Porch's stock plummets in wake of Vesttoo scandal; medical cost trends stabilize

Porch Group Inc.'s stock has declined by more than 40% since its insurance carrier, Homeowners of America Insurance Co., got swept up in the Vesttoo Ltd. letter-of-credit scandal.

Porch's stock value had dropped to 79 cents per share by close of business Sept. 5. During the same period, the S&P 500 declined 1.75% while the S&P 500 US Insurance index rose 0.06%. As of 3:30 p.m. on Sept. 8, it was trading at 83 cents per share.

In addition, Homeowners of America Insurance (HOA) was placed under temporary supervision by the Texas Department of Insurance (DOI) on Sept. 5 due to its connection to the scandal-laden Vesttoo.

"Insurtech holds the promise of reshaping the insurance domain, but it must heed the lessons from Vesttoo's missteps," said Kaenan Hertz, managing partner for Insurtech Advisors LLC, adding that insurance startups need to emphasize risk management, compliance and profitability over mere growth.

Problems emerge

Porch disclosed in its second-quarter earnings release that HOA had a reinsurance contract with White Rock Insurance (SAC) Ltd., an Aon PLC subsidiary for which Vesttoo arranged capital. The news has likely imperiled efforts by the company to receive regulatory approval to form a new reciprocal exchange, although the Texas DOI declined to comment "on the financial status of regulated companies or licensees."

In late July, Vesttoo began facing allegations of fraudulent activity in connection with collateral it and Aon White Rock were required to provide to HOA and certain other third parties, according to a news release from Porch.

In the weeks since the Vesttoo scandal broke, the company has blamed "pervasive and systemic misconduct" by a "limited set" of executives and other third parties for dozens of fraudulent letters of credit. The company initially blamed "external" factors.

Porch did not respond to a request for comment.

Vesttoo's investor roster comprised venture capitalists without much background in insurance.

"Traditional insurance investors understand that profit margins in insurance are often modest compared to tech sectors," Hertz said. "Venture capitalists, accustomed to high returns from tech startups, might have inadvertently set unrealistic expectations for insurtechs."

Medical cost utilization trends remain on target

Managed care insurers Centene Corp. and Humana Inc. posted modest bumps to their stock values during the same week they released 8-K forms maintaining adjusted earnings-per-share estimates.

During a Sept. 6 investor call, Centene CEO Sarah London said the insurer had a "good July" and utilization was slightly below June levels.

In terms of Medicaid redeterminations — the annual process by which states determine who is qualified for state and federally subsidized health insurance — London said acuity and membership numbers are in line with expectations.

"We touched on this on the Q2 call ... but members who may be dropping for procedural reasons are pretty quickly reenrolling," London said. "And so if you look across the last five months or so, we're seeing about 15% of members that are rejoining, but that's sort of the average across those five months."

Humana CFO Susan Diamond said during a Sept. 6 investor call that paid claims data for June and July supports the company's medical cost trend expectations for the second half of 2023. However, Diamond said the insurer is seeing an uptick in inpatient care.

"Things have been relatively comparable to what we described in the second quarter with the exception of we have seen a further slight uptick in the inpatient side related to COVID, which is consistent with what you've probably seen and read about in the news lately," Diamond said.

Centene was trading up 6.11% for the week at $65.26, while Humana was up 1.42% at $467.11 per share around 3:30 p.m. on Friday.