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On Wednesday, Insurtech Root announced the first quarter 2022 results, most of which show improvements, which I will discuss in more detail shortly. Root also announced the intention to carry out a reverse stock split, which interestingly will have the potential for long-term dilution, as they retain the right to issue the same number of additional shares. However, there is a statement at the very beginning of the shareholder letter that, in my opinion, defines who the Root leadership believes to be them – technologists. And perhaps this is why they will continue to struggle to pass the Insurance credentialing exams.

According to Alex, Dan and Rob:


“Nevertheless, we drove progress on what makes us special — our ability to build world-class products through the very best technology. At the heart of this is our technology moat.”

Root’s 1Q 2022 Shareholder letter

For thousands of years, moats protected castles and rulers. Companies try to copy this in order to maintain their supremacy. However, in order to resupply a moat, you have to open the gates and lower the drawbridge. So, at some point, you have to abandon your defenses. If you have a completely closed ecosystem, you suffer from inbreeding and eventually become weakened and either extinct or captured. Many companies thought they had moats only to find that others were able to hurl themselves over them. Remember Kodak, Nokia, Blackberry, The Hummer, Blockbuster, PanAm, Tower Records, Polaroid, MySpace, and the list goes on….


I can’t say if Root will suffer this death. What I can say, is that technology companies parading as Insurance companies have traditionally failed or been acquired at rock bottom prices. As I wrote earlier, the Insurance industry has a very simple operating model. Collect more premium than all your expenses put together. To do this successfully, you must combine technological advances with the historic rigor that comes from an industry that is many centuries old.


1Q2022 results

The only good thing about a low share price is that small-dollar changes look great in percentage terms. Root’s share price has risen about 10% over the course of Q1 2022, compared to a 12-month decline of 85%. GWP was $187.2 million, an 18% increase from $158.4 million in Q4 2021. However, gross earned premium fell 8% from $189.3 million in Q4 2021 to $174.7 million in Q1 2022.

Their “Gross Accident Period Loss Ratio” decreased by 10% from 90.7% in 4Q2021 to 81.4% in 1Q2022. Much of this decline was attributable to rising rates. It will be interesting to see how these rate increases affect the retention rates that will ultimately affect their loss ratios, as new business has significantly worse loss ratios than their experienced portfolio.

The following table attempts to hide quarterly volatility by looking at the preceding 12 months of results: Root has reduced about 9% of their G & A spending to just under $400 million in expenditure on TTM, while increasing their revenue, with annualized revenue about 9% lower than G & A. However, they are still losing about half a billion dollars a year, and this year they had to receive a significant credit line that increases future interest carry-forward costs, reporting that they have $934.7 million in cash available. This gives them another two years or so unless they make even greater progress in reducing G & A costs and losses.


Insurtech Root's Financial Results


Is Root a threat to the legacy Carriers?

Root has opened a new distribution channel, and this is the latest buzzword “embedded insurance.” They proclaim their exclusive relationship with “Carvana.” It has generated 13% of their new premium. But even in this area, what prevents a competitor from partnering with CarMax or AutoNation? Moreover, Polly formerly DealerPolicy already has an established platform to sell insurance through dealers, and they take advantage of the strength of the independent agent channel and represent several carriers to the potential car buyer.

If we want to see what is really possible when you embed insurance, we must turn our attention to Asia. insurance has been embedded in almost every distribution location or distributor for over 30 years. However, what makes this so successful is the fact that the products are micro-focused, for example, you can purchase a special insurance policy for a specific disease, a policy that covers you for your daily ski trips, etc.

Are you ready to rethink your product strategy to create micro versions of your current product set? I would like to speak to anyone interested in exploring this possibility.

Insurtech Advisors helps regional carriers and agencies to work with the best Insurtechs that will enable you to succeed and continue to meet the needs of your members, employees, and independent agents. We know your business and the landscape of Insurtech. We save you countless hours of wasted time and false starts. Furthermore, we work closely with your team to identify opportunities and goals, then introduce you personally and to the best Insurtechs pilot.


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