Insurtech Root Insurance just held its first earnings call as a publicly-traded company. Investors don’t seem too pleased with the results. The stock was down nearly 10% in after-hours trading (8:15PM). Adding insult to injury, the Oregon Department of Consumer and Business Services today levied civil penalties against Root and Allstate Insurance for canceling policies violating state COVID-19 emergency orders.
When we look at their results report, it is once again difficult to unpack it and it is definitely a mixed picture.
Direct Written Premium and Loss Ratios
Root reported $164.6 million in the third quarter, a 13.5% increase from the previous quarter and putting them where they were in the first quarter.
Their third-quarter loss ratio fell to 85% from 101% a year earlier. And they better manage their LAE, which fell 30% from 13% to 10%.
The combination of these led them to their first adjusted gross profit of $9.7 million in Q3 and $17.1 million for the first nine months.
Policyholder Growth and Customer Acquisition Costs
When I calculated these figures, I had to do a double-take and recheck my math. I’m only focusing on the auto numbers because Root doesn’t write any of the renters policies and gets a commission for it. As you can see in the table below, Root has been struggling to attract policyholders since the COVID-19 crisis. In fact, they lost nearly 12,000 policies in the 3Q 3.7%. On the plus side, their premium per policy has risen to $929 per policy term.
This figure indicates how much Root spent per policy to write 118 net new policies in the second quarter. Add to that that they lost 11,904 policies in the third quarter but still spent $36.9 million, and it’s good news that they raised $1.2 billion in their IPO. Looking at the first nine months, Root is spending $2,192 to add each new policy. If you compare that with 2019, where they spent about $646 to acquire a customer, they are now spending nearly three times more.
Reinsurance: Borrowing a Page from Lemonade
Root, like Lemonade, announced a reinsurance relationship in which they cede 70% of their premiums and associated losses to reinsurers in exchange for a 25% commission on the written premium. See figure below. This will help stabilize their earnings volatility, and in the end we will have to track the net earnings premium, which has increased by almost 60% in the last 9 months.
What Does This Mean for You?
For now, Root will continue to focus on their three core objectives:
- Drive significant growth (Premium and policyholders)
- Enhance profitability via loss ratio and retention improvements
- Optimize customer acquisition via direct marketing and a strong user experience
They are making progress in achieving the first two objectives, but acknowledge that it will take more time before they see a significant improvement in their acquisition costs.
They will drive national expansion so that there will be more competition in your local markets, and their user experience and ease of handling insurance and service claims will set them apart, especially compared to a sales approach for independent agents.
In addition, Metromile is expected to go public in early 2021, and the local auto insurance market will become more competitive, especially for younger drivers.
3 Things You Can Do Now
Here are three things you should start doing if you’re not currently doing it:
- Explore a telematics option that helps you differentiate within your markets and ensure you have an offer that meets the needs and desires of each buyer segment
- Work with your agents to understand their feedback on the changing competitive nature of the auto business and how a telematics solution could help them increase sales
- Continue to focus on improving the customer experience throughout the entire life cycle of insurance – from awareness to renewal!
Do not hesitate to reserve time with me to discuss this or any other topic.
About Insurtech Advisors
Insurtech Advisors is dedicated to helping regional insurance carriers and agencies find and partner with Insurtechs enabling you to thrive and continue to meet the needs of your members and independent agents. We work closely with your team to identify opportunities and aspirations and then personally curate and introduce you to the best Insurtechs to pilot.
Kaenan is a professional in the areas of block chain, telematics, wearables, analytics, artificial intelligence (AI) and Insurtech. He has played a key role in innovating many start-ups and established carriers. His advice has been widely appreciated in the financial community, which resulted in multiple quotes and publications in various media.
Most recently he was Practice Lead for Innovation, Fintech, and Strategic Insights at EY. Throughout his career he has held leading roles within Marketing Strategy and Decision Management with top Insurance, Banking and Finance companies, including USAA, Citibank and Sallie Mae.