AInsurance Wars: ROOT vs. LMND

Spoiler Alert: One's a stud, the other one's a dud.

Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.

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Insurance is an important digitization frontier that has not yet been disrupted by emergent players like those that have successfully challenged incumbents in many other industries. This may be due to important market entry barriers such as regulatory challenges and the enormous capital intensity in this industry. It may also be due to the fact that insurers are actually already data champions by DNA. After all, the actuarial profession is closely related to data science. Insurers have worked with large statistical models for a long time and they own a ton of data to work with.

Nevertheless, there are companies that are trying to prove that it is possible. Two of those have recently reported their 4Q23 earnings. Interestingly with very different outcomes. On February 21, 2024, ROOT 0.00%↑ ’s release was very well received by investors. The company unexpectedly reached EBITDA breakeven and the stock is up 250% as of this writing. On February 27, 2024, Lemonade LMND 0.00%↑ followed suit. As of this writing, the stock is down 27% (admittedly after spiking pre earnings, the true decline is probably closer to 10%).

In this article, I will look into both. Is the initial stock reaction correct and my short thesis for Lemonade is intact? Is Root’s pump an overreaction based on news that the inevitable bankruptcy is merely postponed but not cancelled? Or could it be a decent long opportunity, potentially a even a pair trade against a Lemonade short? Let’s take a look.

Before I dive in, hat tip to Modern Value Investing for bringing this opportunity to my attention with his latest article Root, Inc: Disruptive Insurtech Delivers a Turnaround Quarter that Changes Everything. Thank you for your great work, Sir!

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