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A Potential New Superstock for the QV Portfolio

March 7, 2024

The chart above is of the Nasdaq Composite Index, a broad-based index measuring the performance of the Nasdaq market. It is testing the all-time high but has already given a golden cross buy signal, only the fourth in half a century so rather special.

The performance since 1973, when the chart began, is extraordinary. It has risen 302 times. If somebody had told me in 1973 when I was in charge of the US portfolio at a large UK insurance company (somebody had to do it), that over the next 50 years the Nasdaq was going to rise over 300-fold I would have been stunned.

All Hail the Americans. What a demonstration of the power of capitalism, which contrary to popular belief does not just benefit a handful of zillionaires. There is wealth everywhere in the USA and salaries are way ahead of UK and European levels. And what are we going to do, slam the brakes on even more sharply with yet another Labour government hellbent on yet more tax-led distribution of a stagnant national pot?

My Part in the Tories’ Downfall

I am disillusioned and it is most unlikely that the Tories will get my vote in the coming election. I plan to vote Reform UK to split the right-of-centre vote and lead to an extinction-level event for the Tories and a gigantic Labour majority that will implode in squabbles between right and left. Meanwhile, there will be a total rethink of right-wing politics, which, I am gambling, will lead to the emergence of a party which believes in a smaller state, less regulation, lower taxes, sensible levels of immigration, and a healthy belief, like the great 19th-century Liberal prime minister, W. E. Gladstone, that money should fructify in the pockets of the people.

Meanwhile, none of that is happening, faith in politicians and fiat currency is collapsing, dictators are seizing power all over the place, and the crypto-currency market, beyond the control of all the hapless do-gooders who often do so much harm, is booming.

Rant over, back to business. Most of us may live in the UK, and it is a lovely place to live, but we can invest in America and I strongly advise all my subscribers to take full advantage of that fact.

Speculative but Exciting – my New Hot Stock

Note the tiny market value. This is an unusual stock to feature in a QV Alert. Below is a description of what they do.

With a vision of bettering lives through better insurance, Root was founded in 2015 on the principle that car insurance rates should be based primarily on driving behaviors, not demographics. The company has revolutionized the archaic auto insurance industry using mobile technology and data science to offer fair, personalised rates to good drivers. The company has collected 20bn miles of mobile telematics data to enhance and inform pricing models. With more than 12m downloads, the modern app experience allows drivers to get their policy in less than 1 minute, manage their policy, and file a claim. A proprietary claims system, paired with advanced machine learning techniques, allows for automated loss expense, fast claims payout, and higher customer satisfaction. Root is the nation’s first licensed insurance carrier powered entirely by mobile and is currently offered in 34 states. In 2020, Root went public, serving as Ohio’s largest IPO.

Root Inc., website

The CEO and co-founder, Alex Timm, is an interesting guy. He is still only 32! Where do they find all these guys in the USA?

Some entrepreneurs enter the insurance industry cold, with no prior experience whatsoever, and expect to make their bright spark work. That wasn’t the case for Alex Timm, CEO and Co-Founder of usage-based auto insurer Root, who has set about creating a company that works better for the customer.

In fact, Root was supremely experienced when he founded Root Insurance in 2015. A fellow of the Casualty Actuarial Society and a member of the American Academy of Actuaries, Timm studied Actuarial Science, Accounting and Mathematics at Drake University in Des Moines, Iowa before working as an Actuarial Exam Review Instructor at his alma mater for just over a year. He moved on to Nationwide, one of the largest insurance companies in the US, holding a series of consultant roles before making the leap and starting Root.

Its vision was to tackle the archaic car insurance industry, taking a market that worked for insurers and flipping it round so that it worked for customers, too. Root Insurance became the nation’s first licensed insurance carrier powered entirely by mobile, and it drew heavily on data and technology to bring fairness back into policy pricing. Its entire business model is predicated on usage-based insurance – the idea that customers only pay for the miles they clock up – and this is one of the ways that Timm achieved such a fair pricing model. But it also did something that many incumbent insurers would never have dared to do: it committed to removing credit scores from its car insurance pricing.

Despite a well-defined vision, the path to success was not always clear for Timm and for his fledgling insurtech company. Speaking to Forbes magazine in 2019, he described the startup experience: “Building Root was like a treasure map. When you start a journey, you may have a good idea of where you want to go; you’ve got a rough direction. But not everything is on the map. No map is perfect, and along the way you can find hidden gems, you can also run into storms. The success of your journey is based on how quickly and how nimbly you can react to all those things that you find along the way. That’s really what we found as a company.”

InsurTech, 3 January 2023

He has made plenty of progress.

Today, Root Insurance is an unstoppable force that is revolutionising car insurance – true to its original vision of orienting the insurance marketplace towards the consumer’s need, not the insurer’s. It sells in 34 states and counting and, in 2019, diversified into renters’ insurance and homeowners’ insurance, which uses the same mobile-based approach to deliver seamless and affordable coverage to householders. The proposition is still niche, with the renters’ insurance only available in nine states, but the company is growing.

Timm continues to lead the organisation he founded as CEO and, today, Root Insurance is the largest property/casualty insurtech in the country with more than 1,500 employees. 

InsurTech, 3 January 2023

It is all starting to happen for Root but only after a very difficult period.

Just over 2 years ago, we underwent a crisis as we saw used car prices soar and observed the worst inflationary environment in recorded history. It was clear that we needed to pivot our business. This entailed making a number of decisions that, while difficult in the near term, were ultimately the necessary and correct decisions to ensure we evolved our company and positioned ourselves to be able to fully disrupt the auto insurance industry. To do this, we crafted a 3-step plan. One, drive toward healthy margins on our business by hitting our target loss ratios; two, materially lower our fixed expenses; and three, efficiently grow to scale in order to drive profitability.

Alex Timm, CEO, Root Inc., Q4 2023, 21 February 2024

As Timm says the change in mood music is incredible.

Fast forward 2 years and we believe the transformation is remarkable. For the full year 2023, we restarted our growth engines, increasing gross written premiums by 31pc and policies enforced by 55pc. We generated a Direct contribution of $151m. That’s nearly a 20x expansion from just 2 years ago. We recorded a gross accident period loss ratio of 66pc and a gross combined ratio of approximately 116pc, both major improvements while also validating our efforts to enhance our tech and data capabilities.

To that point, for the past 3 quarters, our loss ratios have been among the best in the entire auto insurance industry. Most importantly, we invested considerably in our technology and data science to significantly enhance our underwriting and pricing capabilities. As a result, we enter 2024 believing we have achieved scale in our business which provides us the ability to make decisions for the long-term success of Root. Specifically, we plan to look for opportunities to profitably gain market share or quickly shift our focus if we determine that growth may not achieve our target returns.

Alex Timm, CEO, Root Inc., Q4 2023, 21 February 2024

So what lies ahead? Fireworks if you believe the man.

We could not be more excited for the long-term potential of Root and here’s what you should expect to see from us as the new year progresses.

First, we see the opportunity to continue growth in 2024 and expand our market share. We expect the Direct channel to continue to benefit from our machine learning approach to targeted and automated customer acquisition as well as our significant advancements in pricing and underwriting. We’ll continue to invest our marketing dollars to achieve target returns and respond as we see changes in the competitive landscape. We also expect to grow through our Partnership channel where we will continue to focus on launching additional partners in 2024. The Partnership channel provides potential customers with a differentiated experience at contextually relevant times which we believe will ultimately be foundational to our long-term diversified growth strategy.

As we have achieved our target loss ratio and established a scalable expense base, we believe our ability to reach profitability is now largely dependent on the level of our investments in discretionary marketing. Root’s future looks brighter than ever as we continue to profitably and efficiently grow and scale our business. We continue to build an enduring company and are making excellent progress in our mission to unbreak insurance through our data science and technology. We knew when we started Root, it was going to be a long journey, carving a new approach into an industry that has been untouched for almost 100 years is hard. The challenges of the past 2 years have galvanised our team, who believe in our mission and vision more than ever.

Alex Timm, CEO, Root Inc., Q4 2023, 21 February 2024

I had a look at the presentation that came with the latest results. You can tell that Alex Timm is an actuary by training. Much of it is technical but it creates a strong impression that the numbers are moving in the right direction and the chart looks good.

The latest quarterly results end with a strong statement of intent (and remember the insurance industry is huge).

We are still in the early chapters of disrupting the auto insurance industry. Our conviction remains unwavering that over the long-term, our ongoing investments in data science and technology will continue to provide better experiences and prices for our customers. We believe this will ultimately unlock long-term shareholder value.

Root Inc., Q4 2023, shareholder letter, 21 February 2024

Strategy – One for the Portfolio

I am brooding on yet another new strategy for shares like Root Inc., and maybe ARM Holdings which are newcomers to Quentinvest. My idea is that you start with a relatively small portfolio position and then as you/ I get to know the stock better we can decide whether to go in big or not. Analysts say Root and ARM are not cheap but both in their different ways look early stage to me. Root Inc. is tiny and has existed for less than 10 years with a CEO who was at school not long ago. What a contrast from the guys likely to be slugging it out to be the next president of the US.

Share Recommendations

Root Inc. ROOT Buy @ $44

Root reminds me as an investment of Carvana, which is disrupting the used car industry in the USA and had a near-death experience in 2022 for similar reasons to Root but is also recovering strongly.

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