Root has $300 million of off-balance sheet assets on $800 million market cap

Root (ROOT) is an auto-insurance business with only 0.42% of market share in the US. Root is also one of the leaders in telematics technology and embedded insurance, both of which are growing faster than the industry average. Today, the technology has become so good, that Root is one of the most profitable auto-insurers with a loss ratio of around 65%. In other words, for every $100 of premium earned, roughly $65 goes toward insurance losses. These are very good numbers. But for the technology to get that good and for them to reach these numbers, they had to suffer much losses. It goes without saying that when you’re losing money, you cannot pay taxes. But now that Root is profitable, it should be paying taxes. But it isn’t. Because of the years of losses, it accumulated Net Operating Losses (NOLs) that can be used to offset future tax payments. For example, in 2025 Root reported $40.8 million of pre-tax income but only $0.5 million of income-tax expense (1.2%). More importantly, Root still had enormous accumulated tax losses available to offset taxable income in the future. But soon, Root might put it on the balance sheet, creating about $300 million of assets as Deferred tax assets (DTA). It is interesting to note a change on the 10-Q this quarter. For the first time ever management wrote the following: *given our anticipated future earnings, management believes that there is a reasonable possibility that in the foreseeable future, sufficient positive evidence may become available to reach a conclusion that all or a portion of the valuation allowance may no longer be needed. Release of the valuation allowance would result in recognition of certain deferred tax assets and a corresponding material income tax benefit for the period the release is recorded. The exact timing and amount of the valuation allowance release would depend on our financial performance, projected taxable income in the relevant jurisdictions, and ongoing evaluation of available positive and negative evidence.* The exact amount depends on several factors such as whether these NOL expire or not or at what rate they are taxed. For example, the $1.28 billion in Federal NOLs are taxed at 21%, giving us about $270 million in DTA. And we can estimate about $300 million in DTA if we add the local and state NOLs. The last reported amount was $339 million in December 2025 (technically as valuation allowance, it becomes DTA only once it is on the balance sheet). Now, you may be wondering, why does it matter whether it is on or off-balance sheet. This addition will be recorded as net income. In 2023, something similar happened to Airbnb and this boosted their profits to $4.43 billion in one quarter. Of course, is not a cash profit. It is just accounting. But at the same time, it helps that the company can go years without paying taxes. This cash can be returned to owners. $300 million that doesn’t go to the government but rather to owners is a lot for a $800 million company. It won’t happen over a single year. But it still matters. In the case of Root, it has another advantage. Root is an insurance business and the equity capitalization matters. Insurance is regulated by the states, and each state subsidiary will need its own capital requirement. I cannot tell you for sure how much of the DTA will help. But it will help.