ROOT, INC. – 10-K – Management report and analysis of the financial situation and operating results

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.
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 2019 performance or a comparison of
2020 versus 2019 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, 2020 filed with the Securities and Exchange Commission, or the SEC,
on March 4, 2021.

Overview

Root is a technology company revolutionizing personal insurance with a pricing
model based upon fairness and a modern customer experience. We operate primarily
a direct-to-consumer model in which we currently acquire the majority of our
customers through mobile applications.

We believe the Root advantage is derived from our unique ability to efficiently
and effectively bind auto insurance policies quickly, aided by segmenting
individual risk based on complex behavioral data and proprietary telematics, a
customer experience built for ease of use and a product offering made possible
with our full-stack insurance structure. These are all uniquely integrated into
a single cloud-based technology platform that captures the entire insurance
value chain-from customer acquisition to underwriting to claims and
administration to ongoing customer engagement.

Our model benefits from the maturity of the portfolio. As we grow the business, our
results are disproportionately skewed towards new customers compared to
traditional insurers. As we build an underlying base of recurring revenue
customers, we anticipate the following financial impacts:

•Improved loss ratio. Renewal premiums, referring to premiums from a customer's
second term and beyond, have lower loss ratios as compared to new premiums in
the customer's first term. As we grow our business, we anticipate, consistent
with industry norms, that a greater proportion of our premiums will be from
customer renewals and drive down the loss ratio across our portfolio.

•Reduced marketing as a percentage of premium. Recurring customer premiums have
no associated customer acquisition costs and minimal underwriting costs, driving
profitability. As we grow our business, we anticipate, consistent with industry
norms, that a greater proportion of our premiums will be from customer renewals
without associated marketing costs.

•Improved retention. As a young insurance carrier weighted towards new
customers, we naturally have a higher percentage of more frequent shoppers. As
our business tenures and our flywheel spins, allowing us to increase our pricing
advantage, we will have the opportunity to acquire more long-standing customers
and retain those that might naturally shop frequently. In addition to our
pricing advantage, we anticipate our expanding relationships with customers
through product bundling will demonstrate further improvement in retention.

•Increased revenue per customer. The expansion of our products provides an opportunity
to generate additional bonus and commission revenue per customer without hardware
marketing overhead.

We use technology to drive efficiency across all functions, including
distribution, underwriting, policy administration and claims in particular. We
believe this allows us to operate with a cost to acquire and cost to serve
advantage. We continue to develop machine learning loss models, which allows us
to respond more quickly to changes in the market, improve pricing segmentation
through enhancements to our UBI model and take appropriate rate actions. We
efficiently acquire customers directly through multiple channels, including
embedded, digital

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(performance), channel media, referrals and agency. Our marketing costs have
historically been well below industry averages, although in any given period,
these costs can vary by channel mix, by state, or due to seasonality or due to
the competitive environment. Today, we acquire the vast majority of our
customers through our mobile app and mobile website. We believe that through
prudent investment in and diversification of our marketing channels, including a
focus on embedded insurance through our exclusive partnership with Carvana, and
leveraging proprietary data science and technology to build out independent
agent products and relationships, will position us for more sustainable,
long-term and profitable growth. Additionally, we are realizing operating
efficiencies as we scale against our fixed expense base. Our claims management
expenses, as represented by our loss adjustment expenses, or LAE, are in line
with peers within only three years of bringing claims management in-house and we
expect to improve as we further embed machine learning into our processes.

We also use our proprietary technology to measure long-term benefits to our
business. When a state reaches certain maturation thresholds, we refer to it as
a seasoned state. A seasoned state is defined as a state where (1) the regulator
has approved our data science-driven telematics and pricing models and (2) we
have been writing policies in the state for a minimum of one year with a minimum
of two pricing filings.

As a full-stack insurance company, we currently employ a "capital-light" model,
which utilizes a variety of reinsurance structures at elevated levels of
reinsurance. These reinsurance structures deliver three core objectives (1)
top-line growth without a commensurate increase in regulatory capital
requirements, (2) support of customer acquisition costs and (3) protection from
outsized losses or tail events. We expect to maintain an elevated level of
third-party quota share reinsurance while rapidly growing our business in order
to operate a capital-light business model. As our business scales, we expect to
have the flexibility to reduce our quota share levels to maximize the return to
shareholders.

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas
county mutual insurance company, or the fronting carrier. Pursuant to this
arrangement, we route all of our new auto policies and, over time, expect to
route certain renewal auto policies, in Texas through the fronting carrier. In
exchange for a commission paid to the fronting carrier, we assume 100% of the
related premium and losses on those policies. Through this fronting arrangement,
we have greater rating and underwriting flexibility that we believe will allow
us to more accurately segment risk in Texas to improve profitability.

Given the significant impact of reinsurance on our results of operations, we use
certain gross basis key performance indicators to manage and measure our
business operations and enhance investor understanding of our business model
prior to reinsurance. We believe our long-term success will be apparent through
the progression of our gross metrics. Results of operations on a gross basis
alone are not achievable under our regulatory landscape given our top-line
growth and resulting capital requirements, which are relieved, in part, by
obtaining reinsurance. The gross metrics include gross written premium, gross
earned premium, direct contribution, ratio of direct contribution to gross
earned premium, gross loss ratio, gross LAE ratio and gross accident period loss
ratio. For additional information, including definitions of these key metrics,
see "- Key Performance Indicators" and for a reconciliation of direct
contribution to the most directly comparable generally accepted accounting
principles in the United States, or GAAP, metric, see "- Non-GAAP Financial
Measures."

Main factors and trends affecting our operating performance

Our financial condition and results of operations have been and will continue
be, affected by a number of factors, including the following:

Our ability to manage risk

Advertising

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 that 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.

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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, machine
learning loss models and our telematics-based pricing. 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 our embedded experience and digital marketing channels. Our
ability to attract new customers will depend on a number of factors, including
the pricing of our products, offerings of our competitors, our ability to expand
into new markets, and the effectiveness of our marketing efforts. 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 our 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 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 obtain a license in all states of 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 (48 states for personal auto) and the District of Columbia
and operate in 32 of those states. Our continuous 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.

To expand our geographic footprint, by November 2020we acquired all
authorized, issued and outstanding shares of Catlin Compensation Society,
later renamed Root Property and Casualty Insurance Companyor Root
Property and accidents.

Our ability to increase premium and expense revenue per policy through cross-selling

We are in the early stages of cross-selling non-auto products across our
customer base. In 2019, we began offering renters insurance and, in May 2020, we
launched our homeowners insurance product in partnership with Homesite
Insurance, or Homesite. Cross-sales allow us to generate additional premiums
(renters) and fee income (homeowners) 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
depends on our marketing efforts with new products, continuous state expansion
of these offerings and the pricing of our bundled products. 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

Impact of COVID-19

In March 2020the World Health Organization declared COVID-19 a global
pandemic. The pandemic and related measures taken to contain the spread of
COVID-19, such as government-mandated business closures,

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"shelter in place" orders, or SIPs, and travel and transportation restrictions,
have negatively affected the U.S. and global economies, disrupted global supply
chains and led to unemployment. We, and other businesses within the insurance
industry, have been impacted by certain individual state bulletins that were
issued in 2020 and outlined COVID-19 premium relief efforts, including
restrictions on the ability to cancel policies for non-payment, requirements to
defer insurance premium payments for up to 60 days and restrictions on
increasing policy premiums. The COVID-19 pandemic and governmental responses
thereto have impacted and may further impact the broader economic environment,
including creating or exacerbating supply chain disruptions and inflation and
negatively impacting unemployment levels, economic growth, the proper
functioning of financial and capital markets and interest rates.

As a result of the SIPs that started to occur toward the end of March 2020, our
customers drove less and we had a resulting decline in loss costs during the
first quarter of 2020. Most parts of the country eased COVID-19-related
restrictions and began to return to customary levels of business activity during
the second quarter of 2021. We are now seeing miles driven exceed pre-COVID-19
levels. As a result of the increase in average miles driven, claims frequency
has rebounded proportionally. In addition, the economic instability caused by
the COVID-19 pandemic has led to acute inflationary pressures and supply chain
disruptions, which have increased the value of used vehicles and replacement
parts in 2021. These cost increases have resulted in greater claims severity
while being partially offset by higher salvage and subrogation recoveries on
damaged vehicles. As a result of certain factors related to the COVID-19 global
pandemic, we continue to file in multiple states to establish rates that more
closely follow the evolving loss cost trends.

The American Rescue Plan Act became law in March 2021 and provided a third round
of stimulus payments from the federal government to many American consumers. The
easing of COVID-19 SIPs and these stimulus payments led to an unexpected surge
in interest in vehicle and auto insurance purchases. This elevated interest
resulted in a significant increase in customer acquisition and advertising
campaigns in digital channels on the part of our competitors, increasing our
customer acquisition costs during 2021. With the recent surge of the Delta and
Omicron variants of COVID-19 across the United States and increasing rates of
COVID-19 cases and hospitalizations, it is unclear what the impact of the
pandemic will be on future operations. As the COVID-19 pandemic continues, there
is ongoing uncertainty around the severity and duration of the pandemic and the
pandemic's potential impact on our business and our financial performance. See
the section titled "Risk Factors" for more details.

Global reinsurance

We expect to continue to utilize reinsurance in the future, and our diversified
approach to reinsurance allows us to be flexible in response to changes in
market conditions or our own business changes, which allows us to strategically
fuel growth and technology investment by optimizing the amount of capital
required.

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Key performance indicators

We regularly review a number of metrics, including the following key performance
indicators, to evaluate our business, measure our performance, identify trends
in our business, prepare financial projections and make strategic decisions. We
believe these non-GAAP and operational measures are useful in evaluating our
performance, in addition to our financial results prepared in accordance with
GAAP. See the section titled "- Non-GAAP Financial Measures" for additional
information regarding our use of adjusted gross profit/(loss) and direct
contribution and their reconciliations to the most directly comparable GAAP
measures.
                                                                       Years Ended December 31,
                                                            2021                     2020                 2019
                                                           (dollars in millions, except Premiums per policy)
Policies in force
Auto                                                         354,371                322,759              281,310
Renters                                                        8,802                  7,739                1,747
Premiums per policy
Auto                                                $          1,006            $       939          $       904
Renters                                             $            140            $       140          $       127
Premiums in force
Auto                                                $          713.0            $     606.1          $     508.6
Renters                                             $            1.2            $       1.1          $       0.2
Gross written premium(1)                            $          742.6            $     616.8          $     451.1
Gross earned premium(1)                             $          719.6            $     605.2          $     352.9
Gross profit/(loss)                                 $          (51.9)           $     (14.2)         $     (83.5)
Gross margin                                                   (15.0)   %              (4.1) %             (28.8) %
Adjusted gross profit/(loss)                        $           (3.3)           $      21.0          $     (54.2)
Direct contribution                                 $            8.1            $      18.9          $     (57.4)
Ratio of adjusted gross profit/(loss) to total
revenue                                                         (1.0)   %               6.1  %             (18.7) %
Ratio of adjusted gross profit/(loss) to gross
earned premium                                                  (0.5)   %               3.5  %             (15.4) %
Ratio of direct contribution to total revenue                    2.3    %               5.4  %             (19.8) %
Ratio of direct contribution to gross earned
premium                                                          1.1    %               3.1  %             (16.3) %
Gross loss ratio                                                86.0    %              82.0  %              99.9  %
Gross LAE ratio                                                 10.5    %              10.1  %              12.0  %
Gross accident period loss ratio                                87.9    %              76.2  %             103.0  %


______________

(1) Includes premiums assumed from the fronting carrier that commenced in August
2021. Assumed written premium and assumed earned premium for the year ended
December 31, 2021 were $16.7 million and $7.3 million, respectively. Prior to
the fronting carrier commencement, we did not assume any premiums.


Applicable policies

We define policies in force as the number of current and active policyholders
underwritten by us as of the period end date. We view policies in force as an
important metric to assess our financial performance because policy growth
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 written premium on policies
in force 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. As discussed below in gross
written premium, this key

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performance indicator has been updated to include assumed premiums written
beginning in the third quarter of 2021. There is no impact on the
periods for this change.

Premiums in effect

We define premiums in force for our auto policies as premiums per policy
multiplied by policies in force multiplied by two. We view premiums in force as
an estimate of annualized run rate of gross written premium as of a given
period. Since our auto policies are six-month policies, we multiply this figure
by two in order to determine an annualized amount of premiums in force. We
define premiums in force for our renters policies as premiums per policy
multiplied by policies in force. We view this as an important metric because it
is an indicator of the size of our portfolio of policies as well as an indicator
of expected earned premium over the coming 12 months. Premiums in force is not a
forecast of future revenue nor is it a reliable indicator of revenue expected to
be earned in any given period. We believe that our calculation of premiums in
force is useful to investors and analysts because it captures the impact of
growth in customers and premiums per policy at the end of each reported period,
without adjusting for known or projected policy updates, cancellations and
non-renewals.

Gross written premium

We define gross written premium, as the total amount of gross premium on
policies that were bound during the period less the prorated impact of policy
cancellations. Gross written premiums includes direct premiums and assumed
premiums. We began assuming premium during the third quarter of 2021 in
connection with our entry into an arrangement with a fronting carrier in Texas;
therefore, there is no impact to this key performance indicator for any prior
periods. We view gross written premium as an important metric because it is the
metric that most closely correlates with our growth in gross earned premium. We
use gross written premium, which excludes the impact of premiums ceded to
reinsurers, to manage our business because we believe that it reflects the
business volume and direct economic benefit generated by our customer
acquisition activities, which along with our underlying underwriting and claims
operations (gross loss ratio and gross LAE) are the key drivers of our future
profit opportunities. Additionally, premiums ceded to reinsurers can change
significantly based on the type and mix of reinsurance structures we use, and,
as such, we have the optionality to fully retain the premiums from customers
acquired in the future.

Gross Earned Premium

We define gross earned premium as the amount of gross premium that was earned
during the period. Premiums are earned over the period in which insurance
protection is provided, which is typically six months. Gross earned premium
includes direct premiums and assumed premiums. We began assuming premium during
the third quarter of 2021 in connection with our entry into an arrangement with
a fronting carrier in Texas; therefore, there is no impact to this key
performance indicator for any prior periods. We view gross earned premium as an
important metric as it allows us to evaluate our growth prior to the impacts of
reinsurance. It is the primary driver of our consolidated GAAP revenues. As with
gross written premium, we use gross earned premium, which excludes the impact of
premiums ceded to reinsurers to manage our business, because we believe that it
reflects the business volume and direct economic benefit generated by our
customer acquisition activities, which along with our underlying underwriting
and claims operations (gross loss ratio and gross LAE) are the key drivers of
our future profit opportunities.

Gross profit/(loss)

We define gross profit/(loss) as total revenue minus net loss, and LAE expense
and other insurance expense (benefit) inclusive of depreciation and
amortization. We view gross profit/(loss) as an important metric because we
believe it is informative of the financial performance of our core insurance
business.

Gross profit/(loss) margin is equal to gross profit/(loss) margin divided by revenue.

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Adjusted gross profit/(loss)

We define adjusted gross profit/(loss), a non-GAAP financial measure, as gross
profit/(loss) excluding net investment income, net realized gains (losses) on
investments, report costs, Personnel Costs, allocated Overhead, licenses,
professional fees and other expenses, which are included in other insurance
(benefit) expense. After these adjustments, the resulting calculation is
inclusive of only those variable costs of revenue incurred on the successful
acquisition of business. We view adjusted gross profit/(loss) as an important
metric because we believe it measures our progress towards profitability for our
core insurance business.

The ratio of adjusted gross margin/(loss) to total revenue is equal to
gross profit / (loss) divided by total revenue.

See the section entitled “- Non-GAAP Financial Measures” for a reconciliation of
total revenue to adjusted gross profit / (loss).

Direct contribution

We define direct contribution, a non-GAAP financial measure, as adjusted gross
profit/(loss) excluding ceded earned premium, ceded loss and LAE, and net ceding
commission and other. Net ceding commission and other is comprised of ceding
commission received in connection with reinsurance ceded, partially offset by
related sliding scale commission adjustments and amortization of excess ceding
commission, and other impacts of reinsurance ceded which are included in other
insurance (benefit) expense. After these adjustments, the resulting calculation
is inclusive of only those gross variable costs of revenue incurred on the
successful acquisition of business, but exclusive of net ceding commission,
ceded loss and LAE and other impacts of reinsurance ceded. We view direct
contribution as an important metric because we believe it measures progress
towards the profitability of our total policy portfolio prior to the impact of
reinsurance.

The ratio of direct contribution to total revenue is equal to
contribution divided by total revenue.

See the section entitled “- Non-GAAP Financial Measures” for a reconciliation of
total revenue to direct contribution.

Ratio of adjusted gross profit/(loss) to gross premium earned

The ratio of adjusted gross profit/(loss) to gross earned premium measures the
relationship between the underlying business volume and gross economic benefit
generated by our underwriting operations, on the one hand, and our underlying
profitability trends, on the other. We rely on this measure, which supplements
our gross profit/(loss) ratio as calculated in accordance with GAAP, because it
provides management with insight into our underlying profitability trends with
respect to our customer base. We use gross earned premium as the denominator in
calculating this ratio because it reflects business volume free of elective
capital-light choices related to our reinsurance programs. As discussed above in
gross written premium, this key performance indicator has been updated to
include assumed earned premiums in the calculation of ratio of adjusted gross
profit/(loss) to gross earned premium during the third quarter of 2021. There is
no impact to any prior periods for this change.
                                                                   Years Ended December 31,
                                                         2021                2020                2019
                                                                     (dollars in millions)
Numerator: adjusted gross profit/(loss)              $     (3.3)         $     21.0          $    (54.2)
Denominator: total gross earned premium              $    719.6          $    605.2          $    352.9
Ratio of adjusted gross profit/(loss) to gross
earned premium                                             (0.5) %              3.5  %            (15.4) %


Ratio of direct contribution to gross earned premium

The ratio of direct contribution to gross earned premium measures the
relationship between the underlying business volume and gross economic benefit
generated by our underwriting operations, on the one hand, and our underlying
profitability trends, on the other, without contemplating the impacts of
reinsurance. We rely on this measure, which supplements our gross margin as
calculated in accordance with GAAP, because it provides

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management with insight into our underlying profitability trends with respect to
our total policy portfolio. We use gross earned premium as the denominator in
calculating this ratio because it reflects business volume free of elective
capital-light cession or commission structures choices from our reinsurance
ceded programs. As discussed above in gross written premium, this key
performance indicator has been updated to include assumed earned premiums in the
calculation of ratio of direct contribution to gross earned premium during the
third quarter of 2021. There is no impact to any prior periods for this change.
                                                                Years Ended December 31,
                                                            2021          2020          2019
                                                                 (dollars in millions)
Numerator: direct contribution                           $   8.1       $  18.9       $ (57.4)
Denominator: total gross earned premium                  $ 719.6       $ 

605.2 $352.9
Ratio of direct contribution to gross earned premiums 1.1% 3.1% (16.3)%

Gross Loss Ratio

We define gross loss ratio expressed as a percentage, as the ratio of gross
losses to gross earned premium. Gross loss ratio excludes LAE. We view gross
loss ratio as an important metric because it allows us to evaluate incurred
losses and LAE separately prior to the impact of reinsurance. As discussed above
in gross written premium, this key performance indicator has been changed to
include assumed losses and assumed earned premiums in the calculation of gross
loss ratio beginning during the third quarter of 2021. There is no impact to any
prior periods for this change.

Gross LAE ratio

We define gross LAE ratio expressed as a percentage, as the ratio of gross LAE
to gross earned premium. We view gross LAE ratio as an important metric because
it allows us to evaluate incurred losses and LAE separately. Currently, we do
not cede any of our LAE to our third-party quota share reinsurance treaties;
therefore, we actively monitor LAE ratio as it has a direct impact on our
results regardless of our reinsurance strategy. As discussed above in gross
written premium, this key performance indicator has been changed to include
assumed LAE and assumed earned premium in the calculation of gross LAE ratio
beginning during the third quarter of 2021. There is no impact to any prior
periods from this change.

Gross loss ratio by accident period

Gross accident period loss ratio, expressed as a percentage, represents all
losses and claims expected to arise from insured events that occurred during the
applicable period regardless of when they are reported and finally settled
divided by gross earned premiums for the same period. Changes to our loss
reserves are the primary driver of the difference between our gross accident
period loss ratio and gross loss ratio. We believe that gross accident period
loss ratio is useful in evaluating expected losses prior to the impact of
reinsurance. As discussed above in gross written premium, this key performance
indicator has been changed to include assumed accident period losses and assumed
earned premium in the calculation of gross accident period loss ratio beginning
during the third quarter of 2021. There is no impact to any prior periods from
this change.

Components of our operating results

Income

We generate revenue primarily from the sale of auto insurance policies within
the United States and, to a lesser extent, from the sale of renters insurance
policies. We have agency operations that generate commission revenue by selling
homeowners insurance policies on behalf of a third-party insurance company. We
distribute website and app policy inquiry leads in geographies where we do not
have a presence to third parties in exchange for fee revenue. We also generate
revenue through fee income from our customers paying on installment and from net
investment income earned on our investment portfolio.

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Net earned premiums

Premiums written are deferred and earned pro rata over the policy period. Net
premiums earned represents the earned portion of our gross written premium, less
the earned portion that is ceded to third-party reinsurers under our reinsurance
agreements.

Net Investment Income

Net investment income represents interest earned from our fixed maturity and
short-term investments and cash and cash equivalents less investment expenses,
unrealized gains from our private equity investments, and impairment of our Low
Income Housing Tax Credits, or LIHTC, project investments. Net investment income
is directly correlated with the overall size of our investment portfolio, market
level of interest rates, changes in fair value of our private equity investments
and utilization of premium tax credits generated by our LIHTC investment. Net
investment income will vary with both the size of our investment portfolio,
market returns and the investment strategy.

Net realized gains on investments

Net realized gains on investments represent the net positive difference between
the amount we received from the sale of an investment compared to the
basic investment cost.

fee income

For those policyholders who pay premiums on an installment basis, we charge a
flat fee for each installment related to the additional administrative costs
associated with processing more frequent billing. We recognize this fee income
in the period in which we process each installment.

Other income

Other income primarily comprises revenue earned from distributing website and
app policy inquiry leads in geographies where we do not have a presence,
recognized when we generate the lead; commissions earned for homeowners policies
placed with a third-party insurance company where we have no exposure to the
insured risk, recognized on the effective date of the associated policy; and
sale of enterprise technology products to provide telematics-based data
collection and trip tracking, recognized ratably as the service is performed.

Functionnary costs

Our operating expenses include loss and LAE, sales and marketing, other
insurance costs (benefit), technology and development, and overhead and
administrative expenses.

Claims and claims adjustment expenses

Loss and LAE include an amount determined using adjuster determined case-base
estimates for reported claims and actuarial determined unpaid claim estimates
using past experience and historical emergence patterns for unreported losses
and LAE. These reserves are a liability established to cover the estimated
ultimate cost to settle insured losses. The unpaid loss estimates consider loss
trends, mix of business, and other risk factors impacting claims settlement. The
method used to estimate unpaid LAE liability is based on claims transaction
data, including the relative cost of adjusting and settling a range of claim
types from express material damage claims to more complex injury cases.

Loss and LAE is 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 for growth. These expenses are a function of the size and
term of the insurance policies we write and the loss experience associated with
the underlying risks. Loss and LAE may be paid out over a period of years.

Various other expenses incurred while processing claims are considered EALs.
These amounts include claims wages, health benefits, bonuses, employees
expenses related to pension plans and shares

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remuneration expenses or staff costs; software costs; internally developed
amortization of software; and overhead allocated based on headcount or overhead.

Sales and Marketing

Sales and marketing expense includes spend related to performance and embedded
channels, channel media, advertising, branding, public relations, consumer
insights and referral fees. These expenses also include related Personnel Costs,
Overhead and warrant compensation expense related to our embedded channel. We
incur sales and marketing expenses for all product offerings. Sales and
marketing are expensed as incurred.

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. We expect that in the long-term, our sales and marketing will
decrease as a percentage of revenue as the proportion of renewals to our total
business increases.

Other insurance costs (benefit)

Other insurance expense (benefit) includes underwriting expenses, credit card
and policy processing expenses, premium write-offs, insurance license expenses,
and Personnel Costs and Overhead related to actuarial and certain data science
activities. Other insurance expense (benefit) also includes amortization of
deferred acquisition costs like premium taxes and report costs related to the
successful acquisition of a policy. Other insurance expense (benefit) is
expensed as incurred, except for costs related to deferred acquisition costs
that are capitalized and subsequently amortized over the same period in which
the related premiums are earned. These expenses are also recognized net of
ceding commissions earned.

Technology and development

Technology and development expense consists of software development costs
related to our mobile app and homegrown information technology systems;
third-party services related to infrastructure support; Personnel Costs and
Overhead for engineering, product, technology, and certain data science
activities; and amortization of internally developed software. Technology and
development is expensed as incurred, except for development and testing costs
related to internally developed software that are capitalized and subsequently
amortized over the expected useful life.

We expect technology and development to increase in absolute dollars and as a
percentage of total revenue as we continue to devote significant resources to
enhance our customer experience and continually improve our integrated
technology platform. Over time, we expect technology and development to decrease
as a percentage of revenue.

General and Administrative

General and administrative expenses primarily relate to external professional
service expenses; Personnel Costs and Overhead for corporate functions; and
depreciation expense for computers, furniture and other fixed assets. General
and administrative expenses are expensed as incurred.

We expect general and administrative expenses to continue to increase in the
near term, both in absolute dollars and as a percentage of total revenue, and
then decrease as a percentage of revenue over time.

Interest charges

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 the amortization of debt issuance costs. In addition, changes in
the fair value of warrant liabilities that were associated with our long-term
debt are recorded as interest expense.

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Loss on early extinguishment of debt

Loss on early extinguishment of debt is not an operating expense; therefore, we
include these expenses below operating expenses. Loss on early 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 and warrants issuance costs
are recognized as expense.

Results of Operations

Comparison of the years ended December 31, 2021 and 2020

The following table sets forth our results of operations for the periods
indicated:

                                                                                Years Ended December 31,
                                                       % of Total                               % of Total
                                     2021               Revenue               2020               Revenue             $ Change             % Change
                                                                                 (dollars in millions)
Revenue:
Net premiums earned               $  310.3                   89.8  %       $  322.5                   93.0  %       $  (12.2)                  (3.8) %
Net investment income                  5.0                    1.4  %            5.4                    1.6  %           (0.4)                  (7.4) %
Net realized gains on investments      2.4                    0.7  %            0.3                    0.1  %            2.1                  700.0  %
Fee Income                            20.9                    6.1  %           17.4                    5.0  %            3.5                   20.1  %
Other income                           6.8                    2.0  %            1.2                    0.3  %            5.6                  466.7  %
Total revenues                       345.4                  100.0  %          346.8                  100.0  %           (1.4)                  (0.4) %
Operating expenses:
Loss and loss adjustment expenses    392.3                  113.6  %          362.8                  104.6  %           29.5                    8.1  %
Sales and marketing                  270.2                   78.2  %          139.7                   40.3  %          130.5                   93.4  %
Other insurance expense (benefit)      5.0                    1.4  %           (1.8)                  (0.5) %            6.8                  377.8  %
Technology and development            65.5                   19.0  %           52.9                   15.3  %           12.6                   23.8  %
General and administrative            97.6                   28.3  %           78.5                   22.6  %           19.1                   24.3  %
Total operating expenses             830.6                  240.5  %          632.1                  182.3  %          198.5                   31.4  %
Operating loss                      (485.2)                (140.5) %         (285.3)                 (82.3) %         (199.9)                     N.M.
Interest expense                     (20.0)                  (5.8) %          (77.7)                 (22.4) %           57.7                  (74.3) %
Loss on early extinguishment of
debt                                 (15.9)                  (4.6) %              -                      -  %          (15.9)                 100.0  %
Loss before income tax expense      (521.1)                (150.9) %         (363.0)                (104.7) %         (158.1)                     N.M.
Income tax expense                       -                      -  %              -                      -  %              -                      -  %
Net loss                            (521.1)                (150.9) %         (363.0)                (104.7) %         (158.1)                     N.M.
Other comprehensive (loss)
income:
Changes in net unrealized
(losses) gains on investments         (5.2)                  (1.5) %            5.0                    1.5  %          (10.2)                (204.0) %
Comprehensive loss                $ (526.3)                (152.4) %       $ (358.0)                (103.2) %       $ (168.3)                     N.M.


______________

NM – Percent change not significant

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Income

Net earned premiums

Net premiums earned decreased $12.2 million, or 3.8%, to $310.3 million for the
year ended December 31, 2021 compared to 2020. The decrease was primarily due to
greater cessions of gross earned premium as a result of a change in reinsurance
structure partially offset by growth in gross earned premium between the
periods.

During the years ended December 31, 2021 and 2020, we ceded approximately 56.9%
and 46.7% of our gross earned premiums to third-party reinsurers, respectively.
The change in ceding percentage between the periods was driven by our evolving
approach to our reinsurance structure, in an effort to produce a capital-light
model with reinsurance terms available to us in the market.

The following table presents the gross written premiums, the written premiums ceded, the
written premium, gross earned premium, ceded earned premium and net earned premium
bonus for completed years December 31, 2021 and 2020:

                                      Years Ended December 31,
                           2021          2020        $ Change      % Change
                                       (dollars in millions)
Gross written premium   $   742.6      $ 616.8      $  125.8         20.4  %
Ceded written premium      (397.3)      (378.0)        (19.3)         5.1  %
Net written premium         345.3        238.8         106.5         44.6  %

Gross earned premium        719.6        605.2         114.4         18.9  %
Ceded earned premium       (409.3)      (282.7)       (126.6)        44.8  %
Net earned premium      $   310.3      $ 322.5      $  (12.2)        (3.8) %

The growth in gross premiums earned is mainly attributable to a 20.4% increase in gross premiums
premium written through deeper market penetration in our we state footprint.
We also saw a 7.1% increase in premiums per auto insurance policy
primarily resulting from price increases in several states between
periods.

Net realized gains on investments

Net realized gains on investments increased $2.1 million, or 700.0%, to $2.4
million for the year ended December 31, 2021 compared to 2020. The increase was
due to proceeds received from sales of investments in excess of investments'
cost bases.

Fee Income

Fee income increased $3.5 million, or 20.1%, to $20.9 million for the year ended
December 31, 2021 compared to 2020. The increase was primarily due to increased
customer volumes and an increase in customers paying in installments.

Other income

Other income increased $5.6 millioni.e. 466.7%, at $6.8 million for the year
ended December 31, 2021 compared to 2020. The increase is mainly due to
increased revenue from web and app policy inquiry distribution fees in
geographical areas where we are not present to third parties.

Functionnary costs

Claims and claims adjustment expenses

Loss and increase of LAE $29.5 millioni.e. 8.1%, at $392.3 million for the year
ended December 31, 2021 compared to 2020. The increase is mainly due to
higher volume of claims, increased severity of claims and greater

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provisions related to the growth of policies in force, partially offset by an increase
cessions of incurred losses, net of corridor reserves of higher losses due to a
increase in our loss ratio, following a change in our reinsurance policy
structure.

Gross accident period loss ratios increased to 87.9% from 76.2% for the years
ended December 31, 2021 and 2020, respectively. The change in the loss ratios
was driven by higher loss costs due to elevated claims frequency as miles driven
during the period exceeded pre-COVID-19 levels and average severity per claim
for material damage increased as replacement parts and higher used car prices
outpaced expected inflation. The increases in loss costs were partially offset
by growth in average premium per policy.

In addition, loss and LAE for the year ended December 31, 2021 includes a
decrease in incurred losses and LAE attributable to accident periods prior to
2021 of $13.6 million. This decrease is primarily attributed to
lower-than-expected reported losses on bodily injury claims from accident year
2020. In addition, recoveries from subrogation and salvage from 2020 material
damage claims were higher than estimated.

Sales and Marketing

Sales and marketing increased $130.5 million, or 93.4%, to $270.2 million for
the year ended December 31, 2021 compared to 2020. The increase was primarily
due to increased investment in performance marketing of $73.9 million and
branding and advertising of $35.6 million as we responded to changes in consumer
behavior and increased customer acquisition and advertising campaigns in digital
channels on the part of our competitors. Performance marketing spend declined
during the second half of 2021 as we navigated the exposure to significant cost
increases we experienced earlier in the year and responded to the elevated loss
cost environment. We have focused on diversifying our marketing investments to
reach more customers and drive profitable growth in the states in which we
operate. Additionally, marketing spend was lower through much of the year ended
December 31, 2020 due to uncertainty surrounding the ongoing COVID-19 pandemic.
We also recognized $8.8 million of warrant compensation expense related to
Carvana's progress toward an integrated automobile insurance solution for
Carvana's car buying platform, or Integrated Platform. See Note 11,
"Shared-Based Compensation," in the Notes to Consolidated Financial Statements
for further details on these warrants.

Other insurance costs (benefit)

Other insurance expense (benefit) increased $6.8 million, or 377.8%, to an
expense of $5.0 million for the year ended December 31, 2021 compared to 2020.
The increase was primarily driven by $6.7 million in greater underwriting costs,
premium taxes and payment processing fee expense due to growth in the core
insurance business and greater premiums collected on an installment basis and
$5.5 million in higher Personnel Costs and Overhead due to headcount growth.
This was partially offset by a $2.7 million decrease in bad debt expense
primarily related to delayed cancellation of policies for non-payment stemming
from compulsory state issued notices in reaction to the COVID-19 pandemic during
2020 and a $2.4 million increase in ceding commission contra-expense net of
sliding scale commission expense due to reinsurance structure changes.

Technology and development

Technology and development increased $12.6 million, or 23.8%, to $65.5 million
for the year ended December 31, 2021 compared to 2020. The increase was
primarily driven by incremental investments of $11.5 million in Personnel and
Overhead costs as a result of headcount growth of engineering and product teams.

General and administrative

General and administrative increased $19.1 million, or 24.3%, to $97.6 million
for the year ended December 31, 2021 compared to 2020. The increase was
primarily driven by a $14.6 million increase in Personnel and Overhead costs
across finance, legal and administrative teams as a result of an increase in
headcount. In addition, we incurred a $11.1 million increase in professional
service expenses to support corporate functions and $1.5 million in higher
depreciation and amortization as result of write-offs and more fixed assets in
use. This was partially offset by a decrease in share-based compensation expense
of $9.7 million for the year ended December 31, 2021 compared to 2020, primarily
related to the completion of a secondary tender offer for common stock in 2020
by an investor.

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Non-operating expenses

Interest charges

Interest expense decreased $57.7 million, or 74.3%, to $20.0 million for the
year ended December 31, 2021 compared to 2020. The decrease was primarily due to
the warrant fair value adjustment of $54.7 million that we recognized during
2020. In addition, there was a $2.9 million decrease in amortization of discount
and debt and warrants issuance costs primarily attributable to debt
modifications and lower average debt balance.

Loss on early extinguishment of debt

Loss on early extinguishment of debt increased $15.9 million, or 100.0%, to
$15.9 million for the year ended December 31, 2021 compared to 2020. The
increase was driven by $15.9 million of accelerated amortization of unamortized
discount and debt and warrant issuance costs from the extinguishment of our Term
Loan B.

Other comprehensive income (loss)

Changes in net unrealized gains (losses) on investments

Changes in net unrealized (losses) gains on investments decreased $10.2 million,
or 204.0%, to a loss of $5.2 million for the year ended December 31, 2021
compared to 2020. The decrease was primary driven by changes of $8.1 million in
net unrealized losses on investments and $2.1 million in net realized gains
reclassified to net loss.

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Comparison of the years ended December 31, 2020 and 2019

The following table sets forth our results of operations for the periods
indicated:

                                                                               Years Ended December 31,
                                                       % of Total                              % of Total
                                     2020               Revenue               2019               Revenue            $ Change             % Change
                                                                                 (dollars in millions)
Revenue:
Net premiums earned               $  322.5                   93.0  %       $  275.3                  94.9  %       $   47.2                   17.1  %
Net investment income                  5.4                    1.6  %            5.2                   1.8  %       $    0.2                    3.8  %
Net realized gains on investments      0.3                    0.1  %              -                     -  %       $    0.3                  100.0  %
Fee and other income                  18.6                    5.3  %            9.7                   3.3  %       $    8.9                   91.8  %
Total revenue                        346.8                  100.0  %          290.2                 100.0  %           56.6                   19.5  %
Operating expenses:
Loss and loss adjustment expenses    362.8                  104.6  %          321.4                 110.8  %           41.4                   12.9  %
Sales and marketing                  139.7                   40.3  %          109.6                  37.8  %           30.1                   27.5  %
Other insurance (benefit) expense     (1.8)                  (0.5) %           52.3                  18.0  %          (54.1)                (103.4) %
Technology and development            52.9                   15.3  %           24.0                   8.3  %           28.9                  120.4  %
General and administrative            78.5                   22.6  %           43.0                  14.7  %           35.5                   82.6  %
Total operating expenses             632.1                  182.3  %          550.3                 189.6  %           81.8                   14.9  %
Operating loss                      (285.3)                 (82.3) %         (260.1)                (89.6) %          (25.2)                     N.M.
Interest expense                     (77.7)                 (22.4) %          (22.3)                 (7.7) %          (55.4)                 248.4  %
Loss before income tax expense      (363.0)                (104.7) %         (282.4)                (97.3) %          (80.6)                     N.M.
Income tax expense                       -                      -  %              -                     -  %              -                      -  %
Net loss                            (363.0)                (104.7) %         (282.4)                (97.3) %          (80.6)                     N.M.
Other comprehensive income:
Changes in net unrealized gains
on investments                         5.0                    1.5  %            0.6                   0.2  %            4.4                      N.M.
Comprehensive loss                $ (358.0)                (103.2) %       $ (281.8)                (97.1) %       $  (76.2)                     N.M.


______________

NM – Percent change not significant

The December 31, 2020 and 2019 results of operations discussion can be found in
Part II, Item 7, "Results of Operations" of our Annual Report on Form 10-K for
the year ended December 31, 2020.

Non-GAAP Financial Measures

The non-GAAP financial measures below have not been calculated in accordance
with GAAP and should be considered in addition to results prepared in accordance
with GAAP and should not be considered as a substitute for, or superior to, GAAP
results. In addition, adjusted gross profit/(loss) and direct contribution
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

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performance of our business operations; (3) facilitate external comparisons of
the results of our overall business to the historical operating performance of
other companies that may have different capital structures and debt levels; (4)
review and assess the operating performance of our management team; (5) analyze
and evaluate financial and strategic planning decisions regarding future
operating investments; and (6) plan for and prepare future annual operating
budgets and determine appropriate levels of operating investments.

Adjusted gross profit/(loss)

For the definition of adjusted gross profit/(loss) and why management believes
this measure provides useful information to investors, see "- Key Performance
Indicators."

Direct Contribution

For the definition of direct contribution and why management thinks it
measurement provides useful information for investors, see “- Key performance
Indicators.”

The following table provides a reconciliation of total revenue to adjusted gross
profit/(loss) and direct contribution for the years ended December 31, 2021,
2020 and 2019:

                                                                  Years Ended December 31,
                                                        2021                2020                2019
                                                                    (dollars in millions)
Total revenue                                       $    345.4          $    346.8          $    290.2
Loss and loss adjustment expenses                       (392.3)             (362.8)             (321.4)
Other insurance (expense) benefit                         (5.0)                1.8               (52.3)
Gross profit/(loss)                                 $    (51.9)         $    (14.2)         $    (83.5)
Gross margin                                             (15.0) %             (4.1) %            (28.8) %
Less:
Net investment income                               $     (5.0)         $     (5.4)         $     (5.2)
Net realized gains on investments                         (2.4)               (0.3)                  -
Adjustments from other insurance (expense)
benefit(1)                                                56.0                40.9                34.5
Adjusted gross profit/(loss)                              (3.3)               21.0               (54.2)
Ceded earned premium                                     409.3               282.7                77.6
Ceded loss and loss adjustment expenses                 (302.5)             (194.8)              (73.6)
Net ceding commission and other(2)                       (95.4)              (90.0)               (7.2)
Direct contribution                                        8.1                18.9               (57.4)
Gross earned premium                                $    719.6          $    605.2          $    352.9
Ratio of adjusted gross profit/(loss) to total
revenue                                                   (1.0) %              6.1  %            (18.7) %
Ratio of adjusted gross profit/(loss) to gross
earned premium                                            (0.5) %              3.5  %            (15.4) %
Ratio of direct contribution to total revenue              2.3  %              5.4  %            (19.8) %
Ratio of direct contribution to gross earned
premium                                                    1.1  %              3.1  %            (16.3) %


______________

(1) Adjustments to other insurance expenses include reporting costs, personnel
costs, allocated overhead, licenses, professional and other fees.

(2) Net ceding commission and other is comprised of ceding commissions received
in connection with reinsurance ceded, partially offset by sliding scale
commission adjustments and amortization of excess ceding commission, and other
impacts of reinsurance ceded.

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Cash and capital resources

General

Since inception, we have financed operations primarily through sales of
insurance policies and the net proceeds we have received from our issuance of
stock and debt and from sales of investments. Cash generated from operations is
highly dependent on being able to efficiently acquire and maintain customers
while pricing our insurance products appropriately. We are continuously
evaluating alternatives for efficiently funding our ongoing operations. We
expect, from time to time, to engage in a variety of financing transactions for
such purposes, including the issuance of securities.

Regulatory Considerations

We are organized as a holding company, but our primary operations are conducted
by two of our wholly owned insurance subsidiaries, Root Insurance Company, an
Ohio-domiciled insurance company, and Root Property & Casualty Insurance
Company, a Delaware-domiciled insurance company. The payment of dividends by our
insurance subsidiaries is subject to restrictions set forth in the insurance
laws and regulations of the States of Ohio and Delaware, respectively, or the
insurance laws. To date, our insurance subsidiaries have not paid any dividends
and as of December 31, 2021, they were not permitted to pay any dividends
without approval of the applicable superintendent, commissioner and/or director.

As our insurance subsidiaries continue to grow, the amount of capital we are
required to maintain to satisfy our risk-based capital requirements may increase
significantly. To comply with these regulations, we may be required to maintain
capital in the insurance subsidiaries that we would otherwise invest in our
growth and operations. At December 31, 2021, 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, 2021, Root Re was subject
to compliance with certain capital levels and a net earned premium to capital
ratio of 15:1, which was maintained as of December 31, 2021. The capital ratio
can fluctuate at Root Re's election, subject to regulatory approval. Root Re's
primary sources of funds are capital contributions from the holding company,
assumed insurance premiums and net investment income. These funds are primarily
used to pay claims and operating expenses and to purchase investments. Root Re
must receive approval from CIMA before it can pay any dividend to the holding
company.

Financing Arrangements

On January 26, 2022, we closed on a $300.0 million five-year term loan with
BlackRock Financial Management, Inc., or BlackRock. The maturity of this term
loan is January 27, 2027. Interest is payable quarterly and is determined on a
floating interest rate calculated on the Secured Overnight Financing Rate, or
SOFR, plus 9%. Concurrently with the term loan, we also issued to the lender
warrants to purchase 5,664,193 shares of Class A common stock. Under certain
contingent scenarios, BlackRock may also receive additional warrants to purchase
shares of Class A common stock equal to 1.0% of the aggregate number of issued
and outstanding shares of our common stock on a fully-diluted basis as of the
triggering date.

In November 2021, we repaid the outstanding Term Loan B principal balance of
$100.0 million and accrued interest, including paid-in-kind, or PIK interest,
and fees of $20.9 million. As a result, we recognized a $15.9 million loss on
early extinguishment.

In October 2021, we consummated the transactions contemplated by the investment
agreement with Carvana, or the Investment Agreement, that we entered into on
August 11, 2021. We received $126.5 million of gross proceeds from the issuance
of 14.1 million shares of redeemable convertible preferred stock designated as
the Series A Convertible Preferred Stock. We also issued Carvana eight tranches
of warrants to purchase shares of our Class A common stock. In connection with
the Investment Agreement, we incurred issuance costs of $19.6 million, $9.0

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million euros depend on the success of the investment agreement as
measured by the achievement of certain warrant vesting milestones.

In October 2021at the maturity of our term loan A and at the expiration of the
revolving credit facility, we have repaid the outstanding term loan A principal balance of
$98.8 million and accrued interest and costs of $0.2 million.

In October 2020, we completed our initial public offering, or IPO, which
resulted in the issuance and sale of 24.2 million shares of Class A common stock
at the IPO price of $27.00. Concurrently, we issued and sold 18.5 million shares
of our Class A common stock in private placements. We received total net
proceeds of $1.1 billion after deducting underwriting discounts and other
offering costs.

Liquidity

As of December 31, 2021, we had $706.0 million in cash and cash equivalents, of
which $452.2 million was held outside of regulated insurance entities. We also
had $129.9 million in available-for-sale fixed maturity securities.

Our cash and cash equivalents primarily consist of bank deposits and money
market funds. Our available-for-sale fixed maturity securities consist of U.S.
Treasury securities and agencies, municipal securities, corporate debt
securities, residential and commercial mortgage-backed securities, and other
debt obligations.

We believe that our existing cash and cash equivalents, available-for-sale fixed
maturity securities, cash flow from operations, along with the net proceeds from
our issuance of redeemable convertible preferred stock and IPO, will be
sufficient to support short-term working capital and capital expenditure
requirements for at least the next 12 months.

Our long-term capital requirements depend on many factors, including our
insurance premium growth rate, renewal activity, including the timing and the
amount of cash received from customers, the performance of our embedded product,
the timing and extent of spending to support development efforts, the
introduction of new and enhanced products, the continuing market adoption of
offerings on our platform, and the ongoing uncertainty in the global markets
resulting from the global COVID-19 pandemic. In the first quarter 2022, in
response to inflation and loss cost trends and to further drive efficiency and
increased focus on our strategic priorities we instituted an organizational
realignment, including an involuntary workforce reduction affecting
approximately 330 employees, which represented approximately 20% of our
workforce. In the first quarter of 2022, we have recognized charges of $6.8
million for severance, benefits and related costs as a result of these actions,
of which $4.3 million of these charges are expected to result in cash
expenditures. Additionally, we expect to incur real estate exit costs comprising
accelerated amortization of certain right of use assets and related leasehold
improvements and furniture and fixtures of approximately $2.4 million. We
continue to review the potential impact of the realignment, including additional
facility lease exits and employee-related costs, and are unable to estimate any
additional restructuring costs or charges at this time. We expect the annual
expense savings related to the organizational realignment to be approximately
$30 million annually. 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.

Currently, our debt covenants require cash and cash equivalents held in entities
other than our insurance subsidiaries to be at least $200 million at all times.
This threshold may be reduced to $150 million under two sets of circumstances:
issuing 62,500 insurance policies through our Carvana embedded product and
achieving a ratio of direct contribution to gross earned premium of 12%; or
ceasing any customer acquisition spend outside of the Carvana agreement and
reducing our monthly cash burn to no greater than $12 million.

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Cash flow

The following table summarizes our cash flow data for the periods presented:
                                                             Years Ended December 31,
                                                         2021          2020          2019
                                                                  (in millions)
Net cash used in operating activities                 $ (403.4)     $ (287.2)     $ (127.2)
Net cash provided by (used in) investing activities       76.9        (114.1)       (114.0)
Net cash (used in) provided by financing activities      (80.3)      1,098.5         535.5


Comparison of completed exercises December 31, 2021 and 2020

Net cash used in operating activities for the year ended December 31, 2021 was
$403.4 million compared to $287.2 million of net cash used in operating
activities for the year ended December 31, 2020. The increase in cash used in
operating activities was primarily due to a greater net loss incurred during the
year ended December 31, 2021 compared to the prior year. Additionally, our
evolving reinsurance strategy and timing of related payments and cash receipts,
timing of cash payments and accruals related to accounts payable and other
expenses and PIK interest paid.

Net cash provided by investing activities for the year ended December 31, 2021
was $76.9 million, primarily due to proceeds from sales, maturities, calls and
pay downs of investments, partially offset by purchases of investments and other
debt obligations. Net cash used in investing activities for the year ended
December 31, 2020 was $114.1 million, primarily due to purchases of corporate
debt securities, commercial mortgage-backed securities, residential
mortgage-backed securities and other debt obligations, partially offset by
sales, maturities, calls and pay downs of investments.

Net cash used in financing activities for the year ended December 31, 2021 was
$80.3 million, primarily due to the pay down of debt and payment of preferred
stock and related warrants issuance costs, partially offset by proceeds from the
issuance of preferred stock and related warrants in connection with our
partnership with Carvana. Net cash provided by financing activities for the year
ended December 31, 2020 was $1,098.5 million, primarily due to proceeds from the
issuance of common stock in connection with our IPO and concurrent private
placements.

Comparison of completed exercises December 31, 2020 and 2019

the December 31, 2020 and the discussion of 2019 net cash can be found in part II, point
7, “Liquidity and Capital Resources” of our Annual Report on Form 10-K.

Significant cash requirements related to contractual and other obligations

As of December 31, 2021, our material cash requirements from known contractual
and other obligations consisted of purchase commitments, as discussed in Note
12, "Commitments and Contingencies" and operating leases, as discussed in Note
8, "Leases," 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.

                                       d

Significant Accounting Policies and Estimates

Our financial statements are prepared in accordance with GAAP. The preparation
of the consolidated financial statements in conformity with GAAP requires our
management to make a number of estimates and assumptions relating to the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenue and expenses during the period. We evaluate our
significant estimates on an ongoing basis, including, but not limited to,
estimates related to reserves for loss and LAE, premium write-offs, and
valuation allowance on our deferred tax assets. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the

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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 policies 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,
"Summary of Significant Accounting Policies," in the Notes to Consolidated
Financial Statements.

Reserves for losses and LAE

Loss and LAE reserves represent management's best estimate of the ultimate
liability for all reported and unreported claims that occurred prior to the end
of each accounting period but have not yet been paid. These reserves are
established to cover the estimated ultimate cost to settle insured losses. Loss
and LAE reserves include an amount determined using adjuster determined
case-base estimates for reported claims and on actuarial unpaid claim estimates
using past experience and historical emergence patterns for unreported loss and
LAE. Case reserve amounts are determined by claims adjusters following our case
reserving practices, which consider the circumstances presented with each
claimant, applicable policy provisions, and state law. The unpaid claim
estimates consider loss cost trends, mix of business, and other risk factors
impacting claims settlement. The methods used to estimate ultimate loss reserves
by accident month include reported loss development, paid loss development,
expected loss ratio, or ELR, frequency-severity, premium based
Bornhuetter/Ferguson, or B/F, and exposure based B/F using frequency-severity.
The method used to estimate unpaid LAE reserves is determined by a
transaction-based allocation method where historical claim department activities
are measured by their relative effort or cost for handling different claim
types. Our estimation for unpaid LAE reserves includes the ultimate cost of
settling a range of claim types from express material damage claims to more
complex bodily injury cases.

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.

Key assumptions that significantly affect the estimate of provisions for losses
and LAE are as follows:

• Many actuarial estimation methods assume that the claim velocity
payments and claims closures, also known as cycle times, remain relatively
consistent over time. While fluctuations and improvements in cycle time

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are expected as we grow, these timing changes can be difficult to discern
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. Rapid
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.

• The broader macro level economy can have a significant impact on the loss reserve
estimates, such as a rapid change in kilometers traveled as observed with the
Covid19 pandemic; unexpected inflation, regulatory restrictions and
developments in the interpretation of contracts and coverage 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 noted below represents a range of reasonably likely reserves, not
a range of all possible reserves. Therefore, the ultimate losses could reach
levels corresponding to reserve amounts outside of the range provided. Given our
growth from inception in 2015, we believe evaluating sensitivity based on a
hypothetical increase or decrease of 5% and 10% is reflective of management's
best estimate and provides an illustrative range of variability in key
assumptions. The below tables present this sensitivity analysis:
                                       Scenarios for Changes in Bodily 

Loss severity for all accident years

                                    (10)%                (5)%                -%                 5%                10%
Bodily injury liability         $     119.3          $   125.9          $   132.5          $   139.1          $   145.7
Uninsured and underinsured
bodily injury                          28.0               29.6               31.2               32.7               34.3
All other coverages                    42.0               42.0               42.0               42.0               42.0

Total losses net of reinsurance $189.3 $197.5 $205.7 $213.8 $222.0

Our loss and LAE expense 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 the we pay for a total loss) and subrogation (the
right to recover payments from third parties).

Premium income, commission income and related expenses

Premiums written are deferred and earned pro rata over the policy period.
Unearned premium is established to cover the unexpired portion of premiums
written. A premium deficiency, as measured on a gross basis, is recorded when
the sum of expected losses, LAE, unamortized acquisition costs and maintenance
costs exceed the recorded unearned premium reserve and anticipated investment
income. A premium deficiency reserve is recognized as a reduction of deferred
acquisition costs and, if necessary, by accruing an additional liability for the
deficiency, with a corresponding charge to operations. We did not record a
premium deficiency reserve in 2021 or 2020.

In August 2021, we commenced a fronting arrangement with an unaffiliated Texas
county mutual insurance company, or the fronting carrier. We route all of our
new auto policies and, over time, expect to route certain renewal auto policies,
in Texas through the fronting carrier whereby we assume 100% of the related
premium and losses on those policies. The fronting arrangement allows us to have
greater rating and underwriting flexibility. Premiums assumed are deferred and
earned pro rata over the policy period. Unearned premium is established to cover
the unexpired portion of premiums assumed. Through this fronting arrangement, we
have greater rating and underwriting flexibility that we believe will allow us
to more accurately segment risk in Texas to improve profitability.

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Premiums receivable represents premiums written but not yet collected.
Generally, premiums are collected prior to providing risk coverage, minimizing
our exposure to credit risk. Due to a variety of factors, including certain
state regulations related to COVID-19 relief efforts, certain premiums billed
may not be collected, for which we establish an allowance for doubtful accounts
based primarily on an analysis of historical collection experience, adjusted for
current economic conditions. Allowance for credit losses was $5.4 million and
$3.5 million as of December 31, 2021 and 2020, respectively, on the consolidated
balance sheets. A policy is generally considered past due on the first day after
its due date and policies greater than 90 days past due are written-off. We
recognized premium write-offs, or bad debt expense, of $20.9 million, $23.6
million and $9.0 million for the periods ended December 31, 2021, 2020 and 2019
respectively.

For those policyholders who pay premiums on an installment basis, we charge a
flat fee for each installment related to the additional administrative costs
associated with processing more frequent billings. We recognize this fee income
in the period which we process each installment.

Policy acquisition costs, consisting of premium taxes, certain marketing costs
and underwriting expenses, and fronting carrier commissions, net of ceding
commissions, related to the successful acquisition of new or renewal business.
They are deferred and amortized over the same period in which the related
premiums are earned. Ceding commissions relating to reinsurance agreements are
recorded as a reimbursement for both deferrable and non-deferrable acquisition
costs. The portion of the ceding commission that is equal to the pro rata share
of acquisition costs based on quota share percentage is recorded as an offset to
the gross deferred acquisition costs. Any portion of the ceding commission that
exceeds the acquisition costs of the business ceded is recorded as excess ceding
commission, a deferred liability, and amortized over the same period in which
the related premiums are earned.

Reinsurance

In the ordinary course of business, we cede and retrocede a portion of our
business written and assumed, respectively, to reinsurers to limit the maximum
net loss potential arising from large risks and catastrophes. These
arrangements, known as treaties, provide for reinsurance coverage on quota-share
and excess-of-loss basis. All reinsurance contracts provide for indemnification
against loss or liability relating to insurance risk and have been accounted for
as reinsurance. Although the ceding of reinsurance does not discharge us from
our primary liability to the policyholder, the insurance company that assumes
the coverage assumes the related liability. Amounts recoverable from and payable
to reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured business. Reinsurance premiums, commissions and
expense reimbursements related to reinsured business are accounted for on a
basis consistent with the basis used in accounting for the original policies
issued and the terms of the reinsurance contracts. Premiums ceded to other
companies have been reported as a reduction of premiums earned and are
recognized over the remaining policy period based on the reinsurance protection
provided. Amounts applicable to reinsurance ceded for unearned premium reserves
are reported as a prepaid reinsurance premiums asset in the accompanying
consolidated balance sheets and as reduction of unearned premiums in Note 6,
"Reinsurance," in the Notes to Consolidated Financial Statements. Ceding
commissions received in connection with reinsurance ceded have been accounted
for as a reduction of other insurance (benefit) expense in the consolidated
statements of operations and comprehensive loss.

Some of our reinsurance agreements provide for adjustment of commissions or
amount of coverage based on loss experience referred to as sliding scale
commissions, loss corridors and loss ratio caps, respectively. We recognize the
asset or liability arising from these adjustable features in the period the
adjustment occurs, which is calculated based on experience to-date under the
agreement.

In the event that all or any of the reinsuring companies might be unable to meet
their obligations under existing reinsurance agreements, we would be liable for
such defaulted amounts. We evaluate and monitor the financial condition
associated with our reinsurers in order to minimize our exposure to significant
losses from reinsurer insolvencies. We obtain reinsurance from a diverse group
of global reinsurers and monitor concentration as well as financial strength
ratings of the reinsurers to minimize counterparty credit risk. For our
reinsurance partners who are not rated, we require adequate levels of collateral
or letters of credit to be available to us in the event of downside scenarios.
To recognize this risk of credit loss, we have established an allowance for
credit losses based on the probability of default and the expected loss given
default as influenced by factors such as the reinsurer's credit rating

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and the average life of our reinsurance recoverables. Provision for credit losses
has been $0.2 million and zero from December 31, 2021 and 2020, respectively.

New accounting statements

See note 2, “Basis of presentation and summary of significant accounting items
policies”, in the notes to the consolidated financial statements.

Election under the Jumpstart Our Business Startups Act of 2012

Prior to December 31, 2021, we qualified as an "emerging growth company," or
EGC, under the Jumpstart Our Business Startups Act, or JOBS Act. We previously
elected to adopt new or revised accounting guidance within the same time period
as private companies as permitted by our status as an EGC.

We became a large accelerated filer on December 31, 2021 and lost our status as
an EGC. Accordingly, we will follow the adoption criteria of public companies
for new accounting pronouncements beginning with this Annual Report on Form
10-K. Prior to this Annual Report, our financial statements did not reflect
adoption of certain amended guidance that public companies generally may have
been required to adopt, but we were not required to adopt based on our EGC
status. This includes Accounting Standard Update, or ASU, 2016-13, Financial
Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. We adopted this guidance using a modified retrospective approach
which resulted in a cumulative-effect adjustment to opening accumulated loss as
of January 1, 2021 since ASU 2016-13 may only be adopted as of the beginning of
a fiscal year. This adoption did not have a material impact on our previously
filed quarterly information. For additional information on the impact of this
guidance, see Note 2, "Basis of Presentation and Summary of Significant
Accounting Policies" in the Notes to Consolidated Financial Statements.

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