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Why Root Dropped 15.3% in May

What Happened

Insurance company Root (NASDAQ: ROOT) saw its stock price plummet 15.3% in May, according to S&P Global Market Intelligence. Its performance was far worse than the S&P 500, which returned 0.55% in May.

Root is an insurtech company in the auto insurance space. Through its mobile app, Root uses behavioral telematics and artificial intelligence to track how you drive and sets rates accordingly. You can also file claims and pay bills through the app and it aims to do it faster, cheaper, and more fairly than its competitors.

Image source: Getty Images.

So what

Root is a start-up that launched in 2015 and went public last October. Its share price has tumbled steadily since it started trading at $26 per share. It is down 32% year to date and lost about half that amount in May, dropping 15.3% for the month. It is now trading at about $10 per share.

The insurtech is still operating in the red with a net loss of $99 million in the first quarter, slightly better than a $105 million net loss a year ago. It only generated about $69 million in revenue, down from $124 million a year ago.

But operating expenses were much lower, $163 million in Q1, down from $224 million in the first quarter of 2020. This was due to a much lower loss and loss adjustment expenses -- just $59 million compared to $129 million a year ago.

Now what

The numbers don't look great, which accounts for the decline in stock price. But Root had some positive momentum in the first quarter with year-over-year increases in written (23%) and earned (11%) premiums and a 22-point decline in loss ratio to 71%. This allowed the company to report gross profit of $6 million and a direct contribution of $27 million, up $23 million and $38 million, respectively. Direct contribution -- meaning net sales minus cost of goods sold and direct expenses -- is the major profitability metric for the business, so that's promising.

Root is looking to disrupt the auto insurance business with what it believes are its unique competitive advantages, its technology and AI, which it says will create better, more predictive algorithms. That, in turn, will lead to better pricing and a faster claims process. It also vows to do away with reliance on credit scores for pricing, which it says will make pricing more fair and less discriminatory.

As a start-up, Root is still in the early stages, but after the initial pullback out of the gates, it seems to be headed in the right direction and bears watching.

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