A sharp decline in stock values for insurtech companies in the third quarter is an indication of investors' waning confidence in a sector beset by underwriting and profitability issues.
Hippo Holdings Inc., Lemonade Inc. and Root Inc. all experienced a rough September, during which their stocks each fell at least 12%.
Those declines indicate how much institutional and retail investors have "soured" on the companies, said Kaenan Hertz, managing partner for Insurtech Advisors LLC. Investors have changed their attitudes since getting interested in the "insurtech boom" after some of the initial IPOs.
"The whole conversation in the marketplace is about profitability, it's about loss ratios, and it's about customer acquisition costs," Hertz said in an interview. "And for the most part, Hippo, Root and Lemonade were having significant problems."
Hippo's stock value had fallen 18.99% this month through Sept. 28, while Root was down 14.90% and Lemonade was off 12.72%.
The numbers are worse for the third quarter for two of the three, with Hippo down 50.83% and Lemonade 28.54% lower. Root is up 8.95% for the quarter through Sept. 28, but Hertz said that is just "the tail" of a boost from a reported buyout offer in June from Embedded Insurance Inc.
Hippo, Lemonade and Root did not respond to requests for comment.
September has historically been the worst month on average for US stocks overall and this go-round has been more of the same, though insurance companies have held up much better.
As of Sept. 28, the S&P 500 is down 4.61% for the month, while the S&P 500 Insurance Index is up 2.02%. The Insurance Index is up 4.35% for the quarter, while the S&P 500 has declined 3.39%.
Buyout offers like the one Root received in June could be in the future for other insurtechs, according to Keefe Bruyette & Woods analyst Tommy McJoynt. Either partnerships or consolidation within the insurtech space would be "a natural outcome for what we're seeing."
Insurtechs have raised "a finite amount of capital" and been given a certain time frame "to get their cash burn under control," McJoynt said.
"It's natural that you kind of look to what can be done that's in the best interest of shareholders and whether that's through consolidation and in terms of M&A and selling the company or in terms of partnerships," McJoynt said in an interview.
Hertz said capital markets seem to be running out of patience with the sector but not with the venture capital market.
"VC dollars coming in are lower, [but] there are still billions being put into the industry," Hertz said, adding that venture capitalists are being more discerning in their choice by requiring profitability and not just growth.