Last night, Root filed to go public, adding a second name to the insurtech IPO rolls in 2020.
Lemonade was first out the gate this summer, taking its rental and home insurance business public at an attractive valuation, compared to its revenues and margins as we traditionally understand them. Wall Street was enticed by its growth and burgeoning consumer brand, according to one insurtech executive TechCrunch spoke to earlier this week.
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Root, in contrast, is focused on the automotive market, a lucrative space with a host of incumbent players and startup rivals like MetroMile and Clearcover. Reuters was first to report that Root was looking to file, after which we dug into the company’s reportedly targeted $6 billion IPO valuation.
We found that a $6 billion price tag, knowing what we did then, seemed reasonable. This morning we’ll fact-check our work.
(Update: Folks from the midwest would like me to remind you that Root is based in Ohio!)
Let’s get into the IPO filing and find out what we can. We want to know how quickly Root is growing, how much its economics have improved over time and how healthy the company is going into its public offering.
Inside Root’s IPO filing
Root has two lines of business in 2020: auto insurance and rental insurance. Akin to how fintech startups will offer you a debit card, and later offer, say, equities trading, insurance startups also want to cross-sell their existing customer base.
Historically, however, Root has been automotive-insurance focused, and its recent addition of rental insurance has yet to constitute a material portion of its in-market premiums. Still, here are the insurance-specific numbers that you should know, before we get into the regular financial results:
- Root’s active automotive policies grew from 111,736 in 2018 to 281,310 in 2019. That’s just under 152% growth on a year-over-year basis.
- Root’s active automotive policies grew from 220,536 on June 30, 2019, to 334,327 on June 30, 2020. That’s just under 52% growth on a year-over-year basis.
As Root has scaled, its economics have improved as well. Here’s a raft of key numbers of how Root’s overall business has gotten better over time:
- Root’s gross margin in 2019 was -28.8%. In the first half of 2020 it improved to -3.4%.
- On an adjusted basis those numbers were -18.7% and +3.0%, meaning that Root, by its own math, now generates gross profit from its insurance business after deducting certain expenses.
- How did it manage that? A falling loss ratio, which has come down from 99.9% in 2019 to just 81.3% in the first half of 2020.
Or, more precisely, it appears that the tailwind that many insurance providers have seen during COVID-19 has provided Root with a nice boost (driving fell during the pandemic, leading some insurance providers to return premiums.) Root is taking advantage of the moment by filing when it can show sharply improved economics.
That’s smart. But how do those improved economics bear out in traditional accounting? Let’s find out:
- Root’s revenue has skyrocketed from $43.3 million in 2018 to $290.2 million in 2019. In the first half of 2020, Root managed $245.4 million in revenue, up 135.73% from what it managed in the first half of 2019.
- Root’s losses have also shot higher, from a net loss of $69.1 million in 2018 to $282.4 million in 2019. The startup has managed to consistently lose more money over time. This was also true more recently, when its H1 2020 net loss of $144.5 million dwarfed its H1 2019 loss of $97.0 million.
Root is therefore something of a startup Rorschach test. You can find things to like (improving adjusted margins! revenue growth!), and you can find things to not like (spiraling losses! negative margins!) very easily.
How the company prices, then, will be very interesting.
After all, once Root is public, we’ll have just two neo-insurance players over the IPO hump. There are more domestic startups in similar spaces that will want to follow suit. So, how Root prices and performs matters.
On the valuation front, when we last did math of this sort we found that Lemonade was worth around 15x its gross written premium. We only have a number for Root’s direct written premium, which is a more conservative number. So, what comes out of the following bit of maths will undershoot the comparison and make Root appear a bit cheaper than it otherwise might be.
Regardless, Root’s H1 2020 direct written premium result was $306.5 million, or an annualized $613 million. At Lemonade’s 15x multiplier — which, we understand, is a very loose comparison to make given that the two firms sell different insurance types as the bulk of their business — Root would be worth around $9.2 billion.
That’s a lot of money for a company that generates negative gross margin at scale! But the public market welcomed Lemonade with its own wonky economics, so, perhaps Root will be just fine when it does debut.
Root was last worth $3.65 billion as a private company. It will list on the Nasdaq under the symbol “ROOT.”
The company has a $100 million IPO placeholder figure in its S-1 document, giving us scant understanding of what it might actually want to raise in its debut.
Wrapping up: Why do we care about how much money Root intends to raise in its IPO? Because the company burns cash at a rapid clip. In 2018, Root’s operations consumed $26.1 million in cash. The next year that figure rose to $127.2 million. And the company’s H1 2020 operations burned 64% more cash than its H1 2019 operations.
Root had around $241 million in cash at the end of June, 2020. It’s going to need a lot more to get to profitability, we reckon. Let’s see where the company will price.
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