Root stock woes continue as Carvana policy count improves

Root Inc.'s poor performance on Wall Street is continuing even as its partnership with Carvana Co. shows signs of revving into life.

In 2021, the auto insurance technology company and the online used car retailer teamed up, with Root offering "embedded insurance" to Carvana customers when purchasing a vehicle.

Root increased its new policy count via this new distribution channel by 41% in the 2022 fourth quarter, but total revenue was down for both the quarter and full year 2022.

While the partnership is starting to yield results, long-term investor confidence seems lacking, and Root's share price has dropped over 95% since the partnership was announced. Carvana is also down over 95% over the same period.

Signs of progress for Root

Heavy losses are still burdening Root, but they are being reduced. The insurtech reported a fourth-quarter 2022 net loss of $58.3 million, an improvement from a $109.9 million loss in the prior-year period. The full-year net loss was $297.7 million compared with a loss of $521.1 million in 2021.

Total operating losses, however, showed dramatic improvement. Fourth-quarter losses were down 35.7% — $119 million from $185.1 million — while full-year losses were $573.9 million, a 30.9% decrease from $830.6 million in 2021, and the company's 2022 gross expense ratio fell to 45.4% from 71.3% in 2021.

Insurtech Advisors analyst Kaenan Hertz said Root has done a "great job" managing the insurance side of its business in terms of getting control of its loss ratios, acquisition costs and expenses.

"They're shrinking their losses faster than they're shrinking their business," Hertz said in an interview. "So that, to me, is a very positive sign."

Examples of this shrinkage include policies-in-force, down to 220,354 from 354,371 in 2021; the value of premiums-in-force falling to $537.7 million from $713 million; and gross premiums written decreasing to $600 million from $742.6 million.

One less positive sign was the news last week that Root had fired its CFO, Rob Bateman, for cause.

Root was down 26.05% for the week of March 10.

Spokeswoman Kelly Ruoff in an emailed statement to S&P Global Market Intelligence said that while Root canno5 predict the market's reaction and its stock performance, "the progress of our business is quite clear."

"We went from being 16 points worse than the industry on loss ratio to being five points better than the industry," Ruoff said. "We cut our expenses nearly in half and, yes, we are rapidly growing our embedded new writings and plan to continue to do so."

Committed to Carvana

Root CEO Alex Timm said in a fourth-quarter 2022 letter to shareholders that the company is ready to build on the rise in new policies with Carvana.

"We see embedded insurance as the next large secular trend in distribution," Timm said, adding that the company is also looking to "scale the platform to new partners."

The confidence in Carvana comes despite a dramatic downturn in the online used-car merchant's balance sheet. Fourth-quarter 2022 net losses totaled $1.44 billion, up from $182 million in the prior-year period, while full-year net losses were $2.9 billion compared with a loss of $287 million in 2021.

Keefe Bruyette & Woods analyst Tommy McJoynt said Root executives told him that despite speculation on possible bankruptcy or restructuring of their balance sheet, Carvana continues as a going concern for the insurtech.

"It's probably in the best interest of all of their capital providers that the business continues to operate for Carvana," McJoynt said in an interview. "Even if there is some sort of restructuring or bankruptcy, Carvana itself is not going to go away anytime soon."

Carvana also can find a financial friend in billionaire George Soros, who reportedly acquired call options on the company. Those options would allow Soros to purchase 1.5 million shares of Carvana stock at a price determined by the company.

Carvana did not immediately respond to requests for comment.

Among other insurtech companies, Lemonade Inc. was down 13.22% for the week. Hippo Holdings Inc. fell 20%, while GoHealth Inc. dropped 5.81% and Oscar Health Inc. fell 25.44%.

The S&P 500 Insurance Index stumbled as well, dipping 6.14%.