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United States securities and exchange commission logo
September 4, 2020
Alexander Timm
Chief Executive Officer
Root Stockholdings, Inc.
80 E. Rich Street, Suite 500
Columbus, Ohio 43215
Re: Root Stockholdings,
Inc.
Draft Registration
Statement on Form S-1
Submitted August
10, 2020
CIK No. 0001788882
Dear Mr. Timm:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so
we may better
understand your disclosure.
Please respond to this letter by providing the requested
information and either submitting
an amended draft registration statement or publicly filing your
registration statement on
EDGAR. If you do not believe our comments apply to your facts and
circumstances or do not
believe an amendment is appropriate, please tell us why in your
response.
After reviewing the information you provide in response to these
comments and your
amended draft registration statement or filed registration statement, we
may have additional
comments.
Draft Registration Statement on Form S-1
General
1. Please provide us with
supplemental copies of all written communications, as defined in
Rule 405 under the
Securities Act, that you, or anyone authorized to do so on your behalf
have presented or
expect to present to potential investors in reliance on Section 5(d) of the
Securities Act, whether
or not you retained, or intend to retain, copies of those
communications. Please
contact the staff member associated with the review of this filing
to discuss how to
submit such copies.
2. Please provide us with
copies of any additional graphics, maps, photographs, and related
captions or other
artwork including logos that you intend to use in the prospectus. Please
keep in mind, in
scheduling printing and distributing of the preliminary prospectus, that
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
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FirstName LastName
we may have comments after reviewing the materials.
3. We note your disclosure on page F-32 that in April 2020 you signed a
Securities Purchase
Agreement to purchase a shell insurance company, subject to regulatory
approval, and
plan to close the acquisition later in 2020. We further note that this
acquisition is meant
to expand your ability to sell personal auto insurance in all 50
states and the District of
Columbia. Please provide an update on this acquisition and the
regulatory approval being
sought, and disclose the details surrounding your plan in the Business
section or
elsewhere.
Prospectus Summary, page 1
4. Please provide support for the following statements and where
appropriate revise to make
it clear these are management's beliefs:
Traditional methods of risk assessment are imprecise and not
personalized
Systems and processes are decades old and disconnected from the
needs of
consumers
Behavioral data is underutilized and agents are the primary form
of distribution
You are the only property and casualty insurance carrier with a
scaled proprietary
telematics solution designed to price an entire book of business
Competitors cannot inject a product similar to your product into a
traditional
insurance model, absent a ground-up technology rebuild and years
of data collection
You are the leader in the race for data-driven scale
The market is on the verge of a tipping point for which very few
industry incumbents
are prepared
The fundamental product, across all lines, has not changed much
and remains
complicated and opaque to customers
You have a four-year head start and a critical first mover
advantage given your
technology
Your flywheel is more powerful than competitors
Your prices for acceptable risk are generally lower than
incumbents giving you an
advantage in acquiring new customers
5. Please clarify here and in the Business section what it means that you
have established the
technological foundation for an "enterprise software offering" and
that your enterprise
software will enable select insurance companies with your "white label
applications and
software development kit." Also, provide further discussion about your
planned
"software-as-a-service recurring revenue stream absent risk retention"
as discussed here
and on page 95. We also note your disclosure on page 96 that over time
you intend to
expand your enterprise product suite to include risk analysis, risk
management scoring and
vehicle fleet performance management software. Disclose the
anticipated timeline for
such offerings, the costs involved for their development and
deployment, and the
associated risks. Further, expand upon your disclosure on page 72 and
elsewhere that in
2020 you launched your first set of enterprise technology products to
provide mobile trip
tracking and scoring services, so that investors can better understand
when in 2020 they
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
Page 3 4, 2020 Page 3
FirstName LastName
were launched, what these technologies do, what is their target
market, how they relate to
your existing insurance businesses, and whether they generate
revenues.
6. Please clarify here and throughout what it means that customers can
"on-board" through
their mobile phone in as little as 47 seconds, and reconcile this with
your disclosure on
page 92 that a two-to-four week test drive is a key component of your
underwriting
process.
7. We note the disclosure here and on page 84 that your customer
experience is validated by
your first-term retention rate of 84%. Please balance this with your
disclosure on page 94
that this retention rate excludes rescissions and policies that do not
make it through the
underwriting period, and adjusting for these customers reduces policy
retention by 33%,
or advise.
8. We note your disclosure here that you are licensed in 36 states, and
your goal is to be
licensed in all 50 states by early 2021. Consistent with your
disclosure on page 22 and
elsewhere, please also clarify in the summary that you currently are
active in 30 states.
Further, consistent with your disclosure on page 37, disclose in the
summary and
elsewhere if you have a material concentration in a select few states.
9. Please define the term "blended loss ratios" and balance your graphic
showing that the
renewal accident period loss ratio declined from FY2018 to FY2019,
with the disclosure
on page 14 that the direct loss ratio increased for the same period.
Also, clarify that there
is no guarantee whether or when your premium base will evolve to more
than 80% from
renewals.
10. Please clarify here and on page 93 what it means that you have an
"agency entity"
structured to allow you to select the risk you hold on balance sheet,
and on page 72 that
your agency entity structure provides a broad set of insurance
products to consumers and
businesses. Please also clarify in what particular lines of business
such agency entity
structures operate.
11. Consistent with your disclosure on page 30, please disclose in the
summary that you are
currently undergoing, but have not completed, your five-year financial
examination with
the Ohio DOI, which includes a specific examination of your pricing
and underwriting
methodologies. Clarify if this is your first examination by your
primary insurance
regulator. In addition, update the disclosure regarding periodic
examinations on page 106
to discuss the various examinations ongoing as referenced on page 30.
The COVID-19 pandemic has caused disruption to our operations, page 18
12. You state that due to COVID-19 s negative impact on driving,
regulators in many states
are either mandating or requesting that auto insurance companies
refund a portion of their
premium to their policyholders to reflect the insurer s decrease in
projected loss exposure
due to the virus. Please revise to describe in greater detail whether
and to what extent you
have been impacted by these mandates and requests.
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
Page 4 4, 2020 Page 4
FirstName LastName
Our expansion within the United States and any future international expansion
strategy will
subject us to additional costs and risks, page 22
13. We note the disclosure that you had applied for licenses in ten states
that have not been
approved or were withdrawn. Please clarify if any of these
applications are still
pending, if you were denied a license by any state, and the reason for
any denials
or withdrawals.
Security incidents, or real or perceived errors, failures or bugs in our
systems, website or app
could impair our operations, page 29
14. We note your disclosure that attempts to fraudulently induce your
personnel into
disclosing usernames, passwords or other information that can be used
to access your
systems and the information in them have increased and that incidents
have in the past
resulted in unauthorized access to certain personal information.
Please tell us if these
reflect cybersecurity risks or incidents that materially affect your
products, services,
relationships with customers or competitive conditions. Also tell us
the magnitude of
any material incident and its consequences, any steps taken to
remediate the incident or
mitigate harm, and whether there is any potential liability for
damages. We may have
further comment upon review of your response.
Use of Proceeds, page 59
15. Please specify the principal intended uses of the net proceeds and the
approximate amount
intended to be used for each such purpose or tell us why you are
unable to do so.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Capital Management, page 68
16. You disclose that effective July 1, 2020 you will cede 70% of direct
earned premiums
under a quota share arrangement with third-party reinsurers. This
ceding rate is
significantly in excess of the 22% ceded in 2019 and 35% ceded in
2018. Please revise
your disclosure here or elsewhere in your submission to explain the
underlying reasons for
the apparent significant change in reinsurance strategy. Otherwise,
tell us where you have
made this disclosure in your submission.
Key Performance Indicators, page 69
17. Please tell us why it is important to provide direct written premiums
and direct earned
premiums as key performance measures in light of your quota share
reinsurance
arrangement effective July 1, 2020 where you will cede 70% of your
premiums to third-
party reinsurers. In your response tell us why these measures will
remain key
performance indicators when it appears, assuming no reinsurance
recoverable
collectibility issues, that 70% of the economic results of your
policies will not be reflected
in your GAAP financial statements.
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
Page 5 4, 2020 Page 5
FirstName LastName
18. Please tell us whether your expense ratio and combined ratio are key
performance
indicators used to evaluate your business and performance.
Key Factors and Trends Affecting our Operating Performance, page 71
19. Please address here the material opportunities, challenges and risks
to your business as
you implement the material components of your growth strategy such as
expanding
coverage, introducing new products and managing risk. In this regard,
please discuss how
you plan to compete with traditional insurers who have diverse product
offerings and
established operating histories. Also discuss the material challenges
and risks posed by
relevant economic or industry-wide factors. Refer to Section III.A of
Securities Act
Release No. 33-8350.
Non-GAAP Financial Measure
Adjusted Gross Profit/Loss and Adjusted Gross Margin, page 77
20. We note your non-GAAP reconciliations of adjusted gross profit/(loss)
to GAAP gross
profit/loss on page 77, and that you calculate adjusted gross profit
margin as adjusted
gross profit/(loss) divided by direct earned premium as disclosed on
page 71. Please
address the following:
As your adjusted gross profit/(loss) appears to be akin to a
contribution margin, we
believe its most directly comparable GAAP measure is a
fully-loaded GAAP gross
profit/loss that must be presented even if one is not depicted on
your statements of
operations. Although you present a gross profit/(loss) in your
reconciliation on page
77, it does not appear to be fully loaded. In this regard, for
example, it appears from
your disclosures on page 74 that your technology and development
expenses may
include software and systems costs used in the policy issuance and
claims processing
functions and that your general and administrative expenses
include share-based
compensation, depreciation and other overhead costs that are
directly attributable to
your policy issuance and claims processing functions. As a result,
revise your gross
profit/(loss) disclosure to present a "fully-loaded" GAAP gross
profit or tell us how
the amounts you disclose are "fully loaded."
We believe that the word "margin" when used to describe a ratio
has a GAAP
connotation. As your adjusted gross profit margin is divided by
direct earned
premiums, please revise the title of this non-GAAP measure to more
accurately
describe what this ratio represents.
As you are presenting your adjusted gross profit on a percentage
basis, revise your
disclosure to include both your fully-loaded GAAP gross profit
margin and a newly
presented non-GAAP adjusted gross profit margin that are divided
by total GAAP
revenues. Refer to footnote 27 of non-GAAP adopting Release No.
33-8176.
Revise your key performance indicators disclosure on page 69 to be
balanced with
the appropriate GAAP comparators. See Question 102.10 of the
Compliance and
Disclosure Interpretations on Non-GAAP Financial Measures.
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
Page 6 4, 2020 Page 6
FirstName LastName
Critical Accounting Policies and Estimates
Loss and LAE Reserves, page 80
21. Please revise your disclosure to:
Describe the methods used to determine your reserve for loss and
loss adjustment
expense (LAE);
Identify and describe those key assumptions that materially affect
the estimate of the
reserve for loss and LAE; and
In order to show investors the potential variability in the most
recent estimate of your
loss reserve, quantify and present preferably in a tabular format
the impact that
reasonably likely changes in the key assumptions identified may
have on reported
results, financial position and liquidity. Explain why you believe
the scenarios
quantified are reasonably likely. See FR-72.
Share-based Compensation, page 82
22. Once you have an estimated offering price or range, please explain to
us the reasons for
any differences between the recent valuations of your common share
leading up to the
initial public offer and the estimated offering price. This
information will help facilitate
our review of your accounting for equity issuances including stock
compensation and
beneficial conversion features.
Business, page 84
23. Please expand your disclosure in the Business section to discuss your
investment strategy
and policy, and provide disclosure breaking down your investment
portfolio by
composition of investment grade and non-investment grade assets,
further broken down
by asset class and assigned credit rating. These figures should be
provided by dollar
amount and percentage of the portfolio.
24. Please tell us whether you have entered into any investment advisory
agreements, and if
so, disclose the material terms of the investment management
agreements, including the
compensation structure with and historical fees paid to the investment
manager, any
minimum amount of assets required to be covered under the agreement,
term and
termination provisions. If applicable, please also file any such
investment advisory
agreements as exhibits.
25. Please provide support for your statement on page 98 that many of your
competitors have
had to run marketing campaigns and other forms of education to drive
utilization of digital
filing features, with mixed success, or revise to remove.
26. We note that you quota share approximately 70% of direct earned
premiums to third-party
reinsurers. To the extent any particular third-party reinsurer or
reinsurance program is
material, please identify the company or companies from whom you
acquired such
reinsurance and file any related agreements as exhibits. Also, expand
upon your
disclosure on page 99 that in favorable loss performance scenarios you
can achieve
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
Page 7 4, 2020 Page 7
FirstName LastName
outsized margins through the receipt of profit rebates from your
reinsurance partners, such
that investors understand what constitutes a favorable scenario and
what rebates are
available when such scenarios are reached.
Competition, page 100
27. Please provide additional information regarding your competitive
position in your
industry, particularly as it relates to the extent to which
traditional insurers
utilize telematics or offer forms of usage-based insurance, along with
any other new
market entrants focused on this technology. Refer to Item 101(c)(1)(x)
of Regulation S-K.
Cybersecurity, page 109
28. We note your disclosure that you take steps to comply with financial
industry
cybersecurity regulations and believe you comply in all material
respects with their
requirements. Please also disclose here or under another appropriately
captioned
section the nature of the board s role in overseeing your
cybersecurity risk management,
the manner in which the board administers this oversight function and
any effect this has
on the board s leadership structure.
Choice of Forum, page 132
29. Please reconcile the disclosure in this section with the risk factor
disclosure on page 55 as
the two descriptions appear to be inconsistent.
Index to the Consolidated Financial Statements, page F-1
30. We note that you do not include any interim financial information in
your submission yet
you include placeholders for June 30 information throughout the front
part of your
document. Please tell us whether you reasonably believe that your
offering will be
completed before September 30 information will be required on or after
November 12,
2020. If so, please include June 30, 2020 and comparable 2019
information in your next
submission as stipulated in Question 1 of the Compliance and
Disclosure Interpretations
for the FAST Act.
Consolidated Balance Sheets, page F-3
31. Please revise your presentation to present your investments as the
first assets. See Rule 7-
03(a)1 of Regulation S-X.
Notes to the Consolidated Financial Statements
Note 2. Significant Accounting Policies
Segment Information, page F-7
32. We note that you operate as a single reportable segment and that your
business section
discloses that you currently offer a variety of products. We further
note your
disaggregation of certain product information on page 69. Please
revise your disclosure to
Alexander Timm
FirstName LastNameAlexander Timm
Root Stockholdings, Inc.
Comapany 4,
September NameRoot
2020 Stockholdings, Inc.
September
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FirstName LastName
provide revenues for each product, or each group of similar products,
or tell us why you
believe the disclosures are not required. Refer to ASC 280-10-50-38 to
50-40 and be
advised that these entity-wide disclosures requirements apply to all
public entities,
including those with one segment. If providing the information is
impracticable, please
disclose that fact.
General and Administrative, page F-9
33. Revise your accounting and related disclosure to allocate your
share-based compensation
to the appropriate captions on your statements of operations depending
on the underlying
function of each employee. See SAB 14F. Also, supply the disclosures
required by ASC
250-10-50-7. Otherwise, tell us why the error correction disclosures
are not warranted
and/or why your classification is appropriate and reference for us the
authoritative
literature you rely upon to support your accounting.
Note 4. Fair Value of Financial Instruments, page F-16
34. Please revise your disclosure to provide, for each class of
investments in Level 2 of the
fair value hierarchy, a description of the valuation techniques and
the inputs used in fair
value measurement. See ASC 820-10-50-2bbb1.
Note 5. Loss and Loss Adjustment Expenses, page F-17
35. Please tell us why you depict $312.6 million in current year net
incurred loss and LAE in
the 2019 rollforward on page F-17 and only $295.0 million of 2019
accident year incurred
loss and allocated LAE in your claims development table on page F-18
when you do not
appear to have any unallocated LAE. In this regard, the reconciliation
of the claims
development table to your gross reserves for losses and LAE on page
F-18 depicts only
reinsurance recoverable as a reconciling item. In addition, revise
this reconciliation to
indicate that the $140.7 million amount is your gross liability,
consistent with your
balance sheet on page F-3 and the rollforward on page F-18, instead of
being net of
reinsurance or advise us.
Note 6. Reinsurance, page F-19
36. We note the sliding scale and loss corridor features of your
reinsurance contracts. As
insurance risk includes uncertainties about risk transfer and timing
risk, please tell us why
these features do not preclude reinsurance accounting under ASC
944-20-15-40 and 15-41
referencing for us the authoritative literature you rely upon to
support your accounting. In
addition, given that your provisions for each feature have
significantly increased in 2019,
please revise your MD&A to identify and clearly explain this known
demand, and the
related impacts on your financial statements and liquidity. Please
refer to Item 303(a)(1)
of Regulation S-K.
Alexander Timm
Root Stockholdings, Inc.
September 4, 2020
Page 9
Note 16. Statutory Financial Information, page F-30
37. Please revise your disclosure to provide your statutory net
income/loss for each period
presented as required by Rule 7-03(a)23(c) of Regulation S-X.
You may contact Bonnie Baynes at 202-551-4924 or Mark Brunhofer at
202-551-3638 if
you have questions regarding comments on the financial statements and related
matters. Please
contact John Stickel at 202-551-3324 or Justin Dobbie at 202-551-3469 with any
other questions.
FirstName LastNameAlexander Timm Sincerely,
Comapany NameRoot Stockholdings, Inc.
Division of
Corporation Finance
September 4, 2020 Page 9 Office of Finance
FirstName LastName