Root (NASDAQ:ROOT) Surprises With Strong Q3

Digital auto insurance company Root (NASDAQ:ROOT) announced better-than-expected revenue in Q3 CY2025, 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.

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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.

Revenue Growth

Insurance companies earn revenue from three primary sources: 1) The core insurance business itself, often called underwriting and represented in the income statement as premiums 2) Income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities 3) Fees from various sources such as policy administration, annuities, or 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.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. 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.

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.

Markets consistently prioritize net premiums earned growth over investment and fee income, recognizing its superior quality as a core indicator of the company’s underwriting success and market penetration.

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Net Premiums Earned

When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore net of what’s ceded to reinsurers as a risk mitigation and transfer strategy.

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 additional streams certainly contribute to the bottom line, their impact can vary. Some firms have shown greater success and long-term consistency in investing their float compared to peers. However, sharp fluctuations in the fixed income and equity markets can significantly affect 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%.

Key Takeaways from Root’s Q3 Results

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. The market seemed to be hoping for more, and the stock traded down 3% to $86.33 immediately following the results.

Is Root an attractive investment opportunity at the current price? If you’re making that decision, you should consider the bigger picture of valuation, business qualities, as well as the latest earnings. We cover that in our actionable full research report which you can read here, it’s free for active Edge members.