Root Upgraded to Buy Despite Unresolved Underwriting Volatility

What happened

Seeking Alpha upgraded Root to Buy, citing GAAP profitability in 2025 and a rise in book value per share to $18.34. However, DeepValue's analysis shows Root's net combined ratio worsened to 102.1% in Q3'25 from 91.1%, indicating deteriorating underwriting discipline. The company strategically reduced quota share reinsurance, increasing retained risk and exposure to claims volatility. Growth in policies and premiums is overshadowed by high accident-period severity and reserve estimation uncertainties flagged as critical. This optimistic upgrade conflicts with the market's 'prove-it again' stance and DeepValue's WAIT rating, underscoring persistent risks.

Implication

The upgrade emphasizes historical profitability but ignores the recent underwriting slippage that threatens future earnings. Root's reduced reinsurance coverage heightens earnings volatility, making consistent profitability uncertain. Key milestones include returning the net combined ratio below 100% while maintaining policy growth, which has not been demonstrated. Partner expansions could lead to dilution via warrant expenses without improving core underwriting. Therefore, the prudent strategy is to monitor upcoming quarterly results for confirmation of underwriting stability rather than following the upgrade blindly.

Thesis delta

The Seeking Alpha upgrade is based on backward-looking metrics and does not alter the core investment thesis. Our analysis still requires Root to prove underwriting discipline by achieving a net combined ratio below 100% in the next quarters, and the WAIT rating remains appropriate due to elevated risks from increased retention and reserve uncertainties.