Root, Inc. (ROOT) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Root’s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker to day, Christine Patrick, Vice President of Investor Relations, please go ahead.

Good morning. And thank you for joining us today. Root is hosting this call to discuss its Third Quarter 2021 Earnings Results. Participating on today's call are Alex Timm, Co-Founder and Chief Executive Officer; and Dan Rosenthal, Chief Operating Officer, Chief Revenue Officer, and Chief Financial Officer. During the question-and-answer portion of this call, our presenters will be joined by Matt Bonakdarpour, Chief Data Science and Analytics Officer, and Frank Palmer, Chief Insurance Officer. Last evening, 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 10Q as well as our 2020 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 undertake no obligation 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. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, once again, please review our Form 10-K, where you will see a discussion of factors that could cause the Company's actual results to differ materially from these statements as well as our shareholder letter released last evening. A replay of this conference call will be available on our website under the Investor Relations section. I would like to also remind you that during the call, we are discussing some non-GAAP measures in talking about Root 's performance. You can find the reconciliation of those historic measures to the nearest comparable GAAP measures in our shareholder letter released last evening, and our filings with the SEC, each of which will be posted on our website at ir.joinroot.com. I will now turn the call over to Alex Timm, Root 's Founder and CEO.

Thank you, Christine. Good morning, everyone, and thank you for joining us on our third quarter call. During the quarter, we made progress on many of our key initiatives and deepened our founding commitment to building world-class technology that addresses the long-standing inefficiencies and unfairness in the auto insurance industry. We're seeing the movement toward fairness grow as evidenced by some of the largest incumbents following our lead in questioning the use of credit scores and pricing. We're excited to be leading this charge in the industry and bringing others along with us. This quarter, we placed the Chief Revenue and Chief Operating Officer responsibilities under Dan Rosenthal. In his new role, Dan oversees 3 critical areas of Root: marketing, insurance, and business growth development. This gives him the ability to drive profitable top-line growth, and streamline operations. With Dan's history of entrepreneurial success, I think he is the perfect person to lead this charge for our organization. I'd now like to walk you through highlights of the third quarter. We made progress toward diversifying our distribution channels, an initiative we detailed on last quarter's call. Root’s technology enabled us to offer quote in under a minute providing meaningful opportunities to build differentiated access to customers and broaden our distribution. By embedding our product offering in moments that meet consumers when they need us most opens up a sizable and largely untapped opportunity in adjacent industries. This also creates a vastly superior customer experience. To bring this to life, we focused on building an embedded product that powers our exclusive partnership with Carvana. Since announcing our partnership in mid-August, cross-functional Root and Carvana teams have been hard at work developing a fully integrated point-of-sale offering. We are currently testing the first iteration in 12 states. Early signs are positive and we look forward to providing additional detail on results in the months ahead. We have made investments to bring the speed and ease-of-use powered by our technology to the independent agency channel, giving Root access to a larger demographic of consumers. We have developed a quote-and-buying process that takes a fraction of the time required compared to other carriers’ platforms. This increases productivity for our agency partners. We're currently testing this product in five states with largely positive feedback to date. While investing in the diversification of our distribution channels, we have significantly dialed back our spend in performance marketing reducing sales and marketing spend by 40 %. This move has greatly reduced our customer acquisition costs, which can be seen in a $45 million improvement to our operating loss compared to the second quarter of this year. This is a prudent use of capital, particularly given the current inflationary loss environment we find ourselves in. We believe the diversified channel approach will enable us to further lower customer acquisition costs, attract customers with higher lifetime values, and provide additional levers to deliver strong, profitable, top-line growth. We have substantially improved our pricing and underwriting models. We continued the rollout of UBI 4.0, our latest and greatest telematics model, and McModel 4.1, our national pricing model. UBI 4.0 is currently active in 20 of our 31 states, representing roughly 70 % of our addressable market. This model enables a precise telematics quote, improves overall segmentation, and does more with less data. Since the roll out of this model, we have been able to extend quotes to an additional 10 % of users. We are also in the process of ruling out McModel 4.1, which leverages Root's growing dataset to expand modeled coverages, improve segmentation, and better predict the lifetime value of a customer. As I’ve stated previously, by growing the dataset, we can accelerate the momentum of our flywheel. As our pricing algorithms improve, we bring down the cost of insurance for good drivers, which allows us to attract and retain a more profitable mix of business. In addition to the segmentation improvements driven by model enhancements, we're also tightening our underwriting by refining contracts and endorsements and leaning on our state management group to unlock state level efficiencies. We will see the results of these improvements in the quarters to come. The actions we've taken this quarter demonstrate our awareness of deploying your capital thoughtfully, and balancing growth and profitability. We still have work to do, but we know what we need to do to positively impact our bottom line. This is an ongoing process and we will continue to find ways to drive toward profitability. I'm thankful for the continued support and trust of our customers, team members, and investors. With that, I'll turn the call over to Dan.

Thanks, Alex. Our results for the third quarter of 2021 reflected a decrease in our marketing spend and continued pressure from the loss environment. You will find our full GAAP financial results contained in the shareholder letter we published yesterday evening, but we wanted to give a few of the key highlights. On the top line, we grew gross written premium 24 % year-over-year to $205 million. Our gross earned premium increased 23 % year-over-year to $189 million. Our gross earned premium from seasoned states increased to 76 % of total earned premiums. The top line's out performance was driven by the tail effect from performance marketing dollars previously committed. Overall, for the quarter, sales and marketing expense declined 40 % as we took action to reduce cash burn, especially in the face of the surge in performance marketing cost and the current inflationary environment. We continue to expect gross written premium to reflect year-over-year declines in the fourth quarter and first half of 2022, as we take active steps to reposition our marketing investments, pursue more cost-efficient distribution channels, and otherwise reduce our customer acquisition costs and operating loss. Shifting to profitability, gross accident period loss ratio was 91% for the third quarter, a 12-point increase year-over-year against Q3 2020 when compared with the low loss environment last year. More importantly, we recorded a 9-point improvement from Q3 2019, demonstrating improved performance when stripping away the impact of the pandemic, which is partially offset by the current loss cost environment. The year-over-year increase in the loss ratio was primarily driven by 8 points of severity, and 9 points of frequency as inflationary pressures increased costs and miles-driven remained above prepandemic levels in our book. Leveraging our technology, rating engine and data architecture has allowed us to respond faster than industry norms with 13 rate increases taken during the third quarter and more planned in the coming months. Direct contribution was a $10 million loss for the quarter. The decline in direct contribution and related margin was driven primarily by direct loss ratio as I covered above. Operating loss was $127 million. A $45 million improvement when compared with the second quarter driven by the aforementioned reduction in performance marketing spend. Following quarter close, we repaid both our term loan A and term loan B. We have signed an exclusive term sheet with BlackRock Financial Management, Inc. on behalf of funds and accounts under its management to put in place a larger term loan facility with a longer maturity than our previous structure. We expect to work in good faith with BlackRock to close the facility before year-end subject to negotiation and documentation of final terms and the terms and conditions contained in the definitive documentation. Turning to our outlook, we remain on the path we laid out last quarter. We have reined in customer acquisition costs in an inflationary environment and are actively laying the foundation for profitable growth. The work we are doing around cost management is a critical step forward to create the flexibility necessary to invest in and grow our business over the long term. These actions have also given us a more optimistic view of full-year operating income. We now expect to close the year on the favorable side of the midpoint of our original guidance of a loss of $555 million to $505 million. I would like to echo Alex 's statement that we have taken a handful of actions that demonstrate our thoughtfulness around deploying capital. It is something we take very seriously and the effort to improve our bottom line is ongoing. In my new role as Chief Revenue and Chief Operating Officer, I'm tasked with aligning our customer experience, products, and market opportunities to drive profitable growth giving further focus to these key drivers of our customer - centric business. I am excited to continue the work around securing our future. We're excited about the opportunities before us and appreciate your continued support. With that Alex, Frank, Matt and I look forward to your questions.

Thank you. [Operator Instructions]. Our first question comes from Michael Phillips with Morgan Stanley. Your line is open.

Hey, thanks. Good morning. Have you seen any change in the auto loss in the trend environment from last quarter? It looks like maybe your severity numbers can be out a bit. I am wondering if that's true, what's driving that and just overall thoughts there.

Sure. This is Frank. Your question was on the loss trends. I'd say that we're seeing a number of factors there. First, is we see higher miles driven, which translates into increased frequency. We've seen that in a number of different reports across the industry, so I believe that that's an industry thing not just a Root thing. As we've seen, there's inflation across the U.S. which increases overall costs, but in particular in the cost of used cars, used car parts, which is causing a super normal increase in severity, especially in the [Indiscernible]. So, these two things together have increased losses dramatically over a very short amount of time. Historically, there have been trend turns in the past, but this is probably one of the most severe trend turns that I've seen in 20, 25 years.

I guess, Frank, I think your wording was -- severity was 8 points this quarter and last quarter was 16. So, that seems to be down, but maybe I'm reading that wrong. So, anything there that looks like it's might be improving there?

Yeah. I think we saw a big step function from quarter 1 to quarter 2. We are still seeing increased trends, but we're not seeing the same amount of step increase from quarter 2 to quarter 3. So, there are still loss trends. We're still seeing inflation. We see that in the news. But I would say we are not seeing as much of an acceleration away in quarter 3 as we did in quarter 2, but it's still -- the inflationary pressures are still high.

Okay. Thank you. You had guided to last couple of calls, you talked about a delay of one of your reinsurance treaties, how that would affect your seeded ratio. It was still down this quarter. I don't think I understand that. I thought it was -- your prior wording was that's going to take back up to around 70 % in the back half of this year, but they did at 55 %. So, is there something else going on or was it going to stay this way until 4Q just trying to think about how and why was it down and then what we can expect that to be in 4Q and going forward?

Yeah. Thanks Mike. This is Dan and good morning.

Good morning.

You're right. Our third-quarter [session] (ph) level remained roughly flat at 55 %, and that's really a function of the way that our cohort base treaties work. We're, just as a refresher, there are multi-year treaties where the first 12 months we take in new business and then the reinsurance treaty follows that cohort of new business into additional years, and really just a function of the two treaties we've executed this year on 4-1 and 7-1 depends upon levels of new business. And so given the fact the pullback on the marketing spend, the lower levels of new business that we've talked about that did lead to the session level staying flat in the third quarter, I'd expect that to roughly continue in the fourth quarter. You will see a little bit higher session rates as we put in place our 10-1 treaty, which is oversubscribed at this point. So that's where we stand in terms of session levels going forward.

Okay, Dan. Thanks. I guess maybe one more here for now, and then we'll see. When you talk about further reduction in customer acquisition costs, I assume you mean relative to what you saw in 2Q and the current environment there from what was happening in your direct channel or do you mean further reductions from, I guess, prior to the spike that occurred in 2Q?

Yeah. We mean effectively further reductions in terms of sales and marketing spend on a quarter-over-quarter basis. So, you'll note that in the third quarter, we said what we talked about on the Q2 call. We pulled back marketing by 40% on the sales and marketing side, focused on really utilizing the most efficient performance marketing channels. I think some of that level in the third quarter was that we were talking to you in early August and we had some dollars that were already committed as the third quarter started. And so now, we're being able effectively to pull that back even further as we enter the fourth quarter.

Okay. Thanks Dan, and good luck with your triple Chiefs hat that you're wearing today. And I thank you very much.

Thanks, Mike.

Thank you. Our next question comes from Matt Carletti with JMP Securities. Your line is open.

Hey, thanks. Good morning.

Good morning.

First question around UBI 4.0 and you talked about how, I think in the past and also in the letter, it enables you to offer a quote with less data. And I was hoping you could peel back the onion a little bit. What have you seen in terms of the impact that that's had on test-drive periods as well as the implications that might have for churn?

Hi. Thanks for the question. This is Matt Bonakdarpour. Historically, when we first released our telematics scoring model, we were conservative in the way we defined our eligibility rules, which is how much data we need before we can produce score to price with. As we've collected more data, we've been able to test different models that require less data to see if that degrades predictive power. UBI 4.0 allowed us to really dig deep into that question and do more with less. Users are becoming eligible much sooner in the test drive; and as a result, we can issue a telematics inspired quote much sooner. We're seeing if that does translate into better conversion level. People are getting more telematics-inspired folks, and we'll continue to work on pushing down that test drive period in the models to come.

Okay, great. And then along those lines, just hoping you could process flow. Just somebody who comes to the app and does a test drive, I think I have a history of knowing how that works. When we think about Carvana or think about your independent agent channel that is growing, how might that work differently? Somebody comes to an agent, do they then have to do a test-drive after downloading the app or do they get a quote that gets adjusted over time? How does that work differently than the direct-to-consumer process?

Yeah. Right now, this is Alex and thank you for that question. Right now what we are in the independent agency channel, it's still very new and we are continuing to experiment with different product flows and where we can introduce telematics. We have a very flexible telematics platform which allows us to both collect telematics data upfront before quote -- after quote, as we also have in our direct model, or even more of a traditional policy over 6 month period and incorporate that telematics data where we see it to be the most beneficial for us and our customer. And so we're still exploring in the independent agency channel where we are actually introducing that telematics rate. In the Carvana channel, right now we're very excited about that. That is an instant quote basically with the vehicle purchase. And so it allows a consumer to really just get insurance connected to that vehicle. And right now, we are not collecting telematics data through that flow, but we do have plans to incorporate telematics in future product iterations.

Great. Thank you very much for the color and the best luck.

Thank you.

Our next question comes from Josh Siegler with Cantor Fitzgerald. Your line is open.

Hi, good morning and thanks for taking my question. Have your telematic capabilities and segmentation allowed you to better weather the increased severity and frequency in the market? For example, by identifying higher-speed drivers or drivers responsible for more miles, or do you find that these macro trends are impacting a wide array of drivers on your platform?

Sure. This is Frank. Great question. I think first it gives us greater granularity and greater insight into the trends that are happening. So even before frequencies started to go up, we could see that miles driven was going up and we could start to prepare rate actions in anticipation of the frequency going up. So we have really great granular data to explain and help us understand what was going on. As we started to see frequency going up, other carriers may have been, paused, they've been like, is this a onetime thing, is this a catastrophe thing? We could actually tell that it was driving patterns that were causing the increases in frequency. And so we could respond much faster than the industry. So not as much at a granular customer level, although of course our score, to the extent that customers maybe speeding more because there's less on the roads. We would capture that in our score of regular rate time. The big benefit, I think, has been the actual granular insight into what's going on with trends since it allowed us to respond faster.

Got it. A [Indiscernible] on the color there. And then just continuing down this road. You mentioned you took 13 rate increases during 3Q. Were these rate increases incremental in nature or perhaps larger step-ups to reflect the loss environment? And how has the market reacted to them? Albeit I understand it's early stage still.

Sure. I'd start also with we had some great increases even early or late [Indiscernible] in Q1. So based on that telematic data and the increase in driving and frequency we actually started around the rate increases in quarter 1, followed that up more with quarter 2, and then had the bunch in quarter 3. We still intend to take more in quarter 4 and quarter 1. Some of them are base rate increases but as we mentioned we're also rolling out our new McModel 4, which we think will also give us greater segmentation power as well as helping us capture more rate.

Got it. Thank you very much.

We have a question from Elyse Greenspan with Wells Fargo. Your line is open.

Hi, thanks. Good morning. My first question just goes back to the guidance you guys provided for gross premiums and you expect premiums to decline in the fourth quarter given that we still saw a good growth in the third quarter. I'm assuming you guys expect a significant decline in your policy count given that you're getting you -- as you alluded to, you're getting good levels of rate increases across your book. But can you give us a sense of the expected decline in PIP than you expect sequentially in Q4 as well as just the level of count you're expecting across your book embedded within the guidance?

Yeah. I think -- look, Elyse, good morning and thank you for the question. Given the actions we've taken on sales and marketing, that's why we wanted to continue to provide the color both for the fourth quarter and the first half of next year consistent with what we shared on the Q2 call. And I think the way you should model it and think about it is that premiums will loosely follow the policy count. We're not guiding to any specific levels of retention. I think Frank just articulated extremely well what we're doing in the contest of the macro environment. We're not providing any specific guidance with respect to renewals. But you can expect that as we continue to reduce that sales and marketing spend level, there will be an impact on PIF.

Then as we think about kind of working through like the frequency and severity issues and you're changing marketing spend to be assumed that the issues persist right beyond the first half of next year that you guys will consider to continue to rain in the marketing spend, I guess does getting through the loss issues Impact when you guys return to increasing marketing and looking to pursue greater growth?

Thanks for that. This is Alex. I think when we think about our marketing spend and really our growth drivers over the long-term of the Company, we're really excited and we're seeing really strong results already in our embedded product. And we believe that meeting consumers where they are in that moment is really going to drive long-term differentiated access to customers and growth. And really what we're doing now is we're making sure that we are preserving that capital, particularly given the inflationary environment that we are in so that we can continue to develop that product and continue to develop more diversified sources of demand. In terms of timing, I will turn it over to Frank. He can talk about when we may see our pricing get to the levels that we want to see as a correction for the inflationary environment.

Sure. And as we think about returning to growth, there's 2 parts that when you think about a rate increase, when you raise rates today, your new business has the full Impact of those rate changes, but it takes time for your renewals to earn in. As we raise rates and take these rate actions, we expect the new business to return to target profitability faster than what our calendar year or total renewable pipe fee, so we might expect our ability to turn marketing back on to be faster than what we might actually see in a calendar year loss ratio period. As that we do have some pretty advanced marketing models the data-science group has come up with, that take a look at a state-by-state and customer by customer segment level profitability. And so I think starting in first quarter, it's likely that we'll be able to turn on either entire states of various segments on marketing and start to grow new business again.

That's helpful. Thank you.

Okay, our next question comes from Nick Jones with Citi. Your line is open.

Great, thanks for taking my questions. I guess 2. 1. I guess on the broader auto environment, we've heard that people are actually trying to delay purchases due to how high used car pricing is and we -- and there's still this chip challenge for new cars. So is that potentially a headwind heading into next year in terms of triggering people to think about auto insurance changes? And the second question -- go ahead, and I have a follow-up.

We don't see that as a headwind going into next year. We think right now actually demand particularly for cars is still very high. Although some of the inflationary pressures that we are seeing are supply chain and chip related, we are also seeing a material amounts of it being demand related as well. If anything, we're pretty excited that there is more interest there than historic levels.

Great. And then on that Carvana partnership, I know it's still early days, but is there any early indication on what kind of attach rate Root is seeing on the [Indiscernible].

Thanks, Nick. This is Dan. And Alex touched a little bit on this. We are really excited about the fact there's really no more opportune moment to connect with the consumer on auto insurance than at the moment they purchased their vehicle. And there's no better partner, no more technology forward and customer - centric auto retailer than Carvana. Their enthusiasm and commitment to the success of the partnership have really been shown by the exclusive relationship, their investment in Root, which we closed on the first of October. And just to provide some more color, in fact, we had more than a dozen Carvana team members in Columbus this very week. And I commend people like Andy Lesko, and Cole Johnston (ph), and Josh Brown, and Rachel Nelson, and all their teams for all the hard work that has us already live testing the first iteration in 12 states. So we were excited about the partnership back in August, and our expectations have really been exceeded. Now, it's time to deliver a seamless experience and a fair price to consumers. I don't want to get into specific levels on attach quite yet, Nick, but I would tell you we're off to a great start. We're going to come back in 2022. We'll talk to you about milestones, timing, and growth at the right time.

Great. Thanks for taking the questions.

Thank you. Our next question comes from Tracy Benguigui with Barclays. Your line is open.

Thank you. Good morning. My first question, this is more of a philosophical question. You set your long-term loss ratio target of 60 % to 65 % when loss cost trends were more benign [Indiscernible] to the pandemic, so I'm wondering if you may be revisiting that 60 % to 65 % target. Since I noticed even your renewed business as well north of that range in the last two quarters within your seasoned state.

This is Frank. Great question. I don't know that the pricing philosophy has changed a lot. We still want to price to lifetime profitability on a cohort of customers. So as we think about new business coming in, we still would like that cohort of new business to have a 65 target loss ratio based upon anticipated long-term expenses and so on. Now, that is somewhat balanced by what the -- in flows book that we have currently. And so for both new and renewals, we do want to bring that loss ratio down given the current environment.

I also have a question on your marketing efficiency. You discussed your work with independent agency channel and I'm wondering if the idea is that maybe at least in the short-term cost is lower for agency distribution? And if so, how meaningful do you think this revenue source could be in your mix?

Thanks, Tracy. I think -- we're not going to get into specific CAC levels by channels, I think the key for us and the discussion we had over the last several quarters is diversifying our distribution channels. And so for us, obviously, we were too concentrated in the performance marketing channels. The first half of this year, that's the conversation that we had following the Q2 call. We are executing on that with Carvana on the embedded insurance product. We are executing on that with what we are exploring on the independent agent product. So we're focused on testing and iterating, focused on diversification, focused on return on capital across the investments, which obviously has to do with CAC, but also the lifetime value of the customers that come through those channels. And we'll come back and talk specifically on each of those channels as that testing develops and we execute further.

This is Frank. I would also add there as we think about the independent agency channel, it plays well -- in both in being an expansion into new consumer segments, it also plays to our strength in UBI. UBI is generally not as developed in the independent agency channel. There are a lot of carriers there that still do not have UBI. And there are agency groups that are concerned with that they're getting cherry picked by a lot of the direct carriers. And so we do see some demand in that independent agency channel, both for our technology and the ability to write a customer in under a minute or 2 compared to 20 minutes with some of their other carriers, as well as being able to deliver them lower rate for good drivers, we are at telematics. So we think that there's good pricing competitive abilities there too.

It would be like interesting cause we've actually done some work and reached out to some of the agents that you're, I guess, testing the waters with. And one thought that I heard is that they're looking for consistency for their customers. So does that limit how agile you could be in pricing [Indiscernible]

One of the things we're doing right now with independent agents, and I think we referenced this a little bit earlier, is to actually make sure that the telematics program works for an independent agent. So it will look different than the direct model where we may be pricing -- repricing mid-term. We may be using now telematics data at renewal. We also have developed a product that allows consumers to really opt-in to telematics. And we think that using that consumer experience both works well for an agent, as well as works well for that agent's customer. And that's really where we're starting to iterate on our product and develop a product that really does work for that channel.

Very helpful context. Thank you for taking my questions, and congrats Dan on your new role.

Thanks Tracy.

Our next question comes from David Motemaden with Evercore ISI. Your line is open.

Hi. Good morning. I had a just another question on the outlook. And so I understand the gross premiums written are expected to be down in the fourth quarter, and then in the first half of '22. So I just wanted to make sure I'm thinking about this right. You guys obviously had a strong third quarter this year. The $205 million of gross premiums written, is that -- I guess when we think about third quarter '22, is that sort of the timing when you guys think you can start to grow gross premiums written again?

Thanks, David, for the question. This is Dan. Yeah, I touched on this a little bit earlier with the lease. We wanted to provide color on where we are through the fourth quarter of this year in the first half of 2022. Given the line-of-sight that we have to those quarters and given what we've shared on both the Q2 call and today about our sales and marketing timing, the development of the Carvana product and the like, we have a lot we're going to come back and talk to the market about following Q4 on our thoughts for full year 2022. But I'd rather not get into the specifics for specific timing quarter-by-quarter next year quite yet. As Carvana further develops in the testing as we develop the diversification of channels that Alex just touched on, we'll come back and talk to you, but right now we are focused on execution. We are focused on what we call internally 'one -play display ', and the play is really focused on a lot of what Frank has been talking to you about on this call, our differentiated technology and how it impacts our ability to get ahead of a loss cost environment. That's our focus right now. We'll come back and talk to you in February about 2022.

Okay. Great. That's helpful. And then I guess maybe this is also somewhat of an outlook question on the '22 operating loss. It sounds like that is going to really be driven by just rationalized sales and marketing spend. But I was wondering if you could just touch on thoughts on the loss ratio over that time frame as well, not necessarily quarter-by-quarter, but just thoughts in terms of how you expect that to trend over the next year.

Thanks, David. This is Dan. Again, maybe I'll start and then turn it over to Frank on the loss ratio. On operating loss overall, we we're pleased to report this quarter that we're expecting to close the year on the favorable side of the midpoint of our original operating loss guidance. And that is a function of the execution that we've been undertaking and the dip in performance marketing spend that we highlighted during the quarter. And I think it's fair to say that we expect to deliver a meaningful improvement in full-year operating loss in 2022 versus the 2021 levels as we continue with that strategy and continue with that focused and disciplined execution. As for the loss ratio, I will turn it over to Frank to speak to trends you will see next year.

Sure. As Alex mentioned, we have a number of opportunities to improve the loss ratio. So we started early with rate increases, we've got our new make model coming in, we're looking at improving our underwriting and our contracts. And so we expect meaningful improvement in the loss ratio in 2022, the timing on that is probably less clear. Certainly as we put in these actions, it takes time for them to earn in, but we're still trying to understand what the macroeconomic trends are. As mentioned earlier, we've got a little indication that it's not further accelerating in quarter 3 over quarter 2, but there's still only been a few months to actually see those trends. So we'll have to wait and see exactly how much loss ratio improvement we'll see as we understand how these trends develop.

Great. Thanks for that. And maybe I can just sneak one more in just on the Carvana partnership. Good to hear about some of the early success in some of the 12 states you're testing in. Do you have a sense for, I guess, when that will be rolled out on a broader basis?

We can continuing to develop that product, and as we do the roll out we'll continue to accelerate as the product becomes more and more mature and we continue to get those consumer learnings. We're really excited about this. We think that this is absolutely how insurance should be purchased in the future, meeting consumers where they are in a really seamless experience. We think it's a clearly superior product experience and we're really excited by it and we're going to continue to work hard and focus.

Great. Thank you.

Thank you. Our next question comes from Mark Hughes with Truist. Your line is open

Yeah. Thanks. Good morning. What should we think about in terms of the average rate hikes? Looks like your premium per policy was up about 6 % in the quarter. Is that a good proxy for what you're putting in place say Q4 Q1?

Go back to the actions that we're taking, right? So we do have rate increases, we've got new model segmentations, and we've got the improved underwriting. As I think about that, part of the loss ratio improvement is going to come from just kind of flat rate increases. We also expect that to not necessarily be totally flat given that, we expect up through the first quarter, maybe 12 to 15 different states picking up our McModel -- our new McModel version. And so the actual increase in premiums will vary greatly by customer segment. And so I don't know with that got kind of a target like this is how much the average premium is going to change, as much as we've got an idea as to -- we think we'll get meaningful improvements in the loss ratio.

Okay. And then when you think within an agent -- yes, go ahead.

Please continue.

Okay. All right. Thank you. When you think about the independent agency channel, how quickly can you roll that out? Are there bigger chunks of maybe agency associations or groups that you can target to speed up your penetration of that market?

Thanks. This is Dan and I appreciate the question. I think we are focused right now on testing and iterating the channel again. This is about diversification. This is about testing. This is about driving towards the path to profitability. We'll a better answer to that as we continue testing with the select group of agents that we're focused on right now. Absolutely, we believe that there are opportunities as Frank touched on to take our product and leverage it with the broader agency market. But we're going to focus right now on testing, iterating, and executing and then come back and talk about specifics around growth and timing.

And then one more if I might, the repayment of the loans, the signing the term sheet with BlackRock, can you talk about the rationale for that and what benefits you think that will bring?

Yeah. I think for us there's two parts to that. The first is we're really excited about the partnership with BlackRock. We talked about in the letter that it's a facility that we think will work really well for us, and we'll come back to the market as we have a fully executed deal in place and provide more specifics. For us, it's about just thoughtful and prudent management of our balance sheet and thinking through our capital overall. And that's what we took into account in terms of maturity level -- or maturity timing of the prior facilities as well as the partnership with an entity like BlackRock.

Thank you.

Our next question comes from Andrew Kligerman with Credit Suisse. Your line is open.

To follow-up on some of the earlier questions just on the sales and marketing area. After the sharp drop off in sales and marketing costs from $112 million to $65 million in the third quarter Q-over-Q, you talked about dialing that down. Do you -- prior to the fourth quarter of last year, do you get into that range of say, $15 million to $35 million? Is that the range that you're thinking about dialing it down to for the year, the immediate term?

Yeah. Thanks for the question, Andrew, I think that the way I would touch on that is to really focus on how seasonality Impact s some of this. So the fourth quarter we've talked about is both traditionally the most expensive quarter from the marketing channels that we have been in as a retail focus quarter approaching the holidays. And then it's a quarter when, just frankly, consumers focus a little bit less on things like car insurance and are focused more on their other purchases approaching those holidays. So for us, seasonally, we would already approach performance marketing in the fourth quarter differently than in prior quarters. And then that is highlighted this year by the fact that we are pulling back in some of those more concentrated marketing channels and focusing on the most efficient channels. So you can expect the level to come down materially in the fourth quarter and we're focused on really investing our dollars in the right channels and taking it from there.

So no numbers around that?

Sorry, no numbers.

Okay. All right. And then on the last question, with regard to independent agency, and again, you're not going to focus exactly on the numbers you said and you're also looking at testing and iterating here, but as you think about that channel, the independent agency channel, is it going to be sharply less expensive than the digital? Is it a situation where you can go into a large brokerage firm, and maybe add a wholesaler or 2, and you could get up and running pretty quickly? I just want to get the sense of the magnitude of the potential upcoming spend. Is it materially less than what you need for your other channels?

This is Alex. In terms of the cost relative to the direct channel, I think what we see is it's just different. It's not necessarily less or more. Any independent agency channel we will be paying a commission. Instead of a flat fee to get a customer as you'd see in the direct channels, we will be paying a commission based on the premium that comes through the channel. And so we like that. We think it's very cash flow efficient because you do not pay all of the customer acquisition costs upfront but rather you get to really pay that over the life of that customer. We also know that there is very high retaining customer segments that still go to independent agency channels and we've seen that really persist. A decade ago, the independent agency channel had a third of all volume. Today, it's got roughly a third of all volume. And so we believe that using our platform that allows us to deliver a quote in under a minute to those customers is really valuable for the productivity of agents. And we think that it will have favorable unit economics as well, both in terms of retention, and then, again, that favorable cash flow profile to customer acquisition costs.

Helpful. Thank you.

Thank you. Our next question comes from Mike Zaremski with Wolfe Research. Your line is open.

Hey, this is Charlie on for Mike. Good morning. Wondering if you can provide some color on accident frequency and miles driven levels you're seeing, has that relationship changed at all versus pre -pandemic level? Is it consistent across the states or does it vary? Did it vary across the months or the quarter? Any views or themes you could share there would be helpful.

Sure. Talking about -- this is Matt, thanks for the question. Talking about this year, we did see an uptake in accident frequency going into April. Since then, it's been a pretty consistent trend month-over-month until now. We looked at day -- time of day frequency. We have seen as we come out of the pandemic, an increased frequency both from vehicle mileage and accurate and frequency in the weekday mornings from say, 6:00 AM to 10:00 AM. These are in line with pre -pandemic levels. In terms of accident frequency within Root because of underwriting and pricing model changes, we have seen decrease in frequency as our population has mix-shifted into lower-frequency customers. That's, not only underwriting, but telematics and other pricing model changes. So overall we're seeing a lower frequency average on our book, but within this year we're seeing the uptick going into April and beyond.

Thanks. That's helpful. And then for my second question, can you guys -- you talked earlier in the year about raising rates in Georgia, can you talk about what you're seeing there? It looks like it didn't slow your growth. Is Georgia a seasoned state now?

In Georgia, we did have a rate increase there. We are rolling out a new program. It's not fully in market yet so we haven't fully turned Georgia back on. We do expect to in the fourth quarter.

Okay. Thank you.

Thank you. Our next question comes from Christopher Martin with KBW. Your line is open.

Yeah. Congrats in the growth in the quarter. I said [Indiscernible] follow-up questions on the Carvana fees. And the first 1 is and it's really [Indiscernible] working done around with which kind of bringing out the credit score from pricing. But if you are not going to be using the telematics fees in the Carvana side. Is that going to be back to a traditional pricing model, or we built them [Indiscernible] a little bit different to feel about that [Indiscernible] immediate close?

We think that there is actually a big future and a differentiation in the pricing model for Carvana, and it's not just a traditional underwriting models. One of the things that's a very interesting opportunity that we are exploring is when these vehicles are sold to consumers, they're actually in the possession of Carvana first. And that gives us actually an opportunity to get closer to that vehicle and closer to the technology inside of that vehicle. And so as we continue to really expand this partnership and continue to do more product development, we fully expect to bring in more data science capabilities and more unique data sources both from mobile phones, and consumers, and then also from the vehicles themselves.

Okay. Great. That makes sense. And just with [Indiscernible] all the chatter, I may have missed this -- my three-year-old kicking the door about 10 minutes ago. But on the independent agent side, will given your core from Carvana, trigger anything what to then be placed as an independent agent if you're in the right place, or would that be a fully direct business?

That would be fully direct business.

Okay. Thank you.

Thank you. And we have a question from Ryan Tunis with Autonomous Research. Your line is open.

Thanks. Following up on some of the independent agency questions, my understanding has always been the table stakes for writing in that channel is like an A minus financial strength rating from AM Best or S&P. You can maybe get away with Demotech if you're a coastal Company. Could you remind us who is giving you your financial strength rating now? And if you don't have an A minus from AM Best or S&P, have you thought about trying to go out and get one?

We are not rated right now. We have not found a strong demand from any of our agency partners actually that we have spoken to. I think primarily because it is personal auto and so typically that's not something that consumers themselves also are really demanding. And so we do not have a financial rating from AM Best or Demotech at this point. And we have not seen that at all be a blocker to our partnerships with agents.

Got it. And then my 1 follow-up was -- I guess just maybe looking for some color. I get what you guys are doing with the performance marketing pullback, which makes sense. But are you seeing that -- some of the advertising like our ad dollar is becoming arguably a little bit more efficient given the pull back up of a lot of carriers you actually theoretically seeing that if you did want to spend, you could maybe do a cheaper if you wanted to at this point with your theme there.

Thanks for the questions. This is Matt Bonakdarpour. We are definitely seeing an improvement in efficiency on back of the pullback marketing spend. And it's not just a pullback, but also more sophisticated segmentation and targeting to ensure that we are allocating our marketing budget in segments that are providing profitable lifetime value. And so that's a -- it's a new level of marketing spend we certainly are seeing return on that spend and more efficient spend as a result.

That's good to hear. Thank you.

Thank you. And we have a question from Youssef Squali with Truist Securities. Your line is open.

Great. Thank you very much. Just want to follow up on a couple of questions my colleague Mark asked earlier, but just maybe at a higher level, Alex. Stepping back, a few years ago, you guys were one of the very few companies tied in telematics and all the virtues of it. It seems like, on the one hand, more and more people are -- or more companies are talking about it. Yesterday, we saw a deal between Lemonade and Metromile to double click on this. Your Carvana, with its instant quote, seems to move away a little bit from it, even at least at a first glance. Can you just maybe describe how you feel the industry is evolving around telematics and just the importance of it today versus how you thought about it maybe 3 years ago or 2 years ago? And second, maybe just give us an update on your campaign to drop the credit score and pricing and any con traction there. Thanks.

Absolutely. Thank you for that question. What we're seeing is that telematics is, as consumers become more and more comfortable sharing data, that telematics is becoming more of a wave of the future and I think we've seen several points of validation across the industry. That being said, we also know that we are at the forefront and we know that for a few reasons. 1. We are entirely focused and committed on disrupting and using new data science method to disrupt the U.S. personal auto market, which is a $260 billion auto market. We have all of our resources, all of our investments, and really have for the last 6 years entirely dedicated and focused to building the best technology in that space, and we've seen it. The Carvana, we believe actually is just the next evolution of the technology. And so we believe that as we develop this technology that is highly differentiated, that now allows us to embed into other vehicles and to actually ingest even more unique data sources. We do not believe that the evolution of data science and insurance stops at the smartphone. We think the smartphone is a pivotal piece of the puzzle, but we don't believe that's where it stops. And we think we've demonstrated that and we are now in more states really than any of our insurtech peers and we are also multiple the size of most of them. We believe that we are out at the forefront. We think telematics is the wave of the future and we're excited to be leading that wave and to really have differentiated technology based on rich behavioral mobile data there. In terms of dropping score and dropping credit score, we also know that when we look at the industry that consumers aren't getting a fair shake, particularly those consumers that we believe need it the most. We think that there's lots of discriminatory factors that do go into car insurance pricing today. And so we have decided to launch a campaign to really challenge the industry. And again, we're out in the forefront here to drop the credit score, and we're really excited actually a major incumbent has followed us into this movement and it's following our lead. And we are incredibly happy with that we have -- and we've also now started to see progress that even the National Association of Insurance Commissioners level where they are now considering laws and model laws for how to handle discrimination in car insurance. And those were things that did not exist 3 years ago. And so the industry is changing, it is moving. And we really know that we are at the forefront.

All right. Thanks. Good color.

That's all the time we have for questions. This concludes today's conference call. Thank you for participating. You may now disconnect everyone. Have great day.