By Telis Demos

It's a tough time to be buying car insurance. It's a good time to be selling it.

Upstart tech-focused auto insurer Root shows why. It reported a dramatic improvement in results, turning its 2023 net loss of roughly $150 million into a $31 million net profit last year. Its shares were up more than 30% on Thursday, following its Wednesday post-market, earnings release.

A sharp turnaround in underwriting performance drove Root's improvement. Insurers track this performance by what is known as their combined ratio. This is the percentage of written premium that is consumed by losses and expenses. Root's gross combined ratio went from 116% in 2023-that is, losses and expenses outpacing premiums-to 95% in 2024.

That was helped by a sharp reduction in Root's reinsurance costs. Primary insurers that write policies for consumers in turn buy insurance for themselves, known as reinsurance.

Back in 2020, when Root went public, investors hoped upstart "insuretech" companies would be able to grow market share and work on underwriting techniques driven by data about drivers' habits by using reinsurance to protect themselves from losses.

That was costly during the pandemic when auto insurers' loss costs surged. Reinsurance costs leapt, too.

Now, loss costs like repairs and auto parts are stabilizing while insurers were able to dramatically increase rates the past few years. Other auto insurers, such as Allstate, have also posted stronger results, despite a jump in catastrophe costs and related disruptions in the market.

Root reduced its use of reinsurance in 2024, lowering its cession rate-or how much of its premiums are then shared with reinsurers-from 27% in 2023 to 11%. It was just 6% in the fourth quarter. For context, Root's cession rate in 2022 was 55%.

This means the company will be more exposed to its underwriting results. But it greatly reduces the expense portion of its combined ratio.

Root's share price has more than quadrupled in the past 12 months. But, as ever, insurance policies are like seeds: They are planted today, but you don't know what you'll be eating until next season.

This analysis comes from the Journal's Heard on the Street team. Subscribe to their free daily afternoon newsletter here.

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(END) Dow Jones Newswires

February 27, 2025 12:12 ET (17:12 GMT)

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