root-20241231
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to_____
Commission file number 001-39658
ROOT, INC.
(Exact name of Registrant as specified in its charter)
(Address of principal executive offices) (Zip Code)
(866) 980-9431
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12-b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☒
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant's Class A common stock, par value $0.0001 per share (the “Class A common stock”) held by non-affiliates was approximately $513.5 million based upon the June 28, 2024, closing price of $51.61 as reported by the Nasdaq Global Select Market.
There were 11.2 million shares of Class A common stock and 4.0 million shares of Class B common stock outstanding as of February 19, 2025.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates by reference specific portions of the Registrant’s Notice of Annual Meeting and Proxy Statement relating to the Annual Meeting of Stockholders to be held on or about June 4, 2025.
ROOT, INC.
FORM 10-K
As of and For the Year Ended December 31, 2024
TABLE OF CONTENTS
Page
Special Note Regarding Forward-Looking Statements
Risk Factors Summary
Part I.
Item 1. Business 1
Item 1A. Risk Factors 17
Item 1B. Unresolved Staff Comments 58
Item 1C. Cybersecurity 59
Item 2. Properties 61
Item 3. Legal Proceedings 62
Item 4. Mine Safety Disclosures 63
Part II.
Item 6. [Reserved] 65
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 85
Item 8. Financial Statements and Supplementary Data 87
Item 9A. Controls and Procedures 135
Item 9B. Other Information 138
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 139
Part III.
Item 10. Directors, Executive Officers and Corporate Governance 140
Item 11. Executive Compensation 141
Item 14. Principal Accountant Fees and Services 144
Part IV.
Item 15. Exhibits and Financial Statement Schedules 145
Signatures
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about us and our industry that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this Annual Report on Form 10-K are forward-looking statements. In some cases, you can identify forward-looking statements because they contain words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “path,” “plan,” “potential,” “predict,” “project,” “should,” “target,” “will” or “would” or the negative of these words or other similar terms or expressions. These forward-looking statements include, but are not limited to, statements concerning the following:
•our ability to retain existing customers, acquire new customers and expand our customer reach;
•our expectations regarding our future financial performance, including total revenue, gross profit (loss), net income (loss), direct contribution, adjusted EBITDA, net loss and loss adjustment expense, or LAE, ratio, net expense ratio, net combined ratio, gross loss ratio, marketing costs and costs of customer acquisition, gross LAE ratio, gross expense ratio, gross combined ratio, operating expenses, quota share levels, changes in unencumbered cash balances and expansion of our new and renewal premium base;
•our ability to realize profits, acquire customers, retain customers, contract with additional partners to utilize the products, or achieve other benefits from our embedded insurance offering;
•our ability to expand our distribution channels through additional partnership relationships, digital media, independent agents and referrals;
•our ability to drive a significant long-term competitive advantage through our partnership with Carvana Group, LLC, or Carvana, and other partnerships;
•our ability to develop products for embedded insurance and other partners;
•the impact of supply chain disruptions, increasing inflation, a potential increase in tariffs or the implementation of new tariffs, a recession and/or disruptions to properly functioning financial and capital markets and interest rates on our business and financial condition;
•our ability to remain profitable and extend our capital runway;
•our goal to be licensed in all states in the United States, or U.S., and the timing of obtaining additional licenses and launching in new states;
•the accuracy and efficiency of our telematics and behavioral data, and our ability to gather and leverage existing and additional data;
•our ability to materially improve retention rates and our ability to realize benefits from retaining customers;
•our ability to underwrite risks accurately and charge profitable rates;
•our ability to maintain our business model and improve our capital and marketing efficiency;
•our ability to drive improved conversion and decrease the cost of customer acquisition;
•our ability to maintain and enhance our brand and reputation;
•our ability to effectively manage the growth of our business;
•our ability to raise additional capital efficiently or at all;
•our ability to improve our product offerings, introduce new products and expand into additional insurance lines;
•our ability to cross sell our products and attain greater value from each customer;
•our ability to compete effectively with existing competitors and new market entrants in our industry;
•future performance of the markets in which we operate;
•our ability to operate a “capital-efficient” business and obtain and maintain desirable levels of reinsurance;
•the effect of further reductions in the utilization of reinsurance, which would result in retention of more premium and losses and could cause our capital requirements to increase;
•our ability to realize economies of scale;
•our ability to attract, motivate and retain key personnel, or hire personnel, and to offer competitive compensation and benefits;
•our ability to deliver a vertically integrated customer experience;
•our ability to develop products that utilize telematics to drive better customer satisfaction and retention;
•our ability to protect our intellectual property and any costs associated therewith;
•our ability to develop an autonomous claims experience;
•our ability to take rate action early and react to changing environments;
•our ability to meet risk-based capital requirements;
•our ability to realize benefits from our Texas county mutual fronting arrangement;
•our ability to expand domestically;
•our ability to comply with laws and regulations that currently apply or become applicable to our business;
•the impact of litigation or other losses;
•changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, specific to the use of artificial intelligence, telematics data and the consent to use telematics data, connected card data, and other sources of data;
•our ability to defend against cybersecurity threats and prevent, or recover from, a security incident or other significant disruption of our technology systems or those of our partners and third-party service providers;
•the effect of interest rates on our available cash and our ability to maintain compliance with our Amended Term Loan (as defined herein);
•our ability to maintain proper and effective internal control over financial reporting; and
•the growth rates of the markets in which we compete.
You should not rely on forward-looking statements as predictions of future events. The outcome of the events described in these forward-looking statements is subject to risks, uncertainties and other factors described under the heading “Risk Factors” and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained herein. The results, events and circumstances reflected in the forward-looking statements may not be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.
The forward-looking statements made in this Annual Report on Form 10-K relate only to events as of the date on which the statements are made and we undertake no obligation to update them to reflect events or circumstances after the date of this Annual Report on Form 10-K or to reflect new information or the occurrence of unanticipated events, except as required by law.
Unless the context otherwise indicates, references in this report to the terms “Root,” “the Company,” “we,” “our” and “us” refer to Root, Inc. and its subsidiaries.
We may announce material business and financial information to our investors using our investor relations website (ir.joinroot.com). We therefore encourage investors and others interested in Root to review the information that we make available on our website, in addition to following our filings with the Securities and Exchange Commission, or SEC, webcasts, press releases and conference calls.
Risk Factors Summary
Investing in our Class A common stock involves numerous risks and uncertainties, as more fully described below. You should read these risks before you invest in our Class A common stock. In particular, risks associated with our business include, but are not limited to, the following:
•We have a history of net losses and could incur substantial net losses in the future. We may not be able to grow or achieve or maintain profitability in the future.
•We may lose our existing customers or fail to acquire new customers, including through our partnership channel, and our future growth and profitability depend in part on our ability to successfully operate in an insurance industry that is highly competitive. If we are unable to maintain the levels of customer service or continue technological innovation and improvements, our prospects for future growth may be materially adversely affected.
•We may require additional capital to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all.
•We rely on telematics, mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting our insurance policies, managing claims and customer support, and improving business processes. To the extent regulators prohibit or restrict our collection or use of this data, our business will be harmed.
•We may fail to maintain an effective partnership channel offering, including our embedded insurance product and our independent agent platform and/or fail to perform under the associated commercial arrangements.
•We depend on search engines, social media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to our website and our mobile app both rapidly and cost-effectively. If these third parties change their listings or increase their pricing, if our relationships with them deteriorate or terminate, or if other factors related to these third parties arise which are beyond our control, we may be unable to attract new customers rapidly and cost-effectively, which would adversely affect our business, and results of operations and prospects.
•Operating system platforms and application stores controlled by third parties, such as Apple and Google, may change their terms of service or policies in a manner that increases our costs or impacts our ability to distribute our mobile app, collect data through it and market our products.
•Our expansion within the U.S. will subject us to additional regulatory approvals and costs and risks, and our plans may not be successful.
•Our technology platform may not operate properly or as we expect it to operate and/or regulators may limit our ability to develop or implement our telematics-based pricing model and/or may eliminate or restrict the confidentiality of our proprietary technology.
•We are subject to full scope financial examinations by state insurance regulatory authorities in each state in which our domestic insurance company subsidiaries are domiciled, and market conduct examinations by state insurance regulatory authorities in any state in which our insurance subsidiaries issue insurance policies, either of which could result in adverse examination findings and necessitate remedial actions.
•Our exposure to loss activity and regulation may be greater in states where we currently have most of our customers: Texas, Georgia and Florida.
•We are subject to stringent and changing privacy and data security laws, regulations, and standards related to data privacy and security, increasing the complexity of compliance. Our actual or perceived failure to comply with such obligations could harm our reputation, subject us to significant fines and liability, or adversely affect our business. In addition, data security incidents, or real or perceived errors, failures or bugs in our or our vendors’ systems or our website or app could impair our operations, compromise our confidential information or our customers’ personal information, damage our reputation and brand, and harm our business, financial condition, operating results and prospects.
•Our brand may not become as widely known or accepted as incumbents’ brands or the brand may become tarnished.
•We rely on highly skilled and experienced personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, our business may be seriously harmed. In addition, the loss of key senior management personnel could harm our business, results of operations, financial conditions and prospects.
•New legislation or legal requirements may affect how we use artificial intelligence and/or impact how we communicate with our customers, which could have an adverse effect on our business, financial condition, results of operations and prospects.
•Denial of claims or our failure to accurately and timely pay claims could materially and adversely affect our business, results of operations, financial condition and prospects.
•Unexpected increases in the frequency or severity of claims, as well as increasing costs of social inflation and the legal environment, may adversely affect our business, results of operations, financial condition and prospects.
•Failure to maintain our risk-based capital at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business.
•We may be unable to prevent, monitor or detect fraudulent activity, including policy acquisitions or payments of claims that are fraudulent in nature, or fraud that may be perpetrated by employees or external parties.
•We rely on our mobile app to execute our business strategy. Government regulation of the internet and the use of mobile apps in particular is evolving, and unfavorable changes could seriously harm our business.
•Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.
•Litigation and legal proceedings filed by or against us and our subsidiaries, could have a material adverse effect on our business, results of operations, financial condition and prospects, and may divert management’s attention and resources away from our business.
•Our ability to utilize our net operating loss carryforwards may be limited.
•The insurance business, including the market for automobile and renters insurance, is historically cyclical in nature, and we may experience periods with excess underwriting capacity and unfavorable premium rates, which could adversely affect our business.
•Retention of business written by us or through our Texas county mutual arrangement could expose us to potential losses. Further, reinsurance may be unavailable at current levels and prices, subjects us to counterparty risk and may not be adequate to protect us against losses.
•The inability to access our cash accounts or to convert investments into cash on favorable terms when we desire to do so may materially and adversely affect our business, cash flows and capital position.
•Failure to meet the continued listing requirements of Nasdaq Global Select Market, or Nasdaq, could result in delisting of our Class A common stock, which in turn would negatively affect the price of our Class A common stock and limit investors’ ability to trade in our common stock.
•Our Amended Term Loan includes a floating interest rate that exposes us to interest rate risk, and the terms of our Amended Term Loan place restrictions on our operating and financial flexibility. Our failure to comply with covenants contained in the Amended Term Loan may result in acceleration of our repayment obligations, which could harm our liquidity, financial condition, operating results, business and prospects and cause the price of our Class A common stock to decline.
PART 1.
Item 1. Business
Overview
Root is a technology insurance company founded on the idea that car insurance rates should be based primarily on driving behaviors, not demographics. We are revolutionizing the archaic car insurance industry using mobile technology and data science to offer fair, personalized rates to good drivers. We primarily reach customers through two channels: our Direct channel, where we target consumers with what we believe to be a great insurance product at a great price, and through our partnership channel, where we meet consumers with our offering at contextually relevant times such as the car purchasing experience.
Our primary focus is on the U.S. auto insurance market, and we have built a company that recognizes each individual is unique and puts customers in control, rewarding them for their actions. For centuries, traditional insurance companies have grouped people into risk pools and long relied on the ‘law of large numbers’ to produce acceptable pricing on an aggregate basis. Root is different—we have the ability to use technology to measure risk based on individual driving performance, prioritizing fairness to the customer. We are fundamentally reinventing insurance through technology, data science and a deliberate focus on the customer experience.
We believe the $300 billion U.S. auto insurance market is ripe for disruption. Traditional methods of pooled risk assessment are not personalized and inherently less precise given individual behavioral data is underutilized or not widely measured as a component of the insurance risk assessment process. We believe traditional systems and processes have become outdated and are increasingly disconnected from the needs of consumers. Our initial focus on auto insurance was motivated by how well-suited we believe the product to be for fundamental improvement through technology. We believe Root is the innovator to drive this transformation.
Auto insurance is required for the vast majority of drivers in the U.S. and we believe it is typically the first insurance policy purchased by consumers. As a result, our auto-first strategy establishes the foundation for an expansive lifetime relationship with the opportunity to add other personal insurance lines as customer needs evolve.
The Root advantage is derived from our technology-enabled approach to the customer lifecycle. We engage with customers at a point of high intent across various channels, offer a product with significant ease of use and utilize data science to fairly price our policies. As a full-stack insurance carrier, we have the infrastructure and flexibility to design products and distribute, underwrite, administer and pay claims. Our model, supported by proprietary technology, allows us to be more adaptive across the value chain, provides design and feature discretion and we believe frees us to innovate and iterate more quickly than any of our major competitors. We view this flexibility as absolutely critical to introducing new capabilities, responding to macroeconomic trends, reinforcing customer centricity and driving growth at favorable unit economics. In practice this means we own and control an end-to-end insurance experience and have near complete operating autonomy, subject to regulation and agreements with our partners, to grow our business.
As we mature as an insurance company, a more significant portion of our premiums are expected to be earned from customer renewals. Renewal premiums, referring to premiums from a customer’s second term and beyond, generally have lower loss ratios as compared to new premiums in the customer’s first term. As a young insurance company, our results are disproportionately weighted toward new customers. Our data- and technology-driven approach allows for rapid response to macroeconomic trends through quick, appropriate rate actions. This, paired with our ability to continually enhance underwriting and segmentation to price better drivers more fairly has contributed to stability in our gross loss ratios.
Our Industry
Insurance is one of the oldest and largest markets in the world, touching every corner of the world and protecting many of our most important assets. Our primary addressable market today is U.S. personal lines insurance. This market exceeded $488 billion in 2023 premiums and has grown at a 6% compound annual growth rate, or CAGR, since 2016.
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Over the past century, there have been only a few waves of innovative disruption within insurance. Perhaps the most disruptive was the advent of the internet as a distribution channel in the late 1990s, which redefined the personal auto insurance market. We believe the next technology-driven structural shift is underway—a large secular shift in distribution with embedded insurance and a holistic change in the way insurance is priced and delivered, to include individualized pricing based on telematics data.
We believe innovation has been slow within the property and casualty insurance industry, in part, because legacy systems are difficult to build upon and nearly impossible to replace. Also impacting the pace of innovation is institutional friction generated by the cost and perceived risk of a requisite ground-up technology rebuild, disruption of carrier-agent relationships and the business model implications of replacing broad pool-based pricing. Our proprietary technology and business model enable us to bypass these challenges.
Our Business Model
Customer Experience
We strive to meet customers where they are with a user-friendly interface and convenient, efficient experience. This is the mantra that drives our user experience and our business model. App installation and initial engagement are designed to be intuitive so that customers can easily identify the coverage they need.
Our mobile engagement extends across the customer experience and value chain:
•Engagement. Most of our new customers come through our two distribution channels: direct and partnership. We continue to diversify the ways we reach our customers. We believe meeting customers in the moment of need creates better customer engagement and access to a differentiated customer base.
•Profile Creation. The Root app is available for both iOS and Android operating systems making it available to 99% of U.S. smartphone users. A prospective customer can quickly and easily complete a profile, part of an on-boarding process that takes mere minutes to complete.
•Underwriting. The test drive is a key component of the underwriting process in certain channels. A two-to-four week test drive gathers and analyzes an individual’s data from smartphone sensors measuring braking, consistency, turning, time of day, driver attentiveness and other performance and contextual data. While telematics is core to our value proposition, some of our customers have an immediate insurance need, and as such, we are able to utilize traditional underwriting variables at policy origination, when needed. With this approach, we leverage both traditional underwriting variables and the power of our proprietary telematics platform to offer good prices to our best customers. As we collect more data, our telematics’ predictive power increases, allowing us to make further segmentation advances. We are also able to offer certain customers a price with the benefit of telematics data collected from other sources. For this reason, we view telematics as a better and more fair approach to underwriting.
•Coverage Selection. As part of profile setup, our app is designed to pre-populate with a customer’s owned automobiles and existing or prior coverage terms, allowing easy and seamless selection of policy terms.
•Policy Management. Once purchased, customers can perform all policy management functions seamlessly from our app, including profile or coverage adjustments, obtaining proof of insurance or chatting with an automated assistant or human.
•Claims. We make it easy to file a claim and track adjusting status through to settlement via the app, allowing us to administer claims more rapidly.
Distribution
We distribute largely through our direct and partnership channels. The direct channel includes mobile, which is the fastest growing retail channel in the U.S., as customers spend less time in front of computers and utilize smart phones for more convenient shopping. To further differentiate access to our products, we are continuing to develop our partnership channel. The partnership channel emphasizes ease of use and minimal separation between intent and
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bind while leveraging the platforms of our strategic partners. We believe that through a diverse customer acquisition strategy we can meet customers at a high point of intent with a pleasant experience.
•Direct: seamless experiences driven by performance marketing and organic traffic connecting consumers directly to the product.
◦Digital. Our direct digital channel is designed to drive volume by efficiently capturing high-intent customers. We accomplish this by meeting our customers within platforms they use extensively such as Google or select marketplace platforms where consumers are actively shopping for insurance. We deploy dynamic data science models to optimize advertising, targeting and bidding strategies across our digital platforms, aligning customer acquisition cost to expected lifetime value of the potential customer.
◦Referral. We encourage our existing customers to spread our value proposition. Our referral channel compensates existing customers who refer new customers who subsequently complete a test drive. This channel facilitates community-based growth to those who value our fair and transparent approach to insurance. This is our lowest cost acquisition channel and an important aspect of our ongoing distribution and brand strategy.
◦Channel Media. We build consideration and drive intent through household-level targeted media channels including direct mail and social media. We utilize these media channels to drive awareness when launching in new markets and to actively target customers in active states.
•Partnership: a wide array of integrations, spanning early-stage marketing partnerships through fully embedded user experiences.
◦Embedded. We build upon or within the mobile and web customer experiences of distribution partners to reach a captive customer base with an embedded solution. With varying levels of connectivity, including our proprietary and fully-integrated application which removes the need for the customer to ever visit a Root website to purchase and bind a policy. While these partnerships take time to onboard and launch, over the long term, we believe our flexible technology stack and investment in our platform seeks to optimize a seamless bind experience, creating a differentiated customer experience in this channel. We expect increased penetration of this channel over time as we seek to grow embedded relationships with other automotive and financial service technology companies with relevant customer bases.
◦Agency. We continue to invest in a product to bring the speed and ease of our technology to the independent agency channel. This channel provides access to a larger demographic of customers and we believe it has staying power. We developed an efficient quote and bind process through our agent platform that enables simplified distribution from agents to their customers. The technology driven approach makes this an appealing platform for agents and an efficient acquisition channel for us.
Our customer acquisition costs can vary by channel mix, by state, due to seasonality, or due to the competitive environment. We believe our distribution channels allow us to efficiently acquire customers in a contextually relevant, data-centric way. Our marketing spend is grounded in a disciplined data-science approach, targeting customers that align with our lifetime expected returns. Furthermore, we continue to invest in the technology and data science behind our distribution with A/B tests, dynamic bidding models, and rapid updates and iterations, supporting differentiated cost of customer acquisition over the long term.
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Reinsurance
As a full-stack insurance company, we currently employ a “capital-efficient” model, which utilizes a variety of reinsurance structures. These include excess of loss and quota share reinsurance. Excess of loss provides us with volatility protection against a portion of large individual losses or an aggregation of losses from catastrophes. Quota share provides, among other advantages, regulatory surplus relief for growing companies. We primarily utilize reinsurance to mitigate the impact of large losses or tail events. We continuously evaluate our utilization of third-party reinsurance in order to operate a capital-efficient business model. As our gross loss ratios have stabilized we strategically reduced the utilization of external quota share to balance the cost of reinsurance with capital-efficiency. Over the long-term, we expect to maintain the flexibility to modify our reinsurance program.
Reinsurance is a cornerstone of our capital management framework. We utilize a wholly-owned, Cayman Islands-based reinsurer, Root Reinsurance Company, Ltd., or Root Re. Several leading global reinsurers participate in our external reinsurance program.
Behavioral Data and Proprietary Telematics Models
For the majority of our customers, we use technology to measure risk based on transparent collection and analysis of individual driving performance, which we believe is the most powerful predictor of losses and the leading variable in our underwriting model. By collecting and synthesizing massive amounts of rich, sensory behavioral data across thousands of driving variables, including distracted driving, we strive to price auto insurance based more on causality than correlation. While the notion of telematics has been around for decades, only recently has mobile technology made the concept adoptable at large scale.
The hallmark of our data advantage is our integrated set of actual claims and associated proprietary telematics, which we believe to be one of the largest in the market. We match miles tracked, on an individual basis, with actual claims and identify a set of driving performance factors that cause, or on a relative basis are more likely to cause, losses. We use an internally developed claims infrastructure to capture comprehensive structured data, contributing to our data advantage when combined with the telematics experience and iterate over time.
Our model uses integrated data and technology to create a pricing advantage through segmentation and has allowed us to respond quickly to macroeconomic trends. The data we collect feeds proprietary risk scoring models which assist us in identifying what we believe to be the riskiest drivers on the road, a group we have elected not to quote, thus avoiding a risk segment that is up to two times more likely to get in an accident than our average targeted customer. By using such powerful segmentation, we can price better drivers more fairly, resulting in a stronger conversion of customers whose behavioral data indicates lower risk than a market-standard demographic rating alone. This data advantage, combined with the machine learning approach to core elements of our technology stack, allows us to quickly identify loss trends and reflect this information faster in our rate filings. The resulting segmentation benefit allows for a better risk profile of our book over time, while delivering consistent value to our customers.
Our Strategy
We are focused on the following strategies to continue penetrating the more than $300 billion U.S. auto insurance market. In the near term, our primary focus is to execute on the auto opportunity at hand. In the longer-term, we plan to continue to develop additional growth opportunities through the expansion of product offerings.
•Execute the Auto Opportunity
◦Accurate pricing. We will never stop working to improve our ability to segment risk by increasing the influence of behavioral factors in our underwriting and pricing models. Our primary tool for improvement is to continue applying data science. Over time, we hope that we can replace most correlation-related inputs to our pricing model, such as credit scores, with causal inputs like driving behavior. We believe that modern quantitative methods combined with systematic decision-making leads to more effective risk management and, ultimately, lower prices for our customers.
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◦Enhance marketing efficiency. We will continue to enhance the efficiency of our marketing spend through data science and dynamic bidding and targeting strategies.
◦Expand partnership network. We will continue to leverage our technology to embed with prospective strategic partners and bring the speed and ease of our technology to multiple channels, including independent agent platforms. Integrating our auto insurance solutions into partner platforms allows us to engage prospective customers at contextually relevant times. These arrangements involve varying degrees of integration, including our fully integrated embedded product utilized with some partners, such as Carvana. Over time, we expect increased penetration of this channel as we seek to partner across additional automotive, financial services, affinity, and independent agency channels.
◦Grow national auto insurance presence. We will continue to focus on domestic growth by diversifying distribution channels and launching additional states.
We may selectively pursue additional investments, acquisitions and partnerships to accelerate any of our growth and profitability objectives or to improve our competitive positioning within existing and new products.
Investments
Our portfolio of investable assets is primarily held in cash, cash equivalents and available-for-sale fixed maturity securities, including U.S. Treasury securities, corporate debt securities, asset-backed securities, and municipal securities. We manage the portfolio in accordance with investment policies and guidelines approved by our board of directors. We have designed our investment policy and guidelines to provide a balance between current yield, conservation of capital, and liquidity requirements of our operations. We set guidelines that provide for a well-diversified investment portfolio that is compliant with insurance regulations applicable to the states in which we operate. For further information, see Note 3, “Investments,” in the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
Competition
The insurance industry in which we operate is highly competitive. Several of our primary competitors spend billions of dollars on annual marketing initiatives to create well-established national brands. Our competitors include large national insurance companies such as GEICO, Progressive and Allstate, as well as new market entrants in the insurtech industry, some of which also utilize telematics and offer forms of usage-based insurance. The established national insurance companies have increased name recognition, higher financial ratings, greater resources, additional access to capital, and more lines of insurance coverage to offer due to their time in market. Many of these competitors offer consumers the ability to purchase multiple other lines of insurance coverage and “bundle” them together for discounts and, in certain circumstances, include an umbrella liability policy for additional coverage at competitive prices. Moreover, as we expand into new lines of business and offer additional products, we could face intense competition from traditional insurance companies that are already established in such markets and product offerings.
Competition is based on many factors, including the reputation and experience of the insurer, coverages offered, pricing and other terms and conditions, customer service, claims experiences, size, and financial strength ratings, among other considerations. We believe that we compete favorably across many of these factors and have developed a platform and business model based on behavioral data collection and machine learning that will be difficult for incumbent insurance providers to emulate.
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Intellectual Property
We believe that our intellectual property rights are valuable and important to our business. We rely on trademarks, patents, copyrights, trade secrets, license agreements, intellectual property assignment agreements, confidentiality procedures, non-disclosure agreements, and employee non-disclosure and invention assignment agreements to establish and protect our proprietary rights. Though we rely in part upon these legal and contractual protections, we believe that factors such as the skills and ingenuity of our employees and the functionality and frequent enhancements to our platform are larger contributors to our success in the marketplace.
As of December 31, 2024, we had eight issued patents, six non-provisional patent applications and four continuation applications pending examination in the U.S. We continually review our development efforts to assess the existence and patentability of new intellectual property.
We have trademark rights in our name, our logo, and other brand indicia, and have trademark registrations for select markets in the U.S. and Canada. We also have registered domain names for websites that we use in our business.
We intend to pursue additional intellectual property protection to the extent we believe it would be beneficial and cost-effective. Despite our efforts to protect our intellectual property rights, they may not be respected in the future or may be invalidated, infringed, circumvented, or challenged. For additional information, see the section titled “Risk Factors—Risks Related to Our Business—Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.”
People Team
As a technology company, we view strong talent as one of our differentiating factors. We believe our employees’ knowledge, skills, and the way they work provide a distinct competitive advantage allowing us to innovate, move with speed and bring subject matter expertise to the market for our customers and shareholders.
Our mission is to reinvent insurance through a commitment to technology and data science. We aim to empower better lives through better insurance. Our team members achieve this mission with a focus on customer value, experimentation and innovation, disciplined thinking, and operational excellence. These four principles form the basis of our management approach and performance review model, ensuring clear expectations, meaningful mentorship and powerful growth.
We strive to create an empowering work environment and experience for each of our team members. We understand that a team with diverse backgrounds and perspectives delivers better insights and outcomes, enables creativity, and fosters a greater understanding of our customers. Our efforts to create an inclusive workspace are focused on talent acquisition and development, education and training, feedback and collaboration, and strategic planning aimed at consistent growth.
Employees
As of December 31, 2024, we had 1,021 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements. In 2024, we focused on retaining the talent required to execute our strategic plan, improving our operating efficiency and operating costs, prioritizing our resources to further strengthen our pricing and underwriting foundation and continuing development and distribution of our insurance products. Furthermore, we implemented several training initiatives to help support our employees. This includes a monthly management skills series training, designed to cover relevant topics such as performance reviews, difficult conversations, and employment law. Overall, these programs have been positively received and we plan to expand our training offerings throughout 2025.
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Ethics and Company Values
In addition to applicable laws and regulations, our code of conduct, company values and policies provide the grounding for our ethical framework. Employees are encouraged to report any unusual behavior or any non-compliant activities through our anonymous reporting system. On an annual basis, we provide compliance training to, and require acknowledgement of our code of conduct and other key policies by, every employee. We strive to ensure our new employees know how and what to report. We have an open-door policy that allows employees to reach out to leaders, our people team, our legal team, our compliance team and/or internal audit to ensure that their concerns are communicated and addressed.
Hiring and Retaining Talent
We are continually working on building a culture of attraction and retention of key talent. We recruit nationally to attract the best talent to innovate and meet the needs of our customers in a multitude of ways. Our focus on employee engagement continues with employee surveys and feedback opportunities to create action plans to address needs. Our performance development process aims to ensure that employees receive timely and actionable feedback, enables performance improvement where necessary, and provides employees the opportunity to voice their career aspirations.
In addition, we seek to provide competitive pay and benefits through a combination of fixed and variable compensation programs. We have set salary ranges, based on our defined competitive markets, and our annual short-term incentive and discretionary long-term incentive programs are aligned to each of our positions through market analysis. Our executives and senior leadership roles, along with several identified roles throughout the business participate in a long-term equity-based incentive program. We believe this strongly supports a long-term view and pay for performance that is aligned with our shareholders’ expectations. Our benefit offering includes medical, dental, vision, prescription drug benefits, an employee assistance program, life insurance, short- and long-term disability, paid time off and paid parental leave.
Insurance Regulation
We are subject to insurance regulation in the jurisdictions in which we hold licenses and transact insurance through our licensed insurance carriers and producer subsidiaries in the U.S. Insurance regulatory authorities have broad authority to regulate all aspects of an insurance carrier or producer’s business in each state, including the powers to restrict or revoke licenses to transact business, and to levy fines and monetary penalties against insurers and insurance producers found to be in violation of applicable laws and regulations. Regulations to which our licensed insurance carriers and producer subsidiaries are subject include, but are not limited to:
•prior approval of transactions resulting in a change of “control” (as such term is defined under the Insurance Holding Company System Regulatory Act of Ohio, or the Ohio Holding Company Act);
•approval of policy forms and premiums;
•approval of intercompany agreements;
•statutory and risk-based capital solvency requirements, including the minimum capital and surplus our regulated insurance subsidiaries must maintain;
•establishing minimum reserves that insurance carriers must hold to pay projected insurance claims;
•required participation by our regulated insurance subsidiaries in state guaranty funds;
•restrictions on the type and concentration of our regulated insurance subsidiaries’ investments;
•restrictions on the advertising and marketing of insurance;
•restrictions on the adjustment and settlement of insurance claims;
•restrictions on the use of rebates to induce a policyholder to purchase insurance;
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•restrictions on the sale, solicitation and negotiation of insurance;
•restrictions on the sharing of insurance commissions and payment of referral fees;
•prohibitions on the underwriting of insurance on the basis of race, sex, religion and other protected classes;
•restrictions on our ability to use telematics to underwrite and price insurance policies, particularly in California;
•restrictions on the ability of our regulated insurance subsidiaries to pay dividends to us or enter into certain related-party transactions without prior regulatory approval;
•rules requiring the maintenance of statutory deposits for the benefit of policyholders;
•privacy regulation and data security;
•regulation of corporate governance and risk management;
•periodic examinations of operations, finances, market conduct and claims practices; and
•required periodic financial reporting.
The business of insurance is almost entirely regulated at the state level, and the laws and regulations to which we are subject vary depending on the state. Unless the context otherwise requires, references herein to “state” include any of the 50 states, the District of Columbia and certain U.S. territories. These laws and regulations are subject to change as state legislatures and regulatory agencies update their authority to address real and perceived issues and concerns. These laws and regulations are also subject to interpretation by courts. The National Association of Insurance Commissioners, or NAIC, and the National Council of Insurance Legislators, are the principal organizations tasked with establishing standards and best practices across the various states, the District of Columbia and five U.S. territories, and from time to time promulgate model rules and regulations that often are the basis for insurance rules and regulations adopted by such jurisdictions. While we currently operate in 35 states, we would need to obtain regulatory approval, including with respect to the regulations described above, before offering our products in new markets. We cannot predict precisely whether or when regulatory actions may be taken that could adversely affect us, the operations of our regulated insurance subsidiaries, or our ability to expand our operations into new markets. Interpretations by regulators may change and laws, regulations and interpretations may be applied with retroactive effect, particularly in areas such as accounting or reserve requirements.
Required Licensing
We have three wholly-owned regulated U.S. insurance subsidiaries, Root Insurance Company, Root Property & Casualty Insurance Company, or Root Property & Casualty, and Root Florida Insurance Company, or Root Florida. Collectively, these are our insurance subsidiaries. Root Insurance Company, an Ohio-domiciled insurer, is admitted in the state of Ohio to transact certain lines of property and casualty insurance, maintains licenses to transact insurance in Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and West Virginia. Root Property & Casualty is also domiciled in Ohio and licensed in all 50 states and the District of Columbia to transact certain lines of property and casualty insurance. Root Florida is domiciled in Florida and was formed to transact certain lines of property and casualty insurance. Root Florida was incorporated in early 2025 and is a wholly-owned subsidiary of Root Property & Casualty. The Ohio Department of Insurance, or the Ohio DOI, is the primary state insurance regulator for Root Insurance Company and Root Property & Casualty and Root Florida’s primary regulator is the Florida Office of Insurance Regulation, or the FOIR.
We also have a reinsurance captive subsidiary, Root Re, domiciled in the Cayman Islands.
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Our licensed insurance producer subsidiaries, Root Insurance Agency, LLC, Root Lone Star Insurance Agency, LLC, and Root Scout, LLC, must maintain an insurance producer license in every state in which they sell, solicit or negotiate insurance. Root Insurance Agency, LLC currently holds a resident insurance producer license in Ohio and a non-resident license in the District of Columbia and 47 states, which does not include Florida, Massachusetts and New York. In Florida, Root Insurance Agency, LLC holds an agency license and an independent adjusting firm license and will be appointed as a managing general agent for Root Florida. Root Lone Star Insurance Agency, LLC currently holds a resident managing general agency license in Texas. Root Scout, LLC currently holds a resident insurance producer license in Ohio and a non-resident license in the District of Columbia, and the remaining 39 states, which does not include Alabama, Alaska, Arkansas, Illinois, Massachusetts, Minnesota, Nevada, New Mexico, Washington, and West Virginia.
Insurance regulators have broad authority to restrict or revoke licenses of insurance carriers and producers who are found to be in violation of any applicable laws and regulations. In addition, we must obtain additional regulatory approvals before offering our products in markets where we do not currently operate.
Required Licensing of Independent Agents and Our Employees
Any of the independent agents who sell, solicit or negotiate insurance on our behalf must be licensed and appointed insurance producers and must fulfill annual continuing education requirements. Similarly, any of our employees who sell, solicit or negotiate insurance must be licensed and appointed insurance producers and must fulfill annual continuing education requirements. In certain states in which we operate, insurance claims adjusters are also required to be licensed and fulfill annual continuing education requirements.
Insurance Holding Company Regulation
As the ultimate controlling person in the “insurance holding company system” under the Ohio Holding Company Act, we are required to file annual enterprise risk reports, corporate governance disclosures and Own Risk and Solvency Assessments, or ORSAs, with our domiciliary regulators. Moreover, in Ohio for example, any person divesting control of an insurer must provide 30 days’ notice to the regulator and the insurer.
Under the Ohio Holding Company Act, all inter-affiliate transactions within a holding company system must meet the following conditions: (i) the terms must be fair and reasonable; (ii) charges or fees for services performed must be fair and reasonable; and (iii) expenses incurred and payments received must be allocated to the insurer in conformity with customary insurance accounting practices consistently applied. We generally must disclose any transaction between our regulated insurance subsidiaries and our other affiliates to the supervisory Department of Insurance, or DOI, and obtain prior approval from such DOI before entering into certain material inter-affiliate transactions, including, but not limited to, management agreements, tax allocation agreements, service contracts, cost-sharing arrangements, extraordinary dividends, certain reinsurance transactions and certain loan agreements.
Change of Control
Pursuant to the Ohio Holding Company Act, a person must seek regulatory approval from the superintendent of the supervisory DOI prior to acquiring direct or indirect “control” of a domestic insurer by filing a Form A Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer. As part of this Form A application, the entity acquiring control (as well as any controlling shareholders of such entity) will need to submit, along with other documents and disclosures, its financial statements, organizational charts and biographical affidavits for any officers, directors and controlling shareholders of each applicable entity. The superintendent of the DOI will grant approval of an application to acquire control of a domestic insurer unless, after a public hearing, the superintendent finds that any of the following apply: (i) after the change of control, the domestic insurer would not be able to satisfy the requirements for the issuance of a license to write the line or lines of insurance for which it is presently licensed; (ii) the effect of the merger or other acquisition of control would be substantially to lessen competition in insurance in the applicable state or tend to create a monopoly; (iii) the financial condition of any acquiring party is such as might jeopardize the financial stability of the domestic insurer, or prejudice the interests of its policyholders; (iv) the plans or proposals that the acquiring party has to liquidate the domestic insurer, sell its assets, or consolidate or merge it with any person, or to make any other material change in its business or corporate
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structure or management, are unfair and unreasonable to policyholders of the domestic insurer and not in the public interest; (v) the competence, experience and integrity of the persons that would control the operation of the domestic insurer are such that it would not be in the interest of policyholders of the domestic insurer and of the public to permit the merger or other acquisition of control; or (vi) the acquisition is likely to be hazardous or prejudicial to the insurance-buying public.
The Ohio Holding Company Act provides that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, ten percent or more of the voting securities of the domestic insurer. A person may rebut this statutory presumption of control by submitting a disclaimer of affiliation with the supervisory DOI, disclosing all material relationships and bases for affiliation between the person and the insurer as well as the basis for disclaiming such affiliation. The state regulators, however, may also find that “control” exists in circumstances in which a person owns or controls less than ten percent of the voting securities of the domestic insurer.
These change of control regulations may dissuade investors from acquiring a controlling stake in our company, including through transactions that some or all of our stockholders might consider to be desirable. Such regulations may also inhibit our ability to acquire an insurance company should we wish to do so in the future. See the section titled “Risk Factors—Risks Related to Ownership of Our Class A Common Stock—Applicable insurance laws may make it difficult to effect a change of control.”
ORSA
Pursuant to the Own Risk and Solvency Assessment, or ORSA, an insurance company with gross written and unaffiliated assumed premium of more than $500 million or that is part of an insurance group with gross written and unaffiliated assumed premium of more than $1 billion must maintain a risk management framework to assist the insurer with identifying, assessing, monitoring, managing, and reporting on its material and relevant risks. In addition, the insurer must regularly conduct an own risk and solvency assessment in accordance with NAIC’s ORSA Guidance Manual. Upon the request of the superintendent of the Ohio DOI, and not more than once a year, an insurer must submit an ORSA summary report, or any combination of reports that together contain the information described in the ORSA Guidance Manual, with respect to the insurer and the insurance group of which it is a member. Root Insurance Company became subject to ORSA in 2020 since it had gross written and unaffiliated assumed premium in excess of $500 million for that year and its first assessment was due prior to the end of fiscal year 2021. Root, Inc. has filed its ORSA summary reports with the Ohio DOI annually since 2021, and will file its 2024 ORSA summary report by the end of the first quarter in 2025.
Restrictions on Paying Dividends
We are a holding company that transacts a majority of its business through operating subsidiaries. Consequently, our ability to pay dividends to stockholders and meet our debt payment obligations depends on the results of operations of our operating subsidiaries and on the ability of such subsidiaries to provide us with cash, whether in the form of dividends, distributions, loans or otherwise. The payment of any extraordinary dividend by one of our regulated insurance subsidiaries requires the prior approval of the superintendent of the supervisory DOI. “Extraordinary dividend” is defined under applicable state law as: (i) any dividend or distribution of cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding twelve months, exceeds the greater of (a) ten percent of an insurer’s policyholder surplus as of December 31 of the preceding year, or (b) an insurer’s net income for the twelve-month period ending December 31 of the preceding year or (ii) any dividend or distribution paid by an insurer from a source other than earned surplus. As of December 31, 2024, none of our insurance subsidiaries requested approval or review of the supervisory DOI to issue any extraordinary or ordinary dividends. Root Re is permitted to pay dividends. See the section titled “Risk Factors—Risks Related to Our Business— Failure to maintain our risk-based capital at the required levels could adversely affect our ability to maintain regulatory authority to conduct our business.”
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In addition, insurance regulators have broad powers to prevent a reduction of statutory surplus to inadequate levels, and there is no assurance that dividends of the maximum amount calculated under any applicable formula would be permitted. The Ohio DOI may in the future adopt statutory provisions more restrictive than those currently in effect.
Reserves
Our domestic insurance subsidiaries are required to hold reserves to cover projected losses under its policies, in accordance with actuarial principles. In accordance with NAIC’s property and casualty statement instructions, they must submit an annual Statement of Actuarial Opinion from a qualified actuary appointed by the Company, certifying that its reserves are reasonable.
Risk-Based Capital and Group Capital
State insurance regulators establish and monitor compliance with capital and surplus requirements. Our domestic insurance subsidiaries are therefore subject to certain capital restrictions and requirements including risk-based capital, or RBC, developed by the NAIC and adopted by state insurance regulators to support their overall business operations and minimize the risk of insolvency. RBC is calculated using a series of factors applied against financial balances and activity. State insurance regulators use RBC to set capital requirements, based on the size and degree of risk taken by the insurer, taking into account various risk factors including asset risk, credit risk, underwriting risk, and interest rate risk. If the ratio of an insurer’s total adjusted capital and surplus decreases relative to its RBC, the RBC laws provide for increasing levels of regulatory scrutiny and intervention.
An insurance company with total adjusted capital that is less than 200% of its authorized control level RBC is at a company action level, which would require the insurance company to file a RBC plan that, among other things, contains proposals of corrective actions the Company intends to take that are reasonably expected to result in the elimination of the company action level event. Given the relatively short operating history of our insurance subsidiaries, certain state insurance regulators require our insurance subsidiaries to maintain RBC levels in excess of 200% of its authorized control level. As of December 31, 2024, both Root Insurance Company and Root Property & Casualty’s RBC levels are above the company action levels.
In addition, the NAIC has developed a group capital calculation covering all entities in our insurance company group. The group capital calculation provides regulators with an additional analytical tool for conducting supervisory activities. As of December 31, 2024, Ohio adopted the model legislation, which will become effective June 1, 2025 for those insurance holding company systems that do not write business outside of the U.S., like us.
Hazardous Financial Conditions
Our insurance regulatory authorities have the authority to deem our domestic insurance subsidiaries to be in a hazardous financial condition such that the insurer’s continued operation may be hazardous to its policyholders, creditors, or the general public. A finding of a hazardous condition can be based upon a number of factors, including, but not limited to: (i) adverse findings in a financial, market conduct or other examination; (ii) failure to maintain adequate reserves in accordance with presently accepted actuarial standards of practice; (iii) net loss or negative net income in the last twelve month period or any shorter period of time; (iv) failure to meet financial and holding company filing requirements; (v) insolvencies with a company’s reinsurer(s) or within the insurer’s insurance holding company system; (vi) a finding of incompetent or unfit management of the insurer; (vii) a failure to furnish requested information or provide accurate information in relation to a response to an inquiry or filing of a financial statement; and (viii) any other finding determined by the commissioner to be hazardous to the insurer’s policyholders, creditors or general public.
If an insurance regulatory authority finds one of our domestic insurance subsidiaries to be in hazardous condition it has the authority, in lieu of placing the insurer into supervision, rehabilitation or liquidation, to enter into a memorandum of understanding with the insurer or issue an order to require the insurer to remedy the hazard. This would include, but is not limited to, ordering the insurer to: (i) increase its capital and surplus, (ii) suspend payments of dividends, (iii) limit or withdraw from certain investments, (iv) correct corporate governance deficiencies and (v) take any other action necessary to cure the hazardous condition.
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Periodic Examinations
Our insurance subsidiaries are subject to on-site visits and financial and/or market conduct examinations by state insurance regulatory authorities. We are subject to financial condition examinations in any state in which one of our insurance company subsidiaries is domiciled. Root Insurance Company and Root Property & Casualty are domiciled in Ohio and subject to a financial condition examination by the Ohio DOI at least every three to five years, during which the Ohio DOI reviews the Company’s financials, governance, and operations, including its relationships and transactions with affiliates. The most recent financial condition examinations of Root Insurance Company and Root Property & Casualty by the Ohio DOI covered the periods of January 1, 2020 through December 31, 2022 and January 1, 2021 through December 31, 2022, respectively. The examination reports were completed on June 14, 2024, and are available to the public. There were no formal findings or financial statement adjustments.
We are also subject to market conduct examinations in any state in which one of our insurance subsidiaries issues policies. Market conduct examinations examine an insurer’s conduct toward policyholders, including complaint handling, marketing, claims, policyholder notice, rate and form filing, and customer service. These examinations can result in fines and other monetary penalties, as well as other regulatory orders requiring remedial, injunctive, or other corrective action. Previously, we have been subject to such fines, although the amounts have been immaterial. As of December 31, 2024, Root Insurance Company is undergoing market conduct examinations conducted by the Maryland Insurance Administration, the Colorado Division of Insurance, the California Department of Insurance, the Pennsylvania Insurance Department, and the Missouri Department of Insurance. In addition, Root Re, our Cayman Islands subsidiary, is subject to inspections by the Cayman Islands Monetary Authority, or CIMA, on an ad-hoc basis and typically every three to five years. An inspection is scheduled for the first quarter of 2025.
Statutory Accounting Principles
A licensed insurance carrier’s financial statements must be completed in accordance with statutory accounting principles, or SAP. SAP was developed by U.S. insurance regulators as a method of accounting used to monitor and regulate the solvency of insurance companies. In developing SAP, insurance regulators were primarily concerned with evaluating an insurer’s ability to pay all its current and future obligations to customers. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary jurisdiction.
Uniform statutory accounting practices are established by the NAIC and generally adopted by regulators in the various U.S. jurisdictions. These accounting principles and related regulations differ somewhat from generally accepted accounting principles in the U.S., or GAAP, which are designed to measure a business on a going-concern basis. GAAP gives consideration to matching of revenue and expenses and, as a result, certain costs are capitalized when incurred and then amortized over the life of the associated policies where SAP generally recognizes those costs as expenses when incurred. Other assets such as fixed assets are accounted for under GAAP financial statements, but are not admitted under SAP. As a result, the values for assets, liabilities, and equity reflected in financial statements prepared in accordance with GAAP may be different from those reflected in financial statements prepared under SAP.
Credit for Reinsurance
Our wholly-owned regulated U.S. insurance subsidiaries, primarily Root Insurance Company and Root Property & Casualty, are currently parties to a number of reinsurance agreements under which they have ceded a portion of their risk they are insuring to various reinsurers, including but not limited to Root Re. State insurance laws permit U.S. insurance companies, as ceding insurers, to take financial statement credit for reinsurance that is ceded, so long as the assuming reinsurer satisfies the state’s credit for reinsurance laws. Once an insurance carrier has received credit for reinsurance it does not need to hold separate reserves to cover claims on the risks that it has ceded to the reinsurer. There are several different ways in which the credit for reinsurance laws may be satisfied by an assuming reinsurer, including being licensed in the state, being accredited in the state, or maintaining certain types of qualifying collateral. We ensure that all of our insurance subsidiaries’ reinsurers qualify for credit for reinsurance so that they are able to take full financial statement credit for reinsurance.
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Rate Regulation
Most states require personal property and casualty insurers to file rating plans, policy or coverage forms, and other information with the state’s regulatory authority. In certain cases, such rating plans, policy forms, or both must be approved prior to use.
We currently have products on file and approved in the following states: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, West Virginia, and Wisconsin.
The speed with which an insurer can change rates in response to competition or increasing costs depends, in part, on whether the rating laws are (i) prior approval, (ii) file-and-use or (iii) use-and-file laws. In states having prior approval laws, the regulator must approve a rate before the insurer may use it. In states having file-and-use laws, the insurer does not have to wait for the regulator’s approval to use a rate, but the rate must be filed with the regulatory authority prior to being used. A use-and-file law requires an insurer to file rates within a certain period of time after the insurer begins using them. Under all three types of rating laws, the regulator has the authority to disapprove a rate filing. In addition, when a regulator disapproves a rate filing that the company has already implemented, the regulator may require the company to issue refunds to insureds who purchased or renewed a product sold pursuant to that rate filing.
An insurer’s ability to adjust its rates in response to competition or to changing costs depends on an insurer’s ability to demonstrate to the regulator that its rates or proposed rating plan meet the requirements of the rating laws. In those states that significantly restrict an insurer’s discretion in selecting the business that it wants to underwrite, an insurer can manage its risk of loss by charging a rate to reflect the cost and expense of providing the insurance. In those states that significantly restrict an insurer’s ability to charge a rate that reflects the cost and expense of providing the insurance, the insurer can manage its risk of loss by being more selective in the type of business it underwrites. When a state significantly restricts both underwriting and pricing, it becomes more difficult for an insurer to maintain its profitability.
From time to time, the personal lines insurance industry comes under pressure from state regulators, legislators, and special-interest groups to reduce, freeze, or set rates at levels that do not correspond with our analysis of underlying costs and expenses. In recent years, auto insurers in particular have come under increasing pressure because of inflation and other macroeconomic factors. Whether this pressure continues to exist depends on the macroeconomic environment. State regulators may interpret existing law or rely on future legislation or regulations to impose new restrictions that adversely affect profitability or growth. In addition, certain regulators may institute moratoriums that prohibit or limit an insurer’s ability to cancel or non-renew an insurance policy or require an insurer to defer the collection of past-due premiums to the end of the moratorium period. These moratoriums may lead to an increase in earned, but not collected premium, thereby adversely impacting the insurer. We cannot predict with precision the impact on our business of possible future legislative and regulatory measures regarding insurance rates.
Insolvency Funds and Associations, Guarantee Funds, Assigned Risk Plans, Mandatory Pools, and Insurance Facilities
Most states require admitted property and casualty insurance companies to become members of insolvency funds or associations, which they fund through an annual assessment. In addition, certain states have enacted laws that require an insurer conducting business in that state to participate in assigned risk plans, reinsurance facilities and joint underwriting associations. These funds cover payments of claims of state policyholders whose admitted insurance carriers have become insolvent. The annual assessments required in any one year will vary from state to state and are subject to various maximum assessments per line of insurance.
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Investment Regulation
Root Insurance Company and Root Property & Casualty are subject to Ohio’s rules and regulations governing the investment of its assets, while Root Florida is subject to Florida’s rules and regulations. These laws generally require that an insurance company invest in a diverse portfolio and limit their investments in certain asset categories. Failure to comply with these laws and regulations would cause non-conforming investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in certain circumstances, we would be required to dispose of those investments.
Trade Practices
Insurance producers are subject to regulation on how they may sell, solicit or negotiate insurance and conduct their business, with state laws prohibiting certain unfair trade practices. Such practices include, but are not limited to, false advertising, making false statements to regulators, unfair discrimination and rebating premium to policyholders above certain de minimis amounts. We set business conduct policies and provide training to make our employee-agents and other customer service personnel aware of these prohibitions and require them to conduct their activities in compliance with these statutes.
Unfair Claims Practices
Insurance companies, third-party administrators and individual claims adjusters are prohibited by state statutes from engaging in unfair claims practices. Unfair claims practices include, but are not limited to, misrepresenting pertinent facts or insurance policy provisions, failing to acknowledge and act reasonably promptly upon communications with respect to claims arising under insurance policies, failing to adopt reasonable standards for the investigation and adjustment of a claim and attempting to settle a claim for less than the amount to which a reasonable person would have believed such person was entitled. We set business conduct policies to make claims adjusters aware of these prohibitions and to require them to conduct their activities in compliance with these statutes.
Commission Sharing
Insurance producers cannot share insurance commissions with any person for selling, soliciting or negotiating insurance unless such person holds an insurance producer license in the lines of insurance that are being transacted. Under the insurance laws of most states, there is a limited exception to this prohibition on commission sharing for the payment of referral fees to unlicensed persons, provided that the fee is a flat fee that is not contingent on the purchase of insurance and the referral does not involve the discussion of the terms or conditions of the policy. We set business conduct policies to make appropriate employees aware of these rules and the policies require them to conduct their activities in compliance with these statutes.
Data Privacy and Cybersecurity
The use of non-public personal information in the insurance industry is subject to regulation under the privacy provisions of the Gramm-Leach Bliley Act and the NAIC Insurance Information and Privacy Act, as adopted and implemented by the various state legislatures and insurance regulators, including through the California Financial Information Privacy Act. Pursuant to these laws and regulations, among other things, an insurance carrier or producer must disclose its privacy policies to all of its applicants and policyholders and must also provide either an opt-in or opt-out, depending on the state, to the sharing of non-public personal information with unaffiliated third parties. Under these rules and regulations, insurance companies and producers must also establish a program of administrative, technical, and physical safeguards designed to address the security and confidentiality of customer information, protect against anticipated threats or hazards to the security or integrity of customer information, and protect against unauthorized access to or use of customer information that could result in substantial harm or inconvenience to the customers.
Certain collection and processing of personal information makes us subject to the California Consumer Privacy Act, or CCPA, which took effect on January 1, 2020, and the California Privacy Rights Act, or CPRA, which took effect on January 1, 2023. The CCPA and CPRA give California residents the right to access and require deletion of certain of their personal information, opt out of certain personal information sharing, and receive detailed
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disclosures about how their personal information is used and shared. The CCPA and CPRA exempt certain information that is collected, processed, sold or disclosed pursuant to the California Financial Information Privacy Act, the Gramm-Leach-Bliley Act or the federal Driver’s Privacy Protection Act, which also apply to us. However, the definition of “personal information” in the CCPA is broad and encompasses other information that we process beyond the scope of this exemption. In addition, we are subject to multiple state requirements pertaining to how insurers handle their customers’ non-public personal information, including but not limited to in Virginia, Montana, and Nevada.
Further, in response to the growing threat of cybersecurity-attacks in the insurance industry, several jurisdictions have adopted, or have begun to consider adopting, cybersecurity regulations that establish requirements and standards for safeguarding non-public personal information, including the New York Department of Financial Services. In 2017, the NAIC adopted the Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern the cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. A number of states have adopted versions of the Insurance Data Security Model Law, each with a different effective date. Additional state laws impose notification requirements in the event of cybersecurity breaches affecting their residents. Root takes steps to comply with applicable cybersecurity regulations, but the patchwork nature of the laws in this area currently makes it more costly and difficult to ensure compliance.
Federal Regulation
The regulation of insurance companies is principally a matter of state law, and the federal government does not directly regulate the transaction of insurance. However, federal regulation and initiatives do have an impact on the insurance industry. In particular, the Federal Insurance Office, or FIO, was established within the U.S. Department of the Treasury by the Dodd-Frank Act in July 2010 to monitor and coordinate the regulation of the insurance industry across the U.S.
Although the FIO has limited direct regulatory authority over insurance companies or other insurance industry participants, it does represent the U.S. on prudential aspects of international insurance matters, including at the International Association of Insurance Supervisors, or IAIS. In addition, the FIO serves as an advisory member of the Financial Stability Oversight Council, or FSOC, assists the Secretary of the U.S. Department of the Treasury with administration of the Terrorism Risk Insurance Program, monitors trends in the insurance industry and advises the secretary of the U.S. Department of the Treasury on important national and international insurance matters. The FIO has the ability to make a recommendation to the FSOC to designate an insurer as “systemically significant,” subjecting the insurer to regulation by the Federal Reserve as a bank holding company, which in some cases could lead to higher capital requirements.
In addition, a number of federal laws affect and apply to the insurance industry, including various privacy laws, false advertising laws, anti-money laundering laws, the Fair Credit Reporting Act, or FCRA, and the economic and trade sanctions implemented by the Office of Foreign Assets Control, or OFAC. We acquire consumer reports, including credit reports and driving data about applicants with their consent, which are governed by the FCRA. OFAC has in the past imposed civil penalties on persons, including insurance and reinsurance companies, arising from violations of its economic sanctions program.
Available Information
General information about Root, Inc., including our Corporate Governance Guidelines and our Code of Business Conduct and Ethics, can be found at ir.joinroot.com under the “Governance” tab by selecting “Documents & Charters.” We will post on our website any amendments to, or waivers from, our Code of Business Conduct and Ethics requiring disclosure under applicable rules within four business days of the amendment or waiver. Charters for the Audit, Risk and Finance Committee, Compensation Committee, and Nominating and Governance Committee are also available at this location. Root, Inc. uses its website, ir.joinroot.com, as a channel for routine distribution of important information, including news releases and other investor communications. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after the reports are
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filed with or furnished to the SEC. These documents are also available in hard copy, free of charge, by contacting our Investor Relations office. Additionally, the SEC maintains a website (www.sec.gov) that contains the reports, proxy statements and information statements, and other information regarding issuers that file or furnish electronically with the SEC. In addition, our website allows investors and other interested persons to sign up to automatically receive email alerts when we post news releases and financial information on our website. Information contained on our website is not incorporated into this Annual Report on Form 10-K or other securities filings.
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Item 1A. Risk Factors
The following are certain risk factors that could affect our business, results of operations, financial condition and prospects. Although the risks are organized by headings and each risk is described separately, many of the risks are interrelated. The risks that we have highlighted in the following section of this report are not the only ones that we face. Our business involves various risks and uncertainties as well as those associated with the general business and insurance industry environments.
Investing in our Class A common stock involves a high degree of risk. You should carefully consider the following risks, together with all of the other information contained in this Annual Report on Form 10-K, before deciding to invest in our Class A common stock. Our business, results of operations, financial condition or prospects could be materially and adversely affected by any of these risks or uncertainties, as well as by risks or uncertainties not currently known to us, or that we do not currently believe are material. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
We have a history of net losses and could incur substantial net losses in the future. We may not be able to grow or achieve or maintain profitability in the future.
We incurred net losses on an annual basis from our incorporation in 2015 through the second quarter of 2024, and we may incur significant net losses in the future. We incurred net losses of $147.4 million and $297.7 million for the years ended December 31, 2023 and 2022, respectively. While we recorded a net profit of $30.9 million for 2024, we had an accumulated loss of $1,681.9 million and $1,715.2 million as of December 31, 2024 and December 31, 2023, respectively.
The principal driver of our historical losses has been our loss ratios associated with accidents by our customers. As a newer and historically high growth-focused full-stack insurance company, we have a higher proportion of new customers and/or customers who are inclined to more regularly shop for insurance relative to longer-tenured insurance companies. This higher proportion of new and shopper customers typically generates proportionately greater losses, thus impacting our loss ratio. Like with other more-tenured insurance companies, over time we expect a greater proportion of all customers will be renewal customers. Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, loss adjustment expenses, or LAE, and other costs. When we do not accurately assess the risks that we underwrite, the premiums that we charge may not be adequate to cover our losses and expenses, which adversely affects our results of operations and our profitability.
Despite posting a net profit for 2024, our accumulated net loss may increase as we continue to make investments in the development and expansion of our business or if we suffer adverse business results. Expenses in the areas of building partnership products, telematics, digital marketing, brand advertising, consumer-facing technologies, core insurance operations services and lines of insurance not presently offered by Root contribute to net losses. We have in the past encountered, and will continue to encounter, unforeseen or unpredictable factors, including, but not limited to, elevated operating expenses, complications or delays, or other losses (for example, litigation losses), which have and may in the future result in increased costs, contributing to our net losses and impacting our ability to grow. It is difficult to predict the size and growth rate of our market, demand for our services and success of current or potential future competitors and our investments to grow our business may not result in increased or sufficient revenue or growth for several years or at all. Additionally, we will continue to incur significant expenses in connection with the repayment of the outstanding principal and accrued interest on our Amended Term Loan (as defined herein), and we will also incur significant legal, accounting and other expenses as a public company.
Our limited operating history makes it difficult to evaluate our current business and our future prospects. While our revenue has grown in some recent periods and contracted in others, our historic growth rate may not be sustainable. With changes to our focus areas of growth, our historic growth rates should not be considered indicative of future performance, and we may not realize sufficient revenue to maintain profitability. Revenue growth rates may slow in future periods due to a number of reasons including increased competition and market changes. We
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may choose to preserve capital, change our focus areas of growth, reinvest in the business, or encounter unforeseen or unpredictable factors, which may, and in some cases will, result in increased operating expenses, other losses, complications or delays slowing demand for our services, increasing competition, a decrease in the growth of our overall market, and our failure to capitalize on growth opportunities or the maturation of our business. If we fail to manage our losses or to grow our revenue sufficiently to keep pace with our investments and other expenses, our business will be seriously harmed and we may not maintain profitability in future periods.
We may lose existing customers or fail to acquire new customers, including through our partnership channel, and our future growth and profitability depend in part on our ability to successfully operate in an insurance industry that is highly competitive. If we are unable to maintain the levels of customer service or continue technological innovation and improvements, our prospects for future growth may be materially adversely affected.
If we lose customers, our value will diminish. In addition, we may fail to accurately predict risk segmentation of new customers or potential customers, which could also reduce our profitability. While our loss performance has generally improved over time, loss performance is influenced by a number of factors, including inflation, and as more customers renew their policies and remain policyholders for longer, a future loss of customers could lead to higher loss ratios or loss ratios that cease to decline, which would adversely impact our profitability. Further, our ability to attract and retain customers depends, in part, on our ability to successfully expand geographically, grow our business in the markets we currently serve, expand into new lines of business and offer additional products beyond automobile and renters insurance. Expanding into new geographic markets takes time, places us in unfamiliar competitive and regulatory environments, requires us to navigate and comply with extensive regulations and may occur more slowly than we expect and we may be unsuccessful at expanding nationwide.
Further, the insurance industry in which we operate is highly competitive. Many of our primary competitors have well-established national brands and market similar products. Our competitors include large national insurance companies, as well as up-and-coming companies and new market entrants in the insurtech industry, some of which also utilize telematics and offer forms of usage-based insurance. Several of these established national insurance companies are larger than us and have significant competitive advantages over us, including better name recognition, higher financial ratings, greater resources, additional access to capital, and more types of insurance coverage to offer, such as health and life. In particular, many of our competitors offer consumers the ability to purchase multiple types of insurance coverage and “bundle” them together for discounts under one policy and, in certain circumstances, include an umbrella liability policy for additional coverage at competitive prices. To the extent we expand into new lines of business and offer additional products, we will face intense competition from traditional insurance companies that are already established in such markets.
Our business model and technology are still developing compared to the established business models of the well-established incumbents in the insurance market. Our success in the automobile insurance market depends on our deep understanding of this industry. To penetrate new vertical markets, we will need to develop a deep understanding of those new markets and the associated business challenges faced by participants in them. Developing this level of understanding requires substantial investments of time and resources, and we may not be successful. In addition to the need for substantial resources, insurance regulation could limit our ability to introduce new product offerings. New insurance products could take an extended amount of time to be approved by regulatory authorities or may not be approved at all. If we fail to penetrate new vertical markets successfully, our revenue may grow at a slower rate, and our business, results of operations, financial condition and prospects could be materially adversely affected.
We have invested in growth strategies by utilizing unique customer value propositions, differentiated product offerings and distinctive advertising campaigns. In addition, we have invested in and are actively attempting to expand our partnership channel, including our embedded insurance offering and our independent agent platform. If we are unsuccessful through these strategies in generating new business, retaining a sufficient number of customers or retaining or acquiring key relationships, our ability to maintain or increase premiums written or the ability to sell our products will be adversely impacted. Because of the competitive nature of the insurance industry, there can be no assurance that we will continue to compete effectively within our industry, or that competitive pressures will not have a material effect on our business, results of operations, financial condition and prospects. If we fail to remain
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competitive on customer experience, pricing, and insurance coverage options, our ability to grow our business will also be adversely affected.
There are many other factors that could negatively affect our ability to maintain or grow our customer base, including if:
•we fail to offer new and competitive products, or fail to maintain or obtain regulatory approvals necessary for expansion into new markets or in relation to our products (such as underwriting and rating requirements);
•we fail to realize profits, retain customers, contract with additional partners to utilize products, or achieve other benefits related to our partnership channel, including our embedded insurance offering and our independent agent platform;
•we fail to effectively use search engines, social media platforms, digital app stores, content-based online advertising, and other online sources for generating traffic to our website and our mobile app;
•our digital platform experiences disruptions; technical or other problems frustrate the customer experience, particularly if those problems prevent us from generating quotes or paying claims in a fast and reliable manner; we fail to provide effective updates to our existing products or to keep pace with technological improvements in our industry; or customers have difficulty installing, updating or otherwise accessing our app or website on mobile devices or web browsers as a result of actions by us or third parties;
•we suffer reputational harm to our brand including from negative publicity, whether accurate or inaccurate;
•customers are unable or unwilling to adopt or embrace new technology or the perception emerges that purchasing insurance products online is not as effective as purchasing those products through traditional offline methods; or
•we experience cybersecurity incidents or are unable to address customer concerns regarding the content, privacy, and security of our digital platform and our customers’ information.
Our inability to overcome these challenges will impair our ability to attract new customers and retain existing customers and could have a material adverse effect on our business, operating results and financial condition.
We may require additional capital to support business growth or to satisfy our regulatory capital and surplus requirements, and this capital might not be available on acceptable terms, if at all.
We intend to continue to make investments to support our business growth which will require us to use funds to respond to business challenges, including the need to develop new features and products or enhance our existing products and services, satisfy our regulatory capital and surplus requirements, cover losses, improve our operating infrastructure or acquire complementary businesses and technologies. Many factors will affect our capital needs as well as their amount and timing, including our growth and profitability, regulatory requirements, market disruptions and other developments. If our present capital and surplus is insufficient to meet our current or future operating requirements, including regulatory capital and surplus requirements, or to cover losses, we may need to raise additional funds through financings or curtail our growth. We evaluate financing opportunities from time to time, and our ability to obtain financing will depend, among other things, on our development efforts, business plans and operating performance, as well as the condition of the capital markets at the time we seek financing. We cannot be certain that additional financing will be available to us on favorable terms, or at all.
If we raise additional funds through future issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of Class A common stock. Further, if the trading price of our Class A common stock is depressed or declines, the potential magnitude of this dilution will increase. As an insurance company, we are subject to extensive laws and regulations in every jurisdiction in which we conduct business, and any such issuances of equity or convertible debt securities to secure additional funds may be impeded by regulatory approvals or requirements imposed by such regulatory authorities if such issuances are deemed to result in a person
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acquiring “control” of our company under applicable insurance laws and regulations. Such regulatory requirements may require potential investors to disclose their organizational structure and detailed financial statements as well as require managing partners, directors and/or senior officers to submit biographical affidavits which may deter investment in our company.
Further, we are restricted by covenants in our Amended Term Loan. These covenants restrict, among other things, our ability to incur additional debt without lender consent or grant liens over our assets, which may limit our ability to obtain additional funds.
We rely on telematics, mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting our insurance policies, managing claims and customer support, and improving business processes. To the extent regulators prohibit or restrict our collection or use of this data, our business will be harmed.
We use telematics, mobile technology and our digital platform to collect data points that we evaluate in pricing and underwriting certain of our insurance policies, managing claims and customer support, and improving business processes. Our business model is dependent on our ability to collect, obtain or use driving behavior data and utilize telematics. If legislation or judicial or regulatory intervention were to restrict our ability to collect or use driving behavior data, it would impair our capacity to underwrite insurance cost effectively, negatively impacting our revenue and earnings. Further, if federal, state or international regulators were to determine that the type of data we collect or obtain, the process we use for collecting or obtaining this data or how we use this data is unfairly discriminatory or otherwise violates one or more laws, our ability to collect, obtain and use this data will be seriously impaired.
Due to Proposition 103 in California, we are currently limited in our ability to use telematics data beyond miles-driven to underwrite insurance, including data on how the car is driven. This has significantly hindered our ability to offer cost-competitive insurance policies in California and, if other states were to pass similar laws or regulations, would impede our ability to offer insurance policies in those states.
Although there is currently limited federal and state legislation outside of California restricting our ability to collect driving behavior data, private organizations are implementing principles and guidelines to protect driver privacy. The Alliance of Automobile Manufacturers and Global Automakers established their Consumer Privacy Protection Principles to provide member automobile manufacturers with a framework with which to consider privacy and build privacy into their products and services while the National Automobile Dealers Association has partnered with the Future of Privacy Forum to produce consumer education guidelines that explain the kinds of information that may be collected by consumers’ cars, the guidelines that govern how it is collected and used, and the options consumers may have to protect their vehicle data. The Global Alliance for Vehicle Data Access is another organization that was formed to advocate for driver ownership of all vehicle data, particularly for insurance underwriting purposes. If federal or state legislators pass laws limiting our ability to collect or obtain driver data, particularly through driver’s smartphones, such legislation would have a material adverse effect on our business, results of operations, financial condition and prospects.
In 2024, news reports about certain automobile manufacturers’ collection of driving behavioral data, and the means of obtaining consent for the same, and the subsequent sale of this vehicle-derived telematics data to third-party brokers, and then eventually to insurers, drew national attention. State attorneys general and private litigants initiated investigative activities and litigation against certain of these manufacturers and brokers. If consumer sentiment, legislation, litigation, or a combination of these, were to materially impact our ability to collect, obtain and use telematics data, it would have a material adverse effect on our business, results of operations, financial condition and prospects.
Some regulators have expressed interest in the use of external data sources, algorithms and/or predictive models in insurance underwriting or rating. Specifically, regulators have raised questions about the potential for unfair discrimination, adequacy of consent and lack of transparency associated with the use of external consumer data. A determination by federal or state regulators that the data points we collect or obtain and the process we use for collecting or obtaining data unfairly discriminates against a protected class of people could subject us to fines and
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other sanctions, including, but not limited to, disciplinary action, revocation and suspension of licenses, regulatory fines and other sanctions, and withdrawal of product forms. Any such event could, in turn, materially and adversely affect our business, results of operations, financial condition and prospects. Although we have implemented policies and procedures into our business operations that we feel are appropriately calibrated to our machine learning and automation-driven operations, these policies and procedures may prove inadequate to manage our use of this nascent technology, resulting in a greater likelihood of inadvertent legal or compliance failures.
Regulators may also require us to disclose the external data we use from third parties, algorithms and/or predictive models prior to approving our underwriting models and rates. Such disclosures, if mandated, could put our intellectual property at risk. While we take steps to protect our intellectual property when seeking approvals as required from regulators, and in responding to periodic requests for information and examinations, certain regulators have already sought such information to a limited extent, and we cannot assure you that our intellectual property will be protected in all instances.
Additionally, existing laws, future laws, and evolving attitudes about privacy protection may impair our ability to collect, obtain, use, and maintain data points of sufficient type or quantity to develop and train our algorithms. If such laws or regulations were enacted federally or in a large number of states in which we operate, it would impact the integrity and quality of our pricing and underwriting processes, as it already has in California.
We may fail to maintain an effective partnership channel offering, including our embedded insurance product and our independent agent platform and/or fail to perform under the associated commercial arrangements.
We entered into a commercial agreement with Carvana on October 1, 2021, in which the parties agreed to develop an integrated automobile insurance solution for Carvana’s online car buying platform, and we pay commissions to Carvana for insurance policies purchased by Carvana customers. The commercial agreement includes exclusivity rights to offer automobile insurance on Carvana’s platform, and we will partner exclusively with Carvana for an enterprise total loss replacement vehicle solution. In addition, we are a party to and are pursuing commercial arrangements with other potential partners with varying levels of integration, including utilization of an embedded insurance offering. If we or our commercial counterparties, including Carvana, are unable to satisfy obligations under commercial arrangements, if we are unable to maintain effective partnership arrangements, including an embedded insurance product and our independent agent platform, if we are unable to contract with additional partners to utilize these products, or if our partners experience difficulty with their businesses or if they or we are unable to attract insurance customers, that could have a material and adverse effect on our business, results of operations, financial condition and prospects.
We depend on search engines, social media platforms, digital app stores, content-based online advertising and other online sources to attract consumers to our website and our mobile app both rapidly and cost-effectively. If these third parties change their listings or increase their pricing, if our relationships with them deteriorate or terminate, or if other factors related to these third parties arise which are beyond our control, we may be unable to attract new customers rapidly and cost-effectively, which would adversely affect our business, results of operations and prospects.
Our success depends on our ability to attract consumers to our website and mobile app and convert them into customers in a rapid and cost-effective manner through our mobile app. We depend in large part on search engines, social media platforms, digital app stores, content-based online advertising and other online sources for traffic to our website and our mobile app, which are material sources for new consumers.
With respect to search engines, we are included in search results as a result of both paid search listings, where we purchase specific search terms that result in the inclusion of our advertisement, and free search listings, which depend on algorithms used by search engines. For paid search listings, if one or more of the search engines or other online sources on which we rely modifies or terminates its relationship with us, we have to pay a higher price for such listings or if the alternatives we find are more expensive, our expenses have in the past and would again rise, or we could lose consumers and traffic to our website, any of which could have a material adverse effect on our business, results of operations, financial condition and prospects. For free search listings, if search engines on which
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we rely for algorithmic listings modify their algorithms, our website may appear less prominently or not at all in search results, which could result in reduced traffic to our website and our mobile app and fewer new customers.
Our ability to maintain or increase the number of consumers who purchase our products after being directed to our website or our mobile app from other digital platforms depends on many factors that are not within our control. Search engines, social media platforms and other online sources often revise their algorithms and introduce new advertising products. If one or more of the search engines or other online sources on which we rely for traffic to our website and our mobile app were to modify its general methodology for how it displays our advertisements or keyword search results, resulting in fewer consumers clicking through to our website and our mobile app, our business and operating results will suffer. In addition, if our online display advertisements are no longer effective or are not able to reach certain consumers due to consumers’ use of ad-blocking software, our business and operating results will suffer.
Additionally, changes in regulations could limit the ability of search engines and social media platforms, including but not limited to Google and Facebook, to collect data from users and engage in targeted advertising, making them less effective in disseminating our advertisements to our target customers. For example, the proposed Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data, or DASHBOARD, Act would mandate annual disclosure to the SEC of the type and “aggregate value” of user data used by harvesting companies, such as Facebook, Google and Amazon, including how revenue is generated by user data and what measures are taken to protect the data. If the costs of advertising on search engines and social media platforms increase, we have in the past and will again incur additional marketing expenses and be required to allocate a larger portion of our marketing spend to other channels and our business and operating results could be adversely affected. Similarly, changes to regulations applicable to the insurance brokerage and distribution business may limit our ability to rely on key distribution platforms, such as the Root API, if the third-party distribution platforms are unable to continue to distribute our insurance products without an insurance producer license pursuant to applicable insurance laws and regulations.
From time to time (including in 2024), competition for limited and/or high-value advertising space from our competitors or other companies can result in increases in the costs we incur in our marketing efforts. Our customer acquisition costs can vary by channel mix, by state, due to seasonality, or due to the competitive environment. These increases to our customer acquisition costs depend on a number of factors outside of our control and can negatively affect our business and operating results. As we grow, we may struggle to maintain cost-effective marketing strategies, and our customer acquisition costs could rise substantially.
The marketing of our insurance products depends on our ability to cultivate and maintain cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. Furthermore, because many of our customers access our insurance products through a mobile app, we depend on the Apple App Store and the Google Play Store to distribute our mobile app.
Operating system platforms and application stores controlled by third parties, such as Apple and Google, may change their terms of service or policies in a manner that increases our costs or impacts our ability to distribute our mobile app, collect data through it and market our products.
We are subject to the terms of service and policies governing the operating system platforms on which our mobile app runs and the application stores through which we distribute our mobile app, in particular, those operated by Apple and Google. These terms of service and policies govern the distribution, operation and promotion of applications on such platforms and stores. These platforms and stores have broad discretion to change and interpret their terms of service and policies in a manner that may adversely affect our business. For example, an operating system platform or application store may increase its access fees, restrict the collection of data through mobile apps that run on those platforms, restrict access to sensors contained on the mobile devices, restrict how that data is or may be used and shared, and limit how mobile app publishers advertise online.
Additionally, limitations on our ability to collect, obtain or use telematics and other data derived from customer activities on smartphones, as well as new technologies that block our ability to collect or use such data, would
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significantly diminish the value of our platform and have an adverse effect on our business, operating results, financial condition and prospects.
Limitations or blockages on our ability to collect, obtain, use or share data derived from use of our mobile app would also restrict our ability to analyze such data to facilitate our product improvement, research and development and advertising activities. For example, in 2021, Apple implemented a requirement for applications using its mobile operating systems to obtain an end-user’s permission to track them or access their device’s advertising identifier for advertising and advertising measurement purposes. These and other restrictions that have been or could be implemented in the future could adversely affect our business.
If we were to violate, or be perceived to have violated, the terms of service or policies of an operating system platform or application store, the provider may limit or block our access to it. It is possible that an operating system platform or application store might limit, eliminate or otherwise interfere with the distribution of our mobile app, the features we provide and the manner in which we market our mobile app, or give preferential treatment on their platforms or stores to a competitor. To the extent either of these occur, our business, results of operations, financial condition and prospects would be adversely affected.
Further, one of the factors we use to evaluate our customer satisfaction and market position is our Apple App Store ratings. This rating may not be a reliable indicator of our customer satisfaction relative to other companies who are rated on the Apple App Store since, to date, we have received a fraction of the number of reviews compared to the companies we benchmark against, and thus our number of positive reviews is not as meaningful.
Our expansion within the U.S. will subject us to additional regulatory approvals and costs and risks, and our plans may not be successful.
Our success depends in significant part on our ability to expand into additional markets in the U.S. We currently hold Certificates of Authority in 50 states and the District of Columbia and operate in 35of those states. We plan to have a presence in all 50 states and the District of Columbia, but cannot and do not guarantee that we will be able to provide nationwide coverage on any particular timeline or at all. In order to gain approval to operate in certain states, we have agreed to certain limitations on our licenses, and we may need to agree to additional limitations imposed by other states. Generally, regulators in states (i) in which we have valid licenses but are not selling insurance or (ii) into which we are considering entering with an affiliated underwriting company, have preferred that we only begin selling insurance or entering the state with an affiliated underwriting company at such time that we can demonstrate that we have met certain financial performance metrics.
As we seek to expand in the U.S., we will incur significant incremental operating expenses, including expenses in connection with securing applicable regulatory approvals, marketing, hiring additional personnel, engaging third-party service providers and other research and development costs. We have invested and expect to continue to invest substantial time and resources to expand our operations and revenues from those additional operations may not exceed the expense of establishing and maintaining them. If we are unable to manage these risks effectively, our business, results of operations, financial condition and prospects will be adversely affected.
Moreover, our countrywide expansion has taken a substantial number of years to date, and may not be successful for a variety of reasons, including because of:
•one or more states could revoke our license to operate, or implement additional regulatory or financial requirements that could preclude or inhibit our ability to obtain or maintain our license in such state;
•failures in identifying and entering into joint ventures with strategic partners, or entering into joint ventures that do not produce the desired results;
•challenges in, and the cost of, complying with various laws and regulatory standards, including with respect to the insurance business and insurance distribution, capital and outsourcing requirements, data privacy, tax, litigation and local regulatory restrictions;
•difficulty in recruiting and retaining licensed (where required), talented and capable employees;
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•competition from local incumbents that already own market share and better understand the local market, may operate more effectively and may enjoy greater local affinity or awareness with customers;
•differing demand dynamics, which may make our product offerings less successful; and
•limitations on the repatriation and investment of funds.
If we fail to grow our geographic footprint or geographic growth occurs at a slower rate than expected, our business, results of operations, financial condition and prospects could be materially and adversely affected.
Our technology platform may not operate properly or as we expect it to operate.
We utilize our technology platform to gather customer data in order to determine whether or not to write and how to price our insurance products. Similarly, we use our technology platform to process many of our claims. Our technology platform is expensive and complex, its continuous development, maintenance and operation may encounter difficulties including material performance problems or defects or errors. We may encounter technical obstacles, and it is possible that we may discover additional problems that prevent our technology from operating properly. If our platform does not function reliably, we may incorrectly select our customers, incorrectly price insurance products for our customers or incorrectly pay or deny claims made by our customers. These errors could cause us to select an uneconomic mix of customers, encounter customer dissatisfaction, which could lead customers to cancel or fail to renew their insurance policies with us or make it less likely that prospective customers obtain new insurance policies, underprice policies or overpay claims, or incorrectly adjust or deny policyholder claims and become subject to liability. Additionally, technology platform errors may lead to unintentional bias and discrimination in the underwriting and claims process, which would subject us to legal or regulatory liability and harm our brand and reputation. Any of these alone or in combination could result in a material adverse effect on our business, results of operations, financial condition and prospects.
While we believe our telematics-based pricing model to be more fair for consumers when compared to traditional insurers’ offerings, it may also yield results that customers themselves nonetheless find unfair. For instance, we may quote certain drivers higher premiums than our competitors, if our model determines that the driver is higher risk even though their higher-risk driving has not resulted in a claim. Such a perception of unfairness could negatively impact our brand and reputation.
Regulators may limit our ability to develop or implement our telematics-based pricing model and/or may eliminate or restrict the confidentiality of our proprietary technology.
Our success depends on our ability to continue to develop and implement our telematics-based pricing model, and to maintain the confidentiality of our proprietary technology. Changes to existing regulations, their interpretation or implementation, or new regulations could impede our use of this technology or require that we disclose our proprietary technology to our competitors and/or regulators, which would negatively impact our competitive position and result in a material adverse effect on our business, results of operations, financial condition and prospects. For example, as explained above, the matters involving certain automobile manufacturers’ and third-party brokers’ collection and sharing of telematics data may prompt changes in the quality and availability of telematics data for use by us and others in the insurance industry, as well as changes to existing laws and regulations and their interpretation or implementation. Our business, results of operations, financial condition and prospects could be adversely affected by any of these factors.
We are subject to full scope financial examinations by state insurance regulatory authorities in each state in which our insurance company subsidiaries are domiciled, which could result in adverse examination findings and necessitate remedial actions.
State insurance regulators perform examinations of insurance companies under their jurisdiction to assess compliance with applicable laws and regulations, financial condition and the conduct of regulated activities at least every three to five years. Root Insurance Company is Ohio-domiciled and has completed financial examinations with the Ohio DOI, which include a review of the Company’s financials, governance, and operations, including its relationships and transactions with affiliates, and a specific examination of our pricing and underwriting
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methodologies and our regulatory capital, and was most recently reviewed in 2024 resulting in no material findings. Root Property & Casualty Insurance Company is also Ohio-domiciled but completed a similar financial examination by the Delaware Department of Insurance prior to its redomestication as an Ohio-domiciled insurer. It also underwent a financial examination with the Ohio DOI resulting in no material findings. Newly-formed Root Florida Insurance Company is Florida-domiciled will be subject to an initial financial examination, which is customary for newly-licensed insurance subsidiaries and which is expected to begin in early 2026, though the commencement date is at the discretion of FOIR. If, as a result of future examinations, our regulators determine that our financial condition, capital resources or other aspects of any of our operations are not satisfactory, or that we have violated applicable laws or regulations, such regulator may subject us to fines or other penalties and/or require us to take one or more remedial actions or otherwise subject us to regulatory scrutiny, such as an enforcement action or, in the case of regulatory capital, require us to maintain additional capital. The results of the examinations are a matter of public record, and our reputation may also be harmed by penalties. For more information regarding our financial condition examinations, see the section titled “Periodic Examinations” in the “Insurance Regulation” section of Item 1. Business.
We are subject to market conduct examinations by state insurance regulatory authorities in any state in which our insurance subsidiaries issue insurance policies, which could result in adverse examination findings and necessitate remedial actions.
Our insurance subsidiaries are also subject to other investigations or inquiries, including market conduct examinations, in any state in which they issue policies. These examinations have resulted in, and could in the future result in fines and other monetary penalties, as well as other regulatory orders requiring remedial, injunctive, or other corrective action. For example, Root Insurance Company was subject to a market conduct examination by the Virginia State Corporation Commission’s Bureau of Insurance, or the Virginia DOI, and in addition to requiring the company to undertake remedial action, the Virginia DOI fined the company for various market conduct violations. Any regulatory or enforcement action or any regulatory order imposing remedial, injunctive, or other corrective action against us resulting from an examination could have a material adverse effect on our business, reputation, financial condition, results of operations or prospects. For more information regarding our previous and ongoing market conduct examinations, see the section titled “Periodic Examinations” in the “Insurance Regulation” section of Item 1 Business.
Our exposure to loss activity and regulation may be greater in states where we currently have most of our customers: Texas, Georgia and Florida.
Approximately 39.8% of our gross premiums written for the year ended December 31, 2024 originated from customers inTexas, GeorgiaandFlorida. As a result of this concentration, if a significant catastrophic event or series of catastrophic events occur, and cause material losses inTexas, GeorgiaorFlorida, our business, results of operation, financial condition and prospects would be materially adversely affected. Further, as compared to our competitors who operate on a wider geographic scale, any adverse changes in the legal and regulatory environment affecting property and casualty insurance inTexas, GeorgiaorFlorida may expose us to more significant risks.
We are subject to stringent and changing privacy and data security laws, regulations, and standards related to data privacy and security, increasing the complexity of compliance. Our actual or perceived failure to comply with such obligations could harm our reputation, subject us to significant fines and liability, or adversely affect our business.
In the U.S., insurance companies are subject to the privacy provisions of the federal Gramm-Leach-Bliley Act and the NAIC Insurance Information and Privacy Protection Model Act, as adopted and implemented by certain state legislatures and insurance regulators. The regulations implementing these laws require insurance companies to disclose their privacy practices to consumers, allow them to opt-in or opt-out, depending on the state, of the sharing of certain personal information with unaffiliated third parties, and maintain certain security controls to protect their information. Violators of these laws face regulatory enforcement action, substantial civil penalties, injunctions, and in some states, private lawsuits for damages. Insurance companies are also subject to state-specific privacy laws governing the use of particular data. For instance, the Illinois Biometric Information Privacy Act regulates the use
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and storage of biometric data such as fingerprints in the insurance industry and requires the informed written consent from policyholders if the insurance company intends to collect or disclose their personal biometric identifiers.
Privacy and data security regulation in the U.S. is rapidly evolving. For example, existing laws, such as the CCPA, which became effective January 1, 2020, future laws, and evolving attitudes about privacy protection may impair our ability to collect, obtain, use, and maintain data points of sufficient type or quantity to develop and train our algorithms. The CCPA gives California residents expanded rights to access and require deletion of certain of their personal information, opt out of certain personal information sharing, and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as well as a private right of action for certain data breaches, which is expected to increase the volume and success of class action data breach litigation. In addition to increasing our compliance costs and potential liability, the CCPA’s restrictions on “sales” of personal information restrict our use of cookies and similar technologies for advertising purposes. The CCPA excludes information covered by Gramm-Leach-Bliley Act, the Driver’s Privacy Protection Act or the California Financial Information Privacy Act from the CCPA’s scope, but the CCPA’s definition of “personal information” is broad and may encompass other information that we maintain.
The requirements of the CCPA expanded substantially in January 2023 as a result of California voters approving the CPRA in November 2020. The CPRA, effective January 1, 2023, gives California residents the ability to: limit use of precise geolocation information and other categories of information classified as “sensitive”; add e-mail addresses and passwords to the list of personal information that, if lost or breached, would entitle affected individuals to bring private lawsuits; and establish the California Privacy Protection Agency to implement and enforce the new law, as well as impose administrative fines. The effects of the CCPA, the CPRA, and other similar state or federal laws, are significant and may require us to further modify our data processing practices and policies, incur substantial compliance costs and subject us to increased potential liability.
Some observers have noted that the CCPA and the CPRA could mark the beginning of a trend toward more stringent privacy legislation in the U.S. There is also discussion in Congress of new comprehensive federal data protection and privacy laws to which we likely would be subject if enacted. Until an overarching federal privacy law is passed, however, it is anticipated that individual states will continue to adopt or amend state laws and regulations governing data privacy and cybersecurity, which will increase the cost and complexity of our compliance efforts and impact the integrity and quality of our pricing and underwriting processes.
Additionally, in response to the growing threat of cyberattacks in the insurance industry, certain jurisdictions have begun to impose new cybersecurity laws and regulations. On October 24, 2017, the NAIC adopted its Insurance Data Security Model Law, intended to serve as model legislation for states to enact in order to govern cybersecurity and data protection practices of insurers, insurance agents, and other licensed entities registered under state insurance laws. At least 26 states have adopted the same or substantially similar versions of the Insurance Data Security Model Law, each with a different effective date, and other states may adopt versions of the Insurance Data Security Model Law in the future. Also in 2017, the New York State Department of Financial Services adopted regulations providing minimum standards for insurance companies’ cybersecurity programs, requiring an annual certification confirming compliance. In May 2018, South Carolina passed a cybersecurity bill requiring, among other things, any insurance entity operating in the state to establish and implement a cybersecurity program protecting their business and their customers from a data breach, to investigate data breaches and to notify regulators of a cybersecurity event. Some jurisdictions, such as Connecticut, Massachusetts, Nevada, Maryland, Virginia and California have enacted more generalized data security laws that apply to certain data that we possess. Additionally, some of the enacted regulations have since been amended to expand and strengthen established cybersecurity requirements in response to the evolving cybersecurity landscape. Although we take steps to comply with applicable cybersecurity regulations and data security laws, our failure to comply with new or existing cybersecurity regulations could result in material legal and/or regulatory actions and other penalties and/or damages. In addition, efforts to comply with new or existing cybersecurity regulations could impose significant costs on our business, which could materially and adversely affect our business, results of operations, financial condition or prospects.
Further, we are subject to the terms of our privacy policies, privacy-related disclosures, and contractual and other privacy-related obligations to our customers and other third parties. We have in the past experienced cybersecurity attacks that have resulted in threat actors obtaining customer personal information and some of these
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events have caused us to incur losses, including regulatory penalties, costs and expend resources to modify our systems. Any failure or perceived failure by us or third parties we work with to comply with privacy policies, disclosures, and obligations to customers or other third parties, or privacy or data security laws may result in governmental or regulatory investigations, enforcement actions, regulatory fines, criminal compliance orders, private litigation or public statements against us by consumer advocacy groups or others, and could cause customers to lose trust in us, any of which could materially and adversely affect on our business, results of operations, financial condition and prospects.
Cybersecurity incidents, or real or perceived errors, failures or bugs in our or our vendors’ systems or our website or app could impair our operations, compromise our confidential information or our customers’ personal information, damage our reputation and brand, and harm our business, financial condition, operating results and prospects.
Our success depends on our systems, applications, and software continuing to operate and to meet the changing needs of our customers and users. We rely on our technology and engineering staff and vendors to successfully implement changes to and maintain our systems and services in an efficient and secure manner. Like all information systems and technology, our website and mobile app, systems and environment and those of our service providers and business partners have in the past experienced and may contain or develop material errors, failures, vulnerabilities or bugs, particularly when new features or capabilities are released, and are subject to fraud, malicious code, phishing attacks or other social engineering attempts, system intrusion, exfiltration, theft, web application attacks, attempts to overload our servers with denial-of-service or other attacks, ransomware and similar incidents or disruptions from unauthorized use of our computer systems, as well as unintentional incidents causing data leakage, any of which could lead to interruptions, delays or website or mobile app slowdowns or shutdowns. Third parties could misappropriate our data through website scraping, bots or other means and aggregate this data on their websites with data from other companies. Many of our services are provided through the Internet which increases our exposure to potential cybersecurity attacks. In addition, we utilize a workforce that is largely remote and may exacerbate exposure to cybersecurity incidents.
We have experienced cybersecurity threats to our information technology infrastructure and we have experienced cybersecurity incidents that have resulted in threat actors obtaining customer personal information, attempts to breach our systems, fraudulent activity and other incidents, and some of these events have caused us to incur losses, including regulatory penalties, costs and expend resources to modify our systems. We continue to expend resources to address past incidents and would expend resources in the future to respond to incidents if they again occur. In addition, we utilize vendors (and our vendors utilize vendors), some of which have also experienced cybersecurity breaches and other incidents. Publicized threats, incidents or events could cause harm to our business and our reputation and challenge our ability to provide reliable service, as well as negatively impact our results of operations materially.
In addition, copycat websites or mobile apps have in the past and may again attempt to misappropriate data and attempt to imitate our brand or the functionality of our website or our mobile app. When we become aware of such websites or mobile apps, we have employed technological or legal measures in an attempt to halt their operations and intend to do so in the future. However, we may be unable to detect all such websites or mobile apps in a timely manner and, even if we could, technological and legal measures may be insufficient to halt their operations. Regardless of whether we can successfully enforce our rights against the operators of these websites or mobile apps, any measures that we may take could require us to expend significant financial or other resources, which could harm our business, results of operations, financial condition or prospects. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business would be harmed.
Operating our business and products involves the collection, storage, use and transmission of sensitive, proprietary and confidential information, including personal information, pertaining to our current, prospective and past customers, employees, contractors, and business partners. The security measures we take to protect this information have been and may again be compromised as a result of computer malware, viruses, social engineering, ransomware attacks, credential stuffing attacks, hacking and cyberattacks, including by state-sponsored and other sophisticated organizations, and other cybersecurity incidents. Such incidents have become more prevalent in recent years. For example, attempts to fraudulently induce our personnel into disclosing usernames, passwords or other
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information that can be used to access our systems and the information in them have increased. Cybersecurity incidents can also result from malfeasance of our personnel, theft, errors, data leaks, and security vulnerabilities or bugs in our website, mobile app or the software or systems on which we rely. Cybersecurity incidents have in the past resulted in unauthorized access to certain personal information that we handle, and may again in the future result in unauthorized, unlawful or inappropriate use, destruction or disclosure of, access to, or inability to access the sensitive, proprietary and confidential information that we handle. These incidents may remain undetected for extended periods of time.
We rely on third parties to provide critical services that help us deliver our solutions and operate our business. These third parties support or operate critical business systems for us or store or process the same sensitive, proprietary and confidential information that we handle. They may not have adequate security measures and could experience a cybersecurity incident that compromises the confidentiality, integrity or availability of the systems they operate for us or the information they process on our behalf. Some of our vendors have experienced cybersecurity breaches and other incidents. Such past or future occurrences could adversely affect our business to the same degree as if we had experienced these occurrences directly and we may not have recourse to the responsible third parties for any resulting liability that we incur.
There are many different cybercrime and hacking techniques, such techniques continue to evolve, and we may be unable to anticipate security breaches or incidents, react to cybersecurity incidents in a timely manner, implement adequate preventative measures or completely mitigate the effects of any such attack or incidents. While we have developed systems and processes designed to protect the integrity, confidentiality and security of the confidential and personal information under our control, we cannot guarantee that any security measures we or our third-party business partners have implemented will be effective against all current or future security threats.
A security breach or other cybersecurity incident, or the perception that one has occurred, could result in a loss of customer confidence in the security of our platform and damage our reputation and brand; reduce demand for our insurance products; disrupt normal business operations; require us to expend significant resources to investigate and remedy the incident and prevent recurrence; and subject us to litigation, regulatory enforcement action, fines, costs, penalties, and other liability, which could have a material adverse effect on our business, results of operations, financial condition and prospects. Even if we take steps that we believe are adequate to protect us from cybersecurity threats, hacking against our competitors or other companies in our industry could create the perception among our customers or potential customers that our digital platform is not safe to use. Security incidents could also damage our IT systems and our ability to make the financial reports and other public disclosures required of public companies. These risks are likely to increase as we continue to grow and process, store and transmit an increasingly large volume of data.
Our insurance coverage may not be adequate to cover all cybersecurity liabilities, including the costs, fines and/or damages related to cybersecurity attacks, associated privacy litigation or regulatory actions, or disruptions resulting from such events. In addition, we cannot be certain that insurance coverage will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim. The successful assertion of one or more large claims against us that exceed available insurance coverage, or changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our reputation, business, results of operations, financial condition and prospects. In some cases, particularly in the case of websites or mobile apps operating outside of the U.S., our available remedies may not be adequate to protect us against the effect of the operation of such websites or mobile apps. Regardless of whether we can successfully enforce our rights against the operators of these websites or mobile apps, any measures that we may take could require us to expend significant financial or other resources and harm our business, results of operations, financial condition and prospects. In addition, to the extent that such activity creates confusion among consumers or advertisers, our brand and business would be harmed.
Our brand may not become as widely known or accepted as incumbents’ brands or the brand may become tarnished.
Many of our competitors have brands that are well-recognized. As a newer entrant into the insurance market, we have spent, and expect that we will for the foreseeable future continue to spend, considerable amounts of money and
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other resources on creating brand awareness and building our reputation. We may not be able to build brand awareness to levels matching our competitors, and our efforts at building, maintaining and enhancing our reputation could fail and/or may not be cost-effective. Complaints or negative publicity about our business practices, our marketing and advertising campaigns (including marketing affiliations or partnerships), our compliance with applicable laws and regulations, the integrity of the data that we provide to consumers or business partners, data privacy and security issues, and other aspects of our business, whether real or perceived, could diminish confidence in our brand, which would adversely affect our reputation and business. As we expand our product offerings and enter new markets, we will need to establish our reputation with new customers, and to the extent we are not successful in creating positive impressions, our business in these newer markets could be adversely affected. We may choose to engage in a broader marketing campaign to further promote our brand, this effort may not be successful or cost effective. If we are unable to maintain or enhance our reputation or enhance consumer awareness of our brand in a cost-effective manner, our business, results of operations, financial condition and prospects would be materially adversely affected.
We rely on highly skilled and experienced personnel and if we are unable to attract, retain or motivate key personnel or hire qualified personnel, our business may be seriously harmed. In addition, the loss of key senior management personnel could harm our business, results of operations, financial condition and prospects.
Our success depends on the talents and efforts of highly skilled individuals. Our future success depends on our continuing to identify, hire, develop, motivate and retain highly skilled and experienced personnel and, if we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to maintain or implement our current initiatives, or our business may contract and we may lose market share. We have implemented involuntary workforce reductions in the past, which may have harmed our reputation and relationship with our employees and may make it more difficult for us to recruit top talent, and we may implement workforce reductions in the future to support other business objectives. We have experienced the effects of a competitive labor market and prior workforce reductions and have responded by increasing wages and/or benefits in certain circumstances and provided cash and equity to certain employees in order to attract and retain them, all of which may continue to negatively impact our business, results of operations, financial condition and prospects. Moreover, certain of our competitors or other insurance or technology businesses may seek to hire our employees. We cannot guarantee that our cash and equity incentives and other compensation and benefits will provide adequate incentives to attract, retain and motivate employees in the future, particularly if the market price of our Class A common stock declines or remains challenged. If we do not succeed in attracting, retaining and motivating highly qualified personnel, our business may be seriously harmed.
We depend on our senior management, including Alexander Timm, our Chief Executive Officer. We have experienced turnover among our senior management and employees. We may not be able to retain the services of any of our senior management or other key personnel, as their employment is at-will, and they could leave at any time. If we lose the services of one or more of our senior management or other key personnel, including as a result of our workforce reductions or our business results, we may not be able to successfully manage our business, meet competitive challenges or achieve our business objectives. Further, to the extent that our business grows, we will need to attract and retain additional qualified management personnel in a timely manner, and we may not be able to do so. Our success depends on our continuing to identify, hire, develop, motivate, retain and integrate highly skilled personnel in all areas of our business.
New legislation or legal requirements may affect how we use artificial intelligence and /or may impact how we communicate with our customers, which could have an adverse effect on our business, financial condition, results of operations and prospects.