Root CEO eyes nationwide presence after best-ever quarter

➤Root Inc., an insurance technology company that offers coverage in 34 states, is planning to expand into new markets with an eye on establishing a nationwide presence for its car, home and renters lines of business.

➤ While other insurtechs have struggled, Root recently reported its best-ever quarter while cutting expenses and reducing its loss ratios. CEO Alex Timm said the path to profitability is clearer as underwriting and pricing changes have sparked a "remarkable" transformation for the company.

➤ Timm has been president and CEO of the Columbus, Ohio-based insurer since founding the company with Dan Manges in 2015. Before starting Root, Timm was a senior consultant for corporate strategy with Nationwide Mutual Insurance Co. and currently is an independent director for GoHealth Inc.

S&P Global Market Intelligence spoke with Timm about the role of AI in the company's underwriting process, how it prices risk and how it will shape its future. Other topics included Root's struggles in the stock market, its strategy for sustaining growth in a volatile market and how it will execute on its expansion plans. The following interview was edited for brevity and clarity.

S&P Global Market Intelligence: Root recently reported its best-ever quarter and the market responded by driving your stock to its highest level in almost two years. What does that mean to you as the CEO of the company?

Timm: One thing I've learned is not to look to the market to tell me things. I don't like looking to them on the upside because that would mean I have to listen to them on the downside, too. I think we've been deeply misunderstood by the market for quite some time and we've tried to stay focused and disciplined on the fundamentals of our business, driving near best-in-class industry loss ratios, disciplined growth and expense management. We want to focus on our customers, and I believe that the market eventually figures it out.

What markets are you prioritizing for expansion, and how do you assess the potential risks and rewards in these new markets?

We have a state expansion plan in place that we'll be executing this year, and we're going to be entering those states judiciously. When we add a state, we go in, we pick up a few thousand policies and then we measure the loss ratio and make sure that our pricing is holding up. If it is, we'll go get a few more until we build that confidence in our ability to price the risk in these markets. And as we do that, then we unconstrain that market and will allow it to grow. We're in 34 markets today and we don't see a reason Root shouldn't be nationwide at some point here soon. We want to continue to pursue that, particularly now that we've got our loss ratio to be one of the best in the industry.

How do you plan to leverage technology to enhance underwriting results and improve unit economics in the future?

What we've developed is a platform that can ingest lots of data, from smartphone behavioral data to data from connected vehicles, to all the traditional underwriting variables. We gather the data, retrain the models and then we get those new prices back out into the market. What that allows us to do is to be more sophisticated in our pricing so that we can better match price to risk. By doing so, we can pick up those lower-risk drivers and drive superior loss ratios to the industry. We do the same thing on our underwriting. And by doing this on a modern technology platform, we're able to deploy machine-learning algorithms that do all of this for us. And so that's one of the reasons we've been able to sort of sustain this loss ratio, particularly relative to our peers. It's our biggest technical achievement. And I think that will continue to be a huge area of differentiation for us.

You've had a number of challenges to deal with in the market. How well are other insurers handling theirs?

This is kind of an unprecedented time in many ways in the auto insurance industry where you still have some of the biggest carriers in the country unable to underwrite risk profitably. And so what are they going to do? How are they going to get back in line? Are they going to be taking a material amount of rate and shocking their books of business? That could cause shopping behavior that we haven't seen before, and the risk there for us is that we wouldn't be there to take advantage of it, so we're making sure that we're constantly monitoring that environment as well. We have to make sure that we're keeping control of sort of the macro environment, both in terms of the competitive landscape and the inflationary landscape and consistently responding to them.

As you work toward achieving profitability, what strategies will sustain growth on that journey in what has been and still is a volatile insurance market?

We're constantly monitoring loss trends, anything that's changing in the competitive environment or the inflationary environment, and we're always looking in real-time. We've deployed lots of data science and algorithms to monitor our loss ratios and how those are progressing across all of our segments and our states. We're also constantly looking at our marketing channel performance and the competitive environment. We're making sure that every policy we acquire is going to return our target marketing ROI so that we're not overpaying for customers and that we aren't solving for growth, but, instead, for profitable growth.

Are there financial metrics you feel that shareholders should watch over the coming quarters to gauge Root's progress toward its profitability goals?

Sustained loss ratio is the most important. We have to make sure that we can, as we're growing, continue to sustain that loss ratio, as well as fixed expense discipline and earned premium growth. If we can continue to generate more and more earned premium and sustain our loss ratios, that builds a very valuable company, almost by definition, long term.