During the week’s news cycle one particular bit of reporting slipped under our radar: Root Insurance is tipped by Reuters to be prepping an IPO that could value the neo-insurance provider at around $6 billion.
Coming after two 2020 insurtech IPOs, Root’s steps toward the public markets are not surprising. But they are good news all the same for a number of insurance startups that have raised lots of capital and will eventually need to prepare their own debuts if they don’t find a larger corporate home.
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The Root IPO will also help clarify Lemonade’s own public offering and ensuing valuation. Lemonade’s debut brought a strong price to the rental-focused insurance provider, leading to a more buoyant attitude toward the valuation of its class of startups. More precisely, the public price assigned to Lemonade when it floated was, no bullshit, very bullish.
If Root can repeat the feat it would cast a warm light on the yet-private players in its niche that will have their eyes pinned to the flotation. Names like MetroMile and Hippo could be next if Root’s IPO goes well.
But, first, does Root make sense at a $6 billion valuation? We can do a little digging on that this morning, using Lemonade’s present-day valuation to get a handle on the figure. Let’s go!
Root’s valuation in a Lemonade world
Before we get into the numbers, bear in mind that we’re going to compare apples and oranges today, and that we’ll have to use some dated numbers as well. That said, we can still get somewhere about what Root could be worth. So, roll with me but don’t take every number as engraved onto an obelisk.
Back in July of this year, in the wake of the Lemonade IPO and Hippo’s latest funding round, a $150 million investment at a $1.5 billion post-money valuation, we started to do some math. Lemonade’s valuation was much richer than Hippos’ when you look at their multiples, which got us thinking about private and public neo-insurance provider valuations: Why was Lemonade worth so much more than its peers per dollar of written premium?
To better understand the situation, we dug up some 2019 data on the dollar value of gross written premium Hippo and Lemonade wrote and found new valuation multiples for them based on those numbers. Lemonade was worth 28.4x its Q1 annualized gross written premium, while Hippo was worth just 5.6x its own.
Then we also found Root and MetroMile gross written premium numbers for 2019, which allowed us to calculate their own effective valuations (albeit using dated numbers).
As before when we found that Hippo’s private valuation looked light compared to Lemonade’s public valuation when we contrasted their valuation/gross written premium multiple, we discovered that MetroMile and Root also looked cheap. Very cheap.
Turning to Root and a possible $6 billion public valuation, we’ll need to recut our numbers. Why? Because we have more recent data for Lemonade to use, so the maths are all shaken up.
To understand whether Root could be worth $6 billion on the public markets today, we need a new Lemonade gross written premium number for Q2 2020. We will annualize that number and use it to get a valuation/gross written premium multiple based on the company’s current market capitalization. Then, we can apply that number to the most recent Root premium-written results and see what valuation the public markets could assign Root.
Here’s all of that, but with numbers instead of words:
- H1 2020 Lemonade gross written premium: $85 million.
- Q1 2020 Lemonade gross written premium: $38 million.
- Implied Q2 Lemonade gross written premium: $47 million.
- Lemonade annualized gross written premium after Q2: $188 million.
- Lemonade valuation, this morning via Yahoo Finance: $2.82 billion.
- Implied Lemonade valuation/gross written premium multiple: 15.0x.
Why is that number so much lower than it was earlier this year? Because Lemonade grew from the last time we calculated its annualized gross written premium and the company’s valuation has declined due to a falling share price.
Now that we have Lemonade’s multiple, we have to ask what the last Root gross written premium multiple figure we can find is. Sadly, it’s a Q4 2019 number, namely $143.7 million. So we know that Root reportedly closed 2019 with an annualized gross written premium run rate of around $575 million.
Now, using Lemonade’s current valuation/gross written premium multiple of 15.0x, we can estimate that, all other things held equal, Root could be worth $8.6 billion if public. Toss in a few quarters of growth since Q4 2019 and Root would be worth even more!
Why is Root worth so much? Is Lemonade mispriced?
If the Lemonade comp shows us that Root could be worth far more than $6 billion, why would it target that price?
Putting aside the fact that private investors valued the company at just $3.65 billion last September, I think that we can see in this comparison that Lemonade’s valuation is still very rich, recent declines aside. That’s good news for Root and other neo-insurance startups that might want to go public, but Root’s expected price implies that it is anticipating a lower multiple. And, thus, that Lemonade could still be a bit pricey at its current valuation.
Perhaps Root has lesser economics than Lemonade, but we doubt that given that it is focused on car coverage rather than rental insurance. Indeed, Root would have to have much worse economics to make a $6 billion valuation make sense, or at least far slimmer growth.
What are our takeaways?
That Root should be able to land a $6 billion valuation if it goes public in the near term. That means a quick return for its most recent private investors, including “DST Global and Coatue Management led the funding round. Existing investors Drive Capital, Redpoint Ventures, Ribbit Capital, Scale Venture Partners and Tiger Global Management,” per our prior reporting. And that such a debut would probably drive another round of megadeals into the remaining private, large neo-insurance players.