As I was reflecting on Root’s shareholder letter, I couldn’t stop thinking about the Wizard of Oz. In the enchanting land of Insurtech, Root has emerged as an unlikely hero in Q2 2024. Like Dorothy in “The Wizard of Oz,” Root seems to have found its ruby slippers, clicking its heels towards profitability while its companions Lemonade and Hippo still search for their own paths home.
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Over the Rainbow: Root’s Financial Highlights
Root’s Q2 2024 results reminded me of what it must have been to see the old Charlie Chaplin movies in Sepia and then witness the vibrancy of Technicolor in the Wizard of Oz. Root has certainly painted a vibrant picture:
- Policies in force nearly doubled to 406,283
- Gross premiums written increased 113% to $308 million
- Net loss improved 79% to $8 million
- Operating income of $4 million and adjusted EBITDA of $12 million
These numbers suggest Root might be nearing the end of its yellow brick road to profitability. As the Scarecrow sang in “If I Only Had a Brain” — “I could while away the hours, conferrin’ with the flowers, consultin’ with the rain” – or in Root’s case, conferring with algorithms and consulting big data.
The Emerald City: Carvana Partnership
Root’s bet on Carvana as a distribution channel has paid off handsomely. The partnership has provided Root with a steady stream of customers, much like the Emerald City provided hope for our “Oz” protagonists.
The Wicked Witch of Losses: Melting Away?
While Root still reported a net loss, the trajectory is promising. The company’s net loss of $8 million is a significant improvement from previous quarters. It’s as if the wicked witch of losses is slowly melting away, leaving Root to claim its rightful place in the Insurtech kingdom.
Lions and Tigers and Bears, Oh My!: Challenges Ahead
Despite the positive trends, Root still faces challenges. The insurance industry is unpredictable, filled with potential pitfalls and unexpected turns. Root must navigate regulatory landscapes, maintain customer satisfaction, and fend off competition.
The Flying Monkeys of Expense: Costs and Loss Ratios
The struggle with loss ratios and expenses plays the role of the relentless antagonist. Even though the gross combined ratio improved by 18 points to 99.9%, Root’s net combined ratio stands at 102.7%—still over that critical break-even point. It’s as if the characters are fighting a formidable enemy that keeps them just out of reach of victory. The gross accident period loss ratio did improve slightly by 2 points to 62.4%, but it’s clear the battle isn’t over.
There’s No Place Like Home: Lessons for Regional Carriers
For regional carriers, Root’s journey offers valuable lessons to navigate the challenges of the insurance industry. Here are some key takeaways:
- Follow the Yellow Brick Road of Technology: Root’s success is largely due to its innovative use of telematics and AI. Regional carriers should explore similar technologies to improve underwriting and pricing. By embracing data-driven approaches, carriers can better assess risk, optimize pricing, and create more personalized customer experiences. Just as the yellow brick road led Dorothy to the Emerald City, technology can guide regional carriers towards a brighter future. Please reach out if you want to discuss successful strategies.
- Find Your Own Glinda: Strategic Partnerships: Root’s alliance with Carvana shows the power of finding the right distribution channels. Regional carriers should seek partnerships that align with their strengths and target markets. By collaborating not only with agents, but also with other companies or organizations, carriers can expand their reach, improve customer engagement, and create new revenue streams. For example, the National Federation of Independent Business has a relationship in TX with Texas Mutual and with Sedgwick in Ohio to sell workers comp. Just as Glinda the Good Witch helped Dorothy on her journey, the right partners can provide valuable guidance and support.
- Tame the Tornado of Unit Economics: Root’s improvement in loss ratios and operating efficiency demonstrates the importance of getting the fundamentals right. Regional carriers should focus on optimizing their unit economics, including managing expenses, improving loss ratios, and streamlining operations. By controlling costs and improving efficiency, carriers can create a solid foundation for growth and profitability. There are many approaches to solving for weather related storms. Just as Dorothy’s house landed safely in Munchkinland, regional carriers can find stability by mastering their unit economics.
- Be Prepared for the Twister of Change: Regional carriers must be ready to pivot and adapt to changing market conditions and customer preferences. By staying agile and responsive, carriers can navigate the unexpected twists and turns of the insurance industry. Just as Dorothy and her friends adapted to the strange world of Oz, regional carriers must be prepared to adjust their strategies to stay ahead of the competition.
- Look Behind the Curtain of Data: Root’s use of data for pricing and underwriting is a key differentiator. Regional carriers should invest in data analytics capabilities to stay competitive. By leveraging data insights, carriers can better understand customer behavior, optimize pricing, and identify new opportunities. Just as the Wizard of Oz was revealed to be a humbug, data analytics can help regional carriers uncover the hidden truths of their business and make informed decisions. Just remember, sometimes things are ugly behind the curtain.
- Beware the Flying Monkeys of Expense: Root’s struggle with loss ratios and expenses serves as a reminder to regional carriers to keep a close eye on their own costs and loss ratios. Even small improvements can make a big difference in the pursuit of profitability. By monitoring expenses and loss ratios closely, carriers can avoid being swooped up by the flying monkeys of financial woe.
- Follow the Road to Scale: Root’s improving gross combined ratio and increasing premiums written demonstrate the importance of scale in achieving profitability. Regional carriers should consider strategies to grow their business while maintaining control over costs and loss ratios. By expanding their reach and increasing their scale, carriers can build a more stable and profitable business, just as the yellow brick road led to the Emerald City.
- Don’t Get Lost in the Haunted Forest of Complacency: The persistent challenge of loss ratios and expenses is a reminder that regional carriers should never underestimate the importance of careful risk management and expense control. Complacency can lead to trouble, even for carriers that seem to be on the right path. By staying vigilant and proactive, carriers can avoid getting lost in the haunted forest of financial struggles and stay on the path to profitability.
The Man Behind the Curtain: Root vs. Other Insurtechs
Among the three main public insurtechs, Root appears closest to pulling back the curtain on profitability. While Lemonade and Hippo face challenges, Root has shown tangible progress towards sustainable operations.
Conclusion: Following the Yellow Brick Road
As we watch Root’s journey unfold, one can’t help but wonder if they’ve found the magic formula that will lead them to profitability. While challenges remain, Root’s Q2 2024 performance suggests they’re on the right path.
For regional carriers, brokers, and other players in the insurance industry, Root’s story offers both inspiration and caution. The yellow brick road to success is paved with technology, strategic partnerships, and a relentless focus on fundamentals.
Please reach out if you want to discuss how you can ensure you stay on the yellow brick road of success.
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.