Overview

Root Insurance went public in October 2020 which brands itself as the first insurance carrier powered entirely by mobile. The Columbus, Ohio-based company has started in auto insurance, using data and technology to base rates on how people actually drive, not who they are. Their main goal is to provide personalized insurance for good drivers with better rates and an easy-to-use mobile app. In 2019, they also introduced renters insurance with the same mobile-native user experience.

For insurance companies (like Progressive), we should on looking at important metrics like net premiums written, net premiums earned, combined ratio, and book value. To reiterate how the industry handled the pandemic, the main companies in the $266 billion industry saw lower combined ratios during the early days of the pandemic as mobility dropped, but net premiums written also slowed over that time frame. The Apple Mobility Report for April 19th is shown below.

Ultimately, $ROOT will be a pass due uncertainty around their unit economics. This stock is similar to Lemonade ($LMND) as they both try to disrupt the status quo in the insurance industry using AI and data science, but they are both reporting heavy losses as they grow and tweak their pricing models. We expect losses from early-stage, high-growth companies, but in the case of Root, we have seen inconsistency with its loss ratio - an indicator of the quality of underwriting. We should keep an eye on these companies over the next couple of years as they mature, but there are too many questions at this point to confidently put a buy rating on these stocks today.

Introduction - Root Insurance

Root Insurance ($ROOT) believes the auto insurance industry is ripe for disruption because many of the large companies, like Progressive, use risk pools and rely on the law of large numbers to produce acceptable pricing numbers. Root wants to assess risk at the individual level and to cut out the insurance agent middleman to drive costs lower for good drivers.

Root is trying to build a competitive advantage in the auto industry behind these three pillars:

Behavioral Data and Proprietary Telematics: Collection and analysis of driving performance
Root Customer Experience: Mobile-first customer experience to make things simple
Full-Stack Insurance Structure: Full stack development to quickly innovate

Like most AI firms, Root focuses on its operational flywheel. The data collected from drivers and policyholders feeds proprietary risk scoring models that assist in identifying what the company believes to be the 10% - 15% riskiest drivers on the road. Root’s strategy is to not cover drivers that fall into this category at all. As more people drive with Root at lower prices for safe driving, the more data the company can utilize for underwriting. Their belief is that traditional auto insurers will continue to use pooled-risk underwriting without broad implementation of telematics making their prices less competitive for low-risk drivers.

Since its public listing on October 28th, 2020, $ROOT has seen its share price fall over 60% to $10.20 after opening at $27.00. According to Finviz, $ROOT has over 30% short interest. $LMND also has the attention of short-sellers with short interest above 20%. It seems like institutional investors are not believing in the industry disruption the companies are preaching.