Root, Inc. Q3 FY2022 Earnings Call

Good day, and welcome to the Root Incorporated Third Quarter 2022 Earnings Conference Call. Please note, today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. At this time, I would like to turn the conference over to Jodi Baker, Vice President and Corporate Secretary. Ms. Baker, you may begin your conference.

Good morning, and thank you for joining us today. Root is hosting this call to discuss its third quarter 2022 earnings results. Participating on today's call are Alex Timm, Co-Founder and Chief Executive Officer; and Rob Bateman, Chief Financial Officer. During the question-and-answer portion of the call, our presenters will be joined by Dan Rosenthal, Chief Revenue and Operating Officer; Matt Bonakdarpour, Chief Technology Officer; and Frank Palmer, Chief Insurance Officer. Last evening, Root issued a shareholder letter announcing its financial results. While this call will reflect items discussed within that document, for more complete information about our financial performance, we also encourage you to read our third quarter 2022 Form 10-Q, which was filed with the Securities and Exchange Commission last evening. Before we begin, I want to remind you that matters discussed on today's call will include forward-looking statements related to our operating performance, financial goals and business outlook, which are based on management's current beliefs and assumptions. Please note that these forward-looking statements reflect our opinions as of the date of this call, and we undertake no obligation to revise this information as a result of new developments that may occur. Forward-looking statements are subject to various risks, uncertainties and other factors that could cause our actual results to differ materially from those expected and described today. In addition, we are subject to a number of risks that may significantly impact our business and financial results. For a more detailed description of our risk factors, please review our Form 10-K for the year ended December 31, 2021, where you will see a discussion of factors that could cause the company's actual results to differ materially from these statements as well as our shareholder letter and third quarter 2022 Form 10-Q released last evening. A replay of this conference call will be available on our website under the Investor Relations section. I would also like to remind you that during the call, we will discuss some non-GAAP measures while talking about Root's performance. You can find reconciliations of those historical measures to the nearest comparable GAAP measures in our shareholder letter released last evening and our Form 10-Q filed with the SEC, which are posted on our website at ir.joinroot.com. I will now turn the call over to Alex Timm, Root's Co-Founder and CEO.

Thank you, Jodi. I want to take today's call and back up a minute to remind everyone of why we built Root. During the last year, we have continued to comment on how our technology has allowed us to navigate one of the worst inflationary environments to ever hit the auto insurance industry. We have continually communicated how that technology allows us to drive loss ratio improvement above and beyond anyone else in the industry. In Q3, this is exactly what you saw. We improved our loss ratio by 14 points year-over-year, while most others in the industry had their loss ratio go in the other direction. This effectively tripled the margins of our business, and we are continuing to see loss ratio improvements. We have done this while improving our ability to segment risk, underwrite risk and classify risk using what we believe is the very best technology in predictive analytics and software development. That improvement is the bedrock of our ability to profitably scale, but it is just step one. Step two is building differentiated access to customers. We have further invested in our product innovation through our embedded channel. Even during this runaway inflationary environment, we were able to further differentiate our product, as demonstrated by 200% growth on our embedded platform year-to-date. What's more, we believe this channel offers extremely attractive conversion rates, acquisition costs, and underwriting ratios. We are progressing towards finalizing our second embedded partnership and look forward to providing further details in the months ahead. We believe we are at the very beginning of a massive shift in auto insurance distribution and that we are at the tip of the spear. In our direct channel, we are focusing on only writing clearly profitable business with an immediate return. This means utilizing our deep understanding of customer segmentation and geography to drive profitable new writings with very limited marketing spend. By leveraging our ability to quickly retrain our loss models, we can drive frequent increases to the sophistication and accuracy of our prices. We believe we are in a position to drive growth in the most profitable segments as we go forward. Over the last year, one thing has been made crystal clear: Root must control its own destiny. To do this, we are driving the company to profitability. Year-over-year, we have reduced our operating cash consumption by 55%. As part of this, we had to make the difficult decision to separate with 17% of our workforce yesterday. At the same time, we continue to rightsize our non-headcount expenses. Together, these actions will lower our run rate expenses by roughly $50 million annually. I would like to thank the customers and shareholders that have been with us on this journey. I would also like to share my gratitude with all Root employees, current and past. I am grateful for their hard work and contributions to Root. I'll now turn the call over to Rob to discuss our operating results in more detail.

Thanks, Alex. Our full GAAP financial results are disclosed in the shareholder letter we published yesterday evening, but I want to focus on a few key highlights. On the top line, gross written premium declined 26% year-over-year to $150 million. Our gross earned premium decreased 18% year-over-year to $155 million. The top line decline reflects higher rates and stricter underwriting in underperforming geographies and customer segments, along with a 91% reduction in marketing spend compared with the third quarter of 2021. These actions have caused new business writings to decrease, with renewals making up 79% of gross earned premium this quarter as we focus on profitability. We are committed to lowering the loss ratio and expenses to further reduce operating losses. During the third quarter, the operating loss was $55 million, a 57% improvement over prior year. Adjusted EBITDA, a KPI we introduced this year to give a clearer view of the underlying performance of our business, excluding certain non-cash items, improved 62%. Gross accident period loss ratio was 79% for the third quarter, a 14-point improvement versus the third quarter of 2021. Our ability to recognize and respond to loss trends early, along with a higher weight of renewal premium, have driven consistent year-over-year improvement. Year-to-date, we have implemented 41 rate filings with an average increase of 35%, representing 97% of our total book. In addition, we have filed revised contracts in 25 states to tighten underwriting, refine our fee schedules and reduce premium leakage. Going forward, we will continue to take rate in response to inflationary trends and in states where we are actively working to address profitability concerns. In combination with the markets where we believe we have adequate pricing, we forecast this approach will allow our loss ratio to continue to improve to our target levels and generate capital over the long term. As Alex discussed, we have taken further expense actions to decrease cash burn. We are moving closer to our optimal cost structure by further reducing both headcount and non-headcount expenses. We expect these actions to collectively reduce run rate expenses by roughly $50 million annually. The fourth quarter will include a restructuring charge of approximately $10.5 million to $11.5 million, including fourth quarter cash expenditures of approximately $7 million to $7.5 million. We ended the third quarter with $629 million of unencumbered capital compared with roughly $696 million at the end of the second quarter. Our operating cash consumption has dropped 55% year-to-date. We are continuing to enact measures to reduce cash burn as we are focused on strengthening the financial foundation of the company. Turning to our outlook. We expect our results to reflect the actions we are taking as we navigate through this challenging environment. We anticipate that the gross written premium decline will continue into next year as growth in our embedded channel is overshadowed by declines in our direct channel as we focus on accretive business. We expect continued year-over-year improvement in adjusted EBITDA and operating loss in the fourth quarter, though to a lesser degree than the first nine months, as our cost-cutting efforts begin to improve the bottom line in the fourth quarter of 2021. We are making progress against our strategic priorities, but recognize there's further work to be done. By focusing our efforts in capital deployment in areas we believe will produce immediate returns, we believe we are positioning Root to reach profitability and create long-term shareholder value. With that, we look forward to your questions.

Your first question comes from Michael Phillips with Morgan Stanley.

I guess first question. First question relates to kind of similar wording in the letter, profitable new writings in our direct channel with limited marketing kind of expand upon that what you meant and marketing there. And then as you look out over whatever time period, 3, 5 years, what's your mix that you're looking to do for embedded versus direct because you do say that it's going to be the primary focus of our business?

Yes, thanks for the question. This is Dan Rosenthal. Look, we think embedded offers a really special opportunity as we go forward. And we're seeing the product prove out with better unit economics and a better customer experience. The technology that only we have can really service those needs and drive a superior experience. So that is our focus. We don't put a percentage on it, but you can see in the letter a really nice trend line for the percentage of our new writings that are coming from embedded, and we look forward to growing that in the quarters ahead. On the direct channel, and really for much of 2022, we're seeing that continue, we have narrowed our focus to areas that are immediately profitable. We leverage our technology and our learnings to help us find the profitable segments in direct, and that's where our focus has been. But again, going forward, there will be a greater emphasis on embedded as we continue.

I guess as I think about what else obviously on the beams on your upcoming announcement for the next partnership. But when I think about the universe is embedded, for auto insurance, I think, okay, well, the OEMs. And I think most of the OEMs already have some kind of partnership with somebody. So can you maybe just think about in specific with your upcoming announcement, like could you help me give me an educational on along on like what else should I be thinking about for where embedded can be in auto insurance?

Yes, absolutely. Look, it starts with real success in the Carvana partnership. So a growth of 200% year-to-date with a lot more on the product roadmap in the quarters ahead is exciting. And as we mentioned in the shareholder letter, we're progressing towards finalizing our next competitive partner. We expect to have an announcement in the coming months. And we've got multiple additional prospects in various stages of discussion, with more than one of those advancing rapidly. As we enter 2023, we're going to ramp up our business development and our product work going forward on embedded. Our focus is meeting consumers at logical points as companies expand out their platforms to generate revenue across their existing customer bases that will include companies in the auto sector and the financial services sector. There's actually quite a wide breadth that are interested in learning more about our embedded product and our speed to produce the bindable quote within 45 seconds. Specifically, with the auto OEMs, a lot of the partnerships that you sort of read about that are in place are not really truly embedded. They don't compare to the product that we have with Carvana. They are not driving a bindable quote within 45 seconds. They are not meeting consumers with a differentiated experience. So we think that there will be opportunities in the quarters ahead, again, across a lot of different sectors to just meet consumers at logical places and build out the embedded channel. It starts with getting the product right. It starts with getting the technology right. Our learnings show we have an industry-leading embedded technology that helps our partners quickly integrate a seamless bind experience, that quality, that differentiation is going to be appealing to a lot of folks.

Okay. Last one, if I could. You had a bull on your frequent already. What's driving the neatest declines in frequency for you guys? And then what are you assuming going forward as you do your pricing?

Sure. I'll start with as we assume in our pricing, we've got higher net trends around 9%, 10%. We are seeing kind of flat this year vehicle prices. So when you look year-over-year, we're seeing higher severity trends than we see like in the most recent six months. On the frequency, we do have mix shifts in our business. We've got some more towards more profitable or more tenured preferred segments. We also have the shift from new to renewal. All of those will kind of contribute to lower frequency, higher severity. We are seeing some decrease in mileage in the third quarter seasonality versus earlier in the year.

Your next question comes from the line of Elyse Greenspan with Wells Fargo.

My first question pertains to the recent headcount reduction, but I also noticed the focus on developing a new embedded relationship. You mentioned that gross premiums are expected to decline into next year. Can you give us an idea of when you might start seeing growth again? Or is it possible that the level of decline we anticipate at the start of next year will mirror what we observed in the third quarter and throughout 2022?

Yes. Elyse, first, I would say we are in growth mode when you look at our embedded channel. We have grown those new writings 200% year-to-date, and we expect to continue to grow that channel for us. We think that there is a huge amount of opportunity in that channel. So we do believe that we are well positioned for growth in that highly differentiated channel, and that's based on our technology. In terms of when we expect premium declines in our guidance and going forward, I'll turn it over to Rob so he could talk a bit about our expectations.

Yes. I think our expectation is, this is Rob Bateman, is that premium will decline going into next year and possibly into 2024 as the direct book sort of runs down in states that we have accretive business and we spend very little on direct marketing and as we ramp up with additional partners in the embedded channel.

And then you add continued to take a good amount of site rate increases. I guess where are you in terms of the rate increases? And what do you expect, I guess, through the balance of this year and into 2023 from a rate increase perspective throughout your book of business?

In the third quarter, we implemented 13 rate increases. To date, we've made 41 increases this year. There are still about 13 rates, which account for somewhere between 10% and 15%, that are still generating earnings. We are monitoring these trends closely, including the future potential of Trend Select, which is around 10%. We plan to continue taking aggressive rate increases as long as we observe these strong trends.

And then last one, like you guys did point out, right, that the underlying loss ratio did get trend better in the quarter. Would you expect that to continue?

Yes, we do expect that to continue, and we've seen continued progression through October. With that rate earning in and an on-level loss ratio that is materially below our Q3 loss ratio, we expect continued improvements until we hit our targets.

Your next question comes from the line of Yaron Kinar with Jefferies.

First question, going back to the frequency improvement. So I think you called out the mix change as part of the driver there. Can you maybe elaborate on that a little bit? Do you see that as a direct impact from the Carvana embedded growth? Or is there something else? And I guess the reason I'm asking this is just I'm trying to figure out if there is a risk that maybe we see that loss ratio while still improving, maybe not improving as much if our frequency trends stabilize.

Yes, this is Frank. When I consider those loss trends, we're pricing based on a 10% increase in future trends, expecting losses to rise by that amount. We're more focused on the overall total, whether frequency decreases or severity increases. We recognize that new business typically incurs higher losses than renewals. Therefore, as we grow, we anticipate an uptick in the frequency and severity shift. However, if we implement sufficient rate increases to maintain the loss ratio, even with rising frequency, the loss ratio should decline. That's our perspective. Some of these mix shifts are indeed moving towards more profitable segments, including Carvana and our new segmentation models, which are yielding lower rates for preferred segments. This shift, along with the changes in the renewal mix, contributes to the observed decrease in frequency. It's important to note that this reflects observed frequency and severity from one quarter to the next, rather than our expectations moving forward.

And then with the headcount actions that you took overnight, I think those come on top of actions earlier in the year. So can you maybe talk a little bit about where the reduction is coming from? Is it broad-based? Or is it concentrated in specific units? And maybe how do we, as outsiders, look at this and have confidence that you're not cutting to the bone?

Yes, thanks for that question, Yaron. So where we are focused right now is on driving the company to profitability. We have been taking aggressive expense action throughout the year on both headcount and non-headcount, and we have materially reduced our cash fixed expenses year-to-date. We think that that is appropriate given the increase in cost of capital and given the uncertain environment that we are in, and we believe that that's very necessary. Now I will point out, in terms of cutting to the bone, during that period where we were eliminating almost 50% of our cash fixed expenses, we were still able to ship what we believe is an incredibly innovative product with Carvana and actually grow that product 200% almost entirely through product improvements and innovation and the flows and the experience for customers. So we do not believe that we are cutting to the bone. In addition, we were able to make meaningful segmentation improvements and continue to make meaningful segmentation improvements in our models. So we are still actually able to keep the momentum going forward. Rob, do you want to comment a bit on where exactly the expense savings are occurring?

Sure. So we're talking about is more of a pivot to embedded growth. If you were to look at our headcount reductions, they really were around marketing and other personnel that support the direct channel. Then just other areas that we just felt that we needed to take some headcount out as our premium comes down.

Your next question comes from the line of Matt Carletti with JMP.

I guess I have one question left that a lot of others have been answered. In your letter, you say that we believe we have the ability to reach breakeven in the coming years. My question is, is the caveat to that without raising additional capital? Or do you see that happening with the need for additional capital down the road?

So Matt, this is Rob. I believe we have sufficient capital to execute our strategy in the coming years. When considering the reductions we're making in the loss ratio, the implementation of policyholder fees, the minimization of marketing expenses, and cost reductions, we anticipate investing around $400 million in cash this year to take advantage of current interest rates. We're committed to reducing cash burn and generating revenue. Looking at the growth trajectory over the next few years, we are confident in our capital to carry out our strategy. Our primary goal is to control our own destiny, and we are focused on what we need to do to achieve that through expense reductions, underwriting, and investment strategies. Of course, the outcome will also depend on the macroeconomic environment. However, given the actions we have taken and our past efforts, we believe we have the capacity to move forward with our strategy.

Your next question comes from the line of Tracy Benguigui with Barclays.

I think I heard you comment that you expect to take some rate actions and these rates are still earning in. But if I could get some clarity on a comment you made in your shareholder letter, where you mentioned you believe you have achieved rate adequacy in a significant number of your markets. So how much of that book does significant markets represent? And what gives you confidence that you've achieved rate adequacy?

Sure. This is Frank. When considering the overall loss ratio, it significantly varies by state. For instance, California has not permitted rate increases for nearly two years, and as a result, we are not rate adequate there. We have substantially reduced our writings in that state. Currently, we believe we are rate adequate in between five and ten states, and we continue to see rates being implemented in those states. There are also other states where we anticipate achieving rate adequacy over the next year. Therefore, as we discuss our targeted marketing efforts, we're engaging in limited amounts of focused marketing, specifically aiming at states where we believe we are rate adequate, particularly in segments that we consider to be capital-accretive in the short term.

And I'd add, when we look at the third quarter, we have an on-level loss ratio, so accounting for all of the rates that we have already taken. This does not even account for the future rate we will take. We are seeing an on-level loss ratio in the low 60s. As we publicly said, our long-term target is 65%. That gives us a lot of confidence when you look at the book of business that we have taken appropriate action to get to rate adequacy in many areas.

So what percentage of your book premium-wise is those five to ten states represent?

About 40%.

And then just going back to the frequency comments about the improvement. You said you're not expecting that to continue. So when you come up with your loss picks, are you seeing or booking a number that reflects your perspective view and not what you're seeing now on the frequency side?

Correct. We're pricing to expected future loss trends, which, as I mentioned, we're seeing between 9% and 10%, and not necessarily on the year-over-year. Last year, you had dramatically increasing this but not as much on the liability or medical cost. This year, we're seeing much flatter on the severity. Used car prices have been flat most of this year, but we're seeing some increase in litigation and medical costs. I wouldn't set the prices based on the frequency severity of quarter three over quarter three. So we're setting our future rate need and future rate expectations based upon that in total, about 10% going forward.

Your next question comes from the line of Francois Maisonrouge with Evercore.

In the press release, you mentioned the goal of decreasing cash burn next year. Can you quantify that for us? How much less cash burn would you be expecting in 2023?

Well, this is Rob. As I mentioned earlier in the call, we are making every effort to reduce cash burn and increase cash generation. We anticipate that our cash burn will be significantly lower next year compared to this year. While we have not disclosed a specific number yet, we do expect it to be considerably less than this year. If you examine our adjusted EBITDA, you'll see an improvement of 62% year-over-year. With the rate actions we're implementing, the enhancements in loss ratios, adjustments to fees, and the cost reductions we've enacted, we believe our cash burn will be much lower next year.

And just on the timing of the $50 million annual expense savings, when would you expect to reach that full $50 million?

I would say by the end of the year, the headcount reductions will be complete for 2023. For the non-headcount reduction, it will take the full year to recognize the remainder of that $50 million.

Your next question comes from the line of Mark Hughes with Truist.

Can you just talk about your posture towards reinsurance, what you see in terms of pricing dynamics? How much you intend to perhaps rely on reinsurance on a go-forward basis?

So this is Rob again. Regarding the reinsurance market, if you consider our program, we have several treaties in place. We have a typical catastrophe treaty for auto and a single occurrence excess of loss. Our main capital support comes from several quota share agreements, which we renew annually. Currently, we've been able to achieve the terms we desire, and we haven't experienced much pressure on the terms and pricing. We have slightly reduced our quota shares; for instance, we moved from a 35% quota share to a 30% quota share. However, we haven't noticed significant tightening in our terms. As our loss ratio improves, we do anticipate gradually reducing our quota shares. Our quota shares include some punitive loss corridors that we plan to eliminate over time.

And then I didn't get that number, but the unencumbered capital at the end of the quarter, what was that number?

I think it was yes. It's in the script.

Your next question comes from the line of Brian Meredith with UBS.

A couple of quick questions here for you. First, did you have any losses from Hurricane Ian? Was there any cat losses in the quarter? Because I know there's some auto loss in that hurricane.

Brian, this is Rob. To address the last question, we had $629 million in cash at the end of the quarter. Regarding Hurricane Ian, we essentially had no exposure. We have minimal involvement in Florida since we only started writing there a couple of months ago, so the number of claims we've received is quite low at this time.

I have a question about Carvana, as there has been significant media attention regarding their financial situation. Is there still much to be done to develop that partnership in terms of worker investment from Carvana? Have you observed any slowdown in that area? Additionally, if something were to go wrong with Carvana, would there be any financial implications for you?

Brian, this is Dan. Thanks for the question. No question, economic conditions are impacting car sales on a macro level. We believe the Carvana team is focused in the right areas. Where economic conditions are driving an even higher focus on gross profit per unit means an even higher focus on the insurance product. The product roadmap that we are building is being proven out. We expect it to improve the attach rate next year, and there's focus from both companies on doing so, which is wonderful for our embedded product. As far as the second part of your question, no, I can't foresee any financial ramifications with the agreement that we have in place with Carvana. It's pretty straightforward that as they continue to sell cars, we're focused on driving attach rate and ultimately leading to new writings. Again, we believe that the macroeconomic conditions around car sales are not going to have a negative impact on our ability to drive new writings.

Makes sense. And then I guess I want to quickly slip in here. I'm noticing that the renters PIF has been declining sequentially for a little while. Can you just remind us what's going on with that business?

Yes. We have renters really as a cross-sell opportunity. It's a very low-premium product, so we don't look to acquire monoline renters. It's just hard to ever recoup the customer acquisition cost. It is a cross-sell product that is primarily active in our direct channel. As we have deprioritized, to some extent, the direct channel in favor of growing the embedded channel, we have seen the PIF and the policies in force decline.

Yes, Brian, this is Dan. What you're seeing from us is a strong focus on execution and prioritization. We've been implementing this strategy for over a year, and it has been effective. We have made progress in leveraging our technology and enhancing our pricing and underwriting foundation. Now, we need to continue on this path to drive embedded growth and maintain our focus and prioritization. That's where our efforts are concentrated.

Your next question comes from the line of Josh Siegler with Cantor Fitzgerald.

This is Keeler on for Josh. So the growth in the Carvana product has been really impressive, and it's exciting to hear that you're close to closing a second embedded partnership. Will the lessons learned and the work you did on Carvana make a second embedded product easier to bring to market and scale? And are you able to add any detail around what a second embedded rollout might look like?

Yes. Thanks for the question, Josh. This is Dan. We're really excited about the opportunities in the embedded product. That's what you're hearing from us. As we build the channel, we're really going to have two types of products and two types of partners. One that's more customized, focused on the underlying customer, focused on the opportunities within that particular partner and within that particular channel. We're seeing opportunities to leverage the learnings from Carvana, what has worked, what has not worked into creating a more successful customized product for other partners. We're also finding that in order to drive new writings volume in a positive way, we can leverage those learnings to create more of an off-the-shelf product so that we can drive that faster and more seamless integration with partners that don't require the significant level of customization. That's part of how we're going to be able to drive new writings with the team and the resources that we have in place.

Your next question comes from the line of Andrew Kligerman with Credit Suisse.

First question, I need a little more clarification on how you're adjusting pricing to account for 10% increases in rates for future losses. Does that indicate that your work isn't finished and that you will need to raise rates across the board this year? Also, is this increase coming from areas like litigation and social inflation? Please elaborate on the reasons behind this need.

Absolutely. When we think about where we are today, again, when we look at the current loss levels and the current level of where we're seeing severities and frequencies coming in, we do believe, given our on-level loss ratio being in the low 60s, that we are broadly rate adequate across many markets for where loss costs are today. That said, going forward, we do believe that as inflation continues, whether it's from social inflation, medical inflation, labor inflation, parts inflation, whatever it may be, we do believe that we need to continue to take rates as the entire industry will need to continue to take rates to keep up with an ever-rising cost inside of our claims costs. That's what we're talking about when we say a 10% forward trend is that we want to take at least 10% rate sort of going forward so that we can keep up with inflation.

So hard to say exactly where, but you're feeling it, and you expect that inflation to continue. Is that the right way to think about it?

That's the right way to think about it. I will note we're seeing right now in our actual numbers, something lower than what we are assuming going forward. We are in a very conservative stance, we believe, with a 10% forward trend.

With your loss ratio having improved so much, when we think about Carvana, which is a lot newer than direct, how is the profitability there? Could you share anything around the loss ratios on your Carvana business to date?

We are observing significantly improved loss ratios in the Carvana and embedded business. This improvement is largely because many of the customers are making purchases from us without primarily focusing on price. When customers buy through Carvana, they typically have fewer alternatives to compare against compared to when they buy directly from us. Additionally, we believe we've reduced certain moral hazards, leading to less fraud in that channel. Although it is still early, all the initial indicators for the Carvana loss ratios are looking very positive, and it is exceeding our direct business performance when we analyze those early loss ratio indicators.

And then just lastly, and congrats on the second embedded product, what are you seeing in terms of competition for that business? I'm sure a lot of the big auto players are taking notice of what you're doing. Are you seeing a lot of competition as you aim to write embedded business? If you could elaborate on how that's playing out, that would be great.

Yes, this is Dan. Thanks for the question. We are seeing a lot of people talk about embedded. But when you think about what Alex just said around ease and around the customer experience, we are not seeing competition in terms of the product that we offer. We are leveraging the technology that we have built to have our partners quickly integrate a seamless buying experience for their customers, and we're doing so, I think, faster than others for two reasons. One, we've built the technology stack in the right way, and it allows us to access everything interconnected in a very, very fast manner. Number two, you're hearing from us that embedded is our priority. We are driving embedded auto insurance as our top priority for growth. As Alex said, we're already in growth mode. We're already leveraging the foundation that Frank and team and Matt and team have helped build around the pricing and underwriting side to go forward with the embedded growth. Driving that prioritization is something that partners and prospective partners are really feeling from us. When they interact with us and they ask questions and say, can you introduce this product or can you introduce this level of customization to address a specific customer need, we can respond very, very fast. We have an embedded team that is second to none, deeply passionate about creating a differentiated customer experience that will impact how consumers buy their car insurance for many, many years to come. That's what our prospective partners are feeling: speed to market and a level of customization that no one else has.

Interesting. Actually gives me one last follow-on. Just given what you announced today with the second partner and what you just said, does this give you a lot of optimism about 2023 and that we'll be hearing about more partnerships that you'll be binding?

Yes. Thanks for the question. Just to be clear, we're not announcing a second partner today. We're announcing multiple partners in various stages deep into the funnel and, frankly, just excitement around the product. Look, I don't want to be over-exuberant on this. We think that we have built a product that is highly differentiated and showing very, very clear success with our launch partner. As Alex said, we've scaled those new writings 200% year-to-date. We will continue to do so, but we want to make sure that we choose the right partners—that we build the right products and that we test those products in the right states with the right customer segments and then scale them. That's our focus. I'm not promising significant embedded new writing growth next quarter, and I don't want you to think that. But I want you to understand that embedded insurance is our top priority from a growth perspective. We are seeing it work, and we are going to continue to invest in scaling the channel from here.

Your final question comes from the line of Tommy McJoynt with KBW.

Just a quick follow-up or two actually on Mark's earlier question on reinsurance. Just confirming if I heard your comments correctly that you have not seen and are not expecting any changes in the ceding commission on those quota share contracts?

We have observed very minimal changes in the ceding commission. We have adjusted our approach by backing off on our partnership percentage while maintaining our firm order terms, particularly when we encounter nonconcurrent terms. However, we are noticing some improvement in the contract terms, especially regarding the loss corridor as our loss ratio improves, which aligns with expectations.

And just remind me, are your quota share agreements staggered or multi? Or what's the setup of those?

Yes. The way we work is they're multiyear agreements that are risk attaching. If we have a risk that we write this year, that quota share will stay with that risk for the period that it's on the books for up to about four years, depending on the contract.

And then just last one, is there a long-term sort of steady-state level for the quota share percentage that you envision?

There is—we just have not—we haven't gotten there yet. We still have some analysis to do around it.

That concludes today's conference. Thank you for participating. You may disconnect at this time.