Taking Root, the Next Insurtech IPO. Clover Chooses SPAC.

After Lemonade and other successful IPOs including Snowflake and Palantir, Root Insurance has its sights set on the primary public market. In its S-1, Root minces no words about its intent to reinvent the $266 billion US auto insurance.

Five insurtech companies established after 2015 have each raised private capital in the region of $500 million. Lemonade has gone public, Root has announced plans and there are signs of more to come.

Root Insurance which focuses on automotive, claims to be the only P&C insurance carrier with a scaled proprietary telematics solution and largest proprietary dataset of miles driven, driving behavior and claims experience.

Are these companies going public too soon? In 2016, Mary Jo White, SEC chair argued that a company goes public not only to raise capital but to “shed light on its operations and strengthen its controls and governance in ways not required of private companies”. The increased efforts required are compensated by attendant benefits from listing such as improved sense of trust for stakeholders. A successful IPO boosts brand awareness.

To understand Root’s IPO plans in the context of its financial performance, I refer two articles offering insights from its S-1. In this first one, Hertz explains that despite phenomenal growth, Root’s underwriting performance is much lower than expectations as is their cross-sell success selling renters. Their low retention rate will compel them to invest on acquiring new business, thus increasing marketing expenses and eroding profitability. Though Root is upbeat about deriving benefits from declining 10-15% of applicants deemed as riskiest drivers, it hasn’t yet translated into bottom line performance.

Examining S-1 filing documents of Root and Lemonade is illuminating. As insurtech’s poster children, they prominently emphasize their raison d’etre to shake up insurance. Both face similar marketplace pressures competing against the industry’s best and rely on their technology edge to be the structural moat. So, the risks they outline are largely similar.

Some risks entail pitfalls in building a national brand and creating differentiators aggressively that competitors cannot emulate. While highlighting these risks, they paint a long term picture of tech-enabled insurance value chain dominance that will help them disrupt their respective lines.

Building moats is painstaking, as the telematics evolution at Root will attest. Data collected from sensors record implied physical events and feed proprietary risk scoring models, resulting in a UBI score used for underwriting. The scores identify the riskiest 10-15% of drivers who aren’t quoted thus avoiding a high risk segment.

With the improvement in predictability from UBI1.0 to UBI3.14 and as the number of trips grow further, scoring models help Root get better and better at risk selection and profitability.

Davis and Lukpanov challenge Root’s S-1 claims about first mover advantage and prior telematics programs not being scalable. They argue that leading national carriers with huge competitive advantages on scale do have similar major mobile-delivered telematics programs (e.g. Progressive’s Snapshot) that are as effective. Several industry experts continue to dissect Root’s performance and though there are undercurrents of concerns on its capability to scale and disrupt, the IPO market might still be bullish on tech enabled insurance scrips.

Recently, Next Insurance raised $250 million Series D led by CapitalG at a valuation of $2 billion, up from $1 billion Series C last year. Its vision is to use technology to transform SMB insurance experience. Next’s strategy has been to opportunistically raise money and the Series D opportunity presented far more quickly than anticipated.

Clover Health, an insurtech for Medicare Advantage Plans, will go public through a merger with SPAC Social Capital. The deal values Clover at $3.7 billion. Of the $1.2 billion gross proceeds, Clover will receive up to $728 million and the rest to existing shareholders. The transaction also includes a $400 million private investment in public equity.

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