Root IPO: Insurance Tech Company Bringing Stock to Nasdaq
The Root IPO is finally here after months of speculation. Known for its goal to disrupt the auto insurance industry, the company is bringing Root stock to the market. And after the success of one of its biggest competitors, investors want in on the action.
But is Root a good investment opportunity? Here’s what we know…
Root IPO: The Business
Alex Timm and Dan Manges co-founded Root in 2015. It’s a technology company focusing on modernizing personal insurance. Timm worked at his father’s agency as a teenager and developed a love for the insurance business. Manges is the former CTO of Braintree, which merged with PayPal. Together, the two of them have created a new pricing model aimed to give fair, personalized pricing.
In the Root prospectus, the company states…
“We have built a company that recognizes each individual is unique and puts customers in control, rewarding them for their actions. For centuries, traditional insurance companies have grouped people into risk pools and long relied on the ‘law of large numbers’ to produce acceptable pricing on an aggregate basis. Fairness at the individual level has been largely ignored. Root is different — we use technology to measure risk based on individual performance, prioritizing fairness to the customer. The way we design and deliver insurance is not a simple tweak to the traditional insurance model — we are fundamentally reinventing insurance through technology, data science and a maniacal focus on the customer. While our opportunity is expansive and our ambition is global, our story begins with U.S. auto insurance.”
The Root IPO comes after its main competitor, Lemonade (NYSE: LMND), successfully went public in July. And the company believes Root stock will give investors the opportunity to invest in the future of personal insurance.
Root Stock: Investing in the Auto Insurance Market
Although Root provides homeowners and renters insurance, its primary market is auto insurance. Global P&C insurance premiums total $2 trillion annually. In the U.S. alone, 2019 premiums exceeded $370 billion, growing at a compound annual growth rate (CAGR) of 5% since 2014. Root plans to focus on the $266 billion U.S. auto insurance market. Most states require drivers to have auto insurance, and it’s usually the first insurance policy bought by consumers.
Root believes it can disrupt the industry with the use of technology. The company says the rise of digital distribution is the biggest driver of the $50 billion market share shift to direct models over traditional in the last two decades. But Root also says technology can change not just distribution but how insurance is priced.
Telematics: Can It Change the Industry?
The startup company uses telematics. Telematics is technology used to monitor a wide range of information relating to an individual vehicle or fleet. Root’s telematics process takes data collected by its platform to give insight about customers’ driving performance, particularly around driving behavior that causes claims. It then takes that data to create a usage-based insurance (UBI) score. A UBI score consists of modeled variables that determine both underwriting eligibility and pricing.
Here are some reasons Root believes telematics is the key to disrupting the industry.
- Massive data set – Root’s app analyzes thousands of driving variables, collecting multiple data points per second through the driver’s mobile device. So far, Root has collected more than 10 billion miles and hundreds of thousands of claims.
- Predictive power – Root believes that driving behavior can predict losses, and it uses telematics to measure those behaviors. The company aims for a purely behavior-based approach and will be removing credit scores from underwriting. Additionally, Root’s newest generation of UBI scoring has 10 times the predictive power of its original solution.
- Foundation of flywheel – This is the wording Root uses in its prospectus. The idea is that, as it gathers more data, Root can offer lower quotes than its competitors. This should lead to increased conversion and provide more data to the platform.
- Management of loss ratios – Root claims telematics-based pricing models are more accurate than traditional, demographic-based underwriting variables. This allows the company to segment risk and deliver lower loss ratios. As a result, Root can share better prices for its customers.
Root claims by using telematics, the customer is in control of their premium. And the Root IPO will help the company continue to offer its product to new markets. But before investing in Root stock, let’s look at the company’s financial records.
Root’s Financial History
Like many startups, Root isn’t profitable, although the company does bring in revenue. In 2018, Root’s total revenue was $43.3 million. This increased by 570% to $290.2 million in 2019. Additionally, for the six months ended June 20, 2019, Root reported $104.1 million in total revenue. For the first six months of 2020, this more than doubled to $245.4 million.
However, despite the increase in revenue, Root reported increased net losses each year. In 2018, net loss reported was $69.1 million. It increased in 2019 to $282.4 million, a growth of 408%. And for the first six months of 2020, Root’s net loss was $144.5 million. This is up 49% from net loss reported on June 30, 2019, of $97 million.
One reason is Root’s operating expenses increased. In 2018, total operating expenses were $111.5 million. It increased by 394% to $550.3 million in 2019. It then increased by 90% for the first six months, going from $198.5 million in 2019 to $376.5 million in 2020. Loss and loss adjustment expenses are the biggest expenses Root has.
Fortunately for the Root IPO, many investors have focused more on growth than profitability for 2020 IPOs. That could be to the company’s advantage. So, if you’re interested in Root stock, let’s look at the details.
Root IPO Details
Root publicly filed with the SEC on October 5, 2020. The Root IPO date is set for Tuesday, October 27, 2020. The offer will consist of 24,164,515 shares of Root stock. Root will offer 22 million, and an existing stockholder will sell the rest. Root will not receive any profits from the existing stockholder’s shares. The expected price range is $22 to $25 for a deal size of $568 million.
Root stock will trade on the Nasdaq under the ticker symbol ROOT.
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The Root IPO is coming at a good time for the market. But there are some concerns. One is less people are driving as companies continue to implement work-from-home practices. Another is the company relies on a newer generation adapted to using technology in most aspects of everyday life. But for the long game, Root stock could be a good investment opportunity.
About Amber Deter
Amber Deter has researched and written about initial public offerings (IPOs) over the last few years. After starting her college career studying accounting and business, Amber decided to focus on her love of writing. Now she’s able to bring that experience to Investment U readers by providing in-depth research on IPO and investing opportunities.