This morning, Root Insurance, a relatively new insurance company that has successfully secured significant private investment for its car insurance operations, is aiming for a market capitalization of up to $6.34 billion with its upcoming initial public offering (IPO).

The company, previously a startup, is following insurtech frontrunner Lemonade in entering the public stock market during a period where investors have shown a preference for companies demonstrating growth, even if immediate profitability is not yet achieved. Following the positive reception and high revenue valuations seen with Lemonade’s public debut, it became foreseeable that another comparable startup would explore a similar path.

Root’s potential valuation of $6.34 billion, based on its current price range, aligns with prior projections. The company intends to offer shares to the public at a price between $22 and $25 per share.

The offering is expected to generate more than $500 million for the company through the sale of its shares. Additional investments totaling $500 million from Dragoneer and Silver Lake bring the total funding raised to over $1 billion and may contribute to increased investor interest in the company’s stock. A comparable situation occurred with Snowflake’s highly successful IPO, which also included substantial private placements from prominent investors and ultimately became a landmark deal.

Is it likely that Root will increase its target valuation? And what implications does Root’s IPO price range have for other insurtech startups? Let's examine the financial details.

Root’s numbers

We have analyzed Root’s business performance on several occasions, both prior to and following the filing of its initial public offering (IPO) documents. Today, we will consolidate these previous analyses, utilize a current revenue multiple from Lemonade, apply it to Root’s financial figures, identify any valuation discrepancies, and consider the potential future trajectory of the company as it enters the public market.

What is the likelihood of an increase in Root’s IPO price? Here’s a framework for evaluating this possibility:

• Lemonade’s projected Q2 gross written premium: $47 million, which translates to an annualized figure of $188 million.
• Lemonade’s current valuation: $3.41 billion.
• Lemonade’s annualized gross written premium multiple: 18.1x.

Examining Root’s performance, we observe the following data:

• Root’s Q3 direct written premium, based on the midpoint of the range: $163.9 million, resulting in an annualized figure of $655.6 million.¹
• Root’s highest anticipated IPO valuation: $6.34 billion.
• Root’s annualized direct written premium multiple: 9.7x.

It’s important to acknowledge that we are comparing two distinct companies, primarily focused on different insurance sectors. While Root does offer renters’ insurance, a core product for Lemonade, their primary areas of operation differ, which may contribute to the observed valuation difference. (However, it’s unclear why this would negatively impact Root’s valuation relative to Lemonade, considering the characteristics of the auto insurance market.)

Generally, it appears that Root, with a valuation of approximately $6 billion, is currently undervalued when compared to Lemonade’s present pricing. Therefore, it is reasonable to anticipate that Root may adjust its IPO price range upward to align more closely with the multiples enjoyed by Lemonade. While we are not suggesting Root’s valuation will double to match Lemonade’s current metrics, a partial convergence is plausible.

Even Root’s existing valuation is robust for insurtech startups. It’s worth noting that Root was valued at $3.65 billion just last August. The company has experienced substantial growth, increasing to a $6.34 billion valuation in just over a year. A modest repricing could readily increase Root’s valuation differential to 100%.

Consequently, for companies like MetroMile and ClearCover, and other similar businesses, it is advisable to capitalize on these favorable conditions while they persist. However, it is crucial to address cost of revenue to ensure a sustained period of positive gross margins when entering the market, similar to Root.

This is concerning.

¹As previously stated: “We are utilizing Root’s direct written premium figure, which is a more conservative metric. Consequently, the subsequent calculations will likely underestimate the comparison and present Root as potentially more affordable than it actually is.”