Root Inc - Ordinary Shares - Class A Stock

Greetings, and welcome to the Root's Second Quarter 2026 Earnings Conference Call.

[Operator Instructions] 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-GAAP measures while we talk 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. 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 data sets. 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 data sets. 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 in 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 remained 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 e-mail.

Alex, I want to close with a few questions we 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?

Well, 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. And as you said, we really -- 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. And so we built the company based on data science and modern technology.

And now as we've seen sort of 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 proof 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 PIF 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 get -- turned the other direction. One thing we've done and that's 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 over -- 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 you can reaccelerate 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. We'll 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. And 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 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 #1 reason a customer chooses us is because of price. The #1 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.

[Operator Instructions]

Your first question comes from Tommy McJoynt with KBW.

Alex, you spoke a lot about the competitive environment and that sort of causing you guys to pull back a bit this quarter, especially in the direct channel. As we think about your ability to grow policies in force going forward, is that purely going to depend on what you see in the direct environment? Do you think the sort of 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 and July was when that first went live, and we're seeing great results there. Our partnerships channel, which even despite a lot of the unexpected increases in competitive dynamics in the second quarter still grew considerably. And then 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 we don't think that this quarter is just basically an episodic incident versus any -- 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.

Yes. Thanks, Alex. As we sit here today, Tommy, we've maintained PIF relatively flat with second quarter. And then as Alex mentioned, looking ahead, we've got a vast amount of long-term growth opportunities 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 balance or 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. 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 5 points on a year-over-year 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?

Yes. Tommy, I can take that one. The new -- 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 continues to perform well and really remains within our overall expectations.

Next question, Elyse Greenspan with Wells Fargo.

My first question, I guess, is following up just on the PIF conversation. So I think you said PIF 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 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 both quarters, I guess, losing a little bit of policies sequentially?

Yes, Elyse, 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, 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 PIF 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, and 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, would 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 Q, 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 0. Why did you guys take that action in the quarter?

Yes, Elyse, good question. One thing I do want to highlight is 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 original cash investment that we made several years ago. The remaining $3.8 million actually reversed previously recognized unrealized gains. So these investments are very small non-core portion of the overall portfolio. And our primary strategy just remains to continue to generate returns through the high-quality fixed income portfolio.

Next question, Andrew Kligerman with TD Cowen.

So my first question is around pricing. PIF 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?

Yes. 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 3 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? Like -- 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?

Yes, 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 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 when you look at our loss ratio, you can see that we're not chasing that growth because it is 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 3 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 aggressive like 20-ish? Where does that go near and long term?

Yes. Thanks, Andrew. As you mentioned, we have brought down the expense ratio over time. 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 Q, 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 in policies in force and loss ratio performance. So what you're seeing in the quarter, given where we ended the quarter from a PIF perspective, was lower expense. Importantly, I do want to just highlight 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 million 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.

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

Yes. I would use Q1, Q4 as a more normalized expense ratio.

So the 29-ish. Okay.

Next question, Andrew Andersen with Jefferies.

On the $10 million R&D spend that you had discussed, could 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 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 coming close to, provided we can optimize it, our targets. And so we are really excited by that. We're actually -- 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 in 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 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.

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 the 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 few years, and we don't think that's going to change.

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

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.

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.

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.

Greetings, and welcome to the Root, Inc. Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the call over to Matt LaMalva, Head of Investor Relations and Corporate Development. Please go ahead, sir.

Good afternoon, and thank you for joining us. Root is hosting this call to discuss its fourth quarter and full year 2025 earnings results. Participating on today's call is Alex Timm, Co-Founder and Chief Executive Officer; Jason Shapiro, Senior Vice President of Business Development; and Megan Binkley, Chief Financial Officer.

Earlier today, Root issued a shareholder letter announcing its financial results. While this call will reflect items within that document, for more complete information about our financial performance, we also encourage you to read our full year 2025 Form 10-K. 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 key performance indicators and risk factors, please review our most recent 10-K 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. 2025 was another strong year for Root. We grew revenue by 29% and our net income by 30%, exiting the year in the strongest position in the company's history. These are standout results in any year, but particularly in 2025. This is a testament to the strong foundation that Root has built to deliver throughout cycles.

With $1.5 billion in premiums, exceptional financial performance and a strong balance sheet, we have put in the hard work, time and investment to be in the enviable position to drive profitable and material growth in our business, and we are doing this in a $350 billion auto market. Furthermore, our technology has given us a structural advantage and positioned us since our founding to lead in the adoption of AI-driven pricing and automation.

As a company whose founding principles lie at the heart of AI, namely the advancements of modern quantitative methods, we are able to take advantage of an increasingly connected world and we are seeing this come through the numbers. In the last 12 months, we increased our LTVs by more than 20% on average by just doing better math.

While we believe that automation via robotic process automation and chatbots will be important to our operating leverage, our data suggests that this opportunity pales in comparison to the relative enormity of leveraging next-generation quantitative machines to the fundamental problem of insurance that is prediction.

And our technology advantage doesn't end there. As technology and consumer behavior rapidly shifts and expectations rise, insurance distribution is now increasingly a technology problem. In the past, distribution first relied on appointing the right exclusive agents in local areas. Then as the direct channel grew, it moved to inundating customers with ads.

Today, whether it's integrating with new consumer-facing GPTs, financial services apps or vehicles, we believe the future of distribution will be the ability to seamlessly integrate with these services to provide easy, almost invisible insurance.

Doing this with flexible and transparent underwriting so that there is no dilemma between ease and profit is fundamentally a technology and data science capability, an opportunity that Root was built for. I'd like to share our growth strategy that consists of 5 key growth levers.

The first is pricing. The continued rapid iteration of our pricing models as we incorporate new data from a variety of sources, ranging from cell phone sensors to in-app behaviors to traditional underwriting variables, enables lower prices while maintaining our strong loss ratio performance.

This drives material and compounding growth across all of our channels. Price is the most important factor in insurance and ultimately, as we lower prices, consumers in all our channels benefit. We are constantly working to make our product more affordable for our customers.

The second is geographic expansion. We are already covering 80% of the U.S. population, and our goal is to be in all contiguous states by the end of 2027. There's no reason our model doesn't scale to these folks in these new states as consumers everywhere want affordable, easy, transparent and fair insurance.

The third is independent agents. This is our fastest-growing segment with a total addressable market of over $100 billion and growing.

Our seamless agent purchasing experience and competitive pricing makes for a formidable product that is not easily replicated. The fourth is our connected technology ecosystem. A prime example of this opportunity is the recently announced partnership with Toyota that enables consenting drivers to receive an instant telematics-based car insurance quote from Root.

Jason will go into more details on this exciting partnership on today's call. And our fifth lever is our direct distribution machine. Built on a modern data science architecture, our integrated pricing and marketing machines use hundreds of behavioral variables to target the right customers with the right price, adapt quickly to change and deploy capital with agility and discipline.

We're continuing to expand the scope of this machine as we enter into more data-rich channels, providing new veins of growth for the business.

This growth strategy, we believe, is self-reinforcing, creating compounded effects when successful. For example, as pricing gets better, our performance improves. And as a regulated insurance carrier, this performance is critical to our state expansion. As we become national, this, in turn, makes us more attractive to large partners, and we begin to see economies of scale in our direct distribution.

This is a virtuous growth cycle that has been unlocked by our scale and net income profitability. In 2026, we expect accelerating annual PIF growth, fueled by continued expansion of our distribution channels. We also expect to continue investing in the talent and technology to support our growth.

Given our clear market opportunity, proven business model and track record of execution, these investments represent a significant long-term opportunity. We operate with a long-term mindset, prioritizing durable value over short-term reporting results.

That means thoughtfully balancing growth and profitability as market conditions shift and we invest in R&D, all while staying focused on the compounding strength of our model rather than quarterly fluctuations. Taken together, we believe this approach positions Root to become one of the defining insurance companies of the next decade. I'll now turn the call over to Jason to talk about our exciting partnership results.

Thanks, Alex. I'd like to spend a few minutes on our partnerships channel, what we've built, why it matters and why we believe it represents a durable competitive advantage for Root. Over the past 2 years, we have built a partnerships business that was nearly half of overall new writings in the fourth quarter and is achieving our profitability and loss ratio target.

That growth has been delivered. It's the result of a focused strategy to diversify distribution and solve what we believe is fundamentally a technology problem inside the insurance industry. For years, the idea of embedded insurance has been promised in the industry.

The idea is simple, meet customers where they are and make insurance easy. But in practice, much of the industry stopped at surface level integrations, public APIs, referral links or marketing announcements labeled as partnerships.

That is not what we mean when we say Root is in the partnerships business. A true partnership requires a shared vision, deep technical integration, aligned incentives, ongoing optimization and measurable impact for both companies and their customers. It requires scale, regulatory breadth and a modern technology stack capable of solving real operational complexity.

That is where Root is differentiated. We operate in 36 states, representing roughly 80% of the U.S. population. We have a full stack digital platform with a comprehensive suite of APIs that enable quoting, underwriting, binding, servicing and telematics, all configurable to a partner's native environment.

That combination of scale plus modern infrastructure is rare in our industry and extremely difficult to replicate. Let me give you a few examples. With Carvana, we are deeply embedded in their purchase flow. Customers can quote and buy an insurance in 3 clicks and as little as 30 seconds without ever leaving the Carvana experience.

This is not a static integration. 4 years into the partnership, we continue to run joint experiments, optimize attach rates and improve conversion. We are aligned on increasing vehicle transactions and delivering a better customer experience. That is what true partnership looks like.

In the independent agent channel, our integration with Goosehead has reduced quote-to-bind time by more than 50%. Our APIs are deployed directly inside their native agent platform, reducing key strokes and friction. For agents, that means more productivity. For customers, it means faster service. And for Root, it means profitable growth in a channel that represents roughly 1/3 of the auto insurance market.

The independent agent channel has become one of our fastest-growing verticals because we are not simply adding another carrier option. We are delivering technology that materially improves the agent workflow. We support agents across the spectrum from fully embedded API integrations to our hosted experience and Root agent portal.

The strategy is simple, meet partners where they are and grow deeper over time. In automotive and financial services, the opportunity is even larger. Our OEM partnerships, including Hyundai and Toyota, demonstrate another level of differentiation. Through our connected vehicle relationships with major manufacturers, we can access vehicle data directly, enabling telematics-based pricing immediately at policy inception.

That shortens time to bind, enhances underwriting precision and increases customer retention. We're incredibly excited to announce that in the fourth quarter, owners of connected Toyota vehicles can provide consent to share their vehicle driving data with Root through our platform.

This data partnership with Connected Analytics Services allows eligible Toyota and Lexus vehicle owners to opt in to receive an instant telematics-based quote on a voluntary basis using their own connected car data. The same model applies in financial services. Through partnerships with financial partners like Experian, we are embedding insurance into high-intent financial moments, credit monitoring and personal financial management.

These are ecosystems where consumers are already making important financial decisions. Our platform allows us to integrate at varying levels of depth from API-driven quoting experiences with partner environments to streamline transitions into a Root-hosted buying flow.

As partners see performance and customer value, we have the ability to expand and further embed over time. That flexibility is critical. Many large financial institutions are not ready on day 1 for a fully native insurance stack. Root's platform architecture allows us to start with a lighter integration and progressively deepen it without rebuilding infrastructure. That adaptability is a significant competitive advantage when working with large organizations. Alex mentioned our hard one foundation. Our geographic footprint, balance sheet strength, regulatory infrastructure and technical depth to support these partners in a meaningful way.

Having this foundation in place and technology makes Root n-of-one. We believe we are in the Goldilocks zone. We have both the technical abilities to move quickly and deliver customized solutions and have the geographic reach and financial performance needed for Fortune 500 companies to feel comfortable partnering with us.

The result is a diversified distribution engine that is not dependent on advertising spend alone. It is a capital-efficient growth model built on long-term mutually beneficial relationships. Most importantly, it allows us to delight partners while also building better customer experiences at better prices.

We are still early. Auto insurance is a $350 billion market in the U.S. and independent agents alone represent roughly 1/3 of that market. Our penetration across automotive, financial services and independent agents remains small relative to the total opportunity, but the momentum is real. The integrations are deepening and the contribution to near-term growth is accelerating.

More importantly, we've built the technical and strategic foundation to continue compounding that growth, and we believe that is a competitive advantage that will endure. I'll now turn the call over to Megan.

Thanks, Jason. Turning to financial performance. We concluded 2025 with exceptional underwriting, a strong capital position and record net income. This foundation positions us to accelerate growth and invest further into our business, all while maintaining the disciplined unit economics that underpin our long-term success.

In the fourth quarter, we grew gross written premium and gross earned premium by 9% and 14% year-over-year. We achieved this growth while generating net income of $5 million, a decrease of $17 million year-over-year. In the fourth quarter, we also delivered operating income of $11 million and adjusted EBITDA of $29 million, a $24 million and $14 million decrease year-over-year, respectively.

The year-over-year decreases reflect deliberate investments in partnership acquisition and direct R&D marketing as well as a modest increase in loss ratio due to elevated seasonality. We accelerated policies in force growth by more than double the pace of the fourth quarter of 2024.

For the full year 2025, we grew our gross written premium and gross earned premiums by 16% and 19%, respectively. We generated net income of $40 million, an increase of $9 million year-over-year. In 2025, operating income was $62 million and adjusted EBITDA was $132 million. This compares to 2024 operating income of $79 million and adjusted EBITDA of $112 million. We are incredibly proud of achieving record net income in 2025. This momentum reflects the durability of our unit economics and our continued discipline in managing fixed expenses. We ended 2025 with $312 million of unencumbered capital and maintained an excess capital position across our insurance subsidiaries.

We are well capitalized as we focus on accelerated growth and believe continued execution will further reduce our cost of capital over time. Looking ahead to the first quarter of 2026, on the growth side, we expect to see elevated shopping increased sequential policies in force growth, largely driven by tax refund season.

Note that year-over-year growth will be less pronounced than what we saw in the first quarter of 2025 as that time period was positively impacted by increased vehicle sales in response to tariff uncertainty. On the underwriting side, we expect more favorable gross accident period loss ratio performance relative to our Q4 results, ultimately benefiting Q1 profitability.

Typically, our loss ratio tends to be the lowest in the first quarter as less miles are driven in the winter months. In the second and third quarters, our loss ratio tends to increase modestly as driving activity returns and then elevates in the fourth quarter as animal collisions increase.

Throughout 2026, we plan to continue investing in key strategic areas, expanding our distribution channels and national footprint, enhancing our product suite and deepening our data science and technology capabilities. These investments are foundational to advancing long-term growth, scale and sustained value creation.

We expect these investments, combined with a higher loss ratio, while still within our long-term target range of 60% to 65% to result in lower full year net income in 2026. We are entering 2026 with the team, the technology and the momentum to scale without compromise. With that, we look forward to your questions.

[Operator Instructions] And we'll take a question from Tommy McJoynt with KBW.

The first one here is regarding your anticipation for accelerating PIF growth in 2026. In the shareholder letter, you talked about the 5 different growth drivers. Should we think of those as sort of the ranking that you were thinking about in terms of what's going to be most impactful to drive PIF growth?

Yes. Thanks, Tommy. I wouldn't say that those are necessarily in order. I will say pricing, which is really the first lever that we listed, that's going to be and continue to be the tide that lifts all ships, right? As we get better at pricing, we really see that hit both our direct channel and our independent agent channel. So -- and similarly, as we expand geographies, that will open up, again, more growth opportunities for our direct machine as well as our independent agent machine and our partner machine.

So all of those are really intimately linked to one another, and they actually have a really nice way that they work together. Independent agents, of course, has been our fastest-growing channel to date. It's more than tripled year-over-year in new writings. And again, we're in about 10% of appointed agents nationwide. And so that, we think, has a really strong growth opportunity that we are executing on currently and is going really well for us.

And then on the connected vehicle ecosystem, we're really excited about the announcement that we're sharing with Toyota. We think we're just getting started there. Those might take a little bit longer to get to scale as we crawl, walk, run through those integrations and those strategies similar to what you saw with Carvana.

And then on our direct machine, we're continuing to optimize that. That's grown -- we've grown our direct new writings really well for the last 3 quarters straight as we've continued to optimize that machine. So I think you're going to see real positive progression across all of those. And as each one begins to execute, it has positive impacts on all of the others. So that's really what I'd expect.

You also mentioned a willingness to see average premium per policy come down a little bit as you price risk more accurately, and that can help with retention. Do you have an expectation for the magnitude that we could see the average premium per policy come down? It's decelerated pretty decently over the past year. I just want to get a sense of where that could go terminally.

Yes. Again, we're -- really what's driving this is as we've been better and better at segmenting risk, which we're rapidly getting better at through our AI and ML pricing models. As we continue to refine those, we're finding the ability to actually continually lower prices for our customers while continuing to post strong net income and strong loss ratios. And that's really the beauty of the model.

We believe long term that actually creates a moat around our customers because we're continually expanding our pricing advantage in the market. And again, price is the #1 reason a consumer purchases insurance and chooses a particular carrier. It's also the #1 reason they leave.

So as we do that, we believe that we're continuing to build a structural advantage into the business. We still have our new model out there. Some are still renewing on to that model. And so you might see a slight decrease in average premiums through the first quarter, but we think it will probably normalize thereafter.

Yes. And then, Tommy, if I could just layer on to that. Alex talked about the increases that we're expecting in terms of growth on a year-over-year basis. Keep in mind that is going to translate into an increase in acquisition investments throughout 2026. And keep in mind also that as we continue investing in the partnership and IA channel, you're going to see that growth translate to increased acquisition expense through other insurance expense line item.

And then we are also planning to continue scaling our direct channel, which shows up in the sales and marketing line item.

Next, we'll move to Andrew Andersen with Jefferies.

This is Charlie on for Andrew. I want to start kind of just more broadly with a question regarding the OEM partnerships in general. What exactly is the data that you guys are receiving and pricing based on? Is it more behavioral telemetry data? Or do you also kind of look at whether or not autonomous or ADAS features are enabled or how often they're enabled? And I guess, just a better look at what kind of data you'll be getting from these sorts of partnerships and what you are either able to or plan to price on with that?

Thanks, Charlie. It's really dependent on each individual OEM. And so we've now partnered with several OEMs, and they all have their own strategies. Some OEMs have publicly available APIs that you can -- really any company can integrate with, which is simple consumer consent. Others require more deeper integrations.

And through these integrations, all of the data is different depending on what vehicle model you're dealing with. you, of course, get the basic telemetry data from pretty much all of these, but then you're increasingly getting access to more data than that.

And so that includes both ADAS features as well as autonomous features. And as that data continues to progress, it's still changing. So we are also seeing actually additional data features being added to a lot of this as the vehicle technology is changing. And really, what we're doing is we're using all of that.

So we pull in as much data as we possibly can from every OEM. We actually work very closely with these OEMs, too, in terms of the specific data that we're getting and that we can get access to proactively actually see if we can get even more data off of these vehicles, but we're using all of that data to really make sure that our models are appropriately fit to each specific model and OEM because it's very, very important.

Again, all of these are very different. And so that's really what we're getting. Some OEMs, the other nuance here, some OEMs will give you data on a consumer in the past. And so you download the Root app and we can see that we have driving data on you and we can immediately give you an insurance quote with telematics involved. Others will only do streaming and only have streaming capabilities on a go-forward basis. And so you've really got to have a flexible system that understands the nuance between every single OEM in order to successfully use this data.

And then I guess just looking at the overall pricing environment for the industry, right, we're looking at pricing has been moderating for some time now. It's likely to turn negative pretty soon for the industry.

I know you guys are talking about accelerating PIF and also trying to compete on price as well. But how are you kind of prioritizing retention versus new business acquisition? And maybe how does that look different within the different channels? And I guess just kind of looking at retention, what levers aside from pricing, I suppose, are your kind of key ones within those 5 for improving retention rather than growth?

Absolutely. So yes, I would say we saw and we've continued to see increased competition really over the past year, and you still saw us grow impressively. I had just mentioned over the last 3 quarters, despite the increase in competition, we were still able to grow new writings even in the direct channel.

And so -- and that's just through continuing to refine our models within marketing. And so we still believe that we can grow the company actually across cycles, which is important to note. On retention, the first and the biggest driver of retention is customer profile. And there, what we're doing is we're making sure that we're appropriately priced really across the spectrum from really preferred business all the way to more nonstandard business.

As well as showing up where all of these different segments are shopping for insurance. And so if that's in independent agents, for example, we see a different customer mix come through there than we do on the direct business.

And so that's one of the biggest needle movers to driving retention is making sure that we're targeting the right distribution channels. From there, of course, price is important. And then the third I would say is our product features. We're constantly working to make our product more flexible for customers, whether that's flexible billing schedules, whether that's different grace periods. And so we're actively working there to continue to improve retention, and we've seen good results.

Okay. And then if I could just quickly slip one last one in. What kind of assumptions are you guys embedding in your pricing for 2026 regarding loss cost inflation?

Right now, we're in roughly a low single-digit probably net trend environment. And so that's really where we're thinking we're going to end up.

And next, we'll move on to Andrew Kligerman with TD Securities.

My first question, I guess, Megan kind of talked about the kind of targeted 60 to 65 accident year loss ratio and kind of in the fourth quarter came squarely in between that. Just looking through 2026, '27, how do we think about the -- and Megan talked about investing in various areas.

How do we think about that 30 to [ 35 ] expense ratio, where does that kind of settle out? I guess it kind of bumps from quarter-to-quarter. And are you on a combined ratio basis kind of looking to -- I think you've said in the past, 100 or maybe slightly even higher than 100 is sort of a going combined. So maybe you can help me think through the time line for that.

Yes. Thanks, Andrew. It's a good question. As we think about the loss ratio expectations in 2026, I think it's important to keep in mind that, as you mentioned, our long-term loss ratio target is between 60% and 65%. On a full year basis, we've been operating below that for quite some time now, both in 2024 and in 2025.

So as we look to accelerate new business growth in 2026 and as we expand our distribution channels with more new business, that mix is naturally going to carry a higher loss ratio than the renewal business, though we do still expect to remain within our long-term loss ratio targets.

On the expense ratio side, when we think about operating expenses, we really think about them in 2 main components. The first one being acquisition expense. So you can expect that as we continue our investments into growth in 2026 consistent with what you saw in both 2024 and 2025, we're going to continue to spend from an acquisition perspective.

We're comfortable increasing that spend as long as we continue to meet our unit economic or profitability targets. The acquisition expense really mainly runs through sales and marketing and other insurance expense. And I think I hit on this earlier, as we continue to invest in the partnership and independent agent channel, then you're going to see more acquisition expense actually show up in other insurance expense.

And then lastly, on the fixed expense cost, we do expect that our fixed expense will remain relatively flat as a percentage of gross earned premium. When you compare 2025 to 2026, we are continuing to make targeted investments in our product and our technology as we look to scale our proprietary platforms and distribution channels.

Important to note that most of our technology and talent costs really roll up into your tech and dev and G&A line item. And as we think about these line items as a percentage of GEP, you can expect some consistency in 2026 as you saw in 2025. I hope that answers your question.

Yes. And just to kind of round it out, so it sounds like that kind of puts you somewhere around 100 combined. Is that right?

Yes. We think about it more in terms of specific investments that we're making in 2026. And we don't necessarily want to give a guide for a specific combined ratio, particularly given the way that we manage the direct marketing expense.

If we identify opportunities to push into growth, particularly indirect, we're certainly going to do that. So you could see the combined ratio increase in certain quarters, really driven by our appetite for growth.

Understood. And I guess next question is around independent agents. It sounds like you've got some really robust opportunity there. Of course, maybe in the last couple of weeks, investors have assumed that the independent agency channel is going to die because AI is going to completely displace it. So I'm kind of -- I'm intrigued by your interest in growing in the independent channel and how you think AI will affect that channel going forward?

Yes. I think -- well, one, first, I'd say, if I take a step back, there's $100 billion of premium today going through independent agents. So it's roughly 1/3 of the market. If I go back, by the way, 10 years ago, it was 1/3 of the market. If I go back 50 years ago, it was roughly 1/3 of the market. And so the independent agents have had material staying power.

And the way they've done that is actually through evolving their businesses. And we're still seeing that today. We actually have 2 partners, both of which function as independent agents that are actually already live within ChatGPT and generating effectively quotes. And we are there and we are live and we're doing that.

I think Google, a lot of independent agents still advertise on Google. So I think what you're going to see is consumers will continue to move, but a lot of what's going to happen is you're going to see companies continue to adapt. I think things like chatbots and those types of experiences are going to become commoditized.

And that's where you're going to see, I think, AI really play a big role, at least in terms of distribution. But we don't necessarily -- we think that, that's actually a much smaller opportunity compared to the opportunity to actually apply a lot of the underlying advancements in really prediction sciences that are underlying a lot of these LLMs that sure might be used for predicting the next word in a sentence, but that can now be used actually directly to predict also who's going to get into an auto accident and who's not.

And what we've seen is that, that opportunity is far, far larger. And it's based on -- importantly, it's based on really strategic assets that Root has built, namely proprietary claims data. We have $1.5 billion in revenue of auto claims that's required to actually put -- the more data you give these things, the better and better they get. The second is the ability to actually collect all of the rich underwriting data, whether that's phone telemetry, vehicle telemetry, behavioral data from consumers, traditional underwriting variables and then ultimately price and using all of these variables.

And to do that, you've got to be a regulated insurance carrier. And so a lot of the data that we have is proprietary. The technology that we have is proprietary. And then the regulatory structure also creates big barriers for really anybody to come in to the space. And so that gives us the advantage, and we're really at a unique spot when you look at the industry of both having the scale required to make these new modern quantitative methods work really within claims and pricing, but then also have the technology and the nimbleness to be able to apply it.

And I think we believe that over the long term, that creates a structural advantage on pricing, and that's where you're going to see really the differences amongst carriers between the haves and the have-nots on AI. In terms of distribution, chatbots, we think a lot of that's going to be commoditized.

And next question, we'll hear from Christian Getzoff with Wells Fargo.

My first question is on the accelerating annual PIF growth. So that's versus the 16.2% uptick we saw in 2025. I guess how much of that accelerating growth is based off improving retention, just given your lower pricing and just lower rates across the industry? Or is the vast majority of that accelerating growth going to stem from the IA channel growth and the national footprint expansion?

Yes. Thanks, Christian. Our goal in 2026 is to invest in growth across all of our channels. We are expecting on a year-over-year basis that we're going to grow our gross written premium, our PIF and our premium and in force. And that's really building and compounding on our pricing advantage that Alex talked about earlier. One thing I do want to highlight, as we think about sequential quarter growth and going into Q1, thus far, we have continued to see sequential PIF growth from Q4 to Q1. And we do expect to continue investing in profitable growth across both of our distribution channels in 2026.

But as we look back to this time last year, and I hit on this in my prepared remarks, one thing I just want to caution is Q1 of 2025 was an exceptionally strong growth quarter for us. And that was really driven by -- in part by tariff-related pull forward and shopping activity.

So it will be tough to do a year-over-year comparison Q1 to Q1. But to be clear, overall, we are continuing to invest in growth, and we expect to have annual PIF growth year-over-year.

Got it. And then for my second question, we've seen a few direct autonomous solution insurance partnerships announced in recent months. And I guess, how should we think about the premium per policy for an AV vehicle versus a non-AV vehicle over the long run as we've seen some aggressive price cuts on that cohort given the lower frequency. But I'm guessing with your new OEM partners, you've seen some of the loss cost data already on it.

And I know -- I recognize it's premature, but do you see a large drop-off in premiums per policy in the long run? for this cohort or higher severity will be a larger offset than the lower frequency?

So first, I think it's important to note where we are. And where we are right now is we are still seeing a lot of those vehicles that have fully autonomous continuing to have loss costs rise. And so we are still seeing a healthy amount of increase and positive trend.

And so we haven't yet seen sort of the crest of that where suddenly average premiums are coming down materially. That said, our belief is certainly that vehicle technology is going to continue to progress and that as that vehicle technology progresses, it is, of course, much cheaper. A lot of these fully autonomous vehicles are getting materially fewer accidents, often 80% to 90% fewer accidents than human-driven vehicles.

It's important that not all of that technology is created equal as well. And so whether there's LiDAR on the car or whether there's just camera technology, all of this impacts -- by the way, when that technology is used, is it being used through a city street or is it being used on the highway.

If you just sort of naively apply any sort of pricing adjustment to that, it will actually erode your predictiveness. And so you've got to be really nuanced in the way that you, again, use this data. We do believe over time, what this will do as autonomous vehicles become more prolific, we will then be well positioned with these partnerships that we have with OEMs to ensure these vehicles.

And as we ensure those vehicles, whether that turns into product liability coverage or whether that turns into personal coverage, by the way, we think there will be a hybrid world for a very, very long time where sometimes it will be personal liability, sometimes it will be product liability, but I think the important part is through our embedded platform where we have a clear lead in the market and through our deep OEM relationships, we are really positioned at the forefront to allow and to help and assist these OEMs really see their strategies through and to help execute their strategies as that continues to move forward. And we're really excited for that because we think we're probably the best positioned in the industry to do so.

And there are no more further questions at this time. This does conclude today's teleconference. We thank you for your participation. You may now disconnect your lines at this time.

Greetings. Welcome to Root's Third Quarter 2025 Earnings Conference Call. [Operator Instructions].

Please note, this conference is being recorded.

I will now turn the conference over to Matt LaMalva, Head of Investor Relations and Corporate Development. Thank you, and you may begin.

Thank you for joining us. Root is hosting this call to discuss its third quarter 2025 earnings results. Participating on today's call is Alex Timm, Co-Founder and Chief Executive Officer. Megan Binkley, our Chief Financial Officer, will be unable to join us this afternoon due to a family medical matter. In her absence, I will be providing our financial results and will also be available for Q&A.

Earlier today, Root issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document, for more complete information about our financial performance, we also encourage you to read our third quarter 2025 Form 10-Q, which was filed with the Securities and Exchange Commission earlier 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 Timm, Root's Co-Founder and CEO.

Thanks, Matt. The third quarter was another very strong quarter for Root, and we're excited by the momentum we are building. It was a record quarter for policies in force and revenue, driven by accelerating growth in both direct and partnership distribution channels. We achieved this growth while maintaining our exceptional loss ratio performance.

As a technology company, we believe we have a structural and durable competitive advantage. This DNA is evident in everything we do, from our customer obsession, to our pricing technology, to the people we hire. It is what makes us special. And you saw that come through in the quarter across our pricing algorithm innovations, our partnership platform expansion and our direct marketing machine, all combining to generate exceptional performance.

As one example, we deployed our newest pricing algorithm in the quarter, which is improving customer LTVs by 20% on average. This model allowed us to accelerate growth across all channels. And we aren't stopping there. In the quarter, we also launched our new UBI model, which, we estimate, has improved predictive power by 10%. We believe this speed of innovation is unmatched in the industry, and we have no plans of slowing down.

Also in the quarter, you saw our growth strategy at work, more than doubling new writings in our partnership channel, launching Washington State and launching several experiments in new marketing channels. In our partnerships channel, we are extending our competitive advantage that provides seamless, easy purchase experiences with great prices to customers no matter how or where they shop. This represents a vast growth opportunity. Today, Root is only active in a very small fraction of distribution points in the insurance shopping ecosystem. This opportunity was on display in the quarter as we more than tripled our new writings year-over-year from independent agents, which now represents 50% of our partnership distribution. This channel alone is over $100 billion in premium nationally. And although we have made great strides, we are still active in less than 10% of agents, giving us a long and natural runway to rapidly expand our presence in this space.

In our direct channel, new writings increased sequentially by high single digits despite increased competition. Combined with our new pricing model, we continue to invest in new real-time bidding algorithms that allow us to optimize for anticipated long-term economics. This machine continues to detect trends and changes in the marketplace and dynamically deploys our investments.

We have also begun to see green shoots in a handful of new marketing channels, the focus of our R&D efforts. We plan to continue to accelerate our investments in these channels given our recent successes and react appropriately as the data emerges. Our success makes us excited and confident to invest further into the business to accelerate our pricing advantage, increase our distribution presence across channels and geographies and continue to create experiences customers love through product innovation.

With a healthy capital position, excellent underwriting results and a culture of discipline and excellence, we are ideally positioned to accelerate our growth trajectory. Our goal remains to build the largest, most profitable personal lines insurance carrier in the United States, and this quarter represents marked progress toward that goal.

I'll now turn the call back over to Matt for more details on the quarter.

Thanks, Alex. For the third quarter, we recorded a net loss of $5 million, operating income of $300,000 and adjusted EBITDA of $34 million. As previously communicated, our net loss in the quarter was primarily driven by a $17 million noncash expense related to our warrant structure with Carvana. Of the $17 million, $15.5 million reflects a cumulative expense catch-up. This expense ultimately reflects the success of our partnership as the vesting of warrants depends on achieving policy origination milestones. Even with this expense taken into account, we have generated $35 million of net income on a year-to-date basis.

In the third quarter, we accelerated growth while continuing to achieve our target unit economics. Year-over-year, we delivered double-digit percentage increases in policies in force, written premium and earned premium while achieving a 59% gross accident period loss ratio. These strong results were driven by the deployment of our latest pricing model, advancements in our real-time bidding algorithm and expanded partner integrations.

Our capital position remains strong with unencumbered capital of $309 million at the end of the third quarter. Given our exceptional underwriting performance, we also continue to be in a position of excess capital across our insurance subsidiaries. This allows us to optimize our operating structure and deploy growth capital to the highest profit-yielding opportunities. We continue to take a disciplined and opportunistic approach to direct marketing investment, adjusting quarter-by-quarter based on prevailing competitive dynamics.

On the partnership side, we are still early in scaling this channel, and we expect it to continue to increase as a percentage of our overall book over the long term.

Looking ahead, we expect continued acceleration of policies in force growth and are excited to support that growth by increasing our investment in direct R&D marketing by roughly $5 million in the fourth quarter. Further, we anticipate a headwind to our loss ratio from typical seasonality in the fourth quarter, which is driven by elevated animal collisions and bad weather. Last year, the impact of the seasonality was roughly 5 percentage points of the accident period loss ratio, and we expect a similar impact this year.

As we close out 2025 with exceptional underwriting performance, a healthy capital position and a strong culture, we are now focused on accelerating growth at our target unit economics. Put simply, we are optimistic that our superior technology will drive growth despite an increasingly competitive environment. We are just getting started.

With that, Alex and I look forward to your questions.

[Operator Instructions]. Our first question comes from Andrew Andersen with Jefferies LLC.

Sounds like some opportunities in the direct channel this quarter with some new writings increasing sequentially, high single digits. Maybe you could just talk about how that opportunity came to be and just the overall level of competitiveness you're seeing on the direct channel?

Yes. Thanks for the question. We are still seeing competition up in the quarter and in the channel. But really, what has happened, and we've continued actually to see that even this quarter to date, a continued acceleration of new writings and growth in our direct channel and our partnerships channel and really every channel overall. And a big thing that's driving that is our price. Last quarter, we detailed that we shipped a new pricing algorithm that improved customer LTVs by 20%. That unlocks a lot of opportunity for us to continue to grow. And as we do that and we continue to refine pricing, continue to collect more data and continue to get better at it, you're going to continue to see us be able to grow despite increased competitive pressures. And that's exactly what you saw this quarter, and we're still seeing that quarter-to-date as well.

And then on the severity number, plus 9%. It seems to have ticked up a little bit after kind of some 6s and 7s in recent periods. Can you maybe just talk about the change that you saw in severity this quarter, and if it requires any change to rate here?

We're not anticipating any major changes to rate. It's going to be -- we're broadly rate adequate. There will be some maintenance rate that we take here and there. I think the increase that you saw in the quarter is well within sort of natural variation for those numbers. We did see a little bit more in our property damage line, so in vehicle collisions versus our medical coverages. But again, I think that it was well within the normal range of variation.

Our next question comes from Tommy McJoynt with KBW.

Can you hear me?

Yes, we can hear you.

Awesome. You mentioned being active with less than 10% of independent agents. Can you just give us some color on how that figure has trended over the last couple of years so we can get a sense of the trajectory of your penetration? And then what's the process to go live with more agents?

Absolutely. Independent agents has been one of the most attractive near-term growth levers we've actually seen in the business, and we just are getting started. We really just launched a couple of years ago significantly into independent agents. And last quarter, I believe we had disclosed that we were in less than 4% of all agents nationally. And so it represents -- it's 1/3 of the market still. It was 1/3 of the market a decade ago, it was 1/3 of the market 100 years ago. So we don't think the independent agents channel is going anywhere. And we're -- again, we're just barely dipping our toe in.

And so as we continue to grow that, we grew at 3x year-over-year this quarter, and we're not seeing that slow down. So we are marketing to agents. We're actively onboarding more agents. We are continuing to improve the product for agents so that they have more service capabilities, better prices for their customers as well. So we're seeing that as a really attractive growth channel, and we don't have any plans to slow down on appointing agents.

And then my second question is just that you gave us the partnership as a percentage of new writings in the quarter. But if we wanted to think about partnership as a percentage of earned premium, could we take a trailing 12-month average?

So this quarter, you saw roughly flat partnership percentage of overall new writings, and that's because both of our channels grew very strongly. We're still continuing, as Alex mentioned, to see very strong growth in partnership driven by IIA, but we have the pricing model that we launched last quarter, which tends to be the tide that lifts all ships. So we are seeing very strong growth there. But when we look over sort of the medium to longer term, we do expect partnership to continue to grow and to continue to be an increasing proportion of our book over time.

And as a matter of earned premium, you're probably going to see -- you see higher average premiums in the partnership channel. They're just larger policies that come through because there's more vehicles per household in that channel, particularly in the independent agency channel where a lot of preferred business shops. And so I think you're going to see a little bit more -- it will be a little bit more skewed towards earned premium than sort of a trailing 12-month average.

Our next question comes from Hristian Getsov with Wells Fargo.

My first question is on the average premium per policy. It actually went down quarter-over-quarter. And I was trying to get a sense of how much was that driven by that new pricing model? And then given you continue to trend well below the 60% to 65% target loss ratio, do you have more flexibility to maybe give up a little bit more on price to continue to win in this environment?

First, on average premium, you saw us, I believe it was in June, take a fairly sizable rate decrease at the order of like -- it was double-digit rate decrease in Florida. And Florida is a very big market. I think you saw that some folks had to do some refunds in Florida. We really wanted to make sure that we were giving the right prices to customers upfront. And so we took that rate decrease proactively. And that's why you've seen sort of those average premiums come down, which has actually put us in a really good position for the end of the year.

In terms of the ability to give more price back or to potentially lower prices, we're not in a position right now where we're broadly lowering rates, believing that we're overpriced. But we really do see a continued very healthy loss ratio. And what that's allowing us to do is to just continue to grow faster. And that's what we saw in this quarter. And again, we've seen that quarter-to-date as well.

Got it. And then for my follow-up, any changes in the competitive landscape? Obviously, it remains elevated, but have you noticed anything, I guess, any recent changes? And then, do you have any color on how October PIF has trended versus the Q3?

Yes. October PIF growth has definitely accelerated versus what you saw in Q3. And again, we're not seeing that slow down. And so we feel good there. The competitive environment, it's still very competitive. You are seeing lower rate -- the lower pace of rate increases in the market right now. You're also seeing continued high levels of marketing advertising. And so on the direct channel, specifically, you are seeing high degrees of competition. But again, we saw that in Q3. And I think now we've been able to show that we can even grow, and we can execute through that cycle. And that's really driven by our technology and our new pricing models that are continuing to allow us to grow despite the fact that competition is about as hot as we've ever seen it.

Got it. And if I could sneak one more in. Obviously, tariffs were a topic of discussion at the start of the year, and now it's kind of dwindled down, and I think people are maybe expecting less of an impact than they originally thought. I guess, have you guys seen any meaningful change in your data? And has your expectation for those impacts changed?

We have not -- we have not seen that come through yet. Right now, it still looks like our expectations are basically right in line with what we'd expect just from natural trend. And so we don't think that we're seeing any sort of impact to inflation in the data or in the numbers right now from tariffs. We do expect to see loss ratios generally increase in Q4. There's seasonality, and that's usually -- if you look at 2024, you can see that's usually 3 to 5 points. So we might see some temporary increases in loss ratios in the fourth quarter, but we don't think that's going to be driven by tariffs.

Ladies and gentlemen, this now concludes our question-and-answer session and does conclude today's teleconference as well. Thank you for your participation. Please disconnect your lines, and have a wonderful day.