This morning Root Insurance, a neoinsurance provider that has attracted ample private capital for its auto-insurance business, is targeting a valuation of as much as $6.34 billion in its pending IPO.
The former startup follows insurtech leader Lemonade to the public markets during a year in which IPOs have been well-received by investors focused more on growth than profitability. In the wake of Lemonade’s strong public offering and rich revenue multiples, it was not impossible to see another, similar startup test the same waters.
Root’s $6.34 billion valuation upper limit at its current price range matches expectations for its bulk. The company is targeting $22 to $25 per share in its debut.
The startup will raise over $500 million from the shares it is selling in its regular offering. Concurrent placements worth $500 million from Dragoneer and Silver Lake raise that figure to north of $1 billion and could help boost general demand for shares in the company. Snowflake’s epic IPO came with similar private placements from well-known investors in what became the transaction of the year.
Will we see Root boost its target? And what does Root’s IPO price range mean for insurtech startups? Let’s dig into the numbers.
Root’s numbers
We’ve dug into Root’s business a few times now, both before and after it formally filed its IPO documents. This morning we will merge both sets of work, snag a fresh revenue multiple from Lemonade, apply it to Root’s own numbers, observe any valuation deficit and ask ourselves what’s next for the debuting company.
Will we see Root’s IPO price rise? Here’s how to think about the question:
- Lemonade’s implied Q2 gross written premium: $47 million, or a $188 million annualized figure.
- Lemonade’s valuation: $3.41 billion.
- Lemonade’s annualized gross written premium multiple: 18.1x.
Turning to Root, we can see the following numbers:
- Root’s Q3 direct written premium, middle of range: $163.9 million, or a $655.6 million annualized figure.1
- Root’s upper-end IPO valuation: $6.34 billion.
- Root’s annualized direct written premium multiple: 9.7x.
Now we are comparing two different companies, focusing largely on two different forms of insurance. Yes, Root does offer renters’ insurance, Lemonade’s bread and butter. But their loci are different, which could explain some of the valuation differential. (Though how that would wind up dinging Root and not Lemonade, given what we know about auto insurance is beyond me.)
But largely it appears that Root at around $6 billion is cheap compared to Lemonade’s pricing today. So, if you’d like to anticipate that Root raises its IPO price range to bring it closer to the multiples that Lemonade enjoys, feel free as you are probably not wrong. Are we saying that Root will double its valuation to match Lemonade’s current metrics? No. But closing the gap a bit? Sure.
For insurtech startups, even Root’s current pricing is strong. Recall that Root was worth $3.65 billion just last August. At $6.34 billion, the company has appreciated massively in just the last year and change. A small repricing could boost Root’s valuation differential to a flat 100% rather easily.
So, for MetroMile and ClearCover and the rest of the related players, do enjoy these good times as long as they last. But please clean up your cost of revenue so that you don’t come to the market with a very slim period of time with positive gross margins. Like Root.
Yuck.
1As we noted the other week: “We only have a number for Root’s direct written premium, which is a more conservative number. So, what comes out of the following bit of maths will undershoot the comparison and make Root appear a bit cheaper than it otherwise might be.”