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Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is 0.01pp more bullish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.01pp
Flat
Net-tone change vs last year's 10-K.
MD&A
+0.04pp
Flat
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adversely+3
moratoriums+3
losses+2
adverse+2
incidents+2
Positive rising
innovation+3
great+3
integrity+2
profitable+2
leadership+2
Risk Factors (Item 1A)
41,820 words
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, 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 , our prospects for future growth may be materially affected.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
claims+2
losses+2
retaliatory+2
accident+1
critical+1
Positive rising
satisfy+2
favorable+2
adequately+1
efficiency+1
improve+1
MD&A (Item 7)
10,328 words
Item 7. 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 consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” included elsewhere in this Annual Report on Form 10-K. Additionally, our historical results are not necessarily indicative of the results that may be expected for any period in the future. This Management’s Discussion and Analysis does not discuss 2023 performance or a comparison of 2024 versus 2023 performance for select areas where we have determined the omitted information is not necessary to understand our current period financial condition, changes in our financial condition, or our results. The omitted information may be found in our Annual Report on Form 10-K for the year ended December 31, 2024 filed with the Securities and Exchange Commission, or the SEC, on February 26, 2025.
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 the archaic car insurance industry by using modern technology, telematics, and data science to offer fair, personalized rates to drivers.
• 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 (including generative AI-driven search and discovery tools such as ChatGPT, Gemini, and Perplexity), 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 United States 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, Florida, and California.
• We are subject to complex and evolving privacy, data security and cybersecurity laws, regulations, and standards, increasing the burden 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, cybersecurity incidents, or real or perceived errors, failures or bugs in our or our vendors’ systems or our website or mobile 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 our competitors’ brands or our 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 seriouslyharmed. 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 AI 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 seriouslyharm 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 againstlosses.
• 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 I
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 by using modern technology, data science, and telematics 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 at contextually relevant times, such as during the car purchasing experience or through independent insurance agents.
Our primary focus is the United States personal auto insurance market. We have built our company around the principle that each individual has unique behaviors and that customers should be in control and rewarded 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 strong focus on the customer experience.
We believe the approximately $350 billion United States personal 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 and expectations of modern consumers. Our initial focus on auto insurance reflects how well-suited we believe the product is for fundamental improvement through technology and we believe Root is the innovatorbest positioned to drive this transformation.
Auto insurance is required for the vast majority of United States drivers, and we believe it is typically the first insurance product 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. Our technology platform is scalable and supports future product expansion.
Our advantage is derived from our technology-enabled approach to the customer lifecycle. We engage customers at a point of high intent across multiple channels, provide a seamless and intuitive product experience, and utilize sophisticated data science to fairly price our policies. As a full-stack insurance carrier, we have the infrastructure and flexibility to design products and to distribute, underwrite, administer, and pay claims. Our model, supported by proprietary technology, allows us to adapt more quickly across the value chain, provides design and feature discretion, and we believe enables us to innovate and iterate with more speed than any of our major competitors. We see this flexibility as critical to introducing new capabilities, responding to macroeconomic conditions, 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 continue to mature, we expect an increasing proportion of our premiums 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 technology and data science-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 United States personal lines insurance. This market exceeded $552 billion in 2024 premiums and has grown at a 6% compound annual growth rate, or CAGR, since 2016.
Over the past century, there have been only a few waves of innovativedisruption 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 while delivering a user-friendly interface and convenient, efficient experience. This is the mantra that drives our user experience and our business model. Initial engagement, which may include app installation, is designed to be intuitive so that customers can easily identify the coverage they need.
Our customer engagement extends across the customer experience and value chain:
• Engagement. We acquire customers through our two distribution channels: direct and partnership. The direct channel delivers a seamless, digital-first experience supported by performance marketing and organic traffic, connecting consumers directly to our product. The partnership channel integrates our insurance offering within trusted third-party ecosystems, providing access to customers at the moment of need. Together, these channels drive higher-quality customer engagement and expands our overall reach.
• Profile Creation . The Root app is available for both iOS and Android operating systems making it available to 99% of United States 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 for 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. For customers with an immediate insurance need; we are able to offer insurance products where we leverage our data science advantage and utilize data from traditional underwriting variables to offer a bindable quote. As we collect more data, our predictive power increases, enabling further refinement of our segmentation over time.
• 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 one of the fastest growing retail channels in the United States, 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 bind while leveraging the platforms of our strategic partners or network of independent agents. 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 search engines 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, social media, and digital media. We conduct experimental structured tests across media channels and geographies through a disciplined test-and-learn approach to evaluate new tactics. These efforts are intended to support expansion beyond high-intent acquisition channels while maintaining focus on efficiency and long-term value creation. We utilize these media channels to drive awareness when launching in new markets and to target prospective customers in active states.
• Partnership: a wide array of integrations, spanning early-stage marketing partnerships through fully embedded user experiences .
◦ Automotive & Financial Services . We build upon or within the mobile and web customer experiences of our automotive and financial services distribution partners to reach a captive customer base with an integrated solution. Our flexible technology stack allows us to meet our partners where they are with the best solution for them 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 platform will deliver 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 relationships with other automotive and financial service companies with relevant customer bases.
◦ Independent Agent . We continue to invest in a product to bring the speed and ease of our technology to the independent agent 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 independent agent platform that enables simplified distribution from independent agents to their customers. Technology is at the core of the experience, enabling licensed independent agents to onboard quickly and seamlessly integrate with the comparative raters that many are already using. This allows us to offer our insurance products to customers alongside other established insurance carriers. The technology driven approach makes this an appealing platform for independent agents and an efficient acquisition channel for us.
Our customer acquisition costs can vary due to channel mix, state, seasonality, or 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.
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 catastrophic 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 Data Models
For certain 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 and braking patterns, 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.
We have expanded beyond just traditional telematics to include various other means of measuring risk. This includes traditional underwriting variables, continuous telematics, which facilitates ongoing policyholder engagement, and third-party telematics. We have built a data platform capable of ingesting multiple data sources to continuously optimize our pricing engine. By using a high quantity of differentiated data and continuously retraining our models, we are able to write profitable business at great prices for customers, regardless of their telematics preference.
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. The collection of the high quantity of differentiated data paired with our internally developed claims infrastructure contributes to our data advantage, which continues to 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 approximately $350 billion United States personal 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.
• 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. We are constantly iterating on our models with the most up to date information. 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.
• Enhance direct 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 agents. 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, and affinity channels. Additionally, by continuing to invest in our independent agent product with quick onboarding and seamless integration with comparative raters, we expect to drive growth through a well-established independent agent network.
• 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 United States Treasury and agency 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.
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, 2025, we had 13 issued patents, four non-provisional patent applications and six continuation applications pending examination in the United States. 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 United States 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.”
Human Capital Management
As a technology company, our people are central to our success and differentiation. We believe our employees’ expertise, creativity, and shared purpose are what enable us to innovate, execute with speed and discipline, and deliver value to our customers and shareholders.
Our mission to reinvent insurance through technology and data science comes to life through our people. We believe we empowerbetter lives through better insurance by cultivating an environment where employees are encouraged to think boldly, act with accountability, and continuously learn and grow. Our people strategy is built around four guiding pillars: Customer Value, Experimentation and Innovation, Disciplined Thinking, and Operational Excellence. These principles shape how we hire, develop, manage performance, and build leadership capabilities across the organization.
We are committed to creating an empowering, inclusive, and high-performance culture. We recognize that diverse backgrounds, experiences, and perspectives strengthen our business and foster innovation. Our inclusion strategy is embedded across the employee lifecycle from talent acquisition and onboarding to development, feedback, and advancement, ensuring equitable outcomes for all team members.
Employees
As of December 31, 2025, we had 1,256 full-time employees. None of our employees are represented by a labor union or covered by collective bargaining agreements. In 2025, we focused on executing our people strategy by aligning talent and capability development with our business priorities. This included retaining and developing talent critical to executing our strategic plan, improving our operating efficiency, underwriting foundation, and continuing development and distribution of our insurance products. We are enhancing organizational effectiveness through
streamlined processes and clearer accountability structures and building leadership capability through a monthly management skills series training, covering topics such as performance feedback, difficult conversations, and employment law. We have invested in learning and development, with plans to expand offerings in 2026 to support continuous growth and career mobility. These initiatives are designed to ensure our people have the clarity, resources, and skills needed to deliver exceptional results and drive long-term value creation.
Ethics and Company Values
Our culture is grounded in integrity, accountability, and transparency. Our Code of Conduct, values, and policies establish the ethical framework for how we operate. We encourage employees to report any unusual behavior or any non-compliant activities through multiple channels, including an anonymous reporting system designed to allow employees to raise concerns confidentially, and maintain an open-door policy that allows employees to connect with leaders, our People, Legal, Compliance, or Internal Audit teams directly.
Every employee completes annual compliance and ethics training, including acknowledgment of our Code of Conduct and related policies. We are committed to maintaining a workplace built on trust, where employees feel empowered to speak up and where we act with integrity in everything we do.
Hiring and Retaining Talent
We are intentional about attracting, engaging, and retaining top talent nationally. Our hiring strategy focuses on sourcing high-performing, diverse talent capable of driving innovation and operational excellence.
Employee engagement remains a key priority. We regularly collect feedback through engagement surveys and listening mechanisms to identify opportunities for improvement and take meaningful action. We have also been recognized as a Great Place to Work by Great Place To Work ® . Our performance and development process ensures that employees receive timely, actionable feedback, are clear on expectations, and can align their growth aspirations with business needs.
We provide competitive compensation and benefits designed to support the overall well-being of our employees and are intended to align rewards with company performance. This includes competitive fixed- and variable-pay programs benchmarked to market data, annual short-term incentives and long-term, equity-based programs that are designed to align leadership and key roles with shareholder outcomes, and comprehensive benefits.
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 United States. 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, to levy fines and monetary penaltiesagainst insurers and insurance producers found to be in violation of applicable laws and regulations, and, in certain jurisdictions, to require insurers to return excess profits to policyholders if specified regulatory thresholds are exceeded; and, in some cases, to require insurers transacting business in their jurisdiction to maintain statutory capital and surplus, deposits, or other financial security in excess of the minimum risk-based capital or solvency standards required by the insurer’s domiciliary regulator, which may require the insurer to allocate additional capital or modify business operations to continue operations in that jurisdiction.. 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 Ohio or Florida law);
• approval of policy forms, underwriting rules/guidelines, rates 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;
• requirements imposed by non-domiciliary regulators to maintain additional statutory capital and surplus, deposits, or other financial security in excess of domiciliary standards as a condition of transacting business in their jurisdictions;
• required 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 servicing and management of policies;
• restrictions on the use of rebates to induce a policyholder to purchase insurance;
• 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 or to operate our telematics program to underwrite and price insurance policies consistently across jurisdictions, particularly in California, which prohibits any use of telematics, as well as other jurisdictions, which impose unique telematics-related requirements, some of which we have elected not to meet at this time;
• 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 regulations, model governance, and data security regulations;
• regulations on data and records storage and retention;
• regulation of corporate governance and risk management;
• consumer protection regulations, including regulations on management of consumer grievances;
• periodic examinations of operations, finances, market conduct and claims practices; and
• required periodic financial reporting.
Regulation of insurance continues to evolve in response to emerging industry practices and developments. In recent years, regulators have shown increasing scrutiny and interest in the use of AI, predictive and automated decisioning models, particularly those that may affect pricing, underwriting, claims, or customer treatment, as well as in the use and disclosure of consumer information, cybersecurity and privacy practices, investment risks, restrictions on nonrenewal and cancellation, and concerns regarding unfair or discriminatory pricing. This heightened focus may slow the further development of our advanced analytics capabilities and delay the deployment of new model-driven products features.
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 United States 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 United States 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 36 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 United States 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 licensed to transact certain lines of property and casualty 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, Ohio, 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 and maintains a license to transact insurance in the state of Florida only. 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 Florida OIR.
We also have a reinsurance captive subsidiary, Root Re, domiciled in the Cayman Islands.
Our licensed insurance producer subsidiaries, Root Insurance Agency, LLC, Root Lone Star Insurance Agency, Inc., Root Scout, LLC, Root Republic Managing General Agency, LLC, and Root Texas Managing General Agency, 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 48 states, which does not include Massachusetts and New York. In Florida, Root Insurance Agency, LLC holds an agency license and an independent adjusting firm license and is appointed as a managing general agent for Root Florida. Root Lone Star Insurance Agency, Inc., Root Republic Managing General Agency, LLC, and Root Texas Managing General Agency, LLC each hold a resident managing general agency license in Texas. Root Scout, LLC currently holds a resident insurance producer license in Ohio.
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, appointed and fulfill annual continuing education requirements.
Insurance Holding Company Regulation
As the ultimate controlling person in the “insurance holding company system” under state insurance holding company laws, we are required to file annual enterprise risk reports, corporate governance disclosures and Own Risk and Solvency Assessments, or ORSAs, with our domiciliary regulators.
These laws also mandate that all inter-affiliate transactions within a holding company system 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 insurance holding company laws of the states in which our insurance subsidiaries are domiciled, including Ohio and Florida, a person must obtain regulatory approval from 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) must 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 DOI will grant approval of an application to acquire control of a domestic insurer unless the DOI 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 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.
State insurance holding company laws provide 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.
Moreover, in both Ohio and Florida, any person divesting control of an insurer must provide 30 days’ notice to the regulator and the 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. We have filed ORSA summary reports annually since 2021 and, since the formation of Root Florida, have likewise submitted it to the Florida Office of Insurance Regulation.
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. To date, our subsidiary boards of directors have declared and executed dividends on an intercompany basis, in the exercise of their respective discretion and subject to regulatory approval, after considering a variety of factors, including our results of operations, capital and liquidity needs, and applicable regulatory requirements. 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.”
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 or Florida OIR 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 their 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 their 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 of their domiciliary states, 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. In addition to domiciliary state RBC requirements, some states may impose extraterritorial surplus and capital restrictions on insurance companies, which limit our ability to move capital freely among subsidiaries and restrict our ability to deploy excess funds for operational or strategic purposes.
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, 2025, Root Insurance Company, Root Florida, and Root Property & Casualty had RBC levels 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. Ohio adopted the model legislation, which became effective June 1, 2025, for insurance holding company systems like ours that do not write business outside of the United States, and the Company has made the required group capital calculation filing.
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.
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. Root Florida is also subject to financial examinations by the state of Florida. As a new underwriting company in the state of Florida, we expect Root Florida will be subject to financial examinations in each of the next three years, starting with the examination of its financial condition to begin in 2026. 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 of Root Re was completed in 2025 and resulted in 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, and are subject to consent orders concerning certain of our business practices. Final market conduct examinations are public records and can be found on examining state websites.
Statutory Accounting Principles
A United States licensed insurance carrier’s financial statements must be completed in accordance with statutory accounting principles, or SAP. SAP was developed by United States 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 United States jurisdictions. These accounting principles and related regulations differ somewhat from generally accepted accounting principles in the United States, 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 United States insurance subsidiaries, Root Insurance Company, Root Property & Casualty and Root Florida, 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 United States 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.
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. Some states may also require the filing of underwriting guidelines, and in certain cases, such rating plans, policy forms, and/or underwriting guidelines, must be approved prior to use.
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.
Investment Regulation
Root Insurance Company and Root Property & Casualty are subject to Ohio’s rules and regulations governing the investment of 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 its 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.
UnfairClaims Practices
Insurance companies, third-party administrators and individual claims adjusters are prohibited by state statutes from engaging in unfairclaims practices. Unfairclaims 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 consumer privacy notice 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, where applicable. 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 againstunauthorized 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, as amended by the California Privacy Rights Act, or CPRA, effective January 1, 2023, and numerous other comprehensive consumer privacy laws that have gone into effect since then. These state consumer privacy laws give residents of certain states the right to access and require correction and/or deletion of certain of their personal information, opt out of certain personal information sharing and other processing activities, and receive detailed disclosures about how their personal information is used and shared. These state consumer privacy laws often exempt certain information that is collected, processed, or disclosed pursuant to the California Financial Information Privacy Act, the Gramm-Leach-Bliley Act, the federal Driver’s Privacy Protection Act or the Fair Credit Reporting Act, which also apply to us. However, the definition of “personal information” in each of these laws 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.
Further, in response to the growing threat of cybersecurity attacks and cybersecurity incidents 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 United States Department of the Treasury by the Dodd-Frank Act in July 2010 to monitor and coordinate the regulation of the insurance industry across the United States.
Although the FIO has limited direct regulatory authority over insurance companies or other insurance industry participants, it does represent the United States 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 United States Department of the Treasury with administration of the Terrorism Risk Insurance Program, monitors trends in the insurance industry and advises the Secretary of the United States 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 important,” 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. While not our primary means of communication, investors can also learn more about us by visiting our LinkedIn account (linkedin.com/company/rootinsurance), and we may disclose material non-public information through our LinkedIn account. 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 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 or our LinkedIn account is not incorporated into this Annual Report on Form 10-K or other securities filings.
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 Annual Report on Form 10-K 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, 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 $40.3 million and $30.9 million for 2025 and 2024, respectively, we had an accumulated loss of $1,641.6 million and $1,681.9 million as of December 31, 2025 and December 31, 2024, 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 greaterlosses, 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 2025 and 2024, our accumulated net loss may increase as we continue to make investments in the development and expansion of our business or if we sufferadverse business results or other losses. 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, litigationlosses), 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 certain 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
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 certain cases will, result in increased operating expenses, other losses, complications or delaysslowing 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 seriouslyharmed, 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, requires investment in technology, 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 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 problemsfrustrate 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, including generative AI and machine learning technology;
• 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. 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 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, 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 seriouslyimpaired.
Due to Proposition 103 in California, we are currently limited in our ability to use telematics data beyond miles driven to underwrite insurance. Additionally, restrictions in Maryland are currently limiting our ability to operate a consistent telematics program across jurisdictions. These constraints hinder our ability to offer cost-competitive insurance in these states, and if other states were to adopt comparable laws or regulatory positions, our ability to underwrite and price insurance policies effectively in those markets will be harmed.
Although there is relatively limited federal and state legislation outside of these states restricting our ability to collect driving behavior data and operate a consistent telematics program, private organizations are implementing principles and guidelines to protect driver privacy. The Alliance for Automotive Innovation 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. Additionally, 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 drivers’ smartphones, such legislation would have a material adverse effect on our business, results of operations, financial condition and prospects.
Recent 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, continues to draw national attention. State attorneys general and private companies and litigants initiated investigative activities and/or litigationagainst certain of these manufacturers and brokers under consumer protection and privacy laws. If consumer sentiment, legislation,
litigation, or a combination of these, were to materially impact our ability to collect, obtain and use telematics data, or if such factors encouraged automobile manufacturers to move away from offering usage-based insurance programs to their customers, it would have a material adverse effect on our business, results of operations, financial condition and prospects.
Certain 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 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 and Maryland.
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. The commercial agreement is set to expire on September 1, 2027. 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 renew or extend the term of any of our commercial agreements on terms attractive to us or at all, 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 (including generative AI–driven search and discovery tools such as ChatGPT, Gemini, and Perplexity), 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 may again in the future 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 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 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 such data. If the costs of advertising on search engines and social media platforms increase, we have in the past and may again in the future 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 2025), 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 rapid, cost-effective and otherwise satisfactory relationships with digital app stores, in particular, those operated by Google and Apple. 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 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. 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 and Google Play Store ratings. This rating may not be a reliable indicator of our customer satisfaction relative to other companies who are rated in the app stores 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 United States 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 United States. We currently hold Certificates of Authority in 50 s tates and the District of Columbia and operate in 36 of those jurisdictions. 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 United States, we will incur significant incremental operating expenses, including expenses in connection with securing applicable regulatory approvals, establishing new underwriting entities, 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, and we may not exceed the expense of establishing and maintaining them. In addition, these efforts compete for Company resources and may require the Company to forgo other projects that could be more profitable, including expansion into new states. 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:
• 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;
• competition from local incumbents that already own market share and better understand the local market, may operate more effectively and may enjoygreater 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 denyclaims made by our customers. These errors could cause us to select an uneconomic mix of customers or 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 variations and anomalies 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 is 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, the interpretation or implementation of such regulations, 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 includes 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 methodologies and our regulatory capital, and was most recently reviewed in 2024 resulting in no material findings. Root Property & Casualty is also Ohio-domiciled but completed a similar financial examination by the Delaware DOI 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 is Florida-domiciled and will be subject to an initial financial examination, which is customary for newly-licensed insurance subsidiaries and which the Florida OIR has notified us will begin in June 2026. If, as a result of 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. Certain of our insurance subsidiaries are undergoing examinations and will be subject to such examinations in the future. 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, including Texas, Georgia, Florida, and California.
Approximately 46.9% of our gross premiums written for the year ended December 31, 2025 originated from customers in Texas , Georgia, Florida, and California. As a result of this concentration of customers, if a significant catastrophic event or series of catastrophic events occur and cause material losses in Texas , Georgia, Florida, or California, 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 in Texas , Georgia, Florida, or California may expose us to more significant risks.
We are subject to complex and evolving privacy, data security and cybersecurity laws, regulations, and standards increasing the burden 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 United States, 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, 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 certain 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 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 United States 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, correct, delete and transfer certain of their personal information, opt out of certain personal information sharing and other processing activities, 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 increases the risk of class action data breachlitigation. In addition to increasing our compliance costs and potential liability, the CCPA’s restrictions on the “sharing”/”sale” of personal information restricts our use of cookies and similar technologies for cross-advertising purposes. The CCPA excludes certain personal information covered by Gramm-Leach-Bliley Act, Fair Credit Reporting 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 collect and/or 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, which went into effect on January 1, 2023, gives California residents the ability to: limit use of precise geolocation information and other categories of information classified as “sensitive”; and add e-mail addresses and passwords to the list of personal information data fields that, if lost or breached, would entitle affected individuals to bring private lawsuits. The CPRA also established 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.
Importantly, the CCPA and the CPRA marked the beginning of a trend toward more stringent privacy legislation in the United States. At present, there are numerous comprehensive state privacy laws in effect, which mirror—and sometimes expand upon—the obligations and restrictions present in the CCPA and CPRA. There also continues to be 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. Today, all 50 states have enacted some type of cybersecurity and data protection regulation, and around 19 jurisdictions have comprehensive privacy regulations that may apply to certain consumer 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 bound by 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, and may in the future experience, cybersecurity incidents that have resulted in threat actors obtaining customer personal information and some of these events have caused us to incur losses, including regulatory penalties, costs and attorneys fees, 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 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 mobile 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 unintentionalincidents 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. The rapid evolution and increased adoption of generative AI technologies may also increase our cybersecurity risks and the cybersecurity risks of our business partners.
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 in the future, attempt to misappropriate data and 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 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 may 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, and such techniques continue to evolve. As such, 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 effectiveagainst 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; 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. Cybersecurity 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 claimsagainst 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 United States, 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 our competitors’ brands or our 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 to continue to spend for the foreseeable future, considerable amounts of money and 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, whether accurate or inaccurate, 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 seriouslyharmed. 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 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 seriouslyharmed.
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 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 AI 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.
We continue to develop and implement applications of AI, a term we use broadly to refer to computational systems that learn from data, identify patterns, and generate insights that can automate decision-making. This term is also inclusive of classical supervised machine learning, in which models are trained to faithfully mimic patterns observed in data sets. Applications of AI implemented by the Company include but are not limited to our pricing and underwriting models, claims process decisioning and marketing bid models, though in these instances the AI deployed is static and deterministic. As with many innovations, AI presents risks, and there is no guarantee that our use of AI or incorporation of AI capabilities into our business will benefit our business.
State and federal lawmakers and insurance regulators are focusing on the use of AI broadly, including, in particular, concerns about transparency, deception, and fairness. For instance, on August 24, 2020, the NAIC adopted guiding principles on AI developed by the NAIC’s AI Working Group to provide guidance to regulators on the use of AI in the insurance industry, and on December 4, 2023, the NAIC issued a model bulletin on AI, Use of Artificial Intelligence Systems by Insurers, which is intended to be used by state departments of insurance to set forth regulatory expectations as to how insurers should govern the development, acquisition, and use of AI. Subsequently, many state insurance regulators have promulgated that model bulletin through their own departments of insurance, occasionally modifying the model template to highlight state-specific concerns or positions.
In addition, legislation regulating the use of AI has been enacted in several states (but recently challenged by the executive order on “Ensuring a National Policy Framework for Artificial Intelligence”) and has been proposed on the federal level. Changes in laws or regulations, or changes in the interpretation of laws or regulations by a regulatory authority, specific to the use of AI, may decrease our revenues and earnings and may require us to change the manner in which we conduct some aspects of our business. We may also be required to disclose our proprietary software to regulators, putting our confidential intellectual property at risk, in order to receive regulatory approval to use such AI in the underwriting of insurance and/or the payment of claims. In addition, our business and operations are subject to various United States federal, state, and local consumer protection laws, including laws which place restrictions on the use of automated tools and technologies to communicate with wireless telephone subscribers or consumers generally. Colorado’s requirements on an insurance company’s use of external consumer data and information sources, algorithms, and predictive models, which such requirements include additional documentation, oversight, testing, and reporting obligations, were extended to private passenger automobile insurers by regulation effective October 15, 2025. Although we have taken steps to mitigate our liability for violations of this and other laws restricting the use of electronic communication tools, we cannot guarantee that we will not be exposed to civil litigation or regulatory enforcement for actual or perceived failures in this respect. Further, to the extent that any changes in law or regulation further restrict the ways in which we communicate with prospective or current customers before or during onboarding, customer care, or claims management, these restrictions could result in a material reduction in our customer acquisition and retention, and our business, results of operations, financial condition and prospects would be materially adversely affected.
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.
Under the terms of our policies, we are required to accurately and timely evaluate and pay covered claims. We have settled claims and actions related to allegations that we did not timely or accurately pay claims and have been assessed market conduct fines and penalties by regulatory authorities. Our ability to accurately and timely evaluate and pay claims depends on a number of factors, including the efficacy of our claims processing, the training and experience of our claims adjusters, including our third-party claims administrators, and our ability to develop or select and implement appropriate procedures and systems to support our claims functions.
We believe that the speed at which our technology-based claims processing platform allows us to process and pay claims is a differentiating factor for our business relative to our competitors, and an increase in the average time to process claims could lead to customer dissatisfaction and undermine our reputation and position in the insurance marketplace. If our claims adjusters or third-party claims administrators are unable to effectively process our volume of claims, our ability to grow our business while maintaining high levels of customer satisfaction will be compromised, which in turn, would adversely affect our business, results of operations, financial condition and prospects. Any failure to pay claims accurately or timely could also lead to regulatory and administrative actions or other legal proceedings and litigationagainst us, or result in damage to our reputation, any one of which 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.
Our business experiences volatility in claim frequency from time to time, and short-term trends may not continue over the longer term. Changes in claim frequency may result from changes in mix of business, miles driven, distracted driving, weather, pandemics, the macroeconomic environment, including inflation, or other factors. A significant increase in claim frequency or severity could have an adverse effect on our business, results of operations, financial condition and prospects.
Changes in bodily injury claim severity specifically are impacted by inflation in medical costs, litigation trends and precedents, regulation and the overall safety of automobile travel. Changes in auto property damage claim severity are driven primarily by inflation in the cost to repair or replace vehicles, including parts and labor rates, the mix of vehicles that are declared total losses, model year mix as well as used car values. An increase in tariffs, or the implementation of new tariffs, including retaliatory tariffs, would likely drive an increase in auto property damage claim severity.
In addition, social inflation may materially and adversely affect our financial condition. Social inflation is a term used to describe how insurers’ costs may be increasing at a rate higher than other economic inflation, generally due to trends in increasing litigation costs brought by insureds and claimants seeking larger settlement amounts, as well as the proliferation of litigation-financing firms, the hiring of testifying expert witnesses, and the use of costly, sophisticated technology to aid trial presentations. Considered part of social inflation are nuclear verdicts, which are generally considered to be jury verdicts exceeding $10 million in punitive and compensatory awards and have recently become more common.
While actuarial models for pricing and reserving typically include an expected level of inflation (including social inflation), unanticipated increases in claim severity can arise from events that are inherently difficult to predict, such as inflationary shocks or surges in health care costs. Implementation of tariffs and changes in trade policies could also contribute to claim severity. Although we pursue various loss management initiatives to mitigate future increases in claim severity, we cannot guarantee that these initiatives will successfully identify or reduce the effect of future increases in claim severity, and our failure to do so would 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 are required to maintain sufficient capital and surplus in order to comply with insurance regulatory requirements, support our business operations and minimize our risk of insolvency. The NAIC has developed a system to test the adequacy of statutory capital and surplus of United States-based insurers, known as risk-based capital, that all states have adopted. This system establishes the minimum amount of capital and surplus necessary for an insurance company to support its overall business operations in consideration of its size and risk profile. It identifies insurers that may be inadequately capitalized by looking at certain risk factors, including asset risk, credit risk and underwriting risk with respect to the insurer’s business in order to determine an insurer’s authorized control level risk-based capital.
An insurer’s risk-based capital ratio measures the relationship between its total adjusted capital and its authorized control level risk-based capital. Insurers with a ratio falling below certain calculated thresholds may be
subject to varying degrees of regulatory action, including heightened supervision, examination, rehabilitation or liquidation. An insurance company with total adjusted capital that is less than 200% of its authorized control level risk-based capital is at a company action level, which would require the insurance company to file a risk-based capital 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. Additional action level events occur when the insurer’s total adjusted capital falls below 150%, 100% and 70% of its authorized control level risk-based capital. Lower percentages trigger increasingly severe regulatory responses. In the event of a mandatory control level event (triggered when an insurer’s total adjusted capital falls below 70% of its authorized control level risk-based capital), an insurer’s primary regulator is required to take steps to place the insurer into receivership.
In addition, the NAIC Insurance Regulatory Information System, or IRIS, is a collection of analytical tools designed to provide state insurance regulators with an integrated approach to screening and analyzing the financial condition of insurance companies operating in their respective states. If our ratios fall outside of the usual range for one or more ratios set forth by the NAIC for any number of reasons, it could subject us to heightened regulatory scrutiny or measures or create investor uncertainty around the stability of our financial condition, which could harm our business. We previously disclosed to the Ohio DOI that certain of our ratios fall outside the usual range for one or more IRIS ratio factors. The Ohio DOI has acknowledged this and taken no regulatory action, although we cannot guarantee that the Ohio DOI will not do so in the future.
Further, the NAIC has promulgated a Model Regulation to Define Standards and Commissioner's Authority for Companies Deemed to be in Hazardous Financial Condition, or the Hazardous Financial Condition Standards, which has been adopted by states in whole or part. If our financial condition is deemed by state insurance regulators to meet the Hazardous Financial Condition Standards, it could subject us to heightened regulatory scrutiny or measures or create uncertainty around the stability of our financial condition, which would harm our business. The Florida OIR requires the provision of monthly financial reports.
Similarly, our wholly-owned, Cayman Islands-based captive reinsurer, Root Re, is subject to additional capital and other regulatory requirements imposed by the CIMA. Although these capital requirements are generally less constraining than United States capital requirements, failure to satisfy these requirements could result in regulatory actions from the CIMA or loss of or modification of Root Re’s Class B(iii) insurer license, which would adversely impact our ability to improve our overall capital efficiency and support our “capital-efficient” model.
As a newer entrant to the insurance industry, we may face additional capital and surplus requirements as compared to those of our larger and more established competitors, including requirements imposed by non-domiciliary regulators to maintain statutory capital and surplus, deposits, or other financial security in excess of domiciliary standards as a condition of transacting business in their jurisdictions. Failure to maintain adequate risk-based capital, or other capital requirements, at the required levels could result in limited state operations expansion, withdrawal from a state, and/or increasingly onerous reporting and examination requirements and 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.
If we fail to maintain adequate systems and processes to prevent, monitor and detect fraud, including fraudulent policy acquisitions or claims activity, or if inadvertenterrors occur with such prevention, monitoring and detection systems due to human or computer error, our business could be materially adversely impacted. While we believe past incidents of fraudulent activity by customers, purported customers and/or claimants have been relatively isolated, we cannot guarantee that our systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes. We use a variety of tools to protect againstfraud, but these tools may not always be successful. Instances of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on our business and reputation.
In February 2023, we filed suit against a former senior marketing employee and other defendants to recover approximately $10 million of funds we believe were misappropriated. A confidential settlement was reached with certain of these parties and the litigation continues as to others. It is unlikely that we will be able to recover all of the
funds from such former employee or the other defendants. While we maintain insurance coverage to protect us against such loss, our coverage was less than the amount of that loss and may be insufficient or inadequate to cover future losses.
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 seriouslyharm our business.
We rely on our mobile app to execute our business strategy. We are subject to general business regulations and laws, as well as federal and state regulations and laws specifically governing the internet and the use of mobile apps in particular. Existing and future laws and regulations may impede the growth of the internet or other online services and increase the cost of providing online services. These regulations and laws may involve taxes, tariffs, trade policies, privacy and data security, anti-spam, content protection, electronic contracts and communications, electronic signatures and consents, consumer protection and social media marketing. It is at times not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the internet and the use of mobile apps in particular, as the vast majority of these laws were adopted prior to the advent of the internet and the use of mobile apps and do not contemplate or address the unique issues raised by the internet. It is possible that general business regulations and laws, or those specifically governing the internet and the use of mobile apps in particular, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot guarantee that our practices have complied, currently comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business and decrease the use of our mobile app or website by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations.
Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand.
Our trade secrets, trademarks, copyrights, patents, know-how, and other intellectual property rights are important assets for us, in the United States and other jurisdictions. We rely on, and expect to continue to rely on, various agreements with our employees, independent contractors, consultants and third parties with whom we have relationships, as well as trademark, trade dress, domain name, copyright, and trade secret laws, to protect our brand and other intellectual property rights. Such agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology, and we may fail to consistently obtain, police and enforce such agreements. Additionally, various factors outside our control pose a threat to our intellectual property rights, as well as to our products, services and technologies. For example, we may fail to obtain effective intellectual property protection, or effective intellectual property protection may not be available in every country in which our products and services are accessible. Also, the efforts we have taken to protect our intellectual property rights may not be sufficient or effective, especially in foreign jurisdictions, and any of our intellectual property rights may be challenged, which could result in them being narrowed in scope or declared invalid or unenforceable. Despite our efforts to protect our proprietary rights, we cannot guarantee our intellectual property rights will be sufficient to protect against others offering products or services that are substantially similar to ours and compete with our business or that unauthorized parties may attempt to copy aspects of our technology and use information that we consider proprietary.
In addition to registered intellectual property rights such as trademark registrations, we rely on non-registered proprietary information and technology, such as trade secrets, confidential information, know-how and technical information. Certain information or technology that we endeavor to protect as trade secrets may not be eligible for trade secret protection in all jurisdictions, or the measures we undertake to establish and maintain such trade secret protection may be inadequate. In order to protect our proprietary information and technology, we rely in part on agreements with our employees, investors, independent contractors, contract counterparties and other third parties that place restrictions on the use and disclosure of this intellectual property. These agreements may not adequately
protect our trade secrets, these agreements may be breached, or this intellectual property, including trade secrets, may otherwise be disclosed or become known to our competitors, which would likely cause us to lose any competitive advantage resulting from this intellectual property. To the extent that our employees, independent contractors, contract counterparties or other third parties with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Current or future legal requirements may require us to disclose certain proprietary information or technology, such as our proprietary algorithms, to regulators or other third parties, including our competitors, which could impair or result in the loss of trade secret protection for such information or technology. The loss of trade secret protection could make it easier for third parties to compete with our products and services by copying functionality. In addition, any changes in, or unexpected interpretations of, intellectual property laws may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain protection of our trade secrets or other proprietary information could harm our business, results of operations, financial condition and prospects.
We have filed, and may continue in the future to file, applications to protect certain of our innovations and intellectual property. We do not know whether any of our applications will result in the issuance of a patent, trademark or copyright, as applicable, or whether the examination process will require us to narrow our claims or otherwise limit the scope of such intellectual property. In addition, we may not receive competitive advantages from the rights granted under our intellectual property. Our existing intellectual property, and any intellectual property granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing our rights to our intellectual property. Therefore, the exact effect of the protection of this intellectual property cannot be predicted with certainty. Because obtaining patent protection requires disclosing our inventions to the public, such disclosure may facilitate our competitors developing improvements to our innovations. In addition, given the costs, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations. Any failure to adequately obtain such patent protection, or other intellectual property protection, could later prove to adversely impact our business. In addition, other parties may independently develop similar or competing technologies designed around any patents or patent applications that we hold. Some of our products and technologies are not covered by any patent or patent application. A failure to timely seek patent protection on products or technologies generally precludes us from seeking future patent protection on these products or technologies.
We currently hold various domain names relating to our brand, including root.com, joinroot.com, rootinsurance.com and root-enterprise.com. Third parties have in the past registered domain names confusingly similar to domain names we currently hold, and our failure to protect our domain names could adversely affect our reputation and brand and make it more difficult for customers to find our website and our mobile app. We may be unable, without significant cost or at all, to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks and other proprietary rights.
We may be required to spend significant resources in order to monitor and protect our intellectual property rights, and some violations may be difficult or impossible to detect. Litigation to protect and enforce our intellectual property rights could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology againstunauthorized copying or use, as well as any costlylitigation or diversion of our management’s attention and resources, could impair the functionality of our platform, delay introductions of enhancements to our platform, result in our substituting inferior or more costly technologies into our platform or harm our reputation or brand. In addition, we may be required to license additional technology from third parties to develop and market new offerings or platform features, which may not be on commercially reasonable terms or at all and could adversely affect our ability to compete.
Although we take measures to protect our intellectual property, if we are unable to prevent the unauthorized use or exploitation of our intellectual property, the value of our brand, content, and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential customers may become confused, and our ability
to attract customers may be adversely affected. Any inability or failure to protect our intellectual property could adversely impact our business, results of operations, financial condition and prospects. While we take precautions designed to protect our intellectual property, it may still be possible for competitors and other unauthorized third parties to copy our technology and use our proprietary brand, content and information to create or enhance competing solutions and services, which could adversely affect our competitive position in our rapidly evolving and highly competitive industry. Some license provisions that protect againstunauthorized use, copying, transfer and disclosure of our technology may be unenforceable under the laws of certain jurisdictions and foreign countries. While we enter into confidentiality and invention assignment agreements with our employees and consultants and enter into confidentiality agreements with our third-party providers and contract counterparties, we cannot guarantee that these agreements will be effective in controlling access to, and use and distribution of, our products and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our offerings.
Some of our products and services contain open source software, which may pose particular risks to our proprietary software, products, and services in a manner that could have a negative effect on our business.
We use open source software in our products and services and anticipate that we will continue to use open source software in the future. Some open source software licenses require those who distribute open source software as part of their own software product to publicly disclose all or part of the source code of such software product or to make available any derivative works of the open source code on unfavorable terms or at no cost, and we may be subject to such terms. The terms of certain open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that open source software licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to provide or distribute our products or services. Additionally, we could face claims from third parties claiming ownership of, or demanding release of, the open source software or derivative works that we develop using such software, which could include our proprietary source code, or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to make our software source code freely available, purchase a costly license or cease offering the implicated products or services unless and until we can re-engineer such source code to eliminate use of such open source software. This re-engineering process would require us to expend significant additional research and development resources, and we may not be able to complete the re-engineering process successfully. In addition to risks related to license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, assurance of title or controls on the origin or operation of the open source software, which are risks that cannot be eliminated, and could, if not properly addressed, negatively affect our business. We have established processes to help alleviate these risks, including a review process for screening requests from our development teams for the use of open source software, but we cannot be sure that all of our use of open source software is in a manner that is consistent with our current policies and procedures, or will not subject us to liability. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a negative effect on our business, operating results, financial condition and prospects.
Claims by others that we infringed proprietary technology or other intellectual property rights could harm our business.
Companies in the telematics, internet and technology industries are frequently subject to litigation based on allegations of infringement or other violations of intellectual property rights. In addition, certain companies and rights holders seek to enforce and monetize patents or other intellectual property rights they own, have purchased, or have otherwise obtained. As we gain an increasingly high public profile, intellectual property rights claimsagainst us may become more frequent. From time to time, third parties have, and may in the future, assert claims of infringement of intellectual property rights against us. Although we believe that we have meritorious defenses, we cannot guarantee that we will be successful in defendingagainst these allegations or in reaching a business resolution that is satisfactory to us. Our competitors and others may now and in the future have significantly larger and more mature patent portfolios than us. In addition, future litigation may involve patent holding companies or other adverse patent owners who have no relevant product or service revenue and against whom our own patents may therefore provide little or no deterrence or protection. Many potential litigants, including some of our competitors and patent-holding companies, have the ability to dedicate substantial resources to the assertion of their
intellectual property rights. Any claim of infringement by a third party, even those without merit, could cause us to incur substantial costs defendingagainst the claim, could distract our management from our business and could require us to cease use of such intellectual property. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, we risk compromising our confidential information during this type of litigation. We may be required to pay substantial damages, royalties, licensing or other fees in connection with a claimant securing a judgment against us, we may be subject to an injunction or other restrictions that prevent us from using or distributing our intellectual property, or from operating under our brand, or we may agree to a settlement that prevents us from distributing our offerings or a portion thereof, which could adversely affect our business, results of operations, financial condition and prospects.
With respect to any intellectual property rights claim, we may have to seek out a license to continue operations found or alleged to violate such rights, which may not be available on favorable or commercially reasonable terms, or at all, and may significantly increase our operating expenses. Some licenses may be non-exclusive, and, therefore, our competitors may have access to the same technology licensed to us. If a third party does not offer us a license to its intellectual property on reasonable terms, or at all, we may be required to develop alternative, non-infringing technology, which could require significant time (during which we would be unable to continue to offer our affected offerings), effort and expense and may ultimately not be successful. Any of these events could adversely affect our business, results of operations, financial condition and prospects.
If our customers were to claim that the insurance policies they purchased failed to provide adequate or appropriate coverage, we could face claims that could harm our business, results of operations, financial condition and prospects.
Although we endeavor to provide adequate and appropriate coverage under each of our policies, customers could purchase policies that prove to be inadequate or inappropriate. Customers have from time to time made claims, and may continue to do so in the future, alleging that we or our appointed insurance producers failed in our responsibilities to provide them with the type or amount of coverage that they sought to purchase. We have settled some such claims in the past, and we could in the future be found liable for amounts significantly in excess of the policy limit, resulting in an adverse effect on our business, results of operations, financial condition and prospects. While we maintain errors and omissions insurance coverage to protect us against such liability, such coverage may be insufficient or inadequate, or may be unavailable in the future.
If we are unable to underwrite risks accurately or charge competitive yet profitable rates to our customers, our business, results of operations, financial condition and prospects will be adversely affected.
In general, the premiums for our insurance policies are established at the time a policy is issued and, therefore, before all of our underlying costs are known. The accuracy of our pricing depends on our ability to adequately assess risks, estimate losses and comply with state insurance regulations. Like other insurance companies, we rely on estimates and assumptions in setting our premium rates. We also utilize the data that we gather through our interactions with our customers and about our customers with their consent, as evaluated and curated by our technology-based pricing platform.
Establishing adequate premium rates is necessary, together with investment income, if any, to generate sufficient revenue to offset losses, LAE, and other costs. If 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 would adversely affect our business, results of operations, financial condition and prospects. Moreover, if we determine that our prices are too low, insurance regulations may preclude us from being able to cancel insurance contracts, non-renew customers, or raise premiums. Alternatively, we could set our premiums too high, which could reduce our competitiveness and lead to fewer customers and lower revenues, which would likely have a material adverse effect on our business, results of operations, financial condition and prospects.
Pricing involves the acquisition and analysis of historical loss data and the projection of future trends, loss costs and expenses, and inflation trends, among other factors, for each of our products in multiple risk tiers and many different markets. In order to accurately price our policies, we must:
• collect and properly analyze a substantial volume of data about our customers;
• develop, test and apply appropriate actuarial projections and rating formulas;
• review and evaluate competitive product offerings and pricing dynamics;
• closely monitor and timely recognize changes in trends; and
• project both frequency and severity of our customers’ losses with reasonable accuracy.
There are no guarantees that we be successful in implementing our pricing methodology accurately in accordance with our assumptions. Our ability to accurately price our policies is subject to a number of risks and uncertainties, including:
• insufficient, inaccurate or unreliable data;
• incorrect or incomplete analysis of available data;
• uncertainties generally inherent in estimates and assumptions;
• our failure to implement appropriate actuarial projections and rating formulas or other pricing methodologies;
• incorrect or incomplete analysis of the competitive environment;
• regulatory constraints on rate increases;
• our failure to accurately estimate investment yields and the duration of our liability for loss and LAE, as well as unanticipated court decisions, legislation or regulatory action; and
• unexpected or unanticipated changes in auto repair costs, auto parts prices, used car prices, labor and materials costs, tariffs, trade policies, rising medical costs, or changes in national or state healthcare laws or regulations.
To address the potential actual or perceived inadequacy of our current business model, we may be compelled to increase the amount allocated to cover policy claims, increase premium rates or adopt stricter underwriting standards, any of which would likely result in a decline in new business and renewals and, as a result, have a material adverse effect on our business, results of operations, financial condition and prospects.
Our insurance operating results have been, and will likely continue to be, materially adversely affected by severe weather or other catastrophic events, and climate change may be exacerbating these events and their impacts.
Our insurance operating results have periodically been, and in the future will likely continue to be, materially adversely affected by natural events, such as hurricanes, tornadoes, windstorms, floods, fires, hailstorms, and severe winter weather. The frequency, severity, duration, and geographic location and scope of such events are inherently unpredictable. Moreover, climate change may be contributing to the increase in frequency of severe weather events and other natural disasters, how long they last, and how much insured damage they cause, and may change where the events occur.
The extent of losses from a catastrophic event is a function of our exposure in the area affected by the event, the nature, severity, and duration of the event, and the extent of our excess of loss reinsurance that we have obtained with respect to such an event. As a result, an increase in the frequency, severity or duration, or unanticipated changes in geographic location or scope, of severe weather or other catastrophes could materially adversely affect our business, results of operations, financial condition and prospects.
We are subject to assessments and other surcharges from state guaranty funds from time to time, which may materially reduce our profitability.
We are subject to statutory property and casualty guaranty fund assessments in many states in which we do business. The purpose of a guaranty fund is to protect customers in a particular state by requiring that solvent
property and casualty insurers pay the insurance claims of insolvent insurers in such state. These guaranty associations generally pay these claims by assessing solvent insurers proportionately based on each insurer's share of voluntary premiums written in the state. During the year ended December 31, 2025, the amounts we contributed to such funds were immaterial; however, as we enter new markets, the amounts we are required to contribute may increase materially.
Maximum contributions required by law in any one year vary by state. We cannot predict with certainty the amounts of future assessments because they depend on factors outside our control, such as insolvencies of other insurance companies. Significant assessments due to a rise in insurance insolvencies could have a material adverse effect on our business, results of operations, financial condition and prospects.
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.
From time to time, we are subject to allegations, and are party to litigation and legal proceedings relating to our business operations. Litigation and other proceedings include complaints from or litigation by customers or reinsurers, related to allegedbreaches of contract or otherwise. We expect that as our market share increases, competitors may pursue litigation to require us to change our business practices or offerings and limit our ability to compete effectively.
As is typical in the insurance industry, we continually face risks associated with litigation of various types arising in the normal course of our business operations, including disputes relating to insurance claims under our policies as well as other general commercial and corporate litigation. Members of the insurance industry are periodically the target of class action lawsuits and other types of litigation, some of which involve claims for substantial or indeterminate amounts, and the outcomes of which are unpredictable. Claimsagainst insurers could be based on a variety of issues, including the sale of insurance policies and claim settlement practices. In addition, because we employ a technology platform to collect customer data, it is possible that customers, regulators or consumer groups could bring individual or class action claimsalleging that our methods of obtaining consent and collecting data and pricing risk are improper and/or impermissibly discriminatory. We cannot guarantee we will not be involved in such litigation in the future or what impact such litigation would have on our business. We have successfullydefendedagainst some class action lawsuits in the past, and settled others. If we were to be involved in future litigation and it was determined adversely, it could require us to pay significant damages or to change aspects of our operations, either of which would likely have a material adverse effect on our business. Even claims without merit can be time-consuming and costly to defend and may divert management’s attention and resources away from implementing our strategy and adversely affect our business, results of operations, financial condition and prospects. Additionally, routine lawsuits over claims that are not individually material could in the future become material if aggregated with a substantial number of similar lawsuits. In addition to increasing costs, a significant volume of customer complaints or litigation could also adversely affect our brand and reputation, regardless of whether such allegations have merit or whether we are liable. While we maintain excess of loss and insurance company professional liability insurance coverage to protect us against such liability, such coverage may be insufficient or inadequate, or may be unavailable in the future. We cannot predict the costs of defense, the costs of prosecution, insurance coverage or the ultimate outcome of litigation or other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation, and other proceedings may harm our business, results of operations, financial condition and prospects.
Our ability to utilize our net operating loss carryforwards may be limited.
As of December 31, 2025, we had federal income tax net operating losses, or NOLs, of approximately $1,284.7 million, and state and local income tax NOLs of approximately $487.3 million, available to offset our future taxable income, if any, prior to consideration of annual limitations that may be imposed under Section 382 of the Internal Revenue Code, or the Code, or otherwise. Of our federal and state and local NOLs, $629.6 million and $232.1 million of losses will begin to expire in tax years 2038 through 2046 and 2026 through 2045, respectively, and $655.1 million and $255.2 million, respectively, of losses can be carried forward indefinitely.
We may be unable to fully use our NOLs, if at all. Under Section 382 of 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. We have experienced ownership changes in the past, and we may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If we undergo a future ownership change, we may be prevented from fully utilizing our NOLs existing at the time of the ownership change prior to their expiration. Future regulatory changes could also limit our ability to utilize our NOLs. To the extent we are not able to offset future taxable income with our NOLs, our net income and cash flows may be adversely affected.
The Tax Cuts and Jobs Act, or the Tax Act, as modified by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, among other things, includes changes to United States federal tax rates and the rules governing NOL carryforwards. For federal NOLs arising in tax years beginning after December 31, 2017, the Tax Act as modified by the CARES Act limits a taxpayer’s ability to utilize non-P&C NOL carryforwards in taxable years beginning after December 31, 2020, to 80% of taxable income. In addition, federal non-P&C NOLs arising in tax years beginning after December 31, 2017, can be carried forward indefinitely, but carryback of NOLs are generally permitted to the prior five taxable years only for NOLs arising in taxable years beginning before January 1, 2021 and after December 31, 2017. Deferred tax assets for NOLs will need to be measured at the applicable tax rate in effect when the NOLs are expected to be utilized. This limitation on use of NOLs may significantly impact our ability to utilize our NOLs to offset taxable income in the future. In addition, for state income tax purposes, there may be periods during which the use of NOL carryforwards is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, California imposed limits on the usability of California state NOLs to offset taxable income in tax years beginning after 2019 and before 2023.
The manner in which we fund tax withholding obligations that will arise upon vesting of outstanding restricted stock awards may require us to use a substantial amount of cash, which would reduce our liquidity, or may result in sales of shares of our Class A common stock into the market, which could cause the market price of our Class A common stock to decline.
As of December 31, 2025, our executive officers and other employees held an aggregate of 1.3 million unvested equity awards, including up to a maximum of 0.6 million unvested equity awards that are scheduled to vest in the ordinary course during 2026. Tax withholding obligations arise upon vesting of equity awards and these obligations must be satisfied at the time they arise through cash payments remitted to the relevant tax authorities. To the extent we satisfy our tax withholding obligations with respect to these equity awards by withholding shares and remitting cash to the relevant tax authorities, the net cash payments due for taxes upon the vesting of such equity compensation awards is dependent on the price of our Class A common stock on the applicable vesting dates and could be substantial. Net tax withholding obligations will vary based upon, among other things: the price of our Class A common stock at the time of vesting; the applicable tax withholding rates then in effect; the number of employees electing to pay us an amount in cash, via a broker, sufficient to cover their applicable tax withholding obligations; whether we continue to arrange for withholding in respect of vesting; the number of equity awards that may be forfeited prior to vesting; the level of achievement with respect to performance- or market-based awards; and the timing and amounts of future equity awards.
We may seek to implement “sell-to-cover” arrangements with one or more holders of equity awards to minimize our expenditure of cash to satisfy tax withholding obligations. Under such arrangements, a broker would assist the holder in selling, in the open market, all or a portion of the shares subject to the equity award vesting and would remit a portion of the sales proceeds to us. We would in turn remit such amounts to the taxing authorities. Such “sell-to-cover” arrangements would enable us to satisfy tax withholding obligations and remain in a net neutral cash position, but would result in sales of shares of our Class A common stock into the market, and such sales could cause the market price of our Class A common stock to decline. In addition, if the price of our Class A common stock appreciates rapidly or experiences temporary dislocations that coincide with vesting dates, we may not be able to change our withholding methodology prior to vesting events.
Future obligations could have a negative impact on our liquidity and ability to use funds for operational purposes and could have a material adverse effect on our business, results of operations, financial condition and prospects.
Risks Related to Our Business Model and Industry
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.
Historically, insurers have experienced significant fluctuations in operating results due to competition, frequency and severity of catastrophic events, levels of capacity, adverselitigation trends, regulatory constraints, general economic conditions, and other factors. The supply of insurance is related to prevailing prices, the level of insured losses and the level of capital available to the industry that, in turn, may fluctuate in response to changes in rates of return on investments being earned in the insurance industry. As a result, the insurance business historically has been a cyclical industry characterized by periods of intense price competition due to excessive underwriting capacity, as well as periods when shortages of capacity increase premium levels. Demand for insurance depends on numerous factors, including the frequency and severity of catastrophic events, levels of capacity, the introduction of new capital providers and general economic conditions. All of these factors fluctuate and may contribute to price declines generally in the insurance industry.
We cannot predict with certainty whether market conditions will improve, remain constant or deteriorate. Negative market conditions may impair our ability to underwrite insurance at rates we consider appropriate and commensurate relative to the risk assumed. Additionally, negative market conditions could result in a decline in policies sold, an increase in the frequency of claims and premium defaults, and an uptick in the frequency of falsification of claims. If we cannot underwrite insurance at appropriate rates, our ability to transact business will be materially and adversely affected. Any of these factors could lead to an adverse effect on our business, results of operations, financial condition and prospects.
Retention of business written by us or through our Texas county mutual arrangement could expose us to potential losses.
We retain risk for business underwritten by our insurance company subsidiaries, including business assumed through our Texas county mutual arrangement. The determination to retain risk by reducing the amount of external reinsurance, by being unwilling or unable to obtain reinsurance, or by not purchasing reinsurance for a particular risk, customer segment or niche, is based on a complex variety of factors, including market conditions, strategy, pricing, availability of reinsurance, our capital levels, loss experience and tolerance. Historically, we have utilized reinsurance to expand our capacity to write more business than our insurance subsidiaries’ surplus would have otherwise supported. A determination by us to continue to retain risk increases our financial exposure to losses and significant losses could have a material adverse effect on our business, results of operations, financial condition, and prospects.
Reinsurance may be unavailable at current levels and prices, which may limit our ability to underwrite new policies. Furthermore, reinsurance subjects us to counterparty risk and may not be adequate to protect us againstlosses, which could have an adverse effect on our results of operations and financial condition.
Reinsurance is a contract by which an insurer, which may be referred to as the ceding insurer, agrees with a second insurer, called a reinsurer, that the reinsurer will cover a portion of the losses incurred by the ceding insurer in the event a claim is made under a policy issued by the ceding insurer, in exchange for a premium. Our regulated insurance subsidiaries obtain reinsurance to help manage exposure to property and casualty insurance risks.
Although our reinsurance counterparties are liable to us according to the terms of the reinsurance treaties, we remain primarily liable to our policyholders as the direct insurers on all risks reinsured. As a result, reinsurance does not eliminate the obligation of our regulated insurance subsidiary to pay all claims, and we are subject to the risk that one or more of our reinsurers will be unable or unwilling to honor its obligations, that the reinsurers will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts.
We are also subject to the risk that, under applicable insurance laws and regulations, we may not be able to take credit for the reinsurance on our financial statements and instead would be required to hold separate admitted assets as reserves to cover claims on the risks that we have ceded to the reinsurer. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years. At such time, we may have no legal ability to recover what is due to us under our agreement with such reinsurers. Any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success.
Market conditions beyond our control impact the availability and cost of the reinsurance we purchase. No guarantee can be made that reinsurance will remain continuously available to us to the same extent and on the same terms and rates as is currently available, as such availability depends in part on factors outside of our control. Market forces and external factors, such as significant losses from hurricanes or terrorist attacks or an increase in capital and surplus requirements, impact the availability and cost of the reinsurance we purchase. If we were unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient at acceptable prices, we would have to either accept an increase in our catastrophe exposure, reduce our insurance underwritings, or develop or seek other alternatives.
The unavailability of acceptable reinsurance protection would have a materially adverse impact on our business model, which depends on reinsurance companies to absorb any unfavorable variance from the level of losses anticipated at underwriting. If we are unable to obtain adequate reinsurance at reasonable rates, we would have to increase our risk exposure or reduce the level of our underwriting commitments, each of which would have a material adverse effect upon our business and profitability. Alternatively, we could elect to pay higher than reasonable rates for reinsurance coverage, which would have a material adverse effect upon our profitability unless policy premium rates could be raised, in most cases subject to approval by state regulators, to offset this additional cost.
Reinsurance subjects us to risks of our reinsurers and may not be adequate to protect us againstlosses arising from ceded insurance, which could have an adverse effect on our results of operations and financial condition.
The collectability of reinsurance recoverables is subject to uncertainty arising from a number of factors, including changes in market conditions, whether insured losses meet the qualifying conditions of the reinsurance contract and whether reinsurers, their affiliates, or certain regulatory bodies have the financial capacity and willingness to make payments under the terms of a reinsurance treaty or contract. Any disruption, volatility and uncertainty in the financial reinsurance markets may decrease our ability to access such markets on favorable terms, or at all. In addition, we are subject to the risk that one or more of our reinsurers will not honor its obligations, that the reinsurers will not pay in a timely fashion, or that our losses are so large that they exceed the limits inherent in our reinsurance contracts, limiting recovery. Reinsurers may become financially unsound by the time that they are called upon to pay amounts due, which may not occur for many years. At such time, we may have no legal ability to recover what is due to us under our agreement with such reinsurer. For instance, certain reinsurers, including reinsurers utilized by us, have become financially unsound in the past. In addition, any disputes with reinsurers regarding coverage under reinsurance contracts could be time consuming, costly, and uncertain of success. Our inability to collect a material recovery from a reinsurer could have a material effect on our business, results of operations, financial condition and prospects.
We are subject to extensive regulation, and potential further restrictive regulation may increase our operating costs and limit our growth.
We are subject to extensive laws, regulations and various approvals by the individual state insurance departments in the states in which we transact business and the CIMA as it pertains to our captive reinsurance company. These laws, regulations and approvals are complex and subject to change. Changes may sometimes lead to additional expenses, increased legal exposure, increased required reserves or capital and surplus, and additional limits on our ability to grow or to achieve targeted profitability. 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”; approval of policy forms and premiums; approval of intercompany service agreements and reinsurance agreements; statutory and risk-based capital solvency requirements, including the minimum capital and
surplus our regulated insurance subsidiary must maintain; restrictions on, and regulatory approval requirements for, the payment of dividends, or other capital distributions, by and among our insurance subsidiaries; and establishing minimum reserves that insurance carriers must hold to pay projected insurance claims. To date, our subsidiary boards of directors have declared dividends on an intercompany basis only, in the exercise of their respective discretion and subject to regulatory approval, after considering a variety of factors, including our results of operations, capital and liquidity needs, and applicable regulatory requirements.
To the extent we decide to expand our current product offerings to include other insurance products, this would subject us to additional regulatory requirements and scrutiny in each state in which we elect to offer such products. Most states have also adopted legislation prohibiting unfair methods of competition and unfair or deceptive acts and practices in the business of insurance as well as prohibiting unfairclaims practices. Prohibited practices include, but are not limited to, misrepresentations, false advertising, coercion, disparaging other insurers, unfairclaims settlement procedures, and discrimination in the business of insurance. Noncompliance with any of such state statutes may subject us to legal and regulatory action by the relevant state insurance regulator, and possibly private litigation. States also regulate various aspects of the contractual relationships between insurers and independent agents as well as, in certain states, insurers and third-party administrators.
Although state insurance regulators have primary responsibility for administering and enforcing insurance regulations in the United States, such laws and regulations are further administered and enforced by a number of additional governmental authorities, each of which exercises a degree of interpretive latitude, including state securities administrators; state attorneys general, as well as federal agencies including the SEC, the Financial Industry Regulatory Authority, the Federal Reserve Board, the Federal Insurance Office, the United States Department of Labor, the United States Department of Justice and the National Labor Relations Board. Consequently, compliance with any particular regulator’s or enforcement authority’s interpretation of a legal issue may not result in compliance with another’s interpretation of the same issue, particularly when compliance is judged in hindsight. Such regulations or enforcement actions are often responsive to current consumer and political sensitivities, which may arise after a major event. Such rules and regulations may result in rate suppression, limit our ability to manage our exposure to unprofitable or volatile risks, or lead to fines, premium refunds or other adverse consequences. The federal government also may regulate aspects of our businesses, such as the protection of consumer confidential information or the use of consumer insurance (credit) scores to underwrite and assess the risk of customers under the Fair Credit Reporting Act, or FCRA. Among other things, the FCRA requires that insurance companies (i) have a permissible purpose before obtaining and using a consumer report for underwriting purposes and (ii) comply with related notice and recordkeeping requirements. Failure to comply with federal requirements under the FCRA or any other applicable federal laws could subject us to regulatory fines and other sanctions. In addition, given our short operating history and rapid rate of growth, we are more vulnerable to regulators identifying errors in the policy forms we use, the rates we charge, or with respect to our customer communications, and consumer-initiated litigation, including class action litigation, pursuant to regulations providing a private right of action. As a result of such noncompliance, regulators have in the past imposed non-material fines and penalties and could in the future impose fines, rebates or other penalties, including cease-and-desist orders with respect to our operations in an individual state, or all states, until the identified noncompliance is rectified.
In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue or the scope of a regulator’s authority may change over time, or may change due to a court order or judgment, to our detriment. There is also a risk that changes in the overall legal environment may cause us to change our views regarding the actions we need to take from a legal risk management perspective. This would necessitate changes to our practices that may adversely impact our business. Furthermore, in some cases, these laws and regulations are designed to protect or benefit the interests of a specific constituency rather than a range of constituencies. State insurance laws and regulations are generally intended to protect the interests of purchasers or users of insurance products, rather than the holders of securities that we issue. For example, state insurance laws are generally prescriptive with respect to the content and timeliness of notices we must provide policyholders. Failure to comply with other state insurance laws and regulations in the future could also have a material adverse effect on our business, operating results, financial condition and prospects. As another example, the federal government could pass a law expanding its authority to regulate the insurance industry, expanding federal regulation over our business
to our detriment. These laws and regulations may limit our ability to grow, raise additional capital or improve the profitability of our business.
Our ability to retain state licenses depends on our ability to meet licensing requirements established by the NAIC and adopted by each state, subject to variations across states. If we are unable to satisfy the applicable licensing requirements of any particular state, we could lose our license to do business in that state, which would result in the temporary or permanent cessation of our operations in that state. Alternatively, if we are unable to satisfy applicable state licensing requirements, we may be subject to additional regulatory oversight, have our license suspended, or be subject to the seizure of assets. Any such events could adversely affect our business, results of operations, financial condition and prospects. See the sections titled “Regulation — Insurance Regulation”, “Regulation — Insurance Holding Company Regulation” and “Regulation — Required Licensing” in Item 1. Business for additional information.
A regulatory environment that requires rate increases to be approved or that can dictate underwriting practices, mandate participation in loss sharing arrangements, or require insurers to lower rates and/or disgorge profits may adversely affect our business, results of operations, financial condition and prospects.
The regulation of insurance frequently changes as regulators respond to new, emerging, or perceived issues within the insurance market. From time to time, political events and pressures also affect the insurance market, including efforts to suppress rates to a level that may not allow us to reach targeted levels of profitability. Regulatory authorities may impose rate rollbacks, require premium refunds to policyholders or otherwise challenge or delay our efforts to raise rates even when rate increases may be actuarially justified. Such challenges affect our ability to obtain approval for rate changes necessary to achieve targeted levels of profitability and returns on equity and may result in our pricing being inadequate, which could adversely impact our underwriting results. This could also negatively impact our cash flows and deteriorate our financial condition.
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. Certain states also require insurers to offer coverage to all consumers, often restricting an insurer’s ability to charge the price it might otherwise charge. In these markets, we may be compelled to underwrite significant amounts of business at lower-than-desired rates, possibly leading to an unacceptable return on equity. Laws and regulations of many states also limit an insurer’s ability to withdraw from one or more lines of insurance there, except pursuant to a plan that is approved by the state insurance department. Additionally, as addressed above, certain states require insurers to participate in guaranty funds for impaired or insolvent insurance companies. These funds periodically assess lossesagainst all insurance companies doing business in the state. Our business, results of operations, financial condition and prospects could be adversely affected by any of these factors.
State insurance regulators impose additional reporting requirements regarding enterprise risk on insurance holding company systems, and we must comply as an insurance holding company.
In the past decade, various state insurance regulators have increased their focus on risks within an insurer’s holding company system that may pose enterprise risk to the insurer. For example, an insurance holding company system’s ultimate controlling person is required to annually submit an “enterprise risk report” to its primary state insurance regulator that identifies activities, circumstances or events involving one or more affiliates of an insurer that, if not remedied properly, are likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole. On behalf of Root Insurance Company, Root Property & Casualty, and Root Florida, Root, Inc. submitted its annual enterprise risk report with Ohio and Florida on May 30, 2025, as required by applicable laws. Other changes include the requirement that a controlling person submit prior notice to its supervisory insurance regulator of a divestiture of control, having detailed minimum requirements for cost sharing and management agreements between an insurer and its affiliates and expansion of the agreements between an insurer and its affiliates to be filed with its supervisory insurance regulator.
In addition, we are subject to Own Risk and Solvency Assessment, or ORSA, requirements, which require an insurer to conduct an internal assessment of material and relevant risks associated with its business plans and the sufficiency of its capital and liquidity under normal and stressed conditions. ORSA summary reports must be filed
annually with the lead state insurance regulator. We conduct an ORSA review annually, and we last submitted our report to Ohio on April 2, 2025. There is also risk that insurance holding company systems may become subject to group capital requirements at the holding company level. The NAIC has developed a group capital calculation covering all entities in our insurance company group for us in solvency monitoring activities. The group capital calculation provides regulators with an additional analytical tool for conducting supervisory activities. We filed a group capital calculation in 2025.
We rely on technology and intellectual property from third parties to operate our business, including for pricing and underwriting our insurance policies, handling claims and maximizing automation, the unavailability or inaccuracy of which could limit the functionality of our products and disrupt our business.
Our business is highly dependent upon our ability to perform necessary business functions in an efficient and uninterrupted manner. The shut-down, disruption, degradation or unavailability of one or more of our systems or facilities, or the inability of our employees to communicate in a largely work-from-home environment, for any reason could significantly impair our ability to perform critical business functions on a timely basis. In addition, many of our critical business systems interface with and depend on third-party systems.
We currently offer our products through our website and mobile app using third-party data centers and a leading provider of cloud infrastructure services. We do not have control over the operations or facilities of these third parties. Such facilities are vulnerable to damage or interruption from human error, intentionalbad acts, earthquakes, floods, fires, severe storms, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures, and similar events, many of which are beyond our control, any of which could disrupt our services, prevent customers from accessing our products, destroy customer data, or prevent us from being able to continuously back up and record data. In the event of significant physical damage to one of these data centers, it may take a significant period of time to achieve full resumption of our services, and our disaster recovery planning may not account for all eventualities. If the data centers we utilize or related systems fail to operate properly, or become disabled even for a brief period of time, we could suffer financial loss, a disruption of our business, liability to customers or damage to our reputation. We may not be able to easily switch our operations to another cloud or data center provider if there are disruptions or interference, and, even if we do switch our operations, other cloud and data center providers are subject to the same risks. Moreover, negative publicity arising from these types of disruptions could damage our reputation and may adversely impact the use of our website and mobile app.
We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all.
Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms or prices. In either case, we would be required to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. We may not carry sufficient business interruption insurance, it may not be sufficient to compensate us for the potentially significant losses, including the potential harm to the future growth of our business that may result from interruptions in our services or products. Any of these results could harm our business, results of operations, financial condition and prospects.
We are subject to payment processing risk and risk related to the availability of consumer credit.
We currently rely exclusively on one third-party vendor to provide payment processing services, including the processing of payments from credit cards and debit cards, and our business would be disrupted if this vendor refuses to provide these services to us and we are unable to find a suitable replacement on a timely basis or at all. In addition, if the availability of consumer credit decreases, including as a result of the imposition of caps on credit card interest rates as has been proposed, customers may lose access to payment methods and we may experience difficulty collecting payments. If we or our processing vendor fail to maintain adequate systems for the authorization and processing of credit card transactions, it could cause one or more of the major credit card companies to disallow our continued use of their payment products. The failure to do so could result in contractual fines or disruption of our ability to receive credit card payments, harming our reputation and financial condition. Data security standards for merchants and service providers that accept credit card payments are prescribed by the PCI Security Standards Council, or PCI, an independent body formed by an association of the major credit card vendors. These standards are intended to promote a common set of data security measures to help ensure the safe handling of sensitive information by companies accepting credit card payments. The PCI data security standards, however, will likely evolve over time to address emerging payment security risks and other issues requiring additional compliance efforts by us. Our intention is to maintain compliance with PCI’s data security standards, but such compliance cannot be guaranteed.
The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly sophisticated, seeking to obtain unauthorized access to or exploitweaknesses that may exist in payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, including the Payment Card Industry Data Security Standard, a self-regulatory standard that requires companies that process payment card data to implement certain data security measures, or if payment-related data are compromised due to a breach of data, we may be liable for significant costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. If we fail to adequately control fraudulent credit card transactions, we may face civil liability, diminished public perception of our security measures, and significantly higher credit card-related costs, each of which, in addition to other disruptions in our ability to accept or collect credit card payments, could harm our business, results of operations, financial condition and prospects.
Our success depends upon the insurance industry continuing to move online at its current pace and the continued growth and acceptance of online and mobile app-based products and services as effective alternatives to traditional offline products and services.
We provide automobile and renters insurance products primarily through our websites, mobile app, and partnership channel, including our embedded insurance product and our independent agent platform, which compete with traditional offline insurance counterparts. We believe that the continued growth and acceptance of online products and services, as well as those offered through mobile devices generally will depend, to a large extent, on the continued growth in commercial use of the internet and mobile apps, and the continued migration of traditional offline markets and industries online.
Purchasers of insurance may develop the perception that purchasing insurance products online or through a mobile app is not as effective as purchasing such products through a broker or other traditional offline methods, and the insurance market may not migrate online as quickly as (or at the levels that) we prefer. Moreover, if, for any reason, an unfavorable perception generally develops that telematics, mobile engagement, a technology-based platform, AI and/or bots are less efficacious than traditional offline methods of purchasing insurance, underwriting, claims processing, and other functions that do not use data automation, AI and/or bots, or that our processes lead to unfair outcomes, our business, results of operations, financial condition and prospects could be adversely affected.
Our actual incurred losses and LAE may be greater than our loss and LAE reserves, which could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our financial condition and results of operations depend on our ability to accurately price risk and assess potential losses and LAE under the terms of the policies we underwrite. Reserves do not represent an exact calculation of the unpaidclaims liability. Rather, reserves represent an estimate of what the expected ultimate settlement and administration of claims will cost, and the ultimate liability may be greater or less than the current estimate. In our industry, there is always a risk that reserves may prove inadequate or redundant since we will likely misestimate the exact cost of claims and claims administration.
We base our estimates on our assessment of known facts and circumstances, as well as estimates of future trends in claim severity, claim frequency, judicial theories of liability, and other factors. These variables are affected by both internal and external events that could increase our exposure to losses, including changes in actuarial projections, claims handling procedures, inflation, severe weather, economic and judicial trends and legislative and regulatory changes. Moreover, changing climate conditions, whether due to global climate change or other causes, may increase how often severe weather events and other natural disasters occur, how long they last, and how much insured damage they cause, and may change where events occur. We regularly monitor reserves using new information on reported claims and a variety of statistical techniques to update estimates. Our estimates could prove to be inadequate, and this underestimation could have a material adverse effect on our business, results of operations, financial condition and prospects.
Recorded claim reserves, including case reserves, salvage and subrogation and incurred but not reported, or IBNR, claims reserves, are based on our estimates of losses after considering known facts and interpretations of the circumstances, including settlement agreements. Additionally, models are used that rely on the assumption that past loss development patterns will persist into the future. Internal factors are considered including our experience with similar cases, actual claims paid, historical trends involving claim payment patterns, pending levels of unpaidclaims, loss management programs, product mix, state mix, contractual terms, industry payment and reporting patterns, changes in claim reporting, and settlement practices. External factors are also considered, such as court decisions, as well as changes in law and litigation imposing unintended coverage. We also consider benefits, such as requiring the availability of multiple limits for a single loss occurrence. Regulatory requirements and economic conditions are also considered.
Since reserves are estimates of the unpaid portion of losses and expenses for events that have occurred, including IBNR losses, the establishment of appropriate reserves, including reserves for catastrophes, is an inherently uncertain and complex process that is regularly refined to reflect modern estimation processes and practices. The ultimate cost of losses may vary materially from recorded reserves and such variance may adversely affect our business, results of operations, financial condition and prospects as the reserves and reinsurance recoverables are reestimated.
If any of our insurance reserves should prove to be inadequate for the reasons discussed above, or for any other reason, we will be required to increase reserves, resulting in a reduction in our net income and stockholders’ equity in the period in which the deficiency is identified. Future loss experience substantially in excess of established reserves could also have a material adverse effect on future earnings and liquidity and financial rating, which could affect our ability to attract new business or to retain existing customers.
Performance of our investment portfolio is subject to a variety of investment risks that may adversely affect our financial results.
Our results of operations depend, in part, on the performance of our investment portfolio. We seek to hold a diversified portfolio of investments in accordance with our investment policy, which is routinely reviewed by the Audit, Risk and Finance Committee. However, our investments are subject to general economic and market risks as well as risks inherent to particular securities and classes of securities.
Our primary market risk exposures are to changes in interest rates. See the section titled “Quantitative and Qualitative Disclosures about Market Risk” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. In recent years, interest rates have been at or near historic lows although rates
have been slightly higher of late. A protracted low interest rate environment would place pressure on our net investment income, particularly as it relates to fixed income securities and short-term investments, which, in turn, may adversely affect our operating results. Future increases in interest rates could cause the values of our fixed income securities portfolios to decline, with the magnitude of the decline depending on the maturity of the securities included in our portfolio and the amount by which interest rates increase. Some fixed income securities have call or prepayment options, which create possible reinvestment risk in declining rate environments. Other fixed income securities, such as asset-backed securities, carry prepayment risk or, in a rising interest rate environment, may not prepay as quickly as expected.
The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to deterioration in the financial condition of one or more issuers of the securities we hold, or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Downgrades in the credit ratings of fixed maturities also have a significant negative effect on the market valuation of such securities.
Such factors could reduce our net investment income and result in realized investment losses. Our investment portfolio is subject to increased valuation uncertainties when investment markets are illiquid. The valuation of investments is more subjective when markets are illiquid, thereby increasing the risk that the estimated fair value (i.e., the carrying amount) of the securities we hold in our portfolio does not reflect prices at which actual transactions would occur.
Risks for all types of securities are managed through the application of our investment policy, which establishes investment parameters that include, but are not limited to, maximum percentages of investment in certain types of securities and minimum levels of credit quality, which we believe are within applicable guidelines established by the NAIC. The maximum percentage and types of securities we may invest in are subject to insurance laws and regulations, which may and do change. 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 such investments.
Although we seek to preserve our capital, we cannot guarantee that our investment objectives will be achieved and results may vary substantially over time. In addition, although we seek to employ investment strategies that are not correlated with our insurance and reinsurance exposures, losses in our investment portfolio may occur at the same time as underwriting losses and, therefore, exacerbate the adverse effect of the losses on us.
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.
We rely on our ability to access our cash accounts at banks and other financial institutions to operate our business. If we are unable to access the cash in those accounts as needed, whether due to our own systems’ difficulties, an institution-specific issue at the bank or financial institution (such as a bank failure, cybersecurity incident, severe weather or other catastrophe impacting their operations), a broader disruption in banking, financial or wire transfer systems, or otherwise, our ability to pay insurance claims and other financial obligations when due and otherwise operate our business could be materially adversely affected. In the recent past, certain banks, including a bank utilized by the Company, have failed and depositors, including the Company, were unable to access funds in those banks for a period of time. Likewise, our investment portfolios are subject to risks inherent in the nation’s and world’s capital markets, including the United States continuing to honor its outstanding debt and other obligations. Any disruption in the functioning of those markets or in our ability to liquidate investments or specific categories of investments on favorable terms when desired, or a default by the United States in its obligations, could impair our ability to pay claims or other financial obligations when due and could result in a significant decline in the value of our investment portfolio and have a material adverse impact on our cash flows and capital position. Any such event or series of such events could also result in significant operational difficulties, reputational harm and adverse actions by regulators and have a material adverse effect on our business, results of operations, financial condition and prospects.
Unexpected changes in the interpretation of our coverage or provisions, including losslimitations and exclusions, in our policies could have a material adverse effect on our financial condition and results of operations.
There can be no guarantees that specifically negotiated losslimitations or exclusions in our policies will be enforceable in the manner we or our customers intend, or at all. As industry practices and legal, judicial, social, and other conditions change, unexpected and unintended issues related to claims and coverage may emerge. For example, many of our policies limit the period during which a customer may bring a claim, which may be shorter than the statutory period under which such claims can be brought against our customers. While these limitations and exclusions help us assess and mitigate our loss exposure, it is possible that a court or regulatory authority could nullify or void a limitation or exclusion, or legislation could be enacted modifying or barring the use of such limitations or exclusions. These types of governmental actions could result in higher than anticipated losses and LAE, which could have a material adverse effect on our business, results of operations, financial condition or prospects. In addition, court decisions, such as the 1995 Montrose decision in California, could read policy exclusions so as to expand coverage, thereby requiring insurers to create and write new exclusions. Under insurance laws, the insurer typically has the burden of proving an exclusion applies and any ambiguities in the terms of a losslimitation or exclusion provision are typically construed against the insurer. These issues may adversely affect our business by either broadening coverage beyond our underwriting intent, by increasing the frequency or severity of claims or both. In some instances, these changes may not become apparent until sometime after we have issued insurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a contract is issued and may subject us to aggregated class action litigation.
Risks Related to Ownership of Our Class A Common Stock
Failure to meet the continued listing requirements of Nasdaq could result in delisting of our Class A common stock, which in its turn would negatively affect the price of our Class A common stock and limit investors’ ability to trade in our common stock.
Our common stock trades on Nasdaq. Nasdaq rules impose certain continued listing requirements, including the minimum $1 bid price, corporate governance standards and number of public stockholders. If we fail to meet these continued listing requirements, Nasdaq may take steps to delist our Class A common stock. If our Class A common stock is delisted from The Nasdaq Global Select Market, we could face significant material adverse consequences, including:
• a limited availability of market quotations for our Class A common stock;
• a reduced liquidity with respect to our Class A common stock;
• a determination that shares of our Class A common stock are a “penny stock,” which will require broker-dealers trading in our Class A common stock to adhere to more stringent rules, possibly resulting in a reduced level of trading activity in the secondary trading market for our Class A common stock;
• a limited amount of news and analyst coverage for our Company; and
• a limited ability to issue additional securities or obtain additional financing in the future.
The dual class structure of our common stock will have the effect of concentrating voting control with our executive officers, directors and their affiliates, which will limit your ability to influence the outcome of important transactions.
Our Class B common stock has ten votes per share and our Class A common stock has one vote per share. As of February 18, 2026, holders of our Class B common stock collectively beneficially own shares representing approximately 55.4% of the voting power of our outstanding capital stock. Our directors and executive officers and their affiliates collectively beneficially own, in the aggregate, shares representing approximately 34.3% of the voting power of our outstanding capital stock. As a result, the holders of our Class B common stock are able to exercise considerable influence over matters requiring stockholder approval, including the election of directors and approval
of significant corporate transactions, such as a merger or other sale of our company or our assets, even if their stock holdings represent less than 50% of the outstanding shares of our capital stock. This concentration of ownership limits the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests. This control may adversely affect the market price of our Class A common stock.
Further, future transfers by holders of our Class B common stock will generally result in those shares converting into shares of our Class A common stock, subject to limited exceptions, such as certain transfers effected for tax or estate planning purposes. The conversion of shares of our Class B common stock into shares of our Class A common stock will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock, including our directors and executive officers and their affiliates, who retain their shares in the long term.
Applicable insurance laws may make it difficult to effect a change of control.
Under applicable state insurance laws and regulations, no person may acquire “control” of an insurer until written approval is obtained from the state insurance commissioner. Applicable law provides for a rebuttable presumption of “control” by any person which owns or acquires, directly or indirectly, 10% or more of the voting stock of the insurance company, and a person must seek regulatory approval from the superintendent of the supervisory DOI prior to acquiring direct or indirect “control” of an insurer by filing a Form A Statement Regarding the Acquisition of Control of or Merger with a Domestic Insurer, or Form A. As part of this Form A, 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. Would-be acquirers may find these requirements burdensome, which could deter potential acquisition proposals and may serve to delay or prevent change of control transactions, including transactions that some or all of the stockholders might consider to be desirable. These requirements may also inhibit our ability to acquire an insurance company should we wish to do so in the future.
We do not intend to pay dividends on our Class A common stock so any returns will be limited to the value of our stock.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Additionally, we are a holding company that transacts a majority of our business through operating subsidiaries. Consequently, our ability to pay dividends to stockholders is largely dependent on receipt of dividends and other distributions from our subsidiaries. As addressed above, applicable insurance laws restrict the ability of our regulated insurance subsidiaries to declare extraordinary stockholder dividends and require insurance companies to maintain specified levels of statutory capital and surplus. Insurance regulators have broad powers to prevent reduction of statutory surplus to inadequate levels, and there is no guarantee that dividends of the maximum amounts calculated under any applicable formula would be permitted. State insurance regulatory authorities that have jurisdiction over the payment of dividends by our regulated insurance subsidiary may in the future adopt statutory provisions more restrictive than those currently in effect. Any return to stockholders will therefore be limited to any appreciation of their stock.
As a public company, we are subject to more stringent federal and state law requirements. We incur significant increased costs as a result of operating as a public company, and our management devotes substantial time to compliance initiatives.
As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of Nasdaq, and other applicable securities rules and regulations. Compliance with these rules and regulations has increased, and may continue to increase, our legal, accounting, investor relations, financial and other costs and expenses, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. In addition, the Sarbanes-Oxley Act and rules subsequently implemented by the SEC and Nasdaq have imposed various
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. Stockholder activism, the current political environment and the current high level of United States government intervention and regulatory reform may also lead to substantial new regulations and disclosure obligations, which may in turn lead to additional compliance costs and impact the manner in which we operate our business in ways we do not currently anticipate. Our management and other personnel devote a substantial amount of time to comply with these requirements. Moreover, these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. We cannot predict or estimate the amount or timing of additional costs we may incur to respond to these requirements. Being a public company and the associated rules and regulations make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain adequate coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our Audit, Risk and Finance Committee, on our Compensation Committee, and as qualified executive officers.
Actions and changing expectations from investors, clients, regulators and our employees with respect to environmental, social and governance matters may impose additional costs on us, impact our access to capital, or expose us to new or additional risks.
Changing expectations, including from governmental organizations, investors, advisory firms, employees and clients, on environmental, social and governance matters, such as environmental stewardship, climate change, diversity, equity and inclusion, pay equity, racial justice, workplace conduct and cybersecurity and data privacy, may result in increased costs (including but not limited to increased costs related to compliance and stakeholder engagement), impact our reputation, or otherwise affect our business performance. Conflicting environmental, social and governance policies within jurisdictions, such as between federal and some state policies in the United States, is leading to a complex and fragmented regulatory environment, which may be difficult to navigate, and we may not effectively anticipate or respond to regulatory changes. Negative public perception, adverse publicity or negative comments in social media, whether accurate or inaccurate, could damage our reputation or harm our relationships with regulators, investors and the communities in which we operate, if we do not, or are not perceived to, adequately address these issues, including if we fail to demonstrate progress towards any current or future environmental, social and governance goals. Any harm to our reputation could negatively impact employee engagement and retention and the willingness of customers to do business with us. We could also incur additional costs and require additional resources to monitor, report, and comply with various environmental, social and governance practices.
In addition, a variety of organizations have developed ratings to measure the performance of companies on environmental, social and governance topics, and the results of some of these assessments are widely publicized. Such ratings are used by certain investors to inform their investment and voting decisions. In addition, many investors have created their own proprietary ratings that inform their investment and voting decisions. Unfavorable ratings of the Company or our industry, as well as omission of inclusion of our stock into environmental, social and governance-oriented investment funds may lead to negative investor sentiment and the diversion of investment to other companies or industries, which could have a negative impact on our stock price and our access to and cost of capital.
If we fail to maintain proper and effective internal control over financial reporting, our ability to produce accurate and timely financial statements could be impaired, investors may lose confidence in our financial reporting and the trading price of our Class A common stock may decline.
Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report by our management on our internal control over financial reporting, including an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with GAAP. Our management does not expect that our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable assurance, not absolute assurance, that the control system’s objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company will have been detected.
There can be no assurance that there will not be material weaknesses in our internal control over financial reporting in the future. Any failure to maintain internal control over financial reporting could severely inhibit our ability to accurately report our financial condition, results of operations or cash flows. If we are unable to conclude that our internal control over financial reporting is effective in the future, or if our independent registered public accounting firm determines that we have a material weakness in our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our Class A common stock could decline and we could be subject to sanctions or investigations by Nasdaq, the SEC or other regulatory authorities. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to capital markets.
To comply with the Sarbanes-Oxley Act, the requirements of being a reporting company under the Exchange Act and any complex accounting rules in the future, we may need to upgrade our information technology systems; implement additional financial and management controls, reporting systems and procedures; and hire additional accounting and finance staff. If we are unable to hire the additional accounting and finance staff necessary to comply with these requirements, we may need to retain additional outside consultants. If we or our auditors are unable to conclude that our internal control over financial reporting is effective, investors may lose confidence in our financial reporting and the trading price of our Class A common stock may decline.
Provisions in our corporate charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a merger, acquisition or other change in control of us that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions also could limit the price that investors might be willing to pay in the future for shares of our Class A common stock, thereby depressing the market price of our Class A common stock. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Among other things, these provisions:
• establish a classified board of directors such that not all members of the board are elected at one time;
• allow the authorized number of our directors to be changed only by resolution of our board of directors;
• limit the manner in which stockholders can remove directors from the board;
• establish advance notice requirements for stockholder proposals that can be acted on at stockholder meetings and nominations to our board of directors;
• require that stockholder actions must be effected at a duly called stockholder meeting and prohibit actions by our stockholders by written consent;
• prohibit our stockholders from calling a special meeting of our stockholders;
• authorize our board of directors to issue preferred stock without stockholder approval, which could be used to institute a stockholder rights plan, or so-called “poison pill,” that would work to dilute the stock
ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors; and
• require the approval of the holders of at least 66 2⁄3% of the votes that all our stockholders would be entitled to cast to amend or repeal certain provisions of our charter or bylaws.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, or DGCL, which prohibits a person who owns 15% or more of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired 15% or more of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our Class A common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are willing to pay for our stock.
Claims for indemnification by our directors and officers may reduce our available funds to satisfysuccessful third-party claimsagainst us and may reduce the amount of money available to us.
Our amended and restated certificate of incorporation and amended and restated bylaws provide that we will indemnify our directors and officers, in each case, to the fullest extent permitted by the DGCL. The DGCL provides that directors of a corporation will not be personally liable for monetary damages for any breach of fiduciary duties as directors, except liability for:
• any breach of the director’s duty of loyalty to the corporation or its stockholders;
• any act or omission not in good faith or that involves intentionalmisconduct or a knowing violation of law;
• unlawful payments of dividends or unlawful stock repurchases or redemptions; or
• any transaction from which the director derived an improper personal benefit.
Such limitation of liability does not apply to liabilities arising under federal securities laws and does not affect the availability of equitable remedies such as injunctive relief or rescission.
Our amended and restated bylaws provide that we are required to indemnify our directors and officers to the fullest extent permitted by the DGCL and may indemnify our other employees and agents. Our amended and restated bylaws also provide that, on satisfaction of certain conditions, we will advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of the DGCL. We have entered and expect to continue to enter into agreements to indemnify our directors and executive officers. With certain exceptions, these agreements provide for indemnification for related expenses, including attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in connection with any action, proceeding or investigation. We believe that these amended and restated certificate of incorporation and amended and restated bylaws provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers.
While we maintain directors’ and officers’ liability insurance, such insurance may not be adequate to cover all liabilities that we may incur, which may reduce our available funds to satisfy third-party claims and may adversely impact our cash position.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware and the federal district courts of the United States are the exclusive forums for substantially all disputes
between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or employees.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware (or, if and only if the Court of Chancery of the State of Delaware lacks subject matter jurisdiction, any state court located within the State of Delaware or, if and only if all such state courts lack subject matter jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for the following claims or causes of action under Delaware statutory or common law:
• any derivative claim or cause of action brought on our behalf;
• any claim or cause of action for breach of a fiduciary duty owed by any of our current or former directors, officers or other employees to us or our stockholders;
• any claim or cause of action against us or any of our current or former directors, officers or other employees, arising out of or pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws;
• any claim or cause of action seeking to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws;
• any action or proceeding as to which the DGCL confers jurisdiction to the Court of Chancery of the State of Delaware; and
• any claim or cause of action against us or any of our current or former directors, officers or other employees that is governed by the internal-affairs doctrine, in all cases to the fullest extent permitted by law and subject to the court having personal jurisdiction over the indispensable parties named as defendants.
This provision would not apply to claims or causes of action brought to enforce a duty or liability created by the Exchange Act, or any other claim for which the federal courts have exclusive jurisdiction, or the Securities Act. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigateclaims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated certificate of incorporation provides that the federal district courts of the United States will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act. While the Delaware courts have determined that such choice of forum provisions are facially valid, a stockholder may nevertheless seek to bring a claim in a venue other than those designated in the exclusive forum provisions. In such instance, we would expect to vigorously assert the validity and enforceability of the exclusive forum provisions of our amended and restated certificate of incorporation. This may require significant additional costs associated with resolving such action in other jurisdictions and there can be no assurance that the provisions will be enforced by a court in those other jurisdictions.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find an exclusive forum provision in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may encounter additional costs associated with resolving the dispute in other jurisdictions, which could seriouslyharm our business.
Risks Related to Our Indebtedness
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.
Root is a party to a term loan agreement by and among Root, Caret Holdings, Inc., or Caret, as borrower, and other subsidiary loan parties, the lenders party thereto, or the Lenders, and Acquiom Agency Services LLC, as the administrative agent for the Lenders, as amended, or the Amended Term Loan. Under the terms of the Amended Term Loan, Caret has borrowed a principal amount of $200 million, all of which is currently outstanding. Interest is determined on a floating interest rate calculated on the Secured Overnight Financing Rate, or SOFR, with a 1.0% floor, plus an applicable margin ranging from 5.25% to 6.00%, based upon the debt-to-capital ratio payable quarterly. Rising interest rates have an adverse impact on the cost of debt and results in less cash available to utilize in our operations and could have a material adverse effect on our business and financial condition.
The Amended Term Loan includes limitations that restrict and limit, among other things, our ability to incur other indebtedness and liens, make restricted payments and investments, transfer or sell certain assets, engage in transactions with affiliates, and includes covenants requiring our cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $50 million at all times, direct contribution margin on a rolling twelve months to be at least 20% at the end of each fiscal quarter and the surplus of our insurance subsidiaries to be at least $125.0 million at the end of each fiscal quarter.
The Amended Term Loan also contains customary events of default, including, among others, payment default, bankruptcy events, cross-default, breaches of covenants and representations and warranties, change of control and judgment defaults. A breach of any of these covenants could result in default under our Amended Term Loan, which could prompt lenders to declare all amounts outstanding under the Amended Term Loan to be immediately due and payable. A repayment of our debt would materially reduce our cash position and may cause insurance regulators to review our financial condition and require us to take actions to raise additional funds via equity or debt, which may be at less favorable terms than under the Amended Term Loan. If we do not have sufficient cash or reserves, insurance regulators could take regulatory action. If we were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. An acceleration of our outstanding indebtedness could have serious consequences to our financial condition, operating results, and business.
General Risk Factors
Significant stockholders may attempt to effect changes at our company or acquire control over our company, which could impact the pursuit of business strategies and adversely affect our results of operations and financial condition.
Our stockholders may from time to time engage in proxy solicitations, advance stockholder proposals or otherwise attempt to effect changes or acquire control over our company. Campaigns by stockholders to effect changes at publicly traded companies are sometimes led by investors seeking to increase short-term stockholder value through actions such as financial restructuring, increased debt, special dividends, stock repurchases or sales of assets or the entire company. Responding to proxy contests and other actions by activist stockholders can be costly and time-consuming and could divert the attention of our board of directors and senior management from the management of our operations and the pursuit of our business strategies. As a result, stockholder campaigns could adversely affect our business, results of operations, financial condition and prospects.
Future acquisitions or investments could disrupt our business and harm our financial condition.
In the future we may pursue acquisitions or investments that we believe will help us achieve our strategic objectives. There is no guarantee that such acquisitions or investments will perform as expected or will be successfully integrated into our business or generate substantial revenue, and we may overestimate cash flow, underestimate costs or fail to understand the risks of or related to any investment or acquired business. The process of acquiring a business, product or technology can also cause us to incur various expenses and create unforeseen operating difficulties, expenditures and other challenges, whether or not those acquisitions are consummated, such as:
• intense competition for suitable acquisition targets, which could increase prices and adversely affect our ability to consummate deals on favorable or acceptable terms;
• inadequacy of reserves for losses and LAE;
• failure or material delay in closing a transaction, including as a result of regulatory review and approvals;
• regulatory conditions attached to the approval of the acquisition and other regulatory hurdles;
• a need for additional capital that was not anticipated at the time of the acquisition;
• anticipated benefits not materializing or being lower than anticipated;
• diversion of management time and focus from operating our business to addressing acquisition integration challenges;
• transition of the acquired company’s customers;
• difficulties in integrating the technologies, operations, existing contracts and personnel of an acquired company;
• retention of employees or business partners of an acquired company;
• cultural challenges associated with integrating employees from the acquired company into our organization;
• integration of the acquired company’s accounting, management information, human resources and other administrative systems;
• the need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lackedeffective controls, procedures and policies;
• coordination of product development and sales and marketing functions;
• theft of our trade secrets or confidential information that we share with potential acquisition candidates;
• risk that an acquired company or investment in new offerings cannibalizes a portion of our existing business;
• adverse market reaction to an acquisition;
• liability for activities of the acquired company before the acquisition, including patent and trademark infringementclaims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities; and
• litigation or other claims in connection with the acquired company, including claims from terminated employees, users, former stockholders or other third parties.
If we are unable to address these difficulties and challenges or other problems encountered in connection with any future acquisition or investment, we might not realize the anticipated benefits of that acquisition or investment and we might incur unanticipated liabilities or otherwise sufferharm to our business generally.
To the extent that we pay the consideration for any future acquisitions or investments in cash, it would reduce the amount of cash available to us for other purposes. Future acquisitions or investments could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses, increased interest expenses or impairment charges against goodwill in our consolidated balance sheet, any of which could seriouslyharm our business.
We expect a number of factors to cause our results of operations to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.
Our revenue and results of operations could vary significantly from quarter to quarter and year to year and may fail to match periodic expectations as a result of a variety of factors, many of which are outside of our control. Our results may vary from period to period as a result of fluctuations in the number of customers purchasing our insurance products and renewing their agreements with us as well as fluctuations in the timing and amount of our
expenses. In addition, the insurance industry is subject to its own cyclical trends and uncertainties, including extreme weather which is often seasonal and may result in volatility in claims reporting and payment patterns. Fluctuations and variability across the industry may also affect our revenue. As a result, comparing our results of operations on a period-to-period basis may not be meaningful, and the results of any one period should not be relied on as an indication of future performance. Our results of operations may not meet the expectations of investors or public market analysts who follow us, who may adversely change their recommendation regarding our stock or provide more favorable relative recommendations about our competitors, or decline or cease to cover the Company or fail to publish regular reports on us, any of which may adversely affect our stock price. In addition to other risk factors discussed in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, factors that may contribute to the variability of our quarterly and annual results include:
• our ability to attract new customers and retain existing customers, including in a cost-effective manner;
• our ability to accurately forecast revenue and losses and appropriately plan our expenses;
• the effects of changes in search engine placement and prominence;
• the effects of increased competition on our business;
• our ability to successfully maintain our position in and expand in existing markets as well as successfully enter new markets;
• our ability to protect our existing intellectual property and to create new intellectual property;
• our ability to maintain an adequate rate of growth and effectively manage that growth;
• our ability to keep pace with technology changes in the insurance, mobile and automobile industries;
• the success of our sales and marketing efforts;
• the success of our partnership channel, including our embedded insurance platform;
• the success of our agency channel, including our independent agent platform;
• costs associated with defendingclaims, including accident and coverage claims, intellectual property infringementclaims, misclassifications and related judgments or settlements;
• the impact of, and changes in, governmental or other regulation affecting our business;
• the attraction and retention of qualified employees and key personnel;
• our ability to choose and effectively manage third-party service providers;
• our ability to identify and engage in joint ventures and strategic partnerships;
• the impact of litigation or other losses;
• the effect of increasing interest rates on our available cash;
• the effects of natural or man-made catastrophic events, including those caused by global climate change;
• the effectiveness of our internal controls; and
• changes in our tax rates or exposure to additional tax liabilities.
New or changing technologies, including those impacting personal transportation, could cause a disruption in our business model, which may materially impact our results of operations and financial condition.
If we fail to anticipate the impact on our business of changing technology, including automotive technology, our ability to successfully operate may be materially impaired. Our business could also be affected by potential technological changes, such as autonomous or partially autonomous vehicles or technologies that facilitate ride, car or home sharing, the more widespread adoption of electric vehicles (including potentially as a result of climate change or regulatory responses to it), or vehicles with built-in telematics features. Such changes could disrupt the demand for products from current customers, create coverage issues or impact the frequency or severity of losses, or reduce the size of the automobile insurance market, causing our business to decline. Since auto insurance constitutes substantially all of our business, we are more sensitive than other insurers and more adversely affected by trends that could decrease auto insurance rates or reduce demand for auto insurance over time. We may not be able to respond effectively to these changes, which could have a material effect on our business, results of operations, financial condition and prospects.
An economic downturn and economic uncertainty may adversely affect demand for our products.
There are indications of increased economic uncertainty in the United States, including the potential for an economic recession. Impacts of such general economic weakness include, without limitation: reduced credit availability; reduced liquidity; volatility in credit and equity markets; contentious trade markets, including changes to tariffs and trade policy; increasing job losses, bankruptcies and rising interest rates. In recent years, there have been instances of Congress and the President failing to reach agreement on federal budgetary and spending matters. A government shutdown, a default by the United States government on its debt obligations, credit-rating downgrades or a weakened dollar relative to other currencies could also have adverse effects on the broader global economy and contribute to, or worsen, an economic recession or create recessionary conditions. 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. Certain of the jurisdictions in which we operate instituted moratoriums during the COVID-19 pandemic, and could do so again in adverse economic conditions. In addition, adverse economic conditions have included or resulted in, and could continue to include or result in, a significant increase in inflation. We may not be able to respond effectively to these challenges, which could have a material effect on our business, results of operations, financial condition and prospects.
Future sales of our Class A common stock in the public market by current shareholders could cause the market price of our Class A common stock to decline.
Sales of a substantial number of shares of our Class A common stock in the public market, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the timing of or the effect that such sales may have on the prevailing market price of our Class A common stock.
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We believe our competitive advantage is derived from our ability to efficiently and effectively bind auto insurance policies quickly, through direct and partnership channels, aided by segmenting individual risk to price better drivers more fairly. Our customer experience is 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 administration and ongoing customer engagement. This unified platform enhances pricing accuracy, strengthens operating efficiency, and supports a more seamless customer experience, while creating a defensible, technology- and data-driven advantage that compounds over time.
To scale the business, we aim to drive new customer growth and optimize unit economics via our two distribution channels: direct and partnership. The direct channel efficiently drives volume from high-intent customers by reaching them where they are already shopping for insurance, such as search engines or select marketplaces they actively use. The data science model continuously seeks to optimize bidding strategies that fine tunes our prices to strike a balance between offering a competitive price and achieving target unit economics. The partnership channel provides differentiated access to high intent customers, primarily in the automotive, financial services, and independent agent sectors. We build upon or within the mobile and web customer experiences of distribution partners to reach a captive customer base with an embedded solution, which can even remove the need for the customer to ever visit a Root website to purchase and bind a policy.
We use technology to drive efficiency across the organization within distribution, underwriting, policy administration, and claims. Although we believe we are priced adequately in a majority of the states in which we operate, our technology- and data-driven approach to pricing and underwriting allows for rapid response to macroeconomic trends and competitive dynamics through quick, timely, and appropriate rate actions. We continue to release iterations of our pricing models that incorporate enhanced telematics features, new rating variables, upgraded loss models, and improved risk segmentation. These enhancementsstrengthen our ability to select risks more precisely and maintain pricing accuracy as conditions evolve.
Claims operations remain a critical driver of our unit economics and long-term competitiveness. We continue to invest in automation, workflow optimization, and advanced analytical tools designed to improve accuracy, speed, and consistency in claims handling. Improvements to the claim process not only supports customer satisfaction but also reinforces the stability of loss ratios and improves long-term cost efficiency by reducing operating expenses.
Through continued investment in and diversification of our distribution channels, leveraging our proprietary technology and data science and focusing on partnerships with automotive, financial services, and independent agents, we believe this will position us for a sustainable, long-term and profitable path for growth.
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 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.
Key Factors and Trends Affecting our Operating Performance
Our financial condition and results of operations have been, and will continue to be, affected by a number of factors, including the following:
Our Ability to Manage and Price Risk
We leverage technology to help manage risk. For instance, we leverage machine learning to “clean” behavioral data obtained through a customer’s mobile device, and we use advanced statistical methods to model data into usable behavior scores. We leverage intelligent chat functions and various forms of machine learning and advanced automation to help power our claims function. Technology is a key differentiator in managing risk across our key functions. Our success depends on our ability to adequately and competitively price risk.
Our Ability to Attract New Customers
Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform. We intend to continue to drive new customer growth by leveraging our differentiated consumer experience, our partnership channel, direct performance marketing driven by dynamic data science models, machine learning loss models and our telematics-based pricing models. Additionally, our proprietary dataset will continue to scale as we grow, enabling us to enhance our predictive models to further improve pricing and attract potential new customers. We will also continue to target attractive potential customer segments through a diverse distribution strategy, which includes direct and partnership channels. Our ability to attract new customers will depend on a number of factors, including the pricing of our products, offerings of our competitors, success of our partnership channel and the effectiveness of our marketing efforts, and our ability to expand into new markets. Our ability to attract and retain customers depends on maintaining and strengthening our brand by providing superior customer experiences and competitive pricing. In particular, we are challenged by traditional insurers who have more diverse product offerings and longer established operating histories. These competitors can mimic certain aspects of our digital platform and offerings, and as they have more types of insurance products, can offer customers the ability to “bundle” multiple coverage types together, which may be attractive to many customers.
Our Ability to Retain Customers
Our ability to derive significant lifetime value from our customer relationships depends, in part, on our ability to retain our customers over time. Strong retention allows us to build a recurring revenue base, generating additional premiums term over term without material incremental marketing and underwriting costs. As we broadly retain customers and our book of business evolves to be more weighted towards renewals versus new business, as is the case with our mature competitors, we will benefit from the inherently lower loss ratios that characterize renewed premiums. Our ability to retain customers will depend on a number of factors, including our customers’ satisfaction with our products, offerings of our competitors and pricing of products.
Our Ability to be Licensed in All States in the United States
Our long-term growth opportunity will benefit from our ability to provide insurance across more states in the United States. Today, we are currently licensed in 50 states and the District of Columbia and operate in 36 of those states. Our state expansion has unlocked a large total addressable market for sustained growth, made our direct targeted marketing more efficient and created an opportunity to build a national brand, supporting our marketing holistically.
Our Ability to Expand Premiums Through Cross-Selling and Fee Income Per Policy
We are in the early stages of cross-selling non-auto products across our customer base. Cross-sales of renters policies will allow us to generate additional premiums without material incremental marketing spend, and ultimately higher revenue per customer. We have also observed that bundling products with auto insurance improves retention as the relationship with our customer expands. Our success in expanding revenues through cross-sales and greater fee income per policy depends on our marketing efforts with new products, continuous state expansion of these offerings and the pricing of our bundled products and continuing to refine the fee schedules in our policyholder contracts to be more consistent with industry norms. The success of our renters insurance offering is also subject to our ability to develop underwriting capabilities to adequately price renters risk.
Recent Developments Affecting Comparability
General Macroeconomic Factors
Changing global economic conditions has resulted in inflationary pressures, supply chain disruptions, changes in interest rates and changes in equity markets. In addition, economic uncertainty has developed as a result of changes in tariff policy, including the imposition of new, increased or retaliatory tariffs. There remains uncertainty around the future of inflation, including as a result of evolving tariffs and trade policy; elevated levels of inflation for an extended period could cause claims and claim expenses to increase, impact the performance of our investment portfolio, increase nonpaymentcancellations or have other adverse effects, including variability in the competitive environment. We have also seen an increase in vehicle repair and medical costs, which are affected by inflation. These cost increases have resulted in greaterclaimsseverity. Additionally, we continue to file in multiple states to establish rates that more closely follow the evolving loss cost trends. Fluctuations in interest rates could impact our cost of capital and may limit our ability to raise additional capital.
Comprehensive Reinsurance
We have significantly reduced the utilization of reinsurance through a strategic reduction of external quota share. The changes to the reinsurance program aim to deliver improved economics. Our diversified approach to reinsurance allows us to optimize capital requirements while remaining flexible in response to changes in market conditions or changes specific to our own business. We may choose to amend, commute, and/or non-renew certain third-party reinsurance arrangements in the future, which may result in us retaining more or less of our business. To the extent we retain a larger share of our book of business, our capital requirements may increase.
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. In addition to our financial results prepared in accordance with accounting principles generally accepted in the United States, or GAAP, we believe these non-GAAP and operational measures are useful in evaluating our performance. See the section titled “—Non-GAAP Financial Measures” for additional information regarding our use of direct contribution and adjusted EBITDA and their reconciliations to the most directly comparable GAAP measures.
For the Years Ended December 31,
(dollars in millions, except premiums per policy)
Policies in force
Premiums per policy
Premiums in force
Gross premiums written
Gross premiums earned
Gross profit
Net income (loss)
Direct contribution
Adjusted EBITDA
Net loss and LAE ratio
Net expense ratio
Net combined ratio
Gross loss ratio
Gross LAE ratio
Gross expense ratio
Gross combined ratio
Gross accident period loss ratio
Policies in Force
We define policies in force as the number of current and active auto insurance 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 policy growth and retention drives our revenue growth, expands brand awareness, deepens our market penetration, and generates additional data to continue to improve the functioning of our platform.
Premiums per Policy
We define premiums per policy as the ratio of gross premiums written on auto insurance 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 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 premiums written 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 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 Premiums Written
We define gross premiums written, as the total amount of gross premium on policies that were bound during the period less the prorated impact of policy cancellations. Gross premiums written includes direct premiums and assumed premiums. We view gross premiums written as an important metric because it is the metric that most closely correlates with changes in gross premiums earned. We use gross premiums written, 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 loss adjustment expense, or 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 Premiums Earned
We define gross premiums earned 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 premiums earned includes direct premiums and assumed premiums. We view gross premiums earned as an important metric as it allows us to evaluate our premium levels prior to the impacts of reinsurance. It is the primary driver of our consolidated GAAP revenues. As with gross premiums written, we use gross premiums earned, 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
We define gross profit as total revenue minus net loss and LAE and other insurance expense. We view gross profit as an important metric because we believe it is informative of the financial performance of our core insurance business.
Direct Contribution
We define direct contribution, a non-GAAP financial measure, as gross profit excluding net investment income, net realized gains on investments, acquisition expenses which include report costs and refunds related to these expenses and commission expenses related to our partnership channel, and fixed expenses, which include certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, or Integrated Platform, overhead allocated based on headcount, or Overhead, and salaries, health benefits, bonuses, employee retirement plan-related expenses and employee share-based compensation expense, or Personnel Costs, licenses, professional fees and other expenses. Further impacts related to reinsurance are excluded, and these consist of ceded premiums earned, 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 amortization of excess ceding commission, and other impacts of reinsurance ceded which are included in other insurance expense. After these adjustments, the resulting calculation is inclusive of only those gross variable costs of revenue incurred on the successful acquisition of business. We view direct contribution as an important metric because we believe it measures profitability of our total policy portfolio prior to the impact of reinsurance.
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 income (loss) excluding interest expense, income tax expense, depreciation and amortization, share-based compensation, loss on extinguishment of debt, warrant compensation expense, restructuring charges, legal fees and other items that do not reflect our ongoing operating performance. 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 income (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 income (loss) to adjusted EBITDA.
Net Loss and LAE Ratio
We define net loss and LAE ratio, expressed as a percentage, as the ratio of net loss and LAE to net premiums earned. We view net loss and LAE ratio as an important metric because it allows us to evaluate loss trends as a percentage of net premiums, and we believe it is useful for investors to evaluate those separately from other operating expenses.
Net Expense Ratio
We define net expense ratio, expressed as a percentage, as the ratio of all operating expenses less loss and LAE and less fee income to net premiums earned. We view net expense ratio as important because it allows us to analyze our expense and acquisition trends, net of fee income, and allows investors to evaluate these expenses exclusive of our loss and LAE.
Net Combined Ratio
We define net combined ratio, expressed as a percentage, as the sum of net loss and LAE ratio and net expense ratio. We view net combined ratio as important because it allows us to analyze our underwriting result trends and is a key indicator of overall profitability and health of the overall business. We believe it is useful to investors to evaluate these components separately and in the aggregate when reviewing our underwriting performance. A net combined ratio under 100% indicates an underwriting profit, while a net combined ratio greater than 100% indicates an underwriting loss.
Gross Loss Ratio
We define gross loss ratio, expressed as a percentage, as the ratio of gross losses to gross premiums earned. 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 premiums earned. We view gross LAE ratio as an important metric because it allows us to evaluate incurred losses and LAE separately prior to the impact of reinsurance.
Gross Expense Ratio
We define gross expense ratio, expressed as a percentage, as the ratio of gross operating expenses less loss and LAE and less fee income to gross premiums earned. We view gross expense ratio as important because it allows us to analyze the underlying expense base of the business and establish expense targets, prior to the impact of reinsurance. We believe gross expense ratio is useful for investors to further evaluate business health and performance, prior to the impact of reinsurance.
Gross Combined Ratio
We define gross combined ratio, expressed as a percentage, as the sum of the gross loss ratio, gross LAE ratio and gross expense ratio. We view gross combined ratio as important because it allows us to evaluate financial performance and establish targets that we believe more closely reflect the underlying performance and profitability of the business prior to reinsurance. Further, we believe it is useful for investors to evaluate these components separately and in the aggregate when reviewing our gross underwriting performance. A gross combined ratio under 100% indicates an underwriting profit while a gross combined ratio greater than 100% indicates an underwriting loss, prior to the impact of reinsurance.
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 premiums earned for the same period. The gross accident period loss ratio is remeasured each reporting period to reflect updated estimates of ultimate losses as they develop. Changes to our loss reserves are the primary driver of differences 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.
Components of Our Results of Operations
Revenue
We generate revenue from net premiums earned, net investment income, fee income 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 premiums written, 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 cash, cash equivalents, restricted cash and restricted cash equivalents, fixed maturities, and short-term investments less investment expenses. Investment expenses include costs associated with the management of our investment portfolio, including Personnel Costs. Net investment income also includes impairments related to low income housing tax credits investments in limited liability entities to offset certain state premium taxes. These tax credits are recognized when utilized. Net investment income is directly correlated with the overall size of our cash and investment portfolio, market level of interest rates and changes in the fair value of our private equity investments. Net investment income will vary with the size and composition of our investment portfolio, market returns and the investment strategy.
Fee Income
Fee income consists primarily of the flat fee we charge for installment payments which relates to the additional administrative costs associated with processing more frequent billings. These fees are recognized in the period in which we process the installment. We also charge policy fees, which are typically nonrefundable fees that are intended to reimburse a portion of the costs incurred to underwrite the policy. These fees are recognized ratably over the policy coverage period. Fee income also includes late payment fees that are collected from our policyholders. These fees are recognized in the period in which we process the late payment.
Other Income
Other income is primarily comprised of revenue earned from distributing website and mobile application policy inquiry leads in geographies where we do not have a presence, recognized when we generate the lead.
Operating Expenses
Our operating expenses consist of loss and LAE, sales and marketing, other insurance expense, technology and development, and general and administrative expenses.
Loss and Loss Adjustment Expenses
Loss and LAE include the costs incurred for claims, payments made and estimated future payments to be made to or on behalf of our policyholders, including expenses needed to adjust or settle claims, net of amounts ceded to reinsurers. 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 unreportedlosses and LAE. These reserves are a liability established to cover the estimated ultimate cost to settle insured losses. The unpaidloss 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 damageclaims 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. This includes an allowance for credit losses based on the probability of default and expected loss given default of a reinsurer. 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 Personnel Costs for claims-related employees, vendor expenses, software expense, internally developed software amortization, and Overhead.
Sales and Marketing
Sales and marketing includes both acquisition and fixed expenses. We view direct performance marketing, experimental marketing, channel media, advertising and referral fees as acquisition expenses. We view sponsorship, Personnel Costs and Overhead related to our brand strategy, creative and business development activities, and certain data science activities as fixed expenses. Sales and marketing are expensed as incurred.
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 our sales and marketing will vary based upon the competitive environment and other investments in acquisition. Over the long-term we expect it will decrease as a percentage of revenue as the proportion of renewals to our total business increases.
Other Insurance Expense
Other insurance expense includes expenses primarily related to insurance and underwriting operations of the business and is comprised of acquisition, variable and fixed expenses. We view report costs and refunds related to these expenses and commission expenses related to our partnership channel as acquisition costs. We view premium taxes, credit card and policy processing expenses and premium write-offs as variable expenses. We view insurance license expenses, certain warrant compensation expense related to policies originating through the integrated automobile insurance solution for Carvana’s online buying platform, low income housing tax credits which offset certain state premium taxes, Personnel Costs and Overhead related to actuarial and certain data science activities as fixed expenses.
We amortize a portion of our deferred policy acquisition costs including certain commissions related to our partnership channel, premium taxes, and report costs related to the successful acquisition of a policy. Tax credits are recognized when utilized. Other insurance expense is expensed as incurred, except for costs related to deferred policy acquisition costs that are capitalized and subsequently amortized over the same period in which the related premiums are earned. Warrant compensation expense is recognized on a pro-rata basis considering progress toward
achieving milestones for policies originated through the Integrated Platform as defined under the Carvana commercial agreement.
These expenses are recognized net of ceding commissions earned from our quota share reinsurance agreements. The ceding commission provides for reimbursement of both direct and other periodic acquisition costs, including certain underwriting and marketing costs, and is presented as a reduction of other insurance expense.
Technology and Development
Technology and development are fixed expenses that consist 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 are fixed expenses that primarily relate to external professional service expenses; Personnel Costs and Overhead for corporate functions; and depreciation expense for computers, furniture and other fixed assets; and restructuring costs which include employee costs, real estate exit costs and other costs. General and administrative expenses are expensed as incurred. We expect general and administrative expenses to decrease as a percentage of total revenue over time.
Non-Operating Expenses
Our non-operating expenses consist of interest expense, loss on extinguishment of debt, and income tax expense.
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 discount and debt issuance costs.
Loss on Extinguishment of Debt
Loss on extinguishment of debt is not an operating expense; therefore, we include these expenses below operating expenses. Loss on extinguishment of debt primarily relates to the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt. Upon extinguishment of debt, the remaining unamortized discount and debt issuance costs are recognized as expense.
Income Tax Expense
Income tax expense consists primarily of state income taxes in the United States. We have recorded United States federal and state net deferred tax assets for which we provide a full valuation allowance, which includes net operating loss carryforwards and tax credits.
Results of Operations
Comparison of the Years Ended December 31, 2025 and 2024
The following table presents our results of operations for the periods indicated:
For the Years Ended December 31,
$ Change
% Change
(dollars in millions)
Revenue:
Net premiums earned
Net investment income
Fee income
Other income
Total revenues
Operating expenses:
Loss and loss adjustment expenses
Sales and marketing
Other insurance expense
Technology and development
General and administrative
Total operating expenses
Operating income
Interest expense
Loss on extinguishment of debt
Income before income tax expense
Income tax expense
Net income
Other comprehensive income:
Changes in net unrealized gains on investments
Comprehensive income
Revenue
Net Premiums Earned
Net premiums earned increased due to an increase in policies in force as a result of continued growth in our partnership channel and reduced cessions of premiums earned to reinsurers between periods, partially offset by a decrease in premiums per policy resulting from a shift in customer and state mix.
During the years ended December 31, 2025 and 2024, we ceded approximately 4.4% and 13.0% of our gross premiums earned, respectively. The change in cessions between periods was primarily driven by a strategic reduction of quota share reinsurance.
The following table presents gross premiums written, ceded premiums written, net premiums written, gross premiums earned, ceded premiums earned and net premiums earned for the years ended December 31, 2025 and 2024:
For the Years Ended December 31,
$ Change
% Change
(dollars in millions)
Gross premiums written
Ceded premiums written
Net premiums written
Gross premiums earned
Ceded premiums earned
Net premiums earned
Gross premiums written increased due to growth in new writings as a result of continued growth in our partnership channel. The increase in gross premiums earned was primarily due to greater policies in force compared to 2024.
Fee Income
Fee income increased primarily due to greater policies in force, resulting in an increase of $5.9 million in policy fees and $4.2 million in installment fees.
Operating Expenses
Loss and Loss Adjustment Expenses
Loss and LAE increased due to additional losses incurred on increased gross premiums earned volume and reduced cessions of losses to reinsurers driven by a strategic reduction of quota share reinsurance. This volume-driven increase was partially offset by a reduction of loss and LAE reserves on prior periods due to lower-than-expected reported activity.
Gross accident period loss ratios increased to 59.3% for the year ended December 31, 2025, from 58.2% for 2024. The change in the ratios was driven by geographic and channel mix shift and higher loss costs as a result of increased severity per claim due to higher vehicle repair and medical costs. This was partially offset by rate actions, favorable weather-related losses, and business tenure mix. We observed a mid-single-digit increase in estimated ultimate severity per claim and a low-single-digit decrease in estimated ultimate claim frequency for the year ended December 31, 2025 compared to 2024 across our bodily injury, collision, and property damage coverages.
Sales and Marketing
Sales and marketing increased primarily due to a $26.9 million increase in direct performance marketing spend, reflective of our investments to drive accretive growth and deeper market penetration in the states in which we operate. We also saw a $9.5 million increase in experimental marketing spend as part of our efforts to diversify our distribution channels. While acquisition expenses increased due to heightened competition in the marketing environment, we remained disciplined in our deployment of direct marketing spend, operating within our estimated return targets.
Other Insurance Expense
Other insurance expense increased primarily due to a $35.1 million increase in our acquisition expenses driven by greater commissions paid related to the continued growth in our partnership channel, including amortization of
deferred policy acquisition costs. In addition, acquisition expenses increased due to a $10.9 million sales tax refund that decreased acquisition expenses in the prior year. Acquisition expenses also increased due to a $4.0 million increase in report costs as a result of growth in new writings. We also saw a $19.1 million decrease in net ceding commission contra-expense as a result of a decline in ceded premiums written, largely attributable to a strategic reduction of quota share reinsurance. Fixed expenses increased primarily due to a $15.3 million increase in Carvana warrant expense, including a cumulative expense catch-up, related to our outstanding warrant structure with Carvana. Variable expenses increased primarily due to a $6.6 million increase in premium taxes, as a result of growth of our earned premium and policies in force.
General and Administrative
General and administrative increased due to a $18.6 million increase in Personnel Costs mainly driven by share-based compensation expenses relating to our equity incentive plan.
Non-Operating Expenses
Interest Expense
Interest expense decreased primarily due to a $19.5 million decrease in debt interest expense as a result of reduced principal and a more favorable interest rate in connection with the Amended Term Loan. In addition, interest expense benefited from $4.6 million lower debt discount amortization as a result of changes in our debt structure following the amendment.
Loss on Extinguishment of Debt
Loss on extinguishment of debt was due to unamortized discount and debt issuance costs being expensed as a result of extinguishing the prior term loan in 2024.
Other Comprehensive Income
Changes in Net Unrealized Gains on Investments
Changes in net unrealized gains on investments increased primarily due to declining market interest rates during the year, which resulted in higher fair values for fixed maturity securities, particularly those with longer durations, as well as the replacement of lower yielding securities with higher coupon investments.
Comparison of the Years Ended December 31, 2024 and 2023
The following table presents our results of operations for the periods indicated:
For the Years Ended December 31,
$ Change
% Change
(dollars in millions)
Revenue:
Net premiums earned
Net investment income
Fee income
Other income
Total revenue
Operating expenses:
Loss and loss adjustment expenses
Sales and marketing
Other insurance expense
Technology and development
General and administrative
Total operating expenses
Operating income (loss)
Interest expense
Loss on extinguishment of debt
Income (loss) before income tax expense
Income tax expense
Net income (loss)
Other comprehensive income:
Changes in net unrealized gains on investments
Comprehensive income (loss)
The December 31, 2024 and 2023 results of operations discussion can be found in the section titled “Results of Operations” Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2024.
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, 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, including when determining incentive
compensation; (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.
Direct Contribution
For the definition of direct contribution and why management believes this measure provides useful information to investors, see “—Key Performance Indicators.”
The following table provides a reconciliation of total revenue to direct contribution for the years ended December 31, 2025, 2024 and 2023:
For the Years Ended December 31,
(dollars in millions)
Total revenue
Loss and loss adjustment expenses
Other insurance expense
Gross profit
Net investment income
Adjustments from other insurance expense (1)
Ceded premiums earned
Ceded loss and loss adjustment expenses
Net ceding commission and other (2)
Direct contribution
(1) Adjustments from other insurance expense consists of acquisition expenses, including report costs and refunds related to these expenses and commission expenses related to our partnership channel of $101.8 million, $49.7 million and $50.8 million for the years ended December 31, 2025, 2024 and 2023, respectively. Adjustments from other insurance expense also consists of fixed expenses, including warrant compensation expense related to policies originating through the Integrated Platform, Personnel Costs, Overhead, licenses, professional fees and other of $34.0 million, $16.8 million and $25.5 million for the years ended December 31, 2025, 2024 and 2023, respectively.
(2) Net ceding commission and other is comprised of ceding commissions received in connection with reinsurance ceded, partially offset by amortization of excess ceding commission and other impacts of reinsurance ceded .
Adjusted EBITDA
For the definition of adjusted EBITDA and why management believes this measure provides useful information to investors, see “—Key Performance Indicators.”
The following table provides a reconciliation of net income (loss) to adjusted EBITDA for the years ended December 31, 2025, 2024 and 2023:
For the Years Ended December 31,
(dollars in millions)
Net income (loss)
Adjustments:
Interest expense
Income tax expense
Depreciation and amortization
Share-based compensation
Loss on extinguishment of debt
Warrant compensation expense
Restructuring costs (1)
Other (2)
Adjusted EBITDA
(1) Restructuring costs consist of employee costs, real estate exit costs, and other. This includes zero, zero and $0.4 million of share-based compensation for the years ended December 31, 2025, 2024 and 2023, respectively. This also includes $0.1 million, $0.4 million and $0.4 million of depreciation and amortization for the years ended December 31, 2025, 2024 and 2023, respectively. For further information on restructuring costs, see Note 10, “Restructuring Costs,” in the Notes to Consolidated Financial Statements.
(2) Other primarily reflects legal costs and other items that do not reflect our ongoing operating performance. Legal and other fees net of recoveries related to the 2022 misappropriation of funds by a former senior marketing employee of $(0.2) million, $(1.1) million and $3.2 million for the years ended December 31, 2025, 2024 and 2023, respectively.
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. Cash generated from operations is highly dependent on being able to efficiently acquire and maintain customers while pricing our insurance products appropriately. We also receive cash dividends from our insurance subsidiaries, whose ability to declare and issue dividends is subject to regulatory restrictions and approval. We are continuously evaluating alternatives for efficiently funding our ongoing operations and reducing our cost of capital. We expect, from time to time, to engage in a variety of financing transactions for such purposes, including the issuance of stock and debt.
Certain events may impact our liquidity, such as the economic instability resulting in inflationary pressures, supply chain disruptions, changes in interest rates, new or increased tariffs, changes in equity markets and our utilization of reinsurance. There remains uncertainty around the future of inflation; elevated levels of inflation for an extended period could cause claims and claim expenses to increase, impact the performance of our investment portfolio or have other adverse effects. Conditions in the capital and credit markets, including instability and uncertainty, as well as broader economic factors such as changes in tariff policy, including the imposition of new, increased or retaliatory tariffs, can also influence the returns, liquidity, valuation, and types of our investments. Additionally, fluctuations in interest rates could impact our cost of capital and may limit our ability to raise additional capital. We utilize reinsurance arrangements to mitigate the impact of large losses or catastrophic events.
Over time, our strategy continues to evolve and we may choose to amend, commute, and/or non-renew certain third-party reinsurance agreements, which may result in us retaining more or less of our business in the future. To the extent we retain a larger share of our book of business, our capital requirements may increase.
Regulatory Considerations
We are organized as a holding company, but our primary operations are conducted by three of our wholly-owned insurance subsidiaries, Root Insurance Company and Root Property & Casualty Insurance Company, both Ohio-domiciled insurance companies, and Root Florida Insurance Company, a Florida-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 State of Ohio and the State of Florida. Our domestic insurance subsidiaries are not permitted to pay any dividends without approval of the applicable superintendent, commissioner and/or director. During the year ended December 31, 2025, the Ohio Department of Insurance approved Root Insurance Company to distribute four extraordinary dividends. As a result, over the period, $45.0 million was distributed to Caret Holdings, Inc., its parent company, net of capital contributions made by Caret Holdings, Inc. to our regulated insurance entities.
If our insurance subsidiaries’ business grows, 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 of December 31, 2025, 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.
Our wholly-owned, Cayman Islands-based reinsurance subsidiary, Root Reinsurance Company, Ltd., or Root Re, maintains a Class B(iii) insurer license under Cayman Islands Monetary Authority, or CIMA. At December 31, 2025, Root Re was subject to compliance with certain capital levels and a net premiums earned to capital ratio up to 15:1, which we maintained as of December 31, 2025. The capital ratio can fluctuate at Root Re’s election, subject to regulatory approval. Root Re’s primary sources of funds are 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 notify CIMA before it can pay any dividend to the holding company. During the year ended December 31, 2025, Root Re paid dividends of $60.0 million to Caret Holdings, Inc.
Financing Arrangements
In October 2024, we entered into the Amended Term Loan with the principal amount due and payable upon maturity on October 29, 2030. Interest is payable quarterly and determined on a floating interest rate calculated on the Secured Overnight Financing Rate with a 1.0% floor, plus an applicable margin ranging from 5.25% to 6.00%, based upon the debt-to-capital ratio payable quarterly.
Liquidity
As of December 31, 2025, we had $669.3 million in cash and cash equivalents, of which $312.1 million was held outside of regulated insurance entities. We also had $387.0 million in marketable securities.
Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities primarily consist of United States Treasury and agency securities, municipal securities, corporate debt securities, and asset-backed securities.
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. This belief is based on management’s current assumptions and is subject to changes in market or regulatory conditions affecting the insurance industry, and other general economic, financial, competitive and other factors that are beyond our control.
Our long-term capital requirements depend on many factors, including our insurance premium growth rate, rate adequacy, level of marketing spend, renewal activity, the timing and the amount of cash received from customers,
the performance of our products, including the success of our partnership channel, loss cost trends, the timing and extent of spending to support development efforts, the introduction of new and enhanced products, the continuing market adoption of offerings on our platform, operating costs, and the ongoing uncertainty in global markets.
Tax withholding obligations arise upon vesting of shares of service-based restricted stock units, or RSUs, performance-based restricted stock units, and market-based restricted stock units, and these obligations must be satisfied at the time they arise through cash payments remitted to the relevant tax authorities. To the extent we satisfy our tax withholding obligations with respect to these equity compensation awards by withholding shares and remitting cash to the relevant tax authorities, the amount of cash payments due for taxes upon the vesting of such equity compensation awards is dependent on the price of our Class A common stock on the applicable vesting dates and could be substantial. Accordingly, increases in the price of our Class A common stock could increase the amount of cash required to satisfy these tax withholding obligations, which could have a negative impact on our liquidity and ability to use funds for operational purposes.
Our debt covenants require cash and cash equivalents held in entities other than our insurance subsidiaries to be at least $50.0 million.
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.
Cash Flows
The following table summarizes our cash flow data for the periods presented:
For the Years Ended December 31,
(dollars in millions)
Net cash provided by (used in) operating activities
Net cash used in investing activities
Net cash used in financing activities
Comparison of Years Ended December 31, 2025 and 2024
Net cash provided by operating activities for the year ended December 31, 2025 was $206.5 million compared to $195.7 million of net cash provided by operating activities for the year ended December 31, 2024. The increase in cash provided by operating activities was due to a strategic reduction of quota share reinsurance and timing of reinsurance and premium receipts. This was partially offset by a change in loss and LAE reserves and premiums not yet earned due to greater growth in policies in force in the year ended December 31, 2024 compared to 2025.
Net cash used in investing activities for the year ended December 31, 2025 was $91.7 million, compared to $154.4 million for the year ended December 31, 2024. The decrease in cash used in investing activities was primarily due to lower purchases of investments and higher proceeds from maturities, calls and pay downs of investments for the year ended December 31, 2025 compared to 2024.
Net cash used in financing activities for the year ended December 31, 2025 was $25.2 million, compared to $120.7 million for the year ended December 31, 2024. The decrease in cash used in financing activities was primarily a result of extinguishing the prior term loan and entering into the Amended Term Loan in 2024, which was partially offset by higher tax withholding obligations arising from the vesting of shares of RSUs and market-based RSUs during the year ended December 31, 2025.
Comparison of Years Ended December 31, 2024 and 2023
The December 31, 2024 and 2023 net cash discussion can be found in the section titled “Liquidity and Capital Resources” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2024.
Material Cash Requirements from Contractual and Other Obligations
As of December 31, 2025, our material cash requirements from known contractual and other obligations consisted of purchase commitments, as discussed in Note 13, “Commitments and Contingencies,” operating leases, as discussed in Note 8, “Leases,” and an Amended Term Loan, as discussed in Note 7, “Long-Term Debt,” in the Notes to Consolidated Financial Statements. We believe we have sufficient resources, and access to additional debt and equity capital, to adequately meet our obligations as they come due.
Critical Accounting 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, valuation allowance on our deferred tax assets, and the amount of reinsurance recoverable and receivable from reinsurance contracts. 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.
We believe that the accounting estimates described below involve a significant degree of judgment and complexity. Accordingly, we believe these are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations. For further information, see Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements.
Loss and LAE Reserves
The evaluation and estimation of ultimate losses and LAE requires considerable judgment in understanding how claims mature, how claims differ between lines of business, and how changes in the business impact claims settlement over time. Loss reserves represent a liability estimate at a given point in time based on many input variables including historical and statistical information, inflation, contract interpretation, weather catastrophe impacts, regulatory environment, and economic conditions. While we consider many inputs into the loss reserve valuation process, as well as several actuarial methodologies, there is no single method for determining the exact ultimate claims liability. In many cases, we use multiple estimation methods based on the particular facts and circumstances of the claims and liabilities being evaluated, resulting in a range of reasonable estimates for reserves for losses and LAE. We do not discount reserves.
Our actuarial reserving team performs monthly reviews of the claims experience and loss emergence to support our estimation of ultimate losses and LAE. A few considerations and assumptions in estimating ultimate claim liabilities includes relative case reserve adequacy over time, claims cycle time, claims settlement practices, exposure growth, actuarial projections, current economic conditions, driving patterns observed from telematics, weather catastrophes, and claim litigation. Our loss reserves can be grouped by claim type, where amounts related to material damage of vehicles and property tend to settle within six to 12 months, while claims that involve injuries or personal liability have a much longer time period between the occurrence of a loss and the settlement of the claim. In general, the longer the time span between the incidence of a loss and the settlement of the claim, the more the ultimate settlement amount can vary.
Because actual experience can differ from key assumptions used in establishing reserves, there is potential for significant variation in the development of loss reserves. There is considerable uncertainty associated with the
actuarial estimates, and therefore the actual losses and LAE paid in the future may differ materially from the reserves we have recorded. Our loss estimates are continually reviewed by management and adjusted as necessary; with adjustments included in the period determined.
The key assumptions that materially affect the estimate of the reserves for loss and LAE are as follows:
• Many of the actuarial estimation methods assume that the speed of claim payments and claim closures, also known as cycle time, remains relatively consistent over time. While fluctuations and improvements in cycle time are expected as we grow, these timing changes can be difficult to discern from normal process risk variability in the data.
• For actuarial methods that rely on case reserve data, there is an implicit assumption that the adequacy of case reserve estimates stays relatively constant over time. For example, if the held case reserves represent the 50th percentile outcome for each claim, then any changes to this case reserve level, either higher or lower, would impact the ultimate loss estimates.
• Actuarial methods that rely on exposure bases, such as premiums or car years, perform better when the mix of business is relatively stable over time. Business growth can change the mix of business across several dimensions: new business versus renewal, geography profile, and underwriting profile. As such, prior estimates of claim frequency, claim severity, or loss ratio may not be as predictive of future results when the mix of business changes.
• Broader macro-level economics can have a material impact on loss reserve estimates, such as a rapid change in miles driven, unanticipated inflation, regulatory restrictions, and legal developments as they relate to contract and coverage interpretation and enforceability.
Due to the inherent uncertainty in determining our ultimate cost of settling claims, we evaluate what the potential impact on consolidated results of operations, financial position, and liquidity would be based on a hypothetical 5% and 10% increase or decrease in key assumptions described above. The loss reserve range estimated below represents a range of reasonably likely reserves, not a range of all possible outcomes. Therefore, the ultimate losses could reach levels outside the range provided. Given the growth in exposures from inception in 2015, we believe evaluating sensitivity based on a hypothetical increase or decrease of 5% and 10% reflects management’s best estimate and provides a scenario impact on the reserve ranges due to variability in key assumptions. The following table summarizes this sensitivity analysis:
Scenarios for Changes in Loss Reserves for all Accident Years
(dollars in millions)
Bodily injury liability
Uninsured and underinsured bodily injury
Property damage
All other coverages
Total loss reserves—net of reinsurance
Our loss and LAE reserves are recorded net of external reinsurance and net of amounts expected to be received from salvage (the amount recovered from the damaged property after we pay for a total loss) and subrogation (the right to recover payments from third parties).
Reinsurance Recoverable and Receivable
We also estimate the amount of reinsurance recoverable and receivable from reinsurance contracts. Reinsurance assets include reinsurance recoverable and receivable on unpaidloss and LAE reserves, which are estimated as part of our loss reserving process and are subject to similar judgments and uncertainties. Estimating these amounts involves significant judgment, with key considerations including:
• paid and unpaid amounts recoverable;
• any balances in dispute or subject to legal collection;
• the financial well-being of a reinsurer; and
• the likelihood of collection of the reinsurance recovery considering factors such as, amounts outstanding and length of collection periods.
Recoverability of Net Deferred Tax Assets
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 net operating losses, or NOLs, if at all. Under Section 382 of the Internal Revenue Code, or the Code, if a corporation undergoes an “ownership change” (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. We currently carry a valuation allowance against our entire net deferred tax asset. As such, any reduction in the deferred tax asset would also result in an offsetting reduction in the valuation allowance.
