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ROOT, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission , orSEC , onFebruary 23, 2022 , or the 2021 10-K. This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note Regarding Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q and in the 2021 10-K for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements.
Our Business
Root is a technology company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience. We operate a direct-to-consumer model in which we currently acquire customers through mobile applications and our embedded platform. We believe the$273 billion U.S. auto insurance market is ripe for disruption. Auto insurance is required for the vast majority of drivers inthe United States , 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. As part of our strategy, we have also established the technological foundation for an enterprise software offering, diversifying our revenue streams over time. We believe the Root advantage is derived from our unique ability to efficiently and effectively bind auto insurance policies quickly through direct and embedded distribution channels, aided by segmenting individual risk based on complex behavioral data and proprietary telematics, a customer experience built for ease of use and a product offering made possible with our full-stack insurance structure. These are all uniquely integrated into a single cloud-based technology platform that captures the entire insurance value chain-from customer acquisition to underwriting to claims and administration to ongoing customer engagement.
Our model benefits from portfolio maturity. As we scale the business, our
results are, at times, disproportionately weighted towards new customers
compared to traditional insurance carriers. As we build an underlying base of
recurring customers, we expect the following financial impacts:
•Improved loss ratio. Renewal premiums, referring to premiums from a customer's
second term and beyond, have lower loss ratios as compared to new premiums in
the customer's first term. As we grow our business, we anticipate, consistent
with industry norms, that a greater proportion of our premiums will be from
customer renewals and drive down the loss ratio across our portfolio.
•Reduced marketing as a percentage of premium. Certain recurring customer
premiums have no associated customer acquisition costs and minimal underwriting
costs, driving profitability. As we grow our business, we anticipate, consistent
with industry norms, that a greater proportion of our premiums will be from
customer renewals without associated marketing costs.
•Improved retention. As a young insurance carrier weighted towards new
customers, we naturally have a higher percentage of more frequent shoppers. As
our business tenures and our flywheel spins, allowing us to increase our pricing
advantage, we will have the opportunity to acquire more long-standing customers
and retain those that might naturally shop frequently. In addition to a pricing
advantage, we anticipate our expanding relationships with customers through
product bundling will demonstrate further improvement in retention.
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•Increased revenue per customer. Our product expansion provides an opportunity
to generate additional premium and fee income per customer without material
incremental marketing cost.
We use technology to drive efficiency across all functions, including distribution, underwriting, policy administration and claims in particular. We believe this allows us to operate with a cost to acquire and cost to serve advantage. We continue to develop machine learning loss models, which allows us to respond more quickly to changes in the market, improve pricing segmentation through enhancements to our usage-based insurance model and take appropriate rate actions. We efficiently acquire customers directly through multiple channels, including embedded, digital (performance), channel media, referrals and agency. Our marketing costs have historically been well below industry averages, although in any given period, these costs can vary by channel mix, by state, or due to seasonality or the competitive environment. Today, we acquire our customers through the embedded platform, our website, mobile app and mobile website. We believe that through prudent investment in and diversification of our marketing channels, including a focus on embedded insurance through our exclusive partnership with Carvana Group, LLC, or Carvana, and leveraging proprietary data science and technology to build out products and relationships that will position us for more sustainable, long-term and profitable growth. Additionally, we are realizing operating efficiencies as we scale against our fixed expense base. Our claims management expenses, as represented by our loss adjustment expenses, or LAE, are in line with peers within only four years of bringing claims management in-house and are expected to improve as we further embed machine learning into our processes. As a full-stack insurance company, we currently employ a "capital-light" model, which utilizes a variety of reinsurance structures at elevated levels of reinsurance. These reinsurance structures deliver three core objectives: (1) top-line growth without a commensurate increase in regulatory capital requirements, (2) support of customer acquisition costs and (3) protection from outsized losses or tail events. We expect to maintain an elevated level of third-party quota share reinsurance in order to operate a capital light business model. As our business scales, we expect to have the flexibility to reduce our quota share levels to maximize the return to shareholders. Given the significant impact of reinsurance on our results of operations, we use certain gross basis key performance indicators to manage and measure our business operations and enhance investor understanding of our business model prior to reinsurance. We believe our long-term success will be apparent through the progression of our gross metrics. Results of operations on a gross basis alone are not achievable under our regulatory landscape given our capital requirements, which are relieved, in part, by obtaining reinsurance. The gross basis metrics include gross written premium, gross earned premium, direct contribution, ratio of direct contribution to total revenue, ratio of direct contribution to gross earned premium, gross loss ratio, gross LAE ratio and gross accident period loss ratio. In addition to our gross basis metrics, management uses adjusted earnings before interest, tax, depreciation, amortization, or adjusted EBITDA, as an integral part of managing our business. We believe adjusted EBITDA provides investors with useful insight into our business because such measure eliminates the effects of certain charges that are not directly attributable to our underlying operating performance. For additional information, including definitions of these metrics, see "- Key Performance Indicators," and for a reconciliation of our non-GAAP measures to the most directly comparable generally accepted accounting principles inthe United States , or GAAP, measures, see "- Non-GAAP Financial Measures."
Recent Developments Affecting Comparability
COVID-19 Impact
InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic. The COVID-19 pandemic and governmental responses thereto have impacted and may further impact the broader economic environment, including creating or exacerbating supply chain disruptions and inflation and negatively impacting unemployment levels, economic growth, the proper functioning of financial and capital markets and interest rates. 23 -------------------------------------------------------------------------------- The economic instability caused by the COVID-19 pandemic has led to acute inflationary pressures, supply chain disruptions, rising interest rates and a downturn in equity markets. There is a risk of inflation remaining elevated for an extended period, which could cause claims and claim expenses to increase, impact the performance of our investment portfolio or have other adverse effects. Rising interest rates and reduced equity values have increased the cost of capital and may limit our ability to raise additional capital. In addition, we have seen an increase in the value of used vehicles and replacement parts. These cost increases have resulted in greater claims severity while being partially offset by higher subrogation recoveries on damaged vehicles. We continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends. As the COVID-19 pandemic continues, there is ongoing uncertainty around the severity and duration of the pandemic and the pandemic's potential impact on our business and our financial performance. See the section titled "Risk Factors" in the 2021 10-K for more details.
Comprehensive Reinsurance
We expect to continue to utilize reinsurance in the future, and our diversified approach to reinsurance allows us to be flexible in response to changes in market conditions or our own business changes, which allows us to strategically fuel growth and technology investment by optimizing the amount of capital required.
Components of Our Results of Operations
Revenue
We generate revenue from net premiums earned, net investment income, net
realized gains on investments, and fee and other income.
Net Premiums Earned
Premiums written are deferred and earned pro rata over the policy period. Net premiums earned represents the earned portion of our gross written premium, less the earned portion that is ceded to third-party reinsurers under our reinsurance agreements. Net Investment Income Net investment income represents interest earned from our fixed maturity and short-term investments and cash and cash equivalents less investment expenses and unrealized gains from our private equity investments. Net investment income is directly correlated with the overall size of our investment portfolio, market level of interest rates and changes in fair value of our private equity investments. Net investment income will vary with the size of our investment portfolio, market returns and the investment strategy.
Net Realized Gains on Investments
Net realized gains on investments represents the difference between the amount
received by us on the sale of an investment as compared to the investment's
amortized cost basis.
Fee and Other Income
For those policyholderswho pay premiums on an installment basis, we charge a flat fee for each installment related to the additional administrative costs associated with processing more frequent billing. We recognize this fee income in the period in which we process each installment. Other income is primarily comprised of revenue earned from distributing website and app policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead; commissions earned for homeowners policies placed with third-party insurance companies where we have no exposure to the insured risk, recognized on the effective date of the associated policy; and sale of enterprise technology products to provide telematics-based data collection and trip tracking, recognized ratably as the service is performed. 24 --------------------------------------------------------------------------------
Operating Expenses
Our operating expenses consist of loss and LAE, sales and marketing, other
insurance expense (benefit), technology and development, and general and
administrative expenses.
Loss and Loss Adjustment Expenses
Loss and LAE include an amount determined using adjuster determined case-base estimates for reported claims and actuarial determined unpaid claim estimates using past experience and historical emergence patterns for unreported losses and LAE. These reserves are a liability established to cover the estimated ultimate cost to settle insured losses. The unpaid loss estimates consider loss trends, mix of business, and other risk factors impacting claims settlement. The method used to estimate unpaid LAE liability is based on claims transaction data, including the relative cost of adjusting and settling a range of claim types from express material damage claims to more complex injury cases. Loss and LAE are net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity to write more business. These expenses are a function of the size and term of the insurance policies we write and the loss experience associated with the underlying risks. Loss and LAE may be paid out over a period of years. Various other expenses incurred during claims processing are considered LAE. These amounts include claims salaries, health benefits, bonuses, employee retirement plan related expenses and employee share-based compensation expense, or Personnel Costs; software expense; internally developed software amortization; and overhead allocated based on headcount, or Overhead.
Sales and Marketing
Sales and marketing expense includes spending related to performance and
embedded channels, channel media, advertising, branding, public relations,
consumer insights and referral fees. These expenses also include related
Personnel Costs, Overhead and warrant compensation expense related to our
embedded channel. We incur sales and marketing expenses for all product
offerings. Sales and marketing are expensed as incurred. Certain warrant
compensation expense is recognized on a pro-rata basis considering progress
toward completing the Integrated Platform under the Carvana commercial
agreement.
We plan to continue investing in and diversifying our marketing channels to attract and acquire new customers, increase our brand awareness, and expand our product offerings within certain markets. We expect that in the long term, our sales and marketing will decrease as a percentage of revenue as the proportion of renewals to our total business increases.
Other Insurance Expense (Benefit)
Other insurance expense (benefit) includes underwriting expenses, credit card
and policy processing expenses, premium write-offs, insurance license expenses,
warrant compensation expense related to our embedded channel, and Personnel
Costs and Overhead related to actuarial and certain data science activities.
Other insurance expense (benefit) also includes amortization of deferred
acquisition costs like premium taxes and report costs related to the successful
acquisition of a policy. Other insurance expense (benefit) is expensed as
incurred, except for costs related to deferred acquisition costs that are
capitalized and subsequently amortized over the same period in which the related
premiums are earned. These expenses are also recognized net of ceding
commissions earned. Certain warrant compensation expense is recognized on a
pro-rata basis for policies originated from the Integrated Platform towards
milestones as defined under the Carvana commercial agreement.
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Technology and Development
Technology and development expense consists of software development costs related to our mobile app and homegrown information technology systems; third-party services related to infrastructure support; Personnel Costs and Overhead for engineering, product, technology, and certain data science activities; and amortization of internally developed software. Technology and development is expensed as incurred, except for development and testing costs related to internally developed software that are capitalized and subsequently amortized over the expected useful life. Over time, we expect technology and development to decrease as a percentage of revenue.
General and Administrative
General and administrative expenses primarily relate to external professional
service expenses; Personnel Costs and Overhead for corporate functions;
depreciation expense for computers, furniture and other fixed assets; and
restructuring costs associated with organizational realignment. General and
administrative expenses are expensed as incurred.
We expect general and administrative expenses to decrease as a percentage of
total revenue over time.
Interest Expense
Interest expense is not an operating expense; therefore, we include these
expenses below operating expenses. Interest expense primarily relates to
interest incurred on our long-term debt, certain fees that are expensed as
incurred and amortization of debt issuance costs. In addition, changes in the
fair value of warrant liabilities that were associated with our long-term debt
are recorded as interest expense.
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Key Performance Indicators
We regularly review a number of metrics, including the following key performance
indicators, to evaluate our business, measure our performance, identify trends
in our business, prepare financial projections and make strategic decisions. We
believe these non-GAAP and operational measures are useful in evaluating our
performance, in addition to our financial results prepared in accordance with
GAAP. See the section titled "- Non-GAAP Financial Measures" for additional
information regarding our use of adjusted gross profit/(loss), direct
contribution and adjusted EBITDA and their reconciliations to the most directly
comparable GAAP measures.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in millions, except premiums per policy)
Policies in force
Auto 255,279 380,836 255,279 380,836
Renters 6,964 9,143 6,964 9,143
Premiums per policy
Auto $ 1,150 $ 986 $ 1,150 $ 986
Renters $ 139 $ 140 $ 139 $ 140
Premiums in force
Auto $ 587.1 $ 751.0 $ 587.1 $ 751.0
Renters $ 1.0 $ 1.3 $ 1.0 $ 1.3
Gross written premium $ 150.7 $ 204.6 $ 478.0 $ 584.2
Gross earned premium $ 155.3 $ 189.4 $ 500.8 $ 530.3
Gross profit/(loss) $ (8.3) $ (16.1) $ (28.1) $ (28.7)
Gross margin (11.3) % (17.2) % (11.7) % (11.4) %
Net loss $ (64.0) $ (133.0) $ (230.3) $ (411.2)
Adjusted gross profit/(loss) $ 0.5 $ (2.7) $ (4.6) $ 10.5
Direct contribution $ 11.5 $ (10.5) $ 17.7 $ 12.3
Adjusted EBITDA $ (44.0) $ (117.3) $ (162.4) $ (372.7)
Ratio of adjusted gross profit/(loss)
to total revenue 0.7 % (2.9) % (1.9) % 4.2 %
Ratio of adjusted gross profit/(loss)
to gross earned premium 0.3 % (1.4) % (0.9) % 2.0 %
Ratio of direct contribution to total
revenue 15.6 % (11.2) % 7.4 % 4.9 %
Ratio of direct contribution to gross
earned premium 7.4 % (5.5) % 3.5 % 2.3 %
Gross loss ratio 77.9 % 92.7 % 83.2 % 85.2 %
Gross LAE ratio 10.5 % 10.6 % 9.8 % 10.3 %
Gross accident period loss ratio 79.5 % 92.8 % 81.9 % 86.5 %
Policies in Force
We define policies in force as the number of current and active policyholders
underwritten by us as of the period end date. We view policies in force as an
important metric to assess our financial performance because policies drive our
revenue, brand awareness, our market penetration, and generates additional data
to continue to improve the functioning of our platforms.
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Premiums per Policy
We define premiums per policy as the ratio of gross written premium on policies in force at the end of the period divided by policies in force. We view premiums per policy as an important metric since the higher the premiums per policy the greater the amount of earned premium we expect from each policy.
Premiums in Force
We define premiums in force for our auto policies as premiums per policy multiplied by policies in force multiplied by two. We view premiums in force as an estimate of annualized run rate of gross written premium as of a given period. Since our auto policies are six-month policies, we multiply this figure by two in order to determine an annualized amount of premiums in force. We define premiums in force for our renters policies as premiums per policy multiplied by policies in force. We view this as an important metric because it is an indicator of the size of our portfolio of policies as well as an indicator of expected earned premium over the coming 12 months. Premiums in force is not a forecast of future revenue nor is it a reliable indicator of revenue expected to be earned in any given period. We believe that our calculation of premiums in force is useful to investors and analysts because it captures the impact of fluctuations in customers and premiums per policy at the end of each reported period, without adjusting for known or projected policy updates, cancellations and non-renewals. Gross Written Premium We define gross written premium as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations. Gross written premiums include direct premiums and assumed premiums. We view gross written premium as an important metric because it is the metric that most closely correlates with our growth in gross earned premium. We use gross written premium, which excludes the impact of premiums ceded to reinsurers, to manage our business because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities. Additionally, premiums ceded to reinsurers can change significantly based on the type and mix of reinsurance structures we use, and as such we have the optionality to fully retain the premiums from customers acquired in the future.
Gross Earned Premium
We define gross earned premium as the amount of gross premium that was earned during the period. Premiums are earned over the period in which insurance protection is provided, which is typically six months. Gross earned premium includes direct premiums and assumed premiums. We view gross earned premium as an important metric as it allows us to evaluate our growth prior to the impacts of reinsurance. It is the primary driver of our consolidated GAAP revenues. As with gross written premium, we use gross earned premium, which excludes the impact of premiums ceded to reinsurers to manage our business, because we believe that it reflects the business volume and direct economic benefit generated by our customer acquisition activities, which along with our underlying underwriting and claims operations (gross loss ratio and gross LAE) are the key drivers of our future profit opportunities.
Gross Profit/(Loss)
We define gross profit/(loss) as total revenue minus net loss and LAE and other insurance expense (benefit) inclusive of depreciation and amortization. We view gross profit/(loss) as an important metric because we believe it is informative of the financial performance of our core insurance business.
Gross profit/(loss) margin is equal to gross profit/(loss) divided by revenue.
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Adjusted Gross Profit/(Loss)
We define adjusted gross profit/(loss), a non-GAAP financial measure, as gross profit/(loss) excluding net investment income, net realized gains (losses) on investments, report costs, Personnel Costs, allocated Overhead, licenses, professional fees and other expenses, which are included in other insurance expense (benefit). After these adjustments, the resulting calculation is inclusive of only those variable costs of revenue incurred on the successful acquisition of business. We view adjusted gross profit/(loss) as an important metric because we believe it measures our progress towards profitability for our core insurance business.
The ratio of adjusted gross profit/(loss) to total revenue is equal to adjusted
gross profit/(loss) divided by total revenue.
See the section titled "- Non-GAAP Financial Measures" for a reconciliation of
total revenue to adjusted gross profit/(loss).
Direct Contribution
We define direct contribution, a non-GAAP financial measure, as adjusted gross profit/(loss) excluding ceded earned premium, ceded loss and LAE, and net ceding commission and other. Net ceding commission and other is comprised of ceding commission received in connection with reinsurance ceded, partially offset by related sliding scale commission adjustments and amortization of excess ceding commission, and other impacts of reinsurance ceded which are included in other insurance expense (benefit). After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business, but exclusive of net ceding commission, ceded loss and LAE and other impacts of reinsurance ceded. We view direct contribution as an important metric because we believe it measures progress towards the profitability of our total policy portfolio prior to the impact of reinsurance.
The ratio of direct contribution to total revenue is equal to direct
contribution divided by total revenue.
See the section titled "- Non-GAAP Financial Measures" for a reconciliation of
total revenue to direct contribution.
Adjusted EBITDA
We define adjusted EBITDA, a non-GAAP financial measure, as net loss excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, warrant compensation expense and restructuring charges. After these adjustments, the resulting calculation represents expenses directly attributable to our operating performance. We use adjusted EBITDA as an internal performance measure in the management of our operations because we believe it provides management and other users of our financial information useful insight into our results of operations and underlying business performance. Adjusted EBITDA should not be viewed as a substitute for net loss calculated in accordance with GAAP, and other companies may define adjusted EBITDA differently.
See the section titled "- Non-GAAP Financial Measures" for a reconciliation of
net loss to adjusted EBITDA.
Ratio of Adjusted Gross Profit/(Loss) to Gross Earned Premium
The ratio of adjusted gross profit/(loss) to gross earned premium measures the
relationship between the underlying business volume and gross economic benefit
generated by our underwriting operations, on the one hand, and our underlying
profitability trends, on the other. We rely on this measure, which supplements
our gross profit/(loss) ratio as calculated in accordance with GAAP, because it
provides management with insight into our underlying profitability trends with
respect to our customer base. We use gross earned premium as the denominator in
calculating this ratio because it reflects business volume free of elective
capital-light choices related to our reinsurance programs.
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Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in millions)
Numerator: Adjusted gross profit/(loss) $ 0.5 $ (2.7) $ (4.6) $ 10.5
Denominator: total gross earned premium $ 155.3 $ 189.4 $ 500.8 $ 530.3
Ratio of adjusted gross profit/(loss) to
gross earned premium 0.3 % (1.4) % (0.9) % 2.0 %
Ratio of Direct Contribution to Gross Earned Premium
The ratio of direct contribution to gross earned premium measures the
relationship between the underlying business volume and gross economic benefit
generated by our underwriting operations, on the one hand, and our underlying
profitability trends, on the other, without contemplating the impacts of
reinsurance. We rely on this measure, which supplements our gross margin as
calculated in accordance with GAAP, because it provides management with insight
into our underlying profitability trends with respect to our total policy
portfolio. We use gross earned premium as the denominator in calculating this
ratio because it reflects business volume free of elective capital-light cession
or commission structure choices from our reinsurance ceded programs.
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in millions)
Numerator: direct contribution $ 11.5 $ (10.5) $ 17.7 $ 12.3
Denominator: total gross earned
premium $ 155.3 $ 189.4 $ 500.8 $ 530.3
Ratio of direct contribution to gross
earned premium 7.4 % (5.5) % 3.5 % 2.3 %
Gross Loss Ratio
We define gross loss ratio, expressed as a percentage, as the ratio of gross
losses to gross earned premium. Gross loss ratio excludes LAE. We view gross
loss ratio as an important metric because it allows us to evaluate incurred
losses and LAE separately prior to the impact of reinsurance.
Gross LAE Ratio
We define gross LAE ratio, expressed as a percentage, as the ratio of gross LAE to gross earned premium. We view gross LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately. Currently, we do not cede any of our LAE to our third-party quota share reinsurance treaties; therefore, we actively monitor the LAE ratio as it has a direct impact on our results regardless of our reinsurance strategy.
Gross Accident Period Loss Ratio
Gross accident period loss ratio, expressed as a percentage, represents all
losses and claims expected to arise from insured events that occurred during the
applicable period regardless of when they are reported and finally settled
divided by gross earned premiums for the same period. Changes to our ultimate
loss estimates from prior periods are the primary driver of the difference
between our gross accident period loss ratio and gross loss ratio. We believe
that gross accident period loss ratio is useful in evaluating expected losses
prior to the impact of reinsurance.
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Results of Operations
Comparison of the Three Months Ended
The following table presents our results of operations for the periods
indicated:
Three Months Ended
2022 2021 $ Change % Change
(dollars in millions)
Revenues:
Net premiums earned $ 68.6 $ 85.1 $ (16.5) (19.4) %
Net investment income 0.9 1.0 (0.1) (10.0) %
Fee and other income 4.2 7.7 (3.5) (45.5) %
Total revenues 73.7 93.8 (20.1) (21.4) %
Operating expenses:
Loss and loss adjustment expenses 80.9 114.4 (33.5) (29.3) %
Sales and marketing 5.7 65.4 (59.7) (91.3) %
Other insurance expense (benefit) 1.1 (4.5) 5.6 124.4 %
Technology and development 14.3 18.0 (3.7) (20.6) %
General and administrative 26.4 27.4 (1.0) (3.6) %
Total operating expenses 128.4 220.7 (92.3) (41.8) %
Operating loss (54.7) (126.9) 72.2 N.M.
Interest expense (9.3) (6.1) (3.2) 52.5 %
Loss before income tax expense (64.0) (133.0) 69.0 N.M.
Income tax expense - - - - %
Net loss (64.0) (133.0) 69.0 N.M.
Other comprehensive loss:
Changes in net unrealized losses on investments (2.3) (0.5) (1.8) (100.0) %
Comprehensive loss $ (66.3) $ (133.5) $ 67.2 N.M.
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N.M. - Percentage change not meaningful
Revenue
Net Premiums Earned
Net premiums earned decreased$16.5 million , or 19.4%, to$68.6 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to lower policies in force as a result of reduced marketing expenditures, partially offset by an increase in premium per policy primarily attributable to rate actions. During the three months endedSeptember 30, 2022 and 2021, we ceded approximately 55.8% and 55.1% of our gross earned premiums to third-party reinsurers, respectively. The change in ceding percentage between the periods was primarily driven by a higher proportion of our gross earned premiums being subject to reinsurance treaties. 31 --------------------------------------------------------------------------------
The following table presents gross written premium, ceded written premium, net
written premium, gross earned premium, ceded earned premium and net earned
premium for the three months ended
Three Months Ended September 30,
2022 2021 $ Change % Change
(dollars in millions)
Gross written premium $ 150.7 $ 204.6 $ (53.9) (26.3) %
Ceded written premium (81.0) (107.5) 26.5 (24.7) %
Net written premium 69.7 97.1 (27.4) (28.2) %
Gross earned premium 155.3 189.4 (34.1) (18.0) %
Ceded earned premium (86.7) (104.3) 17.6 (16.9) %
Net earned premium $ 68.6 $ 85.1 $ (16.5) (19.4) %
The decrease in gross earned premium was primarily due to lower gross written
premium as a result of reducing marketing expenditures. This decrease was
partially offset by a 16.6% increase in premium per policy for automobile
insurance primarily attributable to rate actions.
Fee and Other Income
Fee income decreased$3.5 million , or 45.5%, to$4.2 million for the three months endedSeptember 30, 2022 compared to the same period ended in 2021. The decrease was primarily due to a reduction in fee revenue from distributing web and app policy inquiry leads to third parties of$1.7 million as a result of reducing marketing expenditures. In addition, there was a decrease of$1.7 million in installments fees due to lower policies in force.
Operating Expenses
Loss and Loss Adjustment Expenses
Loss and LAE decreased$33.5 million , or 29.3%, to$80.9 million for the three months endedSeptember 30, 2022 compared to the same period ended in 2021. The decrease was primarily driven by lower policies in force for the three months endedSeptember 30, 2022 compared to the same period in 2021. Gross accident period loss ratios decreased to 79.5% from 92.8% for the three months endedSeptember 30, 2022 and 2021, respectively. The improvement in the ratios was driven by higher average premium per policy and improved tenure mix as our book of business matures. We experienced a 10% decrease in claim frequency partially offset by a 7% increase in severity per claim for the three months endedSeptember 30, 2022 compared to the same period in 2021. The claim severity and frequency estimates are based on bodily injury, collision and property damage coverages.
Sales and Marketing
Sales and marketing expense decreased$59.7 million , or 91.3%, to$5.7 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decline in performance marketing of$43.4 million , branding and advertising of$8.9 million , marketing partnership of$3.0 million and content development of$1.6 million . The reduction in sales and marketing expense is due to a shift in direct marketing strategy in response to changing macroeconomic factors and competitive environment. 32 --------------------------------------------------------------------------------
Other Insurance Expense (Benefit)
Other insurance expense (benefit) increased$5.6 million , or 124.4%, to an expense of$1.1 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The increase was primarily driven by a$9.7 million decrease in ceding commission contra-expense, partially offset by a$4.9 million decrease in underwriting costs, both of which were results of the decrease in gross written premium. Technology and Development Technology and development expense decreased$3.7 million , or 20.6%, to$14.3 million for the three months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily driven by a$2.6 million decrease in personnel and overhead related costs as a result of a decrease in headcount. In addition, there was a$1.8 million decrease in share-based compensation expense compared to the same period in 2021 relating to our equity incentive plan. This was partially offset by an increase of$1.2 million in software development expense, as we continue to invest in developing and improving our technology platforms and infrastructure.
Comparison of the Nine Months Ended
The following table presents our results of operations for the periods
indicated:
Nine Months Ended
2022 2021 $ Change % Change
(dollars in millions)
Revenues:
Net premiums earned $ 221.6 $ 225.4 $ (3.8) (1.7) %
Net investment income 2.2 2.6 (0.4) (15.4) %
Net realized gains on investments 1.1 2.4 (1.3) (54.2) %
Fee and other income 14.6 21.8 (7.2) (33.0) %
Total revenues 239.5 252.2 (12.7) (5.0) %
Operating expenses:
Loss and loss adjustment expenses 273.3 284.5 (11.2) (3.9) %
Sales and marketing 45.8 245.5 (199.7) (81.3) %
Other insurance benefit (5.7) (3.6) (2.1) (58.3) %
Technology and development 46.1 49.3 (3.2) (6.5) %
General and administrative 86.3 69.8 16.5 23.6 %
Total operating expenses 445.8 645.5 (199.7) (30.9) %
Operating loss (206.3) (393.3) 187.0 N.M.
Interest expense (24.0) (17.9) (6.1) 34.1 %
Loss before income tax expense (230.3) (411.2) 180.9 N.M.
Income tax expense - - - - %
Net loss (230.3) (411.2) 180.9 N.M.
Other comprehensive loss:
Changes in net unrealized losses on investments (7.3) (4.0) (3.3) 82.5 %
Comprehensive loss $ (237.6) $ (415.2) $ 177.6 N.M.
______________
N.M. - Percentage change not meaningful
33 --------------------------------------------------------------------------------
Revenue
Net Premiums Earned
Net premiums earned decreased$3.8 million , or 1.7%, to$221.6 million , for the nine months endedSeptember 30, 2022 , compared to the same period in 2021. The decrease was primarily due to lower policies in force as a result of reduced marketing expenditures, partially offset by an increase in premium per policy resulting from rate actions.
During the nine months ended
55.8% and 57.5% of our gross earned premiums to third-party reinsurers,
respectively. The change in ceding percentage between periods was primarily
driven by retaining a larger share of our renewal book of business.
The following table presents gross written premium, ceded written premium, net
written premium, gross earned premium, ceded earned premium and net earned
premium for the nine months ended
Nine Months Ended September 30,
2022 2021 $ Change % Change
(dollars in millions)
Gross written premium $ 478.0 $ 584.2 $ (106.2) (18.2) %
Ceded written premium (264.5) (306.8) 42.3 (13.8) %
Net written premium 213.5 277.4 (63.9) (23.0) %
Gross earned premium 500.8 530.3 (29.5) (5.6) %
Ceded earned premium (279.2) (304.9) 25.7 (8.4) %
Net earned premium $ 221.6 $ 225.4 $ (3.8) (1.7) %
The decrease in gross earned premium was primarily due to lower gross written
premium as a result of reducing marketing expenditures. This decrease was
partially offset by 16.6% increase in premium per policy for automobile
insurance primarily attributable to rate actions.
Fee and Other Income
Fee income decreased$7.2 million , or 33.0%, to$14.6 million for the nine months endedSeptember 30, 2022 compared to the same period ended in 2021. The decrease was primarily due to a reduction in fee revenue from distributing web and app policy inquiry leads to third parties of$4.7 million as a result of reducing marketing expenditures. In addition, there was a decrease of$2.5 million in installment fees due to lower policies in force.
Operating Expenses
Loss and Loss Adjustment Expenses
Loss and LAE decreased$11.2 million , or 3.9%, to$273.3 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to lower policies in force for the nine months endedSeptember 30, 2022 compared to the same period in 2021. Gross accident period loss ratios decreased to 81.9% from 86.5% for the nine months endedSeptember 30, 2022 and 2021, respectively. The change in the ratios was driven by growth in average premium per policy primarily attributable to rate actions and improved tenure mix as our book of business matures. This was offset by higher loss costs from increased severity per claim due to inflation, as the industry experienced higher replacement parts cost and growth in used car values. We experienced an 11% increase in severity per claim and 4% decrease in claim frequency for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The claim severity and frequency estimates are based on bodily injury, collision, and property damage coverages. 34 --------------------------------------------------------------------------------
Sales and Marketing
Sales and marketing expense decreased$199.7 million , or 81.3%, to$45.8 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The decrease was primarily due to a decline in performance marketing of$171.7 million and branding and advertising of$34.9 million . The reduction in sales and marketing expense is due to a shift in direct marketing strategy in response to changing macroeconomic factors and competitive environment. This was partially offset by$8.8 million of warrant compensation expense related to the completion of the Integrated Platform pursuant to the Carvana commercial agreement and by$4.7 million in content development as we focus on diversifying our marketing channels compared to the prior year period.
General and Administrative
General and administrative increased$16.5 million , or 23.6%, to$86.3 million for the nine months endedSeptember 30, 2022 compared to the same period in 2021. The increase was driven by$8.4 million of restructuring costs related to an organizational realignment and an increase of$6.6 million in share-based compensation expenses relating to our equity incentive plan.
Non-Operating Expenses
Interest Expense
Interest expense increased$6.1 million , or 34.1%, to$24.0 million for the nine months endedSeptember 30, 2022 compared to the same period ended in 2021. The increase was primarily due to a$9.3 million increase in debt interest expense as a result of higher outstanding debt as ofSeptember 30, 2022 compared to the same period in 2021. This was partially offset by a decrease of$3.0 in amortization of discounts on warrants related to Term Loan B, which was early extinguished in 2021. Non-GAAP Financial Measures The non-GAAP financial measures below have not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, adjusted gross profit/(loss), direct contribution and adjusted EBITDA should not be construed as indicators of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies. Our management uses these non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (1) monitor and evaluate the performance of our business operations and financial performance; (2) facilitate internal comparisons of the historical operating performance of our business operations; (3) facilitate external comparisons of the results of our overall business to the historical operating performance of other companies that may have different capital structures and debt levels; (4) review and assess the operating performance of our management team; (5) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (6) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments. 35
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The following table provides a reconciliation of total revenue to adjusted gross
profit/(loss) and direct contribution for the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in millions)
Total revenue $ 73.7 $ 93.8 $ 239.5 $ 252.2
Loss and loss adjustment expenses (80.9) (114.4) (273.3) (284.5)
Other insurance (expense) benefit (1.1) 4.5 5.7 3.6
Gross profit/(loss) $ (8.3) $
(16.1)
Gross margin
(11.3) % (17.2) % (11.7) % (11.4) %
Less:
Net investment income $ (0.9) $
(1.0) $ (2.2)
Net realized gains on investments
- - (1.1) (2.4) Adjustments from other insurance expense(1) 9.7 14.4 26.8 44.2 Adjusted gross profit/(loss) 0.5 (2.7) (4.6) 10.5 Ceded earned premium 86.7 104.3 279.2 304.9 Ceded loss and LAE (56.5) (81.2) (192.4) (222.0) Net ceding commission and other(2) (19.2) (30.9) (64.5) (81.1) Direct contribution 11.5 (10.5) 17.7 12.3 Gross earned premium$ 155.3 $ 189.4 $ 500.8 $ 530.3 Ratio of adjusted gross profit/(loss) to total revenue 0.7 % (2.9) % (1.9) % 4.2 % Ratio of adjusted gross profit/(loss) to gross earned premium 0.3 % (1.4) % (0.9) % 2.0 % Ratio of direct contribution to total revenue 15.6 % (11.2) % 7.4 % 4.9 % Ratio of direct contribution to gross earned premium 7.4 % (5.5) % 3.5 % 2.3 % ______________
(1) Adjustments from other insurance expense includes report costs, personnel
costs, allocated overhead, licenses, professional fees and other.
(2) Net ceding commission and other is comprised of ceding commissions received
in connection with reinsurance ceded, partially offset by sliding scale
commission adjustments and amortization of excess ceding commission, and other
impacts of reinsurance ceded.
36
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Adjusted EBITDA
The following table provides a reconciliation of net loss to adjusted EBITDA for
the three and nine months ended
Three Months Ended September 30, Nine Months Ended September 30,
2022 2021 2022 2021
(dollars in millions)
Net loss $ (64.0) $ (133.0) $ (230.3) $ (411.2)
Adjustments:
Interest expense 8.5 4.4 22.0 12.8
Income tax expense - - - -
Depreciation and amortization 2.2 3.8 7.5 11.0
Share-based compensation 7.8 7.5 19.7 14.7
Warrant compensation expense 1.5 - 10.3 -
Restructuring costs(1) - - 8.4 -
Adjusted EBITDA $ (44.0) $ (117.3) $ (162.4) $ (372.7)
______________
(1) Restructuring costs consist of severance, benefits, related costs and real
estate exit costs comprising of accelerated amortization of certain right-of-use
assets, leasehold improvements, furniture and fixtures. This includes zero and
$2.1 million of share-based compensation for the three and nine months ended
September 30, 2022 , respectively. This also includes $0.1 million and
$1.4 million in depreciation and amortization for the three and nine months
ended September 30, 2022 , respectively. For further information on restructuring
costs, see Note 9, "Restructuring Costs," in the Notes to Condensed Consolidated
Financial Statements.
Liquidity and Capital Resources
General
Since inception, we have financed operations primarily through sales of insurance policies and the net proceeds we have received from our issuance of stock and debt and from sales of investments. Cash generated from operations is highly dependent on being able to efficiently acquire and maintain customers while pricing our insurance products appropriately. We are continuously evaluating alternatives for efficiently funding our ongoing operations. We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of securities.
Regulatory Considerations
We are organized as a holding company, but our primary operations are conducted by two of our wholly-owned insurance subsidiaries,Root Insurance Company , anOhio -domiciled insurance company, andRoot Property & Casualty Insurance Company , aDelaware -domiciled insurance company. The payment of dividends by our insurance subsidiaries is subject to restrictions set forth in the insurance laws and regulations of the States ofOhio andDelaware . To date, our insurance subsidiaries have not paid any dividends and, as ofSeptember 30, 2022 , they were not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director. If our insurance subsidiaries' businesses grow, the amount of capital we are required to maintain to satisfy our risk-based capital requirements may increase significantly. To comply with these regulations, we may be required to maintain capital in the insurance subsidiaries that we would otherwise invest in our growth and operations. As ofSeptember 30, 2022 , our insurance subsidiaries maintained a risk-based capital level that is in excess of an amount that would require any corrective actions on our part. 37 -------------------------------------------------------------------------------- Our wholly-owned,Cayman Islands -based reinsurance subsidiary,Root Reinsurance Company, Ltd. , or Root Re, maintains a Class B(iii) insurer license underCayman Islands Monetary Authority , or CIMA. AtSeptember 30, 2022 , Root Re was subject to compliance with certain capital levels and a net earned premium to capital ratio of 15:1, which we maintained as ofSeptember 30, 2022 . The capital ratio can fluctuate at Root Re's election, subject to regulatory approval. Root Re's primary sources of funds are capital contributions from the holding company, assumed insurance premiums and net investment income. These funds are primarily used to pay claims and operating expenses and to purchase investments. Root Re must receive approval from CIMA before it can pay any dividend to the holding company. Financing Arrangements InAugust 2022 , a subcommittee of our Board of Directors approved a reverse stock split of our Class A and Class B common stock at a ratio of 1-for-18, which became effective onAugust 12, 2022 . Accordingly, all stock, equity award, warrant, and per share amounts have been adjusted to reflect the reverse stock split for all prior periods presented. OnJanuary 26, 2022 , we closed on a$300.0 million five-year term loan, or Term Loan. The maturity of the Term Loan isJanuary 27, 2027 . Interest is payable quarterly and is determined on a floating interest rate calculated on the Secured Overnight Financing Rate, with a 1.0% floor, plus 9%, plus 0.26161% per annum. Concurrently with the Term Loan, we also issued to the lender warrants to purchase 0.3 million shares of Class A common stock. Under certain contingent scenarios, the lender may also receive additional warrants to purchase shares of Class A common stock equal to 1.0% of the aggregate number of issued and outstanding shares of our Class A common stock on a fully-diluted basis as of the triggering date. Liquidity As ofSeptember 30, 2022 , we had$819.7 million in cash and cash equivalents, of which$629.2 million was held outside of regulated insurance entities. We also had$120.1 million in marketable securities.
Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our marketable securities primarily consist of
securities and agencies, municipal securities, corporate debt securities,
residential and commercial mortgage-backed securities, and other debt
obligations.
We believe that our existing cash and cash equivalents, marketable securities
and cash flow from operations will be sufficient to support short-term working
capital and capital expenditure requirements for at least the next 12 months and
for the foreseeable future thereafter.
Our long-term capital requirements depend on many factors, including our
insurance premium growth rate, renewal activity, the timing and the amount of
cash received from customers, the performance of our embedded product, the
timing and extent of spending to support development efforts, the introduction
of new and enhanced products, loss cost trends, the continuing market adoption
of offerings on our platform, operating costs, and the ongoing uncertainty in
the global markets resulting from the global COVID-19 pandemic.
38
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In the first quarter of 2022, in response to inflation and loss cost trends and
to further drive efficiency and increased focus on our strategic priorities we
instituted an organizational realignment, including an involuntary workforce
reduction affecting approximately 330 employees, which represented approximately
20% of our workforce at the time. On November 9, 2022 , we initiated a
company-wide involuntary workforce reduction involving approximately 160
employees, which represented approximately 20% of our workforce. The action was
taken as part of our efforts to improve efficiency and operating costs, and
prioritize resources to further strengthen our pricing and underwriting
foundation and the continued development of our embedded products. We believe
this action will help extend our capital runway. We expect to record charges of
approximately $10.5 million to $11.5 million in general and administrative
expenses in the fourth quarter of 2022 for severance, benefits and related costs
as a result of these actions. Approximately $7.0 million to $7.5 million of
these charges are expected to result in cash expenditures in the same period. We
also expect to incur approximately $8.0 million to $8.5 million of employee
compensation expense, dependent upon continuous employment, recognized ratably
through the fourth quarter of 2023, we expect a cash expenditure in the first
quarter of 2024. We are continuing to review the potential impact of the
reductions, including additional employee-related costs, and are unable to
estimate any additional restructuring costs or charges at this time.
Through prudent deployment of capital we believe we have sufficient resources,
and access to additional debt and equity capital, to adequately meet our
obligations as they come due. For additional information regarding
organizational realignments refer to Note 9, "Restructuring Costs," and Note 15,
"Subsequent Events," in the Notes to Condensed Consolidated Financial
Statements.
Currently, our debt covenants require cash and cash equivalents held in entities
other than our insurance subsidiaries to be at least $200.0 million at all
times. This threshold may be reduced to $150.0 million under two sets of
circumstances: issuing 62,500 insurance policies through our Carvana embedded
product and achieving a ratio of direct contribution to gross earned premium of
12%; or ceasing any customer acquisition spend outside of the Carvana commercial
agreement and reducing our monthly cash burn to no greater than $12.0 million .
Cash Flows
The following table summarizes our cash flow data for the periods presented:
Nine Months Ended September 30,
2022 2021
(in millions)
Net cash used in operating activities $ (163.9) $ (364.3)
Net cash (used in) provided by investing activities (5.7) 83.3
Net cash provided by financing activities 283.3 2.3
Net cash used in operating activities for the nine months ended September 30,
2022 was $163.9 million compared to $364.3 million of net cash used in operating
activities for the nine months ended September 30, 2021 . The decrease in cash
used in operating activities was primarily due to a decline in net loss incurred
primarily as a result of a reduction in sales and marketing expense due to a
shift in direct marketing strategy in response to changing macroeconomic factors
and competitive environment. In addition, timing of cash receipts and payments
related to reinsurance activity, and timing of premium receipts and claim
payments contributed to the decrease in cash used during the nine months ended
September 30, 2022 compared to the same period in 2021.
Net cash used in investing activities for the nine months ended September 30,
2022 was $5.7 million , primarily due to purchases of investments and
indefinite-lived intangible assets and capitalization of internally developed
software, which was partially offset by sales, maturities, calls and pay downs
of investments. Net cash provided by investing activities for the nine months
ended September 30, 2021 was $83.3 million , primarily due to proceeds from
sales, maturities, calls and pay downs of investments.
39
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Net cash provided by financing activities for the nine months ended September
30, 2022 was $283.3 million , primarily due to proceeds from our Term Loan. Net
cash provided by financing activities for the nine months ended September 30,
2021 was $2.3 million primarily due to proceeds from employees exercising stock
options, net of tax proceeds (withholding), which was offset by a partial
repayment of long-term debt.
Material Cash Requirements from Contractual and Other Obligations
There have been no material changes to our contractual and other obligations from those described in our 2021 10-K other than entering into a$300.0 million five-year term loan. The maturity of this Term Loan isJanuary 27, 2027 . For additional information regarding the Term Loan refer to Note 7, "Long-Term Debt," in the Notes to Condensed Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity or cash flows.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements in conformity with GAAP requires our management to make a number of estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the period. We evaluate our significant estimates on an ongoing basis, including, but not limited to, estimates related to reserves for loss and LAE, premium write-offs and valuation allowance on our deferred tax assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Our critical accounting policies are described under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates," in our 2021 10-K and the Notes to Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q. During the nine months endedSeptember 30, 2022 , there were no material changes to our critical accounting policies from those discussed in our 2021 10-K, other than the potential accounting effects resulting from net operating loss, or NOL, limitations discussed below. We calculate the tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities in accordance with Accounting Standards Codification 740, Income Taxes, or ASC 740. The application of ASC 740 requires a company to evaluate the recoverability of deferred tax assets and to establish a valuation allowance if necessary to reduce the carrying value of the deferred tax asset to an amount that is more likely than not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance we consider many factors, including: (1) the nature of the deferred tax assets and liabilities; (2) whether they are ordinary or capital; (3) the timing of expected reversal; (4) taxable income in prior carry back years as well as projected taxable earnings exclusive of reversing temporary differences and carry forwards; (5) the length of time that carryovers can be used; (6) unique tax rules that would impact the utilization of the deferred tax assets; and (7) any tax planning strategies that we would employ to avoid a tax benefit expiring unused. We may be unable to fully use our NOLs, if at all. Under Section 382 of the Internal Revenue Code, or the Code, if a corporation undergoes an "ownership change" (very generally defined as a greater than 50% change, by value, in the corporation's equity ownership by certain shareholders or groups of shareholders over a rolling three-year period), the corporation's ability to use its pre-ownership change NOLs to offset its post-ownership change income may be limited. The limitation may be such that it prevents the company from fully utilizing its NOLs existing at the time of the ownership change prior to their expiration, which could also result in a substantial reduction in the deferred tax asset with an offsetting reduction in the valuation allowance. 40 -------------------------------------------------------------------------------- During 2022, we performed an estimated ownership change analysis and concluded that we have experienced an ownership change. Our estimated ownership percentage by certain shareholders over the most recent rolling three-year period changed significantly and exceeded the 50% threshold. In connection with this ownership change, we do not expect the limitation under Section 382 of the Code will result in any material reduction in our ability to use pre-ownership change NOLs in the future nor require a reduction in the associated deferred tax asset or valuation allowance. We may still experience additional ownership changes in the future as a result of subsequent shifts in ownership, which could result in additional limitations on our NOL usage. 41
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Investor Presentation Q3 2022
ONCOLOGY INSTITUTE, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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