All right. Well, happy Friday, everyone. I was telling Alex Timm, Co-founder and Chief Executive Officer, that I saved the best for last in terms of our many insurance firesides, and then we get Friday on top of it. This is really good stuff. Also, just to note, Matt LaMalva, Head of Investor Relations, is also on the call. What I think I'll do, Alex, is I'll kick off with some questions, and we'll get the ball rolling. Just an FYI for everyone, if you stay on the line, then you can be in the group chat and ask questions. If you'd like, you're welcome to chat questions to me right now as we're speaking. One way or another, you're welcome to ask. All right, I'm going to jump in. Alex, we've had rising loss cost inflation, particularly in 2021.
What Root cited was that technology and data advantage that it has that allowed the company to identify trends early and take swift action. What we've seen are industry-leading excellent loss ratios. What I'd like to know, Alex, is what technologies enabled Root to detect its rate deficiency in 2021 and accordingly file for necessary increases?
Yeah. And thanks, Andrew. Thanks for having us here today. We're excited to be here. You're exactly right. In 2021, right, in really April or so of 2021, we saw used car prices go up 40%-60% in a matter of a couple of months, right? So one of the worst inflationary environments to ever hit auto insurance. And at Root, what we've done is we've really automated a lot of the core functionality of insurance. And so that's all the way from our claim system, which is completely in-house, our policy management system, our rating systems, so how we price insurance. And we're really on an entire modern technology stack. And what that allows us to do is we've got real-time reserve models or near real-time reserve models that are constantly looking at how the data is coming through.
So when we saw those costs elevate, we were able to detect that trend very, very early. And that's really, again, through our claim system and our reserving system. And not only that, just as important as detecting it early, but that was then able to be fed into our rating systems and our rating algorithms to say, "Hey, okay, we now know loss costs went up. How do we need to adjust our pricing?" And then from there, we were able to actually automate the vast majority of the rate filing. So one of the things that's very special about Root and the way we've thought about this is we believe you can automate the vast majority of what those sort of core operational workflows are inside of insurance, again, all the way from claims filing to pricing the policy.
And so for us, when losses changed, we were able to detect it very, very rapidly and then from there act very rapidly and get new rating plans into state regulator hands and respond very quickly. And it's very rare you get a big event like that to demonstrate really the power of our technology. But that's exactly what you saw in 2023, right? Because of this technology, we delivered some of the best loss ratios in the industry, better than almost all of the top 10 in 2023. And that's all because of our technology. And again, it goes back to being able to detect and respond very, very quickly.
Yeah, that's awesome. And in the shareholder letter in the first quarter, Alex, you cited the rollout of the next generation of traditional and behavioral-based pricing models. And I think you indicated that it's expected to be completed in the back half of this year. Maybe you could share some detail on the advantages this iteration will offer Root's pricing model.
Absolutely. So on top of that modern technology stack that we were just talking about, the other thing, it's not just rate level or sort of how much, how expensive insurance is on a given month that we're able to detect, but it's also what data can allow us to predict and segment risk better than our competition and certainly better than what we have been doing. And so what we do is we've really created a statistical machine. And this machine, as it collects more and more data, it effectively says, "How can we do an even better job of granularly matching price to risk?" And one of the things we believe is that insurance is ripe for quantitative methods. It's such a rich data environment, right, where we get lots and lots of data.
Effectively, it's our job to predict using that data who's going to get into an accident, how much is that accident going to cost. What we found is that machine learning and modern technology are very good at predictive sciences. So what we do is every year, as we collect more and more data, we not only assess the general cost environment, but we can actually retrain all of our loss cost models. We do this almost every year. That's a huge differentiator for us because most places, large industry incumbents, if you're not on a modern technology stack, it's very difficult to actually materially improve your segmentation on an annual cadence. Most do it maybe once every five years.
So for us, every time we do this, we get the power of all of our data, all of the new data we've collected, and all of the most modern algorithms that we can apply. And so we're seeing another 10%-20% improvement in predictive power. What that means is we're getting even better at basically figuring out who is the good risk to write and who is not the good risk to write. And we're able to then effectively, with those improvements, continually lower rates to the folks who deserve it the most. And so you should see that as this year, as we roll that out, that 10%-20% improvement in predictive power is going to continue to benefit us both on the loss ratio and then also on growth.
Awesome. Insurtechs such as Root have pioneered the introduction of machine learning and AI into insurance. Does Root see incumbent players catching up? I mean, as they work similarly to integrate these modern technologies, or is it, yeah, let me stop there and see what you think.
I think as we talk about AI or machine learning, there's certainly the opportunity to apply that to discrete tasks. And I do think some of the bigger carriers can do that. However, to make it really core to your system, there's a lot more than just going and applying a machine learning algorithm or trying to just ship an AI algorithm. You really have to have a modern technology stack that is seamless, that integrates everything from point of sale, data collection, to rate making, to how you're actually creating these models. And when you look at most of the industry, right, there are multiple billion-dollar companies out there that their whole thing, they just provide software to insurance companies, right? So most of our competitors, right, they're not even doing their own policy management systems or their own claims management systems, right?
And if you don't actually have all of that technology in-house, it's very, very difficult to really, truly realize the full power of machine learning. A great example of this is our telematics platform, right? We have really in-house the entirety of our telematics pipeline. So we control the way that the data is collected off the phone, which is a very difficult and hard problem. We control figuring out what that data means in terms of physical events. Were you the driver of the car? Were you the passenger of the car, right? These are very sophisticated algorithms. And then, very importantly, is we've integrated that in with the rest of our pricing system so that it's not just bolted on to sort of the traditional insurance variables because there's lots of correlation between those variables, right?
The only way to truly build world-class machine learning and artificial intelligence technology to truly get the benefit of the algorithms in this space is to do this really in a highly integrated manner. To do that, you have to be really on a modern technology stack. That's very difficult. Most incumbents are still really struggling with legacy technologies. They have dozens, if not hundreds, of systems that don't really talk to each other. And that really makes the ability to realize value from machine learning and other similar technologies very, very difficult for them.
Yeah. Even GEICO, I mean, Ajit Jain was talking about that. And they've got a big job to kind of get up the curve. So that kind of makes sense. Root's share price has jumped over 400% since January 1. Any thoughts or commentary on the incredible performance?
Well, I think it all comes down to our results, right? When you've got one of the best loss ratios in the industry, and we did that while we doubled PIF nearly at the end of Q1 year-over-year, right? So we doubled the number of customers we had, and we did so at one of the best margins in the industry, right? When you do that, you will inevitably build a very valuable company. Now, we're also trying to do a new thing, right? And we're attacking a new industry. And that's never easy. And so we fully expect there to be volatility in that journey. And I think you've seen a lot of that volatility. But at the end of the day, I think what you see now is that the proof is just in the pudding when it comes to our technology, right?
We didn't achieve these results because we're the biggest or because we have the most money or because we have the most people, right? We achieved those kind of results that were truly market-leading because of our technology. And I think as that proof starts to show through more and more, that's what you're seeing the markets start to realize. And we think we're just at the very beginning of that journey. We're nowhere close to where we think we should be and will be. And so we're still very, very early on in the journey as well.
Alex, what about, I mean, again, your gross loss ratio was excellent at 60.6%. Do you see further improvement in the gross loss ratio as you continue to innovate and improve? I know the loss adjustment expense is also another, was it like 9-ish points? So do you see improvement in both of those metrics further?
Yeah. First, I'd say our goal is always, as we continue to improve pricing, is to really hit somewhere between 60%-65% loss ratio. And that we've publicly stated before that that's sort of our goal, keep it in that range. And the reason for that is, as you go lower than that, we think you leave too much profitable market share on the table, right? And so we want to use our pricing technology not just to drive lower loss ratios, but to also drive better prices for customers because we know the number one reason a customer chooses that drives the customer choice in terms of what car insurance company they go with is price. We also know it's the number one reason they'll leave a car insurance company is because of price.
So we believe as we continue to get better and better prices, we're very happy with where our loss ratio is. It's very sustainable, and it's really, honestly, rock solid and one of the best in the industry. So we're not looking to continue to drive that down, but we're still looking to continue to make advancements in pricing. And we are at very material advancements in pricing and underwriting. But you should expect that we use more of that to drive towards growth. I think on our loss adjustment expense ratio, we do believe that there's opportunity to apply technology there and continue to drive that number down over the long term.
Following on that, Alex, so again, exceptional loss ratio, you grew new business writings 338% to net written premium $135 million from, wait, from $135 million in the first quarter of last year to $331 million in the first quarter of this year. So Alex, could you provide some color on the effect of the new business? Everybody talks about, we've been talking to Allstate and Progressive and Kemper and what's the new business penalty. So you've got the 60.6%. You want to kind of keep it at 65% or better from what you were just saying. How does the new business penalty kind of factor into that?
Yeah. The new business penalty is real. So that first six months of a policy, the loss ratio is certainly higher than it is in the subsequent six months on renewal business. For us, we see that being, I would say, low single digits to mid-single digits depending on where you're looking. So it's material. It's real, but it's not so huge that even in this growth period, right, where you just, as you commented, we achieved that 60 loss ratio really with a material amount of growth. So that loss ratio, that new business penalty, I would say, is already baked into our results because of how fast we are currently growing. If that growth slows and more of a larger percentage of our earned premium begins to come from our renewal book, I do anticipate that you would see a lower blended loss ratio.
Alex, you have confidence then that you can kind of stay in that 65-ish zone or maybe even a little bit better?
Absolutely.
Awesome. Then the first quarter, I mean, and again, this is just exceptional. You had a net combined ratio of 102 considering how new to the business Root is. How do you think about the timeline toward profitability? Does Root have a long-term net combined ratio target?
So we don't set. I think something that's common that you may see at some other companies is set a combined ratio target and then say, "Well, how much of that is my loss in LAE? How much of that is my fixed expense?" And then sort of back into an acquisition expense budget and say, "Well, I'll go spend that marketing budget." For us, we really focus and we are laser-focused on unit economics. And we really study the diminishing returns of any incremental dollar deployed in our marketing channels. And provided that sort of our discounted lifetime value of a customer, when we look at those cash flows minus our customer acquisition costs, provided that number is driving the company to profitability economically, we want to continue to grow. So there's no sort of we just spend to a budget level.
There's no combined ratio target for a year because if you do that, you may leave profitable market share on the table in times where you should be growing. And then conversely, you may actually deploy too much marketing and not get what you really should be getting for it. So we think it's a smarter way to grow the business to really look at that long-term economic impact and the unit economic impact of each individual new writing and each individual new dollar that we're spending. So because of that, we don't put a strict timeline on exactly when we want to drive that combined ratio to less than 100 because I think we could make pretty bad long-term decisions that way for our business. That said, we certainly are well on our way to driving the company to profit.
We are continuing to scale the earned premium in our business, which is giving us more operating leverage in terms of reducing our expense ratios. I think that'll naturally drive the company to profitability. But that's certainly not the way that we like to sort of run the business on a quarter-by-quarter basis.
I see. I see. And yeah, I mean, I'm trying to think of my follow-up here because you answered it so well. Would you say if we're having this conversation 5, 10 years from now that Root is kind of, let's just use the Progressive model of grow at 96 combined as fast as possible? I mean, is that something that a conversation we might be having in 5 or 10 years to give you a little airtime to get there?
I think in 5-10 years, certainly you'd see a combined ratio less than 100. But we would still be saying we're going to grow as fast as we can provided the unit economics make sense. I think that is just more philosophically sound and more economically sound to say, "Hey, if we're beating our IRRs when we deploy a marketing dollar, we should keep deploying those marketing dollars provided we have the capital to do so," which we do. And that's just, we believe, a more principled economic approach to scaling a business. And that's why we're going to continue to operate that way, whether it's 5 years from now or 10 years from now. But we will inevitably go profitable as a business as we continue to get that going.
If we don't, if we're not profitable in 5-10 years, actually, that would mean we'd be a very, very, very large business because we would have continued to find opportunities to profitably grow market share long-term.
Got it. That makes total sense. Alex, in the first quarter letter, you cited a reduction in monthly new writings toward the end of the first quarter in the direct distribution channel as a result of the increase in competition in the market and seasonal trends. The question is, how does Root view the competitive landscape as we move toward the latter quarters of the year?
So what we're seeing right now, and we began to see it in the first quarter of the year, is that competitors, as they have finally started to, after multiple years, get control of their loss ratios and hit their profitability targets, they are returning back into marketing channels. That's certainly making marketing more expensive. As we see that, if the diminishing marginal returns on those marketing dollars degrades because of competition, what you'll see, because we don't solve for growth, we don't just grow for growth's sake, you'll see us pull back on new writings. We still feel good about our PIF levels and overall growth. But you'll see us pull back on new writings some. What that'll do is it'll make sure that we still hit those return targets for every piece of new business coming through the door.
By the way, the opposite will happen too. When competition pulls back, which will inevitably happen, you'll see us push forward. You'll see us push forward. So it's a bit of a contrarian way to grow the business. But what it allows us to do is to really grow the direct channel in a way that's very efficient because effectively, we build our book of business while everybody's out of the market. And then what we do is we are prudent and will drive more profit when everybody is sort of just wildly deploying capital into the market, whether or not it's hitting their return targets. And so that's what we think is a good way to grow.
I think what you're going to see is competitors were out of the market for a very long time because they were not able to quickly respond to the inflationary environment. Now I think you're going to see them come back over the next few months into this year. We're going to keep monitoring that. As we do, we're going to keep responding appropriately.
Just to make sure I followed accurately, you do still feel pretty good about the PIF growth in this current pricing scenario. Is that right?
We feel good about where our PIF is. If we ever had to shrink PIF, we would shrink PIF. Again, there's no sort of thing that says we absolutely have to do it. We don't anticipate that. We right now feel good about where our PIF levels are. We think longer term, particularly, there's ample growth opportunity for the business. We're in 75% of our states of the population today. We'd like to get to 100%. We're continuing to onboard new partners. We think there's lots of opportunity for PIF growth. We're seeing retention improve. We feel good about PIF growth. Again, it's not what we solve for.
Got it. But yeah, and just making sure I understand though. So at this point, as you're seeing it today, you can kind of sustain the policy sales that you generated in the first quarter?
Well, I think you'll see that when the competitive environment comes back, you will see new writings come down for certain. But again, that PIF level, we feel good about.
Right. PIF level meaning what you have, not.
Yeah. Total policies in force.
What you have now, but in terms of new, I'm not hearing that it's too aggressive yet. It might happen later in the year, but right now, you're feeling.
Yeah. I would say with the competitive pressures and new writings coming down, as we've said, you're naturally going to see some PIF growth will slow for sure when new writings come down. Yeah.
Right. So they're not back in a big way yet, but they certainly appear to be approaching. Is that sort of you think?
I think the big digital players are back. You're already seeing some rate decreases even from some of the big guys too. And so I would say you were in the part of the market now where a lot of the big digital players are basically pretty much fully back. Maybe there's some additional players to come back in later on in the year. But I think the majority of the competitive environment and the majority of our competition has returned. And we're back into sort of an environment where most people feel good about hitting their loss ratio targets.
I see. Okay. Great. And let's see. Okay. We're still good. I think I've got a five-minute warning, so we're on track. Similar competitive dynamics in the partnership channel, or does the partnership channel act as sort of a differentiated channel in which Root can lean into as the direct area sees more competition?
Yeah. So the partnership channel is very different than this, right? And so these are, whether they're independent agents or embedded partners of ours, this channel is quite different. There's no diminishing return on your marketing dollars, right? You've got a commission rate that you pay. And when you pay that commission rate, it doesn't matter if that was the 10,000th policy or the first policy. You just pay the commission rate. So the scale, you don't have the same kind of diminishing marginal returns in those channels. And we're really excited by the growth that we've seen in that channel. It's been much more consistent and very consistent. And we think that there's a huge opportunity to continue to leverage our competitive differentiation, really, that we've proved out at this point in the data through our attach rate with Carvana and some other partners.
We think that there's still lots of opportunity to continue to scale that channel.
Got it. And right now, is it a relatively small proportion of the overall premium dollars?
We are getting a decent amount. It's smaller than direct. It's still a decent amount of our new writings. Then in terms of premium dollars, it's even more because a lot of those customers actually, they retain longer, and they may have higher average premiums. They're maybe newer vehicles. So because of that, you actually end up getting more economic benefit per policy that you acquire. So it's smaller than direct. We do believe that it's had a very nice growth trajectory over the last 12 months. We think that we're going to continue to scale that channel.
It was interesting. You mentioned independent agents, Alex. I know you touched on it maybe two years ago. You were delving into it. But I didn't get the sense that Root wanted to focus too much on it. Is that changed, or is that something that you're starting to pursue as well?
Yeah. Excuse me. We're definitely pursuing our independent agency strategy. We will be continuing to add more independent agents. Yeah, we did test it first. We needed to make sure we found product-market fit. We wanted to make sure all of the unit economics and loss ratio and underwriting characteristics would hold up in that channel and that our competitive advantages in terms of price and ease would not just be sort of in the direct channel, but that that would translate to competitive advantages in this channel. As we've seen that come through, we're excited about continuing to scale that because we're seeing really good signs there. We know roughly a third of the market purchases car insurance through independent agents today. It was roughly a third of the market 10 years ago and roughly a third of the market 20 years ago.
So it's a channel that we believe has staying power. And we believe, listen, customers want a really delightful, easy experience to purchase insurance, so do agents. Customers value price, so do agents. And so we think a lot of what we've built in terms of the competitive differentiation we have really applies to that channel as well.
They don't, so I'm going to throw a curveball at you, Alex. So you're an independent agent. You've got The Hartford, and you've got Travelers and Nationwide and Root. And how do they view us? Do they view you as an upstart? Do they find that it's good to bring a new carrier in that's kind of newer? How are you being received?
Honestly, we're being received very, very well. One is I'd say the way that they view us is as a company that understands the insurance elements of this business. And that's demonstrated through our underwriting results. And so we're here to stay. We're not just an upstart that has an unsustainable loss ratio, right? We are here. We've got some of the best loss ratios in the industry. And we've been growing our customer base very fast. And so I think they're very interested in that. But at the same time, we're also not a 100-year-old company. And so we can start to actually deliver technology for them that really helps them, right? An agent does not want to sit on the phone for 20 minutes trying to sell a car insurance policy or 15 minutes, right? That's incredibly unproductive, right?
If they can sell a policy in 30 seconds or 2 minutes, that's incredibly valuable to them because then they can grow faster themselves, right? They like the app because we know we have very high self-service rates. And every time a customer calls back into an agent for a servicing request, that agent isn't selling new business, right? And so they really appreciate a lot of what we're bringing to the table. And then the last is they need to have a competitive price, right? Insurance is competitive. And with all of the technology that we have built on our pricing side, we know that we can provide some of the best pricing in the industry. And so they need access to that as well.
And so we've been really well received by independent agents really because of just the core value propositions that we've created in the product from all the technology we've built.
Let's see. I think we have one minute remaining. Let's see what I could ask you that you could give me a one-word answer to. Nope, I'm not going to do that. I'm going to wait until the group call and just say, "Please stay on the line," or dial back into the group call. And I didn't get any chat questions during this session, but definitely pop up on the screen and make sure you follow the instructions with the hand raise. And I'm sure Alex will gladly take your questions. And so on that note, Alex, it's been great hearing your insights and Root's prominent moves in the auto insurance area. And we look forward to hearing more in a few minutes.
Thank you.
All right.