Root Insurance – A Pure Play InsurTech Stock

Ever since the Italians issued the first insurance contract in 1347, companies have been making money issuing insurance policies. It’s not just about accurately predicting your claims so you can price policies that are profitable. It’s about having a massive pool of cash that you receive from the people you insure which can then be invested to generate a return. Lately, innovative startups have been applying technology to improve the insurance industry, something that’s often referred to as “insurtech,” which falls under the umbrella of fintech.

If you’re in the business of auto insurance, you want to be particular about who you ensure. The worst 30% of drivers are responsible for nearly 45% of all accident costs. If you can avoid insuring these accident-prone individuals, you’ll have a very profitable business. That’s exactly what Root Insurance does, and now they’ve filed for an initial public offering (IPO).

The Root Insurance IPO

Click for company website

We first wrote about Root Insurance about a year ago in a piece titled The Cheapest Car Insurance for Good Drivers. Today, we’re going to dig into their S-1 filing to see what’s under the hood of this interesting company that is using technology to disrupt the $266 billion U.S. auto insurance market.

Root refers to itself as a “technology company revolutionizing personal insurance with a pricing model based upon fairness and a modern customer experience.” The foundation of their entire company is the Root mobile app which lives on your smartphone and monitors your driving habits to determine a usage-based insurance (UBI) score which determines your car insurance rate. The safer you drive, the less you pay for car insurance.

Credit: Root Insurance

More than 75% of their customers are acquired via mobile phone in as little as 47 seconds, without touching their keyboard. Just scan your driver’s license and you’re ready to start your two-to-four week test drive. If you’re a safe driver, they’ll probably quote you a premium rate less than what you’re paying elsewhere.

When it comes to measuring progress, there are any number of rather boring benchmarks used by insurance companies to compare themselves with their peers. One of these metrics is “direct written premiums” which represents the growth of an insurance company based on the premiums they’re collecting from customers. In 2019, Root’s direct written premiums totaled $451 million. That’s about 1% of what their biggest competitor – State Farm – managed to do that same year.

Credit: Insurance Information Institute

In other words, Root is a very young company with plenty of room for growth. Since the auto insurance industry is extremely competitive, it typically costs between $500-800 to acquire a new customer. For Root, the cost to acquire a new customer is just $332 as measured over the past several years.

With 70% of their policies being reinsured by third parties, Root is a “capital light” business that focuses on avoiding the 10-15% of drivers who are up to two times more likely to get in an accident than their average targeted customer. But they’re not the only firm out there that’s built a driving behavior dataset.

Big Driving Data

About three years ago, we had an extremely insightful conversation with Jonathan Matus, co-founder of a driver safety data startup called Zendrive. Turns out driver safety data has multiple applications outside of insurance. For example, it’s important to know how safely humans drive when we begin deploying autonomous vehicles. When we published our article on how Zendrive Tackles Distractions While Driving, they had 30 billion miles of driving data. Today, that number has exploded to 180 billion miles of driving data, about 18X the size of Root’s data set. From this data, they can extract some very interesting insights.

Upon analyzing over 160 billion miles of driver data, we uncovered a dangerous new category of distracted drivers: Phone Addicts. These drivers ignore the road 28% of the time they’re driving, are on the road 1.5x more times than the general population and are more dangerous than drunk drivers.

Credit: Zendrive

In addition to selling their data to insurance companies, Zendrive is also working with mobile phone companies to create driver safety features for family plans.

The approach Zendrive took was to collect all the data, then sell it to enterprises. While we have no way of telling how comprehensive the datasets are for each of these companies, we can take inspiration from Zendrive’s business model which focuses on the value of the driving data. That’s not gone unnoticed by Root, and their S-1 talks about plans to make their platform available to enterprises using a software-as-a-service business model. Their first enterprise product, launched in March 2020, includes telematics-based data collection and trip tracking. 

Zendrive’s big data set might make a compelling acquisition for one of those large insurance companies looking to play catchup now that Root has shown everyone their inner workings.

Investing in Root Insurance Stock

In Root’s S-1 you’ll find a “Founder’s Letter” in which one of the co-founders talks about how everything will be sacrificed for growth, and they’ll be taking big bets. “Right now, today, our product is the worst it’s ever going to be,” says the letter which talks about how today’s Root App is delivering almost ten times the predictive power as the original version of the product released just four years ago. It’s reminder of just how young this company is, having been founded just five years ago. It sounds exciting, but it also sounds risky.

The problem with IPOs these days is all the volatility that’s caused by speculating “day traders” over at Robinhood. Given Root’s visible consumer brand, it’s likely that more of these individuals will be familiar with the business and want to invest in it speculate on it.

When investing in any stock, you should use dollar-cost-averaging, but with IPOs you may want to apply some cooling off period. For example, one month following the IPO you’ll buy one-sixth your position size and then the remaining five-sixths over the next five months.

To Buy or Not to Buy

We’re presently looking at the fintech space to see what stocks and ETFs we want to hold in our own disruptive tech stock portfolio. We recently wrote about 16 different financial technology stocks around the globe, some of which we’d like to take a closer look at. Regarding our current exposure to the insurance industry, we’re presently holding two large insurance companies as part of our dividend growth investing strategy.

In looking through Root’s S-1, we’re fascinated by what they’re doing with technology, not only in how they price premiums, but also in how they’ve made the entire auto insurance process easy-to-use and completely accessible via a smartphone app – even the claims process. That said, we’re risk-averse investors who find the company’s youthfulness to be risky. A big part of their value comes from the driver safety data they’re accumulating, and the machine learning algorithms that crunch it. They’re not the only firm out there using telematics to track driver safety. We’re also concerned about the long-term prognosis for the auto insurance industry.

The elephant in the room is what happens to auto insurance companies when self-driving cars start hitting the roads. It’s something we touched on in a piece titled “How Technology Will Affect Big Insurance Companies.” It’s true that Level-5 autonomy could be a decade away or more, but that’s still a concern. While Root is diversifying into renters’ insurance and home insurance, auto insurance is still their bread and butter. All that big data is great for better policy pricing, but it’s less valuable if you’re writing fewer policies as each year passes.


The insurance business is attractive to Warren Buffet because of all the capital it generates that can then be put to work generating returns. While he has recently begun dabbling in tech again following the IBM debacle, Mr. Buffet doesn’t like investing in anything he can’t fully understand. Root’s a young company that’s doing some transformative things in the auto insurance industry. We’re liking the company, but not loving it enough to participate in the IPO.

We’re currently holding an insurance company in our dividend growth investing (DGI) portfolio that’s increased dividends for 38 years straight. To see all 30 DGI stocks we’re holding, and to learn how to build your own DGI portfolio, sign up for a Nanalyze Premium annual subscription.

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