Earnings Call Transcript - HIPO Q2 2021

Operator, Operator

Good evening. Thank you for attending the Hippo Holdings Q2 2021 Earnings Conference Call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Chris Maloney with Hippo. Thank you, he may proceed.

Chris Maloney, Host

Thank you, operator. Good afternoon, everybody. And thank you for joining Hippo's second quarter 2021 earnings conference call. Earlier today, Hippo issued a shareholder letter, announcing its second quarter results, which is also available at investors.hippo.com. Leading today's discussion will be Hippo's Chief Executive Officer, Assaf Wand; President Rick McCathron; and Chief Financial Officer, Stewart Ellis. Following management's prepared remarks, we will open up the call to questions. Before we begin, I'd 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 and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could 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 risks, 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 and 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. Running through some of the technicalities associated with the recent public listing events, the transaction was accounted for as a reversal of the capitalization in Reinvent Technology Partner Z and will be treated as the acquired company for financial statement reporting purposes. Hippo Holding Inc. prior to the business combination was seen as the predecessor in Hippo after the business combinations will be the successor SEC registrant, meaning that Hippo's financial statements for periods prior to the consummation of the business combination will be disclosed in Hippo's future periodic reports. No goodwill or other intangible assets were recorded in accordance with GAAP. For more details, please see our filings with the SEC. Additionally, during this conference call, we will also refer to non-GAAP financial measures, such as total generated premiums and adjusted EBITDA. Our GAAP and a description of our non-GAAP financial measures, with a full reconciliation to GAAP can be found in the second quarter 2021 shareholder letter, which has been furnished to the SEC and is available on our website. And with that, I'll turn the call over to Assaf Wand, CEO of Hippo.

Assaf Wand, CEO

Thank you, Chris. And thank you all for joining us today. We are incredibly proud to report on Q2 financial results for the first time as a public company. This was a quarter that was not only reflective of what we told you we would do, it was reflective of who we are. Our Q2 performance shows Hippo's growth strategy coming to life. We achieved 101% year-on-year growth in total generated premium during the second quarter reaching $159 million. Our Q2 results demonstrate the power of the Hippo platform and the strength of Hippo's strategy; and I couldn't be prouder of the effort and determination of the Hippo team that drives these results. Looking ahead, we have growing visibility and confidence that we will not only meet the expectations we previously set for the year but exceed them. Accordingly, we are increasing our full year guidance for total generated premiums from $544 million to $565 million. At Hippo we are transforming the home insurance market with a fundamentally different experience that customers are rapidly embracing. The homeowners policy from Hippo is a better, more modern policy. Before you pick on Hippo, it's customized and designed with the consumer in mind. The fine experience with Hippo is technology-enabled to be the easiest policy purchase on the market. And Hippo policies can integrate smart home technology and serve as a proactive partner to help you protect your home. And lastly, when something unfortunate happens, the Hippo team provides our customers with support that is caring, efficient, and effective in a timely manner. This strategy has allowed us to continue to take market share in the vast $110 billion industry. Hippo surpassed $0.5 billion of total generated premiums in force at the end of Q2, representing a 96% increase over the past year. Although we are still at the beginning of our journey, our growth strategy is firing on all cylinders, and we believe we are primed to sustain growth for the long-term. And this is not just a vision; it is our mission. We also continue to build a solid foundation for the future. We expanded into new markets, started new partnerships, and launched new products within our own vertical, continuing our work to build and scale the industry's first vertically integrated home protection platform. We executed on our geographic expansion plan, launching our products in three new states, and we are on track to achieve our goal of 40 states by the end of 2021. We continue to strengthen our omni-channel distribution strategy by launching new distribution partnerships with two of the Top 10 insurance carriers, a Top 50 home builder, a Top 5 loan originator, and two leading Smart Home providers. Further, we've doubled our MGA underwriting capacity by signing partnerships with Ally Financial and Inclined P&C to serve as additional carriers, thus reducing the capital that would otherwise be needed to support our future growth. Finally, we launched three products: inspection protection for homebuyers to protect against issues missed during their home purchase, and our first ever commercial product offering insurance to homeowners associations in 350,000 communities across the U.S. In all insurance sectors, unlike in other lines, weather is one of the biggest drivers of short-term loss ratio; therefore, a diversified portfolio of policies enables a more stable result. Returning to the notion of building a diversified portfolio of policies to reduce volatility, as we expand into more states and diversify geographically, our loss ratio should become more consistent over time. In a very real way, the success of our dynamic growth strategy paves the way for us to achieve our long-term loss ratios and improve bottom-line profitability. Let me conclude by saying that the team at Hippo is very pleased and proud to now be trading as a public company. While the form of ownership has changed, the conviction and determination of our team have not. We are a growth-driven company that is determined to transform the home insurance business. We will offer Hippo policies across the United States; we will drive growth and focus on bottom-line metrics as we expand. We will be careful in deploying the more than $900 million that we now have on our balance sheet to enhance our product offering and growth in order to become a leader in this industry. As I noted earlier, home insurance is a vast $110 billion industry, and we at Hippo, have now crossed the $500 million mark. While this is a great milestone for the company, we are just beginning. Thank you. And now I will turn it over to our CFO, Stewart.

Stewart Ellis, CFO

Thanks, Assaf. As Assaf mentioned, Q2 results show our strategy coming to life, with balanced growth across channels and geographies. Let me start with total generated premium, which represents the total amount of new and renewal business in a given period across all our platforms, including Hippo policies, agency policies we sell on behalf of third-party carriers, and other programs that we support through Spinnaker, the carrier acquired in September of last year. Total generated premium in Q2 grew 101% year over year to $158.7 million. The in-force version of this metric, total generated premium in force, grew 96% year over year to $500.6 million. Total generated premium is a great indicator of the long-term value we are building at Hippo because it is recurring, predictable, and unaffected by phenomena like severe weather, which in home insurance can create short-term seasonal fluctuations that impact loss ratio and profitability. I mentioned that the growth was balanced across channels. For the homeowners portion of our business, independent agents and other insurance companies represented 68% of our new generated premium. Twenty-five percent of new generated premium came from our direct-to-consumer channel, and 17% came through partners like homebuilders, mortgage servicers, and other players in the real estate and home protection ecosystem. We also continue to grow and diversify our business across geographies to reduce our concentration in any one area. For example, Texas represented only 19% of new generated homeowners premium in Q2, down from 33% in Q2 of last year and from 65% in Q2 of 2019. Expanding distribution channel relationships and increasing geographic coverage are two areas where our technology platform provides an advantage. Because our platform allows us to bind a policy via a custom Hippo API, customers can purchase the policy from us, in many cases, without ever leaving the website of one of our partners, a capability that presents Hippo with unique distribution opportunities. Because we own and control our own technology stack, we can also launch in new geographies much more quickly than we otherwise would if we were dependent on a third-party policy management system. One of the key drivers of our long-term unit economics, customer retention, remained strong and continues to improve this quarter. We measure the retention of dollars of premium from a cohort of customers that renewed in the current period divided by dollars of premium generated by that same cohort of customers a year ago. Our year one homeowners retention grew to 88% during Q2. Cohorts in their second and third years continue to improve beyond this level as they age. Our revenue, which grew 76% year over year to $29 million for the quarter, is a mixture of net earned premium for the risk we retain on our balance sheet, commission income from premium where we are not the primary bearer of the risk, as well as service fees and investment income. The growth in revenue was driven primarily by the continued growth in our total generated premium. Our gross loss ratio this quarter was 161%, compared to 106% in Q2 of 2020, driven by three main factors. First, we experienced severe hailstorms in parts of Texas where we have concentration in our book. We have a normalized catastrophic weather load built into our actuarially predicted loss ratio, but the hailstorms in Q2 were well beyond normal levels. According to industry data, Q2 residential catastrophic losses in Texas were the third highest reported in the past 24 years, which is when property claims services began breaking out losses by line of business. Second, in Q2, we had a small amount of negative development related to the anomalous Texas Winter Storm Uri. While this contributed an incremental 14 percentage points to our gross loss ratio, it did not negatively affect our P&L on a net basis, underscoring the benefits of our reinsurance strategy. Finally, like other homeowners carriers, we experienced a significant increase in loss severity year over year due to steep but temporary industry-wide disruptions in supply chain, increases in building material costs, and tightening of the labor market as a result of the COVID-19 pandemic. Q2 operating expenses, excluding loss and loss adjustment expenses, as well as other non-cash interest and other expenses, increased 54% from the prior year to $47 million. Of this, $22.2 million relates to sales and marketing, an increase of $4.9 million or 28% compared to the prior year. The other major reason for the increase is growth in headcount, as we continue to add new Hippo employees across all core functions. As of Q2, our headcount was 603, up 117% from 278 last year. Our adjusted EBITDA loss for Q2 was $42.3 million, an increase of $23.5 million compared to Q2 last year, driven by the increase in loss ratio and continued investments in our platform and team to support our long-term strategy. Finally, as Assaf mentioned earlier, we ended the quarter well-capitalized and in a strong position to continue executing on our plan and investing in future opportunities. Including the net proceeds from taking the company public, we had total cash, cash equivalents and investments at the end of Q2 of over $900 million. Looking forward, we remain confident in the execution of our growth strategy and believe we will exceed the forecast we shared previously. As Assaf mentioned earlier, we are increasing our full year guidance for total generated premium from $544 million to between $560 million and $570 million, with a midpoint of $565 million. I'd now like to turn it over to Rick McCathron, our President, to put Q2's loss ratio in context, and to say a bit more about the progress we made in the quarter to bring our actuarially indicated loss ratio down to our long-term target level.

Rick McCathron, President

Thanks, Stewart. Loss ratio is one of the most important drivers of our long-term profitability. This metric will vary year-to-year and quarter-to-quarter due to seasonal impacts from weather. In particular, given the current geographic distribution of our customers, Q2 typically represents the seasonal high for severe weather. This is why a primary focus of ours is on geographic diversification to drive down the volatility of this metric over time. Beyond geographic diversification, we have been tightening our underwriting model, expanding our product portfolio, and optimizing our rates to ensure the right price for the right risk. It is important to recognize that we are trying to build in 10 years what incumbents have built over decades. The difference between the average age of Hippo's customer cohorts and those of legacy players makes it challenging to compare their performance with ours. I am pleased to report that during Q2, despite the unfortunate weather, we have made great progress on initiatives that should significantly improve our long-term loss ratio. And we are encouraged by leading indicators that suggest these actions are already having a positive impact on future loss numbers. I want to highlight three examples of the many concrete steps we are taking in this area: First, geographical diversification out of Texas. As recently as 2019, approximately two-thirds of our new homeowners premium was written in Texas. We have deliberately focused on growth outside Texas to achieve a more geographically balanced portfolio. Over time, this should dramatically reduce our exposure to the types of weather events we experienced in Q2 and lower the volatility of our loss ratio. Second, because of the flexibility of our technology platform, we have the ability to incorporate new data sources, both pricing and underwriting quickly, and we have done just that in Q2. While it will take some time for these actions to positively impact our overall loss ratio, early indicators are encouraging. During the first six months of the year, our early term frequency in both Texas and California have shown significant improvements. In these two states, where we have focused most of our underwriting actions, early term loss frequency has improved by 40% and 37%, respectively, compared to 2020. Third, we have also been diversifying our product portfolio within the homeowners vertical. Our H05 product for newly built homes, realizing strategic partnerships with some of the largest homebuilders in the country, has been performing exceptionally well with loss ratios at approximately 40% over the past 12 months. It has become a key competitive advantage for us and we've been doubling down our efforts to expand its share of our overall book, which has helped this product grow five to six times faster than our more mature homeowners products. Our proprietary APIs enable our technology to integrate with homebuilder sales systems, so our partners can provide their customers with a simple, personalized insurance offer precisely when their customers are in the market for our policy. This is an example of how we leverage technology and form innovative distribution channels to access better risks. And fourth, we are taking strategic actions to ensure our rates are adequate and aligned with the increased severity and inflationary trends we have seen recently across the industry. Lastly, we have significantly deepened our bench of top industry talent, adding five leaders in the area of risk, underwriting, actuarial and insurance product management from respected industry players such as USAA, CHUB, AIG, SwissRe, and RenRe. We are confident and have early indications that our strategy to reduce loss ratios will get us to our long-term targets. With growth and diversification, we expect our loss ratio to improve significantly; it will take time, but given the traction and performance of our growth strategy, I am confident that we will get there. And now, let me turn it back over to Assaf for some final words.

Assaf Wand, CEO

Thanks, Rick. And thanks to everyone for joining Hippo's first earnings call today. In summary, this is just the beginning for Hippo, as our Q2 results proudly demonstrate. We have the right strategy, team, and the resources to execute our growth strategy. We are on a path to gain significant share and transform this massive market. We believe Hippo is the future of home insurance. With that, we'd be happy to take your questions.

Operator, Operator

We will now begin the Q&A session. The first question is from Christopher Martin with KBW. Please proceed.

Christopher Martin, Analyst

Hey guys, congratulations on the IPO and your first earnings call. I'm sure it feels like a relief to have gone through the past few months to get to this point, but it might only become more challenging as everything matures and grows simultaneously. I have two questions; I'll start with the first one. I've noticed that the media has picked up on some investor concerns. Can you comment on the apparently high level of redemptions following the IPO? Does this affect the company's potential growth or the strategy you may be pursuing?

Stewart Ellis, CFO

Hi Chris, this is Stewart here. Happy to speak to this one. I think first, it's important to understand that we structured the transaction to take us public with a large pipe relative to the size of the cash in the trust; and so pro forma for the transaction at the end of the second quarter, as we said, we have more than $900 million on the balance sheet. The short answer to your question is that the redemptions don't change any of our plans with respect to investing in our business over the next few years to pursue our long-term goals. I would also like to highlight one thing that we mentioned in the earlier portion of the call: we have also just signed partnerships with both Ally Financial and Inclined as carrier partners for our MGA, and that in and of itself will also reduce the capital that we otherwise would have needed to support our growth. So while the redemptions weren't obviously what we hoped, we don't expect that they will have any impact on our ability to invest in the future or to pursue our plan.

Christopher Martin, Analyst

Okay, yes, great. That makes a lot of sense, especially those announcements last week which I imagined didn't come online 13 days ago, whatever it is now; it's great. And the other one is just looking at the growth of premiums that have actually outpaced revenue here; and some of the significant increase in headcount. We've seen some commentary in the personal lines players like some peer companies and some other Top 10 names. Even in advertising platforms themselves have talked about customer acquisition costs are on the rise, and this has either become a near-term hindrance to growth or has caused scaling back in attempting growth because of what the market is right now and the big marketing advertising sales. And then, you mentioned there that the increase in sales and marketing expenses were not aligned with how much growth you've had. What have you sort of seen in your target markets and what does that kind of mean for broader expansion plans if you’re seeing this type of expense growth on the customer acquisition side? Are there any specifics that have been outside of your expectations?

Stewart Ellis, CFO

Thanks again. Chris, this is Stewart again, I'll take this one as well. I think the first thing to understand about Hippo, as distinct from some other players in the industry, is that we've always pursued an omni-channel distribution strategy. It's been our core belief to design our entire experience from the very beginning around what is best for our customers. And on the distribution side, that means that we want customers to be able to buy a policy from Hippo where they want to buy a policy from Hippo; that might be through our website, over the phone, through an existing agent relationship, or from a home builder that they are just buying a new home from. There are many different ways that customers might want to buy a policy and we want to be present in all of them. One of the benefits of the omni-channel distribution strategy is that it is resilient to fluctuations in advertising costs or other things that might be occurring in any one component of our channels. It is also cash-efficient in a way that helps us expand to new geographies since the partner and agent channels are things that we pay for based on collected premium over time. So the question about advertising expenses and acquisition costs is important to keep that in mind. We're always very disciplined as we think about spending money in direct-to-consumer advertising channels. That said, we have not seen increases in our own sector for our business in lead costs or other items in the funnel. So we feel very, very strongly about our distribution strategy. We're not scaling back our investment in sales and marketing. In fact, because of our strong unit economics and high customer retention, we feel that now is the time to get aggressive. We want to continue to invest going forward. I think you'll start to see us spend more building and improving and expanding the nationally-recognized brands that we hope to build, so that everyone can start to hear the Hippo story directly from us. So we feel good about our distribution strategy and we feel that we're on track.

Christopher Martin, Analyst

Awesome, that's great. Thanks a lot, and I'm sure there will be a lot more in the future.

Stewart Ellis, CFO

Yes. Thank you, Chris.

Operator, Operator

Thank you, Mr. Martin. The next question comes from Arvind Ramnani with Piper Sandler. Please proceed.

Arvind Ramnani, Analyst

Hi guys, thanks for taking my question. I just wanted to really get your thoughts on bundling. You announced the partnership with Metromile. But I wanted to get your thinking on why are you taking a more focused approach to really launching your own auto product versus kind of bundling with Metromile?

Assaf Wand, CEO

Thanks, Arvind. This is Assaf. I'll take this one. I actually want to break it down into two components. There's a micro and a macro component. So, on the micro-level, we just believe in focus and our focus is to be the best home protection platform in the world. Now, what you realize is that there's actually low correlation between some of the different lines. For instance, auto is the high frequency and low severity product, whereas home is low frequency and high severity. There's also some misalignment; it's not exactly the same claims organization, it's not the same people who need to do it. It’s not the same underwriting experience. It's just a different line where there isn't enough synergy. However, we always want to offer our customers the best policies in the market for what they need. We do not create products if we don't have enough conviction that we can offer our customers something that utilizes technology better, uses data in a better way, or just gives them a better customer experience. In this case, for auto, we just couldn't get that conviction. Hence, we partner with some of the best providers in the market, such as Progressive, Facebook, and Metromile to guide our customers. They are just not going to get the products that are being produced by Hippo. So, that's on the micro-level. Now, I want to raise another point, which is our thinking about it on a macro-level. What we are seeing in world trends, especially in fintech, is the world is actually unbundling. You also see this in insurance because for every Geico product that is sold by SMCU, there's a bundling with someone else's home and auto policies. When you think about it, everything used to be bank-centric. But right now, think 5 to 10 years further, your bank products are now spread across different providers. The world is evolving to an area of best-in-breed products that are very customer-centric and easier for customers to engage with. And we believe that Hippo is going to be one of the biggest benefactors of this trend.

Arvind Ramnani, Analyst

That's perfect. Thank you.

Stewart Ellis, CFO

Thanks, Arvind.

Operator, Operator

Thank you, Mr. Ramnani. The next question comes from Matt Carletti with JMP securities. Please proceed.

Matthew Carletti, Analyst

Hey, thanks. Good afternoon. Thanks for taking my questions. First off, I just want to follow up on some of Chris' questioning on customer acquisition costs and just ask kind of a follow-on in the sense of can you talk a little bit about how you view LTV to CAC by distribution channel? Are they relatively similar or are there wide variances in terms of which channel a customer comes through to Hippo?

Stewart Ellis, CFO

Hi, Matt. This is Stewart, I'll take this one. There are some variances and I think they spring from the different structural ways that these channels work. So, in the direct-to-consumer channel, it functions like a traditional customer acquisition funnel, where we spend advertising dollars upfront to bring people to the website, or to bring them to the phone, and some percentage of those leads will turn into customers. When you have a situation like that, you have acquisition costs upfront and then you earn that acquisition cost back over the life of the customer. Typically, customer lifetimes in homeowners insurance are pretty lengthy relative to a lot of other consumer products. It's a service that when people sign up, they tend to stay with their home insurance provider. The average industry customer lifetime is over eight years. Our data shows very high customer satisfaction with very high net promoter scores and retention. As I mentioned, our first-year retention was at 88% this quarter. For cohorts that have entered their second and third years, those numbers just go up from there. So, we have upfront acquisition costs in the direct channel followed by being able to benefit from the full economics of that customer down the road. In the other two channels, the economics work slightly differently. We don't pay anything upfront to external parties to acquire customers through independent agents or other insurance companies, or through a partner. We share the premium collected from those customers over time. So, in the purest sense, there is no LTV to CAC because there's not really any CAC. The way we think about this internally is we take the first year of premium that we share with that partner and we treat that as customer acquisition cost, even though it's not marketing capital at risk. When you do that math, it starts to approximate what you see in a traditional technology LTV to CAC ratio; the producer and the partner channels, when crafted on this basis, have a slightly higher LTV to CAC than the direct consumer. The way I tend to think about this is we pay more for a direct-to-consumer customer, and then we retain more because the lifetime value is higher. The other two channels incur lower costs, but the lifetime value is also lower. On a blended basis, we think it's five to six times our long-term loss ratio targets. The direct channel will be slightly lower than that on a ratio basis, and the other channels will be slightly higher on that basis. However, all of this stems from the higher and attractive unit economics that derive from our very high customer retention relative to some of the other lines of insurance.

Matthew Carletti, Analyst

Good. That's really helpful. Thank you. The next question I want to ask was you commented a little bit about the ALLY and Incline partnerships. I was hoping that beyond capital leverage, can you peel back the onion a little bit on your strategic thinking there? Should we expect any real loss ratio impact as those come on or any impact related to some of the other underwriting actions I think Rick spoke about?

Rick McCathron, President

Hey, Matt, this is Rick. I'll go ahead and answer that question. As you mentioned, Stewart already addressed sort of that support of our capital structure, which reduces the amount of capital we need and use of our own capital to support our growth. But the ALLY and the Incline partnership essentially doubles our underwriting capacity, which improves our capital light structure. The question you were driving toward is what does it do from a loss ratio or underwriting perspective? The use of multiple carriers allows us to further segment our underwriting customers, both existing and new customers, across multiple underwriting companies. So, over time, as you segment business further, you generally see a more positive underwriting result because you're placing the right customer with the right risk and guidelines. We believe that having multiple carriers supports improvements in our underwriting model.

Matthew Carletti, Analyst

Thank you. Lastly, could you provide more details on the loss ratio? You mentioned several factors, including the hail incident in Texas this quarter and adverse developments from Uri last quarter, which you indicated contributed 14 points. Additionally, the general severity from supply chain and labor shortages is a concern. Can you help us quantify the impact of the hail this quarter and your assessment of how these severity issues are affecting our current situation?

Stewart Ellis, CFO

Thanks, Matt. We generally have not broken out the specifics of individual storm events or series of storm events. We did break out Uri on a gross basis this quarter. The development there was simply because we wanted to help people understand a little bit as that was such an anomalous storm. On a net basis, Uri really didn't negatively affect our profitability. It's important to understand that our book of business is more concentrated in Texas than in other areas of the country because historically, we started in California and Texas. And so, in 2019, something like 55% of our new premium was coming from Texas. We've been diversifying away from Texas over the past couple of years to 33% in Q2 of 2020 and 19% in this quarter. We will have some legacy exposure to severe convective storm risks. The hailstorms that happened in Q2 had a larger impact, and I can say, as I mentioned before, this was truly an unusual year in the second quarter. It was the third worst on record since data began to break out loss ratios. However, we are experiencing growth in areas outside of Texas, which should help mitigate this source of volatility in our overall portfolio going forward. The other operational changes we are making to add new data sources, implement smart home initiatives, and introduce new products that are less susceptible to this kind of loss risk, should help over time. It is important to note that Q2 historically has been a peak season for us, and this quarter's figures were simply higher than we have experienced in the past.

Matthew Carletti, Analyst

Okay. And then from a broad severity standpoint, is there any way you can help us think about your view there of what that's driving higher? And then obviously, would assume that it's a lot of just pricing to try to combat that going forward?

Rick McCathron, President

Yes, Matt, this is Rick. I'll go ahead and take that one. Yes, it's clear that every insurance company in the sector is discussing the increase in severity predominantly due to supply chain issues and labor shortages, which was significantly impacted by COVID. We are seeing that begin to decline. So we believe that this will diminish over time. However, we continuously monitor both frequency and severity metrics. We're constantly looking at strategies to reduce those beyond just pricing actions. When Stewart mentioned our product expansion and the strategic partnerships we have regarding our HO5 new construction initiatives and the integration of IoT devices, such as water shut-off valves, all of these efforts are in place to help improve our loss ratios steadily.

Matthew Carletti, Analyst

Thank you very much for the color. Very helpful. Best of luck.

Assaf Wand, CEO

Thanks, Matt.

Stewart Ellis, CFO

Thanks, Matt.

Operator, Operator

Thank you, Mr. Carletti. The next question comes from Christopher Martin with KBW. Please proceed.

Christopher Martin, Analyst

Hey, guys, thanks for taking my call. My question here again, circling back. If you can comment on with all the things that are in your numbers you've given, the growth you've shown and then with your discussion around the flattening of the loss ratio, the breakdown of geographic diversification, the tightening of the model for rate optimization, looking at balance sheet approach. Are you able to comment at all on a path to profitability, at least on an EBITDA level or even to provide any explicit guidance, but just a discussion on getting towards that breakeven point and where it goes from there in the future?

Stewart Ellis, CFO

Yes. Chris, this is Stewart. We shared a forecast publicly earlier this year. I direct you to that for historical reference. However, I want to talk about our path to profitability. We know that at scale, a well-diversified book of business that is properly priced represents the opportunity to be profitable in home insurance. We also know that by partnering with our customers and using the technology that we have, it is possible to help our customers avoid losses from happening in the first place. Our belief is that when we combine that true customer-centric model with the technology that enables us to not only help our customers avoid loss but to access preferred pools of customers through partners like Lennar and other homebuilders, mortgage servicers, we can bring our loss ratio to an advantageous level. We believe we are at the very beginning of taking share in this incredibly large market. As long as our return on investment in sales and marketing and customer acquisition is high, we should continue to invest aggressively since we aren't close to market share constraints. One of the biggest drivers, as mentioned, lies in the strong return on investment from retaining customers based on their positive experience with Hippo. With strong unit economics and a strong business model that can be profitable long-term, it makes sense to invest in scale. I will continue to be opportunistic as we grow. As I said, we are at the beginning of this journey. Growth will serve as our path to profitability; the more geographic diversification we have, the less volatile our loss ratios will be, leading to greater confidence in continued investment. We envision a virtuous cycle that can continue for many years. Rick, would you like to add anything?

Rick McCathron, President

Yes. Thanks, Stewart. And, Chris, thanks for your question. A couple of things to add. The leading indicators of what we're doing are early term losses and the frequency of those losses. The actions we have taken clearly show improvements. The reduction of early term losses of 40% and 37%, respectively, demonstrates this effectively. Our customer cohorts are very young compared to other cohorts, so as those cohorts age over time, with more of our business being composed of renewals, it will help us reach profitability in conjunction with the geographic diversification and continued growth in other areas.

Christopher Martin, Analyst

Awesome, that's great and thanks a lot. Good luck.

Stewart Ellis, CFO

Thank you, Chris.

Operator, Operator

Thank you, Mr. Martin. Thanks, everyone for joining. This concludes today's conference. You may now disconnect.