InsurTech

Insurtech startup Root drops S-1, revealing sharply rising revenue and net losses

Root's IPO could command a valuation of $6 billion

The insurtech IPO train continues to chug along.

Insurtech startup Root, which sells auto, home and renters insurance, filed Oct. 5 for an IPO seeking to raise $100 million through the sale of Class A common stock. (Although it’s important to note that the $100 million is a placeholder and will likely change with future filings.)

The unicorn has collected more than $500 million in VC funding so far but has yet to turn a profit, with an accumulated net loss exceeding $500 million.

The amount Columbus, Ohio-based Root hopes to raise almost certainly will go up as the IPO draws closer. Some analysts suggest the IPO could haul in $800 million to $1 billion. The company plans to list its stock on the Nasdaq exchange under the ticker symbol ROOT.

In addition to the IPO, San Francisco-based investment manager Dragoneer Investment Group has agreed to buy up to $250 million of Root’s Class A shares in a private placement, according to a filing with the U.S. Securities and Exchange Commission (SEC). The share price of the Dragoneer offering will equal the share price of the IPO. The number of shares to be sold in the IPO and private placement hasn’t been set; nor has the share price.

Dragoneer’s portfolio includes fintech companies Chime, Klarna and SpotOn. Dragoneer also invested in cloud-based data platform Snowflake, which went public last month in a $3 billion-plus IPO — the biggest IPO ever for a software company.

Root’s IPO could bring a valuation of $6 billion, up from its $3.65 billion valuation after raising a $350 million Series E round in September 2019. DST Global and Coatue led the Series E round, with participation from existing investors Drive Capital, Redpoint Ventures, Ribbit Capital, Scale Venture Partners and Tiger Global Management. To date, the 5-year-old company has garnered $523 million in VC, along with $100 million in debt financing.

Goldman Sachs, Morgan Stanley, Barclays and Wells Fargo Securities are lead bookrunners for the proposed IPO. Credit Suisse, Deutsche Bank Securities, Evercore ISI and Truist Securities also are bookrunners, while Cantor Fitzgerald, JMP Securities, and Siebert Williams Shank are co-managers.

These are heady times for Root and other insurtech companies. Lemonade went public this summer, raising $319 million. Lemonade sells homeowners, renters and pet insurance through its digital platform. Shortly before Lemonade’s IPO, insurance comparison site SelectQuote went public in a $360 million IPO. Waiting in the IPO wings are insurtech players Hippo, MetroMile and Next Insurance.

Root enters the IPO arena with a record of rising revenue — and rising net losses.

For the six months ended June 30, Root’s direct written premiums totaled $306.5 million, with revenue at $245.4 million and a net loss of $144.5 million.

In 2019, Root’s direct written premiums added up to $451 million, compared with $106 million the previous year. Revenue last year reached $245.4 million, with a net loss of $282.4 million. In 2018, revenue stood at $43.3 million and the net loss was $144.5 million.

As of June 30, Root had accumulated a total net loss of $529.5 million since its founding in 2015.

During the first six months of this year, 40% of Root’s premiums were from customers in three states: Georgia, Kentucky and Texas. As of June 30, the digital insurer had 334,327 auto policies and 5,974 renters policies in place nationwide. Root only recently added homeowners insurance, so data for that market segment isn’t available.

Root differentiates itself from other auto insurers by tracking a potential customer’s driving behavior through a mobile app before offering an insurance quote. Employing this approach, the company aims to disrupt the $266 billion U.S. auto insurance market.

“Our reinvention of auto insurance is made possible by the transparent collection and analysis of driving performance, which we believe is the most powerful predictor of accidents and the leading variable in our underwriting model. By collecting and synthesizing massive amounts of rich, sensory behavioral data across thousands of driving variables, including distracted driving, we strive to price based more on causality than correlation,” Root explains in the SEC filing.

“This allows us to price our customers’ policies more fairly — and in turn they pay premiums commensurate with their individual risk profile. While the notion of telematics has been around for decades, only recently has mobile technology made the concept adoptable at large scale.”

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