Hippo Holdings Inc. Q2 FY2022 Earnings Call

Good afternoon. Thank you for joining Hippo's Second Quarter 2022 Earnings Call. My name is Daniel, and I will be your moderator for today's call. All lines will be muted during the presentation, and there will be a chance for questions at the end. I would now like to hand the conference over to our host, Cliff Gallant of Hippo. Cliff, please go ahead.

Thank you, operator. Good afternoon, everybody, and thank you for joining Hippo's second quarter earnings conference call. Earlier, Hippo issued a shareholder letter announcing its results, which is also available at investors.hippo.com. Leading today's discussion will be Hippo's Chief Executive Officer and President, Rick McCathron; Executive Chairman and Founder, Assaf Wand; and Chief Financial Officer, Stewart Ellis. Following management's prepared remarks, we will open up the call to questions. Before we begin, I would like to remind you that our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. Forward-looking statements include but are not limited to Hippo's expectations or predictions of financial and business performance and conditions in competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties, and other factors that will cause our actual results to differ materially from historical results and/or from our forecasts, including those set forth in Hippo's Form 8-K filed today. For more information, please refer to the risk uncertainties and other factors discussed in Hippo's SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo's SEC filings. Do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, altering, or otherwise revising any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. During the conference call, we will also refer to non-GAAP financial measures such as total generated premium and adjusted EBITDA. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter 2022 shareholder letter, which has been furnished to the SEC and is available on our website. And with that, I will turn the call over to Assaf Wand, Founder and Executive Chairman of Hippo.

Thanks, Cliff. Before we dig into the details of another solid quarter of delivering on what we said we do, I wanted to take this opportunity to thank Hippo's customers, employees, supporters, and investors for my time as the CEO of the company. When I founded Hippo in 2015, I had a vision of what we could do for homeowners and how we could build a great company. And I think we're well on our way to achieving that vision. As Executive Chairman and Hippo's largest individual investor, I continue to be involved on an ongoing basis and dedicated to the continued success of Hippo. Rick and I have worked side by side for six years to build Hippo into what it is today. As we look to the next phase of Hippo's development, Rick's operational background makes him ideal to take the lead in the CEO role. As an entrepreneur at heart, I will be focused on finding more strategic opportunities for Hippo on our long-term growth and on advancing our mission of protecting the joy of homeownership. Nothing gives me more pride and confidence than Rick's promotion to the CEO role and knowing that Hippo is in amazing hands. Thank you. And now, Rick.

Thank you, Assaf, for your continued involvement and support. Now onto the quarter. Hippo was making steady progress towards our goals of profitability and delivering on our mission of protecting the joy of homeownership. In Q2, we delivered another quarter of strong total generated premium growth, revenue growth, and perhaps most importantly, significant loss ratio improvement. Our total generated premium was up 29% over the prior year quarter. We are growing throughout our geographies as we establish our presence and grow share in the states launched over the last 18 months. During Q2, we announced our entry into the major states of New York, Massachusetts, and North Carolina. While these states will take some time to become meaningful contributors, our confidence is high in our ability to succeed in these new markets. Growth through our builder and partnership channels remains robust. We recently announced the creation of the Amerisave insurance agency powered by Hippo's proprietary technology. We offer our partners a quality insurance experience for their customers, creating a circular win-win-win cycle between our partners, their customers, and Hippo. Our Q2 gross loss ratio of 78% marks yet another leap of improvement from the prior year quarter. Our technology platform, which leverages advanced analytics and data, played a central role in this improvement. In addition, our increased geographic diversification, the early earning out of re-underwritten and rerated policies, favorable reserve development, and relatively good weather all contributed to this improvement. We expect additional improvements as we continue to refine our pricing and risk management, claims handling, and cost efficiency. We are getting better at identifying our target customers and winning their business. As this attractive and appropriately priced business grows and as the other loss ratio improvement efforts gain momentum, we expect our loss ratio to continue to converge with those of our large national peers. Given our strong performance in the first half of 2022, we are pleased to be able to offer improved full-year 2022 guidance for gross loss ratio, bringing it down from our previous guidance of under 100% to under 90%, representing a 48 percentage point improvement from 138 in 2021. As we discussed in our first quarter 2022 letter, we've taken substantial re-underwriting and repricing actions across our book of business as we sharpen and focus on achieving our loss ratio objectives. On average, these actions have resulted in double-digit rate increases, although some of our most attractive risks have seen rate reductions. We are also pleased to report that our premium retention remains high at 87%, even though we are non-renewing policies that are not aligned with our customer segment goals. As we all return to our busy lives in a post-pandemic world, helping our customers manage and protect their biggest assets, their homes, is more important than ever. We recently launched our Hippo home care mobile experience, which includes a home health assessment done either in person or conducted through our mobile app with a Hippo home care expert who can provide home care tips and create a personalized preventative maintenance plan for each Hippo customer. As we like to say, the best claims experience is to help our customers prevent losses from ever occurring. You may have begun seeing more of us online and on TV. We recently launched our targeted brand campaign, 'Feel the Housepower', which focuses on our differentiated product and customer experience. A recent Hippo survey found that 87% of homeowners experience anxiety and dread about home maintenance and worry about what could go wrong next. Hippo empowers homeowners by giving them the confidence and control they need to stand up to whatever homeownership throws at them. We're betting on our customers, not against them. Finally, we're excited for our Investor Day on September 6 in New York City, led by myself, Assaf, and Stewart. Several of our key leadership will present on topics including underwriting, technology, and product development, focusing on how Hippo differentiates itself. We will also welcome extensive Q&A. If you would like to join us in person or if you would like to submit a question, please email us at investors@hippo.com. We are looking forward to sharing our plans for furthering our mission of protecting the joy of homeownership as well as our financial outlook. Thank you. And now I hand it off to Stewart.

Thanks, Rick. The first half of 2022 has gone well for Hippo. Our gross loss ratio improved substantially versus the prior year period with indications of more to come. Our total generated premium growth rate remained strong despite significant underwriting action, and our confidence in our financial position is higher than ever. We ended the first half of the year with cash and investments of $732 million and believe we can achieve profitability without raising additional capital. Total generated premium was $204 million in Q2, up 29% from $159 million in the prior year quarter. Our Hippo homeowners premium retention rate of 87% remains high. As we have worked to accelerate our timeline to profitability, we have become more selective in our underwriting. This has shifted the mix of customers toward our most attractive segments but has slowed our total generated premium growth slightly. Moving forward, for potential policies that are on the margin between a profitable and unprofitable expected loss ratio, we will continue to lean toward profitability when choosing whether to write the business on our Hippo program. As a result, we are slightly reducing our total generated premium guidance from $800 million to $820 million offered previously to $790 million to $810 million. We plan to go into more detail about our future growth plans at our Investor Day in September. Geographic expansion has been a key driver of our growth as we develop a balanced portfolio of risk exposure. With the recent additions of New York, Massachusetts, and North Carolina, we are now live in 40 states. We estimate that our current geographic footprint covers approximately 94% of the U.S. population, but our share of the overall homeowners insurance market is still less than 1%, indicating ample room for share gains and long-term growth even while optimizing for profitable underwriting results. Revenue in Q2 was $28.7 million, up 37% over the prior year quarter. As a reminder, revenue includes net premiums earned growing in steady streams of fees, MGA, and agency commissions paid to us by other carriers and reinsurers, as well as service and fee income. We are also expanding our third-party program administrator business at Spinnaker and taking advantage of higher low-risk yields on our cash balance to grow our investment income. The volume impact of our increased focus on nearer-term profitability and the increased cost of certain kinds of reinsurance, which directly reduce our earned premium, have resulted in a short-term headwind on the earned premium portion of our revenue. As a result, we expect the risk-bearing premium we will earn to come in a little lower than our initial forecast in favor of lower dollar but non-risk bearing and higher-margin commission revenue. Therefore, we are lowering our guidance for 2022 revenue to $119 million to $121 million. Our gross loss ratio in Q2 was 78%, an 83 percentage point improvement over Q2 last year. Q2 is typically when our customers face adverse weather events, particularly hail, but our increasingly balanced risk exposures have helped to blunt the overall impact of this kind of weather on our results. Given the progress we are making in this area, we are comfortable offering improved guidance for full-year gross loss ratio. And now I believe we will be under 90% for the year, down from our previous guidance of 100%. Breaking down the loss ratio a bit, losses from PCS catastrophic events represented 22 points of our Q2 loss ratio net of 12 points of prior periods' favorable development on PCS events driven largely by hail and storms in the Central Plains and northern Texas. I'd like to highlight the benefits of our recent focus on geographic expansion here. A year ago, we were more overweight in this geography and would have likely been impacted to a greater degree by this same weather. Q2 also benefited from 10 percentage points of favorable loss reserve development on attritional losses from prior years. Another key driver of our loss ratio improvement is our continued improvements to our rate adequacy and accuracy through the filing and implementation of segmented rate changes. An additional five states and 11 product rate changes went live in the quarter, bringing our year-to-date changes to 15 states and 34 products. On a premium basis, over 80% of the book has seen a rate change filed, approved, and pushed live in 2022. The speed and nimbleness with which we have been able to affect these changes and the substantial improvements to our loss ratio as a result is one example of the power of our technology platform. We were often asked by investors about the challenge of inflation, and we would highlight that the very core of one of our value propositions to our customers is that the prevention of losses helps avoid these inflation and supply chain problems. Second, our pricing matches price to real risk, which implicitly considers inflation factors. And finally, we rerun our underwriting and rebuilding cost models automatically at each renewal, incorporating all accumulated data since the last renewal, including the impact of inflation on estimated rebuilding costs. This allows our premiums to be resilient to these factors without additional rate filings. We look forward to sharing more about our underwriting and technological strength at our Investor Day in September. Sales and marketing expenses for the quarter decreased to $19.4 million from $22.2 million in the prior year quarter. As we focused on the execution of rate adjustments in the first half of 2022, we were conservative with our marketing spend. In the second half of the year, and now that many of the planned reductions are live, we expect to lean more into customer acquisition. We've recently launched a new brand campaign to better inform our target customers about our unique value proposition. Technology and development expenses for the quarter increased to $16.5 million from $7.5 million in the prior year quarter, in part reflecting recent investments in our claims processing to achieve efficiency and improve service capabilities, as well as additional stock-based compensation. General and administrative expenses increased to $18.2 million from $8.8 million in the prior year quarter, reflecting additional stock-based compensation and the higher costs of being a public company. Our cash and investments at the end of the quarter are $732 million. While our investment strategy remains very conservative with high liquidity, we now hold $454 million in investments, including U.S. Treasury bills and high-rated corporate bonds to capture the benefit of increasing short-term yields. We expect investment income to contribute more towards our bottom line in future years. Net loss attributable to Hippo was $73.5 million, or $0.13 per share in Q2, compared to a net loss of $84.5 million in the prior year quarter. Adjusted EBITDA was a loss of $55.8 million versus a loss of $42.3 million in the prior year quarter. To summarize our updated guidance for 2022, we expect a gross loss ratio of below 90%, improved from our previous guidance of 100%. We're lowering our estimate for full-year total generated premium to between $790 million and $810 million, down slightly from between $800 million and $820 million, and we're reducing our revenue estimate to a range of between $119 million and $121 million, down from $140 million to $142 million. Thank you very much for listening. We would now be happy to take your questions. In addition to posing questions to the operator, you can also email questions to investors@hippo.com. Thank you.

The first question comes from Matt Carletti of JMP. Please proceed.

Thank you. Good afternoon. My first question is about the loss ratio. I'm glad to see the ongoing improvement. It appears from your guidance that it's surpassing your expectations, even in a challenging inflationary environment, while other companies are facing the opposite pressures. Stewart, you mentioned a couple of points there, but I would appreciate it if you could elaborate a bit more on what has enabled this progress. Additionally, if you're able to provide more detail, I'm curious whether you are noticing a significant difference in frequency and whether smart home technology is helping to avoid losses, along with any insights on the balance between frequency and severity.

Yes, hi, Matt. Thanks for your question. I believe you have interpreted it correctly. We are exceeding the expectations we set at the start of the year. This is due to several initiatives we’ve implemented, which continue to be a major focus for the company, as we’ve mentioned in previous quarters. I would categorize our efforts into a few key areas. We are really pushing towards smarter growth, concentrating on more suitable segments. We’ve invested a lot of effort in identifying customers who connect with our value proposition. We’re starting to see some positive outcomes from our targeted messaging and marketing strategies aimed at those who appreciate our technology-driven approach. This has led to a shift towards better customers within Hippo's program. Our technology platform has also bolstered our efforts in reducing the loss ratio by allowing us to execute pricing, rating, and underwriting actions efficiently and in a targeted manner. We have enhanced our claims efficiency and overall cost efficiency by proactively collaborating with our partners in these areas. Additionally, by expanding our geographic diversity, particularly with our launches in New York, Massachusetts, and North Carolina, we've gained an advantage in managing volatility associated with the loss ratio. Although these markets are still small, they represent significant growth potential for us. By diversifying beyond North Texas, we are witnessing improvements in the volatility stemming from weather events like hail. Even though the environment is challenging, and others are facing headwinds, we believe we've managed to accelerate our progress and move in the right direction. There's more to anticipate as well. We've previously mentioned that many rate actions and filings we've undertaken have only partially reflected in our financial results so far. We anticipate seeing the benefits of these actions in upcoming quarters. Therefore, we remain optimistic about the future and feel we are making genuine progress. Rick, do you have anything to add?

Yes. Hey, Matt. Your question around smart home, I think those are two different components to consider. The types of customers that resonate with our value proposition, the ones that we are targeting, and we've made great progress in identifying those and convincing them that our value proposition is what they need. Those are generally positively selected customers who participate either in our smart homes programs or seek a partner in that particular area. The second component of that is specific segments of our business, like our builder channel. These are positively selected new construction properties. We have various distribution techniques that allow us to get more of those positively selected exposures. In our effort to focus on making sure that we are avoiding claims for the benefit of our customers, that is very much where we are targeting our growth and growth targets.

Very helpful. Thank you. And one other quick follow-up if I could, I'm looking at Page 19 of the investor letter, the geographic diversification, and it looks like a slightly bigger piece of the pie this quarter came from California and Texas. And I know one quarter doesn't make a trend. But just to be curious, if you could help me through why that might be versus last year.

Yes. I think one thing to keep in mind is Texas, specifically, is a massively large state that you can fit a half dozen other states within, and it has very different exposures to catastrophe. In areas where we were overly saturated and where we felt like we had inferior pricing, we, with all intents and purposes, shut down those particular markets. Areas in which we were not overly saturated and where we believe we have pricing adequacy, those are areas that, within a given geography, provide better diversification across different weather perils. We are very confident that we are growing in all of our geographies, and we are focused on making sure we don't have overconcentration and oversaturation of similar types of things in places like California. The exposures in Northern California are very different from the exposures in Southern California. So we look at geographical diversification not just on a state-by-state basis, but also in a more granular way, including different exposures that might exist in those specific granular territories.

That makes perfect sense. Thank you for the color.

Operator, are you there? We'll take our next question.

Hey, thanks. Good evening, everybody. Guys, I'm hoping you can touch on comments about being more selective with underwriting. Obviously, that's the impact on your guidance down modestly for the full year versus an uptick in marketing spend for the back half of the year and leaning more into customer acquisition. Which normally what I would think would have an uptick in your top line. So it sounds like the first one is winning over a guidance versus what you might get from a lift for more marketing spend and customer acquisition. So if you could just kind of talk about those two nuances.

Yes. Thanks, Mike. Happy to talk more about that question. So I think we mentioned this last quarter, but this is a continuing trend. We mentioned we have a large number of rate and underwriting filings that we're rolling out across the country, and some of those take time. At this point, we do feel like we are better positioned to write profitable business in a broader area of the country. If you looked at the growth last quarter, and the guidance for the year, it was always going to be the case that we would see accelerating growth in the second half of the year. That has not changed. We still expect growth to pick up in the second half of the year as we move into the broader geographies in the U.S. where we feel like we have rate adequacy. In terms of guidance, I would consider that more as a refinement of guidance. If you look from midpoint to midpoint, it's just a 1% reduction, and we felt like it makes sense to refine that slightly simply because we are erring on the side, and we want to send the message to the broader investment community that we're erring on the side of profitability. Even at the new guidance, we're still expecting 30% year-over-year growth. So what's going to get us there? I think we're going to continue to build on the progress we've made in targeting those high-value segments, with our new brand campaign, which we're planning to roll out in the second half of the year. Brand spend does take a little bit longer to show a positive ROI compared to more quantitative marketing spend. We do have a higher confidence in our pricing, so we're spending more on the quantitative side to bring customers to the website. As Rick mentioned, we are seeing success in the builder and other positively selected channels from a risk standpoint, and those are expected to continue to be our fastest growing segments. Now that we're live in New York, Massachusetts, and North Carolina, we're starting to see positive traction there; it's at the early stage, but we feel optimistic. So I think about the guidance as a signal indicating that, on the margin, we're going to focus on ensuring we move towards cash flow positivity, but we still feel like growth will be a positive feature for our story.

Okay. Thank you, Stewart. I guess also in line with your comments about kind of this policies that might be on the margin and how you decide whether they get onto Hippo paper and from here. What does that imply for, I guess near-term growth and commission income? And whether it's because of that or not just general comments about how commission income is expected to change over the next 12 months?

Yes. In areas where we don't feel like we're adequately right, or we're not the best fit or the best policy for a customer. We do have the ability through our agencies to sell other people's products, and that is something that we've been doing more of, and I expect that will be a feature of our business and our customer experience going forward. We've mentioned over the past few quarters that we see service fees and non-risk gross commission income to be key parts of our future growth story, and we expect that we will see that become a larger part of our financials. I don't think there's anything that's changed. It's something that we're excited about.

Okay, great. Thank you, Stewart. Appreciate it.

Thank you. The next question comes from the line of Alex Scott of Goldman Sachs. Please proceed.

Hi, good afternoon. The first question I had was just to see if you could elaborate a bit on the comment in the shareholder letter around achieving profitability without raising additional capital. Can you just talk a little bit about what that looks like over what timeframe we should think about that?

Yes. Thanks, Alex. I'm happy to take that, and then if Rick wants to add anything happy to have him do so. I think we've been talking a lot on this call about the fact that our loss ratio results in Q2 represent another quarter of consistent progress. We're also sharpening our focus internally on cost containment and operating efficiencies. We're doing that and trying to balance it with continuing to make strategic investments in important growth areas for our business, like the builder and the partner channel that have the potential to deliver positively selected risk. Based on our expectations, we think Q3 is the quarter we're in right now, will be our peak last quarter from an adjusted EBITDA standpoint. As I said earlier, we expect to reach bottom-line profitability without the need to raise additional capital. This is a topic that is probably best covered with more detail than we can on a call like this. So that's going to be the focus of my presentation at the Investor Day that we're planning on September 6, and I'd invite everyone who's interested to join us there. We'll have an opportunity to talk more about our growth plans and also the mechanisms by which we see convergence to profitability.

Alex, I just want to make sure we're very clear on this point. Getting to cash flow positive with a cushion is our number one priority as a company. We intend to achieve this, as Stewart said, we'll have a lot more detail in our Investor Day. Just to be clear, that is something that we will achieve.

Now that was helpful. The next one I had for you all is just on the net loss ratio and your reinsurance agreements. I mean, as you mentioned, we've seen a lot of gross loss ratio improvement over the first half of 2021. The net loss ratio, though, has continued to go up pretty substantially. So at what point does the gross loss ratio begin translating more to the net? I mean, do you have to get to the end of the year and restructure reinsurance contracts? Are those things that can be restructured annually? Or is there some sort of a longer timeline? Because if when they come up or how do I think about all that?

Yes. I'm happy to take the first part of that question. And then, Rick, please feel free to add. I think you captured what's going on, which is that the terms of our annual reinsurance agreements, as we've said, are somewhat lagging related to the performance of the underlying book, which is best represented by the gross loss ratio. Our 2022 reinsurance treaty, as we've said in prior periods, has some loss participation features that are the result of our loss ratio in 2021, which was abnormally high for reasons related to both winter storm Uri, as well as one of the most severe hail seasons on record. Part of the driver of the improvement in the loss ratio is the geographic diversity that we've been able to put into the book through growth. Yet, we still have some loss participation that is impacting our net loss ratio because we're experiencing losses, but we're not actually able to recognize the earned premium. In addition to these loss participation features, we've also seen, like the rest of the industry, higher actual costs, which reduced that net earned premium. The percentage is quite volatile, because we're looking at a very small denominator of earned premium, but it's one of those things that the annual portion of our reinsurance treaty can be structured in ways that we are exploring with reinsurance partners to be more cost-effective going into 2023. We're optimistic about our ability to translate our much-improved loss ratio, which we're delivering in 2022 into better reinsurance trends next year.

Just to add a few points to that. Reinsurance is generally backwards looking on the performance of the book and how the book is exposed to weather. So historically, we have not had a great loss ratio, and that loss ratio, or the business, was very much exposed to catastrophic weather. So, as an example, our 2022 treaty will impact us for 2022 and part of the 2023 because they're calendar year treaties. We are working with our reinsurance partners to structure the 2023 treaty in a manner that recognizes both the improvements in our loss ratio and the reduction of exposure to catastrophic weather. It is lagging, but we're excited that we have strong reinsurance partners; they have a very deep look into the trends. We were oversubscribed last year, even with a poor historical loss ratio. I think you're going to see continued improvement in that as time goes on as we continue to take action to produce a much more favorable gross loss ratio.

Got it. Thanks.

Hey, good afternoon. I wanted to ask about the smart home program and whether there has been any incremental progress in penetration over the last quarter, and what you're seeing in terms of customer engagement and retention.

Yes. We have been excited about the progress we're making within the smart home program in terms of getting it out to new customers. The engagement from customers has been very positive, and we're beginning to see improvements in retention as well. Specific metrics on engagement are still being finalized, but we believe that this program has a lot of potential to further enhance customer loyalty and retention, especially as homeowners increasingly focus on home security and maintenance.

What we've learned is customers that engage with our smart home program usually exhibit better retention than those who do not. Therefore, our focus will continue to be on expanding this offering and ensuring that we're providing value to our customers through their interactions with the program.

Thank you.

Thank you. There are currently no additional questions registered at this time.

Okay. Well, if there are no further questions, we very much appreciate your time this quarter, and we look forward to speaking to you next quarter and in September at our Investor Day.

That concludes the conference call. Thank you for your participation. You may now disconnect your lines.