While he didn’t say that distribution of Root Insurance products through independent agents was off the table in 2022, the InsurTech’s chief executive officer did say the company is now laser-focused on embedded insurance last week.

Last year, during the second quarter of 2021, Root announced an embedded insurance partnership with online car dealer Carvana to sell insurance to customers at the point of time when they’re buying their cars online, and a pilot program to provide Root Insurance to customers through independent agents. But during a fourth-quarter earnings conference call last Thursday, it was the Carvana deal that got the lion’s share of attention, providing a bright spot to a financial report of more than $0.5 billion of net losses on the bottom line for all of last year.

CEO Alex Timm also disclosed that the insurance being sold through Carvana is not a telematics product, but it will be at some point in the future.

According to the text of a letter to shareholders that revealed Root’s bottom line in red ink with net losses of $109.9 million for the fourth quarter of 2021, and $521.1 million for the year, the Carvana embedded product increased the InsurTech carrier’s weekly new writings from our platform by 3.5-times, setting the groundwork for further expansion.

Timm and other executives mentioned the Carvana partnership 22 times during the conference call, and distribution through independent agents just once. The nod to agents came in a response to an analyst question, who wanted to know what happened with agency distribution since the second-quarter 2021 pilot was announced.

“We do have investments throughout multiple distribution channels, including our independent agency channel, which is still live, and we are getting policies through that channel today,” said Timm. “However, what we have seen and what we have observed over the last six months with the Carvana partnership and the success of the embedded product has really surpassed any of our expectations.”

Timm said continuing to drive this growth channel forward and focusing resources on embedded distribution is a prudent course of action.

“We also believe that that [embedded insurance] growth channel actually can create a moat around our business,” he said. In Root’s view, it brings “differentiated access to customers where we can uniquely [meet] those customers in the moment that they actually have the need.”

“Because of that, that’s really where we’re focused right now,” he said.

“Of course, as we progress, we believe that there’s lots of other ways to talk to customers too. And so we will be, over a longer period of time, continuing to incubate other distribution channels,” he added. “But right now, the focus is Carvana,” he said.

The analyst’s question was prompted by Timm’s answer to a prior question about the road ahead for Root, and its path to profitability over the next two or three years.

Giving his future view, Timm predicted a “very large shift” in distribution. “We do believe embedded is a gigantic opportunity….We think it builds better consumer experiences. And we think that we’re at the tip of that spear. And we’re going to continue to expand that product and distribution line.”

During the quarter, Root reported an 8.7 percent increase in gross written premiums and a 60 percent in net written premiums to $67.9 million—with net premiums for the year jumping 45 percent to $345.8 million. Timm’s opening remarks on the conference call suggested that the success of the Carvana partnership was helping the top line, as he noted that the first version of its product for Carvana had been rolled out in 12 states.

“As we build the second version of our product, we will explore how telematics can be used to inform pricing, underwriting and the customer experience,” he said. “We are also building a brokerage offering to serve customers in states where Root currently does not write business,” he said, without expanding further.

Following up on Timm’s reference to the first and second iterations of the Carvana insurance product offering, an analyst asked for clarification about the use of telematics in delivering the Carvana product. Root’s other products sold directly to auto insurance customers are telematics-based products.

“What we’ve done in the first version of Carvana is, we’ve really prioritized getting a product out into the market, into consumers’ hands and moving quickly. That’s the way we like to develop products at Root. We really leverage our engineering abilities to ship product very quickly very, very frequently. And so every week, we are making improvements to that product flow.”

“Currently, we are not using telematics in the Carvana flow. However, we do have plans to. And we think that there’s a lot of really interesting opportunities here, particularly given that they have the vehicle really in their possession, which allows us to get closer to vehicle technology as well while they’re in the reconditioning centers,” Timm said.

Loss Trends and The Bottom-Line

As for other types of distribution, Timm, responding to the question about Root’s future, said, “We also still believe in our direct channel. We think that we can build better consumer experiences through our technology, and that’s what we’re going to continue to do. And then with that, you should expect material improvements to profitability, which is the company’s track record.”

“We have consistently improved loss ratio over the years. And we saw some inflation last year, but we believe we’ve now really acted quickly, decisively and aggressively to get that back under control.”

Although Root reported net loss and loss adjustment expenses and earned premium dollar amounts that indicated a (calendar year) loss ratio of 126.4 for 2021, nearly 14 points worse than 2020, Timm and Chief Financial Officer Dan Rosenthal focused more on accident-quarter loss ratios which remained stable around 90 during 2021.

Noting that inflationary pressures have translated into accelerating loss trends for auto insurers industrywide, Timm said Root’s technology helped the InsurTech to react quickly to recognize the trends and stabilize underwriting results. While the accident-quarter loss ratios remain well below a targeted level of 65, Root is building a path to profitability, he and Rosenthal said.

“We were able to act quickly because our engineering and data science driven infrastructure allows us to collect actionable real-time data, analyze it quickly and then implement change, and that was demonstrated by our Q4 performance,” Timm said.

The two executives also said that deep cuts in digital marketing spending have slashed the fourth-quarter bottom-line net loss figure almost in half from what Root reported in second-quarter 2021 (when the net loss was $178.6 million).

“Our commitment to expense management has not stopped with marketing spend. In January, we made the difficult decision to reduce our workforce by approximately 20 percent,” Rosenthal said, noting that this resulted in run rate expense savings of approximately $30 million annually.

On the underwriting side, Timm said the company is tightening underwriting standards state-by-state to further drive profitability, and that rate hikes were taken in eight states in fourth-quarter 2021, with five more in first-quarter 2022.

Rosenthal said that gross written premiums will show “significant year-over-year declines” in the first half of 2022 as a result of the underwriting and pricing actions, but the company continues to “expect meaningful improvement in our operating losses in 2022.”

But have loss ratios peaked? And what impact will the impact of more Carvana business have on loss ratios?

Chief Technology and Data Science Officer Matt Bonakdarpour responded to the question about Carvana business loss ratios. “It’s important to note that any time you start a new channel, you will feel a new business impact from that channel. But when we compare and control for that fact, the early signs are very encouraging,” he said.

Chief Insurance Officer Frank Palmer tackled the more general question, noting that while loss trends are still high—”as we look at the macroeconomic factors, inflation is still up, used car prices are still up”—those trends need to be distinguished from “loss ratio trends.” Rate and underwriting actions should help bring loss ratios down, or at least keeping pace with loss trends,” he said. “While we might not have seen the peak in loss trends, or industrywide macroeconomic loss trends, we do think that we’ve probably seen a peak in the loss ratio trend,” he asserted.

Another Path Forward?

During the Q&A part of the earnings call, another analyst asked the executives whether they would consider monetizing Root’s technology stack instead of continuing to underwrite insurance in a challenging environment.

“There are definitely other partners, potential balance sheet partners that are interested and are leaning in to potentially partner with us,” Timm reported.

He added, “When we’re looking at those partners and when we’re considering this is it’s very important to us that they can maintain the customer experience that we’re building. And so making sure that they can leverage our technology and sufficiently provide that level of customer adoption and experience is going to be really important,” he said.

Timm also noted that Root already does have an enterprise program that capitalizes on the InsurTech’s “core technology asset,” and said that “two major carriers” partner with Root to broker business today, without naming them.

Rosenthal added that “the industry has taken note of the our ability to leverage our technology during this very unique environment. And you can imagine that we have gotten significant communication on that because the results speak for themselves….We’re always going to look at opportunities and some of the strategic choices that we have in front of us,” he said.

‘Built to Last’

Timm and Rosenthal ended the shareholder letter stating, “We sit in a stronger position than we have at any other time in Root’s history. Our ability to quickly iterate and implement changes not only makes us stronger in the volatile environment we face today but is a core part of the infrastructure that makes Root built to last.”

“Our near-term goals are clear: continuing to capitalize on our technology advantage, strengthen our underwriting foundation, and building out our embedded product through our partnership with Carvana. The success of this focus can be measured in our top and bottom-line results in coming quarters and years ahead.”

In the letter and during the earnings call, Root executives also spoke about the closing on a new five-year loan of $300 million from BlackRock, providing fresh capital to execute on the strategic priorities going forward.