COLUMBUS, Ohio (COLUMBUS BUSINESS FIRST)–Root Insurance Co. will build custom policies presented at the time of car purchase from Carvana Co., which is investing $126 million to take a 5% stake in the digital insurer.
More such exclusive partnerships could develop as a more efficient way to gain customers, so parent Root Inc. plans to significantly reduce spending on advertising, CFO Dan Rosenthal said Thursday. That should slow growth in new policies into the first half of 2022, he said, but result in a more sustainable path to profitability.
“We think there is going to be a fundamental shift toward embedded insurance,” CEO Alex Timm told analysts in a conference call Thursday.
“It makes much more sense for the consumer and is a better consumer experience to effectively, when they’re purchasing a vehicle, just to have insurance included in that purchase,” Timm said. “Auto insurance is not necessarily a product consumers love shopping for.”
While testing the partnership with a subset of customers over the past year, the Tempe-based online used car seller and Columbus insurer built mutual respect for each other’s use of technology to improve customer experience, he said.
“Our partnership has deepened as the two companies have gotten to know each other and understand each other’s businesses and shared values,” Timm said. “We feel very culturally aligned with them.”
Carvana’s investment will be in a convertible preferred security, convertible at $9 per share, into about 14 million Class A shares of Root. Carvana will also get access to additional stock warrants linked to the partnership’s performance.
“In Root, we have found a partner that shares our customer focus and technology-driven approach to delivering exceptional customer experiences,” Carvana CEO Ernie Garcia said in a statement. “We look forward to introducing our customers to Root’s seamless insurance process.”
The embedded model also is a strategy for Columbus digital home and auto insurer Branch Financial Inc.: Its policies are offered at key decision-making points when taking out a mortgage, through partnerships with lenders like Quicken Loans.
The announcement coincided with quarterly earnings for Root Inc., which reported an adjusted loss of $4 million for the quarter ended June 30. Root measures how well its model works by calculating the amount of profit before ceding premiums to the reinsurers that cushion it from losses, $19 million for 2020 but projected at a slight loss this year.
For the full year the company projects a loss close to $555 million on a GAAP basis, Rosenthal said on the call.
The company recently rolled out the fourth generation of its AI-powered premium pricing model that draws on 10 times more data points than the previous version, Timm said. That is resulting in better risk projections and improved retention of policyholders who are the safest drivers.
Root achieved unicorn status in 2019, and its October IPO was the largest in Ohio history. The company’s shares on the Nasdaq closed at $6.87 on Wednesday, well below the high to date of $29.48, and dropped below $6 Thursday morning after the analyst call.
Carvana reached a major company milestone by reporting its first-ever quarterly profit last week, sister publication Phoenix Business Journal reported.
But the company’s shares dropped 2.54% in Wednesday trading following a Wall Street Journal report that the company is barred from selling cars around Raleigh, North Carolina, until January after it failed to deliver titles to the motor vehicle department and sold cars without state inspections.
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