Root, Hippo stocks recover ahead of earnings after double-digit declines

Shares in Root Inc. and Hippo Holdings Inc. recovered some momentum in the last few days after enduring double-digit declines over the two previous weeks.

Both insurtechs were at their highest closing price for the year on April 5, with Root finishing the day at $82.90 and Hippo at $24.02. However, by the close of the market on April 18, Root had fallen 38% to $51.43 and Hippo was at $19.69, an 18.1% decline. But Root rebounded this week with a 21.8% increase at market close on April 25 while Hippo had a more modest 4.1% improvement.

In Root's case, the decline earlier in the month was caused by a mix of profit-taking by investors and fallout from the stocks' triple-digit increases since the end of February, said Kaenan Hertz, managing partner for Insurtech Advisors LLC.

"It was 'irrational exuberance,'" Hertz said in an interview. "By no means [was Root] an $83 company while still losing money."

Profit projections

In Hippo's case, the modest recovery was due to the company releasing "some pretty bullish projections" to reach EBITDA profitability by the end of this year, said Keefe, Bruyette and Woods analyst Tommy McJoynt.

"There's just been sort of less room for surprise [and] getting caught offside with Hippo just because they've kind of communicated their outlook for reaching profitability," McJoynt said in an interview. "That's probably the main reason we've seen less of an outsized stock performance there."

Hertz said Root's rapid increase was investors' reaction to the insurer making efforts toward profitability by cutting back its marketing spend, initiating layoffs and getting approvals for "appropriate rate actions."

"They took their medicine earlier than anybody did and benefitted from that, [but] the appreciation of that stock price was somewhat illogical," Hertz said.

Q1 earnings outlook

McJoynt expects "a fairly upbeat outlook" when Root holds its earnings call on April 30, and Hippo and Lemonade Inc. conduct theirs on May 2, citing optimism over the "resurgence in profitability across the personal lines space."

The number of peak rate increases in the auto insurance space indicates that rate adequacy is "pretty widespread now," he said, adding that those carriers will start focusing on growth. On the homeowner side, McJoynt said rates are still rising and rate adequacy is "probably six to 12 months behind the auto lines."

"Given the sandboxes that these guys play in, we think they'll paint a pretty optimistic outlook for this year," McJoynt said.

Hertz said the insurtechs now understand economics and profitability better and will be "trying their best to make sure that expenses are controlled and their loss ratios are within the rate structure that they have approved."

"In that case, they'll be operating like any other insurance company," Hertz said.