Root (ROOT)

Digital auto insurance company Root (NASDAQ:ROOT) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 26.9% year on year to $387.8 million. Its GAAP loss of $0.35 per share was 35.8% above analysts’ consensus estimates.

Company Overview

Pioneering a data-driven approach that rewards good driving habits, Root (NASDAQ:ROOT) is a technology-driven auto insurance company that uses mobile apps to acquire customers and data science to price policies based on individual driving behavior.

Property & Casualty (P&C) insurers protect individuals and businesses against financial loss from damage to property or from legal liability. This is a cyclical industry, and the sector benefits when there is 'hard market', characterized by strong premium rate increases that outpace loss and cost inflation, resulting in robust underwriting margins. The opposite is true in a 'soft market'. Interest rates also matter, as they determine the yields earned on fixed-income portfolios. On the other hand, P&C insurers face a major secular headwind from the increasing frequency and severity of catastrophe losses due to climate change. Furthermore, the liability side of the business is pressured by 'social inflation'—the trend of rising litigation costs and larger jury awards.

Root competes with established national auto insurance giants including Geico, Progressive, and Allstate, as well as other insurtech companies like Lemonade (NYSE:LMND) and Metromile (acquired by Lemonade in 2022) that also leverage technology and data science for insurance underwriting.

Insurance companies generate revenue three ways. The first is the core insurance business itself, represented in the income statement as premiums earned. The second source is investment income from investing the “float” (premiums collected but not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from policy administration, annuities, and other value-added services. Over the last five years, Root grew its revenue at an incredible 29.2% compounded annual growth rate. Its growth beat the average insurance company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. Root’s annualized revenue growth of 109% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Root reported robust year-on-year revenue growth of 26.9%, and its $387.8 million of revenue topped Wall Street estimates by 4.5%.

Net premiums earned made up 90.9% of the company’s total revenue during the last five years, meaning Root lives and dies by its underwriting activities because non-insurance operations barely move the needle.

Net premiums earned commands greater market attention due to its reliability and consistency, whereas investment and fee income are often seen as more volatile revenue streams that fluctuate with market conditions.

Insurers sell policies then use reinsurance (insurance for insurance companies) to protect themselves from large losses. Net premiums earned are therefore what's collected from selling policies less what’s paid to reinsurers as a risk mitigation tool.

Root’s net premiums earned has grown at a 30% annualized rate over the last five years, much better than the broader insurance industry and in line with its total revenue.

When analyzing Root’s net premiums earned over the last two years, we can see that growth accelerated to 115% annually. Since two-year net premiums earned grew faster than total revenue over this period, it's implied that other line items such as investment income grew at a slower rate. While these supplementary streams affect the bottom line, their contribution can fluctuate. Some firms have been more successful and consistent in investing their float over the long term, but sharp movements in the fixed income and equity markets can play a substantial role in short-term performance.

In Q3, Root produced $360.1 million of net premiums earned, up a hearty 28.9% year on year and topping Wall Street Consensus estimates by 5.1%.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For insurance companies, we look at the combined ratio rather than the operating expenses and margins that define sectors such as consumer, tech, and industrials.

The combined ratio sums the costs of underwriting (salaries, commissions, overhead) as well as what an insurer pays out in claims (losses) and divides it by net premiums earned. If a company boasts a combined ratio under 100%, it is underwriting profitably. If above 100%, it is losing money on its core operations of selling insurance policies.

Given the calculation, a lower expense ratio is better. Over the last two years, Root’s combined ratio has swelled by 54 percentage points, going from 152% to 97.6%. Said differently, the company’s expenses have grown at a slower rate than revenue, which typically signals prudent management.

Root’s combined ratio came in at 102% this quarter, beating analysts’ expectations by 495 basis points (100 basis points = 1 percentage point). This result was 11 percentage points worse than the same quarter last year.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Root’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Root, its two-year annual EPS growth of 50.3% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q3, Root reported EPS of negative $0.35, down from $1.35 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects Root’s full-year EPS of $3.31 to shrink by 35.3%.

Insurance companies are balance sheet businesses, collecting premiums upfront and paying out claims over time. The float–premiums collected but not yet paid out–are invested, creating an asset base supported by a liability structure. Book value per share (BVPS) captures this dynamic by measuring these assets (investment portfolio, cash, reinsurance recoverables) less liabilities (claim reserves, debt, future policy benefits). BVPS is essentially the residual value for shareholders.

We therefore consider BVPS very important to track for insurers and a metric that sheds light on business quality because it reflects long-term capital growth and is harder to manipulate than more commonly-used metrics like EPS.

Root’s BVPS declined at a 158% annual clip over the last five years. However, BVPS growth has accelerated recently, growing by 18.3% annually over the last two years from $12.21 to $17.10 per share.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Root currently has $200.4 million of debt and $265 million of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 0.6×. We think this is safe and raises no red flags. In general, we’re comfortable with any ratio below 1.0× for an insurance business. Anything below 0.5× is a bonus.

Return on Equity, or ROE, ties everything together and is a vital metric. It tells us how much profit the insurer generates for each dollar of shareholder equity entrusted to management. Over a long period, insurers with higher ROEs tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, Root has averaged an ROE of negative 36.8%, a bad result not only in absolute terms but also relative to the majority of insurers putting up 20%+. It also shows that Root has little to no competitive moat.

It was good to see Root beat analysts’ EPS expectations this quarter. We were also excited its net premiums earned outperformed Wall Street’s estimates by a wide margin. Zooming out, we think this was a good print with some key areas of upside. Investors were likely hoping for more, and shares traded down 3% to $86.33 immediately after reporting.

Updated: December 3, 2025 at 11:41 PM EST

Before making an investment decision, investors should account for Root’s business fundamentals and valuation in addition to what happened in the latest quarter.

Root isn’t a terrible business, but it doesn’t pass our quality test. Although its revenue growth was exceptional over the last five years, it’s expected to deteriorate over the next 12 months and its relatively low ROE suggests management has struggled to find compelling investment opportunities. And while the company’s net premiums earned growth was exceptional over the last five years, the downside is its BVPS has declined over the last five years.

Root’s P/B ratio based on the next 12 months is 3.8x. This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $126.75 on the company (compared to the current share price of $77.80).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.