The United States, also known as the "country on wheels", leads the world in the number of cars per capita. Buying auto insurance has become a regular consumption of Americans.

In recent years, great trend changes have taken place in the insurance industry, such as the increasing popularity of Internet insurance. Technological innovation is also promoting the emergence of new insurance models, such as Lemonade, an insurance company characterized by artificial intelligence.

Lemonade, which has been listed for less than a year since it went public in July 2020, closed at $95.58 on Thursday, up more than 300 per cent from its IPO offering price of $29.

Today, we are going to introduce a new type of insurance company, Root Inc. (ROOT.O, "company", "Root"), which is also characterized by innovative technology like Lemonade.

Unlike Lemonade, Root has been unpopular with secondary market investors since its listing in October 2020.The company's shares broke shortly after its IPO, and as of Thursday's close, the shares were trading at $12.2, losing more than half of their market value from their offering price of $27.

However, Citron Research holds the opposite view from most investors.Recently, Citron publicly said it was bullish on Root shares, saying that the company was seriously oversold and that most investors had not yet realized the unique value of the company.

Let's take a look at the citron point of view.

I. innovative pricing model of car insurance

Root, founded in 2015, is an auto insurance company. The company has a pricing model that is completely different from the traditional car insurance.

Traditional car insurance is usually based on users' credit history, but this pricing model has long been questioned as unfair to "good drivers". Historical data show that 50 per cent of claims by car insurance companies come from 10 per cent of 15 per cent of "bad drivers".

By contrast, Root uses a flexible, customized charging model for individuals.

Root will require its users to download Root APP, which will collect real-time data on their driving behavior, including driving time, place, mileage, acceleration, deceleration, turning, light status, and so on.

After continuously collecting user data for 2-4 weeks and using advanced big data technology for analysis, the company decides the user's car insurance quotation.

Citron believes that part of the reason why the company is not favored by investors is due to COVID-19 's epidemic.

After all, 2020 has been a bad year for any auto insurance company, and the COVID-19 epidemic has filled the company's future with uncertainty.

Citron also believes that the company has done a poor job of proclaiming its value to Wall Street.

Usually, U.S.-listed companies attach a special investor introduction document (Investor Presentation) to the investor relations section of their website, which is usually a dozens-page PPT. Especially for emerging technology companies, such documents help investors understand the specific business of the company.

However, there are no special investor profiles on the company's website.

Second, the improving loss rate confirms the establishment of the business model.

The main reason why the company's share price is not optimistic is that the company's current loss rate is significantly higher than that of other auto insurance companies.

Therefore, for auto insurance companies, whether the pricing model based on users' actual driving behavior is commercially feasible has always been controversial.

But Citron recognizes the company's business model.

Citron believes that Root has a younger customer base than traditional car insurance companies. In general, the loss rate of auto insurance companies will significantly improve with the increase of customer base age.

In addition, Root currently operates in a number of states in the United States, but some of them have a short operating history and collect less data on user driving behavior, so the loss rate is higher in these states. As the company operates longer in the states and has more data and experience, the loss rate will improve.

Citron believes that the company's latest results also confirm that its underwriting business is improving.

The contribution of earned premiums from experienced states (Seasoned states) continued to grow in the first to fourth quarters of 2020. In the fourth quarter, the proportion of premiums earned by experienced states has significantly exceeded that of inexperienced states (Unseasoned states), accounting for more than 70%.

At the same time, the loss rate of experienced states is significantly lower than that of inexperienced states, which shows that the company's current data analysis technology and pricing model are effective.

In the third and fourth quarters of 2020, the loss rates of experienced states were 16 percentage points and 15 percentage points lower than those of inexperienced states, respectively.

In states where companies collect enough data and experience, the loss rate has improved more significantly over time.

Texas, Kentucky, Pennsylvania and Arizona are currently the four most experienced states in the company's underwriting business. In the second half of 2020, the loss rates of the four states decreased by 18, 37, 22 and 26 percentage points respectively compared with the same period last year.

In addition, Citron believes that the company's claim mechanism has become quite mature, as evidenced by the low user complaint rate.

By the end of 2020, the company's insurance policies for 32300 personal cars and 8, 000 taxis were in effect. According to the National Association of Insurance Supervisors (NAIC), only 49 personal cars and one taxi complained to regulators about the company in 2020.

Third, the performance is expected to break out within this year.

According to a recent real-time data from short selling analyst S3 Partners, Root's short position further increased to 12.2 million shares, accounting for 44% of outstanding shares, making it one of the most heavily shorted stocks in the US stock market, with a market capitalization of more than $1 billion.

Citron believes that this is an excellent time to buy for investors who are bullish on Root.

Citron believes that Root's performance is expected to break out within this year. Last year, due to the uncertainty of COVID-19 's epidemic, the company's management deliberately slowed down the growth rate, this year will focus on accelerating growth.

Daniel Rosenthal, Root's chief financial officer, also revealed this intention during an earnings call in the fourth quarter of 2020.

"although we decided to cut marketing spending towards the end of the first quarter of 2020 because of the global epidemic and macroeconomic and regulatory uncertainty, we were able to show strong growth," Daniel Rosenthal said. "

"We plan to more than double our sales and marketing investment in 2021, after the COVID-19 epidemic drove investment back in 2020. This investment in marketing will accelerate throughout the year. "

And the company's increased sales and marketing investment so far this year is paying off. Third-party data show that daily and weekly downloads of Root APP have been growing so far this year.

Compared with Lemonade (blue line below), the company (green line below) has more daily and weekly APP downloads than Lemonade, and has widened the gap since March.

IV. There is no shortage of top technology investment institutions in the world on the list of shareholders.

Citron also mentioned that the reason why investors should be bullish on Root is that there is no shortage of the world's best technology investors in the company's list of major shareholders.

At present, the company's shareholder list includes Silver Lake Capital (Silver Lake), Snowflake's early investor Dragoneer, Tiger Global Fund (Tiger Global), DST Global and so on.

Five months ago, Silver Lake and Dragoneer each invested $250 million in Root, which bought at almost twice the company's IPO price of $27. Hillhouse has also made further additional investments after IPO.

Ribbit Capital, founded by Meyer Malka, participated in Root's pre-IPO round E financing and continued to buy 1 million shares at the IPO price of $27 when the company went public. The company's share price fell all the way, and Ribbit Capital bought another 75400 shares on the open market at $16.55.

Citron said: "it may be possible to fool a smart person, but it is difficult to fool a lot of smart people (referring to the above-mentioned investment institutions)." "

It is also worth mentioning that Root raised $350 million in the E round of financing two years ago, with investors including Coatue, DST Global, Redpoint Ventures and Tiger Global Fund.It was valued at $3.65 billion, even higher than its current market capitalization.

Citron says investors have little opportunity to invest in a company with disruptive technology at much lower prices than the world's top technology investors, which have the ability to delve deeply into technology and track data.

Conclusion

Generally speaking, Citron believes that most investors misunderstand Root and cannot really understand the value of its innovative car insurance pricing model.

Citron believes that in any case, the company's stock price should not be lower than the IPO price of $27.

Because the company is now severely oversold, investors have the opportunity to buy its shares at extremely low prices, even lower than the price paid by one of the world's top technology investors five months ago.