Honeymoon over for Root as momentum from buyout bid wanes

The Wall Street momentum produced by a reported buyout bid in 2023 has all but disappeared for Root Inc.

As of Feb. 1, the insurance technology (insurtech) company's stock had fallen 21.8% since the start of the year and about 36% since Root received a takeover bid from Embedded Insurance Inc. The $19.34-per-share offer submitted June 20, 2023 — worth an estimated $180 million — led to Root's stock jumping nearly 60% the next day.

After Root rejected the offer, the spike in valuation started to fade as the initial excitement around the takeover bid subsided.

"A significant part of Root's valuation increase was tied to the anticipation of an 'offer' that never materialized," Kaenan Hertz, managing partner at Insurtech Advisors LLC, said in an interview.

Investors will no doubt be keeping a close watch on the entire insurtech sector over the next 12 months, given its fluctuating performance in recent years.

"The issue with a lot of these insurtech names is this is the year certainly where it feels like you need to really demonstrate a very clear path to profitability, and it needs to be soon," said Keefe Bruyette & Woods analyst Tommy McJoynt.

While Root has struggled since the new year, other insurtechs such as Lemonade Inc. and Hippo Holdings Inc. have gained a little ground but at a very modest pace. Lemonade's share price is up 0.3%, while Hippo's has risen 1.6%.

A confidence game

Investor confidence also took a hit when Root director Nick Shalek stepped down from the company's board and its compensation committee, where he represented Ribbit Capital, one of Root's major investors.

Compounding that was Jonathan Allison, Root's chief administrative officer, selling 8,000 shares of Root's stock, a move that Hertz said could be perceived as a lack of confidence in the company.

Another blow came Jan. 10, when TD Cowen initiated coverage of Root at "market perform," a rating that Hertz said "does not offer a strong vote of confidence in Root's immediate growth potential."

Root declined to comment.

It is not all doom and gloom for the insurtech space. In his annual market report on the sector, S&P Global Market Intelligence senior research analyst Tom Mason struck an upbeat, if cautious, note.

"We expect the insurtech space to continue recovering in 2024, as the industry keeps consolidating and companies with the best prospects for profitability survive," Mason said. "A gradual decline in interest rates would help the sector, coaxing public market investors back into growth stocks and making venture funding less expensive for startups."