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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____________to____________

Commission File Number: 001-39658
ROOT, INC.
(Exact name of Registrant as specified in its charter)
Delaware84-2717903
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
80 E. Rich Street, Suite 500
Columbus, Ohio
43215
(Address of principal executive offices)(Zip Code)
(866) 980-9431
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock,
$0.0001 par value per share
ROOTThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer
Non-accelerated filer ☐
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of April 23, 2024, the number of outstanding shares of the registrant’s Class A common stock, par value $0.0001 per share, was 9.9 million and the number of outstanding shares of the registrant’s Class B common stock, par value $0.0001 per share, was 5.0 million.



TABLE OF CONTENTS
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “path,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
our ability to retain existing customers, acquire new customers and expand our customer reach;
our expectations regarding our future financial performance, including total revenue, gross profit/(loss), net income/(loss), direct contribution, adjusted EBITDA, net loss and loss adjustment expense, or LAE, ratio, net expense ratio, net combined ratio, gross loss ratio, marketing costs and costs of customer acquisition, gross LAE ratio, gross expense ratio, gross combined ratio, operating expenses, quota share levels, changes in unencumbered cash balances and expansion of our new and renewal premium base;
our ability to realize profits, acquire customers, retain customers, contract with additional partners to utilize the products, or achieve other benefits from our embedded insurance offering;
our ability to expand our distribution channels through additional partnership relationships, digital media, independent agents and referrals;
our ability to drive a significant long-term competitive advantage through our partnership with Carvana Group, LLC, or Carvana and other partnerships;
our ability to develop products for embedded insurance and other partners;
the impact of supply chain disruptions, increasing inflation, a recession and/or disruptions to properly functioning financial and capital markets and interest rates on our business and financial condition;
our ability to reduce operating losses and extend our capital runway;
our goal to be licensed in all states in the United States and the timing of obtaining additional licenses and launching in new states;
the accuracy and efficiency of our telematics and behavioral data, and our ability to gather and leverage additional data;
our ability to materially improve retention rates and our ability to realize benefits from retaining customers;
our ability to underwrite risks accurately and charge profitable rates;
our ability to maintain our business model and improve our capital and marketing efficiency;
our ability to drive improved conversion and decrease the cost of customer acquisition;
our ability to maintain and enhance our brand and reputation;
our ability to effectively manage the growth of our business;
our ability to raise additional capital efficiently or at all;
our ability to improve our product offerings, introduce new products and expand into additional insurance lines;
our ability to cross sell our products and attain greater value from each customer;
our lack of operating history and ability to attain profitability;
our ability to compete effectively with existing competitors and new market entrants in our industry;
future performance of the markets in which we operate;
our ability to operate a “capital-efficient” business and obtain and maintain desirable levels of reinsurance;
ii


the effect of further reductions in the utilization of reinsurance, which would result in retention of more premium and losses and could cause our capital requirements to increase;
our ability to realize economies of scale;
our ability to attract, motivate and retain key personnel, or hire personnel, and to offer competitive compensation and benefits;
our ability to deliver a vertically integrated customer experience;
our ability to develop products that utilize telematics to drive better customer satisfaction and retention;
our ability to protect our intellectual property and any costs associated therewith;
our ability to develop an autonomous claims experience;
our ability to take rate action early and react to changing environments;
our ability to meet risk-based capital requirements;
our ability to realize the benefits anticipated from our Texas county mutual fronting arrangement;
our ability to expand domestically;
our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business;
the impact of litigation or other losses;
changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, specific to the use of artificial intelligence;
our ability to defend against cybersecurity threats and prevent, or recover from, a security breach or other significant disruption of our technology systems or those of our partners and third-party service providers;
the effect of interest rates on our available cash and our ability to maintain compliance with our Term Loan (as defined herein);
our ability to maintain proper and effective internal control over financial reporting and remediate existing deficiencies;
our ability to continue to meet The Nasdaq Stock Market listing standards; and
the growth rates of the markets in which we compete.
You should not rely on forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described under the heading “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained herein. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Quarterly Report on Form 10-Q relate only to events as of the date on which the statements are made and we undertake no obligation to update them to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q or to reflect new information or the occurrence of unanticipated events, except as required by law.
Unless the context otherwise indicates, references in this report to the terms “Root,” “the Company,” “we,” “our” and “us” refer to Root, Inc. and its subsidiaries.
We may announce material business and financial information to our investors using our investor relations website (ir.joinroot.com). We therefore encourage investors and others interested in Root to review the information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, or SEC, webcasts, press releases and conference calls.
iii


Part I.  Financial Information
Item 1.  Financial Statements - Unaudited
`
ROOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
As of
March 31,December 31,
20242023
(in millions, except par value)
Assets
Investments:
Fixed maturities available-for-sale, at fair value (amortized cost: $210.6 and $168.4 at March 31, 2024 and December 31, 2023, respectively)
$207.3 $165.9 
Short-term investments (amortized cost: $8.7 and $0.9 at March 31, 2024 and December 31, 2023, respectively)
8.7 0.9 
Other investments4.4 4.4 
Total investments 220.4 171.2 
Cash and cash equivalents640.5 678.7 
Restricted cash1.0 1.0 
Premiums receivable, net of allowance of $5.2 and $4.0 at March 31, 2024 and December 31, 2023, respectively
292.0 247.1 
Reinsurance recoverable and receivable, net of allowance of $1.8 at March 31, 2024 and December 31, 2023
147.1 125.3 
Prepaid reinsurance premiums50.2 48.2 
Other assets81.1 76.2 
Total assets$1,432.3 $1,347.7 
Liabilities, Redeemable Convertible Preferred Stock and Stockholders’ Equity
Liabilities:
Loss and loss adjustment expense reserves$322.0 $284.2 
Unearned premiums339.4 283.7 
Long-term debt and warrants299.3 299.0 
Reinsurance premiums payable54.1 54.4 
Accounts payable and accrued expenses40.9 65.6 
Other liabilities98.9 83.1 
Total liabilities1,154.6 1,070.0 
Commitments and Contingencies (Note 11)
Redeemable convertible preferred stock, $0.0001 par value, 100.0 shares authorized, 14.1 shares issued and outstanding at March 31, 2024 and December 31, 2023 (redemption value of $126.5)
112.0 112.0 
Stockholders’ equity:
Class A common stock, $0.0001 par value, 1,000.0 shares authorized, 9.6 and 9.5 shares issued and outstanding at March 31, 2024 and December 31, 2023, respectively
  
Class B convertible common stock, $0.0001 par value, 269.0 shares authorized, 5.0 shares issued and outstanding at March 31, 2024 and December 31, 2023
  
Additional paid-in capital1,890.4 1,883.4 
Accumulated other comprehensive loss(3.3)(2.5)
Accumulated loss(1,721.4)(1,715.2)
Total stockholders’ equity165.7 165.7 
Total liabilities, redeemable convertible preferred stock and stockholders’ equity$1,432.3 $1,347.7 
See Notes to Condensed Consolidated Financial Statements - Unaudited
1


ROOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS - UNAUDITED
Three Months Ended March 31,
20242023
(in millions, except per share data)
Revenues:
Net premiums earned$230.3 $60.0 
Net investment income9.2 6.7 
Fee income14.7 3.2 
Other income 0.7 0.2 
Total revenues254.9 70.1 
Operating expenses:
Loss and loss adjustment expenses166.4 63.3 
Sales and marketing30.4 3.6 
Other insurance expense24.6 1.3 
Technology and development11.0 10.2 
General and administrative17.1 21.5 
Total operating expenses249.5 99.9 
Operating income (loss)5.4 (29.8)
Interest expense(11.6)(11.1)
Loss before income tax expense(6.2)(40.9)
Income tax expense  
Net loss(6.2)(40.9)
Other comprehensive (loss) income:
Changes in net unrealized (losses) gains on investments(0.8)1.1 
Comprehensive loss$(7.0)$(39.8)
Loss per common share: basic and diluted (both Class A and B)$(0.42)$(2.88)
Weighted-average common shares outstanding: basic and diluted (both Class A and B)14.6 14.2 

See Notes to Condensed Consolidated Financial Statements - Unaudited

2


ROOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY - UNAUDITED
Redeemable Convertible Preferred StockClass A and Class B Convertible Common StockAdditional Paid-in CapitalAccumulated Other Comprehensive LossAccumulated LossTotal Stockholders' Equity
SharesAmountClass A SharesClass B SharesAmount
(in millions)
Balance—January 1, 202414.1 $112.0 9.5 5.0 $ $1,883.4 $(2.5)$(1,715.2)$165.7 
Net loss— — — — — — — (6.2)(6.2)
Other comprehensive loss— — — — — — (0.8)— (0.8)
Common stock—restricted stock units vesting, net of shares withheld for employee taxes— — 0.1 — — — — —  
Common stock—share-based compensation expense— — — — — 4.6 — — 4.6 
Warrant compensation expense— — — — — 2.8 — — 2.8 
Warrant issuance costs— — — — — (0.4)— — (0.4)
Balance—March 31, 202414.1 $112.0 9.6 5.0 $ $1,890.4 $(3.3)$(1,721.4)$165.7 
Balance—January 1, 202314.1 $112.0 9.2 5.0 $ $1,850.7 $(5.8)$(1,567.8)$277.1 
Net loss— — — — — — — (40.9)(40.9)
Other comprehensive income— — — — — — 1.1 — 1.1 
Common stock—share-based compensation expense— — — — — 2.5 — — 2.5 
Warrant compensation expense— — — — — 4.4 — — 4.4 
Warrant issuance costs— — — — — (0.5)— — (0.5)
Balance—March 31, 202314.1 $112.0 9.2 5.0 $ $1,857.1 $(4.7)$(1,608.7)$243.7 


See Notes to Condensed Consolidated Financial Statements - Unaudited

3


ROOT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Three Months Ended March 31,
20242023
(in millions)
Cash flows from operating activities:
Net loss$(6.2)$(40.9)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Share-based compensation4.6 2.5 
Warrant compensation expense2.8 4.4 
Depreciation and amortization2.9 2.7 
Bad debt expense6.0 2.8 
Changes in operating assets and liabilities:
Premiums receivable(50.9)(4.4)
Reinsurance recoverable and receivable(21.8)19.4 
Prepaid reinsurance premiums(2.0)0.1 
Other assets(5.0)8.9 
Losses and loss adjustment expenses reserves37.8 (27.8)
Unearned premiums55.7 4.6 
Reinsurance premiums payable(0.3)(33.9)
Accounts payable and accrued expenses(24.7)(13.5)
Other liabilities15.6 (8.6)
Net cash provided by (used in) operating activities14.5 (83.7)
Cash flows from investing activities:
Purchases of investments(59.0)(4.8)
Proceeds from maturities, call and pay downs of investments9.0 8.2 
Capitalization of internally developed software(2.1)(2.5)
Purchases of fixed assets(0.2) 
Net cash (used in) provided by investing activities(52.3)0.9 
Cash flows from financing activities:
Taxes paid related to net share settlement of equity awards(0.4) 
Net cash used in financing activities(0.4) 
Net decrease in cash, cash equivalents and restricted cash (38.2)(82.8)
Cash, cash equivalents and restricted cash at beginning of period679.7 763.1 
Cash, cash equivalents and restricted cash at end of period$641.5 $680.3 

See Notes to Condensed Consolidated Financial Statements - Unaudited

4


ROOT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1.NATURE OF BUSINESS
Root, Inc. is a holding company which, directly or indirectly, maintains 100% ownership of each of its subsidiaries, including, among others, Root Insurance Company and Root Property & Casualty Insurance Company, both Ohio-domiciled insurance companies, and Root Reinsurance Company, Ltd., a Cayman Islands-domiciled reinsurance company, together with Root, Inc., “we,” “us” or “our.”
We were formed in 2015 and began writing personal auto insurance in July 2016. We are a technology company operating primarily a direct-to-consumer model with the majority of our personal insurance customers acquired through mobile apps. We offer auto and renters insurance products underwritten by Root Insurance Company and Root Property & Casualty Insurance Company.
2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation—In our opinion, all adjustments necessary for a fair presentation of the condensed consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. These condensed consolidated financial statements are unaudited and, accordingly, should be read in conjunction with the consolidated financial statements and related notes included in the Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission, or SEC, on February 21, 2024.
Basis of Consolidation—The unaudited condensed consolidated financial statements include the accounts of Root, Inc. and its subsidiaries, all of which are wholly owned. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. All intercompany accounts and transactions have been eliminated.
Use of Estimates—The preparation of the unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated financial statements include, but are not limited to, reserves for loss and loss adjustment expense, or LAE, valuation allowances for income taxes and allowance for expected credit losses on premium receivables and reinsurance recoverables.
Cash, Cash Equivalents and Restricted CashThe following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amount in the condensed consolidated statements of cash flows:
As of
March 31,December 31,
20242023
(dollars in millions)
Cash and cash equivalents$640.5 $678.7 
Restricted cash1.0 1.0 
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows$641.5 $679.7 


5


Deferred Policy Acquisition CostsThe following tables provides a reconciliation of the beginning and ending deferred policy acquisition costs, net of accumulated amortization, reported in other assets within the condensed consolidated balance sheets as of March 31, 2024 and 2023:
20242023
(dollars in millions)
Balance, January 1
$18.0 $6.7 
Acquisition costs deferred
10.0 4.8 
Amortization expense
(6.6)(2.6)
Balance, March 31
$21.4 $8.9 
Upcoming Accounting Pronouncements—In November 2023, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU looks to provide improvements to the segment disclosure by providing users with more decision-useful information about reportable segments in a public entity. The main provisions require a company to disclose, on an annual and interim basis, significant expenses included within each reported measure of segment profit or loss, an amount for other segment items by reportable segment and a description of its composition. It also requires all annual disclosures about a reportable segments’ profit or loss and assets to be reported on an interim basis. Although we operate in only one reporting segment, we are still required to provide all the disclosures required by this ASU and all existing segment disclosures in Topic 280.
The ASU is to be applied retrospectively to all prior periods presented in the financial statements with an effective date for all public entities for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this ASU.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU looks to enhance the transparency and decision usefulness of income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The main provisions to the rate reconciliation disclosure require public entities on an annual basis to: disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The main provisions to the income taxes paid disclosure require that all entities disclose on an annual basis: the amount of income taxes paid disaggregated by federal, state and foreign taxes and the amount of income taxes paid disaggregated by individual jurisdictions in which income taxes paid meets a quantitative threshold. This ASU also requires all entities to disclose: income (loss) from continuing operations before income tax expense (benefit) disaggregated between domestic and foreign and income tax expense (benefit) from continuing operations disaggregated by federal, state and foreign.
This ASU is to be applied on a prospective basis with an effective date for all public entities for annual periods beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of this ASU.

6


3.INVESTMENTS
The amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities at March 31, 2024 and December 31, 2023 are as follows:

March 31, 2024
Amortized CostAllowance for Expected Credit LossesGross Unrealized GainsGross Unrealized LossesFair Value
(dollars in millions)
Fixed maturities:
U.S. Treasury securities and agencies$22.2 $ $ $(0.2)$22.0 
Municipal securities22.4  0.1 (0.8)21.7 
Corporate debt securities82.1  0.1 (1.5)80.7 
Residential mortgage-backed securities18.8   (0.3)18.5 
Commercial mortgage-backed securities39.1   (0.7)38.4 
Other debt obligations26.0  0.1 (0.1)26.0 
Total fixed maturities210.6  0.3 (3.6)207.3 
Short-term investments8.7    8.7 
Total$219.3 $ $0.3 $(3.6)$216.0 
December 31, 2023
Amortized CostAllowance for Expected Credit LossesGross Unrealized GainsGross Unrealized LossesFair Value
(dollars in millions)
Fixed maturities:
U.S. Treasury securities and agencies$14.6 $ $0.1 $(0.1)$14.6 
Municipal securities24.8  0.1 (0.8)24.1 
Corporate debt securities66.3  0.2 (1.3)65.2 
Residential mortgage-backed securities12.0  0.1 (0.2)11.9 
Commercial mortgage-backed securities30.4  0.1 (0.7)29.8 
Other debt obligations20.3  0.1 (0.1)20.3 
Total fixed maturities168.4 0.7(3.2)165.9
Short-term investments0.9   0.9
Total$169.3 $ $0.7 $(3.2)$166.8 
Management reviewed the available-for-sale securities at each balance sheet date to consider whether it was necessary to recognize a credit loss as of March 31, 2024 and December 31, 2023. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities before recovery. Management concluded that the available-for-sale securities’ unrealized losses were due to non-credit related factors and, therefore, there was no allowance for credit loss as of March 31, 2024 and December 31, 2023.

7


The following tables reflect the gross unrealized losses and fair value of short-term investments and available-for-sale fixed maturity securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023:
March 31, 2024
Less than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
(dollars in millions)
Fixed maturities:
U.S. Treasury securities and agencies$11.0 $(0.1)$2.4 $(0.1)$13.4 $(0.2)
Municipal securities5.6  12.7 (0.8)18.3 (0.8)
Corporate debt securities33.0 (0.3)33.7 (1.2)66.7 (1.5)
Residential mortgage-backed securities11.2 (0.1)2.0 (0.2)13.2 (0.3)
Commercial mortgage-backed securities20.3 (0.2)12.8 (0.5)33.1 (0.7)
Other debt obligations15.0  3.8 (0.1)18.8 (0.1)
Total fixed maturities96.1 (0.7)67.4 (2.9)163.5 (3.6)
Short-term investments8.7    8.7  
Total$104.8 $(0.7)$67.4 $(2.9)$172.2 $(3.6)
December 31, 2023
Less than 12 Months12 Months or MoreTotal
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
Fair ValueUnrealized
Loss
(dollars in millions)
Fixed maturities:
U.S. Treasury securities and agencies$1.7 $ $2.4 $(0.1)$4.1 $(0.1)
Municipal securities3.1  15.1 (0.8)18.2 (0.8)
Corporate debt securities13.4  35.1 (1.3)48.5 (1.3)
Residential mortgage-backed securities4.1  1.9 (0.2)6.0 (0.2)
Commercial mortgage-backed securities9.1 (0.1)13.4 (0.6)22.5 (0.7)
Other debt obligations4.4  4.4 (0.1)8.8 (0.1)
Total fixed maturities35.8 (0.1)72.3 (3.1)108.1 (3.2)
Short-term investments0.3    0.3  
Total$36.1 $(0.1)$72.3 $(3.1)$108.4 $(3.2)

Other Investments
As of March 31, 2024 and December 31, 2023, other investments related to our private equity investments were $4.4 million. There were no realized or unrealized gains and losses or impairment losses recognized on private equity investments for the three months ended March 31, 2024 and 2023.

8


There were no realized gains or losses on short-term investments, available-for-sale fixed maturities and other investments for the three months ended March 31, 2024 and 2023.
The following table sets forth the amortized cost and fair value of short-term investments and available-for-sale fixed maturity securities by contractual maturity at March 31, 2024:
March 31, 2024
Amortized CostFair Value
(dollars in millions)
Due in one year or less$36.0 $35.6 
Due after one year through five years137.5 135.2 
Due five years through 10 years24.3 24.2 
Due after 10 years21.5 21.0 
Total$219.3 $216.0 
The following table sets forth the components of net investment income for the three months ended March 31, 2024 and 2023:

Three Months Ended March 31,
20242023
(dollars in millions)
Interest on bonds$1.7 $0.9 
Interest on deposits and cash equivalents8.1 5.9 
Total9.8 6.8 
Investment expense(0.6)(0.1)
Net investment income$9.2 $6.7 


9


The following tables summarize the credit ratings of short-term investments and available-for-sale fixed maturity securities at March 31, 2024 and December 31, 2023:

March 31, 2024
Amortized CostFair Value% of Total
Fair Value
(dollars in millions)
S&P Global rating or equivalent
AAA$62.4 $61.4 28.4 %
AA+, AA, AA-, A-185.4 84.3 39.0 
A+, A, A-54.9 53.8 24.9 
BBB+, BBB, BBB-16.6 16.5 7.7 
Total$219.3 $216.0 100.0 %


December 31, 2023
Amortized CostFair Value % of Total
Fair Value
(dollars in millions)
S&P Global rating or equivalent
AAA$53.0 $52.1 31.2 %
AA+, AA, AA-, A-159.4 58.835.3 
A+, A, A-42.1 41.224.7 
BBB+, BBB, BBB-14.8 14.78.8 
Total$169.3 $166.8 100.0 %

10


4.FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables provide information about our financial assets measured and reported at fair value as of March 31, 2024 and December 31, 2023:

March 31, 2024
Level 1Level 2Level 3Total
Fair Value
(dollars in millions)
Assets
Fixed maturities:
U.S. Treasury securities and agencies$20.8 $1.2 $ $22.0 
Municipal securities 21.7  21.7 
Corporate debt securities 80.7  80.7 
Residential mortgage-backed securities 18.5  18.5 
Commercial mortgage-backed securities 38.4  38.4 
Other debt obligations 26.0  26.0 
Total fixed maturities20.8 186.5  207.3 
Short-term investments7.5 1.2  8.7 
Cash equivalents388.5   388.5 
Total assets at fair value $416.8 $187.7 $ $604.5 
December 31, 2023
Level 1Level 2Level 3Total
Fair Value
(dollars in millions)
Assets
Fixed maturities:
U.S. Treasury securities and agencies$13.3 $1.3 $ $14.6 
Municipal securities 24.1  24.1 
Corporate debt securities 65.2  65.2 
Residential mortgage-backed securities 11.9  11.9 
Commercial mortgage-backed securities 29.8  29.8 
Other debt obligations 20.3  20.3 
Total fixed maturities13.3 152.6  165.9 
Short-term investments0.9   0.9 
Cash equivalents439.6   439.6 
Total assets at fair value $453.8 $152.6 $ $606.4 
We estimate the fair value of all our different classes of Level 2 fixed maturities and short-term investments by using quoted prices from a combination of an independent pricing vendor or broker/dealer, pricing models, quoted prices of securities with similar characteristics or discounted cash flows. All significant inputs were observable in the active markets.


11


Fair Value of Long-Term Debt
The carrying amount of long-term debt is recorded at the unpaid balance, net of discount and debt issuance costs. The fair value of outstanding long-term debt 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. As of March 31, 2024 and December 31, 2023, the carrying amounts and fair values of these financial instruments were as follows:

Carrying Amount
as of
March 31, 2024
Estimated Fair Value as of March 31, 2024
Carrying Amount
as of
December 31, 2023
Estimated Fair Value as of December 31, 2023
(dollars in millions)
Long-term debt$299.3 $304.8 $299.0 $305.2 
The carrying amounts of other short-term financial instruments approximates their fair value due to their short-term nature.
5.LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The following provides a reconciliation of the beginning and ending reserve balances for loss and LAE, net of reinsurance:
Three Months Ended March 31,
20242023
(dollars in millions)
Gross loss and LAE reserves, January 1$284.2 $287.4 
Reinsurance recoverable on unpaid losses(43.8)(76.4)
Net loss and LAE reserves, January 1240.4 211.0 
Net incurred loss and LAE related to:
Current year169.4 61.9 
Prior years(3.0)1.4 
Total incurred166.4 63.3 
Net paid loss and LAE related to:
Current year52.1 24.4
Prior years79.2 64.0
Total paid131.3 88.4 
Net loss and LAE reserves, March 31
275.5 185.9 
Plus reinsurance recoverable on unpaid losses46.5 73.7 
Gross loss and LAE reserves, March 31
$322.0 $259.6 
Incurred losses and LAE attributable to prior accident years was a decrease of $3.0 million and an increase of $1.4 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, the development of incurred losses and LAE related to prior periods was primarily driven by lower-than-expected reported losses from accident year 2023. For the three months ended March 31, 2023, the development of incurred losses and LAE related to prior periods was primarily driven by higher-than-expected reported losses on material damage claims due to higher vehicle repair costs and higher-than-expected LAE on prior accident period claims.

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6.REINSURANCE
The following table reflects amounts affecting the condensed consolidated statements of operations and comprehensive loss for reinsurance for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31,
20242023
(dollars in millions)
Premiums written:
Direct$272.9 $123.8 
Assumed57.8 10.9 
Ceded(46.7)(69.9)
Net premiums written$284.0 $64.8 
Premiums earned:
Direct$228.4 $120.1 
Assumed46.6 10.0 
Ceded(44.7)(70.1)
Net premiums earned$230.3 $60.0 
Losses and LAE incurred:
Direct$162.2 $99.8 
Assumed31.5 7.7 
Ceded(27.3)(44.2)
Net losses and LAE incurred$166.4 $63.3 
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 to the policyholder for such defaulted amounts.

7.LONG-TERM DEBT
In January 2022, we entered into a $300.0 million five-year term loan, or Term Loan, with the principal amount due and payable upon maturity on January 27, 2027. Interest is payable quarterly and is determined on a floating interest rate currently calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0% floor, plus 9.0%.
The following summarizes the carrying value of long-term debt and warrants as of March 31, 2024 and December 31, 2023:
March 31, 2024December 31, 2023
(dollars in millions)
Term Loan$300.0 $300.0 
Accrued interest payable
7.5 7.9 
Unamortized discount and debt issuance costs and warrants(8.2)(8.9)
Total$299.3 $299.0 


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8.INCOME TAXES
The consolidated effective tax rate was zero for the three months ended March 31, 2024 and 2023. The difference between these rates and the U.S. federal income tax rate of 21% was primarily due to a full valuation allowance on our U.S. deferred tax assets.
As of March 31, 2024 and December 31, 2023, we did not have any unrecognized tax benefits for uncertain tax positions and had no interest or penalties related to uncertain tax positions.

9.RESTRUCTURING COSTS
In 2022, we conducted strategic initiatives to reduce operating costs, improve efficiency, and increase focus on our strategic priorities. These initiatives resulted in restructuring actions that included a reduction in workforce levels, contract terminations, and in certain instances, a reduction in office space. These restructuring actions include the following costs:
Employee costs—consist of severance, benefits, share-based compensation, and employee compensation expense dependent upon continuous employment for certain employees and related employee costs.
Real estate exit costs—consist of real estate exit costs primarily related to accelerated amortization of right-of-use assets, leasehold improvements and furniture and fixtures.
Other costs—primarily consist of contract termination costs incurred as part of our efforts to improve efficiency and reduce operating costs and accelerated expense for software that no longer has economic benefit.
As of March 31, 2024, we do not expect to incur any additional material expenditures in future periods related to restructuring actions that have occurred.
The following table displays restructuring costs recorded in general and administrative expenses on the condensed consolidated statements of operations and comprehensive loss:
Three Months Ended March 31,
Cumulative Incurred Through March 31, 2024
20242023
(dollars in millions)
Restructuring costs:
Employee costs$0.1 $2.3 $23.3 
Real estate exit costs  2.1 
Other costs 3.3 4.5 
Total restructuring costs$0.1 $5.6 $29.9 
The following table displays a rollforward of the accrual for restructuring costs recorded in accounts payable and accrued expenses on the condensed consolidated balance sheets:
Employee costs
(dollars in millions)
Restructuring activity:
Restructuring liability as of January 1, 2024$8.3 
Expense incurred0.1 
Payments(8.4)
Restructuring liability as of March 31, 2024$ 

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10.SHARE-BASED COMPENSATION
Warrants
In October 2021, we issued Carvana eight tranches of warrants, comprised of three tranches of “short-term warrants” and five tranches of “long-term warrants,” with the opportunity to purchase a maximum of 7.2 million shares of Class A common stock.
As of March 31, 2024, we determined the remaining unvested short-term warrants were probable of vesting. Under that scenario, it is not a possible outcome for the long-term warrants to also vest, so they are considered not probable of vesting. We recognized warrant compensation expense related to these equity-classified warrants based on policies originating through the integrated automobile insurance solution for Carvana’s online buying platform. All of these warrants are out-of-the-money and therefore have no intrinsic value as of March 31, 2024.
We recognized warrant compensation expense of $2.8 million and $4.4 million for the three months ended March 31, 2024 and 2023, respectively. Warrant compensation expense is recorded in other insurance expense in the condensed consolidated statements of operations and comprehensive loss.
As of March 31, 2024, there was $1.0 million of unrecognized compensation cost related to warrants. The remaining costs are expected to be recognized in the second quarter of 2024.
Employee Share-Based Compensation
We maintain an equity incentive plan, or the Plan, for the issuance and grant of equity awards (restricted stock, restricted stock units, or RSUs, PSUs, and incentive and nonqualified stock options) to our officers, directors, employees and certain advisors. As of March 31, 2024, we had 1.9 million common shares available for issuance under the Plan.
When these RSU and PSU awards vest, we fund the related payroll tax withholding and remittance obligations by either (i) withholding shares of our Class A common stock that have otherwise been issued with respect to such awards and pay the relevant tax authorities in cash to satisfy such tax obligations, or (ii) allow holders of such awards to pay us an amount in cash, via a broker, sufficient to cover the applicable tax withholding obligations. We recognize the related tax withholding liability for employee taxes on the date of the event triggering the measurement and payment of the tax to the taxing authority, which is the vesting date.
The following table displays share-based compensation expense recorded in the condensed consolidated statements of operations and comprehensive loss:
Three Months Ended March 31,
20242023
(dollars in millions)
Share-based compensation expense:
Loss and loss adjustment expenses$0.4 $0.1 
Sales and marketing0.1 0.1 
Other insurance expense0.2 0.1 
Technology and development0.8 0.7 
General and administrative3.1 1.5 
Total share-based compensation expense$4.6 $2.5 

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The following table provides total share-based compensation expense by type of award:

Three Months Ended March 31,
20242023
(dollars in millions)
Share-based compensation expense:
Restricted stock unit expense$4.2 $2.1 
Performance-based restricted stock unit expense
0.2  
Stock option expense0.2 0.4 
Total share-based compensation expense$4.6 $2.5 
As of March 31, 2024, there was $0.8 million, $15.8 million, and $1.7 million of unrecognized compensation cost related to unvested stock options, RSUs, and PSUs, respectively. The remaining costs are expected to be recognized over a period of approximately two years for unvested stock options, four years for RSUs and three years for PSUs.
Restricted Stock Units and Performance-Based Restricted Stock Units
A summary of RSU and PSU activity for the three months ended March 31, 2024 is as follows:

Three Months Ended March 31, 2024
Restricted Stock Units and Performance-Based Restricted Stock Units
Number of SharesWeighted-Average
Grant Date Fair
Value per Share
Aggregate Intrinsic Value
(in millions, except per share amounts)
Nonvested at January 1, 20241.9 $14.47 $20.3 
Granted 9.06 
Vested(0.1)45.94 1.1 
Forfeited, expired or canceled 16.50 
Nonvested at March 31, 2024
1.8 $12.77 $112.5 
Stock Options
A summary of option activity for the three months ended March 31, 2024 is as follows:
Three Months Ended March 31, 2024
OptionsNumber of SharesWeighted-Average Exercise PriceWeighted-Average Remaining Contractual Term (in Years)Aggregate Intrinsic Value
(in millions, except exercise price and term amounts)
Outstanding and exercisable at January 1, 20240.1 $33.68 4.29$0.5 
Granted  
Exercised   
Forfeited, expired or canceled 43.20 
Outstanding and exercisable at March 31, 2024
0.1 $33.68 4.04$5.6 

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11.COMMITMENTS AND CONTINGENCIES
From time to time, we are party to litigation and legal proceedings relating to our business operations. While the outcome of all legal actions is not presently determinable, except as disclosed below, we do not believe that we are party to any current or pending legal action that could reasonably be expected to have a material adverse effect on our financial condition or results of operations and cash flow.
On December 19, 2022, a purported class action complaint was filed against the Company’s subsidiary, Root Insurance Company, in the U.S. District Court for the Western District of Texas (Case No. 1:22-cv-01328-LY) by an individual on her behalf and further claiming to represent a putative class of insureds. The complaint alleges that Root Insurance Company breached its insurance contract and violated specific provisions of the Texas Prompt Payment of Claims Act for an alleged failure to include sales tax in total loss vehicle settlements. The complaint seeks damages to include payment of alleged benefits owed under the policy, in addition to pre- and post-judgment interest and attorneys fees on behalf of the named plaintiff and the putative class members. Root Insurance Company’s motion to dismiss the claims set forth in the complaint was granted and the lawsuit was dismissed with prejudice on August 22, 2023, which dismissal has been appealed. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in its early stages. Therefore, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency.
On June 27, 2022, a verified shareholder derivative complaint was filed against certain of the Company’s current and former officers and directors in the U.S. District Court for the District of Delaware (Case No. 1:22-cv-00865). The Company was named as a nominal defendant. The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Section 10(b) of the Securities Exchange Act of 1934, or the Exchange Act, and Rule 10b-5 thereunder, breached their fiduciary duties and/or aided and abetted the breach of fiduciary duties, were unjustly enriched, wasted corporate assets, and are liable under Section 11(f) of the Securities Act of 1933, or the Securities Act, in connection with and following the Company’s initial public offering. The complaint seeks unspecified damages. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is currently stayed pending final resolution of the below matter and, at this time, we cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency.
On March 19, 2021, a purported class action complaint was filed against the Company and certain of its current and former officers and directors in the U.S. District Court for the Southern District of Ohio (Case No. 2:21-cv-01197) on behalf of certain Root shareholders. The complaint alleged that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 thereunder, and of Sections 11 and 15 of the Securities Act in connection with and following the Company’s initial public offering. The complaint sought unspecified damages. The defendants’ motion to dismiss the claims set forth in the complaint was granted and the lawsuit was dismissed with prejudice on March 31, 2023, which dismissal was affirmed on April 29, 2024, by the United States Court of Appeals for the Sixth Circuit. Should plaintiffs further appeal, the Company intends to continue to vigorously defend against the allegations. We cannot predict the outcome or estimate the likelihood or magnitude of our possible or potential loss contingency.
We are contingently liable for possible future assessments under regulatory requirements for insolvencies and impairments of unaffiliated insurance companies.

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12.LOSS PER SHARE
The following table displays the computation of basic and diluted loss per share for both Class A and Class B common stock for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31,
20242023
(in millions, except per share amounts)
Net loss$(6.2)$(40.9)
Weighted-average common shares outstanding: basic and diluted (both Class A and B)14.6 14.2 
Loss per common share: basic and diluted (both Class A and B)$(0.42)$(2.88)
We excluded the following potentially dilutive common stock equivalents, presented based on amounts outstanding at each period end, from the computation of diluted loss per share attributable to common shareholders for the periods indicated because including them would have had an anti-dilutive effect:

As of March 31,
20242023
(in millions)
Options to purchase common stock0.10.2
Nonvested shares subject to repurchase0.10.1
RSUs and PSUs1.80.9
Redeemable convertible preferred stock (as converted to common stock)0.80.8
Warrants to purchase common stock7.77.6
Total10.5 9.6 

13.GEOGRAPHICAL BREAKDOWN OF GROSS PREMIUMS WRITTEN
Gross premiums written by state is as follows for the three months ended March 31, 2024 and 2023:
Three Months Ended March 31,
20242023
Amount% of TotalAmount% of Total
(dollars in millions)
State:
Texas$61.6 18.6 %$19.5 14.5 %
Georgia39.411.9 13.910.3 
South Carolina22.06.7 6.24.6 
Colorado18.25.5 10.67.9 
Pennsylvania17.55.3 9.36.9 
Florida15.64.7 1.81.3 
Arizona13.94.2 4.73.5 
Ohio11.53.5 3.72.7 
Maryland10.83.3 3.32.4 
Utah8.82.7 7.25.3 
All others states111.433.6 54.540.6 
Total $330.7 100.0 %$134.7 100.0 %

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission, or SEC, on February 21, 2024, or the 2023 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading “Special Note Regarding Forward-Looking Statements” in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and in the 2023 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Our Business
Root is a technology insurance company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience. We operate primarily a direct-to-consumer model in which currently we acquire the majority of our customers through mobile apps. We are also focused on expanding our partnership channel, where we acquire customers using various means, including through embedded integrations.
We believe the Root advantage is derived from our unique ability to efficiently and effectively bind auto insurance policies quickly, through direct and partnership channels, aided by segmenting individual risk based on complex behavioral data and proprietary telematics models. Our customer experience is built for ease of use and a product offering made possible with our full-stack insurance structure. These are all uniquely integrated into a single cloud-based technology platform that captures the entire insurance value chain—from customer acquisition to underwriting to claims administration to ongoing customer engagement.
To scale the business, we aim to drive new customer growth by capitalizing on our two distribution channels: direct and partnerships. In both channels we seek to optimize unit economics. Loss ratios for customers in their initial term are generally higher than in subsequent terms. As a young insurance company, compared to our peers, our results are disproportionately weighted toward new customers. We believe our data- and technology-driven approach allows for rapid response to macroeconomic trends through quick, appropriate rate actions. Our ability to continually enhance our underwriting and segmentation capabilities has contributed to improvement in our gross loss ratios. Our marketing spend is grounded in a disciplined data-science approach, targeting customers that align with our lifetime expected returns. Over time we expect to build a base of recurring customers with more favorable loss ratios, resulting in the following financial impacts:
Improved loss ratio. Through improvements in our pricing, underwriting and segmentation we have seen improvement to our gross loss ratios. Renewal premiums, referring to premiums from a customer’s second term and beyond, have lower loss ratios as compared to new premiums in the customer’s first term. As we grow our business we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals and drive down the loss ratio across our portfolio. We also continue to revise contracts to tighten underwriting and implement rate increases to control the impact of increased loss costs.
Reduced marketing as a percentage of premium. Certain recurring customer premiums have no associated customer acquisition costs and minimal underwriting costs, driving profitability. As we grow our business, we anticipate, consistent with industry norms, that a greater proportion of our premiums will be from customer renewals with lower associated acquisition costs.
Increased revenue per customer. Over time we expect to refine our fee schedules to be more consistent with industry norms. This, paired with targeted marketing, strengthened underwriting and pricing segmentation, will facilitate the opportunity to generate additional fee revenue per customer.

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We use technology to drive efficiency across all functions, including distribution, underwriting, policy administration and claims in particular. We continue to develop machine learning loss models, which allow us to respond more quickly to changes in the market, improve pricing segmentation and take appropriate and timely rate actions. We believe this allows us to operate with a cost to acquire and cost to serve advantage. We efficiently acquire customers through multiple channels, including direct digital (performance), channel media, referrals, and partnership, including embedded and agency and affinity. Our evolving acquisition strategy includes utilizing our embedded insurance offering with current and future strategic partners. Our marketing costs have historically been well below industry averages, although in any given period, these costs can vary by acquisition strategy, channel mix, by state, or due to seasonality or due to the competitive environment. Today, we acquire the vast majority of our customers through mobile apps. We believe that through prudent investment in and diversification of our marketing channels, including leveraging proprietary data science and technology and a focus on partnerships with our current and future strategic partners, will position us for more sustainable, long-term and profitable growth.
As a full-stack insurance company, we currently employ a “capital-efficient” model, which utilizes a variety of reinsurance structures. These include excess of loss and quota share reinsurance. Excess of loss provides us with volatility protection against a portion of large individual losses or an aggregation of losses from catastrophes. Quota share provides, among other advantages, regulatory surplus relief for growing companies. These reinsurance structures deliver three core objectives: (1) prioritize revenue and targeted profitable customer growth while maintaining regulatory capital requirements: (2) source efficient capital to support customer acquisition costs; and (3) mitigate impact of large losses or tail events. We expect to continuously evaluate our utilization of third-party reinsurance while scaling our business in order to operate a capital-efficient business model. As our gross loss ratios continue to improve and stabilize over the long-term, we expect to maintain the flexibility to modify our reinsurance program.
Given the impact reinsurance has on our results of operations, we use certain gross basis key performance indicators to manage and measure our business operations and enhance investor understanding of our business model prior to reinsurance. We believe our long-term success will be apparent through the progression of our gross metrics. Results of operations on a gross basis alone may not be achievable under our regulatory landscape given our historical top-line growth and resulting capital requirements, which are relieved, in part, by obtaining reinsurance.
In addition to our gross basis metrics, management uses adjusted earnings before interest, tax, depreciation, amortization, or adjusted EBITDA, as an integral part of managing our business. We believe adjusted EBITDA provides investors with useful insight into our business because such measure eliminates the effects of certain charges that are not directly attributable to our underlying operating performance. For additional information, including definitions of these key metrics, see “—Key Performance Indicators” and for reconciliations of Direct Contribution and adjusted EBITDA to the most directly comparable generally accepted accounting principles in the United States, or GAAP, metric, see “—Non-GAAP Financial Measures.”
Recent Developments Affecting Comparability
General Macroeconomic Factors
Economic instability has led to acute inflationary pressures, supply chain disruptions, changes in interest rates and changes in equity markets. There is a risk of inflation remaining elevated for an extended period, which could cause claims and claim expenses to increase, impact the performance of our investment portfolio or have other adverse effects, including variability in the competitive environment. We have seen an increase in vehicle repair and medical costs. These cost increases have resulted in greater claims severity. We continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends. Fluctuations in interest rates could impact our cost of capital and may limit our ability to raise additional capital.

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Comprehensive Reinsurance
We reduced the utilization of reinsurance through a strategic reduction of external quota share. The changes to the reinsurance program aim to deliver improved economics and capital efficiency. Our diversified approach to reinsurance allows us to optimize capital requirements while remaining flexible in response to changes in market conditions or changes specific to our own business. We may choose to amend, commute, and/or non-renew certain third-party reinsurance arrangements in the future, which may result in us retaining more or less of our business. To the extent we retain a larger share of our book of business, our capital requirements may increase.
Key Performance Indicators
We regularly review a number of metrics, including the following key performance indicators, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions. We believe these non-GAAP and operational measures are useful in evaluating our performance, in addition to our financial results prepared in accordance with GAAP. See the section titled “—Non-GAAP Financial Measures” for additional information regarding our use of direct contribution and adjusted EBITDA and their reconciliations to the most directly comparable GAAP measures.

Three Months Ended March 31,
20242023
(dollars in millions, except premiums per policy)
Policies in force401,255 199,685 
Premiums per policy$1,482 $1,292 
Premiums in force$1,189.3 $516.0 
Gross premiums written$330.7 $134.7 
Gross premiums earned$275.0 $130.1 
Gross profit$63.9 $5.5 
Net loss$(6.2)$(40.9)
Direct contribution$80.7 $18.6 
Adjusted EBITDA$15.1 $(11.3)
Net loss and LAE ratio72.3 %105.5 %
Net expense ratio29.7 %55.7 %
Net combined ratio102.0 %161.2 %
Gross loss ratio60.6 %71.5 %
Gross LAE ratio9.9 %11.2 %
Gross expense ratio29.2 %40.3 %
Gross combined ratio99.7 %123.0 %
Gross accident period loss ratio61.2 %65.6 %
Policies in Force
We define policies in force as the number of current and active auto insurance policyholders underwritten by us as of the period end date. We view policies in force as an important metric to assess our financial performance because policy growth drives our revenue growth, expands brand awareness, deepens our market penetration, and generates additional data to continue to improve the functioning of our platform.

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Premiums per Policy
We define premiums per policy as the ratio of gross premiums written on auto insurance policies in force at the end of the period divided by policies in force. We view premiums per policy as an important metric since the higher the premiums per policy the greater the amount of earned premium we expect from each policy.
Premiums in Force
We define premiums in force as premiums per policy multiplied by policies in force multiplied by two. We view premiums in force as an estimate of annualized run rate of gross premiums written as of a given period. Since our auto policies are six-month policies, we multiply this figure by two in order to determine an annualized amount of premiums in force. We view this as an important metric because it is an indicator of the size of our portfolio of policies as well as an indicator of expected earned premium over the coming 12 months. Premiums in force is not a forecast of future revenue nor is it a reliable indicator of revenue expected to be earned in any given period. We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of fluctuations in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals.
Gross Premiums Written
We define gross premiums written, as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations. Gross premiums written includes direct premiums and assumed premiums. We view gross premiums written as an important metric because it is the metric that most closely correlates with changes in gross premiums earned. We use gross premiums written, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities. Additionally, premiums ceded to reinsurers can change significantly based on the type and mix of reinsurance structures we use, and, as such, we have the optionality to fully retain the premiums from customers acquired in the future.
Gross Premiums Earned
We define gross premiums earned as the amount of gross premium that was earned during the period. Premiums are earned over the period in which insurance protection is provided, which is typically six months. Gross premiums earned includes direct premiums and assumed premiums. We view gross premiums earned as an important metric as it allows us to evaluate our premium levels prior to the impacts of reinsurance. It is the primary driver of our consolidated GAAP revenues. As with gross premiums written, we use gross premiums earned, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.
Gross Profit
We define gross profit as total revenue minus net loss and LAE and other insurance expense. We view gross profit as an important metric because we believe it is informative of the financial performance of our core insurance business.

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Direct Contribution
We define direct contribution, a non-GAAP financial measure, as gross profit excluding net investment income, net realized gains on investments, report costs, commission expenses related to our partnership channel, certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, overhead allocated based on headcount, or Overhead, and salaries, health benefits, bonuses, employee retirement plan-related expenses and employee share-based compensation expense, or Personnel Costs, licenses, professional fees and other expenses, ceded premiums earned, ceded loss and LAE, and net ceding commission and other. Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by amortization of excess ceding commission, and other impacts of reinsurance ceded, which are included in other insurance expense. After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business. We view direct contribution as an important metric because we believe it measures progress towards the profitability of our total policy portfolio prior to the impact of reinsurance.
See the section titled “—Non-GAAP Financial Measures” for a reconciliation of total revenue to direct contribution.
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, warrant compensation expense, restructuring charges, write-off of prepaid marketing expenses, legal fees and other items that do not reflect our ongoing operating performance. After these adjustments, the resulting calculation represents expenses directly attributable to our operating performance. We use adjusted EBITDA as an internal performance measure in the management of our operations because we believe it provides management and other users of our financial information useful insight into our results of operations and underlying business performance. Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define adjusted EBITDA differently.
See the section titled “—Non-GAAP Financial Measures” for a reconciliation of net loss to adjusted EBITDA.
Net Loss and LAE Ratio
We define net loss and LAE ratio expressed as a percentage, as the ratio of net loss and LAE to net premiums earned. We view net loss and LAE ratio as an important metric because it allows us to evaluate loss trends as a percentage of net premiums and believe it is useful for investors to evaluate those separately from other operating expenses.
Net Expense Ratio
We define net expense ratio expressed as a percentage, as the ratio of all operating expenses less loss and LAE and less fee income to net premiums earned. We view net expense ratio as important because it allows us to analyze our expense and acquisition trends, net of fee income, and allows investors to evaluate these expenses exclusive of our loss and LAE.
Net Combined Ratio
We define net combined ratio expressed as a percentage, as the sum of net loss and LAE ratio and net expense ratio. We view net combined ratio as important because it allows us to analyze our underwriting result trends and is a key indicator of overall profitability and health of the overall business. We believe it is useful to investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. A net combined ratio under 100% indicates an underwriting profit, while a net combined ratio greater than 100% indicates an underwriting loss.

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Gross Loss Ratio
We define gross loss ratio expressed as a percentage, as the ratio of gross losses to gross premiums earned. Gross loss ratio excludes LAE. We view gross loss ratio as an important metric because it allows us to evaluate incurred losses and LAE separately prior to the impact of reinsurance.
Gross LAE Ratio
We define gross LAE ratio expressed as a percentage, as the ratio of gross LAE to gross premiums earned. We view gross LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately. Currently, we do not cede any of our LAE to our third-party quota share reinsurance treaties; therefore, we actively monitor LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.
Gross Expense Ratio
We define gross expense ratio expressed as a percentage as the ratio of gross operating expenses less loss and LAE and less fee income to gross premiums earned. We view gross expense ratio as important because it allows us to analyze the underlying expense base of the business and establish expense targets, prior to the impact of reinsurance. We believe gross expense ratio is useful for investors to further evaluate business health and performance, prior to the impact of reinsurance.
Gross Combined Ratio
We define gross combined ratio expressed as a percentage as the sum of the gross loss ratio, gross LAE ratio and gross expense ratio. We view gross combined ratio as important because it allows us to evaluate financial performance and establish targets that we believe more closely reflect the underlying performance and profitability of the business prior to reinsurance. Further, we believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our gross underwriting performance. A gross combined ratio under 100% indicates an underwriting profit while a gross combined ratio greater than 100% indicates an underwriting loss, prior to the impact of reinsurance.
Gross Accident Period Loss Ratio
Gross accident period loss ratio, expressed as a percentage, represents all losses and claims expected to arise from insured events that occurred during the applicable period regardless of when they are reported and finally settled divided by gross premiums earned for the same period. Changes to our loss reserves are the primary driver of the difference between our gross accident period loss ratio and gross loss ratio. We believe that gross accident period loss ratio is useful in evaluating expected losses prior to the impact of reinsurance.
Components of Our Results of Operations
Revenue
We generate revenue from net premiums earned, net investment income, fee income and other income.
Net Premiums Earned
Premiums written are deferred and earned pro rata over the policy period. Net premiums earned represents the earned portion of our gross premiums written, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements.
Net Investment Income
Net investment income represents interest earned from our cash and cash equivalents and fixed maturity and short-term investments and unrealized gains and losses from our private equity investments less investment expenses. Net investment income also includes impairments related to Low Income Housing Tax Credits investments in limited liability entities to offset certain state premium taxes. These tax credits are recognized when utilized. Net investment income is directly correlated with the overall size of our investment portfolio, market level

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of interest rates and changes in the fair value of our private equity investments. Net investment income will vary with the size and composition of our investment portfolio, market returns and the investment strategy.
Fee Income
Fee income consists primarily of the flat fee we charge for installment payments which relates to the additional administrative costs associated with processing more frequent billings. These fees are recognized in the period in which we process the installment. We also charge policy fees, which are typically nonrefundable fees that are intended to reimburse a portion of the costs incurred to underwrite the policy. These fees are recognized ratably over the policy coverage period. Fee income also includes late payment fees that are collected from our policyholders. These fees are recognized in the period in which we process the late payment.
Other Income
Other income is primarily comprised of revenue earned from distributing website and mobile application policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead.
Operating Expenses
Our operating expenses consist of loss and LAE, sales and marketing, other insurance expense, technology and development, and general and administrative expenses.
Loss and Loss Adjustment Expenses
Loss and LAE include the costs incurred for claims, payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims, net of amounts ceded to reinsurers. Loss and LAE include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE. These reserves are a liability established to cover the estimated ultimate cost to settle insured losses. The unpaid loss estimates consider loss trends, mix of business, and other risk factors impacting claims settlement. The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases.
Loss and LAE are net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity to write more business. These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks. This includes an allowance for credit losses based on the probability of default and expected loss given default of a reinsurer. Loss and LAE may be paid out over a period of years.
Various other expenses incurred during claims processing are considered LAE. These amounts include Personnel Costs for claims-related employees; vendor expenses; software expense; internally developed software amortization; and Overhead.
Sales and Marketing
Sales and marketing includes expenses related to direct performance marketing, channel media, advertising, sponsorship, referral fees and the partnership channel. These expenses also include related Personnel Costs and Overhead related to our brand strategy, creative and business development activities, and certain data science activities. We incur sales and marketing expenses for all product offerings. Sales and marketing are expensed as incurred.
We plan to continue investing in and diversifying our marketing channels to attract and acquire new customers, increase our brand awareness, and expand our product offerings within certain markets. We expect that in the long-term, our sales and marketing will decrease as a percentage of revenue as the proportion of renewals to our total business increases.

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Other Insurance Expense
Other insurance expense includes underwriting expenses, commission expenses related to our partnership channel, premium taxes, credit card and policy processing expenses, premium write-offs, insurance license expenses, certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, and Personnel Costs and Overhead related to actuarial and certain data science activities. We amortize a portion of our deferred policy acquisition costs including certain commissions related to our partnership channel, premium taxes, and report costs related to the successful acquisition of a policy. Other insurance expense is expensed as incurred, except for costs related to deferred policy acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned. Certain warrant compensation expense is recognized on a pro-rata basis considering progress toward achieving milestones for policies originated through the Integrated Platform as defined under the Carvana commercial agreement.
These expenses are recognized net of ceding commissions earned from our quota share reinsurance agreements. The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance expense.
Technology and Development
Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems; third-party services related to infrastructure support; Personnel Costs and Overhead for engineering, product, technology, and certain data science activities; and amortization of internally developed software. Technology and development is expensed as incurred, except for development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life. Over time, we expect technology and development to decrease as a percentage of revenue.
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; and restructuring costs which include employee costs, real estate exit costs and other costs. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to decrease as a percentage of total revenue over time.
Non-Operating Expenses
Interest Expense
Interest expense is not an operating expense; therefore, we include these expenses below operating expenses. Interest expense primarily relates to interest incurred on our long-term debt, certain fees that are expensed as incurred and amortization of debt issuance costs. In addition, changes in the fair value of warrant liabilities that were associated with our long-term debt are recorded as interest expense.

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Results of Operations
Comparison of the Three Months Ended March 31, 2024 and 2023
The following table presents our results of operations for the periods indicated:
Three Months Ended March 31,
20242023$ Change% Change
(dollars in millions)
Revenues:
Net premiums earned