I’m trying to be open-minded about what could happen with this business, but based on your response you probably slavishly cling to buying dogshit companies and still can’t figure out why your investing strategy is underperforming for the last 20-some years.
This is a pretty odd comment on many levels -- but let's just say that I'm of the view that if you choose to rely on a negative personal attack in a debate on the merits of a financial investment, then it says more about the lack of noteworthy reasons to purchase the stock than it does about anything else. Regardless, I'm happy to engage on Root.
Car insurance companies like Root are pretty simple. They're a combination of 3 lines of business that put capital at risk: indemnity, marketing, and investing.
Indemnity is the underwriting risks that they choose to take. Are they selling insurance policies at a price-point where they will not pay out more in claims than what they've billed and collected their customers for?
Marketing is like any other business, "can they acquire and retain their customers at a cost basis that is competitive and that leaves them with a meaningful margin after the direct expenses of the unit economics?"
Investing - will the aggregated funds from prepaid policies -- or float -- enable the insurance company's equity owners to accrue a meaningful financial benefit via this interest-free loan?
The primary bull case that gets used to advocate for Root is that their technology allows them to compete on
indemnity. In Root's case that would be the suggestion that:
(1) they can price driver risk more accurately (meaning they'll ensure that they're customers pay enough to more than cover the cost to insure them), and
(2) that they can use technology and automation to process claims efficiently to drive down operational expenses and be able to offer their product more cheaply in scale than competitors.
I don't think any reasonable person would suggest that Root has a moat - nor a potential moat - when it comes to the investing portion of running an insurance company. And when it comes to the marketing, I am not under the impression that they are doing anything particularly unique there -- the competition for share of voice amongst car insurance companies is about as high as brand competition gets (see any football game's commercials, or google car insurance to understand how deeply competitive that world is. Not just among the brands themselves, but also throw in lead aggregators!).
So the question boils down to: do they have a better solution than other insurance companies in terms of cracking the "indemnity code"? And if they do have the better pricing model than all of their competitors, does that improvement enable them to carve a meaningful and profitable position in the industry? (maybe the savings via improved indemnity are so large that they can put up a formidable fight against their competition by being able to spend more than competition on marketing?)
So without getting into that discussion too much, I would wonder if the state departments of insurance that regulate insurance pricing allow them to use this alleged phenomenal pricing model (worthwhile review on some of this -
https://www.casact.org/pubs/white-papers/Insurance_rating_variables_white_paper.pdf)? Is the pricing model proprietary? Typically, the variables must be filed publicly with insurance departments, for all competitors to see. Is the total difference between a good pricing model and a great pricing model enough of the cost-structure that it makes all the difference? If all of the benefit is related to telematics, do they lose money on the first contract (priced before telematics has data on the driver), and then make up for it all on the renewal?
Ultimately, my fundamental view on insurance is that pricing models are not truly part of a car insurance company's proprietary and competitive moat. Ajit Jain can have an edge in being willing to take indemnity risk with things that other won't, and that, among other things, allows him to charge a real premium versus the risks he's taking. But with car insurance, it's much more of a commodity - the agreements are short term so the financial viability of your counter-party isn't too important / switching costs are low and you can change your policy to a different insurer in 15 minutes or less! / most shoppers simply try to minimize price versus any qualitative distinction.
What I think has happened here is that many venture capitalists and retail investors that have seen tech used to disrupt other industries think that that's what is going on to the car insurance industry from Root. I think Root has seized on that opportunity to sell a story of having found a better mousetrap. So VCs (pre-IPO) and public investors (post-IPO) are subsidizing the sale of a commodity product, and all this is what's playing out with the insurance losses and the larger and larger losses as they've grown. Meanwhile, the investors are excited about growth! But again, they're selling a commodity -- if you're willing to sell a commodity for a loss, your sales will obviously grow.
