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Hippo's shares tumble amid underwriting pause, difficult Q2'23 for P&C insurers

Hippo Holdings Inc. shares have fallen dramatically this month following underwhelming second-quarter financial results and a decision to pause writing new business across the US.

August has been a difficult month for Hippo, which reported disappointing second-quarter earnings Aug. 8, including GAAP net loss of $108 million specifically attributed to the insurance technology (insurtech) company.

The earnings report was followed a week later by news that the home insurance-focused insurtech had temporarily stopped accepting new business in the US and that it will consider reopening business on a state-by-state basis depending on portfolio performance.

A spokesperson for Hippo confirmed the pause Aug. 17 and shared a statement attributed to CEO Rick McCathron affirming that Hippo is committed to near-term underwriting profitability.

"These actions are temporary as we evaluate catastrophic risks, geographical diversification, enhanced underwriting and rate actions for the Hippo Home Insurance Program," McCathron said. "These changes do not impact our insurance-as-a-service or services segments. We look for continued growth in those areas, outpacing the reduction in our HHIP segment."

During the company's Aug. 8 earnings call, CFO Stewart Ellis said adjusted operating income was $5 million in the insurance-as-a-service segment, compared to a loss of $1 million in the year-ago period.

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Hippo's decision to halt all new business is a drastic move, especially just one week after the company reaffirmed its commitment to profitability by 2024, said Kaenan Hertz, managing partner for Insurtech Advisors LLC.

"While many other carriers are also halting new business, they are typically doing so in specific areas or for certain types of policies," Hertz said. "Hippo's decision to halt all new business nationwide is more unusual."

The decision will adversely affect Hippo's growth, Hertz said. It will put more pressure on the company's expenses and likely have a negative impact on the agent community, who will have fewer products to offer clients.

The pause is a sign that Hippo is facing financial difficulties, likely exacerbated by a string of natural disasters that have rocked the property and casualty (P&C) insurance sector.

"Overall, Hippo's decision to halt all new business is a sign that the company is facing some challenges," Hertz said. "It remains to be seen whether the company will be able to overcome these challenges and become profitable."

From July 31 to Aug. 16, the day after news of Hippo's pause broke, the insurer's stock value declined 36.4%, falling from $17.20 a share to $10.14. Fellow P&C insurtech Root Inc. fared better during the same period, only falling from $10.18 a share to $9.16 over the same period.

Hippo was trading at $10.97 by midday Friday.

A better-than-expected second-quarter earnings report gave Root's share price an immediate boost, as it touted a reduction in net losses and a drop in its expense ratios.

Root's focus on pricing and underwriting has "allowed us to reignite profitable growth," CEO Alex Timm said on an Aug. 3 conference call. Timm said the key has been the company's "superior technology," which has helped it respond to "changes in the pricing environment."

The S&P 500 fared slightly better from July 31 to Aug. 16, declining a more modest 4.02% to hit 4,404.33. The S&P 500 U.S. Insurance index rose 0.35% to 594.19 during the same period.

Health insurtechs remain strong

On the health side, insurtechs GoHealth Inc. and Oscar Health Inc. have seen little change to their stock values in August following strong second-quarter earnings.

In an Aug. 10 release, GoHealth reported second-quarter net revenues of $142.8 million, down $15.9 million from $158.7 million in the same period in 2022. However, the insurer also reported a net loss of $70.2 million, an improvement of $43.5 million compared to $113.8 million in the year-ago period.

Also in the earnings release, GoHealth shared that a special committee of its board rejected an unsolicited, nonbinding proposal from two shareholders seeking to fully acquire the company.

"We believe the Proposal undervalues GoHealth and fails to recognize the strength of our business today as well as our compelling future prospects," the committee wrote. "We have confidence in the leadership team's ability to execute the Company's long range strategic plan."

GoHealth's operating cash flow has greatly improved year over year, according to a research note from William Blair analyst Adam Klauber.

About one-third of the improvement has been driven by a mix shift toward the non-agency business model, and the remainder reflects restructuring savings and other efficiency improvements, Klauber wrote, maintaining GoHealth's "outperform" ranking.

"We remain encouraged by GoHealth's execution on shifting its business model and improving its unit economics to generate sustainable positive cash flow," Klauber added.

Fellow managed care insurtech Oscar Health has been among the best-performing insurers so far in 2023.

Oscar Health on Aug. 8 reported earnings for the second quarter, including $1.5 billion in premiums earned, up 48% year over year, and net loss of $15.4 million, an improvement of $96.7 million compared to the prior-year period.

CEO Mark Bertolini said during an earnings call that Oscar Health plans to expand into rural markets in 2024 as part of its growth strategy.

Oscar Health's stock value remained largely unchanged in August, declining to $7.39 a share by Aug. 16 from $7.52 a share on July 31.