Short interest: InsurTechs lead the list, Aon/Willis rise
Short interest is the total number of shares of a stock that have been sold short by investors but have not yet been covered or closed. If you expect the price of a stock to fall, you can execute a short sale.
In a short sale you borrow the shares from a broker (his account or another owner) and sell them at the current market price. Later, when the stock price falls, you buy an equal amount of stock and return it to the broker. Simply put, your profit is the difference between what you paid for and what you received.
There is another big topic which is the “short borrow fee rate” which is the cost to borrow stock to sell them short. This is less of an issue in insurance stocks where the fee might be in the 1%-2% range for InsurTech names and 8% for Root. For more established carriers with longer track records, borrow rates are in the 0.25% range. This fee can be materially higher for meme stocks or microcap stocks.
Last week, FINRA updated short interest data on the US publicly listed stocks with the settlement date ending April 15, so it does not fully reflect the current pricing versus exposure debate, as well as the market’s reaction to earnings releases.
As a reminder, FINRA publishes the data twice a month – in the middle and end of every month – with an eight-trading day lag.
Short interest as a percent of float is a great indicator of current market sentiment. All else being equal, higher figures typically imply that investors are pessimistic on a firm’s valuation, fundamentals or are betting on some company-specific negative news to come out.
The latest available data indicates that Aon and Willis experienced modest upticks in short interest – after falls during March – as we seem to be getting into the final innings of this saga. InsurTechs continued to lead the group based on previously discussed profitability questions surrounding these franchises.
Root remains the highest shorted insurance stock, with a short interest of 58.4% of its float. Note, Root has material private equity and insider ownership, limiting the public float versus more mature industry peers, which skews the ratio to the upside.
Lemonade remains second at 22.3%, while Metromile moved higher at 15.2%. Aon and Willis’s relatively high figures continue to reflect bets placed relating to the timing/likelihood of the merger close.
The biggest short interest gainers of the first half of April continued to show an InsurTech flavor. Root’s short interest ticked up higher with a 13.9 pts change while Metromile jumped another 6.1 pts. Apart from the InsurTechs and Aon and Willis, which saw some upticks, the remainder of the group was muted.
At the other end of the spectrum, Lemonade fell 3.1 pts. Beyond Lemonade, Greenlight Re fell by 1.3 pts after jumping 5.9 pts for the prior period in March. For the broader group, we anticipate a bigger shift in the next report, which will include at least half of the P&C reporting cycle.
On days to cover basis, Aon remains the most heavily shorted stock as its entire short interest is equal to the 20 days’ worth of average trading volume. The number was up from 12 days two weeks ago. Despite the relatively substantial short interest, it only takes approximately five to six trading days to cover the entire short interest in Root, Metromile, and Lemonade. However, note that the InsurTechs’ trading volumes are skewed upwards due to active trading in the post-IPO period.
Short interest in SPACs remains subdued
The short interest in insurance-focused SPACs remains subdued. Hippo’s SPAC RTPZ has the highest short interest, with about 2.46% of its float shorted (vs. 3% last period). The claims processing app developer CCC Information Services’ SPAC DGNR has only 0.33% of its float shorted.
The SPACs currently searching for a target, including III, KAIR, and DWIN, continue to have a negligible short interest. Note, SPAC shares are typically redeemable at ~$10 plus accrued interest, which serves as a floor for the price.