Q1 2026 Earnings Call Transcript

Ladies and gentlemen, greetings, and welcome to the Root, Inc. Q1 '26 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today, Matt LaMalva, Head of IR and Corporate Development. Please go ahead.

Good afternoon and thank you for joining us. Root is hosting this call to discuss its first quarter 2026 earnings results. Participating on today's call is Alex Timm, Co-Founder and Chief Executive Officer; and Megan Binkley, Chief Financial Officer. Earlier today, Root issued a shareholder letter announcing its financial results.

We'll focus today on how we're executing against our model and the progress we're delivering across the business. While today's discussion will reflect the shareholder letter for more complete information about our financial performance, we also encourage you to read our first quarter 2026 Form 10-Q, which was filed with the Securities and Exchange Commission today. Before we begin, I want to remind you that matters discussed on today's call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions.

Please note that these forward-looking statements reflect our opinions as of the date of this call, and we are not obligated to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. For a more detailed description of our risk factors, please review our most recent 10-K, 10-Q and shareholder letter. A replay of this conference call will be available on our website under the Investor Relations section.

I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root's performance. You can find reconciliations of these historical measures to the nearest comparable GAAP measures in our financial disclosures, all of which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex.

Thanks, Matt. Good afternoon, and thank you, everyone, for joining us. We kicked off 2026 with the most profitable quarter in the company's history, generating an annualized ROE of 47%. The team has worked hard to deliver these fantastic results, and we're all grateful for their hard work.

These results reflect a structurally stronger model driven by improvements in pricing, underwriting and capital allocation. On growth, we grew policies in force over 9% in the quarter year-over-year with gross premiums written of $389 million. Recall that last year's growth temporarily increased on news of impending tariffs, making year-over-year comparisons difficult. As a reminder, we continue to be focused on our 5-part growth strategy: one, create the lowest prices for customers; two, launch our product in every state; three, expand into the independent agency channel; four, scale our embedded insurance products; and five, leverage our AI expertise to grow our automated marketing machine.

Some highlights from the quarter. On distribution, we're continuing to build a platform that is both diversified and scalable, which is very important to our long-term growth trajectory. Our overall partnerships grew new writings 30% year-over-year. On independent agents, we now partner with more than 15,000 agents across 5,000 agencies nationwide.

In the first quarter, we launched our partnership with Freeway Insurance, the largest personal lines insurance distributor in the country. We're very excited by the prospects of continuing to scale in this channel, bringing products that are easier for agents and more affordable for customers to an over $100 billion market. As our models have continued to learn in this space, we were able to materially improve our pricing for this segment of our business in the first quarter as well. We also continue to scale our embedded insurance offering with Carvana now surpassing 200,000 policies sold.

This channel allows us to present nearly frictionless insurance at the point of need, creating a great experience for customers. In addition, this allows for the potential to create new pricing models distinct to each partner, leveraging their unique data, including connected vehicle data, which is critical to our long-term AV strategy. In direct, we saw a difficult growth environment that intensified throughout the quarter. These cycles are common in our industry, and we are well positioned to manage them prudently, only deploying your capital when we see meaningful opportunities to exceed our hurdle rate.

When conditions are attractive, we invest aggressively. When they are not, we remain disciplined and patient. This creates some fluctuations in our quarterly growth. But over the long term, we believe it creates much better outcomes for our shareholders.

We believe a key source of value is our ability and willingness to act differently from the crowd and maintain our long-term orientation. Regardless of the cycle, we always invest in our technology and customer experiences that makes Root special. And right now, we are living in one of the most exciting times in technology that we've seen in our lifetimes. Since our inception, our founding principles lie at the heart of AI.

We were born out of the forces of mathematical invention. And now the advancements of this technology have perfectly situated our strategy for acceleration. We are actively working to build a completely automated insurance company that will be the first of its kind. This allows us to create a closed loop tying customer acquisition, onboarding, pricing, underwriting and claims, together in one technical system.

We believe this structural advantage will create meaningful operating leverage and most importantly, allow us to price and manage risk at a fidelity never before seen. Insurance is fundamentally a prediction problem and AI is fundamentally an advancement in predictive sciences. And we've built moats around this advantage. This future belongs to a technology company and requires loads of claims data, insurance licensing and a complete insurance technology stack built entirely in-house.

We have invested tremendously in these hard-won assets, and this puts Root in the ideal position for this future. We're very, very excited by this future and what we can achieve. We are well on our way to fulfilling our mission. I'll now pass the call over to Megan to talk about financial performance.

Thanks, Alex. We delivered record net income of $36 million in the quarter, up $18 million year-over-year. Operating income was $41 million and adjusted EBITDA was $57 million, increasing $17 million and $25 million year-over-year, respectively. We grew policies in force 9% on a year-over-year basis.

We continue to diversify our business, growing our partnership and independent agent new writings by more than 30% year-over-year. Related to premiums, Q1 gross premiums written were $389 million, a moderation of 5% year-over-year. As Alex reiterated, this was largely driven by early 2025 tariff-related demand. Q1 gross premiums earned were $370 million, growth of 8% year-over-year.

These results reflect continued improvement in our unit economics, driven by pricing, underwriting and acquisition efficiency. Our record profitability reflects how we manage the business, including focusing on high-return growth and market expansion opportunities, maintaining flexibility across underwriting cycles and continuing to invest in product and technology innovation. On capital, I'm pleased to announce that we refinanced our $200 million debt facility with the Huntington National Bank on May 4, lowering our annual run rate interest expense by roughly $5 million. The new facility enhances our financial flexibility, allowing us to allocate capital more dynamically.

Consistent with our strategy, we are investing in our technology, organic growth, partnerships and shareholder returns. As part of this approach, our Board of Directors authorized a $75 million share repurchase program, reflecting both the strength of our capital position and our confidence in the intrinsic value of the business. Overall, the financial profile of the business continues to strengthen, and we are energized by the progress we've made. We remain focused on the long-term opportunities in front of us, supported by massive growth prospects across our 5 levers and advancements in our data science, technology and distribution capabilities.

We will continue to stay nimble and believe we are well positioned to continue strengthening profitability while maintaining flexibility to invest in growth. With that, to begin the Q&A session, I'll turn it back over to Matt and Alex to answer a few questions we've received through social media and our Investor Relations e-mail.

Thanks, Megan. As we continue to engage more directly with our shareholders, we wanted to address a few of the most common themes we've seen this quarter. Alex, the first question is, what is Root's approach to the growth versus profitability trade-off?

Yes, that's a great question, and it's actually unique at Root because we don't see those 2 things as trade-offs actually. We think the best way to grow our company through cycles is to continue to invest growth dollars provided that we continue to exceed our cost of capital. And by doing that, we're basically, we're essentially directly solving for increasing the intrinsic value of the shares and of the company. We don't have calendar period targets because if you try to optimize for growth in a calendar period at a certain profit constraint or anything like that, you actually run the risk of making decisions and actually destroy intrinsic value that are not good for the company.

And we didn't invent it. This is, we learned this in college and finance classes and things like that, that we should just optimize to continue to build the largest discounted cash flow, future cash flow of the company. And so what you see from us is when we have high returns and high opportunities in the market, we invest aggressively, we grow aggressively. That might, by the way, in that calendar period, reduce short-term earnings.

And then you see when times, when there's not as many opportunities in the market, we're totally fine being patient with the capital, and you'll see us be very, very profitable. And we think that, that's just absolutely the best, most disciplined patient way to manage our shareholders' capital. And really, so there's really not an implicit trade-off in our business decisions between growth and profit.

Great. The second question is, which part of Roof Advantage compounds the fastest over time, data, pricing models or distribution?

Well, the interesting thing is data, pricing models and distribution all actually have this nice mutually symbiotic relationship with one another. As you get more data, you get better at pricing; as you get better at pricing, your distribution grows; as your distribution goes, you then get more data. And that flywheel is something we started a while ago, and we've actually built a lot of technology to continue that flywheel going very, very fast. I think the part that probably compounds the fastest and that maybe is the hardest to understand from the outside, is just how fast and to what magnitude our pricing can improve as our data science continues to advance because those algorithms are incredibly powerful and our ability to consistently retrain and understand the signal and deploy modern quantitative capabilities, that's really, really important.

So I believe that, that compounds really materially over time.

Next question is, how did Root become the profitable insurtech?

Focus. We picked one of the hardest and largest though, lines of business in the country. And then we picked one of the hardest problems, which is getting really, really good at pricing and underwriting it. Now why do we do that?

Well, price, one, if you want to be serious about disruption in personal lines insurance, you got to be serious about auto insurance because it's the #1 product most consumers actually purchase. It's, again, the largest line of business in the country. And then two, the biggest thing that matters is price, and that is fundamentally a data science game. And it's not an easy problem to solve.

And, but we stuck with it. And by sticking with it, we got very good at it. And that focus has allowed us to drive material earnings now because, again, now we've become experts at what I think is probably one of the most important problems right now for consumers in insurance.

Great. And finally, which part of the company is most misunderstood by investors?

Well, that's a great question. We get it sometimes. I'd say it's always very difficult to understand the platforms that we are building and the systems that we are building truly in like what I would say is like the guts of the company, whether that's pricing or claims. And so these aren't, it's much easier to understand some consumer-facing features.

It's easier to understand marketing. It's very difficult to see and understand and appreciate the value of a 10x platform in insurance, whether that's our data science platform, our telematics platform or our claims platform or most importantly, the fact they're all a single platform and integrated inside one company. That is incredibly difficult to sort of see clearly from the outside. But from the inside, that is our most valuable asset.

Thanks, Alex. Operator, we'll now open the line for questions.

[Operator Instructions] Our first question comes from Tommy McJoynt with KBW.

Thomas Mcjoynt-Griffith: The first question here is about what you guys are doing on the rate side and how you think about that competitively. I think last quarter, you had talked about the expectation that with rate, your average premium per policy might decrease a little bit in the first quarter, but then normalize after that for the rest of the year. Is that still the case? And can you just give us an update on how you view your rate adequacy across your book?

Yes. Thanks, Tommy. First, I want to just remind everybody, we do not price to try to hit growth targets. We do not price to try to hit a calendar period loss ratio or combined ratio target.

We price to optimize the lifetime value of the customer. And in doing that, that's how we always sort of optimize our net present value. In the quarter, we did improve pricing. We actually improved the LTV of our customers by roughly 15%.

A lot of that was through some of the independent agency channel updates that we had as well as with returning customers. What I think you, and have seen in our numbers is that as we've improved segmentation, there has been a bit of a mix shift to some lower premium segments that we've identified that are really good risks. And you can see that because although these average premiums decreased, our loss ratio was still rock solid, which is really proof of the power of the model. As we look forward, I think you might see from some of those improvements in segmentation that we shipped this quarter, you might see some mild decreases in average premiums continue as we continue to unlock more affordable insurance for a lot of our customers, but it shouldn't be anything massive or material.

Thomas Mcjoynt-Griffith: Got it. And then switching over to your appetite for direct channel. It seems that the sales and marketing expense in the first quarter was a bit less than we expected, and it sounded like some of your commentary pointed to expectations for the challenging growth environment to persist for the remainder of the year. Do you have an expectation for how much you'd expect to spend on the direct marketing channel in the coming quarters as we think about modeling?

Yes. I mean, first, we grew PIF 9% in the quarter, and our partnerships channel grew 30% year-over-year. And so that was actually despite what was a very difficult macro backdrop and challenging growth environment. And we are, we saw that environment actually intensify throughout the quarter.

And so we were fine being patient and not deploying as much capital as we would have otherwise knowing that the returns probably weren't there. And so that's what also why you saw us be very profitable in the quarter, one of the reasons you saw us be very profitable in the quarter. And we think that's really disciplined. We aren't expecting the macro environment to totally change quickly here.

And so I think you can probably expect more of what you saw in Q1 for now. But long term, we've seen these cycles happen before. We know how to manage the cycles. And we think our technology can also respond very, very quickly if that cycle changes.

And so you should expect if the competitive environment does change for us to change very aggressively and quickly into a growth position as well as we're continuing to appoint new independent agents. We're continuing to add partners to our platform. We're continuing to refine pricing, and we're continuing to expand nationwide. So there's also some really nice long-term growth opportunities that we're pursuing regardless of the macro backdrop.

Yes. And Tommy, if I could just layer on in terms of expectations on spend. Just to reiterate what Alex mentioned, as it relates in particular to the direct channel, our focus is going to remain on meeting our return thresholds and really leveraging our direct marketing machine to make quick and distinct decisions as the environment evolves. I mean I think that, that's a really significant differentiator for us.

So we'll continue to invest in direct marketing as long as we're meeting our return hurdles across our distribution channels. A couple of other things to note. We continue to be very excited by our partnership and independent agent channels. You can expect that we'll continue to spend through the other insurance or other insurance expense line item as we continue to expand our partnerships and independent agent footprint.

And then also, we are continuing to invest in many of the direct R&D channels. You saw that from us in 2025. And we'll continue to invest in many of these mid- to upper funnel channels that we're not in today.

Our next question comes from Andrew Andersen with Jefferies LLC.

Given commentary for a challenging growth environment and recognizing the 1Q comp was more challenging, just how should we think about PIF growth trending relative to guidance you had given last quarter of full year PIF acceleration?

Yes. We're, if the environment stays currently where it is, our expectations are probably something similar to what you saw in Q1. Again, we're really well positioned to pivot and to push direct growth if we see that as prudent in that quarter. And we have those other growth engines that are outside of direct, whether it's independent agents, partnerships or continuing to expand nationally.

Got it. And if PIF growth sees some moderation here while, or premium growth sees some moderation while PIF does continue to expand, how do you think about the OpEx leverage, specifically on G&A and tech spend, so not looking at the marketing and other expense line item.

Yes, Andrew, good question. As we think about OpEx leverage for the rest of the year outside of our acquisition investments, we expect that, that will remain relatively stable as a percentage of gross earned premium. So that's been around 10% to 11% of gross earned premium. Most of our fixed expense run through that tech and dev and G&A line item.

And we expect that as a percentage of premium that that's going to remain stable throughout the rest of the year.

Our next question comes from Andrew Kligerman with TD Securities.

My first question is around the gross accident period loss ratio and the gross loss ratio with gross accident being 58.8%, gross loss ratio at 54.5%. So that's about 4.3 points of favorable development. And I'm curious as to where you're seeing that from, what accident years? Any color you could share would be great on that.

Andrew, I can add some color to that. So firstly, I'll just say our reserves have been very stable over the past few years. On a quarter-over-quarter basis over the last few years, we continue to have confidence in our loss reserve estimates. The book overall is relatively short tailed.

And it is important to highlight that we do perform a full month, a full reserve analysis on a monthly basis. So, you're not seeing a lag when we're reporting reserves on a quarterly basis. It's all as of the current period. But to more specifically answer your question, the prior period development that we saw in Q1 around 2.5 points of that was related to the accident year 2025, and that was really spread across most of our major coverages, so bodily injury, collision, comp and PD.

We also had an additional about 1.5 points of prior period favorable development that was related to additional subrogation opportunities that we actually identified through model enhancements in the quarter. And so that, from a combination of 2025 accident periods flowing through in Q1 of 2026 as well as a small amount of additional subrogation opportunities, that's going to really bridge your gross accident period and your gross loss ratio in the quarter. But overall, I think our volatility has been minimal overall.

That's really terrific. And as I think about it, too, even if I were to use the accident period loss ratio of 58.8%, Root targets, I think, 60% to 65% and you're looking toward a combined ratio in order to just kind of build a book, you're willing to go in that 60% to 65% zone. I would even think you might even go a little bit higher and hit a combined of about 99% or 100%. It's been really good.

So is this a sign that maybe Root would want to lean in a little more? I know the prior question, you answered that PIF growth would remain the same. But given these metrics that we're seeing, why wouldn't you just lean in a little bit more?

Yes, I think that's a great question. When we make decisions based on whether it's pricing or deploying our capital, we're always looking at the value of a customer and optimizing that value. And so, and making sure that we're not deploying capital at a rate that is lower than our cost of capital. And so we really study incrementality.

And that's why, and by the way, we've instrumented this directly into our system. And so we are very good at predicting lifetime value of customers, retention of customers, how they will behave throughout their lifetime. And we're very good then at optimizing how we actually achieve our target returns. So we don't set our loss ratio targets based on trying to hit a calendar period combined ratio or loss ratio because you can leave a lot of money on the table or make the wrong business decisions that way for investors in the long term.

And so what we do is we stay very committed to our framework and our philosophy of making sure that we're constantly looking to optimize basically the net present value of the business. And that's how we operate. And so sometimes that leads to some periods like you saw in Q1, where we are very, very profitable and some periods where we grow very, very fast. And although that might fluctuate quarter-to-quarter, what we believe is continuing to manage the business according to that really principled economic approach and foundation and fundamentals, you end up building a much stronger business long term.

And this is enforced culturally here. This is embedded directly into our system. So, it's automated. These beliefs are automated at this point to a large degree in how we operate.

And so that's really important for us. And so you won't see us say, well, we could hit a higher combined ratio, let's go lower rates. We just don't think that way.

Yes. And Andrew, if I could layer on too, and you've seen this from us historically as well, but there is a bit of seasonality favorability in the Q1 loss ratio. So Q1 typically is our lowest loss ratio from a seasonality perspective, and this quarter was certainly no exception to that trend. When we think about our loss ratio targets between 60% and 65%, we do expect that our accident period loss ratios will remain within that target as we persist throughout the rest of the year, even with modest seasonal and macro pressures.

So, as a reminder, Q4 loss ratios tend to have the highest level of seasonality impacts, and that's largely driven by animal collisions. And so, we would expect that Q4 is typically at the top end of that 60% to 65% range, whereas in Q2 and Q3, the seasonal patterns are typically more in that 60% to 62% range.

Safer time for the animals, another good quarter for Root. Thank You.

Our next question comes from Elyse Greenspan with Wells Fargo.

I guess one question, just following up on, I guess this goes back to loss ratios a little bit, right? We're starting to think about higher gas prices and then there potentially could also be supply chain impact, right, from what's going on in Iran. So, I was just wondering, as you guys think about these factors, what are you thinking could potentially happen to frequency and severity from here? And are you assuming any impacts when you say you'll stay in kind of the 60% to 65% range this year and the low end, right, in the second and third quarters?

Yes. So that's a great question, Elyse. Right now, we have not seen, we have seen mileage slightly down, not massively down. However, we have not seen frequency drop tremendously.

So a lot of those miles are discretionary miles that consumers are driving that are generally low-frequency miles in the first place. And so we certainly haven't seen that sort of impact the numbers immediately. And it's the same thing with inflation. We think that we are in a reasonable low single-digit type trend environment right now.

And we're watching that every day. We're always measuring it. We have a lot of cutting-edge claims models that look at that actually on a daily basis to try to predict exactly what we think is happening in the market so that we are very well positioned if trend does change to quickly take, to quickly detect it and then quickly take rate through a lot of our automated actuarial systems. And so we're always looking at that data.

So right now, our expectation and when we talk about our loss ratio expectations, they do include our expectation of the macro as well.

And then I know you guys highlighted, right, that the direct environment, right, competition there got more difficult, during the quarter. As we just think about, it seems like in the market today, right, most players at target margins and a lot less rate taking, if anything, right, negative rates across the personal auto industry. As you guys, with that backdrop, I guess, would your assumption be, I guess, that competition on the direct side just continues to intensify from here when we think about the rest of 2026?

It's certainly a macro prediction. So take it for what it's worth. But we're not predicting that the soft market or that a lot of the irrationality of massively increasing marketing budgets with limited incremental growth that, that necessarily goes away at our competitors overnight. And so we're always monitoring it.

You never know when it's going to change. But right now, our base case is that it stays roughly where it is or maybe gets a little bit hotter as those margins stay where they are until, and maybe rates come down a little bit as well. And that's what we're prepared for. But again, we're not guessing because we're measuring it every day.

And thanks to our technology, we can actually just react to it every day. And so it's, we don't really guess a lot. We just measure it.

And then you guys put in place, right, a $75 million repurchase program. is the expectation that you guys will start buying back your shares? Or is this just to give you flexibility at some point if you decide you want to?

Thanks, Elyse. It's a great question. And before I answer that question, I think I'd be remiss not to just highlight that we're incredibly pleased with the new debt structure with Huntington. Huntington has been a long-standing banking partner for us, and we're really thrilled to continue the partnership with them in this manner.

The refinancing of that debt is beneficial in a couple of ways. One, we're unlocking significant interest expense savings for the company. And then two, the new facility gives us the optionality as it relates to deploying capital or deploying excess capital. So you hear Alex and I say it consistently, our objective here is really to maximize the long-term value of the company.

And we believe we can do that through disciplined and dynamic capital allocation based on relative returns. So one thing I just want to reiterate is that we are continuing to invest in organic growth and continuing to invest in our technology and our product innovation in the business. These are really non-negotiables for us, and we're going to continue investing here. As it relates to the $75 million share repurchase authorization, a couple of things to really keep in mind.

One, it comes down to the flexibility that we now have with our new debt facility. Secondly, we have a really strong excess capital position. And then third, we've got confidence in the long-term opportunities in the business. And we now have the flexibility to repurchase our stock when we believe that it's trading at a discount relative to our intrinsic value.

We believe this is a great and indirect way to return capital to shareholders. So in terms of the mechanisms that we'll use, like many of our investments, we'll be opportunistic in our approach to share repurchases. Again, I just want to reiterate that we're going to continue to invest in the business at the same time that we plan to deploy capital for share repurchases. We've got confidence that we can do both, and we've got the flexibility now under our new capital stack.

Our next question comes from Brian Meredith with UBS.

This is actually Leandro on behalf of Brian. My question is related to the investment space. If I remember correctly, last quarter, you said that we would eventually see the net income lower in '26 full year, but this quarter was actually pretty strong at $36 million. So my question is, is there any implied acceleration in investment base going forward related to new channels, technology and R&D?

Yes. Great question. Just to start off, I mean, and you mentioned this in your question. But given the record net income that we posted in Q1, as we sit here today, we do expect to deliver more net income in 2026 than we did in 2025. And that really just comes down to the strength of our model and our agility and opportunity to move quickly as it relates to direct marketing investment.

So with the intensity that we've seen in the competitive environment, you did see us scale back on direct marketing expense in March, which we believe is the right decision for the business long term. So we're going to continue to be opportunistic in terms of how much investment we deploy throughout the remainder of the year. So really, the way I'd think about acquisition expense is it's really variable and based on the returns that we see in the direct. But we are going to continue to invest in R&D, direct marketing.

And we're really excited to continue growing our partnership and independent agent channels. So you will expect to see other insurance expense increase throughout the back half of the year. And then earlier, I mentioned some of the seasonality trends on loss ratio. So again, keep in mind, Q1 is our strongest loss ratio quarter from a seasonality perspective.

We do expect that loss ratios will increase mildly throughout the rest of the year but still remain within our long-term target of 60% to 65%. So all that to say, if the environment persists, we definitely expect that 2026 net income will be stronger than what you saw in 2025.

That's helpful. And my follow-up question is actually related to the sales and marketing expense line. So this quarter was lower year-over-year and also quarter-over-quarter. I think you've kind of responded that, but how should we think about sales and marketing going forward, I guess, more back-end loaded?

Yes. So as we think about sales and marketing, it really comes down to the competitive environment. And as I mentioned, we're going to remain very opportunistic in that channel. We're only going to spend to the extent that we're hitting our return targets. So if the environment is irrational, then you're going to see us be patient and not lean in spend in a given quarter.

Does that answer your question, Brian?

Yes. Thank You.

Ladies and gentlemen, that was the last question for today. The conference call of Root, Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.