Root, Inc. (ROOT) Earnings

Management highlights

- AI Strategic Positioning * Root was founded on machine learning and data science, and recent advances in generative and predictive AI have amplified its competitive advantage. * Root holds 10 years of proprietary insurance-specific data, including 37 billion miles of driving data and over 900,000 filed claims, paired with a modern technology stack, regulated carrier infrastructure, and capital foundation that neither legacy incumbents (with outdated tech) nor new tech firms (without insurance operating experience) can replicate. * AI is being integrated across core insurance functions (pricing, underwriting, claims, customer service, software development) to build the first end-to-end AI-powered insurance carrier. - Growth Strategy and Discipline * The direct auto insurance market remained highly competitive in Q2, with competitors increasing marketing spend and cutting prices. Root maintains strict discipline, only pursuing growth that meets target return thresholds to protect long-term shareholder value, even if this constrains near-term growth. * Root completed geographic expansion to New Jersey, bringing its total footprint to 37 states covering over 80% of the U.S. addressable auto insurance population, with a target of near-national coverage by the end of 2027. * A new distribution partnership with insurance shopping platform Jerry was launched, expanding Root's presence in high-intent digital marketplaces and embedded partner ecosystems. Distribution is diversified across direct marketplaces, embedded point-of-sale partnerships, independent agents, and AI-enabled experiences. - Product and Underwriting Progress * Underwriting discipline delivered a strong 92.1% net combined ratio, improving 3 percentage points year-over-year driven by expense management. * Root expects to launch its next-generation predictive pricing model in Q4 2026, with early R&D showing meaningful improvements in risk segmentation that are expected to improve customer lifetime value (LTV) and growth. - Capital and Balance Sheet Updates * Root refinanced its existing $200 million debt facility, reducing its cost of debt and increasing financial flexibility. * Under an existing $75 million share repurchase authorization, Root repurchased over $20 million of shares in Q2 2026, as part of its balanced capital allocation framework that also includes organic growth, technology investment, pricing innovation, and strategic distribution expansion.

Guidance

- Full-year 2026 full-year policies in force (PIF) is expected to be relatively flat year-over-year if the current competitive environment in the direct channel persists, ending only modestly above the 2025 year-end level of 482,000. - Normal seasonal patterns are expected to result in higher loss ratios in the second half of 2026 compared to the first half. - Fixed operating expenses (G&A and tech development) are expected to run between 10% and 11% of gross earned premium in H2 2026. Normalized quarterly share-based compensation is expected to be $8 to $9 million, so the 26% Q2 net expense ratio should not be treated as a run rate; Q1/Q4 2025 levels are more representative of a normalized expense ratio. - Root plans to invest approximately $10 million in H2 2026 R&D focused on new customer acquisition channels and AI capabilities. - Long-term growth acceleration is expected from state expansion, scaling independent agent and partnership distribution, and the rollout of the new predictive pricing model.

Segment performance

Root is primarily a personal auto insurance carrier operating across three distribution segments: direct, independent agent, and partnership channels. For Q2 2026, total company revenue was $389 million, up 2% year-over-year. Gross written premium was $340 million, down 2% year-over-year, and gross earned premium was $368 million, down 1% year-over-year. Total policies in force (PIF) increased 6% year-over-year to 484,000. The partnership and independent agent channels represented 51% of new business writings in Q2 2026, up from 44% a year prior. Direct channel PIF declined sequentially in the quarter due to normal runoff of the Q1 2026 tax season cohort and moderated new business growth from heightened competitive pressure. Overall underwriting performance delivered a 92.1% net combined ratio, with a 26% net expense ratio and 66% net loss and loss adjustment expense (LAE) ratio. Net income was $25 million, up 15% year-over-year, with an annualized 31% return on equity.

Risks & headwinds

- The current highly competitive environment in the direct auto insurance market, marked by aggressive pricing and increased marketing spend from competitors, has moderated near-term new business growth and led to a sequential decline in direct channel PIF. - The small non-core private equity investment portfolio had a $4.4 million full impairment recorded in Q2, reducing its carrying value to zero, though this only impacted $600,000 of original invested cash (the rest reversed prior unrealized gains). - All forward-looking statements are subject to general market and industry risks that could cause actual results to differ materially from management's current expectations, as detailed in Root's prior SEC filings.

Analyst Q&A

• Q: Will growth in partnership and independent agent channels offset direct channel weakness to accelerate overall PIF growth in the second half of 2026? What is the full-year outlook? /

  A: Management is confident in long-term PIF growth from state expansion (New Jersey launched in July with strong early results), continued growth in the partnership channel, and new profitable opportunities in direct marketing. As of the call, PIF was flat relative to Q2 end. If the current competitive environment persists, 2026 full-year PIF will be roughly flat year-over-year, only modestly up from 2025 end. The Q2 sequential dip is viewed as an episodic event that does not change long-term growth plans.

• Q: What impact will the next-generation pricing model have after launch later this year? /

  A: The new model will roll out methodically state-by-state starting in Q4 2026, so minimal financial impact is expected in 2026. Full impacts will be seen in 2027. Similar to last year's model launch, which increased customer LTV by over 20%, the new model is expected to improve risk segmentation, boost LTV, and support future growth.

• Q: Does the 8% implied average premium decline imply national pricing is down low single digits, and does Root have room for further rate cuts to drive growth? /

  A: Directionally, average premiums have come down low single digits year-over-year, in line with broader industry trends. Currently, Root estimates it has approximately 3% of low single-digit room to cut rates further while maintaining strong profitability. The upcoming new pricing model will improve risk segmentation, which may shift the customer mix toward higher premium segments, so net rate changes will reflect both model improvements and overall level adjustments.

• Q: Can the low 26% Q2 net expense ratio be sustained, and where is the expense ratio trending longer term? /

  A: The Q2 expense ratio was depressed by lower performance-based equity compensation, which is tied 100% to performance metrics including PIF growth, so the 26% level should not be treated as a run rate. Normalized quarterly share-based compensation will be $8-$9 million going forward, and fixed operating expenses will be 10-11% of gross earned premium in H2. Earlier quarters (Q1 2026, Q4 2025) are more representative of a normalized expense ratio.