With shares of Root Inc. trading at less than 50 percent of the late October 2020 IPO price of $27 per share, the insurtech carrier has been named in a shareholders class action complaint, Carrier Management has reported.
At least plaintiff seven law firms announced they have filed a complaint alleging that Root’s initial public offering documents were negligently prepared and omitted what they claim are material facts. In particular, they allege that Root executives, in the offering document and in subsequent statements, omitted that Root will require cash infusions to stay afloat in the next few years and that traditional competitors already offer the type of telematics platforms that Root believes sets it apart.
The lawyers build their allegations about the prospect of cash infusions and Root’s lack of competitive advantage around a March 9, 2021 report from Bank of America Securities Analyst Joshua Shanker. When Shanker initiated coverage of Root with an “underperform” rating on that day, he wrote that Root “will require not insignificant cash infusions from the capital markets to bridge its cash flow needs,” according to the text of the complaint. The complaint was filed by Robert J. Wagoner Co. L.L.C., Pomerantz LLP and Bronstein, Gewirtz & Grossman LLC in the U.S. District Court, Southern District of Ohio, Eastern Division (Ilia Kolominsky, et al. v. Root, Inc., et al. 21-CV-01197).
In addition to forecasting that Root would not be cash-flow positive for five years, according to the complaint Shanker’s report also said that Progressive, Allstate and Berkshire Hathaway’s GEICO will continue to impede Root’s profitability, with Progressive and Allstate having a “sizable advantage over Root in terms of amount of [telematics] data as well as engagement with the data” that those behemoth competitors use to price their auto insurance.
The law firms tie the end of the class period to the day before the publication of Shanker’s report because they allege that news of the report drove Root’s stock price down $0.18 per share, or 1.46 percent, to close at $12.17 per share on March 9, 2021, representing a total decline of 54.9 percent from the $27 offering price.
Root’s share price had actually been much more volatile before that date, according to online finance websites tracking market activity, with the stock trading as high as $23 in mid January. It plummeted down to the $12.35-$13.50 range in late February after Root announced a bottom-line net loss of $363 million for 2020 on Feb. 25.
The text of the complaint notes that Root’s stock price previously took a hit in early December when the company announced a third-quarter 2020 net loss of $85.2 million, or -$2.20 per share, missing consensus estimates by $1.79, and also badly missing on the top line with $50.5 million revenues roughly 55 percent lower than estimates. The stock price, which had already fallen $10 from the IPO level down to $17 at that point, sank by another $2.30 per share, or 13.5 percent, after the third-quarter report.
Still, comments that Root executives made about 2020 cash flow failed to clue investors in to what Shanker would later spell out in his analysis, the complaint suggests. And statements contained in Root’s offering document and third-quarter 10-Q about being an innovator that could capture disproportionate market share in the personal insurance space are at odds with what Shanker wrote as well, according to the filing.
The complaint cites statements from Root executives including, “[W]e believe we are the only P&C [property and casualty] insurance carrier with a scaled proprietary telematics solution designed to price an entire book of business” and “[b]y collecting and synthesizing massive amounts of rich, sensory behavioral data across thousands of driving variables, including distracted driving, we strive to price based more on causality than correlation [which] allows us to price our customers’ policies more fairly…”
Root declined to comment on the filing, noting that the company does not comment on pending litigation.
Not mentioned in the filing is Root’s pledge to price more fairly by breaking with an industry practice of using credit scores in insurance pricing and its invitation to competitors to follow suit.
Without naming Root specifically, insurtech watcher and venture capital investor Adrian Jones, a managing director for Hudson Structured Capital Management, warned about the dangers of taking an insurtech public too soon during a session of the InsurTech Spring Conference 2021 last week (co-hosted by InsurTech NY and InsurTech Hartford).
“You have to go public when the time is right. I think that’s one of the lessons to draw here,” Jones said, referring to the volatile stock prices of recently IPOed insurtech carriers. “If you go public before you really have a good handle on how your company is going to perform financially quarter by quarter, you are putting yourself at risk [of] a perception [developing] in the market that people don’t believe they can trust your earnings, they don’t trust your forward projections, etc.,” he said.
The class action filing names Root’s Chief Executive Officer Alex Timm, Chief Financial Officer Daniel Rosenthal, Chief Accounting Officer Megan Binkley and nine directors as defendants.
The class period extends from Oct. 28, 2020 through March 8, 2021.
Pursuing claims under the Securities Act of 1933 and the Securities Exchange Act of 1934, plaintiffs allege that the IPO offering documents were negligently prepared and “contained untrue statements of material fact or omitted to state other facts necessary to make the statements made not misleading,” and that defendants similarly made materially false and misleading statements.
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