This year, Root Insurance took the No. 18 spot on CNBC’s Disruptor’s 50 List, which is the first time the company has appeared on it. This startup is a licensed insurance carrier that is based on a mobile app and sophisticated AI analytics. As IPO rumors continue let’s take a look at why it makes sense to buy Root Insurance stock.
The idea for Root Insurance came from Alexander Timm. Keep in mind that he has worked in the insurance industry since he was 14 and took a job at Nationwide Insurance when he left college.
Then in March 2015, he would launch Root Insurance joined by Dan Manges. Before this, Manges was the Chief Technology Officer at Braintree, which develops systems for businesses to accept credit cards and payments. The company is a division of PayPal (NASDAQ:PYPL).
A Closer Look at Root Insurance Stock
You can also file a claim through the app, which involves snapping photos of the damage. The submission process generally takes less than five minutes.
For car policies, Root Insurance does not use demographic information – like age, marital status and gender – for determining premiums. Instead, the business model is based on how well you drive. The result is that there are significant savings, as much as up to 52%.
So how is your driving measured? You will drive your car for a few weeks and the mobile app will come up with a score. This will be the main factor for your quote.
And yes, Root Insurance has expanded into other categories. For example, the company now offers policies for renters and home coverage (the pricing starts at only $6 per month). These are personalized according to your belongings.
Creating an insurance company is certainly capital intensive. But the good news for Root Insurance is that the company has been able to raise a substantial amount of venture capital.
The latest round came in September 2019. Root Insurance raised a hefty $350 million along with $100 million in debt financing, with the valuation at $3.65 billion.
The lead investors were DST Global and Coatue. There were also various other VCs in the syndicate, including Drive Capital, Redpoint Ventures, Ribbit Capital, Scale Venture Partners, and Tiger Global Management. Since its inception, Root Insurance has raised $523 million.
Then again, the market opportunity is enormous. For the auto insurance market in the U.S., it is $250 billion. What’s more, the industry is ripe for innovation and disruption.
At the time of the funding, Root insurance was available for over 65% of the U.S. driving population and there had been more than $187 million on premiums written (for the first six months of the year), up over 8X .
An IPO for Root Insurance?
Lemonade (NYSE:LMND) is another next-generation insurance provider that relies on a mobile app and AI (I recently wrote a profile on the company for InvestorPlace.com).
There are some differences from Root Insurance. For example, Lemonade does not base premiums on driving behavior. Rather, the focus is on using AI to score the risks of its customers. An essential part of this is to detect and block fraud. Keep in mind that insurance fraud comes to over $40 billion a year in the U.S. (according to the FBI) and leads to higher premiums.
Note that in early July Lemonade pulled off its IPO. And it was a red hot offering, as the company raised $319 million. The shares have since soared by nearly 200% and the market cap is now about $4.6 billion.
No doubt, this is very good news for Root Insurance. All in all, it seems like a good bet that the company is gearing up for its own IPO – and soon.
Tom Taulli (@ttaulli) is an advisor and author of various books and online courses about technology, including Artificial Intelligence Basics, The Robotic Process Automation Handbook and Learn Python Super Fast. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.