I took a deeper look at ROOT after seeing it in @ryshab’s port overview. I remember looking into them in 2020, so was interested to find what happened in the meantime. Quite a lot! The stock price went from $431 in Oct 2020 to $4 in April 2023. And it is now at $39.71.
This is a very high-risk company, make no mistake. Just based on that share price trajectory alone, it won’t get much more than a small-ish position in my port.
Links:
IR site: https://ir.joinroot.com/financials-filings/quarterly-results
Latest Shareholders letter: https://ir.joinroot.com/static-files/9cba0cdf-4502-40ee-b98b-0b8bd550fcd0
Who leads the company?
Co-founder Alex Timm, CEO and Megan Binkley, CFO.
Alex is an actuary, Megan is a CPA, ex KPMG.
Says Alex:
I founded Root Insurance in 2015 on the idea that car insurance rates should be based primarily on driving behaviors, not demographics. I’m proud to lead Root in revolutionizing this outdated industry, using mobile technology and data science to give good drivers personalized, fair rates through an easy-to-use app.
What do they do?
Per Dan Manges, ex CTO and co-founder (since left the company):
Root is a car insurance company founded on the simple idea that people who drive well are less likely to get in accidents, and that means they should pay less for insurance. With that in mind, Root set out to reinvent a broken industry—an industry that was still assigning rates based primarily on demographics, had a complicated paperwork process, and determined pricing based on the driving records of all drivers. Using technology in smartphones to measure driving behavior, Root determines who’s a safe driver and who isn’t. Since Root doesn’t insure bad drivers, they can save good drivers money. And it’s all done in a simple, easy-to-use app.
Or as per their “About” page:
With a vision of bettering lives through better insurance, Root was founded in 2015 on the principle that car insurance rates should be based primarily on driving behaviors, not demographics. The company has revolutionized the archaic auto insurance industry using mobile technology and data science to offer fair, personalized rates to good drivers. The company has collected 20 billion miles of mobile telematics data to enhance and inform pricing models. With more than 12 million downloads, the modern app experience allows drivers to get their policy in less than 1 minute, manage their policy, and file a claim. A proprietary claims system, paired with advanced machine learning techniques, allows for automated loss expense, fast claims payout, and higher customer satisfaction. Root is the nation’s first licensed insurance carrier powered entirely by mobile and is currently offered in 34 states.
→ So in a nutshell, they use machine learning and a modern app to provide individualised underwriting for auto insurance. Something like the Upstart (shudder!) of car insurance.
The app got very good ratings online in a variety of places that I looked:
- Trustpilot: 4.4 (2.3k reviews)
- Apple App Store: 4.7 (69k reviews)
On to the numbers:
Revenue
| Rev $m | Q1 | Q2 | Q3 | Q4 | yoy Q1 | Q2 | Q3 | Q4 | Yr |
|---|---|---|---|---|---|---|---|---|---|
| 2021 | 69 | 90 | 94 | 93 | -45% | -26% | 86% | 83% | 0% |
| 2022 | 85 | 80 | 74 | 71 | 24% | -10% | -21% | -23% | -10% |
| 2023 | 70 | 75 | 115 | 195 | -18% | -7% | 56% | 173% | 46% |
| 2024 | 255 | 289 | 264% | 287% |
Something bad happened in 2021 and 2022. P&C insurance had a terrible couple of years. This was due mainly to inflation which put the insurers in a bend: they have to fix insured cars at higher prices than they thought when they issued the policies. Policy income stays stable, but costs go up. Not good. Because ROOT was not yet profitable by a long shot when this happened they were doubly in trouble: they were losing cash operationally, on their policies too, and they weren’t in a position to grow out of that hole. Hence they were priced as if dead. That explains the freefall part of the share price movement above.
So what did they do? They reinsured a lot of the risk, which led to revenues dropping and they cut costs - 17% of the workforce. They increased prices and prioritised surviving = making money/moving to profitability. That meant issuing fewer policies too. But toward the end of last year things seem to have turned and they started growing again.
It seems to have worked out, as revenues were up 264% and 287% in the last two quarters.
How did they manage to grow revenue?
Firstly, they took back some of the reinsured policies onto their own books. Secondly, they started ramping up their sales machine again as you can see from the number of policies they have in force below:
| Policies in force '000 | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 369 | 383 | 390 | 354 |
| 2022 | 343 | 306 | 262 | 220 |
| 2023 | 200 | 204 | 260 | 342 |
| 2024 | 401 | 406 |
→ The number of policies in force almost doubled yoy in the last two quarters, albeit off a low base.
The higher number of policies written translated into higher new written premiums - which more than doubled last Q (and which will translate into revenue in future quarters):
| Gross Written Premium $m | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 202.5 | 177.1 | 204.6 | 158.4 |
| 2022 | 187.2 | 140.1 | 150.7 | 122.0 |
| 2023 | 134.7 | 145.0 | 224.2 | 279.2 |
| 2024 | 330.7 | 308.2 |
Gross margins
Gross margins have been a bit all over the place but has recently grown to the highest level in the last 4 years, and holding steady for 3 quarters now:
| GP% | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 9% | -21% | -17% | -25% |
| 2022 | -14% | -9% | -11% | -6% |
| 2023 | 8% | 17% | 10% | 24% |
| 2024 | 25% | 24% |
EBITDA margins
Adjusted EBITDA margin has seen more improvements as the cost reductions of the past, price increases and efficiency in cost to acquire new policies all started translating into better profitability. They turned EBITDA positive for the first time in the last two quarters.
| Adj EBITDA % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | -131% | -184% | -125% | -79% |
| 2022 | -61% | -79% | -63% | -34% |
| 2023 | -16% | -16% | -17% | 0% |
| 2024 | 6% | 4% |
Net income margins
And of course the litmus test Net Income has trended in the right direction, with the company now on the cusp of (gaap) profitability after some truly impressive margin improvements over the last several quarters. In fact, the CFO said in a recent ER that the company would be profitable already should it stop new customer acquisition. They are basically at break-even, and with some additional scale should break into positive net income territory in the next quarter or two.
| NI % | Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | -145% | -199% | -142% | -118% |
| 2022 | -91% | -119% | -90% | -82% |
| 2023 | -58% | -49% | -40% | -12% |
| 2024 | -2% | -3% |
Loss ratio
Another key ratio drove the improved economics: their loss ratio. Or how much they need to spend on claims from the premiums they earned in a given period. They targeted 65% and have exceeded that in the last q or two (lower is better):
| Gross accident period loss ratio |
Q1 | Q2 | Q3 | Q4 |
|---|---|---|---|---|
| 2021 | 76% | 90% | 93% | 93% |
| 2022 | 81% | 85% | 79% | 78% |
| 2023 | 66% | 65% | 64% | 66% |
| 2024 | 60% | 62% |
They are seeing the opposite from what hit them in 2021/22. They are now seeing inflation come down vs their expectations when pricing the policy, resulting in lower costs on claims. I think this dynamic has some way to run still.
→ Clearly there has been a lot of operational improvement as well as tailwinds over the last couple of quarters. That again explains the share price ramp from the lows of early 2023 (when it was priced for death) to now. Of course that is all in the past, what does the future hold is the ultimate question for us.
Going forward
They need to maintain policy growth or at least not decelerate too much to maintain momentum. Management mentioned that they expect to slow down a bit due to seasonal and competitive reasons. I’m fine with that as 250%+ growth is clearly not sustainable, and they have capital adequacy requirements too, which puts a damper on this type of explosive growth.
They also need to hang on to that loss ratio of theirs. On that score things are looking good, as policyholders that renew have a consistently lower loss ratio vs their total loss ratio in all quarters. Meaning that any slowdown in new policies written should result in a better overall loss ratio and profitability.
Another matter which should play in their favour is an imminent refinancing of a $300m loan which currently has a rate in excess of 10% pa. Management stated reducing the rate on their debt as an objective for the short term.
And then of course lastly we have a lower interest rate environment which should improve the affordability of cars and insurance and lift all boats.
Valuation
The company has a market cap of just under $600m for a ttm p/s of about 0.7x (yes). Annualising last q’s revenue, growing it by 20% for 3 years, assuming they can get to a 7% net income margin by then, and slapping a 15x multiple on the result gives a potential market cap of $2.1bn in 3 years. That would be good for a 3.5x or more from current levels.
Of course it could all go sideways too, and the stock could return to its all time low of $4…But I don’t think so.
Would love to hear opinions from industry insiders or other enthusiasts!
-wsm
(Long ROOT <1% position for now)
)
