Root, Inc.

Greetings and welcome to the Root second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce 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 second 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 second 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-gap measures while we talk about Root's performance. You can find reconciliations of these historical measures to the nearest comparable gap 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. I'm happy to report that in the second quarter, Root continued to deliver strong performance while investing in long-term growth. Net income increased 15% year-over-year to $25 million, generating approximately a 31% annualized return on equity. Revenue increased 2% year-over-year to $389 million, and policies in force increased 6% year-over-year, ending the quarter at 484,000 policies. These results demonstrate the strength of our technology and data science capabilities we have built over the past decade. When we founded Root, our core belief was simple. Insurance would ultimately be won through superior pricing and automation. Long before artificial intelligence became a mainstream conversation, we built the company around machine learning, quantitative science, and a modern technology platform designed to automate insurance from end to end. Today, the pace of AI is rapidly expanding what's possible. It has the potential to reshape nearly every part of insurance. from customer acquisition and underwriting to regulatory filings and claims handling and customer service. The advancement of AI has reinforced our conviction in technology and automation. Moreover, we believe it strengthens Root's competitive position when paired with our proprietary data, our modern infrastructure, and our operating experience as a regulated insurance carrier. Root's data assets, including over 37 billion miles of driving data and more than 900,000 filed claims, are not generic datasets. They are generated from customer behavior, underwriting decisions, and claims outcomes. In order to build insurance-specific AI models, massive amounts of insurance data is a prerequisite. We've spent the last decade building these proprietary datasets. The combination of this data and world-class technology is very difficult to replicate. Many large incumbents have scale and data but continue to modernize decades-old technology stacks. While many newer technology companies have modern software capabilities but lack the regulatory infrastructure, claims experience, underwriting history, and capital foundation required to operate as an insurance carrier at scale. We are building an insurance company for the AI era, one where pricing, underwriting, claims, customer interaction, software development, and capital allocation become increasingly intelligent and automated. We believe the insurance industry is entering a generational technology paradigm shift and that Root is uniquely positioned to lead. Turning to growth, the competitive environment in Direct remained challenging in the second quarter as carriers increased marketing spend while lowering prices. When these cycles occur, we continue to remain disciplined. We intend to pursue growth only when it meets our target returns. While that decision can constrain near-term growth, we believe it is the right one for building long-term shareholder value through cycles. Over the medium term, we expect geographic expansion, continued growth through independent agents, and expanding partnerships to provide durable growth drivers. We recently launched New Jersey, bringing Root to 37 states and covering over 80% of the addressable population. Geographic expansion remains a critical component of our long-term growth strategy, and we are progressing toward a national footprint by the end of 2027. We also announced our partnership with insurance shopping platform Jerry, further expanding Root's presence across high intent digital marketplaces and demonstrating our ability to embed Root's technology and insurance experiences inside partner ecosystems. Customers are buying insurance in more ways than ever before and Root has positioned itself across many of these channels. Direct comparison marketplaces, embedded partnerships at the point of vehicle sale, independent agents, and increasingly AI-enabled customer experiences. Over the long term, we believe the best growth strategy is to build the best insurance product in the world, and that begins with pricing. Pricing and underwriting remain a foundation of everything we do. Technology is at the heart of who we are and has always been fundamental to how we create value. We built the company on the belief that a modern, fully integrated technology stack combined with proprietary data and continuously improving predictive models would allow us to price risk more accurately and operate more efficiently than traditional carriers. Our second quarter results demonstrate the strength of that foundation. We delivered a 92.1% net combined ratio, reflecting the continued profitability and underwriting discipline of the business. At the same time, we continue to invest in what comes next. We expect to launch our newest predictive pricing model later this year, and early results from research and development are highly encouraging. We continue to see meaningful gains as more underwriting, pricing and behavioral data enter our system and strengthen our models. The opportunity ahead is not simply to develop a better model. It is to create an increasingly intelligent, automated insurance company, one that learns faster, prices more precisely and delivers better customer experiences at a lower cost. That is the company we have always been building and AI only increases the potential of the foundation that we have created. We are excited about the future and the opportunity in front of us. We are expanding our national footprint, deepening our distribution capabilities, advancing our pricing algorithms, and building the technology platform we believe will define the next decade of insurance. I'll now pass the call over to Megan to talk about our financial performance.

Thanks, Alex. We delivered another quarter of strong financial performance while continuing to invest in the long-term opportunities that Alex just discussed. In the second quarter, revenue increased 2% year-over-year to $389 million. Gross written premium declined 2% year-over-year to $340 million, while gross earned premium declined 1% to $368 million. Policies in force increased 6% year-over-year to $484,000. These results reflect our continued discipline in a competitive direct market, where we are prioritizing profitable growth. We saw a sequential decline in direct policies in force, primarily reflecting the normal runoff of our first quarter tax season cohort. This was paired with a more competitive acquisition environment that moderated the pace of new business growth and direct during the quarter. Importantly, our new business mix continues to evolve. Partnership and independent agent channels represented approximately 51% of new writings during the quarter compared to approximately 44% a year ago. We believe these channels provide attractive long-term opportunities to diversify our sources of growth while leveraging the investments we have made in technology and embedded distribution. Our underwriting performance remains strong. Net combined ratio improved 3 percentage points year-over-year to a 92% net combined ratio. The improvement was driven primarily by continued expense discipline, with our net expense ratio improving to 26%, while our net loss and LAE ratio remained broadly consistent with the prior year at 66%. During the quarter, we also enhanced the efficiency of our balance sheet. We successfully refinanced our existing $200 million debt facility into a new term loan led by the Huntington National Bank. This facility reduces our cost of debt and increases our financial flexibility. Under our $75 million share repurchase authorization, we repurchased more than $20 million of shares during the quarter. We view repurchases as one component of our broader capital allocation framework, alongside organic growth, technology investment, pricing innovation, and strategic distribution opportunities. Overall, our financial results demonstrate that we can continue generating meaningful profitability while also investing in the capabilities that support long-term growth. As we look ahead to the second half of the year, we plan to continue investing in key strategic areas, expanding our national footprint, deepening our data science and technology capabilities, and diversifying our distribution channels. We expect to invest approximately $10 million in R&D initiatives as we test and expand into new acquisition channels. We believe these investments are foundational to driving long-term growth and scale. In H2, we also expect the normal seasonal pattern of higher loss ratios than H1 to emerge while continuing to invest behind the long-term growth opportunities that we see across the business. Our approach remains unchanged. We intend to continue balancing disciplined underwriting, thoughtful capital allocation, and targeted investments in pricing, distribution, and technology to maximize long-term shareholder value. With that, to begin the Q&A session, I'll turn it back over to Matt and Alex to answer a few questions we have received through social media and our investor relations email.

Alex, I want to close with a few questions we've received from individual investors. First, several investors asked about AI, automation, and telematics. Root was built around data science from the beginning, but what is different today, and why do you believe these capabilities matter more now?

First, I think it's really important to understand and to put into context what hasn't changed, and where we've come from, and the DNA of the company we've created. As you said, when we founded the company, since the very early days, we founded the company on the belief that modern quantitative methods would dramatically change the insurance landscape. We built the company based on data science and modern technology. Now, as we've seen the fundamental mathematics of predictive sciences change, namely in the form of AI, We are able to accelerate that materially. So we're now able to really apply an intelligence layer over top of everything we do, which is going to allow us now to really expand and compound the existing strategy that we've always had as really a quantitative firm. And what that's going to allow us ultimately to do is to, we believe, create the world's first end-to-end based AI insurance carrier. And we think that's going to be tremendously powerful. We're still in the early stages, but we've invested tremendously. We have real proofs of concept, and it's in every part of our business, and importantly, it's in the core areas of our business. It's in pricing. It's in claims. It's not just in onboarding with chatbots or some of those things. It's really at the fundamental level. This technology is going to completely change the insurance game, and we are really well positioned because of our founding principles.

Second, Root delivered another profitable quarter but growth was more muted and PIP was down sequentially. For shareholders who are trying to understand that trade-off, how do you think about growth versus profitability right now?

That's a good question. One of the things we've learned since starting the company is that this industry is marked by really severe cycles where sometimes we see the market get pretty competitive and sometimes we think that capital isn't really returning and It gets a little irrational, frankly. And then sometimes you see competitors pull out and the market turn the other direction. One thing we've done that is actually fairly contrarian is we look at that as an opportunity. And so what we do is we capitalize on that by effectively arbitraging that very cycle. And so when people pull out, you see us push in. We grow the business very fast. You saw us do that before. We've almost doubled the size of our business over a 12-month period before in this company's history. in recent past. And then on the other side, when you see people push in very heavily, you'll see us pull out. And that's exactly what you saw this quarter. This quarter is very competitive. And these are just episodic interruptions in a longer-term growth plan that I think we've very well demonstrated over the last decade since founding the company. But importantly, having the discipline to operate this way, it's not always easy. But when we look at it, We think through cycles and over the long term, it actually is a competitive advantage that allows us to create much higher returns on invested capital over the long term. And we think that's great for long term shareholders.

Third, investors also asked about growth outside of direct, including partnerships, agents, embedded insurance, and the longer term opportunity. Looking past the current competitive environment, What gives you confidence, root, and we accelerate growth over time?

Absolutely. And one of the important things is in being as profitable as we are, we are able to, while we're in these periods, continue to invest inside of our core capabilities and a lot of our growth levers. And so some of these growth levers are very obvious. Things like national expansion. Today we're in 80%. of the U.S. population will go to 100%, where our goal is to be near national by the end of 2027. That's just a mechanical growth driver. There's not a lot of you have to believe to see that sort of come through. We're continuing to add agents as we speak to our platform, and as we do that, we're continuing to see growth. I mean, you look at the growth in our partnership platform, it's been considerable year over year and still is, despite the competitive environment. and so we've been investing in really that white space. There's a lot of distribution that we just aren't in today and we're going after it and we're continuing to add and those will always produce returns regardless of where we are in the cycle. And then the third and what's so important is just the quality of our product. That is durable. It doesn't matter what competitors are doing or where the environment is. When you make a better product, you just will grow faster. And for us, that starts with pricing. And every time we ship a new pricing model, we've seen improved economics, improved LTVs, and therefore improved growth. And we're not seeing that slow down, which is remarkable. We're planning to launch our next iteration of our model in the fourth quarter of this year, and that model in R&D is already showing remarkable growth. improvements in segmentation. So the science is accelerating too. And that's so core. That's core to the quality of the product because the number one reason a customer chooses us is because of price. The number one reason a customer leaves any insurance carrier is because of price. And so that fundamental advantage in investing in that, we think you combine all of these and over the long term, you'll absolutely continue the long-term growth trajectory that, by the way, we've been on. And we think that that will continue.

Thanks, Alex. Operator, please open up the line for questions.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Tommy McJoy with KBW. Please go ahead.

Hey, good evening. Thanks for taking our questions. Alex, you spoke a lot about the competitive environment and that causing you guys to pull back a bit this quarter, especially in the direct channel. As we think about your ability to grow policies and force growing forward, is that purely going to depend on what you see in the direct environment? Do you think the rails you're building on the partnership and through the independent agent side can do enough to offset that where you do actually see PIF accelerate in the rest of the year after it dipped a little bit quarter over quarter here in the second quarter.

Long term, Tommy, we're very confident that PIF acceleration will occur, and that's through state expansion, which we did launch in New Jersey. That actually launched in the third quarter in July was when that first went live, and we're seeing great results there. our partnerships channel which you know even despite a lot of the unexpected increases in competitive dynamics in the second quarter still grew considerably and then you know we're actually finding still in our direct channel new profitable areas to enter into particularly in new marketing channels and so when we combine those over the long term we think absolutely PIF will continue to grow and that we don't think that this quarter is just you know basically an episodic It doesn't change anything about our long-term beliefs. Megan can talk a little bit about what we're seeing right now, maybe, and where we're headed for this year.

Thanks, Alex. As we sit here today, Tommy, we've maintained PIF relatively flat with second quarter. As Alex mentioned, looking ahead, we've got a vast amount of long-term growth opportunities to to increase PIF over time. But as we look at the end of 2026, if the current competitive environment persists, we would expect that 2026 PIF growth will be relatively flat on a year-over-year basis. That said, as Alex mentioned, we do continue to believe in the underlying growth algorithm. It's getting stronger. We're continuing to invest in partnership and independent agents. We expect those channels to continue to scale and really become a larger contributor to the overall business, but our focus remains on building long-term value through expansion of our distribution channels and also state expansion, as Alex mentioned.

Got it. Thanks for that. And then switching over, if we look at the gross accident period loss ratio that strips out all of the noise from prior periods, that was up on the renewal book about five points on your basis in the second quarter. Are we back to more normalized levels? I know it had been running a bit better than expectations and a bit better than modeled previously. So do you think this is a good run rate to where you want to see that number go at?

Yeah, Tommy, I can take that one. The renewal business loss ratio in the period was about 54%. That's primarily the result of normal seasonality. We typically see renewal book loss ratios increase as you move from Q1 to Q2, just given the normal seasonality. But the underlying renewal book, you know, continues to perform well and really remains within our overall expectations.

Next question, Elise Greenspan with Wells Fargo, please proceed.

Hi, thanks. Good evening. My first question, I guess, is following up just on the PIF conversations. I think you said Piff would most likely be flat, right, year over year at the end of the year, which I think backs into perhaps a decline of around, you know, 2,000 in the back half. Can you just give us a sense, I guess, when you're thinking about the back half, do you have a sense of what transpired in July? And I guess, is that assuming even trends, I guess, through the Q3 and the Q4 relative to just, you know, both quarters, I guess, losing a little bit of policies sequentially?

Yeah, Elise, thanks for the question. Just to clarify, so as we sit here today, PIF is relatively flat with where we ended Q2. And looking ahead with the environment, if the current competitive environment, particularly in the direct channel, does persist at the levels that we've seen, we do expect that as we end 2026 that Piff would be relatively flat on a year-over-year basis as you compare it to the end of last year. So it's modestly up from 2025, where we ended at about 482.

Okay. And then you guys were talking about your next-gen pricing model. Can you just Give us a sense of how you expect that to impact your overall pricing as the predictive model is rolled out later this year.

Absolutely. Usually when we launch these models, and I think you saw this last year in our models, we disclosed that that model actually increased our customer LTVs by over 20%, which then did allow us to further grow. It will be a methodical rollout. So this, as I said, in this year would launch later in Q4. And it will be a state-by-state rollout, as it always is. And so I think you won't see a ton of impact in this year, but then usually that's a much better driver into next year. And so that's really when we expect to see more of that impact.

And then I think in the queue, you guys called out that there was an impairment loss of 4.4 million on your private equity investments, which took that carrying value down to zero. Why did you guys take that action in the quarter?

Yeah, Elise, good question. You know, one thing I do want to highlight is, you know, the underlying investment income on our cash, cash equivalents and fixed income. Portfolio was around $10 million, so that's consistent with what you've seen from us in recent quarters. The reported NII for the quarter was $5 million because we did fully impair our private equity investment, so that was around 4.4 million of a full impairment. Only about 600,000 of that impairment represented our The original cash investment that we made several years ago, the remaining $3.8 million actually reversed previously recognized unrealized gains. So, you know, these investments are a very small non-core portion of the overall portfolio and, you know, our primary strategy just remains to continue to generate returns through the high quality fixed income portfolio.

Thank you.

Next question, Andrew Kligerman with PD Cow, and please go ahead.

Hey, good evening. So my first question is around pricing. PAF was up 6% year over year, gross written premium down. And I know this is not the right math, but maybe help me work through it. Does that imply pricing was down 8%? I know on past calls you've talked about writing premiums that might be lower values or in different types of customers that don't necessarily reflect on pricing. But maybe you could give a sense of whether directionally I'm right there and where your pricing is in general on a national basis.

Yeah, thanks, Andrew. That is correct. You did see average premiums come down as you did sort of across the industry. So year over year, you saw us take rate down somewhat. When we are looking at our current rate levels nationally, and of course, it varies by state, we're seeing modest positive trend. And we believe that we have an indication, meaning that we're probably a little overpriced of about 3% or so. or low single digits. And so somewhere in that range is really where you should anticipate us acting and bringing down rates.

So Alex, just to make sure, so you have some, what you're saying is you have flexibility potentially for another three points of rate decline. And when you say rates were down so far somewhat, should I frame that in Low single digits there as well. So it's been down low single, and then there's an opportunity to take it down another 3% or low single digit again. Am I describing that right?

Yeah, that's right. I mean, if you look at our loss ratios versus even some of the largest in the industry, we have held up remarkably well. And so we have a very strong profitability in the business. and so you know although we do not set pricing targets really to optimize for growth we are constantly studying the environment to figure out where we think our pricing level should be and right now we think again we have that room to bring down rates by somewhere in that low single digits that also to remind you we will also be launching a new pricing model that will change segmentation as well and so that often changes customer mix and may push us actually more into higher premium segments and so there's a lot that moves around there but in general right now we're very happy with where our rates are again some modest single digit rate decreases may be coming through the book and you know when you look at our loss ratio you can see that we're not chasing that growth because it is you know one of the best

That makes perfect sense, Alex. And then my follow-up is around the expense ratio. And I was impressed. It was down three percentage points, not only year over year, but quarter over quarter to 26.1%. So my question is, can you hold it there? Can you get it down to a progressive 20-ish? Where does that go near and long term?

Yeah, thanks, Andrew. You know, as you mentioned, we have brought down the expense ratio over time. You know, we do continue to manage the cost basis very prudently, and we've also been investing in areas that support the long term growth. I do want to highlight one of the primary drivers of the net expense ratio being so low in the quarter. and that really was reflective of a reduction in performance-based equity compensation expense. So as you can see in our queue, our executive team, their equity packages are based on 100% performance stock units and that compensation is intentionally tied to performance which closely aligns with shareholder value and those grants are tied to performance objectives specifically around growth and policies in force and loss ratio performance. So what you're seeing in the quarter, given where we ended the quarter from a PIST perspective, was lower expense. Importantly, I do want to just highlight that that reflects current operating environment, does not reflect a change in our long-term growth aspirations by any means. And I would not run rate the 26% net expense ratio. Part of the reduction that we brought down in the G&A line item actually represents a decrease of expense that we had recognized in previous periods. So going forward, share-based comp, I think, is going to be around $8 to $9 million a quarter So definitely don't run rate the share-based comp that you saw in Q2. And just to put a finer point on it, as we think about fixed expense in the business, typically that's running through your G&A line item and your tech and dev. And we expect that that's going to be between 10% and 11% of gross earned premium in the back half.

I see. Okay, so I'll plug those pieces in and just, you know, just to make, without having itemized those numbers, where does that put us at a base expense ratio if you normalize it?

Yeah, I would use, you know, Q1, Q4 as a more normalized expense ratio.

Okay, so the 29-ish. Okay, thank you very much.

Next question, Andrew Anderson with Jeff Reeds. Please go ahead.

Hey, good afternoon. On the $10 million R&D spend that you had discussed, can you talk about maybe more specifically where you're allocating that and how you're thinking about a payback period on that?

Absolutely. So we have historically, when you look at where Root is and where we've invested a lot of our Our R&D and our marketing, it's really been predominantly in lower funnel search channels. And we are in a minority of really marketing channels. And what we've identified is we've done R&D into actually more upper funnel channels. And so we've actually deployed this into some markets. And we're starting to see really good results that hit or are coming close to it, provided we can optimize it. are our targets. And so we are really excited by that. We're in less than probably 10% of all of the media channels right now in the industry, and so it represents a very significant growth opportunity. And like I said, we're seeing really favorable early results. And so what we want to do is we want to actually continue to double down there because it can clearly, clearly scale the business materially. and so right now the way that we manage that is when we start and we launch some of those channels we observe and we collect data and then from there we optimize and over a period of time we expect to optimize that down to the paybacks and the returns that we manage all of our channels and every single piece of the business with because we do have that level of discipline and we've built a lot of interesting technology and the ability to target and measure these things which we think is now going to scale and actually generalize to a lot of these new bets so it's It's very exciting. We also, you will see more investment into AI. We are continuing to invest in AI engineering, particularly. We've made huge strides there where actually over 90% of our code base at this point has been touched meaningfully by AI. And so we are really moving quickly on AI. And so you're going to see investment there as well.

Thanks. And within the partnership channel, could you talk about just the growth there? Is that being driven by increased production from some of the larger relationships, or are you seeing more meaningful contribution from a broader set of partners?

It's really a broader set of partners. We're certainly seeing some of our very large partners continuing to grow impressively and us continuing to take more share in certain partners as well. but we're also more broadly appointing more independent agents and finding product market fit really across more and more agents and so we're very early in the agency strategy. It's another material opportunity for us to grow. We're in a small minority of most of the independent agents nationally and we're continuing to every single day launch more agents and get better at that channel, continue to refine our pricing for that channel and our product for that channel and so as we're doing that We're just seeing a really long runway in front of us. And so we're excited to continue to get that to scale so that it can continue to be a ballast of growth in the business. And it's grown tremendously over the last two years, and we don't think that's going to change.

Thank you. Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and we thank you for your participation.