Root Inc. has priced its IPO at $22 to $25 a share and is offering 22 million shares, which would raise $695 million at the top end of the range, according to a regulatory filing.
The Columbus parent of Root Insurance Co. would be valued at $5.5 billion to $6.2 billion depending on the final share price, according to the updated prospectus filed Tuesday.
Additionally, Root also could raise up to $500 million in a private placement that would follow the IPO. Funds of Dragoneer Investment Group LLC and Silver Lake Technology Management LLC agreed to buy up to $250 million worth of shares apiece at the offering price, dependent on a definitive agreement the IPO closing.
All told, the company would receive net proceeds of about $967 million if the offering is priced at $23.50, the midpoint of the range, the filing said.
"We are still in the very early days of Root," co-founder and CEO Alex Timm said in a statement in the filing. "As we look to the future, we believe the opportunity in front of us is massive and that we have the opportunity to create a historic, market-defining company."
Initial investor Drive Capital LLC would still own 21% of the company after it goes public; the Columbus VC firm holds 26% today, the filing said. Executives and officers as a group would control 54% – but hold 98% of the voting power because their shares have 10 votes to every one vote in the publicly offered shares.
The company and investors cannot comment on the offering beyond the regulatory filing.
Cleveland-based GrafTech International Ltd., a manufacturer of electrodes, raised $525 million at a valuation of $4.5 billion in its 2018 IPO, the largest to date in the state, according to Columbus Business First research. Columbus data center infrastructure company Vertiv Holdings Co. raised $1.2 billion in a private placement that took it public in February, valued at $5.3 billion.
Only one of Root's venture investors seeks to cash in: SVB Capital, the venture arm of Silicon Valley Bank, is offering 2.2 million of its shares. Root would not receive any proceeds from that sale, according to a news release.
Goldman Sachs & Co. LLC, Morgan Stanley, Barclays and Wells Fargo Securities are lead underwriters. Root intends to be listed on the Nasdaq Stock Market with the ticker symbol ROOT.
Ohio hasn't seen a huge tech IPO yet because the state's efforts to attract venture capital started just over a decade ago, said Steve Salopek, senior lecturer in finance at Ohio State University and a former investment manager, in an interview for my earlier story on why Root's IPO vaults the state into a new category.
“These companies in terms of venture, they are relatively young,” Salopek said. “You’re just not far enough into the investment cycle for us to be seeing billion-dollar IPOs at this point.
“Easily within the next five years, you’re going to see a number of them, as Ohio matures.”
The all-digital insurer, with auto and some rental coverage, had a net loss of $140 million on $245 million revenue through the first six months of 2020, the filing said, compared with a $282 million loss on $290 million revenue in all of 2019. It's licensed in 36 states and active in 30.
The third quarter marked a change of strategy, according to unaudited financial results in the updated filing. Revenue was $49 million to $50 million in the quarter ended Sept. 30, down from $75 million in the same period of 2019. The net loss will fall in a range of $64 million to $71 million, down from $87 million last year but a wider loss in comparison to revenue.
That's because Root is shifting more of its portfolio to outside reinsurers, which reduces the primary insurer's risk.
"While our reinsurance activities cede a portion of the profit, we expect the net impact to be highly accretive to us on a return basis," the filing said.
Although Root is not yet profitable, its loss ratios are declining and policy renewals increasing. After three full years it has a 47% renewal rate and is working toward the industry average of 80%, the prospectus said.
The loss ratio, a proportion of claims paid to premiums, was 85% through the first half of 2020, improved from 108% in 2018. Administrative and other costs contribute to the net loss.
"Every piece of data improves our pricing ability," Timm's statement in the filing said. "Every customer who uses our app or website delivers valuable insights to make it better for the next customer. This is almost unheard of in the insurance industry."
The company was valued at $3.65 billion in a $350 million VC round just over a year ago.
Root's premise is that the insurance industry has had little innovation, with the most recent major shift in using the internet as a sales channel. The company says it is a pioneer in using technology and machine learning to fundamentally change how policies are priced.
"These four ingredients – mobile engagement, a clear value proposition, a powerful flywheel and differentiated technology – underlie what we believe is a massive competitive advantage and a barrier to entry that is insurmountable without an investment of time, resources and expertise akin to what we have invested since our founding," the prospectus said.
The growing online privacy movement presents a risk to the business, which gathers telematic data on driving habits from customers' phones. California, for example, has a state law limiting the data that can be gathered to number of miles driven, so Root has not been as successful there in pricing policies, the filing said. A measure increasing privacy restrictions is on the California ballot this election.
The coronavirus pandemic reduced claims losses while people were driving less, but claims are back to normal, the filing said. About 13 states have enacted moratoriums on canceling polices for nonpayment, but that has not had a material effect: about 5% in claims write-offs in the second quarter compared with 3% in the first quarter.
The number of policies in force declined by 7,000 to 21,000 in the third quarter from the 334,000 in effect at the end of June, but it added 1,200 to 1,500 renters' policies to the 6,000 as of June 30.
