Root, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) 88 Consolidated Balance Sheets 90 Consolidated Statements of Operations and Comprehensive I ncome ( Loss ) 91 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity 92 Consolidated Statements of Cash Flows 93 Notes to Consolidated Financial Statements 94 Schedule II: Condensed Combined Financial Information of Registrant 129 Schedule V: Valuation and Qualifying Accounts 133 Schedules, other than those listed above, are omitted for the reason that they are not required, are not applicable or that equivalent information has been included in the consolidated financial statements or notes thereto or elsewhere herein. 87 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Root, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Root, Inc. and subsidiaries (the "Company") as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive income (loss), redeemable convertible preferred stock and stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2025, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Loss and Loss Adjustment Expense Reserves – Refer to Notes 2 and 5 to the financial statements Critical Audit Matter Description Loss and loss adjustment expense reserves represent the liability established to cover the estimated ultimate cost to settled insured losses. The Company’s estimation of the liability for loss and loss adjustment expense reserves is complex and includes subjective considerations and management’s judgement. Loss and loss adjustment expense reserves are inherently uncertain. Because actual experience can differ from key assumptions used in establishing reserves, there is potential for significant variation in the development of loss 88 reserves, particularly related to those reserves where there is a longer time span between the incidence of a loss and the settlement of a claim. Given the subjectivity in estimating the ultimate loss and loss adjustment expense reserves, due to input variables such as historical and statistical information, inflation, contract interpretation, weather catastrophe impacts, regulatory environment, and economic conditions, among other factors, auditing loss and loss adjustment expense reserves, particularly related to those reserves with settlement over a longer period of time, involved an especially high degree of auditor judgment, including the need to involve our actuarial specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to loss and loss adjustment expense reserves included the following, among others: • We tested the effectiveness of controls related to loss and loss adjustment expense reserves, including those over the Company’s actuarial estimate. • We tested the completeness and accuracy of the underlying key data inputs that served as the basis for the actuarial estimate. • With the assistance of our actuarial specialists, we used the Company’s claims data to develop a range of independent estimates for the loss and loss adjustment expense reserves, particularly related to those with settlement over a longer period of time. We used these independent estimates to assess the reasonableness of the Company’s reserves by comparing our estimates to the Company’s recorded loss and loss adjustment expense reserves. • We compared the Company’s prior year estimates of expected loss and loss adjustment expense reserves to actual experience during the current year to identify potential bias in the determination of loss and loss adjustment expense reserves. /s/ DELOITTE & TOUCHE LLP Columbus, Ohio February 26, 2025 We have served as the Company's auditor since 2017. 89 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2024 AND 2023 2024 2023 (in millions, except par value) Assets Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $ 294.3 and $ 168.4 at December 31, 2024 and December 31, 2023, respectively) $ 292.0 $ 165.9 Short-term investments (amortized cost: $ 14.8 and $ 0.9 at December 31, 2024 and December 31, 2023, respectively) 14.8 0.9 Other investments 4.4 4.4 Total investments 311.2 171.2 Cash and cash equivalents 599.3 678.7 Restricted cash 1.0 1.0 Premiums receivable, net of allowance of $ 9.8 and $ 4.0 at December 31, 2024 and December 31, 2023, respectively 305.3 247.1 Reinsurance recoverable and receivable, net of allowance of $ 0.1 and $ 1.8 at December 31, 2024 and December 31, 2023, respectively 150.6 125.3 Prepaid reinsurance premiums 25.1 48.2 Other assets 103.2 76.2 Total assets $ 1,495.7 $ 1,347.7 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity Liabilities: Loss and loss adjustment expense reserves $ 413.2 $ 284.2 Unearned premiums 353.9 283.7 Long-term debt and warrants 200.1 299.0 Reinsurance premiums payable 32.8 54.4 Accounts payable and accrued expenses 71.1 65.6 Other liabilities 108.9 83.1 Total liabilities 1,180.0 1,070.0 Commitments and Contingencies (Note 13) Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2024 and December 31, 2023 (redemption value of $ 126.5 ) (Note 11) 112.0 112.0 Stockholders’ equity: Class A common stock, $ 0.0001 par value, 11.1 and 9.5 shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively (Note 11) — — Class B convertible common stock, $ 0.0001 par value, 4.0 and 5.0 shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively (Note 11) — — Additional paid-in capital 1,887.9 1,883.4 Accumulated other comprehensive loss ( 2.3 ) ( 2.5 ) Accumulated loss ( 1,681.9 ) ( 1,715.2 ) Total stockholders’ equity 203.7 165.7 Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 1,495.7 $ 1,347.7 See Notes to Consolidated Financial Statements 90 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2024, 2023 AND 2022 2024 2023 2022 (in millions, except per share data) Revenues: Net premiums earned $ 1,070.9 $ 399.9 $ 285.9 Net investment income 35.9 30.2 6.2 Net realized gains on investments — — 0.5 Fee income 66.0 23.4 16.5 Other income 3.7 1.5 1.7 Total revenues 1,176.5 455.0 310.8 Operating expenses: Loss and loss adjustment expenses 733.0 331.3 351.0 Sales and marketing 135.8 49.3 48.0 Other insurance expense (benefit) 106.4 47.6 ( 8.0 ) Technology and development 53.3 44.8 55.5 General and administrative 69.5 83.3 127.4 Total operating expenses 1,098.0 556.3 573.9 Operating income (loss) 78.5 ( 101.3 ) ( 263.1 ) Interest expense ( 42.2 ) ( 46.1 ) ( 34.6 ) Loss on extinguishment of debt ( 5.4 ) — — Income (loss) before income tax expense 30.9 ( 147.4 ) ( 297.7 ) Income tax expense — — — Net income (loss) 30.9 ( 147.4 ) ( 297.7 ) Net income attributable to participating securities ( 1.7 ) — — Net income (loss) attributable to common shareholders 29.2 ( 147.4 ) ( 297.7 ) Other comprehensive income (loss): Net income (loss) 30.9 ( 147.4 ) ( 297.7 ) Changes in net unrealized gains (losses) on investments 0.2 3.3 ( 6.2 ) Comprehensive income (loss) $ 31.1 $ ( 144.1 ) $ ( 303.9 ) Earnings (loss) per common share: (both Class A and B) Basic $ 1.96 $ ( 10.24 ) $ ( 21.11 ) Diluted $ 1.83 $ ( 10.24 ) $ ( 21.11 ) Weighted-average common shares outstanding: (both Class A and B) Basic 14.9 14.4 14.1 Diluted 16.9 14.4 14.1 See Notes to Consolidated Financial Statements 91 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY FOR THE YEARS ENDED DECEMBER 31, 2024, 2023 AND 2022 Redeemable Convertible Preferred Stock Class A and Class B Convertible Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Accumulated Loss Total Stockholders' Equity Shares Amount Class A Shares Class B Shares Amount (in millions) Balance—January 1, 2022 14.1 $ 112.0 7.9 6.1 $ — $ 1,806.1 $ 0.4 $ ( 1,270.1 ) $ 536.4 Net loss — — — — — — — ( 297.7 ) ( 297.7 ) Other comprehensive loss — — — — — — ( 6.2 ) — ( 6.2 ) Conversion of Class B to Class A common stock — — 1.1 ( 1.1 ) — — — — — Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.2 — — 0.4 — — 0.4 Reclassification of early-exercised stock option to liabilities — — — — — 0.2 — — 0.2 Common stock—share-based compensation expense — — — — — 30.5 — — 30.5 Warrant compensation expense — — — — — 14.5 — — 14.5 Warrant issuance costs — — — — — ( 1.6 ) — — ( 1.6 ) Term Loan warrants issued — — — — — 0.6 — — 0.6 Balance—December 31, 2022 14.1 $ 112.0 9.2 5.0 $ — $ 1,850.7 $ ( 5.8 ) $ ( 1,567.8 ) $ 277.1 Net loss — — — — — — — ( 147.4 ) ( 147.4 ) Other comprehensive income — — — — — — 3.3 — 3.3 Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.3 — — — — — — Reclassification of early-exercised stock option from liabilities — — — — — 0.1 — — 0.1 Common stock—share-based compensation expense — — — — — 17.3 — — 17.3 Warrant compensation expense — — — — — 17.4 — — 17.4 Warrants issuance costs — — — — — ( 2.1 ) — — ( 2.1 ) Balance—December 31, 2023 14.1 $ 112.0 9.5 5.0 $ — $ 1,883.4 $ ( 2.5 ) $ ( 1,715.2 ) $ 165.7 Net income — — — — — — — 30.9 30.9 Other comprehensive income — — — — — — 0.2 — 0.2 Conversion of Class B to Class A common stock — — 1.0 ( 1.0 ) — — — — — Common stock—option exercises and restricted stock units vesting, net of shares withheld for employee taxes — — 0.6 — — ( 17.4 ) — 2.4 ( 15.0 ) Common stock—share-based compensation expense — — — — — 18.5 — — 18.5 Warrant compensation expense — — — — — 3.8 — — 3.8 Warrants issuance costs — — — — — ( 0.4 ) — — ( 0.4 ) Balance—December 31, 2024 14.1 $ 112.0 11.1 4.0 $ — $ 1,887.9 $ ( 2.3 ) $ ( 1,681.9 ) $ 203.7 See Notes to Consolidated Financial Statements 92 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2024, 2023 AND 2022 2024 2023 2022 (in millions) Cash flows from operating activities: Net income (loss) $ 30.9 $ ( 147.4 ) $ ( 297.7 ) Adjustments to reconcile net income (loss) to net cash used in operating activities: Share-based compensation 18.5 17.3 30.5 Warrant compensation expense 3.8 17.4 14.5 Depreciation and amortization 14.9 12.6 13.8 Bad debt expense 33.6 14.1 17.4 Loss on extinguishment of debt 5.4 — — Net realized gains on investments — — ( 0.5 ) Gain on lease modification — ( 0.3 ) ( 0.9 ) Changes in operating assets and liabilities: Premiums receivable ( 92.3 ) ( 147.7 ) 18.8 Reinsurance recoverable and receivable ( 24.8 ) 21.9 6.2 Prepaid reinsurance premiums 23.1 26.0 26.6 Other assets ( 25.0 ) 4.8 ( 7.5 ) Losses and loss adjustment expenses reserves 129.0 ( 3.2 ) ( 32.8 ) Unearned premiums 70.2 147.2 ( 43.6 ) Reinsurance premiums payable ( 21.6 ) ( 65.4 ) 18.2 Accounts payable and accrued expenses 1.3 27.7 17.9 Other liabilities 28.7 41.4 8.5 Net cash provided by (used in) operating activities 195.7 ( 33.6 ) ( 210.6 ) Cash flows from investing activities: Purchases of investments ( 197.8 ) ( 76.0 ) ( 47.7 ) Proceeds from maturities, call and pay downs of investments 54.6 37.5 34.1 Sales of investments 0.6 2.2 7.1 Purchases of indefinite-lived intangible assets and transaction costs — — ( 1.3 ) Capitalization of internally developed software ( 11.4 ) ( 9.2 ) ( 8.8 ) Purchases of fixed assets ( 0.4 ) ( 0.2 ) — Net cash used in investing activities ( 154.4 ) ( 45.7 ) ( 16.6 ) Cash flows from financing activities: Proceeds from exercise of stock options and restricted stock units 0.1 — 1.3 Taxes paid related to net share settlement of equity awards ( 15.1 ) ( 1.1 ) ( 1.0 ) Payment of preferred stock and related warrants issuance costs ( 3.0 ) ( 3.0 ) ( 3.0 ) Proceeds from issuance of debt and related warrants, net of issuance costs 134.4 — 286.0 Repayments of long-term debt ( 237.1 ) — — Net cash (used in) provided by financing activities ( 120.7 ) ( 4.1 ) 283.3 Net (decrease) increase in cash, cash equivalents and restricted cash ( 79.4 ) ( 83.4 ) 56.1 Cash, cash equivalents and restricted cash at beginning of year 679.7 763.1 707.0 Cash, cash equivalents and restricted cash at end of year $ 600.3 $ 679.7 $ 763.1 See Notes to Consolidated Financial Statements 93 ROOT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS Root, Inc. is a holding company which, directly or indirectly, maintains 100% ownership of each of its subsidiaries, including, among others, Root Insurance Company and Root Property & Casualty Insurance Company, or Root Property & Casualty, both Ohio-domiciled insurance companies, Root Florida Insurance Company, a Florida-domiciled insurance company, which was formed in 2025, and Root Reinsurance Company, Ltd., a Cayman Islands-domiciled reinsurance company, together with Root, Inc., “we,” “us” or “our.” We were formed in 2015 and began writing personal auto insurance in July 2016. We are a technology company operating primarily a direct-to-consumer model with the majority of our personal insurance customers acquired through mobile apps. We offer auto and renters insurance products underwritten by Root Insurance Company, Root Property & Casualty and Root Florida Insurance Company. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation — The consolidated financial statements include the accounts of Root, Inc. and its subsidiaries, all of which are wholly owned. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. All intercompany accounts and transactions have been eliminated. Use of Estimates —The preparation of consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates reflected in our consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, or LAE, valuation allowance on our deferred tax assets and the amount of reinsurance recoverable and receivable from reinsurance contracts. Reverse Stock Split — In August 2022, an authorized subcommittee of our board of directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18. On August 12, 2022, we filed a Certificate of Amendment to our Amended and Restated Certificate of Incorporation to effect a 1-for-18 reverse stock split of our Class A and Class B common stock. As a result of the reverse stock split, every 18 shares of our issued or outstanding pre-reverse split common stock of each class were combined into one share of common stock of such class. No fractional shares were issued upon the reverse stock split. On August 15, 2022, our Class A common stock began trading on a split-adjusted basis on the Nasdaq Global Select Market. In connection with the reverse stock split, there was no change to the shares authorized or in the par value per share of $ 0.0001 . In addition, there was no change to the number of shares issued or outstanding for our Series A Preferred Stock. The conversion price for our Series A Preferred Stock was adjusted to $ 162.00 and the exercise price and number of warrant shares for each of our outstanding warrants were also proportionately adjusted. Accordingly, all historical per share data, number of shares outstanding and other common stock equivalents for the periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect the reverse stock split. Legal and Other Contingencies— From time to time, we are party to litigation and legal proceedings relating to our business operations. We consider legal actions relating to claims made in the ordinary course of seeking indemnification for a loss covered by the insurance policy in establishing loss and LAE reserves. In the ordinary course of business, we also face certain lawsuits that seek damages beyond policy limits, or extra-contractual claims. We continually evaluate potential liabilities and reserves for litigation and other matters using the guidance issued in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, Topic 450, Contingencies . Under this guidance, we may only record reserves for a loss if, as of the date the financial 94 statements are issued or available to be issued, the likelihood of occurrence is deemed probable and we can reasonably estimate the amount of the loss. When disclosing litigation, claims or other matters where a material loss is judged to be reasonably possible, we will disclose an estimated range of loss or state that an estimate cannot be made. We consider each matter using this guidance and record reserves for losses as warranted by establishing a reserve in loss and loss adjustment expense reserves for extra-contractual claims and other liabilities for class action, other non-claims related lawsuits and other matters in our consolidated balance sheets. Any non-reinsurance related recoveries are recognized as other assets in our consolidated balance sheets. We record amounts within loss and loss adjustment expenses for extra-contractual claims and general and administrative for class action and other non-claims related lawsuits in our consolidated statements of operations and comprehensive income (loss). For other recoveries, we record these amounts in the same account as the initial expense in our consolidated statements of operations and comprehensive income (loss). Further details are discussed in Note 13, “Commitments and Contingencies.” Debt and Equity Issuance Costs —Debt and equity issuance costs, which primarily consist of advisor, legal, accounting, and other third-party fees directly related to issuing debt and equity instruments, are capitalized as other assets in our consolidated balance sheets if incurred prior to closing the related transaction. We incurred such costs in connection with the investment agreement with Carvana Group, LLC, or Investment Agreement, that we entered into on August 21, 2021 and our $ 200.0 million six-year term loan, or Amended Term Loan, that we entered into on October 29, 2024. Upon close of the related transaction, these deferred issuance costs are generally offset against the related proceeds. Debt issuance costs are subsequently amortized over the term of the financing agreement as interest expense on the consolidated statements of operations and comprehensive income (loss). Indefinite-Lived Intangible Assets —As of December 31, 2024 and 2023, we had insurance licenses of $ 8.9 million and an intangible asset related to the purchase of the Root.com domain of $ 1.3 million, including transaction costs, in other assets on the consolidated balance sheets. We incur a minimal fee to renew each license. These intangible assets are not amortized, but instead are tested for impairment annually or when indicators of impairment exist. The impairment test for indefinite-lived intangibles involves first assessing qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If so, then a quantitative test is performed to compare the estimated fair value of the indefinite-lived intangible asset to the respective asset's carrying amount. The evaluation requires the use of estimates and significant judgments and considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. No impairment was recognized for 2024, 2023 or 2022 related to indefinite-lived intangible assets. Segment Information —We are a technology company that provides direct-to-consumer insurance products to customers. We operate as a single reporting segment that is managed on a consolidated basis. Our Chief Executive Officer is our chief operating decision maker, or CODM. The primary measure the CODM utilizes to manage operations, monitor budget versus actual results, and evaluate financial performance is net income (loss) as reported on the consolidated statements of comprehensive income (loss). This information is regularly provided to the CODM. The CODM allocates resources based on consolidated expense and forecasted expense information. Significant expenses, which are presented on the consolidated statements of operations and comprehensive income (loss), include loss and loss adjustment expense, sales and marketing, other insurance expense (benefit) and technology and development. Other segment items include expenses that our CODM does not evaluate for purposes of making operating decisions. These items include general and administrative, interest expense, loss on extinguishment of debt and income tax expense, which can all be found on the consolidated statements of operations and comprehensive income (loss). Assets provided to the CODM are consistent with those reported on the consolidated balance sheets. 95 Statement of Cash Flows — The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2024, 2023 and 2022 are as follows: For the Years Ended December 31, 2024 2023 2022 (in millions) Supplemental disclosures: Interest paid $ 43.9 $ 42.5 $ 24.5 Federal income taxes paid — — — Leasehold improvements - non-cash — — 0.9 Cash, Cash Equivalents and Restricted Cash —Cash consists of cash on deposit. Cash equivalents are short-term, highly liquid investments that typically mature within three months from the date of origination or purchase and are principally stated at amortized cost, which approximates their fair value. Restricted cash consists of amounts held by a financial institution to satisfy letter of credit requirements for certain property leases. If checks are issued in excess of cash balances in individual bank accounts, a book overdraft shall be reclassified to accounts payable on the consolidated balance sheets. When a check is issued whereby a disbursement account is used to write the check, but the account is not funded until the check is presented for payment this “negative cash” balance is included in cash and cash equivalents on the consolidated balance sheets, if the funding account has sufficient funds. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amount in the consolidated statements of cash flows: As of December 31, 2024 2023 (in millions) Cash and cash equivalents $ 599.3 $ 678.7 Restricted cash 1.0 1.0 Total cash, cash equivalents and restricted cash shown in the consolidated statements of cash flows $ 600.3 $ 679.7 Investments —Investments in debt securities are classified as short-term and available-for-sale fixed maturity securities and are carried at fair value with any unrealized gains and losses, net of taxes, recorded as a component of accumulated other comprehensive loss. Management regularly reviews our securities for signs of impairment, an assessment requiring significant management judgment. The criteria that management considers are the financial condition of the issuer, including receipt of scheduled principal and interest cash flows, fair value of a security that has fallen below the amortized value, maturity dates, current economic conditions and intent to sell, including if it is more likely than not that we will be required to sell the security before recovery. We then assess whether the decline in value is due to non-credit related or credit related factors. Non-credit related declines in fair value are recorded as unrealized losses in accumulated other comprehensive loss. If we determine that the decline is credit related, we establish an allowance for credit losses equal to the difference between the discounted cash flow model and the amortized value, which is recorded in net realized gains on investments in our consolidated statements of operations and comprehensive income (loss). This allowance may be subsequently adjusted for recoveries or further credit losses. No such credit losses were recognized in 2024, 2023 and 2022. Other investments primarily consist of private equity investments without a readily determinable fair value. We elected to account for these investments at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or a similar investment of the same issuer. Such 96 changes are accounted for within net investment income in our consolidated statements of operations and comprehensive income (loss). We also invest in Low Income Housing Tax Credits, or LIHTC, projects by way of investing in a limited liability entity to offset certain state premium taxes. The purpose of these investments is to encourage private capital investments into regions within these states that are in need of economic development, while providing tax credits and operating loss tax benefits to investors. We account for this investment using the cost method because our interest in the limited liability entity is minor and we have virtually no influence over the entity’s operating and financial policies. When we utilize the tax credits, the associated investment becomes impaired. Impairment of the investment is recognized within net investment income in our consolidated statements of operations and comprehensive income (loss). Fair Value Measurements —Fair value is defined as the price that would be received upon selling an asset or the price paid to transfer a liability on the measurement date in the principal or most advantageous market for the asset or liability in an orderly transaction between willing market participants. A three-tier hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair values are: Level 1 - Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices in active markets for identical assets and liabilities. Level 2 - Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models for which the inputs are corroborated by market data. Level 3 - Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Leases— We record leases in accordance with ASC Topic 842, Leases . We recognized a right-of-use asset and liability on the consolidated balance sheets for all leases, except for leases covering a period of fewer than 12 months. Operating lease expense for operating lease right-of-use assets is recognized on a straight-line basis over the lease term, which may include options to extend or terminate the lease when it is reasonably certain to do so and there is a significant economic incentive to exercise that option. For additional information refer to Note 8, “Leases.” Premiums, Premiums Receivable and Premium Write-offs —Premiums written are deferred and earned pro rata over the policy period. Unearned premium is established to cover the unexpired portion of premiums written. A premium deficiency, as measured on a gross basis, is recorded when the sum of expected losses, LAE, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. A premium deficiency reserve is recognized as a reduction of deferred 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 2024, 2023 or 2022. 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 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. Unaffiliated premiums payable are amounts owed to the fronting carrier for premiums assumed and are recorded in other liabilities on the consolidated balance sheets. Unaffiliated premiums payable was $ 84.2 million and $ 60.5 million as of December 31, 2024 and 2023, respectively. Unaffiliated reinsurance premiums receivable are the amounts owed to us from the fronting carrier for reinsurance premiums and are recorded in reinsurance recoverable and receivable on the consolidated balance sheets. Unaffiliated reinsurance premiums receivable was $ 83.6 million and $ 59.2 million as of December 31, 2024 and 2023, respectively. 97 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 expected credit losses based primarily on an analysis of historical collection experience, adjusted for current economic conditions. Allowance for credit losses was $ 9.8 million and $ 4.0 million as of December 31, 2024 and 2023, respectively, on the consolidated balance sheets. A policy is considered past due on the first day after its due date and policies greater than 90 days past due are written-off. We recognized bad debt expense of $ 34.1 million, $ 12.5 million and $ 17.4 million for the years ended December 31, 2024, 2023 and 2022, respectively. Fee Income —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 —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. Sales and Marketing —Sales and marketing includes expenses related to direct performance marketing, channel media, advertising, sponsorship, experimental marketing, referral fees and certain non-commission expenses related to the partnership channel. These expenses also include related salaries, health benefits, bonuses, employee retirement plan-related expenses and employee share-based compensation expense, or Personnel Costs, and overhead allocated based on headcount, or Overhead, related to our brand strategy, creative and business development activities and certain data science activities. We incur sales and marketing expenses for all product offerings. Sales and marketing costs are expensed as incurred. Other Insurance Expense (Benefit) —Other insurance expense (benefit) includes report costs and any refunds related to these expenses, commission expenses related to our partnership channel, premium taxes which includes low income housing tax credits to offset certain state premium taxes, credit card and policy processing expenses, premium write-offs, insurance license expenses, certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, 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. 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. 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 —Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems; third-party services related to infrastructure support; Personnel Costs and Overhead for engineering, product, technology, and certain data science activities; and amortization of internally developed software. Technology and development is expensed as incurred, except for development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life. 98 General and Administrative —General and administrative expenses primarily relate to external professional service expenses; Personnel Costs and Overhead for corporate functions; and depreciation expense for computers, furniture and other fixed assets; write-offs; and restructuring costs which include employee costs, real estate exit costs and other costs. General and administrative expenses are expensed as incurred. Deferred Policy Acquisition Costs— Acquisition costs consist primarily 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. They are deferred and amortized over the same period in which the related premiums are earned. Ceding commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs. The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the gross deferred 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. Deferred policy acquisition costs, net of accumulated amortization, was $ 29.3 million and $ 18.0 million as of December 31, 2024 and 2023, respectively. We amortized deferred policy acquisition costs of $ 35.7 million, $ 35.1 million and $ 22.5 million for the years ended December 31, 2024, 2023 and 2022, respectively. Loss and Loss Adjustment Expense and Reserves —Loss and LAE include the costs incurred for claims, payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims, net of amounts ceded to reinsurers. Loss and LAE reserves include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE. These reserves are a liability established to cover the estimated ultimate cost to settle insured losses. The estimation of the liability for loss and LAE reserves is complex and includes subjective considerations and management’s judgement. The actuarial methods to determine unpaid loss es timates consider loss trends, contract interpretation, mix of business, regulatory environment, economic conditions, inflation and other risk factors impacting claims settlement. The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases. There is considerable uncertainty associated with the actuarial estimates, and therefore no assurance can be made that the ultimate unpaid claim liability will not vary materially from such estimates. These loss estimates are continually reviewed by management and adjusted as necessary, with adjustments included in the period determined and recorded in loss and LAE in our consolidated statements of operations and comprehensive income (loss). As such, loss and LAE reserves represent management’s best estimate of the ultimate liability related to reported and unreported claims. Our loss and LAE reserves are recorded gross of reinsurance and net of amounts expected to be received from salvage (the amount recovered from a total loss claims expense) and subrogation (the right to recover payments from third parties). Loss and LAE are recorded net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity to write more business. Loss and LAE 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 allocated to LAE. These amounts include claims Personnel Costs, vendor expenses, software expense, internally developed software amortization, and Overhead. 99 Reinsurance —In the ordinary course of business, we cede and retrocede a portion of our business written and assumed, respectively, to reinsurers to limit the maximum net loss potential arising from large risks and catastrophes. These arrangements, known as treaties, provide for reinsurance coverage on quota-share and excess-of-loss basis. All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance. Although the ceding of reinsurance does not discharge us from our primary liability to the policyholder, the insurance company that assumes the coverage assumes the related liability. 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. Amounts recoverable from and payable to reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Reinsurance premiums, commissions and expense reimbursements related to reinsured business are accounted for on a basis consistent with the basis used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premiums earned and are recognized over the remaining policy period based on the reinsurance protection provided. Amounts applicable to reinsurance ceded for unearned premium reserves are reported as a prepaid reinsurance premiums asset in the accompanying consolidated balance sheets and as reduction of unearned premiums in Note 6, “Reinsurance.” Ceding commissions received in connection with reinsurance ceded have been accounted for as a reduction of other insurance expense (benefit) in the consolidated statements of operations and comprehensive income (loss). Some of our reinsurance agreements provide for adjustment of amount of coverage based on loss experience. We recognize the asset or liability arising from these adjustable features in the period the adjustment occurs, which is calculated based on experience to date under the agreement. In the event that all or any of the reinsuring companies might be unable to meet their obligations under existing reinsurance agreements, we would be liable for such defaulted amounts. We evaluate and monitor the financial condition associated with our reinsurers in order to minimize our exposure to significant losses from reinsurer insolvencies. We obtain our reinsurance from a diverse group of reinsurers and monitor concentration as well as financial strength ratings of the reinsurers to minimize counterparty credit risk. To recognize this risk of credit loss, we have established an allowance for credit losses based on the probability of default and the expected loss given default as influenced by factors such as the reinsurer’s credit rating and average life of our reinsurance recoverables. Allowance for credit losses was $ 0.1 million and $ 1.8 million as of December 31, 2024 and 2023, respectively. Income Taxes —For the 2024 tax year, we will file a consolidated federal income tax return with Caret Holdings, Inc., Root Insurance Company, Root Property & Casualty, Root Lone Star Insurance Agency, Inc. and Root Reinsurance Company, Ltd. The consolidated return also includes Root Insurance Agency, LLC, Root Enterprise, LLC, and Root Scout, LLC, which are disregarded entities under Caret Holdings, Inc. for federal income tax purposes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are recognized as allowed under ASC 740, Income Taxes . We establish a valuation allowance when there is more likely than not insufficient evidence to support the recoverability of the deferred tax asset under ASC 740. In making such a determination, management considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. If it is determined that the deferred tax assets would be realizable in the future in excess of their net recorded amount, an adjustment would be made to the deferred tax asset valuation allowance, which would reduce the provision for income taxes. A valuation allowance of $ 345.9 million and $ 356.4 million was established as of December 31, 2024 and 2023, respectively. Further details are discussed in Note 9, “Income Taxes.” 100 We recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on our reserve for uncertain tax positions are recognized as a component of tax expense. As of December 31, 2024 and 2023, we did not have any unrecognized tax benefits for uncertain tax positions and had no accrued interest or penalties related to uncertain tax positions. The Inflation Reduction Act of 2022 includes a corporate alternative minimum tax, or CAMT, which generally imposes a 15% minimum tax on the adjusted financial statement income, or AFSI, of large corporations whose three year average annual AFSI exceeds $1.0 billion, or applicable corporations, applies for tax years beginning after December 31, 2022. For the year ended December 31, 2024, we nor our subsidiaries had a three year average annual AFSI exceeding $1.0 billion. As such, we are not an applicable corporation nor subject to CAMT as of December 31, 2024. Internally Developed Software —We review our software development activity and capitalize costs during the application development phase under ASC 350-40, Internal-Use Software. These costs are amortized on a straight-line basis over a five-year period. Internally developed software costs are assessed for impairment at least quarterly, which also ensures that the assets are still in service. If there are assets identified as no longer in use, the remaining unamortized costs will be fully amortized. We amortized internally developed software of $ 8.6 million, $ 6.3 million and $ 5.0 million for the years ended December 31, 2024, 2023 and 2022, respectively. The capitalized cost and accumulated amortization of internally developed software in other assets in our consolidated balance sheets at December 31, 2024 and 2023 are as follows: As of December 31, 2024 2023 (dollars in millions) Internally developed software $ 50.0 $ 38.5 Accumulated amortization ( 28.0 ) ( 19.3 ) Internally developed software, net $ 22.0 $ 19.2 Fixed Assets —Fixed Assets are carried at cost, net of accumulated depreciation. We capitalize purchases of certain fixed assets, including computers, furniture, and leasehold improvements. Depreciation on computers and furniture is recognized on a straight-line basis over a useful life of three years and five years , respectively. Depreciation on leasehold improvements is recognized on a straight-line basis over the shorter of their useful life or the life of the lease. When certain events or changes in operating conditions occur, an impairment assessment may be performed on the recoverability of the carrying amounts. For the years ended December 31, 2024, 2023 and 2022, depreciation expense was $ 1.0 million, $ 1.5 million and $ 2.1 million, respectively. The capitalized cost and accumulated depreciation of fixed assets in other assets in our consolidated balance sheets at December 31, 2024 and 2023 are as follows: As of December 31, 2024 2023 (dollars in millions) Computers $ 6.0 $ 5.9 Furniture 2.6 2.6 Leasehold improvements 7.2 7.6 Total fixed assets, at cost 15.8 16.1 Accumulated depreciation ( 14.0 ) ( 13.3 ) Fixed assets, net $ 1.8 $ 2.8 101 Employee Share-Based Compensation —We award share-based compensation to our officers, directors, employees, and have also in the past awarded to certain advisors, through approval from the Compensation Committee of the board of directors. These awards have been made in the forms of stock options, service-based restricted stock units, or RSUs, market-based restricted stock units, or MRSUs, performance-based restricted stock units, or PRSUs, and restricted stock. Share-based compensation expense is recognized based on the grant date fair value of the awards, which is determined using the Black-Scholes Merton, or BSM, option-pricing model. The BSM option pricing model requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the options (generally ten years from grant date), the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. We recognize forfeitures as they occur, which generally results in the reversal of previously recognized expense for nonvested awards. In the event of an involuntary termination that results in the cancellation of an award, the remaining unrecognized compensation cost for the entire award is recognized in the period of cancellation. If the award is cancelled and concurrently replaced upon termination, it follows modification accounting, typically as a Type III improbable-to-probable modification whereby it is effectively treated as a forfeiture and new grant as of the date of termination. For performance-based awards, expense is not recognized until it is probable that the performance condition(s) will be met. If a performance condition is improbable but later becomes probable of achievement, a catch up of expense will be recorded as if the award had been vesting on a ratable basis from the grant date. If a performance condition is not achieved or becomes improbable of achievement, the respective cumulative compensation cost is reversed. For market-based awards, if the market condition(s) are never achieved before the expiration date, but the service condition is met, the respective compensation costs remain recognized. Stock options generally vested over four years , with 25 % cliff vesting after one year and approximately 2 % vesting each month over three years thereafter. RSUs generally vest over two or four years . For our awards vesting over two years , 50 % cliff vests after one year and the remainder vest in equal quarterly installments over the following year. For our awards vesting over four years , 25 % cliff vests after one year and the remainder vest in equal quarterly or monthly installments over three years thereafter. Certain other RSUs fully vest after one year . We generally recognize share-based compensation expense ratably over the respective vesting period. PRSUs are expected to vest over an explicit service period of two to three years after the performance period and are dependent upon the fulfillment of both a service condition and the achievement of certain adjusted EBITDA and new writings goals during the performance period. The actual number of PRSUs earned can vary from zero to 200 % of the target depending on goal achievement relative to the adjusted EBITDA and new writings goal matrix. The performance period begins on January 1, 2025 and ends on December 31, 2025. For our awards vesting over three years , 25 % vests on the Compensation Committee certification date, expected to be in February 2026, and 25 % vests annually over approximately three years thereafter. For our awards vesting over two years , 33 % vests on the Compensation Committee certification date and approximately 8 % vests quarterly over approximately two years thereafter. The PRSU compensation expense is recognized based on the grant date fair value of the award, which was determined using the Company’s closing stock price as of the grant date. The expense is recognized ratably over the requisite service period. We assess the probability of the award vesting based on the performance conditions on a quarterly basis. 102 MRSUs are expected to vest over a derived service period of one to four years and are dependent upon the fulfillment of both a service condition and the achievement of stock-price goals during the performance period, with the latter being classified as a market condition according to ASC 718, Stock Compensation . The service condition with respect to the first tranche of MRSUs was met on April 1, 2024 and the remaining three tranches of MRSUs will be met in installments on each of the subsequent three anniversaries of that date, or Vesting Date Requirement, subject to the individual’s continued service through such dates. Stock price goals must be met on or after the respective tranche’s Vesting Date Requirement and are based on the average closing price per share of our Class A common stock over a consecutive 45 -day trading period. Any tranche of MRSUs with respect to which the stock price goal has not been met as of April 1, 2028 (the final day of the performance period) will be forfeited as of such date. The MRSU compensation expense is recognized based on the grant date fair value of the award, which was determined by simulating Root’s stock prices using a Monte Carlo simulation in a risk-neutral framework, assuming a Geometric Brownian Motion. The simulation is repeated 100,000 times, and the average of the discounted values for each tranche is the grant date fair value for that tranche. The median time to vest is the derived service period. Employing a Monte Carlo simulation requires a range of inputs for each uncertain variable, and establishing linkage between the assumptions, if necessary. Inputs and assumptions used in our analysis included our stock price at grant date, exercise prices, the term of the MRSUs, equity volatility, risk-free rate and dividend yield. Equity volatility was derived using a blended volatility assumption of 50 % weight on Root’s historical volatility calculated from daily stock returns since IPO to the grant date and a 50 % weight based on Root’s term matched simple average peer volatility as of the valuation date because our company-specific volatility is not sufficient by itself at the time of grant. MRSU expense is recognized via a graded vesting method over the derived service period. In the event that both the service condition and market condition are met earlier, expense would be accelerated. Warrant Compensation —In October 2021, we closed the Investment Agreement with Carvana that included the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Convertible Preferred Stock and the issuance of eight tranches of warrants to purchase shares of the Company’s Class A common stock. As part of the Investment Agreement, we and Carvana also entered into a five-year commercial agreement whereby our auto insurance products will be embedded into the Integrated Platform. The commercial agreement provides for agent commissions payable to Carvana for policy origination and an enterprise total loss replacement vehicle solution. The Carvana warrants compensation expense is recognized based on the grant date fair value of the award, which was determined using a Monte Carlo simulation in a risk-neutral framework, as contemplated in the Income Approach of valuation. Specifically, future equity is simulated in each period assuming a Geometric Brownian Motion. We considered the features of the warrants and the interdependency of exercise decisions between the Short-Term Warrants and the Long-Term Warrants in using the Monte Carlo simulation in order to determine the optimum exercise decision. The optimum exercise decision was made by choosing the option which would give the highest aggregate expected value to the holder in each of the 100,000 simulated paths. The payoff of each path is then calculated based on the simulated equity and discounted back to time zero using the applicable risk-free rates. The fair value of the warrants are then calculated as the average value from all simulation paths. Employing a Monte Carlo simulation with Geometric Brownian Motion requires a range of inputs for each uncertain variable, and establishing linkage between the assumptions, if necessary. Inputs and assumptions used in our analysis included our stock price at grant date, exercise prices, the term of the warrants, equity volatility, risk-free rate and dividend yield. Additional considerations included a discount for lack of marketability resulting from Carvana’s five-year lock-up period. These warrants vest as the parties develop an integrated automobile insurance solution for the Integrated Platform and insurance sales through the Integrated Platform. The associated compensation expense is dependent on our periodic assessment of the probability of the milestones being achieved. If deemed probable, we recognize compensation expense on a pro-rata basis considering progress toward achieving the milestones. If a performance 103 condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized. In determining the classification as equity, we followed guidance issued within ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging. For additional information refer to Note 12, “Share-Based Compensation.” Earnings (Loss) Per Share —Earnings (loss) per share, or EPS, results are a key indicator of the overall performance relative to each share of our outstanding common stock. Basic earnings per share is calculated using the two-step method. Undistributed earnings are allocated to participating securities based on the extent to which each class may share in earnings as if all the earnings for the period have been distributed. Basic earnings per share is calculated by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Common shares, when contingencies, such as vesting requirements, exist and have not been satisfied, are excluded from basic earnings per share. Our shares of Class A and Class B common stock are entitled to the same liquidation and dividend rights and therefore earnings are allocated equally. Our redeemable convertible preferred stock and nonvested shares subject to repurchase are considered to be participating securities because they participate in dividends that are non-forfeitable and distributions with common stock. Diluted EPS for both Class A and Class B common stock includes all the components of basic EPS, plus the dilutive effect of common stock equivalents, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive. The dilutive effect of stock options, nonvested shares subject to repurchase, RSUs, PRSUs, MRSUs, and warrants are calculated using the treasury stock method. The dilutive effect of redeemable convertible preferred stock is calculated using the if-converted method. For periods in which we operate at a loss, the conversion of common stock equivalents would increase the denominator of the diluted earnings per share calculation and create a lower loss per share. Therefore, these common stock equivalents are considered antidilutive and diluted EPS is equal to basic EPS. Participating securities do not participate in losses and therefore are not allocated in the two-class method. Further details are discussed in Note 15, “Loss Per Share.” Reclassification —Certain prior-year amounts have been reclassified for comparability with the current year presentation. These reclassifications did not have a material impact on the consolidated financial statements and Notes to Consolidated Financial Statements. Recently Adopted Accounting Pronouncements —In November 2023, the FASB issued Accounting Standards Update, or ASU, No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, or ASU 2023-07. This ASU looks to provide improvements to the segment disclosure by providing users with more decision-useful information about reportable segments in a public entity. The main provisions require a company to disclose, on an annual and interim basis, significant expenses included within each reported measure of segment profit or loss, an amount for other segment items by reportable segment and a description of its composition. It also requires all annual disclosures about a reportable segments’ profit or loss and assets to be reported on an interim basis. Although we operate in only one reporting segment, we are still required to provide all the disclosures required by this ASU and all existing segment disclosures in Topic 280. We adopted ASU 2023-07 on December 31, 2024 and the adoption did not have a material impact on the Notes to Consolidated Financial Statements, as noted above. Recently Issued Financial Accounting Standards Not Yet Adopted —In November 2024, the FASB issued ASU No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU looks to improve financial reporting by requiring that public business entities disclose additional information about specific expense categories in the notes to financial statements at interim and annual reporting periods. The main provisions require a company to disclose in the notes to the financial statements the amounts of employee compensation, depreciation, intangible asset amortization and certain other costs and expenses included in each relevant expense caption and include certain 104 amounts that are already required to be disclosed under current generally accepted accounting principles in the same disclosure as the other disaggregation requirements. It also requires a company to disclose a qualitative description of the amounts remaining in relevant expense captions that are not separately disaggregated quantitatively and the total amount of selling expenses and, in annual reporting periods, an entity’s definition of selling expenses. This ASU is to be applied on a prospective basis with an effective date for the first annual reporting period beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027. Early adoption is permitted. We are currently evaluating the impact of this ASU. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU looks to enhance the transparency and decision usefulness of income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The main provisions to the rate reconciliation disclosure require public entities on an annual basis to: disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The main provisions to the income taxes paid disclosure require that all entities disclose on an annual basis: the amount of income taxes paid disaggregated by federal, state and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid meets a quantitative threshold. This ASU also requires all entities to disclose income (loss) from continuing operations before income tax expense (benefit) disaggregated between domestic and foreign and income tax expense (benefit) from continuing operations disaggregated by federal, state and foreign. This ASU is to be applied on a prospective basis with an effective date for all public entities for annual periods beginning after December 15, 2024. Early adoption is permitted. This ASU only requires additional disclosure, will not have an impact on our results of operations or financial condition, and is not expected to have a material impact on the Notes to Consolidated Financial Statements. 105 3. INVESTMENTS The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at December 31, 2024 and 2023 are as follows: 2024 Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 46.5 $ — $ — $ ( 0.3 ) $ 46.2 Municipal securities 23.9 — 0.1 ( 0.5 ) 23.5 Corporate debt securities 106.6 — 0.3 ( 1.2 ) 105.7 Asset-backed securities 117.3 — 0.4 ( 1.1 ) 116.6 Total fixed maturities 294.3 — 0.8 ( 3.1 ) 292.0 Short-term investments 14.8 — — — 14.8 Total $ 309.1 $ — $ 0.8 $ ( 3.1 ) $ 306.8 2023 Amortized Cost Allowance for Expected Credit Losses Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 14.6 $ — $ 0.1 $ ( 0.1 ) $ 14.6 Municipal securities 24.8 — 0.1 ( 0.8 ) 24.1 Corporate debt securities 66.3 — 0.2 ( 1.3 ) 65.2 Asset-backed securities 62.7 — 0.3 ( 1.0 ) 62.0 Total fixed maturities 168.4 — 0.7 ( 3.2 ) 165.9 Short-term investments 0.9 — — — 0.9 Total $ 169.3 $ — $ 0.7 $ ( 3.2 ) $ 166.8 106 Management reviewed the available-for-sale fixed maturity securities at each balance sheet date to consider whether it was necessary to recognize a credit loss as of December 31, 2024 and 2023. We do not intend to sell the investments and it is not more likely than not that we will be required to sell the security before recovery. Management concluded that the available-for-sale fixed maturity securities’ unrealized losses were due to non-credit related factors and, therefore, there was no allowance for credit loss as of December 31, 2024 and 2023. The following tables reflect the gross unrealized losses and fair value of short-term investments and available-for-sale fixed maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2024 and 2023: 2024 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 26.4 $ ( 0.3 ) $ 1.8 $ — $ 28.2 $ ( 0.3 ) Municipal securities 7.1 ( 0.1 ) 10.4 ( 0.4 ) 17.5 ( 0.5 ) Corporate debt securities 49.5 ( 0.6 ) 21.1 ( 0.6 ) 70.6 ( 1.2 ) Asset-backed securities 53.6 ( 0.6 ) 10.6 ( 0.5 ) 64.2 ( 1.1 ) Total fixed maturities 136.6 ( 1.6 ) 43.9 ( 1.5 ) 180.5 ( 3.1 ) Short-term investments 6.4 — — — 6.4 — Total $ 143.0 $ ( 1.6 ) $ 43.9 $ ( 1.5 ) $ 186.9 $ ( 3.1 ) 2023 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 1.7 $ — $ — $ 2.4 $ ( 0.1 ) $ 4.1 $ ( 0.1 ) Municipal securities 3.1 — 15.1 ( 0.8 ) 18.2 ( 0.8 ) Corporate debt securities 13.4 — 35.1 ( 1.3 ) 48.5 ( 1.3 ) Asset-backed securities 17.6 ( 0.1 ) 19.7 ( 0.9 ) 37.3 ( 1.0 ) Total fixed maturities 35.8 ( 0.1 ) 72.3 ( 3.1 ) 108.1 ( 3.2 ) Short-term investments 0.3 — — — 0.3 — Total $ 36.1 $ ( 0.1 ) $ 72.3 $ ( 3.1 ) $ 108.4 $ ( 3.2 ) Other Investments As of December 31, 2024 and 2023, other investments related to our private equity investments were $ 4.4 million. There were no realized gains or losses for the years ended December 31, 2024 and 2023. We recognized $ 1.2 million of realized gains in 2022 related to the sale of one of our private equity investments, which was recorded within net realized gains on investments in our consolidated statements of operations and comprehensive income (loss). There were no unrealized gains and losses or impairment losses recognized on private equity investments for the years ended December 31, 2024, 2023 and 2022. 107 The following table reflects the gross and net realized gains and losses on short-term investments, available-for-sale fixed maturities and other investments that have been included in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Realized gains on investments $ — $ — $ 1.2 Realized losses on investments — — ( 0.7 ) Net realized gains on investments $ — $ — $ 0.5 The following table sets forth the amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities by contractual maturity at December 31, 2024: 2024 Amortized Cost Fair Value (dollars in millions) Due in one year or less $ 46.3 $ 46.1 Due after one year through five years 190.4 189.1 Due five years through 10 years 34.6 34.2 Due after 10 years 37.8 37.4 Total $ 309.1 $ 306.8 The following table sets forth the components of net investment income for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Interest on fixed maturities and short-term investments $ 9.6 $ 4.8 $ 2.4 Interest on cash and cash equivalents 31.9 28.0 5.7 Total 41.5 32.8 8.1 Investment expense ( 5.6 ) ( 2.6 ) ( 1.9 ) Net investment income $ 35.9 $ 30.2 $ 6.2 108 The following tables summarize the credit ratings of short-term investments and available-for-sale fixed maturity securities at December 31, 2024 and 2023: December 31, 2024 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 75.2 $ 74.8 24.4 % AA+, AA, AA-, A-1+ 146.0 145.0 47.3 A+, A, A- 67.8 67.1 21.9 BBB+, BBB, BBB- 20.1 19.9 6.4 Total $ 309.1 $ 306.8 100.0 % December 31, 2023 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 53.0 $ 52.1 31.2 % AA+, AA, AA-, A-1+ 59.4 58.8 35.3 A+, A, A- 42.1 41.2 24.7 BBB+, BBB, BBB- 14.8 14.7 8.8 Total $ 169.3 $ 166.8 100.0 % Pursuant to certain regulatory requirements, we are required to hold assets on deposit with various state insurance departments for the benefit of policyholders. These special deposits are included in available-for-sale fixed maturity securities on the consolidated balance sheets. As of December 31, 2024 and 2023, these required deposits had an amortized cost of $ 15.8 million and $ 9.5 million, respectively, and fair value of $ 15.6 million and $ 9.4 million, respectively. 109 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The following tables provide information about our financial assets measured and reported at fair value as of December 31, 2024 and 2023: 2024 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 46.2 $ — $ — $ 46.2 Municipal securities — 23.5 — 23.5 Corporate debt securities — 105.7 — 105.7 Asset-backed securities — 116.6 — 116.6 Total fixed maturities 46.2 245.8 — 292.0 Short-term investments 11.8 3.0 — 14.8 Cash equivalents 342.4 — — 342.4 Total assets at fair value $ 400.4 $ 248.8 $ — $ 649.2 2023 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 13.3 $ 1.3 $ — $ 14.6 Municipal securities — 24.1 — 24.1 Corporate debt securities — 65.2 — 65.2 Asset-backed securities — 62.0 — 62.0 Total fixed maturities 13.3 152.6 — 165.9 Short-term investments 0.9 — — 0.9 Cash equivalents 439.6 — — 439.6 Total assets at fair value $ 453.8 $ 152.6 $ — $ 606.4 We estimate the fair value of all our different classes of Level 2 fixed maturities and short-term investments by using quoted prices from a combination of an independent pricing vendor or broker/dealer, pricing models, quoted prices of securities with similar characteristics or discounted cash flows. All significant inputs were observable in the active markets. Private Equity Investments Measured at Fair Value on a Non-Recurring Basis Private equity investments that have been remeasured during the period due to an observable event or impairment are classified within Level 3 in the fair value hierarchy because we estimate the value based on valuation methods which may include a combination of the observable transaction price at the transaction date and other unobservable inputs including volatility, rights, and obligations of the investments we hold. See Note 3, “Investments,” for further information on our private equity investments. 110 Fair Value of Long-Term Debt The carrying amount of long-term debt is recorded at the unpaid balance, net of discount and debt issuance costs. The fair value of outstanding long-term debt as of December 31, 2024 was classified within Level 2 of the fair value hierarchy. The fair value was based on a model referencing observable interest rates and spreads to project and discount cash flows to present value. As of December 31, 2024 and 2023, the carrying amounts and fair values of these financial instruments were as follows: Carrying Amount as of December 31, 2024 Estimated Fair Value as of December 31, 2024 Carrying Amount as of December 31, 2023 Estimated Fair Value as of December 31, 2023 (dollars in millions) Long-term debt $ 200.1 $ 204.9 $ 299.0 $ 305.2 The carrying amounts of other short-term financial instruments approximates their fair value due to their short-term nature. 5. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The following provides a reconciliation of the beginning and ending reserve balances for loss and LAE, net of reinsurance: 2024 2023 2022 (dollars in millions) Gross loss and LAE reserves, January 1 $ 284.2 $ 287.4 $ 320.2 Reinsurance recoverable on unpaid losses ( 43.8 ) ( 76.4 ) ( 79.5 ) Net loss and LAE reserves, January 1 240.4 211.0 240.7 Net incurred loss and LAE related to: Current year 752.4 338.3 348.1 Prior years ( 19.4 ) ( 7.0 ) 2.9 Total incurred 733.0 331.3 351.0 Net paid loss and LAE related to: Current year 443.0 165.9 215.6 Prior years 165.2 136.0 165.1 Total paid 608.2 301.9 380.7 Net loss and LAE reserves, December 31 365.2 240.4 211.0 Plus reinsurance recoverable on unpaid losses 48.0 43.8 76.4 Gross loss and LAE reserves, December 31 $ 413.2 $ 284.2 $ 287.4 The decrease to incurred losses for prior accident years in 2024 of $ 19.4 million was primarily driven by lower-than-expected reported losses and LAE from accident year 2023 related to liability and physical damage coverages. The decrease to incurred losses for prior accident years in 2023 of $ 7.0 million was primarily driven by lower-than-expected reported losses from accident year 2022 related to liability and physical damage coverages. The increase to incurred losses for prior accident years in 2022 of $ 2.9 million was primarily driven by higher-than-expected reported losses from accident year 2021 material damage claims due to higher replacement parts cost and growth in used car values. 111 The following table shows incurred and paid losses and allocated loss adjustment expenses, or ALAE, development by accident year for private passenger auto and renters in aggregate, cumulative claim frequency is defined as the number of reported claims at the claim level which includes reported claims that do not result in a liability: Incurred Losses and ALAE—Net of Reinsurance Accident Year 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021 (unaudited) 2022 (unaudited) 2023 (unaudited) 2024 IBNR Reported Claims (1) (dollars in millions) 2018 $ 42.3 $ 48.3 $ 49.6 $ 48.7 $ 48.3 $ 48.5 $ 48.6 $ 0.2 18,117 2019 287.3 306.3 304.7 306.0 305.9 306.4 1.0 90,208 2020 295.9 287.7 286.2 286.8 287.1 1.3 117,479 2021 341.6 348.1 349.6 348.6 3.4 152,470 2022 296.0 288.4 286.0 4.9 119,397 2023 291.2 276.5 14.8 87,526 2024 667.2 182.9 135,934 Total $ 2,220.4 $ 208.5 721,131 Cumulative Paid Losses and ALAE—Net of Reinsurance Accident Year 2018 (unaudited) 2019 (unaudited) 2020 (unaudited) 2021 (unaudited) 2022 (unaudited) 2023 (unaudited) 2024 (dollars in millions) 2018 $ 20.6 $ 44.6 $ 48.1 $ 48.1 $ 47.7 $ 48.0 $ 48.1 2019 177.0 277.7 296.2 302.1 304.5 305.4 2020 182.0 238.5 269.9 280.9 284.6 2021 179.4 294.6 332.3 342.5 2022 175.3 248.3 274.7 2023 133.9 245.2 2024 387.5 Total 1,888.0 Loss and ALAE reserves—net of reinsurance $ 332.4 _______________ (1) Reported by claim event. The following table sets forth the reconciliation of the claims development tables to the balance sheet losses and ALAE reserves, with separate disclosure of unallocated LAE, or ULAE, and reinsurance recoverable on unpaid losses for the years ended December 31: 2024 2023 (dollars in millions) Loss and ALAE reserves—net of reinsurance $ 332.4 $ 222.5 ULAE reserves—net of reinsurance 32.8 17.9 Reinsurance recoverables on unpaid losses 48.0 43.8 Total loss and LAE reserves—gross of reinsurance $ 413.2 $ 284.2 112 The following table sets forth the historical average annual percentage payout of incurred losses and ALAE (claims duration), net of reinsurance, as of December 31, 2024: Year 1 2 3 4 5 6 7 Incremental paid (1) 54.7 % 33.5 % 8.8 % 2.2 % 0.4 % 0.5 % 0.2 % _______________ (1) Supplemental information and unaudited . 6. REINSURANCE The following table reflects amounts affecting the consolidated balance sheets and statements of operations and comprehensive income (loss) for reinsurance as of and for the years ended December 31: 2024 2023 2022 (dollars in millions) Loss and LAE reserves: Direct $ 341.7 $ 253.4 $ 269.3 Assumed 71.5 30.8 18.1 Ceded ( 48.0 ) ( 43.8 ) ( 76.4 ) Net loss and LAE reserves $ 365.2 $ 240.4 $ 211.0 Unearned premiums: Direct $ 289.2 $ 235.4 $ 125.8 Assumed 64.7 48.3 10.7 Ceded ( 25.1 ) ( 48.2 ) ( 74.2 ) Net unearned premiums $ 328.8 $ 235.5 $ 62.3 Premiums written: Direct $ 1,064.6 $ 674.6 $ 556.8 Assumed 236.5 108.5 43.2 Ceded ( 137.0 ) ( 209.9 ) ( 331.2 ) Net premiums written $ 1,164.1 $ 573.2 $ 268.8 Premiums earned: Direct $ 1,010.8 $ 564.9 $ 601.6 Assumed 220.2 70.9 42.0 Ceded ( 160.1 ) ( 235.9 ) ( 357.7 ) Net premiums earned $ 1,070.9 $ 399.9 $ 285.9 Losses and LAE incurred: Direct $ 673.5 $ 424.1 $ 549.8 Assumed 157.2 51.7 44.9 Ceded ( 97.7 ) ( 144.5 ) ( 243.7 ) Net losses and LAE incurred $ 733.0 $ 331.3 $ 351.0 During 2023, we commuted certain agreements with our reinsurers, which resulted in $ 0.7 million of loss and loss adjustment expenses and a $ 4.6 million expense of other insurance expense (benefit), respectively, on the consolidated statements of operations and comprehensive income (loss). A portion of the loss and loss adjustment expenses is related to an allowance for credit losses of $ 1.7 million that was established due to a commutation with one of our reinsurers as of December 31, 2023. During 2024, we recovered $ 0.5 million from this previously commuted reinsurer and relieved the remaining reinsurance recoverable and related allowance for credit losses. 113 Additionally, in connection with the commutation of certain agreements with reinsurers during 2023, we received cash and cash equivalents and released collateral balances held of $ 27.1 million, reinsurance recoverable and receivable decreased by $ 35.1 million, prepaid reinsurance premiums were reduced by $ 34.6 million and reinsurance premiums payable decreased by $ 37.3 million. There were no commutations during 2024. If our reinsurance was cancelled at December 31, 2024 and 2023, the maximum amount of return ceded commissions due with the return of unearned premiums would have been $ 4.4 million and $ 12.3 million, respectively. Our reinsurance recoverable on unpaid losses gross of the provision for loss corridor, loss ratio caps and allowance for credit losses was $ 53.8 million and $ 65.6 million as of December 31, 2024 and 2023, respectively. As of December 31, 2024 and 2023, a provision for loss corridor of $ 5.0 million and $ 19.4 million, respectively, was recorded as a contra-asset in reinsurance recoverable on the consolidated balance sheets. 7. LONG-TERM DEBT In January 2022, we entered into our $ 300.0 million five-year term loan, or Term Loan, with the full principal amount originally due and payable upon maturity on January 27, 2027. Interest was payable quarterly and determined on a floating interest rate calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0 % floor, plus 9.0 %. As part of the loan agreement, we issued warrants to the lender to purchase approximately 0.3 million shares of our Class A common stock at a strike price of $ 162.00 per share, or Tranche 1 Warrants. In September 2024, we entered into the first amendment to the Term Loan, which, among other things, provides greater flexibility for investments in future insurance subsidiaries. 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 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. The Amended Term Loan contains debt covenants that require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $ 50.0 million at all times, direct contribution margin on a rolling twelve months to be at least 20 % at the end of each fiscal quarter and the surplus of our insurance and Cayman subsidiaries to be at least $ 125.0 million at the end of each fiscal quarter. Additionally, in connection with the Amended Term Loan, a new expiration date was established for the Tranche 1 Warrants of January 26, 2027. In connection with the Amended Term Loan, during the fourth quarter of 2024, we recognized a loss on extinguishment of debt of $ 5.4 million and we incurred $ 2.4 million of debt discount and issuance costs related to the new borrowings, which were capitalized and will be amortized over the life of the Amended Term Loan. The Amended Term Loan can be repaid at any time through the maturity date as long as we provide at least three business days written notice and pay a prepayment premium of 2.00 % applicable between October 29, 2024 to October 28, 2025, 1.00 % applicable between October 29, 2025 to October 25, 2026, and no prepayment premium thereafter. The following summarizes the carrying value of long-term debt and warrants as of December 31, 2024 and 2023: 2024 2023 (dollars in millions) Principal balance $ 200.0 $ 300.0 Accrued interest payable 3.8 7.9 Unamortized discount and debt issuance costs and warrants ( 3.7 ) ( 8.9 ) Total $ 200.1 $ 299.0 114 8. LEASES We have operating leases for offices that primarily support our claims and customer service, engineering, and corporate functions. We determine if an arrangement is a lease at inception by evaluating whether the arrangement conveys the right to use an identified asset and whether we obtain substantially all of the economic benefits from and have the ability to direct the use of the asset. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating lease right-of-use assets and corresponding operating lease liabilities are recognized upon the commencement date based primarily on the present value of lease payments over the lease term. We use the implicit rate of the lease, if it is readily determinable, in determining the present value of lease payments. Our leases generally do not provide an implicit rate. Therefore, we use a collateralized incremental borrowing rate that incorporates information available at commencement date, including our company-specific interest rates from recent debt issuances, which we adjusted to obtain our company-specific interest rate risk. We also leverage commercial mortgage-backed securities, or CMBS, rates for transactions with similar values, origination dates, geographies and property types as the respective lease, which are adjusted using linear interpolation if the lease term falls between the published CMBS terms. The following table summarizes supplemental balance sheets information related to leases at December 31, 2024 and 2023: 2024 2023 (dollars in millions) Operating leases: Operating lease liabilities $ 6.0 $ 8.2 Operating lease right-of-use assets $ 2.6 $ 3.5 Operating lease liabilities are included in other liabilities and operating lease right-of-use assets are included in other assets in our consolidated balance sheets. Operating lease expense, variable lease expense and short-term lease expense recognized during the years ended December 31, 2024, 2023 and 2022 were immaterial. Supplemental cash flow information for the years ended December 31, 2024, 2023 and 2022 are as follows: For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Operating cash flows paid for amounts included in the measurement of lease liabilities $ 3.0 $ 3.2 $ 3.9 We also sublease certain office space, resulting in sublease income. Sublease income and the related assets and cash flows are not material to our consolidated financial statements as of and for the years ended December 31, 2024, 2023 and 2022. Sublease income is recognized as a reduction to operating lease expense in our consolidated statements of operations and comprehensive income (loss). The weighted average remaining lease term and weighted average operating lease discount rate, as of December 31, 2024 and 2023 are as follows: 2024 2023 Weighted average of remaining operating lease term (years) 3.1 3.8 Weighted average operating lease discount rate 11.8 % 11.8 % 115 Future lease payments as of December 31, 2024 were as follows: Operating Leases (dollars in millions) 2025 $ 2.2 2026 2.3 2027 2.4 2028 0.2 2029 and thereafter — Total future lease payments 7.1 Less: imputed interest ( 1.1 ) Total lease liabilities $ 6.0 9. INCOME TAXES The following table displays income tax expense (benefit) for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Current: Federal $ — $ — $ — State — — — Total current — — — Deferred: Federal — — — State — — — Total deferred — — — Total income tax expense (benefit) $ — $ — $ — The income tax expense (benefit) differed from the amounts computed by applying the statutory U.S. federal income tax rate of 21 % in 2024, 2023 and 2022 to pretax income as a result of the following: 2024 2023 2022 (dollars in millions) Income (loss) before income taxes $ 30.9 $ ( 147.4 ) $ ( 297.7 ) Statutory U.S. federal income tax benefit 6.5 21.0 % ( 30.9 ) 21.0 % ( 62.5 ) 21.0 % Valuation allowance on deferred tax assets ( 10.5 ) ( 34.0 ) 34.9 ( 23.7 ) 65.8 ( 22.1 ) Share-based compensation ( 6.0 ) ( 19.4 ) 5.5 ( 3.7 ) 4.9 ( 1.6 ) Nondeductible compensation 2.9 9.4 1.2 ( 0.8 ) 1.3 ( 0.4 ) Return to provision permanent adjustments — — — — ( 3.5 ) 1.2 State net operating loss 7.9 25.6 ( 10.5 ) 7.1 ( 7.1 ) 2.4 Other ( 0.8 ) ( 2.6 ) ( 0.2 ) 0.1 1.1 ( 0.5 ) Income tax expense (benefit) $ — — % $ — — % $ — — % 116 The following table sets forth the tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2024 and 2023: 2024 2023 (dollars in millions) Deferred tax assets: Unpaid losses and loss adjustment expenses $ 3.3 $ 2.1 Unearned premium reserves 14.2 10.0 Disallowed interest carryforward 20.8 19.4 Deferred compensation 8.2 7.3 Stock and warrant compensation 12.0 10.2 Other 5.1 6.0 State net operating loss carryforward 20.0 27.9 Net operating loss carryforward 271.6 280.6 Gross deferred assets 355.2 363.5 Less valuation allowance ( 345.9 ) ( 356.4 ) Total deferred tax assets, less valuation allowance 9.3 7.1 Deferred tax liabilities: Research and experimental expenditures 0.2 1.1 Fixed assets 0.4 0.7 Deferred policy acquisition costs 6.7 3.8 Intangible assets 0.6 0.4 Investments 0.9 1.0 Other 0.5 0.1 Deferred tax liabilities 9.3 7.1 Net deferred tax asset $ — $ — The above amounts were calculated in accordance with ASC 740, Income Taxes . The application of ASC 740 requires a company to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the carrying value of the deferred tax asset to an amount which is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance we include many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) the timing of expected reversal; (4) taxable income in prior carry back years as well as projected taxable earnings exclusive of reversing temporary differences and carry forwards; (5) the length of time that carryovers can be used; (6) unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that we would employ to avoid a tax benefit expiring unused. Although lack of realization is not assured, we believe it is more likely than not that the deferred tax assets will not be realized. As such, a valuation allowance of $ 345.9 million has been established. The valuation allowance decreased by $ 10.5 million primarily due to our net operating income for the year ended December 31, 2024. 117 The following table sets forth carryforwards related to NOLs and tax credits: Carryforward with Expiration Carryforward Indefinitely Total Years of Expiration (dollars in millions) Federal $ 622.8 $ 669.5 $ 1,292.3 2038 - 2043 State (gross, apportioned) 291.2 68.9 360.1 2024 - 2043 Research and development credits 0.9 — 0.9 2036 - 2038 Total $ 914.9 $ 738.4 $ 1,653.3 We file a consolidated federal income tax return and certain state income tax returns. Tax years 2021 and forward are still open to U.S. federal examinations. The federal statute of limitations is generally three years. With some exceptions, the statute of limitations for state income and franchise tax returns remains open for tax years 2018 and forward. There are currently no tax years under examination. 10. RESTRUCTURING COSTS Beginning in 2022, we conducted strategic initiatives to reduce operating costs, improve efficiency, and increase focus on our strategic priorities. These initiatives resulted in restructuring actions that included a reduction in workforce levels, contract terminations, and in certain instances, a reduction in office space. These restructuring actions include the following costs: Employee costs —consist of severance, benefits, share-based compensation, and employee compensation expense dependent upon continuous employment for certain employees and related employee costs. Real estate exit costs —consist of real estate exit costs primarily related to accelerated amortization of right-of-use assets, leasehold improvements and furniture and fixtures. Other costs —primarily consist of contract termination costs incurred as part of our efforts to improve efficiency and reduce operating costs and accelerated expense for software that no longer has economic benefit. As of December 31, 2024, we do not expect to incur any additional material expenditures in future periods related to restructuring actions that have occurred. The following table displays restructuring costs recorded in general and administrative expenses on the consolidated statements of operations and comprehensive income (loss): For the Years Ended December 31, Cumulative Incurred Through December 31, 2024 2024 2023 2022 (dollars in millions) Restructuring costs: Employee costs $ 0.1 $ 7.7 $ 15.5 $ 23.3 Real estate exit costs 0.1 — 2.1 2.2 Other costs — 3.5 1.0 4.5 Total restructuring costs $ 0.2 $ 11.2 $ 18.6 $ 30.0 118 The following table displays a rollforward of the accrual for restructuring costs recorded in accounts payable and accrued expenses on the consolidated balance sheets: Employee costs Other costs Total liability (dollars in millions) Restructuring liability as of December 31, 2022 $ 3.1 $ 0.1 $ 3.2 Expense incurred 7.3 3.4 10.7 Payments ( 2.1 ) ( 3.5 ) ( 5.6 ) Restructuring liability as of December 31, 2023 8.3 — 8.3 Expense incurred 0.1 — 0.1 Payments ( 8.4 ) — ( 8.4 ) Restructuring liability as of December 31, 2024 $ — $ — $ — 11. CAPITAL STOCK As of December 31, 2024, our total authorized shares consist of 1.0 billion shares of Class A common stock, 269.0 million shares of Class B common stock, and 100.0 million shares of preferred stock. In October 2021, we issued redeemable convertible preferred stock to Carvana pursuant to the Investment Agreement. We received $ 126.5 million of gross proceeds from the issuance of 14.1 million shares of redeemable convertible preferred stock designated as the Series A Preferred Stock, which have a redemption value of $ 126.5 million, and issued Carvana eight tranches of warrants to purchase shares of the Company’s Class A common stock. Further details on the warrants are discussed in Note 12, “Share-Based Compensation.” In connection with the Investment Agreement, we incurred issuance costs of $ 19.6 million. We allocated the issuance costs between the preferred stock and the warrants based on their relative fair values. As of December 31, 2024, issuance costs were recognized in our consolidated balance sheets as follows: $ 14.5 million as contra-redeemable convertible preferred stock; and $ 5.1 million as contra-additional paid-in capital. The carrying value of our preferred stock was $ 112.0 million as of December 31, 2024. The voting, dividend and liquidation rights of the holders of our Class A and Class B common stock are subject to and qualified by the rights, powers, and preferences of the holders of the preferred stock. Other rights, privileges, and preferences of our capital stock are as follows: Dividends —Class A and Class B common stock are entitled to the same dividend rights. We are not permitted to declare, pay, or set aside any dividends on shares of any other class or series of capital stock unless the holders of the preferred stock then outstanding first receive, or simultaneously receive, a dividend. Beginning after the fifth anniversary of the Integrated Platform becoming available to customers, Series A Preferred Stockholders are entitled to receive, when, as and if declared by the board of directors, a dividend at an annual rate of 5 % of the liquidation preference per share of Series A Preferred Stock, if our 90-day volume-weighted average price per share of Class A common stock is below the conversion price at that time. Voting Rights —Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. Holders of preferred stock are entitled to vote, together with the holders of Class A common stock and Class B common stock, on an as-converted basis on all matters submitted to a vote of the holders of Class A common stock and Class B common stock. Liquidation Preferences —In the event of any voluntary or involuntary liquidation, dissolution, or winding up of our business, after payment or provision for payment of the debts and other liabilities of the Company, the holders of Series A Preferred Stock are entitled to receive, before any distribution out of the assets of the Company may be made to or set aside for the holders of any common stock, an amount per share equal to the greater of (i) $ 9.00 per share plus the amount of any accrued but unpaid dividends thereon as of such date and (ii) the amount such preferred stockholders would have received had they, immediately prior to such an event, converted such shares of Series A 119 Preferred Stock into Class A common stock. Thereafter, holders of Class A and Class B common stock are entitled to any remaining proceeds on a pro-rata basis. Class A and Class B common stock are entitled to the same liquidation rights. Conversion and Transfer —Each share of Class B common stock is convertible at any time into one share of Class A common stock. Future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for tax or estate planning purposes. Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, or from time to time, into shares of Class A common stock at a conversion rate equal to the liquidation preference divided by the conversion price. As of December 31, 2024, the conversion price was $ 162.00 per share and the Series A Preferred Stock was convertible into 0.8 million shares of Class A common stock. To the extent that such conversion would cause the holder to hold in excess of 9.9 % of the voting stock, such conversion would be subject to approval from the Ohio Director of Insurance. Redemption and Balance Sheet Classification —The redeemable convertible preferred stock is classified as mezzanine equity because while it is not mandatorily redeemable, it will become convertible or redeemable at the option of the preferred stockholder in connection with any change of control of the Company, which is considered not solely within our control. 12. SHARE-BASED COMPENSATION Warrants As part of the Investment Agreement discussed in Note 11, “Capital Stock,” we issued Carvana eight tranches of warrants, comprised of three tranches of “short-term warrants” and five tranches of “long-term warrants.” However, the exercisability of certain tranches are subject to Carvana’s decision to exercise certain other tranches. If Carvana exercises short-term tranches, then long-term tranche 1 warrants are cancelled and the remaining long-term tranches would be reduced such that Carvana will have the opportunity to purchase a maximum of 7.2 million shares of Class A common stock. The short-term and long-term warrants have expiration dates of September 1, 2025 and September 1, 2027, respectively. The following table provides other key terms of the warrants: Warrants Exercise Price Shares Issued (in millions) Grant Date Fair Value per Share Vesting Condition Short-Term Tranche 1 $ 180.00 2.4 $ 0.42 Completing the Integrated Platform Tranche 2 $ 198.00 3.2 $ 0.37 50,000 policy originations Tranche 3 $ 216.00 1.6 $ 0.18 75,000 policy originations Total Short-Term 7.2 Long-Term Tranche 1 $ 180.00 1.4 $ 0.42 100,000 policy originations Tranche 2 $ 225.00 1.5 $ 0.35 200,000 policy originations Tranche 3 $ 270.00 1.5 $ 0.24 300,000 policy originations Tranche 4 $ 405.00 1.5 $ 0.09 400,000 policy originations Tranche 5 $ 540.00 1.3 $ 0.04 500,000 policy originations Total Long-Term 7.2 As of December 31, 2024, all of the short-term warrants have vested and all of the respective compensation cost has been recognized. While the short-term warrants are vested and outstanding, it is not a possible outcome for the long-term warrants to also vest, so they are considered not probable of vesting. If, however, the short-term warrants expire unexercised during 2025, and at that time certain long-term warrants become probable of vesting, we would 120 recognize a cumulative warrant expense catch-up in other insurance expense (benefit) considering progress toward achieving the long-term warrant policy origination milestones. We recognized warrant compensation expense related to these equity-classified warrants based on progress toward completing the Integrated Platform and short-term warrant policies originating through the Integrated Platform. There were no exercises upon vesting and all warrants remain outstanding. All of these warrants are out-of-the-money and therefore have no intrinsic value as of December 31, 2024. The following table displays warrant compensation expense recorded in the consolidated statements of operations and comprehensive income (loss): For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Warrant compensation expense: Sales and marketing $ — $ — $ 8.8 Other insurance expense (benefit) 3.8 17.4 5.7 Total warrant compensation expense $ 3.8 $ 17.4 $ 14.5 2020 Equity Incentive Plan We maintain an equity incentive plan, the 2020 Equity Incentive Plan, or the 2020 Plan, for the issuance and grant of equity awards (restricted stock, RSUs, PRSUs, MRSUs and incentive and nonqualified stock options) to our officers, directors, employees and certain advisors. As of December 31, 2024, the number of shares authorized under the 2020 Plan was 4.3 million shares of Class A common stock, inclusive of available shares previously reserved for issuance under the 2015 Equity Incentive Plan, or the 2015 Plan, and subject to increase for awards previously issued under the 2015 Plan which are forfeited or lapse unexercised. In addition, this reserve will automatically increase on January 1 of each year, which commenced on January 1, 2021 and will end on (and including) January 1, 2030, in an amount equal to 4 % of the total number of shares of capital stock outstanding on December 31 of the preceding year. However, the board of directors may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of Class A common stock. The aggregate maximum number of shares of Class A common stock that may be issued pursuant to the exercise of incentive stock options is 6.7 million shares. As of December 31, 2024, the number of shares available for issuance under the 2020 Plan was 1.4 million. In August 2022, our board of directors approved the First Amendment to our 2020 Employee Stock Purchase Plan, or ESPP. As of December 31, 2024, the number of shares authorized and available for issuance under the ESPP was 0.8 million shares. In addition, the number of shares reserved for issuance under the ESPP is subject to an annual increase on the first day of each calendar year beginning on January 1, 2021 and ending on and including January 1, 2030, in an amount equal to the lesser of (i) 1 % of the total number of shares of capital stock outstanding on December 31 of the preceding year and (ii) 0.4 million shares of Class A common stock. Our board of directors may act prior to January 1 of a given year to provide that the increase for such year will be a lesser number of shares of Class A common stock. 2015 Equity Incentive Plan In 2015, the board of directors of the Company adopted the 2015 Plan under which the Company could grant equity awards (restricted stock, and incentive and nonqualified stock options) to its officers, directors, employees and certain advisors. In October 2020, this plan was superseded by the 2020 Plan and all reserved shares under the 2015 Plan were transferred to the 2020 Plan. 121 The following table displays employee share-based compensation expense recorded in the consolidated statements of operations and comprehensive income (loss): For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Share-based compensation expense: Loss and loss adjustment expenses $ 1.9 $ 0.7 $ 0.7 Sales and marketing 0.7 0.3 0.8 Other insurance expense (benefit) 0.8 0.6 0.8 Technology and development 3.4 3.4 3.3 General and administrative 11.7 12.3 24.9 Total share-based compensation expense $ 18.5 $ 17.3 $ 30.5 As of December 31, 2024, there was $ 0.5 million, $ 19.3 million, $ 1.1 million and $ 17.2 million of unrecognized compensation cost related to unvested stock options, RSUs, MRSUs and PRSUs, respectively. The remaining costs are expected to be recognized over a period of approximately two years for unvested stock options, three years for RSUs and MRSUs, and four years for PRSUs. Service-Based Restricted Stock Units A summary of RSU activity for the years ended December 31, 2024, 2023 and 2022 is as follows: Service-Based Restricted Stock Units Number of Shares Weighted-Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in millions, except per share amounts) Nonvested at December 31, 2021 0.5 $ 162.36 $ 27.4 Granted 1.1 31.34 Vested ( 0.1 ) 135.25 3.3 Forfeited, expired or canceled ( 0.4 ) 81.38 Nonvested at December 31, 2022 1.1 $ 51.81 $ 5.0 Granted 1.2 6.91 Vested ( 0.6 ) 49.11 3.4 Forfeited, expired or canceled ( 0.2 ) 51.90 Nonvested at December 31, 2023 1.5 $ 16.74 $ 16.2 Granted 0.3 50.55 Vested ( 0.8 ) 18.34 40.5 Forfeited, expired or canceled — 22.21 Nonvested at December 31, 2024 1.0 $ 25.89 $ 73.6 122 Performance-Based Restricted Stock Units A summary of PRSU activity for the year ended December 31, 2024 is as follows: Performance-Based Restricted Stock Units Number of Shares Weighted-Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in millions, except per share amounts) Nonvested at December 31, 2023 — $ — $ — Granted 0.2 75.55 Vested — — — Forfeited, expired or canceled — — Nonvested at December 31, 2024 0.2 $ 75.55 $ 17.6 Market-Based Restricted Stock Units The fair value of the MRSUs is estimated on the date of grant using a Monte Carlo simulation with Geometric Brownian Motion that uses certain inputs, assumptions and estimates, as follows: expected term of approximately five years , based on the contractual term of the MRSUs; risk-free interest rate of 4.06 %, based on U.S. Constant Maturity Yield Curve over a similar term; dividend rate of 0.0 %, based on our historical and expected future dividend payouts; and volatility of 76 %, and other factors. A summary of MRSU activity for the years ended December 31, 2024 and 2023 is as follows: Market-Based Restricted Stock Units Number of Shares Weighted-Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in millions, except per share amounts) Nonvested at December 31, 2022 — $ — $ — Granted 0.4 5.91 Vested — — — Forfeited, expired or canceled — — Nonvested at December 31, 2023 0.4 $ 5.91 $ 4.1 Granted — — Vested — 7.69 2.4 Forfeited, expired or canceled — — Nonvested at December 31, 2024 0.4 $ 5.71 $ 25.5 123 Stock Options A summary of option activity for the years ended December 31, 2024, 2023 and 2022 is as follows: Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in millions, except exercise price and term amounts) Outstanding at December 31, 2021 0.4 $ 42.48 6.12 $ 9.5 Granted — 21.42 Exercised ( 0.1 ) 6.60 $ 1.9 Forfeited, expired or canceled ( 0.1 ) 83.89 Outstanding at December 31, 2022 0.2 $ 38.15 5.63 $ 0.2 Granted — 8.94 Exercised — — — Forfeited, expired or canceled ( 0.1 ) 44.88 Outstanding at December 31, 2023 0.1 $ 33.68 4.29 $ 0.5 Granted — — Exercised — 16.77 0.3 Forfeited, expired or canceled — 90.82 Outstanding at December 31, 2024 0.1 $ 34.13 3.15 $ 6.7 A summary of total options outstanding and exercisable at December 31, 2024: Options Outstanding and Exercisable Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) (in millions, except exercise price and term amounts) Range of Exercise Prices: $ 0.65 - $ 21.42 0.1 $ 5.04 2.60 $ 21.42 - $ 130.50 — $ 68.50 4.33 $ 130.50 - $ 231.66 — $ 148.88 3.55 The 2020 and 2015 Plans permit the optionee to early exercise options to obtain preferred tax treatment before the completion of the award’s requisite service or vesting period. If the employee terminates employment before the end of this period, the 2020 and 2015 Plans allow us to repurchase the shares, at our option, at the exercise price of the award. The repurchase feature is used to incentivize the employee to remain through the requisite service or vesting period to receive the full economic benefit of the award. As of December 31, 2024 and 2023, share repurchase obligations were immaterial to our consolidated financial statements. 124 13. COMMITMENTS AND CONTINGENCIES During the normal course of business, we enter into various agreements to purchase services, primarily data and information technology based services, that are enforceable and legally binding. Certain supply contracts contain penalty provisions for early termination, in addition to variable costs that are based on volume and usage. We do not expect to incur penalty payments under these provisions that would materially affect our financial position, results of operations or cash flows. The following table summarizes, by remaining maturity, future commitments related to other arrangements as of December 31, 2024: Purchase Obligations (dollars in millions) 2025 $ 17.6 2026 15.8 2027 3.3 2028 2.4 2029 and thereafter 1.0 Total $ 40.1 From time to time, we are party to litigation and legal proceedings relating to our business operations. While the outcome of all legal actions is not presently determinable, we do not believe that we are party to any current or pending legal action that if concluded adversely could reasonably be expected to have a material adverse effect on our financial condition or results of operations and cash flow. On March 19, 2021, a purported class action complaint was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Southern District of Ohio (Case No. 2:21-cv-01197) on behalf of certain Root shareholders. The complaint alleged that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, and of Sections 11 and 15 of the Securities Act in connection with and following the Company’s initial public offering. The complaint sought unspecified damages. The defendants’ motion to dismiss the claims set forth in the complaint was granted and the lawsuit was dismissed with prejudice on March 31, 2023, which dismissal was affirmed on April 29, 2024, by the U.S. Court of Appeals for the Sixth Circuit. The plaintiffs filed a petition for a writ of certiorari on August 28, 2024 with the U.S. Supreme Court, which defendants opposed. The plaintiffs moved to voluntarily dismiss the petition for writ of certiorari and the petition was dismissed on December 6, 2024. We are contingently liable for possible future assessments under regulatory requirements for insolvencies and impairments of unaffiliated insurance companies. 125 14. OTHER COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME The following table presents the changes in our accumulated other comprehensive (loss) income, or AOCI, for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 (dollars in millions) Beginning balance $ ( 2.5 ) $ ( 5.8 ) $ 0.4 Other comprehensive income (loss) before reclassifications 0.2 3.3 ( 6.9 ) Net realized gains on investments reclassified from AOCI to net income (loss) — — 0.7 Other comprehensive income (loss) 0.2 3.3 ( 6.2 ) Ending balance $ ( 2.3 ) $ ( 2.5 ) $ ( 5.8 ) 15. EARNINGS (LOSS) PER SHARE The following table displays the computation of basic and diluted EPS for both Class A and Class B common stock for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 (in millions, except per share amounts) Numerator: Net income (loss) $ 30.9 $ ( 147.4 ) $ ( 297.7 ) Less: Undistributed income allocated to participating securities ( 1.7 ) — — Net income (loss) attributable to common shareholders 29.2 ( 147.4 ) ( 297.7 ) Denominator: Weighted-average common shares outstanding: basic (both Class A and B) 14.9 14.4 14.1 Effect of dilutive securities: RSUs 0.8 — — Redeemable convertible preferred stock 0.8 — — MRSUs 0.3 — — Stock options 0.1 — — Weighted-average common shares outstanding: diluted (both Class A and B) 16.9 14.4 14.1 Earnings (loss) per common share (both Class A and B): Basic $ 1.96 $ ( 10.24 ) $ ( 21.11 ) Diluted $ 1.83 $ ( 10.24 ) $ ( 21.11 ) For the years ended December 31, 2023 and 2022, we operated at a loss and therefore, the conversion of common stock equivalents would increase the denominator of the diluted EPS calculation and create a lower loss per share. Therefore, these common stock equivalents are considered anti-dilutive and diluted EPS is equal to basic EPS. 126 We excluded the following potentially dilutive common stock equivalents, presented based on amounts outstanding at each year end, from the computation of diluted EPS attributable to common stockholders for the years indicated because including them would have had an anti-dilutive effect: For the Years Ended December 31, 2024 2023 2022 (in millions) Options to purchase common stock — 0.1 0.2 Nonvested shares subject to repurchase — 0.1 0.1 RSUs — 1.5 1.1 MRSUs 0.4 — Redeemable convertible preferred stock (as converted to common stock) — 0.8 0.8 Warrants to purchase common stock 7.5 7.7 7.7 Total 7.5 10.6 9.9 16. STATUTORY FINANCIAL INFORMATION Root Insurance Company and Root Property & Casualty, or our insurance subsidiaries, are required to prepare statutory financial statements in conformity with the basis of accounting practices prescribed or permitted by the Ohio Department of Insurance. Ohio has adopted the National Association of Insurance Commissioners, or NAIC, Accounting Practices and Procedures Manual as the basis of their statutory accounting practices. Root Insurance Company and Root Property & Casualty’s statutory capital and surplus as of December 31, 2024 and 2023 and statutory net income (loss) for the years ended December 31, 2024, 2023 and 2022 are as follows: Statutory Net Income (Loss) Statutory Capital and Surplus 2024 2023 2022 2024 2023 (in millions) Root Insurance Company $ 37.6 $ ( 44.4 ) $ ( 125.7 ) $ 115.7 $ 60.1 Root Property & Casualty 5.9 ( 12.2 ) ( 30.8 ) 33.3 21.3 Total $ 43.5 $ ( 56.6 ) $ ( 156.5 ) $ 149.0 $ 81.4 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. These insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory-basis policyholders' surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer as of the prior December 31. During the years ended December 31, 2024, 2023 and 2022, Root Insurance Company and Root Property & Casualty did not pay any dividends. The insurance laws also require domestic insurers to seek prior regulatory approval for any dividend paid from other than earned surplus. Earned surplus is defined under the insurance laws as the amount equal to our unassigned funds as set forth in its most recent statutory financial statements, including net unrealized capital gains and losses. Additionally, following any dividend, an insurer’s policyholder surplus must be reasonable in relation to the insurer's outstanding liabilities and adequate for its financial needs. The NAIC Risk-Based Capital, or RBC, model law requires every insurer to calculate its total adjusted capital and RBC requirement to ensure insurer solvency. Regulatory guidelines provide for an insurance commissioner to intervene if the insurer experiences financial difficulty, as evidenced by a company's total adjusted capital falling below established relationships to required RBC. The model includes components for asset risk, underwriting risk, credit risk and other factors. The State of Ohio imposes a minimum RBC requirement that is developed by the NAIC. The formulas in the model for determining the amount of RBC specify various weighting factors that are 127 applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action. Root Insurance Company and Root Property & Casualty’s capital and surplus exceeded its authorized control level RBC of $ 16.1 million and $ 3.3 million for the year ended December 31, 2024, respectively, and $ 12.8 million and $ 2.8 million for the year ended December 31, 2023, respectively. 17. GEOGRAPHICAL BREAKDOWN OF GROSS PREMIUMS WRITTEN Gross premiums written by state is as follows for the years ended December 31, 2024, 2023 and 2022: For the Years Ended December 31, 2024 2023 2022 Amount % of Total Amount % of Total Amount % of Total (dollars in millions) State: Texas $ 249.3 19.2 % $ 134.3 17.1 % $ 109.3 18.2 % Georgia 159.9 12.3 94.3 12.0 62.3 10.4 Florida 107.4 8.3 16.9 2.2 2.4 0.4 Pennsylvania 74.6 5.7 45.2 5.8 34.9 5.8 Colorado 72.8 5.6 53.6 6.8 40.6 6.8 South Carolina 52.6 4.0 34.4 4.4 20.1 3.4 Arizona 50.0 3.8 35.4 4.5 17.1 2.9 California 49.2 3.8 10.7 1.4 7.7 1.3 Ohio 36.9 2.8 26.7 3.4 15.1 2.5 Maryland 33.2 2.6 22.3 2.8 11.8 2.0 All others states 415.2 31.9 309.3 39.6 278.7 46.3 Total $ 1,301.1 100.0 % $ 783.1 100.0 % $ 600.0 100.0 % 128 z ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Balance Sheets (Parent Company) As of December 31, 2024 2023 (in millions, except par value) Assets Other investments $ 4.4 $ 4.4 Cash and cash equivalents 230.4 404.4 Restricted cash 1.0 1.0 Investments in subsidiaries 213.7 128.4 Other assets 49.9 38.4 Intercompany receivable 43.0 33.0 Total Assets $ 542.4 $ 609.6 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity Liabilities: Long-term debt and warrants $ 200.1 $ 299.0 Accounts payable and accrued expenses 21.2 20.9 Other liabilities 5.4 12.0 Total liabilities 226.7 331.9 Commitments and Contingencies Redeemable convertible preferred stock, $ 0.0001 par value, 14.1 shares issued and outstanding at December 31, 2024 and December 31, 2023 (redemption value of $ 126.5 ) 112.0 112.0 Stockholders’ equity: Class A common stock, $ 0.0001 par value, 11.1 and 9.5 shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively — — Class B common stock, $ 0.0001 par value, 4.0 and 5.0 shares issued and outstanding at December 31, 2024 and December 31, 2023, respectively — — Additional paid-in capital 1,887.9 1,883.4 Accumulated other comprehensive loss ( 2.3 ) ( 2.5 ) Accumulated loss ( 1,681.9 ) ( 1,715.2 ) Total stockholders’ equity 203.7 165.7 Total liabilities, redeemable convertible preferred stock and stockholders’ equity $ 542.4 $ 609.6 See Notes to Condensed Combined Financial Statements 129 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Operations and Comprehensive Income (Loss) (Parent Company) For the Years Ended December 31, 2024 2023 2022 (in millions) Revenue: Net investment income $ 17.4 $ 21.5 $ 4.5 Net realized gains on investments — — 1.2 Total revenue 17.4 21.5 5.7 Operating expenses: Sales and marketing 0.4 1.5 11.9 Other insurance expense 4.7 17.8 6.6 Technology and development 23.0 17.3 33.4 General and administrative 8.9 23.4 18.3 Total operating expenses 37.0 60.0 70.2 Operating loss ( 19.6 ) ( 38.5 ) ( 64.5 ) Interest expense ( 42.2 ) ( 46.1 ) ( 34.6 ) Loss on early extinguishment of debt ( 5.4 ) — — Loss before income tax benefit ( 67.2 ) ( 84.6 ) ( 99.1 ) Income tax benefit ( 12.4 ) ( 1.8 ) — Net loss before equity net income (loss) of subsidiaries ( 54.8 ) ( 82.8 ) ( 99.1 ) Net income (loss) of subsidiaries 85.7 ( 64.6 ) ( 198.6 ) Net income (loss) 30.9 ( 147.4 ) ( 297.7 ) Other comprehensive income (loss): Other comprehensive income (loss) of subsidiaries 0.2 3.3 ( 6.2 ) Comprehensive income (loss) $ 31.1 $ ( 144.1 ) $ ( 303.9 ) See Notes to Condensed Combined Financial Statements 130 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Cash Flows (Parent Company) For the Years Ended December 31, 2024 2023 2022 (in millions) Cash flows from operating activities: Net cash (used in) provided by operating activities $ ( 43.2 ) $ ( 89.1 ) $ 205.9 Cash flows from investing activities: Sales of investments — — 1.3 Purchases of indefinite-lived intangible assets and transaction costs — — ( 1.3 ) Capitalization of internally developed software ( 11.4 ) ( 9.2 ) ( 8.8 ) Purchases of fixed assets ( 0.4 ) ( 0.2 ) — Dividends from subsidiaries 25.0 — — Investment in subsidiaries ( 23.3 ) ( 44.8 ) ( 360.9 ) Net cash used in investing activities ( 10.1 ) ( 54.2 ) ( 369.7 ) Cash flows from financing activities: Proceeds from exercise of stock options and restricted stock units 0.1 — 1.3 Taxes paid related to net share settlement of equity awards ( 15.1 ) ( 1.1 ) ( 1.0 ) Payment of preferred stock and related warrants issuance costs ( 3.0 ) ( 3.0 ) ( 3.0 ) Proceeds from issuance of debt and related warrants, net of issuance cost 134.4 — 286.0 Repayments of long-term debt ( 237.1 ) — — Net cash (used in) provided by financing activities ( 120.7 ) ( 4.1 ) 283.3 Net (decrease) increase in cash, cash equivalents and restricted cash ( 174.0 ) ( 147.4 ) 119.5 Cash, cash equivalents and restricted cash at beginning of year 405.4 552.8 433.3 Cash, cash equivalents and restricted cash at end of year $ 231.4 $ 405.4 $ 552.8 See Notes to Condensed Combined Financial Statements 131 ROOT, INC. and CARET HOLDINGS, INC. Notes to Condensed Combined Financial Statements (Parent Company) 1. Business Caret Holdings, Inc. is a holding company which was formed in 2015. We are a technology company operating primarily a direct-to-consumer model with the majority of our personal insurance customers acquired through mobile apps. We offer auto and renters insurance products In August 2019 a new holding company, Root, Inc. was formed, which became the parent of Caret Holdings, Inc. and maintains 100% ownership of Caret Holdings, Inc. 2. Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation and Combination — The condensed combined financial statements include the accounts of Root, Inc. and its wholly owned subsidiary, Caret Holdings, Inc., and are prepared in accordance with accounting principles generally accepted in the U.S. All intercompany accounts and transactions have been eliminated. These financial statements have been combined in order to present comparative parent company financial statements for 2024, 2023 and 2022 and should be read in conjunction with our consolidated financial statements. Use of Estimates —The preparation of condensed combined financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Statement of Cash Flows — The supplemental disclosures for cash and non-cash flows for the years ended December 31, 2024, 2023 and 2022 are as follows: 2024 2023 2022 (in millions) Supplemental disclosures: Interest paid $ 43.9 $ 42.5 $ 24.5 Federal income taxes paid — — — Leasehold improvements - non-cash — — 0.9 The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed combined balance sheets that sum to the total of the same such amount in the condensed combined statements of cash flows: 2024 2023 (in millions) Cash and cash equivalents $ 230.4 $ 404.4 Restricted cash 1.0 1.0 Total cash, cash equivalents and restricted cash shown in the condensed combined statements of cash flows $ 231.4 $ 405.4 3. Guarantees Root, Inc. entered into an agreement with the Superintendent of Insurance, State of Ohio, (the “Superintendent”) guaranteeing that Root Insurance Company will maintain certain capital and surplus requirements or risk-based capital levels, whichever is greater, and such additional surplus as the Superintendent requires. The guarantee remains in effect until such time as the Superintendent may release Root, Inc. in writing. 132 ROOT, INC. AND SUBSIDIARIES Schedule V: Valuation and Qualifying Accounts For the Years Ended December 31, 2024, 2023 and 2022 Additions Balance at beginning of period Charged to costs and expenses Charge to other accounts Deductions Balance at end of period (in millions) Year Ended December 31, 2022 Valuation allowance for deferred tax assets $ 255.0 $ 65.8 $ 1.5 $ — $ 322.3 Allowance for premium receivables $ 5.4 $ 17.4 $ — $ ( 20.0 ) $ 2.8 Allowance for reinsurance recoverables $ 0.2 $ — $ — $ — $ 0.2 Year Ended December 31, 2023 Valuation allowance for deferred tax assets $ 322.3 $ 34.9 $ ( 0.8 ) $ — $ 356.4 Allowance for premium receivables $ 2.8 $ 12.5 $ — $ ( 11.3 ) $ 4.0 Allowance for reinsurance recoverables $ 0.2 $ 1.6 $ — $ — $ 1.8 Year Ended December 31, 2024 Valuation allowance for deferred tax assets $ 356.4 $ — $ — $ ( 10.5 ) $ 345.9 Allowance for premium receivables $ 4.0 $ 34.1 $ — $ ( 28.3 ) $ 9.8 Allowance for reinsurance recoverables $ 1.8 $ ( 0.5 ) $ — $ ( 1.2 ) $ 0.1 133 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 134