Insurance stocks outpaced the broader market as positive reports from insurtech companies closed out earnings season.
One of the week's biggest winners, Lemonade Inc., saw its shares soar on the heels of its second-quarter results. In a letter to shareholders, the company disclosed that it is "fully funded," which means it has pulled back on hiring and growth spending and has enough capital to tide it over until achieving profitability, Insurtech Advisors analyst Kaenan Hertz said in an interview.
Hertz said Lemonade is touting the rewards from its acquisition of Metromile Inc. as a reason for the increased capital, specifically the $155 million in cash it received in exchange for $145 million in Lemonade shares that were purchased by Metromile shareholders. While the insurtech definitely has cash on hand, there is a question as to whether those funds are "unencumbered or truly available," Hertz said.
Lemonade has made moves to free up capital, such as reducing its reliance on reinsurance contracts, Hertz said. The company in its most recent Form 10-Q said it reduced its overall share of proportional reinsurance to 55% from 75%, protecting its gross profit margin from claims volatility and boosting capital efficiency.
Hertz said if Lemonade is less reliant on reinsurance, that means it has to fund its surplus accounts to meet regulatory requirements.
"They have to fund their surplus accounts so that the regulators will be OK with them being able to pay future claims," Hertz said. "So, it's unclear how much of that cash is really tapped for regulatory requirements."
Lemonade finished the week up 33.03%.
Insurtechs were among the biggest gainers in what turned out to be a strong week for U.S. equities overall. The S&P 500 Insurance index jumped 6.75% to 572.52 for the week ending Aug. 12, while the S&P 500 climbed 3.26% to 4,280.15. In addition to Lemonade's big gains, GoHealth Inc. jumped 69.60%, while Hippo Holdings Inc. and SelectQuote Inc. were up 17.41% and 19.20%, respectively.
Hippo had encouraging news in its latest earnings report, Hertz said, citing impressive underwriting results. The home protection company reduced its loss ratio, excluding catastrophes, to 56% from 62% a year ago, and its overall loss ratio decreased to 78% from 128%. Hippo has started to grapple with the "main mechanics of insurance," the analyst said in a note.
Recovery for Root?
Root Inc., down 31.16% for the week, has endured its share of struggles, but Hertz said it has made "two really critical steps" to safeguard its cash and slow its burn rate: cutting down on marketing costs and laying off a large portion of its workforce before other insurtechs made similar moves.
Hertz said Root achieved an understanding of market dynamics and is doing what it needs to do to weather a bad environment and "right the ship" when it comes to profitability. Root's reliance on its partnership with Carvana Co. is "good, but also challenging" because the online used car retailer may continue to struggle in certain markets. If it fails to grow the way Root hopes it does, that could put the brakes on the insurtech's growth prospects as well, Hertz said.
Argo on the rocks
Argo Group International Holdings Ltd.'s share price plummeted 29.64% for the week after reporting a net loss attributable to common shareholders of $18.9 million, or a loss of 54 cents per share, compared with net income of $ 67.1 million, or $1.93 per share, in the second quarter of 2021.
Earned premiums fell to $454 million from $470.3 million a year ago, while net investment income dipped to $29.3 million from $52.7 million.
CEO Kyriakos Rialas in the company's earnings release said the first half of the year was "devastating for emerging market bonds" due to increases in global interest rates and accelerated outflows.
"Coupled with an illiquid and dysfunctional market, we saw many bonds marked down several points for no good reason," Rialas said.