InsurTechs — technology-led insurers — are trying hard to be game changers, leveraging technologies like AI, telematics, data-driven underwriting and machine learning, among others. Yet, ROOT Inc. ROOT and Lemonade LMND — two U.S.-based insurTech companies — continue to face challenges due to lowered interest rate, increased competition, inflation, higher cost of repair and increased pressure to achieve and sustain profitability. Given heightened regulatory scrutiny with respect to data and pricing models, InsurTechs are looking to invest in regtech solutions to overcome compliance-related challenges. 

InsurTechs use the latest technologies and concepts. However, traditional insurers are also undergoing accelerated digitalization, limiting the advantage these InsurTechs enjoyed earlier. 

Coming back to ROOT and LMND, let’s examine their fundamentals closely to determine which one is more attractive as an investment option. 

Factors to Consider for ROOT

ROOT is primarily focused on auto insurance, utilizing telematics and data-driven pricing models.

ROOT’s growth strategy involves geographic expansion, an increase in distribution channels, and investment in opportunities that have the potential to generate high returns. It has been continually growing its policies in force. 

The insurer continues to expand across the automotive, financial services and agent sub-channels, which in turn have been fueling growth in new writings at its Partnership channel. The Direct channel continues to benefit from prudent investments in customer acquisition. 

Managing fixed expenses while prudently investing in marketing should drive margins.

The insurer expects the refinancing of the debt facility with Blackrock in October 2024 to lower interest expenses by 50% in 2025. Its net margin has been showing improvement over time. 

The company has been effectively lowering its gross loss ratio, staying below the long-term target of 60-65%. This, in turn, has been helping it reduce rates in select states while maintaining desired returns.

Its net margin has shown commendable improvement, expanding 15350 basis points in the last three years. In fact, 2024 marked the company's first year of profitability. 

However, its high debt level increases its leverage ratio, which compares unfavorably with the industry average. Its time interest earned also compares unfavorably with the industry average, posing a financial risk.

ROOT’s return on equity of 16.3%, however, betters the industry average of 8.3%.

Factors to Consider for LMND

LMND’s growth strategy involves acquiring profitable new businesses and increasingly focusing on the car insurance business, thus improving operational efficiencies. It believes the car insurance business will become a major growth engine for the company.  As it aims for diversification, Lemonade offers insurance products that include renters, homeowners, pet and life insurance.

This insurer wants to grow its business tenfold in the near future. Lemonade is focusing more on technology and AI for structural and competitive advantage. It intends to grow the business while scaling operations and thus targets in-force premium growth of 28% in 2025.

LMND has been successful in generating cash flow and targets to generate positive EBITDA by 2026 and then net profit by 2027 by accelerating the top line and controlling expenses.  

The company is exposed to catastrophe losses. To manage this exposure, LMND has implemented several strategic initiatives, including diversifying its geographic footprint and product offerings, partnering with other carriers to share premium risk in certain regions, and selectively not renewing policies in areas with high CAT risk. These efforts have contributed to a consistent, sequential improvement in its gross loss ratio. 

Net margin has been improving, though the company is still in red. Its return on equity of negative 32.4% lags the industry average. Its Synthetic Agents growth funding program continues to generate funds for growth investment.

Estimates for ROOT and LMND

The Zacks Consensus Estimate for ROOT’s 2025 revenues implies a year-over-year decrease of 89.6% while that for EPS implies a year-over-year increase 5.1%.  EPS estimates have moved northward over the past 30 days. 

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The Zacks Consensus Estimate for LMND’s 2025 revenues and EPS implies a year-over-year increase of 1.1% and 24.8%, respectively. EPS estimates have moved southward over the past 30 days. 

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Are ROOT and LMND Shares Expensive?

ROOT is trading at a price-to-book multiple of 8.86X, above its median of 0.92X over the last five years. LMND’s price-to-book multiple sits at 3.2X, above its median of 1.77X over the last five years.

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Conclusion

ROOT envisions being the largest and most profitable company in the industry. The insurer achieved operational efficiency by increasing its investments in pricing and underwriting technologies — a strategy ROOT plans to continue. These technological advancements have been key drivers of the company's growth. Additionally, its active reinsurance policy supports loss mitigation and helps sustain profitability.

Lemonade's focus on accelerating growth, scaling operations, deploying artificial intelligence and geographical expansion bodes well for growth.  However, Lemonade is yet to be profitable.

On the basis of return on equity, which reflects a company’s efficiency in generating profit from shareholders' equity as well as gives a clear picture of the company's financial health, ROOT scores higher than LMND.

Shares of ROOT have surged 77.8% in a year, while those of LMND have gained 55.6% in the same time frame. ROOT stock sports a Zacks Rank #1 (Strong Buy), while LMND carries a Zacks Rank #3 (Hold). Clearly, ROOT seems a better pick than Lemonade now.

You can see the complete list of today’s Zacks #1 Rank stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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