Earnings Call Transcript - HIPO Q4 2021

Operator, Operator

Good afternoon. Thank you for joining today’s Hippo Fourth Quarter 2021 Earnings Call. I’m Heena, your moderator for this call. I will now hand over the conference to our host. Please proceed.

Cliff Gallant, Moderator

Thank you, operator. Good afternoon everybody and thank you for joining Hippo's fourth quarter 2021 earnings conference call. Earlier today, Hippo issued a shareholder letter announcing fourth 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 current expectations as of the date of this presentation. Forward-looking statements include, but are not limited to, our 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 uncertainty in our factors discussed in the SEC filing. 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 and disclosed in the SEC filing. During today's 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 fourth 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, Co-founder and CEO.

Assaf Wand, CEO

Thank you, Cliff. Good afternoon, everybody. 2021 was a landmark year for Hippo, including our public listing, which Hippo shared, and our annual total generated premium crossing $600 million. Some of these successes were tempered by headwinds such as significant points in the equity markets for many tech growth-oriented companies, catastrophe losses in our major geographic markets, and heightened loss cost pressure for home retailers. However, Hippo ended the year operationally and financially strong, in a position to patiently weather the volatility of financial markets, and laser-focused on executing against our long-term vision of protecting the majority of home ownership. We believe we are transforming the home insurance industry with our proactive approach to be the best in home protection. Our 2021 growth in total generated premium of 80%, supported by an 88% retention rate, has validated that. So, we are broadening our reach in 2022. In the coming months, we plan to extend our geographic presence from 37 states by adding major states in the northeast as well as expanding within our existing footprint with new products. We would like to continue to grow through our key partnerships with major US home builders such as Lennar and Toll Brothers. We are sourcing some of our best customers from newly built tech-enabled homes with owners who want to use technology to improve their homeownership experience. Through our partnerships with major financial service companies, we're able to reach potential homeowners at the critical moment when home protection is a top priority. I am pleased with the strong progress we are making to improve our loss ratio. Our Q4 gross loss ratio of 89% was the best quarter of the year, benefiting in part from seasonality and also from releases of reserves from a five-year period. We are improving our loss ratio as we mature by using our technology to better calibrate pricing, increasing our geographic diversity, and entering new markets. We view our progress in this area as particularly encouraging given the many pressures on loss costs. We also had a successful reinsurance renewal in general. Despite the hardening reinsurance market, where prices, terms, and conditions were under pressure, Hippo was able to renew its program with a panel of 11 A-minus rated reinsurers, up from a panel of 9 in 2021. Our insurance partners have closely examined our underwriting practices and we are grateful to have their continued support and confidence in our future results. Technology remains a key differentiator for Hippo. First, we leverage technology to help customers maintain their homes through preventative maintenance and home health via our inspection forces, either in person or through live video, which allows us to facilitate preventative home repair measures. We also offer discounts to customers who partner with us by using technology such as Click Center or Home Security to help prevent losses. What customers might not recognize is that we are also leveraging our technology to build a modern insurance company with agents for underwriting, claims adjusting, and customer support who all leverage our tech stack to enhance their productivity and scale their daily operations with consistency and reliability. Recognizing the evolving role of technology at Hippo, we are pleased to announce the promotion of Mr. Ran Harpaz to the newly created position of COO. Ran will maintain his current responsibilities as Chief Technology Officer and will also oversee our end-to-end customer experience from product inception all the way through customer support. Another major accomplishment for the year was that despite a very difficult hiring environment, we have expanded our workforce to 621 people, attracting top talent across a range of expertise. Starting from the first day of 2022, we're particularly excited to welcome Ms. Grace Hanson, formerly with Hiscox, to our Hippo Board to become our first Chief Claims Officer, as we prepare to help our customers prevent claims. When unfortunate events do occur, we prioritize supporting our customers, and Grace will be working to enhance our capabilities in claims service. While we're unhappy with the share price performance since our August 2021 listing, we have more confidence than ever in Hippo's long-term prospects and our capacity to modernize home insurance and protect the joy of homeownership. Now, to discuss our insurance operations in more detail, I will hand the call over to our President, Rick McCathron.

Rick McCathron, President

Thanks, Assaf. We believe 2021 was a preview of the long-term environment for the homeowners insurance industry. Increased volatility, unpredictable climate activity, inflationary home repair costs, and supply disruptions will require providers to have a level of responsiveness never seen before in the industry. We have been developing the technology platform to be well-positioned for such challenges. In December, we rolled out our latest iteration of our underwriting engine by introducing additional coverage options and increased data. We have added granularity in our models, better matching price with risk. While some existing customers will see price increases, others will see reductions. In Texas, for example, we have done significant re-underwriting where approximately 25% of our Texas customers will see a rate decrease. We've also begun rolling out our multi-carrier strategy utilizing Ally and Incline, which gives us additional channels to file rates for targeted markets, increasing the number of pricing sectors and adding additional rating periods. Part of this strategy involves opening Ally for Hippo's preferred risks, enabling even more competitive pricing for preferred segments. Our fastest-growing distribution partnerships with home builders are also our most profitable channel. These partnerships positively impact nationwide profitability. This channel and its related portfolio continues to indicate that it is aligned with profitable growth. We have not filed any rate activity or rate actions in this area. One last point worth noting is how our tech stack accelerates pricing and underwriting changes. Our flexible tech stack enables us to act more swiftly and efficiently. In our Texas rate filings, we've introduced new data sources, three new underwriting variables, and new coverage restrictions. Under traditional carrier legacy systems, specifications for such changes are often required to be provided to IT months in advance. With our tech stack, we can program these changes immediately after the rate change submission, enabling us to launch changes as soon as they receive regulatory approval. The reduction in our timeline allows us to finalize proposals and submissions to the state in real-time. The extra time allows us to use the most recent data for our loss and trend factor selections. We see inflation as a significant area to lock in as we move through 2022, and we're able to include our view of our projections. We constantly update and re-underwrite each individual risk in our portfolio. When a policy is up for renewal, we don't simply add an inflation adjustment; we re-underwrite the policy, updating it for all new data accumulated since the last renewal to enable our customers to effectively protect their homes. Overall, we believe our segmented, multi-pronged approach to pricing positions us well to drive profitable growth in 2022. Now, I'll pass it over to Stewart, who will update you on our financial progress.

Stewart Ellis, CFO

Thanks, Rick. Hello everyone. Total Generated Premium grew 53% year-over-year to reach $153 million in Q4 and grew 50% year-over-year to $606 million for the full year. Our premium retention remained high at 88%, indicating that our customers continue to appreciate our service and product. Our growth was spread across our many distribution channels, and we're happy for our customers to purchase Hippo policies throughout their lifecycle, whether directly, through independent agents, or via our partnerships with homebuilders or financial institutions. We grew in each of our 37 states, including Texas and California, where we have re-positioned our regional mix within these large states to diversify our total exposure. We expect to launch additional major states in 2022. For the full year 2022, we are targeting total Generated Premium in the range of $800 million to $820 million. Revenue of $32 million in Q4 was up 96% year-over-year. Our revenue includes premiums earned on retained business, growing streams exceeding MGA, and agency commission paid to us by reinsurers or other carriers in exchange for sourcing customers and/or risk that they retain on their balance sheet, as well as service and fee income from our customers. Additionally, through Spinnaker and its affiliate, our wholly-owned A-rated insurance company, we continue to expand our business with third-party program administrators, earning funding fee income through our insurance-as-a-service model. Over time, we expect an increased share of our earnings to derive from a stable and recurring stream of fee and commission-based income. In 2022, we expect our revenue growth rate to exceed our GDP growth rate and that we will generate revenue in the range of $142 million to $143 million. Moving down the P&L, I'm pleased to report that we continue to make progress in improving our gross loss ratio. Q4's gross loss ratio of 89% is our best quarter of 2021. Given historical patterns of seasonality and catastrophic weather events, we don't expect sequential improvement in each quarter of 2022, but we do expect meaningful year-over-year improvement. We're making significant progress on each of our initiatives to reach our intermediate goal of industry-level loss ratios while continuing to grow rapidly. During the fourth quarter, PCS catastrophic losses accounted for 25% of our gross loss ratio, with the largest of these events being the Marshall fire in Colorado on December 30th. Non-PCS large loss events accounted for an additional 11%. Our gross loss ratio also benefited from our lease of reserves held previously in 2021 due to favorable development across all areas, positively impacting our Q4 gross loss ratio by 13%. As our business matures and achieves a more balanced geographic diversification, we expect the volatility from large loss events to decline. Now turning to reinsurance—despite a hardening reinsurance market, we successfully renewed and placed our primary homeowners insurance program for 2022. We expanded our panel of reinsurers from 9 to 11, all rated A-minus or better by AM Best and appropriately collateralized. Additionally, as a reminder, we have multi-year reinsurance for approximately one-third of our capacity from a separate treaty signed at the end of 2020. 2022 will be the second year of that three-year term. We expect to retain approximately 10% of the homeowners' premium that our MGA underwrites on the balance sheets of our insurance company subsidiaries or our captive reinsurance company. The 2022 Proportional Reinsurance Treaty does include a loss participation feature, which may increase the risk retained by the company beyond our pro rata participation of 10%. We have reduced our retention through the purchase of non-proportional reinsurance like excess-of-loss coverage. This program provides protection from catastrophes that could impact many of our customers in a single event. We buy after-loss coverage for events with a return period we deem necessary. To clarify, the probability that losses from a single occurrence exceed the purchased protection is 0.4% or less, protecting us from all but the most severe catastrophic events. Sales and marketing expense increased $25.7 million in Q4 compared to $16.5 million in the prior-year quarter. As we continue to see progress in our key KPIs, we have increased confidence in raising the profile of our brand with potential customers nationwide. Technology and development expenses were $13.5 million in Q4 versus $4.8 million in the prior-year quarter. Technology is the backbone of Hippo, and we continue to invest relentlessly to improve our customer offering, our API-oriented ecosystem, and the efficiency of our platform. Nearly a quarter of our employees are on the technology team, featuring talent that any Silicon Valley company would be proud to have. General and administrative expenses were $18.6 million compared to $9.5 million in the prior-year quarter, reflecting the increased costs of operating a public company and increases in stock-based compensation. Our cash, cash equivalents, and investments at the end of the quarter stood at $839.6 million, positioning us well for an extended period of growth and investment. Net loss attributable to Hippo was $60.7 million, or $0.11 per share, compared to a net loss of $54.1 million, or $0.16 per share in the prior-year quarter. Adjusted EBITDA was a loss of $46 million compared to a loss of $26.1 million in the year-ago quarter. We remain confident in our outlook for strong profitable growth as we diversify and develop our business. To summarize our guidance for the year, we expect overall TGP in the range of $800 million to $820 million, revenue to reach $140 million to $142 million, and barring major catastrophes, a full-year 2022 gross loss ratio under 100%, down from 138% in 2021, and on track for further material improvement. I'd now like to turn it back to Assaf for closing remarks.

Assaf Wand, CEO

Thank you, Stewart. At a time when the world faces multiple challenges, we at Hippo understand that homeownership takes on an even deeper meaning. Our vision of protecting the journey of homeownership has never been more important, and we are energized by the progress we're making. We have assembled a world-class team, and we are building momentum across all of our strategic priorities. I am proud of what we accomplished in 2021, but I am even more excited by the promise of 2022 and beyond. With that, we are happy to take your questions.

Operator, Operator

The first question is from Michael Phillips with Morgan Stanley. You may proceed.

Michael Phillips, Analyst

Thanks, everybody, and good evening or good afternoon. First off with a quick numbers question, and then we'll go into a couple of them. The first numbers question is on your gross loss ratio, the 89%. Can you break that down for us in the categories of catastrophe and large losses? I assume the attritional includes the 13, right? So if we net that out, is the attritional through 66? Is that correct?

Stewart Ellis, CFO

Mike, this is Stewart. The large losses and the PCS catastrophic event and the other attritional numbers are mutually exclusive. The numbers in the shareholder letter reflect that.

Michael Phillips, Analyst

They do so, but where is the 13, I guess, is the question - 13, 40, 89. Is that correct?

Stewart Ellis, CFO

Can you repeat the question? I'm not sure I heard it right.

Michael Phillips, Analyst

Yes, sure. So 25, 11, and 53 that's your 89, but somewhere in those numbers, I assume the 25 or the 11, probably the 53 is a negative 13.

Stewart Ellis, CFO

Yeah, it's across all categories.

Michael Phillips, Analyst

Okay. Okay. All right. Thanks. That's all the numbers question was. Can we talk, I guess, about your channels? Lots of positive talk regarding the profitability of the builder channel. I wanted to see if you could compare your different partnership channels, builder versus financial services companies, in terms of profitability, growth potential, and overall market TAM? Correct me if I'm wrong. I think of financial services like PennyMac as a more significant potential market but maybe lower growth, whereas the builder one might have a smaller TAM but possibly greater growth and profitability. So, I wanted to mesh through all that in your partnership channels.

Assaf Wand, CEO

This is Assaf, Michael. Thanks for the question. Let me start and explain our view on the partnership channel. The partnership channel comes from the view that for many people, they actually never buy home insurance in their life. What they do purchase is a home. And if you buy a home, especially if you need a mortgage, you need home insurance. So that's how the flow goes in people's minds. Our view is that we want to have an omnichannel strategy to support people whenever they want to purchase a policy. The partnership track is about supporting people in the cycle of purchasing a home. We work with realtors, mortgage originators, mortgage service sales, title companies, and build out these relationships. As you stated, some companies are viewed as more financial and larger in scale in some ways, but the fact is, the reach we get is slightly different, and we have customized solutions for each of them. Specifically for builders, they have unique challenges, which are different from other channels' challenges, usually data deficiency. So if you are buying a property in a certain community, you may not have an address; you don't know exactly the condition – there is a lot of missing information that creates issues for standard insurance companies trying to issue policies. On the other hand, since it is a brand new home, there are fewer hidden potential losses. Builders usually provide a warranty during construction. Thus, anything that occurs within the first years is covered by the builder. It's a brand new community, meaning no overarching trees or old structures that could fall on the property. Everything works, from piping to sewage, reducing the risks across the entire community. Builders also know the rebuilding costs of their homes. For builders, we've created a dedicated product that considers all these points, allowing for broader coverage at a more accurate price for the specific risks they face. This is better for customers and has proven efficient for builders. The integration of data for builders is unique, allowing us to create a tailor-made insurance product to address these various challenges. What we're seeing is that this is one of our fastest growing and most profitable products and channels. When we started working with Lennar, the attach rate for these products was around 40%. Now, we are achieving an opt-in rate of about 90% in some regions and closing in on a 70% attach rate, which we are confident will continue to grow. This unique strategy requires strong data and technology support, which we are proud of and excel at.

Rick McCathron, President

I wanted to clarify something about your first question to Stewart, which he answered correctly, but I want to ensure it resonates with you in more detail. The positive development on the reserve release, the 13 points you mentioned, was not just attritional. I think you inferred what the attritional loss ratio would be as a result. As Stewart said, that's applicable across all perils. Let me provide a specific example. Winter storm Uri had a unique event pattern, which differed from typical reporting. Over the course of the year, we saw positive development across all perils and not just attritional peril.

Michael Phillips, Analyst

Okay, thank you, Rich. That's helpful. I appreciate it. I guess the last one to follow on to that last answer from Assaf, you touched on it a bit before. One of the things we hear often is if you guys are going to great partnerships, that's impressive, but what else can you do? What can Hippo do more successfully and faster? So, what would you say to that question that comes up frequently?

Rick McCathron, President

A couple of points. First, the insurance industry is facing one of the most severe channel conflicts we've ever seen. Often, if we focus solely on one partner, the entire model risks diverting traffic to local agents rather than focusing on the Hippo experience. We are offering a holistic service where the customer receives a consistent Hippo experience, rather than only going through a specific agent. Secondly, different companies have unique infrastructures, data sources, compliance regulations—this isn't a trivial task to pivot towards a new strategy. Each of our partners has distinct customers, systems, products, and characteristics. At Hippo, we are first and foremost an insurance company, but we also have a technology advantage underneath it. Based in Palo Alto, in the heart of Silicon Valley, we possess high-level engineers and data scientists, giving us an edge in customizing technology solutions for each partner's unique needs. It is not just as simple as using a third-party system; rather, we leverage our proprietary policy management systems tailored for each partner, which is not a copy-paste solution. These preparations take effort and we’re proud of our capabilities.

Stewart Ellis, CFO

Mike, this is Stewart. I'll add one thing. From our experience with builders like Lennar, the performance we've generated for them in terms of attach rates is significantly higher than before we started. Many other companies are attempting similar strategies, but our technology and our iterative collaboration with partners yield better performance.

Yaron Kinar, Analyst

Thank you and good afternoon, everybody. First question goes back to the TGP growth. Assaf, I think you mentioned you were seeing more growth from the partnership channel. Could you help us understand the growth prioritization among your channels for the year ahead?

Assaf Wand, CEO

Sure. Let me start, and I’m sure Stewart can add in as well. We have an omnichannel approach, and while we’ll see different growth in different channels over time, there are periods where direct-to-consumer costs may increase, prompting us to double down on partnerships, and vice versa. Currently, the partnership channel is showing rapid growth, with direct-to-consumer a close second. I would characterize that as 'sales, sales, and sales'—our business will derive from all three channels, but it's evolving daily or weekly. The partnership channel is currently the strongest for us, starting from the smallest baseline, with direct-to-consumer second and the independent agency as the third. The partnership channel is picking up significantly.

Rick McCathron, President

The commissions on independent agency channels differ structurally; they tend to have higher commission rates than our partnerships, as we generally structure those with joint ventures. The value add in these partnerships allows for additional revenue through cross-selling opportunities within the agency partnerships like Lennar.

Stewart Ellis, CFO

This is Stewart, Yaron. One addition here: on the independent agent fees, we have lower renewal commissions than on new business commissions. So, as our business matures, the overall percentage of fees, as a percentage of premium, will decline gradually.

Yaron Kinar, Analyst

Could you comment on prior period development and the cat losses on a net basis as well?

Assaf Wand, CEO

I'm sorry, the last part of your question dropped off.

Stewart Ellis, CFO

I think we may need to get back to you on that, Yaron.

Matt Carletti, Analyst

Thanks, good afternoon. My first question is about the loss ratio guidance for 2022. Can you provide color, particularly in terms of the attritional aspect and expectations of improvement by year's end?

Stewart Ellis, CFO

Matt, this is Stewart. The sequencing in loss ratios, while we don't anticipate quarterly improvement, we do expect a significant year-over-year improvement. It will depend on the volatility experienced in weather patterns also, which will affect how we position ourselves geographically.

Rick McCathron, President

I've got a couple of additions; first, our speed in filing rate changes will also contribute to improvements within attritional loss ratios. The rate filings will lead to some inconsistent improvement across quarters, depending on regulatory approvals.

Matt Carletti, Analyst

That's very helpful. Just a high-level question in light of your growth forecast for 2022 while also improving your loss ratio. What are your strategies to balance these objectives?

Stewart Ellis, CFO

It's crucial to understand that we are focused on delivering thoughtful, profitable growth. With the industry facing inflationary pressures, we have many filings in process that allow us to position our prices adequately for growth in 2022. Our platform’s adaptability allows us to bring on new states, roll out new products, and enhance our partnerships—leading to significant growth while optimizing loss ratios.

Rick McCathron, President

As we stated, our guidance for 2022 aims for a sub-100 loss ratio, and our intermediate target is within the 60s while maintaining healthy growth. That’s our goal as we move forward.

Alex Scott, Analyst

I have a question regarding the reinsurance renewals. Could you provide insights into how the two-thirds that was repriced might impact reinsurance costs or loss ratios?

Stewart Ellis, CFO

Alex, I will answer the first part. Our ceding commission on our reinsurance treaties is fairly similar to last year. While we won't disclose individual contract specifics with reinsurers, we have confidence in the renewal process and maintain strong protections for our balance sheet.

Rick McCathron, President

I want to emphasize, as Stewart mentioned, that our 2022 treaty was oversubscribed. Our reinsurers examined our underwriting practices and appreciate our technology and long-term partnership, resulting in an oversubscription scenario.

Alex Scott, Analyst

This is helpful. Thank you. Next question, on retention rates this quarter—they looked strong. Is this indicative of current repricing actions, particularly in states like California?

Stewart Ellis, CFO

Yes, that’s accurate. The industry is increasing rates, and we are not alone in this. We've launched a more robust pricing model, allowing us to better match premiums to risks, which benefits our retention rates.

Alex Scott, Analyst

For my final question, back on reinsurance—have there been any material changes to the amount of risk retention above the 10% we maintained?

Rick McCathron, President

We’ve actually taken a little less retention than last year, but we’ve instituted certain performance mechanisms in relation to loss ratios above certain thresholds. This allows us to better align our economic models with our reinsurance partners.

Yaron Kinar, Analyst

I wanted to return to your expectation for increased earnings from stable, recurring commission streams. Does this imply you might consider reducing reliance on reinsurance as a source of earnings?

Stewart Ellis, CFO

No, it doesn’t necessarily indicate a reduction in our use of reinsurance. We have confidence in the stability of our agency's performance and operational management, independent of reinsurance activities. To clarify, the favorable reserve development on a net basis for Q4 was 34 percentage points and on a gross basis, it was a positive 13 percentage points.

Yaron Kinar, Analyst

And regarding the catastrophic losses, do you have those figures on a net basis?

Stewart Ellis, CFO

We may not have broken it down, as the reserve releases we discussed were broad across all perils, reflecting overall reserve development. Regarding the increase in insurance-related expenses, it’s primarily connected to the Spinnaker acquisition, where commissions paid to producers and partners are now recognized over the life of the policy. This results in a comparability issue between 2021 and 2022.

Yaron Kinar, Analyst

Going forward, should we consider this quarter's insurance-related expenses a reasonable run rate?

Stewart Ellis, CFO

That’s correct. Although there may be variances as we continue recognizing the full impact of commission amortization, this will provide a more stable run rate going forward.

Yaron Kinar, Analyst

Lastly, what rate increases did you implement in Q4 2021 and for the whole year?

Rick McCathron, President

We haven’t disclosed specific rate actions, as these details are publicly documented on regulatory websites. We have taken several rate actions recently, many of which are still in the pipeline.

Stewart Ellis, CFO

Additionally, not all of our changes are increases; some adjustments involve calibrating our competencies, which impacts the premium collection.

Assaf Wand, CEO

Thank you for your time. We're entering 2022 with optimism and confidence, despite the challenges we face as an insurance company. We're proud of our team and technology, and we believe 2022 will be a strong year for Hippo. Thank you for your time.

Operator, Operator

That concludes today's Hippo fourth quarter 2021 earnings call. Thank you for your participation. You may now disconnect your lines.