InsurTech IPO - Root(ed) in reality

3 InsurTech IPOs in 1 year?! Root joins Lemonade & Clover Health (courtesy Chamath).

Hey folks! As a founder of a Pre-Seed InsurTech, I get very excited to hear about InsurTech IPOs. I briefly interacted with the Founder of Root over 2.5 years ago around the time I first discovered InsurTech.

In this installment, I will cover Root Insurance’s S1 filing.

Root Insurance

“Right now, today, our product is the worst it’s ever going to be.” - Alex Timm, Co-Founder & CEO of Root Insurance

About Root Insurance

Headquartered in Columbus (Ohio), Root Insurance is a juggernaut - in FY 20, it generated $526.9M in premiums and lost ~ $83.9M. The company has raised ~ $523M in equity financing (most recent funding was its $350M Series E valuing the company at $3.65bn). [1]

Anmol highlighted that you may be surprised to see the Gross Profit in the most recent quarter; given Root’s focus on motor insurance, this Profit is a by-product of lower claims (on account of Covid-19).

Commentary on IPO price

Per TechCrunch, Root is aiming for a $6bn valuation - a 64% markup to its valuation from about ~14 months ago. In my view, Root is on track for ~ $600M in premiums in FY 21; the proposed IPO price would reflect a x10 *forward* premium multiple.

This may seem like a generous price for a public insurance company. As at 08.10, Lemonade’s market capitalization of $3bn reflects a x25 *trailing* premium multiple.

Although Lemonade and Root cannot be compared (difference in insurance business), the above figures do serve as a guide for generous SaaS multiples applied to gross premiums generated by these companies.

For additional context, in India, Digit insurance is valued at x3 *trailing* premiums and Acko at x10 *trailing premiums* - perhaps, there is a ‘stateside’ premium?

Let’s move beyond ‘price’ to more interesting facts about Root Insurance -

Company data and S1 filing release

For a company incorporated in 2015, it has ~850 employees per LinkedIn data .

Root Insurance primarily sells telematics based motor insurance in USA - industry observers think this isn’t true - I won’t comment since I haven’t reviewed their pricing algorithms. Below is the “powerful flywheel” as per Root:

On 05.10.2020, Root Insurance filed its S1 with the SEC to go public. I went through the document and picked up some key statistics/observations for you to mull on:

  1. Policies in force

    • For FY 20, Root’s motor insurance book grew 89% (i.e. nearly 2x) or an impressive 5.5% MoM growth for a late stage venture!

    • However, in Q1 FY 21, Root’s motor book did *not* grow! This shouldn’t surprise you given Covid-19; but there is another variable -

Root Insurance policies renew every 6 months - the plateau in growth of the motor book is driven by Covid-19 and *perhaps* drivers voluntarily letting their Root policy lapse (because they aren’t driving).

  1. Root Re - vehicle of growth

    • Root Insurance retains ~15% of premiums on its own balance sheet i.e. it ‘cedes’ 85% of its top-line revenue to reinsurers (for context - Lemonade’s figure is 75% ceded to reinsurers).

    • Root launched its own reinsurance vehicle “Root Re” in 2019 to retain an additional 15% of premium it generates; i.e. Root now retains 30% of premiums.

Please note that the sharp drop in Loss Cost for Q1 FY 21 is certainly linked with Covid-19; however, in my view, the Loss Cost seems to be trending to a sub 100% level.

  1. Beware of bundling

    • Root has expanded beyond its staple motor insurance into homeowners & renters insurance (ouch, Lemonade!)

    • Interestingly, the cross-sell rate of renters is trending towards ~7% over a 12 month period.

    • At first glance, this sounds terrific but its premium volume and not policies that drive revenue - the average motor premium is $909 versus a renters premium of $139.

Slightly technical: In a bull case scenario today, Root Insurance is *only* earning, on average, an extra 1% in premiums via cross selling renters insurance (i.e. 0.07 * $139 as a % of $909).

  1. Churn

  • Root reports a 84% renewal rate at the end of the 1st 6 months and a 75% renewal rate at the end of the 2nd 6 months.

  • However, they do clarify that these figures could drastically change; cohort analysis is biased towards long time customers (who only account for ~47% of their customer base today).

To sum up my analysis, for a 5 year old company, Root Insurance has performed incredibly well to generate > $500M in premiums in FY 20. Investing in Root would be a bet on the retention and up-sell trend compounding over the next ~5 years.

Small break here - if you have enjoyed the read so far, please do consider subscribing to InsurTech Tribe, if you haven’t already:

In brief: Clover Health

Clover Health (USA Medicare) will go public via Chamath’s $IPOC SPAC (special purpose acquisition company); you can find Chamath’s thesis here:

I had previously touched upon Clover Health in connection with Google’s insurance investments. For Google, its insurance investments might just be a home run - Lemonade’s IPO has taken place, Clover Health will IPO via $IPOC and Oscar Health is expected to IPO in 2021 as per Axios. [2]

I will cover Clover Health in more detail in the next post. However, I am very excited to see that Root, Lemonade and Clover Health will go public in 2020 - that’s 3 InsurTech IPOs this year- liquidity for investors, founders & employees means that more money will pour back into the ecosystem for harder problems.

And, that’s all from me for this week - if you found this post interesting, please do consider dropping a ‘Like’ or sharing it forward. I look forward to your thoughts, comments & feedback.


Update since publishing

The startup I co-founded — BimaPe — is now out of stealth mode. you can read a bit about what we are doing below.

Please note: Any views expressed above are my own and do not reflect those of BimaPe Inc, our investors, employers or customers. 

About BimaPe

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Bonus content:

Venture Capital is pouring into InsurTech; this week saw $61.12M committed (in the Tweet below, I omitted Riskbook’s $2.6M Seed round - apologies!)