Root Insurance, a US-based insurtech, has filed for an IPO

•  Root Insurance is targeting a $6 billion valuation in an upcoming IPO.
• It’ll likely succeed thanks to its improving loss ratio and the increasing demand for usage-based auto insurance.
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The US-based insurtech has filed for an IPO, per TechCrunch. Root has raised a total of $523 million in funding to date and is valued at $3.7 billion, though it’s targeting a $6 billion IPO valuation. The full-stack insurtech sells auto, renters, and homeowners insurance, and is currently available in 29 states.

Root is disrupting the $266 billion auto insurance industry through its use of IoT and AI, and has expanded its coverage to break into other markets. The insurtech collects users’ behavioral data via its mobile app to measure their driving behavior, such as hard braking and speed, to more accurately price each user’s policy. Good drivers save up to 52% compared with traditional insurance options.

The data is processed through machine learning (ML) and helps Root avoid high-risk drivers, decreasing the number of claims it has to pay by 45%. Root expanded its coverage to renters and  homeowners insurance last year, aiming to cross-sell these policies with auto, thus generating additional premiums without having to substantially raise marketing costs. In addition, users can customize and purchase policies, find their insurance card, make changes to their policy, and file a claim all through the Root app—creating a seamless customer experience.

We expect the IPO raise to be a success, as Root is improving its financials and the coronavirus pandemic is encouraging the use of usage-based insurance.

Root’s loss ratio is decreasing thanks to its growing sales and efforts to bring operations costs down through tech—akin to Lemonade’s pre-IPO situation. Root reduced its net loss this year and decreased its loss ratio from 96.4% in June 2019 to 81.3% in June 2020.

For context, the industry average for private auto insurance claims stood at 47.3% in Q2. Its margins are improving due to its boost in sales—with its active automotive policies growing 52% in the same period—the launch of a new revenue stream through its new markets, and its efforts to increasingly embed ML to streamline its claims process, per the IPO filing. This is comparable to insurtech Lemonade, which operates at a loss and yet successfully raised an IPO due to revenue growth and improving margins.

Lockdown has laid bare the shortcomings of traditional auto insurance compared with the more flexible usage-based model, further enhancing Root’s value. Lockdown measures have forced drivers to stay home, which in turn has led traditional auto policyholders to overpay on their premiums.

In addition, the pandemic is causing jobs to become more flexible, leading to more inconsistent driving habits. We expect demand for usage-based insurance to continue increasing as the new normal solidifies, strengthening Root’s growth prospects in the coming years and raising its value among investors.

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