies will allow us to generate additional premiums without material incremental marketing spend, and ultimately higher revenue per customer.

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

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

contracts to be more consistent with industry norms.

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

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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.

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, including variability in the competitive environment.

We have seen an increase in vehicle

repair and medical costs.

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

There remains uncertainty around the future of inflation;

elevated levels of inflation for an extended period could cause claims and claim expenses to increase, impact the performance of our investment portfolio, increase nonpayment cancellations or have other adverse effects, including variability in the competitive environment.

We have also seen an increase in vehicle repair and medical costs.

These cost increases have resulted in greater claims severity.

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Comprehensive Reinsurance

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.

We have significantly reduced the utilization of reinsurance through a strategic reduction of external quota share.

The changes to the reinsurance program aim to deliver improved economics.

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.

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 or less of our business.

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

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Gross profit (loss)

Net loss $ (147.4) $ (297.7) $ (521.1)

$ 337.1 $ 76.1 $ (32.2)

Net income (loss)

$ 30.9 $ (147.4) $ (297.7)

Direct contribution $ 394.0 $ 150.7 $ 27.6

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

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

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

Premiums per Policy

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

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

We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of

fluctuations in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals.

Gross Premiums Written

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Direct Contribution

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.

We define direct contribution, a non-GAAP financial measure, as gross profit (loss) excluding net investment income, net realized gains on investments, acquisition costs which include report costs and refunds related to these expenses and commission expenses related to our partnership channel, fixed costs which include certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, 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.

Further, impacts related to reinsurance are excluded, these consist of ceded premiums earned, 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 expense (benefit).

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

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

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

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

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, write-off of prepaid marketing expenses, legal fees and other items that do not reflect our ongoing operating performance.

We define adjusted EBITDA, a non-GAAP financial measure, as net income (loss) excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, loss on extinguishment of debt, 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 performance.

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

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

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

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

Net Loss and LAE Ratio

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

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

Currently, we do not cede any of our LAE to our third-party quota share reinsurance treaties;

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

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

Gross Expense Ratio

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Net Investment Income

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.

Net investment income represents interest earned from our cash and cash equivalents, fixed maturities, and short-term investments less investment expenses.

Net investment income also includes impairments related to low income housing tax credits investments in limited liability entities to offset certain state 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.

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

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

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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.

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

Operating Expenses

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Sales and Marketing

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.

Sales and marketing includes both acquisition and fixed expenses.

We view direct performance marketing, experimental marketing, channel media, advertising and referral fees as acquisition expenses.

We view sponsorship, certain non-commission expenses related to the partnership channel, Personnel Costs and Overhead related to our brand strategy, creative and business development activities, and certain data science activities as fixed costs.

We incur sales and marketing expenses for all product offerings.

Sales and marketing are expensed as incurred.

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 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.

We expect that our sales and marketing will vary based upon the competitive environment and other investments in acquisition.

Over the long-term we expect it will decrease as a percentage of revenue as the proportion of renewals to our total business increases.

Other Insurance Expense (Benefit)

Other insurance expense (benefit) includes underwriting expenses, 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.

Other insurance expense (benefit) includes expenses primarily related to insurance and underwriting operations of the business, it is comprised of acquisition, variable and fixed expenses.

We view report costs and refunds related to these expenses and commission expenses related to our partnership channel as acquisition costs.

We view premium taxes, credit card and policy processing expenses and premium write-offs as variable costs.

We view insurance license expenses, certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, low income housing tax credits which offset certain state premium taxes, Personnel Costs and Overhead related to actuarial and certain data science activities as fixed costs.

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.

Tax credits are recognized when utilized.

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.

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Technology and Development

Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems;

Technology and development are fixed expenses that consist of software development costs related to our mobile app and homegrown information technology systems;

third-party services related to infrastructure support;

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General and Administrative

General and administrative expenses primarily relate to external professional service expenses;

General and administrative are fixed expenses that primarily relate to external professional service expenses;

Personnel Costs and Overhead for corporate functions;

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therefore, we include these expenses below operating expenses.

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

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

Loss on Early Extinguishment of Debt

Loss on early extinguishment of debt is not an operating expense;

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

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

Loss on Extinguishment of Debt

Loss on extinguishment of debt is not an operating expense;

therefore, we include these expenses below operating expenses.

Loss on early extinguishment of debt primarily relates to the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.

Upon extinguishment of debt, the remaining unamortized discount and debt and warrants issuance costs are recognized as expense.

Loss on extinguishment of debt primarily relates to the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.

Upon extinguishment of debt, the remaining unamortized discount and debt issuance costs are recognized as expense.

Results of Operations

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Net investment income 35.9 30.2 5.7 18.9 %

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

66.0 23.4 42.6 182.1 %

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Sales and marketing 135.8 49.3 86.5 175.5 %

Other insurance expense (benefit)

47.6 (8.0) 55.6 695.0 %

Other insurance expense 106.4 47.6 58.8 123.5 %

Technology and development 53.3 44.8 8.5 19.0 %

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Total operating expenses 1,098.0 556.3 541.7 97.4 %

Operating loss (101.3) (263.1) 161.8 (61.5) %

Operating income (loss) 78.5 (101.3) 179.8 177.5 %

Interest expense (42.2) (46.1) 3.9 (8.5) %

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

Loss on extinguishment of debt (5.4) — (5.4) 100.0 %

Income (loss) before income tax expense 30.9 (147.4) 178.3 121.0 %

Income tax expense — — — — %

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

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 income (loss) 30.9 (147.4) 178.3 121.0 %

Other comprehensive income:

Changes in net unrealized gains on investments 0.2 3.3 (3.1) (93.9) %

Comprehensive income (loss) $ 31.1 $ (144.1) $ 175.2 121.6 %

Net Premiums Earned

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.

Net premiums earned increased due to an increase in policies in force as a result of increased direct performance marketing spend, continued growth in our partnership channel, reduced external quota share cessions of gross premiums earned to reinsurers between periods and greater premium per policy resulting from rate actions.

During the years ended December 31, 2024 and 2023, we ceded approximately 13.0% and 37.1% of our gross premiums earned, respectively.

The change in cessions between periods was primarily driven by a strategic reduction of quota share reinsurance and commutations of certain reinsurance agreements in 2023.

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, 2024 and 2023:

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Net premiums earned $ 1,070.9 $ 399.9 $ 671.0 167.8 %

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.

Gross premiums written increased due to growth in new writings as a result of increased direct performance marketing spend and continued growth in our partnership channel compared to 2023.

The increase in gross premiums earned was primarily due to greater policies in force and an 11.3% increase in premium per policy 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.

Net investment income increased due to a $7.3 million increase in interest and dividends received primarily due to a higher average cash balance and a larger investment portfolio.

This was partially offset by a $2.2 million increase in impairment related to low income housing tax credit utilization.

Fee income increased due to a $24.4 million increase in policy fees and a $15.4 million increase in installment fees due to increased policies in force.

Operating Expenses

Loss and Loss Adjustment Expenses

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 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.

Loss and LAE increased due to additional losses incurred on increased gross premiums earned volume and reduced cessions of losses to reinsurers driven by a strategic reduction of quota share reinsurance and commutations of certain reinsurance agreements.

Gross accident period loss ratios decreased to 59.9% for the year ended December 31, 2024, from 64.0% for 2023.

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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.

We experienced a 5% increase in severity per claim and a 4% decrease in claim frequency for the year ended December 31, 2024 compared to 2023 across our bodily injury, collision, and property damage coverages.

The claim frequency estimates are tenure mix adjusted.

Sales and Marketing

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.

Sales and marketing increased due to greater acquisition expense as we invested in growing our business to drive accretive growth and deeper market penetration in the states in which we operate.

This resulted in a $76.7 million increase in direct performance marketing spend.

We also experienced a $6.7 million increase in experimental marketing spend as part of our efforts to diversify our distribution channels.

Other Insurance Expense

Other insurance expense increased from growth of our earned premium and policies in force, this resulted in greater variable expense including premium write-offs of $21.6 million, premium taxes of $11.9 million and policy processing fees of $6.1 million.

We also saw a $28.9 million decrease in net ceding commission contra-expense as a result of a decline in ceded premiums written, largely attributable to a strategic reduction of quota share reinsurance initiated in 2023 and continued in 2024.

Our acquisition expenses increased due to greater commissions paid related to the continued growth in our partnership channel, including amortization of deferred policy acquisition costs, of $15.8 million.

While acquisition expenses increased overall, report costs decreased $3.5 million primarily driven by enhanced efficiency and reduced costs for reports related to new business.

Additionally, we recorded a $10.9 million sales tax refund related to multiple prior years.

Fixed expenses decreased due to a reduction of $13.4 million in Carvana warrant expense, as all short-term warrant expense has been recognized upon vesting.

Additionally, we recorded an additional $2.5 million of low income housing tax credit utilization that reduces premium taxes.

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 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.

Technology and development increased due to a $5.0 million increase in Personnel Costs.

We also experienced a $2.1 million increase in amortization primarily driven by accelerated amortization of internally developed software and a $1.5 million increase in software development expense as we continue to invest in developing and improving our technology platforms and infrastructure.

General and Administrative

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.

General and administrative decreased due to a $5.9 million decrease in corporate insurance due to maturation as a public company and a $5.7 million decrease in legal and professional fees, of which $2.7 million relates to the 2022 misappropriation of funds by a former senior marketing employee.

Non-Operating Expenses

Interest Expense

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 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.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was due to unamortized discount and debt issuance costs being expensed as a result of extinguishing the Term Loan.

Comparison of the Years Ended December 31, 2023 and 2022

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Sales and marketing 49.3 48.0 1.3 2.7 %

Other insurance (benefit) expense

(8.0) 5.0 (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) 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) (5.2) (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) %

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

(4) review and assess the operating performance of our management team;

(4) review and assess the operating performance of our management team, including when determining incentive

compensation;

(5) analyze and evaluate financial and strategic planning decisions regarding future operating investments;

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Gross profit (loss)

337.1 76.1 (32.2)

Net investment income (35.9) (30.2) (6.2)

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______________

(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 .

(1) Adjustments from other insurance (expense) benefit consists of acquisition costs including report costs and refunds related to these expenses and commission expenses related to our partnership channel of $49.7 million, $50.8 million and $18.7 million for the years ended December 31, 2024, 2023 and 2022, respectively.

Fixed expenses including certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, Personnel Costs, Overhead, licenses, professional fees and other of $16.8 million, $25.5 million and $19.7 million for the years ended December 31, 2024, 2023 and 2022, respectively.

(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 .

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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:

The following table provides a reconciliation of net income (loss) to adjusted EBITDA for the years ended December 31, 2024, 2023 and 2022:

For the Years Ended December 31,

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(dollars in millions)

Net loss $ (147.4) $ (297.7) $ (521.1)

Net income (loss) $ 30.9 $ (147.4) $ (297.7)

Interest expense 39.7 43.2 31.9

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Share-based compensation 18.5 16.9 25.2

Loss on early extinguishment of debt — — 15.9

Loss on extinguishment of debt

Warrant compensation expense 3.8 17.4 14.5

Restructuring costs (1)

0.2 11.2 18.6

Write-offs and other (2)

(1.1) 3.6 9.5

Adjusted EBITDA $ 111.9 $ (42.9) $ (185.9)

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(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.

This includes zero, $0.4 million and $5.3 million of share-based compensation for the years ended December 31, 2024, 2023 and 2022, respectively.

This also includes $0.4 million, $0.4 million and $1.7 million of depreciation and amortization for the years ended December 31, 2024, 2023 and 2022, respectively.

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

(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.

This includes write-off of prepaid marketing expenses of $10.2 million for the year ended December 31, 2022.

Legal and other fees net of recoveries related to the 2022 misappropriation of funds by a former senior marketing employee of $(1.1) million, $3.2 million and $(0.7) million for the years ended December 31, 2024, 2023 and 2022, respectively.

Liquidity and Capital Resources

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Cash generated from operations is highly dependent on being able to efficiently acquire and maintain customers while pricing our insurance products appropriately.

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

We are continuously evaluating alternatives for efficiently funding our ongoing operations and reducing our cost of capital.

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.

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

There remains uncertainty around the future of inflation;

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

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.

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 or less 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 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.

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

To date, our domestic insurance subsidiaries have not paid any dividends, and as of December 31, 2024, they were not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director.

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

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These funds are primarily used to pay claims and operating expenses and to purchase investments.

Root Re must receive approval from CIMA before it can pay any dividend to the holding company.

Root Re must notify CIMA before it can pay any dividend to the holding company.

Financing Arrangements

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

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.

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 Convertible Preferred Stock.

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.

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.

In October 2024, we entered into the second amendment to the Term Loan, or Amended Term Loan, that resulted in extinguishment of $237.1 million of the Term Loan, modification of $62.9 million of the Term Loan, and new borrowings of $137.1 million from new BlackRock participation.

The resulting principal amount under the Amended Term Loan is $200.0 million and has a maturity date of October 29, 2030.

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 an applicable margin ranging from 5.25% to 6.00%, based upon the debt-to-capital ratio, payable quarterly.

As of December 31, 2024, we had $599.3 million in cash and cash equivalents, of which $333.0 million was held outside of regulated insurance entities.

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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.

Treasury securities and agencies, municipal securities, corporate debt securities, and asset-backed securities.

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 for the foreseeable future thereafter.

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.

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

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

issuing 62,500 insurance policies through our Carvana embedded product and achieving a ratio of direct contribution to gross 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 Amended Term Loan, our debt covenants require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $50.0 million at all times.

We continue to have the same available capital under the Amended Term Loan as we did in the Term Loan.

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

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(in millions)

Net cash used in operating activities $ (33.6) $ (210.6) $ (403.4)

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

Net cash provided by (used in) operating activities $ 195.7 $ (33.6) $ (210.6)

Net cash used in investing activities (154.4) (45.7) (16.6)

Net cash (used in) provided by financing activities (120.7) (4.1) 283.3

Comparison of Years Ended December 31, 2024 and 2023

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, 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.

Net cash provided by operating activities for the year ended December 31, 2024 was $195.7 million compared to $33.6 million of net cash used in operating activities for the year ended December 31, 2023.

The change in operating activities was due to higher net income between periods, an increase in the net loss and LAE reserves as a result of growth in policies in force and timing of premium receipts and reinsurance payments.

This was partially offset by change in premiums not yet earned due to growth, timing of reinsurance receipts and the impact of commuting certain agreements with reinsurers in 2023.

Net cash used in investing activities for the year ended December 31, 2024 was $154.4 million, compared to $45.7 million for the year ended December 31, 2023.

The increase in cash used in investing activities was primarily due to purchases of investments which was partially offset by proceeds from maturities, calls and pay downs of investments.

Net cash used in financing activities for the year ended December 31, 2024 was $120.7 million, compared to $4.1 million for the year ended December 31, 2023.

The increase in cash used in financing activities was primarily due to a partial repayment of the extinguished Term Loan and tax withholding obligations arising from the vesting of equity awards.

This was partially offset by net proceeds from the Amended Term Loan.

Comparison of Years Ended December 31, 2023 and 2022

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Material Cash Requirements from Contractual and Other Obligations

As of December 31, 2023, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 13, “Commitments and Contingencies,” operating leases, as discussed in Note 8, “Leases,” and a Term Loan, as discussed in Note 7, “Long-Term Debt,” in the Notes to Consolidated Financial Statements.

As of December 31, 2024, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 13, “Commitments and Contingencies,” operating leases, as discussed in Note 8, “Leases,” and an Amended Term Loan, as discussed in Note 7, “Long-Term Debt,” in the Notes to Consolidated Financial Statements.

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

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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, valuation allowance on our deferred tax assets, premium write-offs and allowance for expected credit losses on premium receivables and reinsurance recoverables.

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, and the amount of reinsurance recoverable and receivable from reinsurance contracts.

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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Loss and LAE Reserves

Loss and LAE reserves represent management’s best estimate of the ultimate liability for all reported and unreported claims that occurred prior to the end of each accounting period but have not yet been paid.

These reserves are established to cover the estimated ultimate cost to settle insured losses.

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

Case reserve amounts are determined by claims adjusters following our case reserving practices, which consider the circumstances presented with each claimant, applicable policy provisions, and state law.

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, 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.

Our estimation for unpaid LAE reserves includes the ultimate cost of settling a range of claim types from express material damage claims to more complex bodily injury cases.

The evaluation and estimation of ultimate losses and LAE requires considerable judgment in understanding how claims mature, how claims differ between lines of business, and how changes in the business impact claims settlement over time.

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

The loss reserve range noted below represents a range of reasonably likely reserves, not a range of all possible reserves.

Therefore, the ultimate losses could reach levels corresponding to reserve amounts outside of the range provided.

Given our growth from inception in 2015, we believe evaluating sensitivity based on a hypothetical increase or decrease of 5% and 10% is reflective of management’s best estimate and provides an illustrative range of variability in key assumptions.

The below tables present this sensitivity analysis:

Scenarios for Changes in Bodily Injury Claim Severity for all Accident Years

The loss reserve range estimated below represents a range of reasonably likely reserves, not a range of all possible outcomes.

Therefore, the ultimate losses could reach levels outside the range provided.

Given the growth in exposures from inception in 2015, we believe evaluating sensitivity based on a hypothetical increase or decrease of 5% and 10% reflects management’s best estimate and provides a scenario impact on the reserve ranges due to variability in key assumptions.

The following table summarizes this sensitivity analysis:

Scenarios for Changes in Loss Reserves for all Accident Years

(10)% (5)% —% 5% 10%

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Uninsured and underinsured bodily injury 26.6 28.0 29.5 31.0 32.5

Property damage

52.0 54.9 57.8 60.7 63.6

All other coverages 37.4 37.4 37.4 37.4 37.4

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

Total loss reserves—net of reinsurance

$ 274.6 $ 287.7 $ 300.9 $ 314.1 $ 327.3

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

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 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.

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.

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 $4.0 million and $2.8 million as of December 31, 2023 and 2022, respectively, on the consolidated balance sheets.

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

We recognized premium write-offs, or bad debt expense, of $12.5 million, $17.4 million and $20.9 million for the years ended December 31, 2023, 2022 and 2021 respectively.

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 billings.

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

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.

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 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 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.

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 reinsurance from a diverse group of global reinsurers and monitor concentration as well as financial strength ratings of the reinsurers to minimize counterparty credit risk.

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

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

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

Reinsurance Recoverable and Receivable

We also estimate the amount of reinsurance recoverable and receivable from reinsurance contracts.

Reinsurance assets include reinsurance recoverable and receivable on unpaid loss and LAE reserves, which are estimated as part of our loss reserving process and are subject to similar judgments and uncertainties.

Estimating these amounts involves significant judgment, with key considerations including:

• paid and unpaid amounts recoverable;

• any balances in dispute or subject to legal collection;

• the financial well-being of a reinsurer;

• the likelihood of collection of the reinsurance recovery considering factors such as, amounts outstanding and length of collection periods.

Recoverability of Net Deferred Tax Assets

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

We have experienced an ownership change.

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

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis