Many life insurance stocks posted gains this week, while one recently listed property and casualty startup that released its first public earnings report saw its shares retreat.
The industry overall managed a slightly better week than the broader market, as the SNL U.S. Insurance Index gained 1.86% to 1,200.35, compared to a 1.67% rise for the S&P 500, which finished the week ending Dec. 4 at 3,699.12.
Telematics-based auto insurer Root Inc. began the week with its shares down more than 35% from its $27 IPO price. The sell-off in its stock continued at an even sharper clip after the company disclosed its financial results Dec. 1.
Root touted significant year-over-year improvement in adjusted growth profit and its direct loss ratio. However, revenues fell over the same period, and the company shed policyholders compared to the previous quarter.
Also troublesome to Insurtech Advisors partner Kaenan Hertz was Root's high customer acquisition costs. Given its advertising spend, a favorable, though nontraditional calculation of that metric, during the last nine months puts that cost at about $600 per customer, which is "still way too high," Hertz said in an interview.
"In a traditional way, when you look at cost of acquisition ... at best they were at almost $2,200 per policy," Hertz said. "It's not sustainable."
Root executives during a conference call said acquisition costs were about what they expected and will likely remain elevated in the near term because the insurer is expanding aggressively into more states. Underwriting will be uncertain before its smartphone-based app can price drivers correctly; rate increases will likely result in high customer turnover and low retention, CFO Daniel Rosenthal said.
"We're expecting elevated levels, not just in the third quarter, but in the fourth quarter, because we're ... investing to support the state expansion plans," Rosenthal said, according to a transcript.
Root's reinsurance model, which transfers 70% of its direct written premiums while receiving a 25% commission, should help stabilize the loss ratio, Hertz said. That said, the company will have to get much better at leveraging technology to grow policies cost effectively, according to Hertz.
"They have to master online acquisition," Hertz said.
By the end of the week, Root's stock was down more than 47% from its IPO price and closed at $14.26.
Investors had become cautious on the whole P&C sector during the quarter in anticipation of normalized driving levels and lower auto insurance rates threatening profit margins, KBW analyst Meyer Shields said in a Dec. 2 research note to clients. Shields upgraded his rating for Progressive Corp. based partly on what he believes is a resulting discount on its shares. Progressive eked out a 1.23% gain for the week.
Allstate Corp.'s shares were mostly flat, rising only 0.21%. Chubb Ltd. managed a 2.64% increase and Travelers Cos. Inc. edged up 1.28%.
Among major life insurers, MetLife Inc. added 2.15%, Prudential Financial Inc. rose 4.10%, while Lincoln National Corp. recorded one of the week's top share price performances with a 11.33% advance.
Amid the announcement of a CEO change, Sun Life Financial Inc.'s stock traded down 2.08% for the week.