Root, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm 82 Consolidated Balance Sheets 83 Consolidated Statements of Operations and Comprehensive Loss 84 Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit) 85 Consolidated Statement s of Cash Flows 86 Notes to Consolidated Financial Statements 87 Schedule II: Condensed Combined Financial Information of Registrant 117 Schedule V: Valuation and Qualifying Accounts 121 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. 81 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, 2020 and 2019 the related consolidated statements of operations and comprehensive loss, redeemable convertible preferred stock and stockholders' equity (deficit), and cash flows, for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 8 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. 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 Public Company Accounting Oversight Board (United States) (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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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. /s/ DELOITTE & TOUCHE LLP Columbus, Ohio March 4, 2021 We have served as the Company's auditor since 2017. 82 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2019 2020 2019 (in millions, except par value) Assets Investments: Fixed maturities available-for-sale, at fair value (amortized cost: $ 215.4 and $ 118.7 at December 31, 2020 and December 31, 2019, respectively) $ 221.0 $ 119.3 Short-term investments (amortized cost: $ 3.0 and $ 3.5 at December 31, 2020 and December 31, 2019, respectively) 3.0 3.5 Other investments 0.5 — Total investments 224.5 122.8 Cash and cash equivalents 1,112.8 391.7 Restricted cash 1.0 24.9 Premiums receivable, net of allowance of $ 3.5 and $ 2.0 at December 31, 2020 and December 31, 2019, respectively 130.1 122.7 Reinsurance recoverable 124.8 25.3 Prepaid reinsurance premiums 112.8 17.4 Other assets 56.3 23.8 Total assets $ 1,762.3 $ 728.6 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Liabilities: Loss and loss adjustment expense reserves $ 237.2 $ 140.7 Unearned premiums 157.1 145.4 Long-term debt and warrants 188.2 192.2 Reinsurance premiums payable 89.1 25.7 Accounts payable and accrued expenses 48.0 29.8 Other liabilities 10.3 8.4 Total liabilities 729.9 542.2 Commitments and Contingencies (Note 13) Redeemable convertible preferred stock, $ 0.0001 par value, zero and 158.9 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (liquidation preference of zero and $ 549.8 , respectively) (Note 10) — 560.4 Stockholders’ equity (deficit): Class A common stock, $ 0.0001 par value, 59.4 and zero shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (Note 10) — — Class B common stock, $ 0.0001 par value, 192.2 and 44.4 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (Note 10) — — Treasury stock, at cost ( 0.8 ) ( 0.1 ) Additional paid-in capital 1,775.6 10.5 Accumulated other comprehensive income 5.6 0.6 Accumulated loss ( 748.0 ) ( 385.0 ) Total stockholders’ equity (deficit) 1,032.4 ( 374.0 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 1,762.3 $ 728.6 See Notes to Consolidated Financial Statements 83 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 2020 2019 2018 (in millions, except per share data) Revenue: Net premiums earned $ 322.5 $ 275.3 $ 40.2 Net investment income 5.4 5.2 1.2 Net realized gains on investments 0.3 — — Fee and other income 18.6 9.7 1.9 Total revenue 346.8 290.2 43.3 Operating expenses: Loss and loss adjustment expenses 362.8 321.4 43.5 Sales and marketing 139.7 109.6 40.3 Other insurance (benefit) expense ( 1.8 ) 52.3 10.2 Technology and development 52.9 24.0 8.2 General and administrative 78.5 43.0 9.3 Total operating expenses 632.1 550.3 111.5 Interest expense 77.7 22.3 0.9 Loss before income tax expense ( 363.0 ) ( 282.4 ) ( 69.1 ) Income tax expense — — — Net loss ( 363.0 ) ( 282.4 ) ( 69.1 ) Other comprehensive income: Changes in net unrealized gains on investments 5.0 0.6 — Comprehensive loss $ ( 358.0 ) $ ( 281.8 ) $ ( 69.1 ) Loss per common share: basic and diluted (both Class A and B) $ ( 4.81 ) $ ( 8.33 ) $ ( 2.73 ) Weighted-average common shares outstanding: basic and diluted 75.5 33.9 25.3 See Notes to Consolidated Financial Statements 84 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 Redeemable Convertible Preferred Stock Class A and Class B Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Loss Total Stockholders' Deficit Shares Amount Class A Shares Class B Shares Amount Shares Amount (in millions) Balance—January 1, 2018 81.7 $ 38.8 — 35.7 $ — 4.5 $ ( 0.1 ) $ — $ — $ ( 33.5 ) $ ( 33.6 ) Comprehensive loss: Net loss — — — — — — — — — ( 69.1 ) ( 69.1 ) Common stock—option exercises — — — 5.8 — — — 0.1 — — 0.1 Reclassification of early-exercised stock option to liabilities — — — — — — — ( 0.2 ) — — ( 0.2 ) Common stock—shared-based compensation expense — — — — — — — 0.1 — — 0.1 Series C—preferred stock - voting issued, net of issuance costs 32.3 46.4 — — — — — — — — — Series C—preferred stock - non-voting issued 3.1 4.5 — — — — — — — — — Series D—preferred stock issued, net of issuance costs 19.3 99.9 — — — — — — — — — Balance—December 31, 2018 136.4 $ 189.6 — 41.5 $ — 4.5 $ ( 0.1 ) $ — $ — $ ( 102.6 ) $ ( 102.7 ) Comprehensive loss: Net loss — — — — — — — — — ( 282.4 ) ( 282.4 ) Changes in other comprehensive income — — — — — — — — 0.6 — 0.6 Tender offer — — — — — — — 8.6 — — 8.6 Common stock—option exercises — — — 2.9 — — — 1.9 — — 1.9 Reclassification of early-exercised stock option to liabilities — — — — — — — ( 1.4 ) — — ( 1.4 ) Common stock—share-based compensation expense — — — — — — — 1.4 — — 1.4 Series E—preferred stock - voting issued, net of issuance costs 21.2 349.6 — — — — — — — — — Series E—SAFE conversion 1.3 21.2 — — — — — — — — — Balance—December 31, 2019 158.9 $ 560.4 — 44.4 $ — 4.5 $ ( 0.1 ) $ 10.5 $ 0.6 $ ( 385.0 ) $ ( 374.0 ) Comprehensive loss: Net loss — — — — — — — — — ( 363.0 ) ( 363.0 ) Changes in other comprehensive income — — — — — — — — 5.0 — 5.0 Tender offer and subsequent conversion (Note 11) 2.9 — — ( 2.9 ) — — — 25.1 — — 25.1 Conversion of redeemable convertible preferred stock to common stock from IPO ( 161.8 ) ( 560.4 ) — 161.8 — — — 560.4 — — 560.4 Common stock—issuance of shares from IPO and concurrent private placement, net of issuance costs — — 42.7 — — — — 1,098.1 — — 1,098.1 Conversion of Class B to Class A common stock — — 16.7 ( 16.7 ) — — — — — — — Warrants exercise — — — 3.3 — — — 75.2 — — 75.2 Common stock—option exercises — — — 2.8 — — — 1.9 — — 1.9 Reclassification of early-exercised stock option from liabilities — — — ( 0.1 ) — — — 0.2 — — 0.2 Common stock—share-based compensation expense — — — — — — — 3.7 — — 3.7 Settlement of related party loan (Note 12) — — — ( 0.4 ) — 0.1 ( 0.7 ) 0.5 — — ( 0.2 ) Balance—December 31, 2020 — $ — 59.4 192.2 $ — 4.6 $ ( 0.8 ) $ 1,775.6 $ 5.6 $ ( 748.0 ) $ 1,032.4 See Notes to Consolidated Financial Statements 85 ROOT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 2020 2019 2018 (in millions) Cash flows from operating activities: Net loss $ ( 363.0 ) $ ( 282.4 ) $ ( 69.1 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation 3.7 1.4 0.1 Tender offer 25.1 8.6 — Depreciation and amortization, net 15.6 4.9 0.6 Bad debt expense 23.6 9.0 0.3 SAFE fair value adjustment — 11.2 — Warrants fair value adjustment 54.7 — — Paid-in kind interest expense 9.1 0.8 — Realized gains on investments ( 0.3 ) — — Changes in operating assets and liabilities: Premiums receivable ( 31.0 ) ( 96.7 ) ( 33.7 ) Reinsurance recoverable ( 99.5 ) ( 9.2 ) ( 15.2 ) Prepaid reinsurance premiums ( 95.4 ) ( 4.6 ) ( 11.6 ) Other assets ( 21.7 ) ( 3.7 ) ( 2.7 ) Losses and loss adjustment expenses reserves 96.5 107.4 32.1 Unearned premiums 11.7 98.1 45.0 Reinsurance premiums payable 63.4 6.1 19.4 Accounts payable and accrued expenses 18.2 19.2 9.0 Other liabilities 2.1 2.7 ( 0.3 ) Net cash used in operating activities ( 287.2 ) ( 127.2 ) ( 26.1 ) Cash flows from investing activities: Purchases of investments ( 158.4 ) ( 138.1 ) ( 40.3 ) Proceeds from maturities, call and pay downs of investments 42.5 36.2 19.2 Sales of investments 17.9 — 4.0 Purchases of indefinite-lived intangible assets and transaction costs ( 8.9 ) — — Capitalization of internally developed software ( 5.4 ) ( 5.5 ) ( 2.3 ) Purchases of fixed assets ( 1.8 ) ( 6.6 ) ( 1.2 ) Net cash used in investing activities ( 114.1 ) ( 114.0 ) ( 20.6 ) Cash flows from financing activities: Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance costs 1,098.1 — — Proceeds from exercise of stock options and warrants 2.1 1.9 0.1 Proceeds from issuance of preferred stock, net of issuance costs — 349.6 150.8 Proceeds from debt and warrants issuance, net of issuance costs 12.0 189.5 — Repayments of long-term debt ( 13.5 ) ( 15.5 ) — Proceeds from SAFE — 10.0 — Purchases of treasury stock ( 0.2 ) — — Net cash provided by financing activities 1,098.5 535.5 150.9 Net increase in cash, cash equivalents and restricted cash 697.2 294.3 104.2 Cash, cash equivalents and restricted cash at beginning of year 416.6 122.3 18.1 Cash, cash equivalents and restricted cash at end of year $ 1,113.8 $ 416.6 $ 122.3 Supplemental disclosures: Interest paid $ 4.5 $ 4.3 $ 0.8 Federal income taxes paid — — — Leasehold improvements - non-cash — 1.5 2.6 Conversion of debt to preferred stock - non-cash — 11.2 — Conversion of preferred stock to common stock - non-cash 560.4 — — Conversion of warrants to common stock - non-cash 75.0 — — Purchases of treasury stock - non-cash 0.5 — — See Notes to Consolidated Financial Statements 86 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 Root Insurance Company, an Ohio domiciled insurance company (together with Root, Inc. “We,” “us” or “our”). We were formed in 2015 and began writing personal auto insurance in July 2016. We are a technology company operating a direct-to-consumer model with more than 75 % of our personal insurance customers acquired through mobile applications. We offer auto and renters insurance products underwritten by Root Insurance Company. As of December 31, 2020, we wrote auto policies in 30 states. As of December 31, 2020, we wrote renters insurance in nine states and offered homeowners insurance in 18 states in partnership with Homesite. 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. To conform to the current year presentation, certain prior year amounts have been reclassified. 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, premium write-offs, intangible asset impairment and valuation allowance for income taxes. COVID-19 —In December 2019, COVID-19 was first reported in Wuhan, China and in March 2020, the World Health Organization declared a global pandemic. The global pandemic has severely impacted businesses worldwide, including within the insurance industry. We have been impacted by certain individual state bulletins that outline COVID-19 premium relief efforts, including restrictions on the ability to cancel policies for non-payment, requirements to defer insurance premium payments for up to 60 days and restrictions on increasing policy premiums. COVID-19 has impacted and may further impact the broader economic environment, including negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates. As the COVID-19 pandemic continues to develop, there is uncertainty around the severity and duration of the pandemic and the pandemic’s potential impact on our business and our financial performance. Deferred Offering Costs —Deferred offering costs, which primarily consist of legal, accounting, and other third-party fees directly related to our IPO and concurrent private placement, are capitalized as incurred. Upon consummation of the IPO, these deferred offering costs were offset against the IPO and concurrent private placement proceeds. Asset Acquisition —In November 2020, we acquired all of the authorized, issued and outstanding shares of Catlin Indemnity Company, renamed Root Property & Casualty, for $ 22.8 million, which included cash, cash equivalents, and accrued investment income of $ 14.4 million and insurance license indefinite-lived intangible assets of $ 8.4 million. The transaction costs associated with this acquisition were $ 0.5 million and were allocated to the insurance license indefinite-lived intangible assets acquired. This acquisition will expand our ability to sell personal auto insurance in 48 states and the District of Columbia. We accounted for the acquisition of Root Property & Casualty as an asset acquisition because substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets (the insurance licenses) and the acquisition of Root Property & Casualty did not include an input 87 and a substantive process that together significantly contribute to the ability to create outputs and therefore does not meet the definition of a business under GAAP. Accordingly, we recognized the acquired assets at fair value as of the acquisition date, with transaction costs allocated to the insurance license indefinite-lived intangible assets. Indefinite-Lived Intangible Assets —In connection with the acquisition of Root Property & Casualty, we recognized insurance licenses of $ 8.9 million, including transaction cost, as of December 31, 2020 in other assets in our consolidated balance sheets. We incur a minimal fee to renew each license. These intangible assets are not amortized, but instead are tested for impairment annually or when indicators of impairment exist. The impairment test for indefinite-lived intangibles involves first assessing qualitative factors to determine if it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. If so, then a quantitative test is performed to compare the estimated fair value of the indefinite-lived intangible asset to the respective asset's carrying amount. The evaluation requires the use of estimates and significant judgments and considers the weight of evidence and significance of all identified events and circumstances and most relevant drivers of fair value, both positive and negative, in determining whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount. Segment Information —Our chief operating decision maker is the Chief Executive Officer. The chief operating decision maker manages operations, allocates resources, and evaluates financial performance on a company-wide basis. We operate in one reporting segment providing direct-to-consumer insurance products to customers. Cash, Cash Equivalents and Restricted Cash —Cash consists of cash on deposit. Cash equivalents are short-term, highly liquid investments that mature within three months from the date of origination and are principally stated at amortized cost, which approximates their fair value. Restricted cash consists of amounts held in escrow by a financial institution to collateralize a portion of outstanding debt. Book Overdraft —If checks are issued in excess of the amount of cash on hand a book overdraft shall be reclassified to accounts payable on the consolidated balance sheets. When a check is issued whereby a disbursement account is used to write the check, but the account is not funded until the check is presented for payment this "negative cash" balance is included in cash and cash equivalents on the consolidated balance sheets, if the funding account has sufficient funds. Investments —Investments in debt securities are classified as short-term and available-for-sale securities and are carried at fair value with any unrealized gains and losses, net of taxes, recorded as a component of accumulated other comprehensive income. Declines in the fair value of debt securities below their cost deemed to be other-than-temporary are reflected in operations as realized losses. Management regularly reviews its securities for signs of other-than-temporary impairment, an assessment requiring significant management judgment. Among the criteria management considers are the financial condition of the issuer, including receipt of scheduled principal and interest cash flows, length of time of unrealized loss, 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. When a debt security has been determined to have an other-than-temporary impairment, the impairment charge is separated into an amount representing the credit loss, which is recognized in earnings as a realized loss and the amount related to non-credit factors, which is recognized in other comprehensive income. There were no other-than-temporary impairments recognized in 2020, 2019, or 2018. 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. 88 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. 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 direct basis, is recorded when the sum of expected losses, loss adjustment expenses, unamortized acquisition costs and maintenance costs exceed the recorded unearned premium reserve and anticipated investment income. A premium deficiency reserve is recognized as a reduction of deferred acquisition costs and, if necessary, by accruing an additional liability for the deficiency, with a corresponding charge to operations. We did not record a premium deficiency reserve in 2020, 2019, or 2018. Premiums receivable represents premiums written but not yet collected. Generally, premiums are collected prior to providing risk coverage, minimizing our exposure to credit risk. Due to a variety of factors, certain premiums billed may not be collected, for which we establish an allowance for doubtful accounts based on an analysis of historical collection experience. Allowance for doubtful accounts was $ 3.5 million and $ 2.0 million as of December 31, 2020 and 2019 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 $ 23.6 million, $ 9.0 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Fee and Other Income —Fee income consists of the flat fee we charge to those policyholders who pay premiums on an installment basis. The fee relates to the additional administrative costs associated with processing more frequent billings. We recognize this fee income in the period in which we process each installment. Other income primarily comprises commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy, and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed. Sales and Marketing —Sales and marketing includes spend related to performance and partnership channels, channel media, advertising, branding, public relations, consumer insights and referral fees. These expenses also include related employee costs including salaries, health benefits, bonuses, employee retirement plan related expenses and share-based compensation expense, or Personnel Costs, and overhead allocated based on headcount, or Overhead. We incur sales and marketing activities for all product offerings. Sales and marketing costs are expensed as incurred. Other Insurance (Benefit) Expense —Other insurance (benefit) expense includes underwriting expenses, credit card and policy processing expenses, premium write-offs, insurance license expenses, and Personnel Costs and Overhead related to actuarial and certain data science activities. Other insurance (benefit) expense also includes amortization of deferred acquisition costs like premium taxes and report costs related to the successful acquisition of a policy. Other insurance (benefit) expense is expensed as incurred, except for costs related to deferred acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned. These expenses are also recognized net of ceding commissions earned from our quota share reinsurance agreements. The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance (benefit) expense. Technology and development —Technology and development 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 89 development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life. General and Administrative —General and administrative expenses primarily relate to external professional service expenses; Personnel Costs and Overhead for corporate functions; and depreciation expense for computers, furniture and other fixed assets. General and administrative expenses are expensed as incurred. Policy Acquisition Costs —Acquisition costs, consisting of premium taxes and certain marketing costs and underwriting expenses, net of ceding commissions, related to the successful acquisition or renewal business, are deferred and amortized over the same period in which the related premiums are earned. Ceding commissions relating to reinsurance agreements are recorded as a reimbursement for both deferrable and non-deferrable acquisition costs. The portion of the ceding commission that is equal to the pro rata share of acquisition costs based on quota share percentage is recorded as an offset to the direct deferred acquisition costs. Any portion of the ceding commission that exceeds the acquisition costs of the business ceded is recorded as excess ceding commission, a deferred liability, and amortized over the same period in which the related premiums are earned. We amortized deferred acquisition costs of $ 17.1 million, $ 12.2 million and $ 2.8 million for the years ended December 31, 2020, 2019 and 2018, respectively, which are recognized in other insurance (benefit) expense in our consolidated statements of operations and comprehensive loss. Loss and Loss Adjustment Expense Reserves —Loss and loss adjustment expense (“LAE”) reserves include an amount determined using adjuster determined case-base estimates for reported claims and on actuarial unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE. These reserves are established to cover the estimated ultimate cost to settle insured losses. The unpaid claim es timates consider loss cost trends, mix of business, and other risk factors impacting claims settlement. The method used to estimate unpaid LAE reserves is based on claims transaction data, including the relative cost of settling the 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 on our consolidated statements of operations and comprehensive loss. As such, loss and LAE reserves represent management’s best estimate of the ultimate liability related to reported and unreported claims. Our loss and LAE reserves are recorded gross of reinsurance and net of amounts expected to be received from salvage (the amount recovered from a total loss claims expense) and subrogation (the right to recover payments from third parties). Reinsurance —In the ordinary course of business, we cede a portion of our business written 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. Although the ceding of reinsurance does not discharge us from our primary liability to the policyholder, the insurance company that assumes the coverage assumes the related liability. Amounts recoverable from and payable to reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. Reinsurance premiums, commissions and expense reimbursements related to reinsured business are accounted for on a basis consistent with the basis used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other companies have been reported as a reduction of premiums earned and are recognized over the remaining policy period based on the reinsurance protection provided. Amounts applicable to reinsurance ceded for unearned premium reserves are reported as a prepaid reinsurance premiums asset in the accompanying consolidated balance sheets and as reduction of unearned premiums in Note 6, “Reinsurance.” Ceding commissions received in connection with reinsurance ceded have been accounted for as a reduction of other insurance (benefit) expense in the consolidated statements of operations and comprehensive loss. Some of our reinsurance agreements provide for adjustment of commissions or amount of coverage based on loss experience. We recognize the asset or liability arising from these adjustable features in the period the adjustment occurs, which is calculated based on experience to-date under the agreement. 90 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. All reinsurance contracts provide for indemnification against loss or liability relating to insurance risk and have been accounted for as reinsurance. Income Taxes —For the 2020 tax year, Root, Inc. will file a consolidated federal income tax return with Caret Holdings, Inc., Root Insurance Company, Root Property & Casualty and Root Reinsurance Company, Ltd. The consolidated return also includes Root Insurance Agency, LLC and Root Enterprise, LLC, which are disregarded entities under Root 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 to the extent that there is sufficient positive evidence, as allowed under the Accounting Standard Codification, or ASC, 740, Income Taxes, to support the recoverability of those deferred tax assets. We establish a valuation allowance to the extent that there is 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 $ 137.3 million and $ 76.8 million was established as of December 31, 2020 and 2019, respectively. Further details are discussed in Note 9, "Income Taxes." We recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on our reserve for uncertain tax positions are recognized as a component of tax expense. As of December 31, 2020 and 2019, we did not have any unrecognized tax benefits for uncertain tax positions and had no accrued interest or penalties related to uncertain tax positions. Internally Developed Software —We review our software development activity and capitalize costs during the application development phase under ASC 350-40, Internal-Use Software. These costs are amortized on a straight-line basis over a five-year period. Internally developed software costs are assessed for impairment at least quarterly to ensure 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 $ 2.4 million, $ 1.4 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, recorded as technology and development expense in our consolidated statements of operations and comprehensive loss. The capitalized cost and accumulated amortization of internally developed software at December 31, 2020 and 2019 are as follows: 2020 2019 (dollars in millions) Internally developed software $ 13.9 $ 8.5 Accumulated amortization ( 4.3 ) ( 1.9 ) Internally developed software, net $ 9.6 $ 6.6 Fixed Assets —Fixed Assets are carried at cost, net of accumulated depreciation. We capitalize purchases of fixed assets with costs greater than $1,000, 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 91 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, 2020, 2019 and 2018, depreciation expense was $ 3.1 million, $ 1.7 million and $ 0.3 million, respectively, in our consolidated statements of operations and comprehensive loss. The capitalized cost and accumulated depreciation of fixed assets at December 31, 2020 and 2019 are as follows: 2020 2019 (dollars in millions) Computers $ 4.5 $ 3.5 Furniture 3.4 2.9 Leasehold improvements 6.3 6.0 Total fixed assets, at cost $ 14.2 $ 12.4 Accumulated depreciation ( 5.3 ) ( 2.2 ) Fixed assets, net $ 8.9 $ 10.2 Share-Based Compensation —We award share-based compensation, including stock options with only a service condition, stock options with service and performance conditions, restricted stock units, or RSUs, and restricted stock, to our officers, directors, employees, and certain advisors through approval from the Compensation Committee of the Board of Directors. Share-based compensation expense is recognized based on the grant date fair value of the awards. The fair value of stock options is determined on the grant date using the Black-Scholes Merton, or BSM, option-pricing model. The BSM option pricing model requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the options, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. The fair value of restricted stock and RSUs granted before our IPO had historically been determined by our Board of Directors, with input from management, and considering third-party valuations of our common stock. Because there had been no public market for our common stock, our board of directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors. Our Board of Directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances. After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares. Stock options are exercisable for a period up to ten years from the grant date. We recognize forfeitures as they occur. Stock options with only a service condition generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter. Stock options with service and performance conditions generally vest ratably over a four-year period assuming achievement of the performance conditions. The compensation expense associated with nonvested stock options that have performance conditions is dependent on our periodic assessment of the probability of the performance conditions being achieved. If deemed probable, we recognize compensation expense on a straight-line basis over the requisite service period. If a performance condition is no longer probable of achievement, any previously recognized compensation expense is reversed and no subsequent compensation expense is recognized until achievement is once again probable, at which point a cumulative catch-up is recognized. Restricted stocks units (RSUs) generally vest over four years - 25 % cliff vests after one year and approximately 2 % vests each month over three years thereafter. Certain other RSUs vest over four years - 25 % cliff vests after one year and in equal increments quarterly over three years thereafter; vest over four years in equal quarterly increments; and fully cliff vest after one year . We generally recognize share-based compensation expense ratably over the respective vesting period. Before our IPO, the fair value of common stock underlying the options had historically been determined by our board of directors, with input from management, and considering third-party valuations of our common stock. Because there had been no public market for our common stock, our board of directors had determined its fair value at the time of grant of the pre-IPO option by considering a number of objective and subjective factors, including 92 financing investment rounds, operating and financial performance, the lack of liquidity of share capital and general and industry specific economic outlook, among other factors. Our board of directors determined the fair value of common stock based on valuations performed using the Option Pricing Method and the Probability Weighted Expected Return Method subject to relevant facts and circumstances. After our IPO, our common stock is now listed on the Nasdaq and we use these market prices for the fair value of our common shares. For additional information refer to Note 11, “Share-Based Compensation.” Net Loss Per Share —Net loss per share results are a key indicator of the overall performance relative to each share of our outstanding common stock. Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted-average number of common shares vested and outstanding during the period. Our warrants were included in the weighted-average number of common shares outstanding, until they were exercised, because they have an insignificant exercise price of $ 0.0001 per share and are therefore considered outstanding common shares for computation of basic EPS. The calculation for Diluted net loss per share is similar to basic net loss per share discussed above except the conversion of dilutive securities is included in the denominator. Notable dilutive securities relevant to our operations are stock options, performance stock options, nonvested shares subject to repurchase, restricted stock units, warrants and redeemable convertible preferred stock. We have operated at a loss from operations for the years ended December 31, 2020, 2019, and 2018. Therefore, the conversion of potential shares from dilutive securities would increase the denominator of the earnings (loss) per share, or EPS, calculation and would create a lower loss per share. This means that the potentially dilutive securities are considered antidilutive as they increase our EPS. Due to these losses from operations, diluted EPS would be equal to basic EPS. Earnings are allocated equally between each class of common stock because they are entitled to the same liquidation and dividend rights. Adopted Accounting Pronouncement —In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement , to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. We early adopted ASU 2018-15 on January 1, 2020. The adoption of this standard did not have a material impact on our financial statements or notes to financial statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes. The amendments in the update simplify the accounting for income taxes by, among other things, removing the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items like comprehensive income, and recognizing franchise tax that is partially based on income as an income-based tax. We early adopted ASU 2019-12 on January 1, 2020. The adoption of this standard did not have a material impact on our consolidated financial statements or notes to consolidated financial statements. Upcoming Accounting Pronouncements —We currently qualify as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, whereby we have the option to adopt new or revised accounting guidance within the same time periods as private companies. We have elected this option but may ultimately determine it is preferable to take advantage of early adoption provisions offered within the applicable guidance. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The main provision of ASU 2016-02 requires the recognition of right-of-use lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance also requires disclosures that meet the objective of enabling financial statement users to assess the amount, timing, and uncertainty of cash flows arising from leases. The effective date of ASU 2016-02 is for annual reporting periods beginning after December 15, 2021, and interim reporting periods beginning after December 15, 2022. We expect to elect the practical expedient which will allow us to not apply the amended lease accounting guidance to comparative periods that will be presented. The majority of our lease spend relates to real estate with the remaining lease spend primarily related to minor equipment. While we are finalizing the evaluation of the impact of this standard on our consolidated financial statements, we expect the adoption of this guidance will result in recognition of operating lease liabilities of approximately $ 16 million based on the present value of the remaining minimum lease commitments. We anticipate recognizing a corresponding 93 right-of-use asset based on the operating lease liabilities adjusted for previously recognized deferred rent and a cease-use liability previously recognized under ASC 420, Exit or Disposal Cost Obligations . In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends previous guidance on the impairment of financial instruments by adding an impairment model that allows an entity to recognize expected credit losses as an allowance rather than impairing as they are incurred. The new guidance is intended to reduce complexity of credit impairment models and result in a more timely recognition of expected credit losses. The effective date of ASU 2016-13 is for reporting periods beginning after December 15, 2022. We are currently evaluating the impact of this ASU. 3. INVESTMENTS The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at December 31, 2020 and 2019 are as follows: 2020 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 16.9 $ 0.1 $ — $ 17.0 Municipal securities 22.6 0.8 — 23.4 Corporate debt securities 87.5 3.1 ( 0.1 ) 90.5 Residential mortgage-backed securities 7.8 — — 7.8 Commercial mortgage backed securities 57.1 1.3 — 58.4 Other debt obligations 23.5 0.4 — 23.9 Total fixed maturities 215.4 5.7 ( 0.1 ) 221.0 Short-term investments 3.0 — — 3.0 Total $ 218.4 $ 5.7 $ ( 0.1 ) $ 224.0 2019 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in millions) Fixed maturities: U.S. Treasury securities and agencies $ 9.7 $ 0.1 $ — $ 9.8 Municipal securities 10.2 0.1 — 10.3 Corporate debt securities 38.3 0.4 ( 0.1 ) 38.6 Residential mortgage-backed securities 3.3 — — 3.3 Commercial mortgage backed securities 31.5 0.1 ( 0.1 ) 31.5 Other debt obligations 25.7 0.1 — 25.8 Total fixed maturities 118.7 0.8 ( 0.2 ) 119.3 Short-term investments 3.5 — — 3.5 Total $ 122.2 $ 0.8 $ ( 0.2 ) $ 122.8 The following tables reflect the gross unrealized losses, fair value on bonds, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019: 94 2020 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Bonds: U.S. Treasury securities and agencies $ 15.7 $ — $ — $ — $ 15.7 $ — Municipal securities 2.3 — — — 2.3 — Corporate debt securities 2.9 ( 0.1 ) — — 2.9 ( 0.1 ) Residential mortgage-backed securities 3.7 — — — 3.7 — Commercial mortgage-backed securities 4.9 — — — 4.9 — Other debt obligations 0.1 — — — 0.1 — Total bonds $ 29.6 $ ( 0.1 ) $ — $ — $ 29.6 $ ( 0.1 ) 2019 Less than 12 Months 12 Months or More Total Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss (dollars in millions) Bonds: Municipal securities $ 5.5 $ — $ — $ — $ 5.5 $ — Corporate debt securities 12.8 ( 0.1 ) — — 12.8 ( 0.1 ) Residential mortgage-backed securities 1.9 — — — 1.9 — Commercial mortgage-backed securities 24.5 ( 0.1 ) — — 24.5 ( 0.1 ) Other debt obligations 7.4 — — — 7.4 — Total bonds $ 52.1 $ ( 0.2 ) $ — $ — $ 52.1 $ ( 0.2 ) There were no other-than-temporary impairments recognized for the years ended December 31, 2020, 2019 or 2018, respectively. The amortized cost and fair value of short-term investments and fixed maturity securities by contractual maturity at December 31, 2020 and 2019 are as follows: 2020 2019 Amortized Cost Fair Value Amortized Cost Fair Value (dollars in millions) Due in one year or less $ 12.9 $ 13.0 $ 14.3 $ 14.3 Due after one year through five years 158.9 163.7 81.6 82.1 Due five years through 10 years 13.3 13.5 4.9 4.9 Due after 10 years 33.3 33.8 21.4 21.5 Total $ 218.4 $ 224.0 $ 122.2 $ 122.8 Net realized gains on investments was $ 0.3 million for the year ended December 31, 2020 and zero for years ended December 31, 2019 and 2018, respectively. 95 The following table sets forth the components of net investment income for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 (dollars in millions) Interest on bonds $ 4.2 $ 1.8 $ 0.4 Interest on deposits and cash equivalents 1.7 3.8 0.9 Total 5.9 5.6 1.3 Investment expense ( 0.5 ) ( 0.4 ) ( 0.1 ) Net investment income $ 5.4 $ 5.2 $ 1.2 The following tables summarize the credit ratings of investments at December 31, 2020 and 2019: December 31, 2020 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 116.5 $ 118.7 53.0 % AA+, AA, AA-, A-1 22.7 23.3 10.4 A+, A, A- 57.5 59.4 26.5 BBB+, BBB, BBB- 21.7 22.6 10.1 Total $ 218.4 $ 224.0 100.0 % December 31, 2019 Amortized Cost Fair Value % of Total Fair Value S&P Global rating or equivalent (dollars in millions) AAA $ 78.8 $ 79.0 64.3 % AA+, AA, AA-, A-1 8.7 8.8 7.2 A+, A, A- 26.6 26.9 21.9 BBB+, BBB, BBB- 8.1 8.1 6.6 Total $ 122.2 $ 122.8 100.0 % 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 fixed maturities, available-for-sale on the consolidated balance sheets. As of December 31, 2020 and 2019, these required deposits had an amortized cost of $ 12.8 million and $ 10.6 million, respectively, and fair value of $ 13.6 million and $ 10.9 million, respectively. 96 4. FAIR VALUE OF FINANCIAL INSTRUMENTS The following tables provide information about our financial assets and liabilities measured and reported at fair value: 2020 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 17.0 $ — $ — $ 17.0 Municipal securities — 23.4 — 23.4 Corporate debt securities — 90.5 — 90.5 Residential mortgage-backed securities — 7.8 — 7.8 Commercial mortgage-backed securities — 58.4 — 58.4 Other debt obligations — 23.9 — 23.9 Total fixed maturities 17.0 204.0 — 221.0 Short-term investments 2.2 0.8 — 3.0 Cash equivalents 568.4 — — 568.4 Total Assets at fair value $ 587.6 $ 204.8 $ — $ 792.4 2019 Level 1 Level 2 Level 3 Total Fair Value (dollars in millions) Assets Fixed maturities: U.S. Treasury securities and agencies $ 9.8 $ — $ — $ 9.8 Municipal securities — 10.3 — 10.3 Corporate debt securities — 38.6 — 38.6 Residential mortgage-backed securities — 3.3 — 3.3 Commercial mortgage-backed securities — 31.5 — 31.5 Other debt obligations — 25.8 — 25.8 Total fixed maturities 9.8 109.5 — 119.3 Short-term investments 3.0 0.5 — 3.5 Cash equivalents 316.6 — — 316.6 Total Assets at fair value $ 329.4 $ 110.0 $ — $ 439.4 Liabilities Warrant liability $ — $ — $ 20.3 $ 20.3 Total Liabilities at fair value $ — $ — $ 20.3 $ 20.3 We estimate the fair value of all our different classes of Level 2 fixed rate 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. In conjunction with the closing of a note purchase agreement, we issued warrants that were disaggregated from the long-term debt in order to appropriately determine their standalone fair value. To calculate the fair value we utilized the BSM approach. The significant inputs in calculating the fair value of the warrants were the current price from the most recently completed 409A, the current risk-free rate used by the United States Treasury, the expected 97 term and the volatility assumption. As of December 31, 2019, the BSM calculation yielded a fair value of $ 7.2497 per share for each of the 2.8 million warrants for a standalone fair value of $ 20.3 million classified as long-term debt and warrants on the consolidated balance sheets. Upon the completion of our IPO, the warrant to purchase shares of preferred stock was converted into a warrant to purchase shares of our common stock. All warrants were exercised into shares of Class B common stock. As a result, the warrant liability was remeasured immediately prior to the IPO and reclassified to additional paid in capital within stockholders' equity on our consolidated balance sheets. During the year ended December 31, 2020 and 2019, we recognized an adjustment of $ 54.7 million and zero , respectively, to the fair value of the warrants within interest expense of our consolidated statements of operations and comprehensive loss. The carrying amount of long-term debt is recorded at historical amounts. The fair value of outstanding long-term debt is classified within Level 2 of the fair value hierarchy. The fair value is based on a model referencing observable interest rates and spreads to project and discount cash flows to present value. For the years ended December 31, 2020 and 2019 the carrying amounts and fair values of these financial instruments were as follows: Carrying amount as of December 31, 2020 Estimated Fair Value as of December 31, 2020 Carrying amount as of December 31, 2019 Estimated Fair Value as of December 31, 2019 (dollars in millions) Long-term debt $ 188.2 $ 209.0 $ 172.7 $ 200.8 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: 2020 2019 2018 (dollars in millions) Gross loss and LAE reserves, January 1 $ 140.7 $ 33.3 $ 1.6 Reinsurance recoverable on unpaid losses ( 18.9 ) ( 11.4 ) ( 0.8 ) Net loss and LAE reserves, January 1 121.8 21.9 0.8 Net incurred loss and LAE related to: Current year 341.9 312.6 43.7 Prior years 20.9 8.8 ( 0.2 ) Total incurred 362.8 321.4 43.5 Net paid loss and LAE related to: Current year 216.3 194.6 22.0 Prior years 110.7 26.9 0.4 Total paid 327.0 221.5 22.4 Net loss and LAE reserves, December 31 157.6 121.8 21.9 Plus reinsurance recoverable on unpaid losses 79.6 18.9 11.4 Gross loss and LAE reserves, December 31 $ 237.2 $ 140.7 $ 33.3 Incurred losses and LAE attributable to prior accident years was an increase of $ 20.9 million and $ 8.8 million during 2020 and 2019, respectively, and a decrease of $ 0.2 million during 2018. The increase to held loss reserves of prior years in 2020 of approximately $ 20.9 million was primarily related to higher than estimated reported losses resulting from frequency and severity in excess of expectations for bodily injury claims as well as higher emergence of collision claims from accident years 2019 and prior, partially due to timing of reported claims. The year ended December 31, 2020 also included development of incurred losses related to accident years 2019 and prior as a result of a change in estimate. The adjustments recorded in the year ended 98 December 31, 2020 were necessary in order to effectuate management’s best estimate for determining the estimated ultimate cost of settling claims using our knowledge and experience about past and current events and developments. The increase to held loss reserves of prior years in 2019 of approximately $ 8.8 million was primarily related to higher than estimated reported losses resulting from higher emergence on bodily injury, uninsured and under-insured bodily injury, and property damage coverages. Reconciliation of incurred and paid losses by LAE development to gross loss and loss expense reserves are as follows: 2020 2019 (dollars in millions) Losses—net of reinsurance $ 133.0 $ 106.6 LAE—net of reinsurance 24.6 15.2 Reinsurance recoverables on unpaid losses 79.6 18.9 Total loss and LAE reserves—gross of reinsurance $ 237.2 $ 140.7 The following table shows incurred and paid losses and allocated loss adjustment expenses, or ALAE, development by accident year for private passenger auto in aggregate, cumulative claim frequency is defined as the number of reported claims at the claim level which includes reported claims that do not result in a liability: Incurred Losses and ALAE—Net of Reinsurance Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 IBNR Reported Claims (1) (dollars in millions) 2017 $ 1.2 $ 1.1 $ 1.1 $ 1.1 $ — 543 2018 42.3 48.3 49.6 0.5 18,081 2019 287.3 306.3 14.2 89,823 2020 295.9 50.0 113,248 Total $ 652.9 $ 64.7 221,695 Cumulative Paid Losses and ALAE—Net of Reinsurance Accident Year 2017 (unaudited) 2018 (unaudited) 2019 (unaudited) 2020 (dollars in millions) 2017 $ 0.6 $ 0.9 $ 1.0 $ 1.1 2018 20.6 44.6 48.1 2019 177.0 277.7 2020 182.0 Total $ 508.9 Loss and ALAE reserves—net of reinsurance $ 144.0 Unallocated LAE reserves 13.6 Ceded unpaid loss and LAE 79.6 Loss and LAE reserves—gross of reinsurance $ 237.2 _______________ (1) Reported by claim event. 99 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, 2020: Year 1 2 3 4 Incremental Paid (1) 53.8 % 36.2 % 8.1 % 1.9 % _______________ (1) Supplemental information and unaudited . 6. REINSURANCE The following table reflects amounts affecting the consolidated balance sheets and statements of operations and comprehensive loss for ceded reinsurance as of and for the years ended December 31: 2020 2019 2018 (dollars in millions) Loss & LAE reserves: Direct $ 237.2 $ 140.7 $ 33.3 Ceded ( 79.6 ) ( 18.9 ) ( 11.4 ) Net loss and LAE reserves $ 157.6 $ 121.8 $ 21.9 Unearned premiums: Direct $ 157.1 $ 145.4 $ 47.3 Ceded ( 112.8 ) ( 17.4 ) ( 12.8 ) Net unearned premiums $ 44.3 $ 128.0 $ 34.5 Premiums written: Direct $ 616.8 $ 451.1 $ 106.4 Ceded ( 378.0 ) ( 82.3 ) ( 32.8 ) Net premiums written $ 238.8 $ 368.8 $ 73.6 Premiums earned: Direct $ 605.2 $ 352.9 $ 61.4 Ceded ( 282.7 ) ( 77.6 ) ( 21.2 ) Net premiums earned $ 322.5 $ 275.3 $ 40.2 Losses and LAE incurred: Direct $ 557.6 $ 395.0 $ 67.9 Ceded ( 194.8 ) ( 73.6 ) ( 24.4 ) Net losses and LAE incurred $ 362.8 $ 321.4 $ 43.5 If our reinsurance was cancelled at December 31, 2020 and 2019, the maximum amount of return ceded commissions due with the return of unearned premiums would have been $ 27.2 million and $ 4.1 million, respectively. Our reinsurance recoverable on unpaid losses was $ 109.1 million and $ 26.7 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, we recorded a provision for sliding scale commission of $ 8.1 million and $ 9.3 million, respectively, in reinsurance premiums payable on the consolidated balance sheets. As of December 31, 2020 and 2019, a provision for loss corridor of $ 29.5 million and $ 7.8 million, respectively, was recorded as a contra asset in reinsurance recoverable on the consolidated balance sheets. 7. EMPLOYEE BENEFIT PLANS Beginning May 1, 2018, we became employer of record providing employees with employer-related health and welfare plans, including a defined contributory retirement plan, to which we contribute a percentage of an employee's salary and is fully vested. During 2020, 2019 and 2018, we contributed $ 2.6 million, $ 1.3 million and $ 0.5 million, respectively, to employee benefit 401(k) plans. 100 8. LONG-TERM DEBT On April 17, 2019, we closed on a $ 65.0 million term loan, or Term Loan A, to a group of syndicated financial institutions including SunTrust Bank (now known as Truist Bank), Huntington National Bank, Silicon Valley Bank, or, collectively, the Lenders. The maturity of Term Loan A is October 16, 2020. Interest is paid monthly and is determined on a floating interest rate calculated on the 1-month LIBOR plus an applicable margin of 4 %. On June 26, 2019, we finalized an incremental term loan joinder agreement of $ 35.0 million to upsize Term Loan A with an additional lender (Western Alliance Bank) to bring the total Term Loan A principal balance to $ 100 million. On November 25, 2019, we entered into an amended and restated Term Loan A in conjunction with an additional closing on a note purchase agreement of $ 100.0 million, or Term Loan B, with Centerbridge Partners, L.P., a private equity investor, or collectively our term loans. The maturity of Term Loan B is November 25, 2024. Interest is determined on a floating interest rate calculated on the 3-month LIBOR plus an applicable margin of 7 %. In the event LIBOR is no longer available to the market, we will enter into an amended agreement, in accordance with the current agreement's terms, to reflect the alternate rate of interest based on this successor rate. We have the option to pay interest in-kind, or PIK, on Term Loan B until October 15, 2021. PIK interest will be added to the principal balance every 3 months until the end of the PIK Period, and interest will subsequently be paid quarterly. Through the year ended December 31, 2019, we have elected to PIK interest on Term Loan B. As a part of closing of Term Loan B, we issued warrants to purchase 2.8 million shares of our common stock with a strike price of $ 0.0001 per share and an expiration date of November 25, 2026. These warrants are classified as liabilities, within long-term debt on the consolidated balance sheets, because they may be settled with a variable number of our shares. The nature of these variable warrants is such that the Term Loan B and warrants holder will earn a rate of return between 20 % to 30 %. Accordingly, the warrants contract does not limit the number of shares that we could be required to issue. The fair value of these warrants as of December 31, 2019 was $ 7.2499 per share. Interest expense of $ 0.4 million related to the amortization of warrants discount was recognized during the year-ended December 31, 2019 on the consolidated statements of operations and comprehensive loss. The debt discount associated with these warrants, net of accumulated amortization and issuance costs, as of December 31, 2019 is approximately $ 19.5 million presented as long-term debt and warrants on the consolidated balance sheets. For further information about the exercise and conversion of these warrants and the impact on our consolidated statements of operations and comprehensive loss, see Note 4, “Fair Value of Financial Instruments.” In connection with the amended and restated Term Loan A on November 25, 2019, Silicon Valley Bank exited the Term Loan A syndication and their $ 24.9 million of outstanding debt was reallocated to two of the existing holders of Term Loan A on a pro rata basis. This required us to escrow $ 24.9 million of cash for a potential pay down of the corresponding debt. The cash in escrow is reflected as restricted cash on the consolidated balance sheets as of December 31, 2020. In February 2020, we amended Term Loan A to add a new financial institution (Goldman Sachs Lending Partners LLC) to the syndicate in the amount of $ 12.5 million. Accordingly, $ 12.4 million of the $ 24.9 million escrowed funds was remitted to us and the other $ 12.5 million was remitted to the two aforementioned existing holders to pay down the pro rata portion of the reallocated Term Loan A. In September 2020, we amended Term Loan A to add new financial institutions (Wells Fargo, Barclays, Morgan Stanley, Deutsche Bank and Citibank) to the syndicate in the amount of $ 13.5 million and extended the maturity of Term Loan A to October 15, 2021. As a part of the amended Term Loan A, the syndicate committed, pro rata, to a new $ 100 million revolving loan. Commitment fees accrue at 0.50 % per annum on the daily amount of unused revolver and is paid quarterly. For any amounts drawn on the revolving loan, interest accrues and is paid consistent with Term Loan A. In addition, there is a letter of credit fee of 4 % per annum on the average daily amount of issued letters of credit against the revolver and a 0.125 % per annum fronting fee based on the average daily amount of letter of credit exposure. We have no letters of credit outstanding as of December 31, 2020. In order to amend Term Loan A, we also amended Term Loan B as the terms are pari passu. Notable changes to Term Loan B include removal of the pay-down requirement after the completion of our IPO, an interest rate increase of 3.5 % (to 3-month LIBOR plus an applicable margin of 10.5 %) starting March 2021, and elimination of payment-in-kind, or PIK, interest after October 15, 2021. 101 We currently pay interest pursuant to the terms of the loan agreements and have the option to PIK on Term Loan B until October 15, 2021. PIK interest is added to the principal balance every 3 months until we no longer PIK interest, at which point interest is paid quarterly. We have elected to PIK interest on Term Loan B from the original date of closing through December 31, 2020. Deferred PIK interest was $ 9.1 million and $ 0.8 million as of December 31, 2020 and 2019. The following summarizes the carrying value of long-term debt and warrants as of December 31, 2020 and 2019: 2020 2019 (dollars in millions) Term Loan A $ 99.5 $ 99.5 Term Loan B 100.0 100.0 Warrants — 20.3 Total $ 199.5 $ 219.8 Accrued interest payable $ 10.2 $ 0.9 Unamortized discount and debt and warrant issuance costs ( 21.5 ) ( 28.5 ) Total $ 188.2 $ 192.2 The required principal payments on long-term debt are as follows: Years Ending Amount (dollars in millions) 2021 $ 99.5 2022 — 2023 — 2024 100.0 2025 — Total $ 199.5 102 9. INCOME TAXES We had no income tax expense (benefit) for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 (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 2020, 2019 and 2018 to pretax income as a result of the following: 2020 2019 2018 (dollars in millions) Loss before income taxes $ ( 363.0 ) $ ( 282.4 ) $ ( 69.1 ) Statutory U.S. federal income tax benefit ( 76.2 ) 21.0 % ( 59.3 ) 21.0 % ( 14.5 ) 21.0 % Valuation allowance on deferred tax assets 61.5 ( 16.9 ) 57.4 ( 20.3 ) 14.8 ( 21.4 ) Warrants fair value adjustment 11.5 ( 3.2 ) — — — — Share-based compensation 5.0 ( 1.4 ) 1.7 ( 0.6 ) — — Other ( 1.8 ) 0.5 0.2 ( 0.1 ) ( 0.3 ) 0.4 Income tax expense (benefit) $ — — % $ — — % $ — — % 103 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, 2020 and 2019: 2020 2019 (dollars in millions) Deferred tax assets: Unpaid losses and loss adjustment expenses $ 1.5 $ 0.9 Unearned premium reserves 1.9 5.4 Nondeductible accruals 0.9 0.5 Deferred rent 1.4 1.0 Research and development credits 0.9 0.9 Disallowed interest carryforward 3.7 0.5 Bad debt expense 0.8 0.4 Debt issuance costs and discount 0.5 0.7 Deferred compensation 1.4 0.7 Other 0.6 0.2 Net operating loss carryforward 129.4 69.7 Gross deferred assets $ 143.0 $ 80.9 Less valuation allowance ( 137.3 ) ( 76.8 ) Total deferred tax assets, less valuation allowance $ 5.7 $ 4.1 Deferred tax liabilities: Internally developed software 2.1 1.4 Fixed assets 1.9 1.8 Deferred acquisition costs 0.4 0.7 Unrealized gains 1.2 0.1 Other 0.1 0.1 Deferred tax liabilities 5.7 4.1 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; (7) and 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 $ 137.3 million has been established. We have carryforwards related to net operating losses of $ 591.7 million of which $ 339.4 million begin to expire in tax years 2035 through 2040, with the remaining $ 252.3 million carried forward indefinitely. We also have carryforwards for credits related to research and development costs of $ 0.9 million which expire between tax years 2036 through 2038, and state operating losses of $ 34.4 million which expire between tax years 2029 through 2040. We file a consolidated federal income tax return and certain state income tax returns. Tax years subsequent to 2017 are still subject to U.S. federal examinations. The federal statute of limitations is generally three years. 104 Currently all state income and franchise tax returns are within each taxing authorities statute of limitations and are still subject to examination. 10. CAPITAL STOCK In October 2020, our Board of Directors approved our amended and restated certificate of incorporation, which authorized additional shares bringing our total authorized shares to 1,000.0 million of Class A common stock, 269.0 million shares of Class B Common Stock and 100.0 million shares of Preferred Stock. All classes of stock have a par value of $ 0.0001 per share. As of December 31, 2020 the Company had 59.4 million shares of Class A Common Stock, 192.2 million shares of Class B Common Stock, and zero shares of preferred stock issued and outstanding. In October 2020, we completed our IPO, which resulted in the issuance and sale of 24.2 million shares of Class A common stock at the IPO price of $ 27.00 . Concurrently, we issued and sold 18.5 million shares of our Class A common stock in private placements. We received net proceeds of $ 1.1 billion after deducting certain underwriting discounts and commissions and other offering costs of $ 57.5 million. All shares of our common stock and redeemable convertible preferred stock outstanding immediately prior to our IPO were converted into shares of our Class B common stock, and all warrants were exercised into shares of Class B common stock. After completion of the IPO, 16.7 million shares of Class B common stock were converted to Class A common stock. Other rights, privileges, and preferences of our common stock are as follows: Dividends — Class A and Class B common stock are entitled to the same dividend rights. Voting Rights —Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. In October 2020, the Board of Directors increased the size of the board to eleven and filled the resulting four vacancies by the affirmative vote of a majority of our shareholders. Effective October 27, 2020, the Board of Directors assigned members already in office to one of three classes — Class I, Class II or Class III. At the first, second and third annual meetings of stockholders following such initial classification, the initial terms of the Class I, Class II and Class III directors, respectively, expire and such directors are elected for a full term of three years. At each succeeding annual meeting of stockholders, directors are elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Liquidation Preferences —In the event of any liquidation, dissolution, or winding up of our business, whether voluntary or involuntary, the holders of Class A and Class B common stock are entitled to the proceeds that shall be distributed to the common stockholders 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. Undesignated Preferred Stock —Shares of preferred stock may be issued from time to time in one or more series. The Board of Directors may determine, in whole or in part, the number, preferences, limitations or relative rights of any such series before the issuance of any shares of that series. As of December 31, 2019, our certificate of incorporation, as amended and restated, authorized 266.0 million of voting common stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, 19.6 million of Series D preferred voting stock and 30.1 million of Series E preferred voting stock. All classes of stock have a par value of $ 0.0001 per share. The voting, dividend, and liquidation rights of the holders of the common stock are subject to and qualified by the rights, powers, and preferences of the holders of the preferred stock. The redeemable convertible preferred stock was recorded in mezzanine equity because while it is not mandatorily redeemable, it becomes redeemable at the option of the preferred stockholders upon the occurrence of a deemed liquidation event that is considered not solely within our control. 105 On September 20, 2019, 21.2 million Series E preferred shares were issued (as part of the “Series E Transaction”) to investors at a price per share of $ 16.4906 for a total cash contribution of $ 350.0 million. Additionally, the Series E transaction was considered a qualifying event for the Simple Agreement for Future Equity ("SAFE") that was originally entered into with an outside investor in June 2019 for a total cash contribution of $ 10.0 million. The SAFE was recorded as a liability prior to the Series E transaction. In accordance with the terms of the agreement, the SAFE converted into 1.3 million Series E preferred shares at a conversion price of $ 7.7842 per share. As of December 31, 2019, we recognized $ 11.2 million in interest expense in the consolidated statements of operations and comprehensive loss due to the change in fair value between the issuance date and the conversion date of the SAFE. As part of the Series E transaction, our certificate of incorporation was amended, authorizing 266.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, 19.6 million of Series D preferred voting stock and 30.1 million of Series E preferred voting stock. All classes of stock have a par value of $ 0.0001 per share. On January 2, 2019 a holder of 1.3 million Series C non-voting preferred shares converted its shares to Series C voting preferred shares. On December 19, 2018, a holder of 1.8 million Series C non-voting preferred shares converted its shares to C voting preferred shares. On November 1, 2018, 19.3 million Series D voting preferred shares were issued (as part of the “Series D Transaction”) to both inside and outside investors at a price per share of $ 5.17071 for a total cash contribution of $ 100.0 million. As part of the Series D transaction, our certificate of incorporation was amended, authorizing 240 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.4 million Series C voting preferred shares, and 3.1 million Series C non-voting preferred shares. All classes of stock have a par value of $ 0.0001 per share. On June 19, 2018, a 10-for-1 stock split was approved by our Board of Directors for our common and preferred stock. As part of the stock split, our certificate of incorporation was amended, authorizing 180.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.8 million Series C voting preferred shares, and 3.2 million Series C non-voting preferred shares. All classes of stock have a par value of $ 0.0001 per share. On March 16, 2018, 32.3 million Series C voting preferred shares and 3.1 million Series C non-voting preferred shares were purchased (as part of the “Series C Transaction”) by both inside and outside investors at a price per share of $ 1.44206 for a total cash contribution of $ 51.0 million. Series C non-voting preferred shares may be converted at any time to voting preferred shares by the holder of the non-voting shares. As part of the Series C Transaction, our certificate of incorporation was amended, authorizing 180.0 million common shares of voting stock, 40.5 million of Series A preferred voting stock, 41.8 million Series B preferred voting stock, 35.8 million Series C preferred voting stock and 3.2 million Series C preferred non-voting stock. All classes of stock have a par value of $ 0.0001 per share. 106 The following table displays our capital stock as of December 31, 2019: Shares Authorized Shares Issued and Outstanding Carrying Value Redemption Value Common Stock Issuable Upon Conversion Conversion Price Per Share Redeemable on or After Common Stock-Voting (1) 266.0 44.4 $ — — Preferred Stock (1) Preferred-Series A Redeemable Convertible (2) 40.5 40.0 5.1 $ 5.0 40.0 0.03 - 0.29 September 6, 2026 Preferred-Series B Redeemable Convertible 41.8 41.7 33.7 33.8 41.7 0.81 September 6, 2026 Preferred-Series C Redeemable Convertible - Voting 35.4 35.4 50.9 51.0 35.4 1.44 September 6, 2026 Preferred-Series D Redeemable Convertible 19.6 19.3 99.9 100.0 19.3 5.17 September 6, 2026 Preferred-Series E Redeemable Convertible (3) 30.1 22.5 370.8 360.0 22.5 7.78 - 16.49 September 6, 2026 Total Preferred Stock 167.4 158.9 $ 560.4 $ 549.8 158.9 _______________ (1) All classes of stock have a par value of $ 0.0001 per share (2) Shares issued for Series A-1 had a conversion price of $ 0.03 . Shares issued for Series A-2 had a conversion price of $ 0.11 . Shares issued for Series A-3 had a conversion price of $ 0.29 . Collectively these shares are referred to as Series A. (3) Shares issued for Series E had a conversion price of $ 16.49 . Shares issued for Series E-1 had a conversion price of $ 7.78 . Collectively these shares are referred to as Series E. 11. SHARE-BASED COMPENSATION 2020 Equity Incentive Plan We maintain an equity incentive plan, the 2020 Equity Incentive Plan, or the 2020 Plan, for the issuance and grant of equity awards (restricted stock, RSUs, and incentive and nonqualified stock options) to our officers, directors, employees and certain advisors. As of December 31, 2020, the number of shares initially authorized under the 2020 Plan was 41.2 million Class A common shares, inclusive of available shares previously reserved for issuance under 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, commencing on January 1, 2021 and ending 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 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 shares. The aggregate maximum number of shares of Class A common stock that may be issued pursuant to the exercise of incentive stock options is 120.0 million shares. As of December 31, 2020, the number of shares available for issuance under the 2020 Plan was 29.4 million. In October 2020, our board of directors adopted and our stockholders approved the 2020 Employee Stock Purchase Plan (the “ESPP”), which became effective immediately prior to our IPO date. The number of shares of Class A common stock initially reserved for issuance under the ESPP is limited to 5.0 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 31st of the preceding year and (ii) 7.5 million shares of Class A common stock. Our board of directors may act prior to January 1st 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 Equity Incentive Plan, or the 2015 Plan, under which the Company may grant equity awards (restricted stock, and incentive and nonqualified stock options) to its 107 officers, directors, employees and certain advisors. In October 2020, this plan was superseded by the 2020 Plan and all reserved shares under the 2015 Plan were transferred to the 2020 Plan. The following table displays share-based compensation expense recorded in the consolidated statements of operations and comprehensive loss: Years Ended December 31, 2020 2019 2018 (dollars in millions) Share-based compensation expense: Loss and loss adjustment expenses $ 0.6 $ — $ — Sales and marketing 1.0 — — Other insurance (benefit) expense 1.0 — — Technology and development 5.8 — — General and administrative 20.4 10.0 0.1 Total share-based compensation expense $ 28.8 $ 10.0 $ 0.1 The following table provides total share-based compensation expense by type of award: Years Ended December 31, 2020 2019 2018 (dollars in millions) Share-based compensation expense: Restricted stock unit expense $ 0.6 $ — $ — Stock option expense 28.2 10.0 0.1 Total share-based compensation expense $ 28.8 $ 10.0 $ 0.1 In March 2020, a current investor completed a tender offer for common stock from vested shareholders, many of whom were employees or members of the Board of Directors. To encourage participation, the tender offer was made at a price in excess of the fair value of our common stock. In February 2019, a similar tender offer by another investor was completed. As a result, we recognized $ 25.1 million and $ 8.6 million of share-based compensation expense related to these tender offers during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, there was $ 12.8 million and $ 6.9 million of unrecognized compensation cost related to unvested stocks options and restricted stock units. The remaining costs are expected to be recognized over a period of six and four years , respectively. Restricted Stock Units A summary of RSU activity for the year ended December 31, 2020 is as follows: 2020 Restricted Stock Units Number of Shares Weighted-Average Grant Date Fair Value per Share Aggregate Intrinsic Value (in millions, except exercise price and term amounts) Nonvested at January 1, 2020 — $ — $ — Granted 0.4 17.72 Vested — 7.25 0.3 Forfeited, expired or canceled — 22.89 Nonvested at December 31, 2020 0.4 $ 18.41 $ 6.2 108 Stock Options The fair value of each stock option award is estimated on the date of grant using a BSM option-pricing model that uses the weighted-average assumptions noted in the following table. Expected volatilities are based on historical volatility of comparable publicly held companies because we did not have sufficient company-specific volatility at the time of grant. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The assumptions used in the BSM option-pricing model for options granted by us in 2020 are as follows: 2020 Range Weighted-Average Expected term (in years) 6.0 Interest rate 0.3 % - 1.7 % 0.9 % Volatility 19.7 % - 50.6 % 42.0 % Grant date fair value per stock option $ 3.2 A summary of option activity for the years ended December 31, 2020 and 2019 is as follows: 2020 Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in millions, except exercise price and term amounts) Outstanding at January 1, 2020 12.3 $ 1.42 8.22 $ 70.4 Granted 1.6 7.76 Exercised ( 2.8 ) 0.70 41.5 Forfeited, expired or canceled ( 0.7 ) 5.00 Outstanding at December 31, 2020 10.4 $ 2.39 7.75 $ 137.7 2019 Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) Aggregate Intrinsic Value (in millions, except exercise price and term amounts) Outstanding at January 1, 2019 10.8 $ 0.60 8.62 $ 17.8 Granted 5.3 2.75 Exercised ( 2.9 ) 0.97 18.6 Forfeited, expired or canceled ( 0.9 ) 0.46 Outstanding at December 31, 2019 12.3 $ 1.42 8.22 $ 70.4 109 A summary of total options outstanding and exercisable at December 31, 2020: Options Outstanding Options Exercisable Options Number of Shares Weighted-Average Exercise Price Weighted-Average Remaining Contractual Term (in Years) 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: $ 0.01 - $ 1.00 4.1 $ 0.27 6.53 4.1 $ 0.27 6.53 $ 1.00 - $ 2.50 4.7 $ 2.40 8.29 4.7 $ 2.40 8.29 $ 2.50 - $ 13.00 1.6 $ 7.75 9.28 1.6 $ 7.75 9.28 The 2015 and 2020 Plans permit the optionee to early exercise 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 Plans require us to repurchase the shares at the exercise price of the award. The repurchase feature is used to require the employee to remain through the requisite service or vesting period to receive the full economic benefit of the award. Given the repurchase feature functions as a forfeiture provision for nonvested shares, we record the exercise cost of nonvested shares as a deposit liability for those shares settling in cash. As the shares vest, the deposit liability is reduced and Paid-In Capital is increased. As of December 31, 2020 and 2019, the early exercise deposit liability was $ 1.3 million and $ 1.5 million, respectively, and is included in other liabilities on the consolidated balance sheets. 12. RELATED PARTY LOANS In July 2018 and April 2019, we entered into partial recourse promissory notes with several key employees for which proceeds were used to exercise 5.6 million in common stock options. The “recourse portion” of the note was an amount equal to 50 % of the initial principal amount plus interested accrued on 100 % of the principal amount, while the “non-recourse portion” was equal to 50 % of the initial principal amount. The loans originally totaled $ 4.3 million and interest was due on the unpaid balances at a weighted-average interest rate of 2.80 % compounded annually. As the stated interest rate was below the market rate that would have been charged for a loan of this nature, the transaction was accounted for as a modification of the stock options. An incremental expense was determined based on the difference in the fair value of the options immediately prior to the modification and the modified fair value. While we recognized the exercised options as shares outstanding, we did not recognize the impact of the underlying loan transaction and option exercise as the transaction is considered a non-recourse receivable in accordance with ASC 718, Compensation—Stock Compensation. In May 2020, we settled a related party loan by accepting 0.3 million unvested shares and 0.1 million vested shares in exchange for the full repayment of the related $ 0.9 million related party loan and accrued interest. We recognized $ 0.7 million of treasury stock as a result. In October 2020, our Board of Directors approved the forgiveness of all outstanding principal and accrued but unpaid interest for each of the remaining related party loans. As the exercise price had effectively been reduced to zero, the forgiveness was accounted for as a modification of the stock options. An incremental share-based compensation cost of $ 3.4 million was determined based on the difference in the fair value of the options immediately prior to the modification and the modified fair value. Based on 0.7 million shares having vested as of December 31, 2020, we recognized $ 0.5 million of share-based compensation expense as of December 2020. The remaining $ 2.9 million share-based compensation expense will be recognized ratably over the remaining vesting period of 6 years. As of December 31, 2020 there were no related party loans outstanding. As of December 31, 2019, there were related party loans outstanding with several key employees of $ 4.3 million with a weighted-average interest rate of 2.80 %. 110 13. COMMITMENTS AND CONTINGENCIES We lease our office facilities under various non-cancelable operating lease agreements that expire in various years through February 2028. Some of these leases provide for payment by the lessee of property taxes, insurance premiums, cost of maintenance and other costs. During the normal course of business, we also 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 operating leases and other arrangements as of December 31, 2020: Operating Leases Purchase Obligations (dollars in millions) 2021 $ 3.9 $ 10.0 2022 4.4 9.3 2023 4.4 4.8 2024 4.3 0.9 2025 1.5 0.6 2026 and thereafter 3.1 — Total $ 21.6 $ 25.6 Base rent and related rent expenses was $ 4.8 million, $ 2.4 million and $ 0.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. We entered into office leases during 2020 and 2019. As part of the lease, the lessor provided us with tenant improvement incentives. These non-cash incentives were zero and $ 1.5 million as of December 31, 2020 and 2019, respectively, and have been capitalized as a leasehold improvement asset with an offset to deferred rent as part of other liabilities on the consolidated balance sheets. These leasehold improvement incentives are being amortized on a straight-line basis over the lease period as part of depreciation and amortization with deferred rent amortization offset against rent expense and included in general and administrative expenses on the consolidated statements of operations and comprehensive loss. There are no litigation matters outstanding or pending that will have a material effect on our financial position or results of operations. We are contingently liable for possible future assessments under regulatory requirements for insolvencies and impairments of unaffiliated insurance companies. 111 14. OTHER COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME The following table presents the changes in our accumulated other comprehensive income, or AOCI, for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 (dollars in millions) Changes in net unrealized gains on investments: Accumulated other comprehensive income beginning balance $ 0.6 $ — $ — Other comprehensive income before reclassifications 5.3 0.6 — Realized gains on investments reclassified from AOCI to net loss ( 0.3 ) — — Net current period other comprehensive income 5.0 0.6 — Accumulated other comprehensive income ending balance $ 5.6 $ 0.6 $ — 15. LOSS PER SHARE EPS is presented for both basic EPS and diluted EPS. We compute basic EPS by dividing net income (loss) attributable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. The calculation of income (loss) available to common stockholders and EPS is based on the underlying premise that all income after payment of dividends on preferred shares is available to and will be distributed to the common stockholders. In addition to common shares outstanding, the computation of basic EPS includes instruments for which the holder has (or is deemed to have) the present rights as of the end of the reporting period to share in current period earnings (loss) with common stockholders (i.e., participating securities and common shares that are currently issuable for little or no cost to the holder). Accordingly, we include in the denominator of our basic EPS computation the weighted-average number of shares of common stock that would be issued upon the full exercise of the warrants which have an insignificant exercise price of $ 0.0001 per share. Diluted EPS includes all the components of basic EPS, plus the dilutive effect of common stock equivalents such as convertible securities and stock options, but excludes those common stock equivalents from the calculation of diluted EPS when the effect of inclusion, assessed individually, would be anti-dilutive. Our potentially dilutive securities are considered antidilutive as they create a lower loss per share; thus, diluted EPS is equal to basic EPS. Earnings are allocated equally between each class of common stock because they are entitled to the same liquidation and dividend rights. 112 The following table displays the computation of basic and diluted loss per share of common stock: For the Years Ended December 31, 2020 2019 2018 (in millions, except per share amounts) Net loss $ ( 363.0 ) $ ( 282.4 ) $ ( 69.1 ) Weighted-average common shares outstanding: basic and diluted 75.5 33.9 25.3 Loss per common share: basic and diluted $ ( 4.81 ) $ ( 8.33 ) $ ( 2.73 ) We excluded the following potential common shares, presented based on amounts outstanding at each year end, from the computation of diluted net loss per share attributable to common stockholders for the years indicated because including them would have had an anti-dilutive effect: As of December 31, 2020 2019 2018 (in millions) Options to purchase common stock 10.4 12.3 10.8 Nonvested shares subject to repurchase 5.0 7.2 9.5 Restricted stock units 0.4 — — Redeemable convertible preferred stock (as converted to common stock) — 158.9 136.4 Warrants to purchase redeemable convertible preferred stock (as converted to common stock) — 0.6 0.6 15.8 179.0 157.3 16. STATUTORY FINANCIAL INFORMATION Root Insurance Company and Root Property & Casualty, or our insurance subsidiaries, are required to prepare statutory financial statements in conformity with the basis of accounting practices prescribed or permitted by the Ohio DOI and Delaware DOI, respectively. Ohio and Delaware have adopted the NAIC Accounting Practices and Procedures Manual as the basis of their statutory accounting practices. As of December 31, 2020, Root Property & Casualty maintained statutory capital and surplus of $ 16.3 million and had a statutory net loss of $ 25.5 million for the year ended December 31, 2020. Root Insurance Company maintained statutory capital and surplus and had statutory net loss as of and for the years ended December 31, 2020, 2019 and 2018 as follows: As of and for the Years Ended December 31, 2020 2019 2018 (in millions) Statutory capital and surplus $ 100.1 $ 152.3 $ 73.5 Statutory net loss ( 123.8 ) ( 157.6 ) ( 58.3 ) The payment of dividends by Root Insurance Company and Root Property & Casualty are subject to restrictions set forth in the insurance laws and regulations of the States of Ohio and Delaware, respectively, or the insurance laws. The insurance laws require domestic insurance companies to notify the supervisory superintendent, commissioner and/or director to seek prior regulatory approval to pay a dividend or distribute cash or other property if the fair market value thereof, together with that of other dividends or distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory-basis policyholders' surplus as of the prior December 31 or (2) the statutory-basis net income of the insurer as of the prior December 31. During the years ended December 31, 2020, 2019 and 2018, we 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. 113 Additionally, following any dividend, an insurers policyholder surplus must be reasonable in relation to the insurer's outstanding liabilities and adequate for its financial needs. The NAIC Risk-Based Capital, or RBC, model law requires every insurer to calculate its total adjusted capital and RBC requirement to ensure insurer solvency. Regulatory guidelines provide for an insurance commissioner to intervene if the insurer experiences financial difficulty, as evidenced by a company's total adjusted capital falling below established relationships to required RBC. The model includes components for asset risk, underwriting risk, credit risk and other factors. The State of Ohio and the State of Delaware impose minimum RBC requirements that are developed by the NAIC. The formulas in the model for determining the amount of RBC specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk. Regulatory compliance is determined by a ratio of total adjusted capital to authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, all of which require specified corrective action. The statutory surplus for Root Insurance Company exceeded the minimum RBC requirements for the years ended December 31, 2020 and 2019. The statutory surplus for Root Property & Casualty exceeded the minimum RBC requirements for the year ended December 31, 2020. 17. GEOGRAPHICAL BREAKDOWN OF DIRECT WRITTEN PREMIUM Direct written premium, or DWP, by state is as follows: December 31, 2020 2019 2018 Amount % of DWP Amount % of DWP Amount % of DWP State (dollars in millions) Texas $ 132.5 21.5 % $ 94.7 21.0 % $ 34.2 32.1 % Georgia 72.4 11.7 44.0 9.7 — — Kentucky 33.9 5.5 46.5 10.3 11.0 10.3 Pennsylvania 30.2 4.9 25.2 5.6 5.2 4.9 Arizona 28.4 4.6 26.7 5.9 9.1 8.6 Louisiana 28.0 4.5 15.3 3.4 3.8 3.6 Missouri 26.8 4.3 22.0 4.9 4.6 4.3 Utah 26.0 4.2 17.6 3.9 5.5 5.2 Oregon 22.3 3.6 12.4 2.7 1.9 1.8 Ohio 20.4 3.3 22.8 5.0 9.0 8.5 All others states 195.9 31.9 123.9 27.6 22.1 20.7 Total $ 616.8 100.0 % $ 451.1 100.0 % $ 106.4 100.0 % 18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The consolidated statements of operations for the quarterly periods in 2020 and 2019 are unaudited and in the opinion of management include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our consolidated statements of operations and comprehensive loss. 114 For the 2020 Quarter Ended March 31 June 30 September 30 December 31 (in millions, except per share data) Revenue: Net premiums earned (1) $ 117.8 $ 115.7 $ 44.9 $ 44.1 Net investment income 1.9 1.3 1.1 1.1 Net realized gains on investments — 0.1 0.1 0.1 Fee and other income 4.3 4.3 4.4 5.6 Total revenue $ 124.0 $ 121.4 $ 50.5 $ 50.9 Operating expenses: Loss and loss adjustment expenses (1) 129.9 97.3 76.1 59.5 Sales and marketing 35.8 17.4 36.9 49.6 Other insurance (benefit) expense (1) 11.3 15.3 ( 26.3 ) ( 2.1 ) Technology and development 16.0 11.3 12.9 12.7 General and administrative (3) 30.9 11.3 16.6 19.7 Total operating expenses $ 223.9 $ 152.6 $ 116.2 $ 139.4 Interest expense (2) 5.7 7.7 19.5 44.8 Loss before income tax expense $ ( 105.6 ) $ ( 38.9 ) $ ( 85.2 ) $ ( 133.3 ) Income tax expense — — — — Net loss $ ( 105.6 ) $ ( 38.9 ) $ ( 85.2 ) $ ( 133.3 ) Other comprehensive income ( 1.8 ) 6.7 0.1 — Comprehensive loss $ ( 107.4 ) $ ( 32.2 ) $ ( 85.1 ) $ ( 133.3 ) Loss per common share: basic and diluted $ ( 2.69 ) $ ( 1.03 ) $ ( 2.20 ) $ ( 0.72 ) Weighted-average common shares outstanding: basic and diluted 39.3 37.9 38.8 185.4 (1) In July 2020, we increased our use of third-party quota share reinsurance whereby we began ceding approximately 70 % of direct earned premium to our third-party reinsurers. This, in turn, resulted in higher cessions of incurred losses and higher ceding commission contra-expense. For further information, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies.” (2) In October 2020, in connection with our IPO, the 2.8 million liability classified warrants were exercised. As a result, the warrant liability was remeasured immediately prior to their exercise and the corresponding change in fair value was recognized as interest expense in the period. For further information, see Note 4, “Fair Value of Financial Instruments.” (3) In March 2020, a tender offer for common stock from vested shareholders was completed, many of whom were employees or members of the Board of Directors. The tender offer was made at a price in excess of the fair value of our common stock. As a result we recognized $ 17.8 million of share-based compensation expense in General and administrative during the quarter ended March 31, 2020. 115 For the 2019 Quarter Ended March 31 June 30 September 30 December 31 (in millions, except per share data) Revenue: Net premiums earned $ 39.1 $ 59.5 $ 75.8 $ 100.9 Net investment income 0.7 1.0 1.1 2.4 Fee and other income 1.6 2.2 2.7 3.2 Total revenue $ 41.4 $ 62.7 $ 79.6 $ 106.5 Operating expenses: Loss and loss adjustment expenses 50.0 59.6 100.9 110.9 Sales and marketing 16.0 23.2 34.4 36.0 Other insurance expense 8.2 10.7 15.2 18.2 Technology and development 2.8 5.6 7.0 8.6 General and administrative 13.9 8.5 9.0 11.6 Total operating expenses $ 90.9 $ 107.6 $ 166.5 $ 185.3 Interest expense (1) 0.2 2.4 13.3 6.4 Loss before income tax expense $ ( 49.7 ) $ ( 47.3 ) $ ( 100.2 ) $ ( 85.2 ) Income tax expense — — — — Net loss $ ( 49.7 ) $ ( 47.3 ) $ ( 100.2 ) $ ( 85.2 ) Other comprehensive income: Changes in unrealized gain on investments 0.2 0.5 0.1 ( 0.2 ) Comprehensive loss $ ( 49.5 ) $ ( 46.8 ) $ ( 100.1 ) $ ( 85.4 ) Loss per common share: basic and diluted $ ( 1.61 ) $ ( 1.44 ) $ ( 2.88 ) $ ( 2.30 ) Weighted-average common shares outstanding: basic and diluted 30.9 32.8 34.8 37.1 (1) During the three months ended September 30, 2019, the SAFE instrument was remeasured immediately prior to its conversion into shares of our preferred stock and the corresponding change in fair value was recognized as interest expense. Moreover, we executed new term loans during 2019 that resulted in additional interest expense, debt related fees that were expensed as incurred, and amortization of certain capitalized debt issuance costs. 116 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Balance Sheets (Parent Company) (in millions, except par value) As of December 31, 2020 2019 Assets Other investments $ 0.5 $ — Cash and cash equivalents 1,043.1 193.2 Restricted cash 1.0 24.9 Investments in subsidiaries 115.0 137.0 Other assets 34.6 16.4 Intercompany receivable 43.3 18.2 Total Assets $ 1,237.5 $ 389.7 Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity (Deficit) Liabilities: Long-term debt and warrants $ 188.2 $ 192.2 Accounts payable and accrued expenses 8.2 4.4 Other liabilities 8.7 6.7 Total liabilities 205.1 203.3 Commitments and Contingencies Redeemable convertible preferred stock, $ 0.0001 par value, zero and 158.9 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (liquidation preference of zero and $ 549.8 , respectively) — 560.4 Stockholders’ equity (deficit): Class A common stock, $ 0.0001 par value, 59.4 and zero shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — — Class B common stock, $ 0.0001 par value, 192.2 and 44.4 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively — — Treasury stock, at cost ( 0.8 ) ( 0.1 ) Additional paid-in capital 1,775.6 10.5 Accumulated other comprehensive income 5.6 0.6 Accumulated loss ( 748.0 ) ( 385.0 ) Total stockholders’ equity (deficit) 1,032.4 ( 374.0 ) Total liabilities, redeemable convertible preferred stock and stockholders’ equity (deficit) $ 1,237.5 $ 389.7 See Notes to Condensed Combined Financial Statements 117 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Operations and Comprehensive Loss (Parent Company) (in millions) For the Years Ended December 31, 2020 2019 2018 Revenue: Net investment income $ 0.9 $ 1.6 $ 0.4 Total revenue 0.9 1.6 0.4 Operating expenses: Technology and development 19.5 3.5 — General and administrative 37.8 15.7 0.4 Total operating expenses 57.3 19.2 0.4 Interest expense 77.7 22.3 0.9 Net loss before equity loss of subsidiaries ( 134.1 ) ( 39.9 ) ( 0.9 ) Net loss of subsidiaries ( 228.9 ) ( 242.5 ) ( 68.2 ) Net loss ( 363.0 ) ( 282.4 ) ( 69.1 ) Other comprehensive income of subsidiaries 5.0 0.6 — Comprehensive loss $ ( 358.0 ) $ ( 281.8 ) $ ( 69.1 ) See Notes to Condensed Combined Financial Statements 118 ROOT, INC. and CARET HOLDINGS, INC. Schedule II: Condensed Combined Financial Information of Registrant Statements of Cash Flows (Parent Company) (in millions) For the Years Ended December 31, 2020 2019 2018 Cash flows from operating activities: Net Loss $ ( 363.0 ) $ ( 282.4 ) $ ( 69.1 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation 3.7 1.4 0.1 Tender offer 25.1 8.6 — Depreciation and amortization, net 11.8 3.5 0.2 Change in equity in subsidiaries 228.9 242.5 68.2 SAFE fair value adjustment — 11.2 — Warrants fair value adjustment 54.7 — — Paid-in kind interest expense 9.1 0.8 — Changes in operating assets and liabilities: Other assets ( 15.5 ) ( 1.2 ) ( 1.1 ) Accounts payable and accrued expenses 3.8 4.9 ( 0.4 ) Other liabilities 2.1 0.6 0.3 Intercompany, net ( 23.6 ) ( 7.2 ) ( 11.0 ) Net cash used in operating activities ( 62.9 ) ( 17.3 ) ( 12.8 ) Cash flows from investing activities: Purchases of investments ( 0.5 ) — ( 9.8 ) Proceeds from maturities, call and pay downs of fixed maturities available-for-sale — 1.7 8.2 Capitalization of internally developed software ( 5.4 ) ( 3.9 ) — Purchases of fixed assets ( 1.8 ) ( 6.5 ) ( 1.0 ) Investment in subsidiaries ( 201.9 ) ( 333.0 ) ( 95.0 ) Net cash used in investing activities ( 209.6 ) ( 341.7 ) ( 97.6 ) Cash flows from financing activities: Proceeds from issuance of common stock from IPO and concurrent private placements, net of issuance cost 1,098.1 — — Proceeds from exercise of stock options 2.1 1.9 0.1 Proceeds from issuance of preferred stock, net of issuance cost — 349.6 150.8 Proceeds from debt and warrants issuance, net of issuance cost 12.0 189.5 — Repayments of long-term debt ( 13.5 ) ( 15.5 ) — Proceeds from SAFE — 10.0 — Purchases of treasury stock ( 0.2 ) — — Net cash provided by financing activities 1,098.5 535.5 150.9 Net increase in cash and cash equivalents 826.0 176.5 40.5 Cash, cash equivalents and restricted cash at beginning of year 218.1 41.6 1.1 Cash, cash equivalents and restricted cash at end of year $ 1,044.1 $ 218.1 $ 41.6 Supplemental disclosures: Interest paid $ 4.5 $ 4.3 $ 0.8 Federal income taxes paid — — — Leasehold improvements - noncash — 1.5 2.6 Conversion of SAFE to preferred stock - noncash — 11.2 — Conversion of preferred stock to common stock - non cash 560.4 — — Conversion of warrants to common stock - non-cash 75.0 — — Purchases treasury stock - non-cash 0.5 — — See Notes to Condensed Combined Financial Statements 119 ROOT, INC. and CARET HOLDINGS, INC. Notes to Condensed Combined Financial Statements (Parent Company) 1. Business Caret Holdings, Inc. is a holding company which was formed in 2015 to develop and launch a direct-to-consumer personal automobile insurance and mobile technology company. In August 2019 a new holding company, Root, Inc. was formed, which became the parent of Caret Holdings, Inc. and maintains 100% ownership of Caret Holdings, Inc. 2. Accounting Policies Basis of Combination —The condensed combined financial statements include the accounts of Root, Inc. and its wholly owned subsidiary, Caret Holdings, Inc., and are prepared in accordance with accounting principles generally accepted in the United States. These financial statements have been combined in order to present comparative parent company financial statements for 2020, 2019 and 2018 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. 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. 120 ROOT, INC. AND SUBSIDIARIES Schedule V: Valuation and Qualifying Accounts For the Years Ended December 31, 2020, 2019 and 2018 (in millions) Additions Balance at beginning of period Charged to costs and expenses Charge to other accounts Deductions Balance at end of period Year Ended December 31, 2018 Valuation allowance for deferred tax assets $ 4.6 $ 14.8 $ — $ — $ 19.4 Allowance for premium receivables $ — $ 0.3 $ — $ ( 0.3 ) $ — Year Ended December 31, 2019 Valuation allowance for deferred tax assets $ 19.4 $ 57.4 $ — $ — $ 76.8 Allowance for premium receivables $ — $ 9.0 $ — $ ( 7.0 ) $ 2.0 Year Ended December 31, 2020 Valuation allowance for deferred tax assets $ 76.8 $ 61.5 $ ( 1.0 ) $ — $ 137.3 Allowance for premium receivables $ 2.0 $ 23.6 $ — $ ( 22.1 ) $ 3.5 121 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None. 122