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Root Insurance's stock may soar after IPO, experience challenges later


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Root Insurance's stock may soar after IPO, experience challenges later

Industry observers believe Root Insurance Co.'s pending initial public offering is likely to benefit from equity markets starved for investment opportunities and momentum from the pop that Lemonade Inc. received when it debuted on the public market.

But the stock could face turbulence from subsequent public scrutiny as Root's leadership will be tasked with turning around operational trends that are troubling even for a unicorn whose flaws investors tend to forgive for the promise of stellar growth.

The company will be able to tout its use of artificial intelligence to monitor driving and price auto insurance to draw interest from investors who favor technology companies and have money to spend, said Kaenan Hertz, managing partner for Insurtech Advisors LLC.

"It would shock me if they don't do well in the IPO market," Hertz said. The preliminary signs point upward for its debut, he said.

Root's leadership believes that the company is positioned well to challenge for market share in an industry shifting its underwriting to more telematics-based platforms and that it has a strong head start on rival insurtechs.

"Our data leads to better pricing and segmentation, which allows us to attract better customers," President and CEO Alexander Timm said in a video promoting the company's upcoming IPO. Root's technology helps it attract desirable customers and charge them with more precision as time goes on, said Timm, who is also one of the company's co-founders.

Social media digital channels have been growing Root's name awareness in a cost-efficient way, and its mobile interface allows customers to sign up in less than 1 minute, executives said during the roadshow video.

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However, the company's financial statements reveal a potentially troubling loss experience and a still-low underlying retention rate of about 54%, Hertz noted. Root seems to be attracting riskier drivers, and its technology platform does not appear to be aptly pricing for loss trends, he said.

"It makes you wonder if their AI is appropriately tuned," Hertz said. The company's loss numbers and churn rate give them an insurance profile that resembles a nonstandard auto carrier, he said.

Still, index manager and IPO observer Josef Schuster said the risk appetite among investors should benefit Root.

"I think there's solid demand for a tech IPO in general, and to that specific IPO as well," Schuster said. "It should be relatively well received."

Root will be the ninth U.S. property and casualty insurer to go public since 2015 and the fifth since 2019, according to S&P Global Market Intelligence data. Of that group, Kinsale Capital Group Inc. has offered the best return on average equity since its 2016 IPO with a 28.23% performance.

While not classified as a P&C underwriter, Lemonade's experience may have blazed a trail for Root. Its stock more than tripled its initial offering price of $29 and touched as high as $96.51 before eventually settling down in the $50 range.

Plenty of institutional investors would take a quick turnaround yield from a startup's shares if Root's stock has it to give, Hertz said.

"Institutional and individual investors are not people who are intending to hold the asset for a very long period of time," he said.