Hippo Holdings Inc 8-K/A, filed Aug 16, 2021
Hippo Holdings Inc. (HIPO)
About this 8-K/A
Hippo Holdings Inc filed this 8-K/A on August 16, 2021, reporting on events of August 2, 2021.
Items reported
- Item 2.01: Completed an acquisition or sale of assets
- Item 4.01: Change of auditor
- Item 5.05: Code of ethics change or waiver
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Amendment No. 1)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
(Exact Name of Registrant as Specified in Its Charter)
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| (State or other jurisdiction of incorporation or organization) |
(Commission File Number) |
(I.R.S. Employer Identification Number) |
(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| Written communications pursuant to Rule 425 under the Securities Act |
| Soliciting material pursuant to Rule 14a-12 under the Exchange Act |
| Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act |
| Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act |
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
INTRODUCTORY NOTE
This Amendment No. 1 on Form 8-K/A (this “Amendment”) amends the Current Report on Form 8-K filed by Hippo Holdings Inc. (the “Company”) on August 5, 2021 (the “Original Report”) by (1) amending and restating the “Security Ownership of Certain Beneficial Owners and Management” table previously set forth in Item 2.01 of the Original Report, (2) adding Item 4.01 Item 5.05 and (3) amending the historical financial statements provided under Items 9.01(a) and 9.01(b) in the Original Report to include (a) the unaudited condensed consolidated financial statements of Hippo Holdings Inc., a Delaware corporation formerly known as Hippo Enterprises Inc. (“Hippo”), as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020, and (b) the unaudited pro forma condensed combined financial information of RTPZ and Hippo as of and for the six months ended June 30, 2021. This Amendment does not amend any other item of the Original Report or purport to provide an update or a discussion of any other developments at the Company subsequent to the Original Report.
Capitalized terms used but not defined herein have the meanings given in the Original Report.
Item 2.01 Completion of Acquisition or Disposition of Assets.
FORM 10 INFORMATION
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Hippo Holdings common stock following the consummation of the Business
Combination and the PIPE Investment by:
| • | each person who is known to be the beneficial owner of more than 5% of shares of Hippo Holdings common stock; |
| • | each of Hippo Holdings’ current named executive officers and directors; and |
| • | all current executive officers and directors of Hippo Holdings as a group. |
Beneficial ownership is determined according to the rules of the SEC, which generally provide that a person has beneficial ownership of a security if he, she or it possesses sole or shared voting or investment power over that security, including options and warrants that are currently exercisable or exercisable within 60 days.
Unless otherwise indicated, Hippo Holdings believes that all persons named in the table below have sole voting and investment power with respect to the voting securities beneficially owned by them.
| Number of Shares of Hippo Holdings Common Stock |
+60 Days Vested |
Number of Shares Beneficially Owned |
% | |||||||||||||
| Name and Address of Beneficial Owner(1)(2) |
||||||||||||||||
| Five Percent Holders: |
||||||||||||||||
| Fifth Wall Ventures, L.P. and affiliates(3) |
74,168,521 | — | 74,168,521 | 13.2 | % | |||||||||||
| LEN FW INVESTOR, LLC and affiliates(4) |
29,339,123 | — | 29,339,123 | 5.2 | % | |||||||||||
| Mitsui Sumitomo Insurance Co., Ltd.(5) |
39,555,425 | — | 39,555,425 | 7.0 | % | |||||||||||
| Bond Capital Fund, LP and affiliate (6) |
30,003,193 | — | 30,003,193 | 5.3 | % | |||||||||||
| RPM Ventures III, L.P.(7) |
30,644,982 | — | 30,644,982 | 5.4 | % | |||||||||||
| Directors and Executive Officers of Post-Business Combination: |
||||||||||||||||
| Assaf Wand(8) |
32,320,815 | 4,586,013 | 36,906,828 | 6.5 | % | |||||||||||
| Richard McCathron(9) |
2,508,501 | 667,633 | 3,176,134 | * | ||||||||||||
| Eric Feder |
— | — | — | — | ||||||||||||
| Sam Landman |
— | — | — | — | ||||||||||||
| Hugh Frater(10) |
1,076,362 | — | 1,076,362 | * | ||||||||||||
| Noah Knauf |
— | — | — | — | ||||||||||||
| Sandra Wijnberg(11) |
— | 81,130 | 81,130 | * | ||||||||||||
| Simon Fleming-Wood |
— | — | — | — | ||||||||||||
| Lori Dickerson Fouché |
— | — | — | — | ||||||||||||
| Amy Errett |
— | — | — | — | ||||||||||||
| Aviad Pinkovezky(12) |
1,810,001 | 333,229 | 2,143,230 | * | ||||||||||||
| Ran Harpaz(13) |
2,104,125 | 36,224 | 2,140,349 | * | ||||||||||||
| Stewart Ellis(14) |
3,366,803 | — | 3,366,803 | * | ||||||||||||
| All Directors and Executive Officers of the Combined Company as a Group (13 individuals) |
43,186,607 | 5,704,229 | 57,640,054 | 8.65 | % | |||||||||||
| * | Less than one percent |
| (1) | Unless otherwise noted, the business address of each of those listed in the table above is c/o Hippo Holdings Inc., 150 Forest Avenue, Palo Alto, California 94301. |
| (2) | Prior to the Closing, holders of record of RTPZ Class A ordinary shares and RTPZ Class B ordinary shares were entitled to one vote for each share held on all matters to be voted on by RTPZ shareholders and vote together as a single class, except as required by law; provided, that holders of RTPZ Class B ordinary shares had the right to elect all of RTPZ’s directors prior to the Closing, and holders of RTPZ’s Class A ordinary shares were not entitled to vote on the election of directors during such time. As a result of and upon the effective time of the Domestication, (a) each of the then issued and outstanding RTPZ Class A ordinary shares converted automatically, on a one-for-one basis, into a share of Hippo Holdings common stock and (b) each of the then issued and outstanding RTPZ Class B ordinary shares converted automatically, on a one-for-one basis, into a share of Hippo Holdings common stock. |
| (3) | Consists of 74,168,521 shares of Hippo Holdings common stock, of which (i) 51,447,246 are common stock directly held by Fifth Wall Ventures SPV IV L.P., (ii) 458,603 are common stock directly held by Fifth Wall Ventures SPV XVII, L.P. and (iii) 22,262,672 are common stock directly held by Fifth Wall Ventures, L.P. Fifth Wall Ventures, L.P. has granted LEN FW Investor, LLC an irrevocable voting proxy in respect of the shares referred to in clause (i) herein, which are held directly by Fifth Wall Ventures SPV IV L.P. The address of the above persons and entities is 11360 Mindanao Way, Suite 100B, Marina Del Rey, California 90292. |
| (4) | Consists of 29,339,123 shares of Hippo Holdings common stock, of which (i) 29,239,123 are common stock held directly by LEN FW Investor, LLC and (ii) 100,000 are PIPE Shares held by Lennar Ventures. The shares referred to in footnote 3 clause (i) herein are directly held by Fifth Wall Ventures SPV IV L.P. but may be deemed to be beneficially owned by LEN FW Investor, LLC as a result of an irrevocable voting proxy. Eric Feder is currently a member of our board of directors and an officer of the parent of LEN FW Investor, LLC. The address of the above persons and entities is 700 Northwest 107th Avenue, Miami, Florida 33172. |
| (5) | Consists of 39,555,425 shares of Hippo Holdings common stock. Mitsui Sumitomo Insurance Co., Ltd.’s address is 9, Kanda-Surugadai 3-chome, Chiyoda-Ku, Tokyo, Japan. |
| (6) | Consists of 30,003,193 shares of Hippo Holdings common stock held in the name of BOND Capital Fund, LP, as nominee, for the account of BOND Capital Fund, LP and BOND Capital Founders Fund, LP (together, the “BOND Funds”). Daegwon Chae, Juliet de Baubigny, Noah Knauf, Mary Meeker, Mood Rowghani, Jay Simons, and Paul Vronsky are managing members of BOND Capital Associates, LLC, the general partner of the BOND Funds, and share voting and dispositive power over the shares held for the account of the BOND Funds. The address of each of these entities is 100 The Embarcadero, San Francisco, California 94105. |
| (7) | Consists of 30,644,982 shares of Hippo Holdings, of which (i) 26,369,295 are common stock directly held by RPM Ventures III, L.P. and (ii) 4,275,687 are common stock directly held by BGW Ventures II, LP, an affiliate of RPM Ventures III, L.P. The address of the above persons and entities is 320 N. Main Street, Suite 400, Ann Arbor, Michigan 48104. |
| (8) | Consists of (i) 36,906,828 shares of Hippo Holdings common stock, of which approximately 17,087,948 shares are held by Mr. Wand and 15,232,867 shares are held by Mr. Wand as trustee of a trust, and (ii) approximately 4,586,013 shares of Hippo Holdings common stock issuable pursuant to Hippo options of which all are held by Mr. Wand and none are held by Mr. Wand as trustee of a trust. |
| (9) | Consists of (i) 4,324,332 shares of Hippo Holdings common stock, of which approximately 2,508,501 shares are held by Mr. McCathron and (ii) 667,633 shares of Hippo Holdings common stock issuable pursuant to Hippo options. |
| (10) | Consists of (i) 1,076,362 shares of Hippo Holdings common stock, all of which are held by Mr. Frater as trustee of a trust and (ii) no shares of Hippo Holdings common stock issuable pursuant to Hippo options. |
| (11) | Consists of (i) no shares of Hippo Holdings common stock and (ii) 81,130 shares of Hippo Holdings common stock issuable pursuant to Hippo options. |
| (12) | Consists of (i) 2,143,230 shares of Hippo Holdings common stock, of which 1,670,920 shares are held by Mr. Pinkovezky as trustee of a trust and 139,081 shares are held for the benefit of Mr. Pinkovezky by a separate trust and (ii) 333,229 shares of Hippo Holdings common stock issuable pursuant to Hippo options of which all are held by Mr. Pinkovezky and none are held by Mr. Pinkovezky as trustee of a trust. |
| (13) | Consists of (i) 2,277,981 shares of Hippo Holdings common stock, of which approximately 2,104,125 shares are held by Mr. Harpaz and (ii) 36,224 shares of Hippo Holdings common stock issuable pursuant to Hippo options. |
| (14) | Consists of (i) 3,366,803 shares of Hippo Holdings common stock, 3,108,425 of which are held by Mr. Ellis and 258,378 of which are held for the benefit of Mr. Ellis by a trust and (ii) no shares of Hippo Holdings common stock issuable pursuant to Hippo options. |
Item 4.01. Changes in Registrant’s Certifying Accountant.
Effective August 16, 2021, the Board of Directors of the Company approved the dismissal of WithumSmith+Brown, PC (“Withum”) as the Company’s independent registered public accounting firm and the appointment of Ernst & Young LLP (“EY”)
as the Company’s new independent registered public accounting firm to audit the Company’s consolidated financial statements for the year ending December 31, 2021. EY served as the independent auditor of Hippo Enterprises Inc. prior to the Transaction. Accordingly, Withum, RTPZ’s independent registered public accounting firm prior to the Transaction, was dismissed as the Company’s independent registered public accounting firm effective upon the completion of their review of the financial statements of RTPZ as of and for the periods ended June 30, 2021.
The audit report of Withum on RTPZ’s financial statements as of December 31, 2020 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainties, audit scope or accounting principles.
During the fiscal year ended December 31, 2020, and the subsequent interim period through August 16, 2021, there were (i) no disagreements with Withum on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which if not resolved to Withum’s satisfaction, would have caused Withum to make reference thereto in their reports on the consolidated financial statements for such years, and (ii) no “reportable events” as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Withum with a copy of disclosures it is making in this Form 8-K and requested that Withum furnish a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the statements above. A copy of Withum’s letter dated August 16, 2021 is filed as Exhibit 16.1 to this Current Report on Form 8-K.
Item 5.05. Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics
Effective August 2, 2021, the board of directors of Hippo Holdings Inc. approved and adopted a new Code of Business Conduct and Ethics (the “Code of Ethics”). The Code of Ethics is applicable to all members of the board of directors, officers, agents and employees of the Company, including the Company’s chief executive officer, chief financial officer and chief accounting officer or controller and any other persons performing similar functions. The Code of Ethics was adopted to reflect what the Company considers to be current best practices, enhance and expand on guiding principles and policies, promote awareness of ethical issues that covered persons may encounter and set forth how to address ethical issues that may arise.
The above description of the Code of Ethics does not purport to be complete and is qualified in its entirety by reference to the full text of the Code of Ethics, a copy of which is filed as Exhibit 14.1 hereto and is incorporated herein by reference.
Item 9.01. Financial Statements and Exhibits.
(a) Financial statements of businesses acquired.
The unaudited condensed consolidated financial statements of Hippo as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 is filed as Exhibit 99.1 hereto and is incorporated herein by reference. Also included herewith as Exhibit 99.2 and incorporated herein by reference is Management’s Discussion and Analysis of Financial Condition and Results of Operations for Hippo for the three and six months ended June 30, 2021.
(b) Pro forma financial information.
The unaudited pro forma condensed combined financial information of RTPZ and Hippo as of June 30, 2021 and for the six months ended June 30, 2021 is filed as Exhibit 99.3 hereto and is incorporated herein by reference.
(d) Exhibits.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| Hippo Holdings Inc. | ||||
| Date: August 16, 2021 | By: | /s/ Assaf Wand | ||
| Name: | Assaf Wand | |||
| Title: | Chief Executive Officer | |||
Exhibit 14.1
HIPPO HOLDINGS INC.
CODE OF BUSINESS CONDUCT AND ETHICS
(Adopted August 2, 2021)
(Effective as of August 2, 2021)
In accordance with the requirements of the Securities and Exchange Commission (the “SEC”), the New York Stock Exchange (“NYSE”) Listing Standards, the Board of Directors (the “Board”) of Hippo Holdings Inc. (the “Company”) has adopted this Code of Business Conduct and Ethics (the “Code”) to encourage:
| • | Honest and ethical conduct, including fair dealing and the ethical handling of actual or apparent conflicts of interest; |
| • | Full, fair, accurate, timely and understandable disclosure; |
| • | Compliance with applicable governmental laws, rules and regulations; |
| • | Prompt internal reporting of any violations of law or the Code; |
| • | Accountability for adherence to the Code, including fair process by which to determine violations; |
| • | Consistent enforcement of the Code, including clear and objective standards for compliance; |
| • | Protection for persons reporting any such questionable behavior; |
| • | The protection of the Company’s legitimate business interests, including its assets and corporate opportunities; and |
| • | Confidentiality of information entrusted to directors, officers and employees by the Company and its customers. |
All directors, officers and employees (each a “Covered Party” and, collectively, the “Covered Parties”) of the Company and all of its subsidiaries and controlled affiliates are expected to be familiar with the Code and to adhere to those principles and procedures set forth below. Covered Parties must conduct themselves accordingly, exhibiting the highest standard of business and professional integrity, and seek to avoid even the appearance of improper behavior.
| I. | Conflicts of Interest |
A conflict of interest occurs when the private interests of a Covered Party interfere, or appear to interfere, with the interests of the Company.
For example, a conflict of interest can arise when a Covered Party takes actions or has personal interests that may make it difficult to perform his or her Company duties objectively and effectively. A conflict of interest may also arise when a Covered Party, or a member of his or her immediate family, receives improper personal benefits as a result of his or her position at the Company. Item 404(a) of SEC Regulation S-K defines “immediate family member” as a person’s child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, or any person (other than a tenant or employee) sharing the person’s household.
Conflicts of interest can also occur indirectly. For example, a conflict of interest may arise when a Covered Party is also an executive officer, a major shareholder or has a material interest in a company or organization doing business with the Company.
Each Covered Party has an obligation to conduct the Company’s business in an honest and ethical manner, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. Any situation that involves, or may reasonably be expected to involve, a conflict of interest with the Company, should be disclosed promptly to the Company’s General Counsel.
This Code does not attempt to describe all possible conflicts of interest that could develop (i.e., see also Related Persons Transactions Policy and Procedures). Other common conflicts from which Covered Parties must refrain are set out below:
| • | Covered Parties may not engage in any conduct or activities that are inconsistent with the Company’s best interests or that disrupt or impair the Company’s relationship with any person or entity with which the Company has or proposes to enter into a business or contractual relationship. |
| • | Covered Parties may not accept compensation, in any form, for services performed for the Company from any source other than the Company. |
| • | No Covered Party may take up any management or other employment position with, or have any material interest in, any firm or company that is in direct or indirect competition with the Company. |
| II. | Disclosures |
The information in the Company’s public communications, including in all reports and documents filed with or submitted to the SEC, must be full, fair, accurate, timely and understandable.
To ensure the Company meets this standard, all Covered Parties (to the extent they are involved in the Company’s disclosure process) are required to maintain familiarity with the disclosure requirements, processes and procedures applicable to the Company commensurate with their
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duties. Covered Parties are prohibited from knowingly misrepresenting, omitting or causing others to misrepresent or omit, material facts about the Company to others, including the Company’s independent auditors, governmental regulators and self-regulatory organizations.
| III. | Compliance with Laws, Rules and Regulations |
The Company is obligated to comply with all applicable laws, rules and regulations. It is the personal responsibility of each Covered Party to adhere to the standards and restrictions imposed by these laws, rules and regulations in the performance of his or her duties for the Company.
The Chief Executive Officer, Chief Financial Officer and Controller (or persons performing similar functions) of the Company (together, the “Senior Financial Officers”) are also required to promote compliance by all employees with the Code and to abide by Company standards, policies and procedures.
Covered Parties located outside of the United States must comply with laws, regulations, rules and regulatory orders of the United States, including the Foreign Corrupt Practices Act (“FCPA”) and U.S. export control laws, in addition to applicable local laws.
| IV. | Insider Trading |
Trading on inside information is a violation of federal securities law. Covered Parties in possession of material non-public information about the Company or companies with whom we do business must abstain from trading or advising others to trade in the respective company’s securities from the time that they obtain such inside information until adequate public disclosure of the information. Material information is information of such importance that it can be expected to affect the judgment of investors as to whether or not to buy, sell, or hold the securities in question. To use non-public information for personal financial benefit or to “tip” others, including family members, who might make an investment decision based on this information is not only unethical but also illegal. Covered Parties who trade stock based on insider information can be personally liable for damages totaling up to three times the profit made or loss avoided by the respective Covered Party. For additional information regarding Insider Trading, please consult the Company’s Insider Trading Policy.
| V. | Reporting, Accountability and Enforcement |
The Company promotes ethical behavior at all times and encourages Covered Parties to talk to supervisors, managers and other appropriate personnel, including the Company’s officers and the General Counsel, when in doubt about the best course of action in a particular situation.
Covered Parties should promptly report suspected violations of laws, rules, regulations or the Code or any other unethical behavior by any director, officer, employee or anyone purporting to be acting on the Company’s behalf to appropriate parties, including supervisors, managers and other appropriate personnel (including the Company’s officers and the General Counsel). Alternatively, Covered Parties may call 833-626-1516 or follow the Fraud and Whistleblower Complaint link on the Company’s BambooHR intranet site to report a complaint. Reports may be made anonymously. If requested, confidentiality will be maintained, subject to applicable law, regulations and legal proceedings.
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The Audit Committee of the Board shall investigate and determine, or shall designate appropriate persons to investigate and determine, the legitimacy of such reports. The Audit Committee will then determine the appropriate disciplinary action. Such disciplinary action includes, but is not limited to, reprimand, termination with cause, and possible civil and criminal prosecution.
To encourage employees to report any and all violations, the Company will not tolerate retaliation for reports made in good faith. Retaliation or retribution against any Covered Party for a report made in good faith of any suspected violation of laws, rules, regulations or this Code is cause for appropriate disciplinary action.
Anyone making a complaint concerning a violation or suspected violation of laws, rules, regulations or the Code or any other unethical behavior by any director, officer, employee or anyone purporting to be acting on the Company’s behalf must be acting in good faith and have reasonable grounds for believing the information disclosed indicates a violation. Any allegations that prove not to be substantiated and which prove to have been made maliciously or were knowingly false will be viewed as a serious disciplinary offense.
| VI. | Corporate Opportunities |
All Covered Parties owe a duty to the Company to advance the legitimate interests of the Company when the opportunity to do so arises. Covered Parties are prohibited from directly or indirectly (a) taking personally for themselves opportunities that are discovered through the use of Company property, information or positions; (b) using Company property, information or positions for personal gain; or (c) competing with the Company for business opportunities.
| VII. | Confidentiality |
In carrying out the Company’s business, Covered Parties may learn confidential or proprietary information about the Company, its customers, distributors, suppliers or joint venture partners. Confidential or proprietary information includes all non-public information relating to the Company, or other companies, that would be harmful to the relevant company or useful or helpful to competitors if disclosed, including financial results or prospects, information provided by a third party, trade secrets, new product or marketing plans, research and development ideas, manufacturing processes, potential acquisitions or investments, or information of use to our competitors or harmful to us or our customers if disclosed.
Covered Parties must maintain the confidentiality of all information so entrusted to them, except when disclosure is authorized or legally mandated. Covered Parties must safeguard confidential information by keeping it secure, limiting access to those who have a need to know in order to do their job, and avoiding discussion of confidential information in public areas such as planes, elevators, and restaurants and on mobile phones. This prohibition includes, but is not limited to, inquiries made by the press, analysts, investors or others. Covered parties also may not use such information for personal gain. These confidentiality obligations continue even after employment with the Company ends.
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| VIII. | Fair Dealing |
Each Covered Party should endeavor to deal fairly with the Company’s customers, service providers, suppliers, competitors and employees. No Covered Party should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice. Inappropriate use of proprietary information, misusing trade secret information that was obtained without the owner’s consent, or inducing such disclosures by past or present employees of other companies is also prohibited.
| IX. | Protection and Proper Use of Company Assets |
All Covered Parties should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. All Company assets should be used only for legitimate business purposes. The obligation of employees to protect the Company’s assets includes its proprietary information. Proprietary information includes intellectual property such as trade secrets, patents, trademarks and copyrights, as well as business, marketing and service plans, engineering and manufacturing ideas, designs, databases, records, salary information and any unpublished financial data and reports.
| X. | Waivers |
Before an employee, or an immediate family member of any such employee, engages in any activity that would be otherwise prohibited by the Code, he or she is strongly encouraged to obtain a written waiver from the Board or General Counsel.
Before a director or executive officer, or an immediate family member of a director or executive officer, engages in any activity that would be otherwise prohibited by the Code in provisions I through IX above, he or she must obtain a written waiver from the disinterested directors of the Board. Such waiver must then be disclosed to the Company’s shareholders, along with the reasons for granting the waiver.
| XI. | Accuracy of Business Records |
All financial books, records and accounts must accurately reflect transactions and events, and conform both to generally accepted accounting principles (GAAP) and to the Company’s system of internal controls. No entry may be made that intentionally hides or disguises the true nature of any transaction. Covered Parties should therefore attempt to be as clear, concise, truthful and accurate as possible when recording any information.
| XII. | Corporate Loans or Guarantees |
Federal law prohibits the Company to make loans and guarantees of obligations to directors, executive officers, and members of their immediate families.
| XIII. | Gifts and Favors |
The purpose of business gifts and entertainment in a commercial setting is to create goodwill and sound working relationships, not to gain unfair advantage with customers. Covered Parties must
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act in a fair and impartial manner in all business dealings. Gifts and entertainment should further the business interests of the Company and not be construed as potentially influencing business judgment or creating an obligation.
Gifts must not be lavish or in excess of the generally accepted business practices of one’s country and industry. In general, no gift, entertainment or business courtesy should be offered, given, provided or accepted unless it: (1) is not a gift of cash, stock or negotiable instruments, (2) is consistent with customary business practices, (3) is not excessive in value (less than $150), (4) cannot be construed as a bribe or payoff and (5) does not violate any laws or regulations. Covered employees and members of their immediate families may not offer, give or receive gifts from persons or entities who deal with the Company: (a) in those cases where the gift would be illegal or result in a violation of law; (b) as part of an agreement to do anything in return for the gift, (c) if the gift has a value beyond what is normal and customary in the Company’s business; (d) if for directors, the gift is being made to influence the director’s actions as a member of the Board; or (e) if the gift could create the appearance of a conflict of interest. Gifts of cash or cash equivalents are never permitted. Requesting or soliciting personal gifts, favors, entertainment or services is unacceptable. Covered Parties should contact the General Counsel to discuss if they are not certain that a gift is appropriate.
The FCPA prohibits giving anything of value, directly or indirectly, to officials of foreign governments or foreign political candidates in order to obtain or retain business. It is strictly prohibited to make illegal payments to government officials of any country. In addition, the promise, offer or delivery to an official or employee of the U.S. government of a gift, favor or other gratuity in violation of these rules would not only violate Company policy but could also be a criminal offense. State and local governments, as well as foreign governments, may have similar rules.
| XIV. | Personal Investments |
Covered Parties may not own, either directly or indirectly, a substantial interest in any business entity that does or seeks to do business with or is in competition with the Company without providing advance notice to the Audit Committee of the Board and the General Counsel. Investments in publicly traded securities of companies not amounting to more than one percent (1%) of that company’s total outstanding shares are permitted without such advanced approval.
| XV. | Antitrust Laws and Competition |
The purpose of antitrust laws is to preserve fair and open competition and a free market economy, which are goals that the Company fully supports. Covered Parties must not directly or indirectly enter into any formal or informal agreement with competitors that fixes or controls prices, divides or allocates markets, limits the production or sale of products, boycotts certain suppliers or customers, eliminates competition or otherwise unreasonably restrains trade.
| XVI. | Political Contributions |
Covered Parties may participate in the political process as individuals on their own time. However, Covered Parties must make every effort to ensure that they do not create the impression that they speak or act on behalf of the Company with respect to political matters. Company contributions
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to any political candidate or party or to any other organization that might use the contributions for a political candidate or party are prohibited. A Covered Party may not receive any reimbursement from corporate funds for a personal political contribution.
| XVII. | Discrimination and Harassment |
The Company is an equal opportunity employer and will not tolerate illegal discrimination or harassment of any kind. The Company is committed to providing a workplace free of discrimination and harassment based on race, color, religion, age, gender, national origin, ancestry, sexual orientation, disability, veteran status, or any other basis prohibited by applicable law. Examples include derogatory comments based on a person’s protected class and sexual harassment and unwelcome sexual advances. Similarly, offensive or hostile working conditions created by such harassment or discrimination will not be tolerated.
| XVIII. | Environmental Protection |
The Company is committed to managing and operating its assets in a manner that is protective of human health and safety and the environment. It is our policy to comply with both the letter and the spirit of the applicable health, safety and environmental laws and regulations and to attempt to develop a cooperative attitude with government inspection and enforcement officials. Covered Parties are encouraged to report conditions that they perceive to be unsafe, unhealthy or hazardous to the environment.
| XIX. | No Rights Created |
This Code is a statement of certain fundamental principles, policies and procedures that govern the Company’s Covered Parties in the conduct of the Company’s business. It is not intended to and does not create any rights in any employee, customer, client, visitor, supplier, competitor, shareholder or any other person or entity. It is the Company’s belief that the policy is robust and covers most conceivable situations.
| XX. | Miscellaneous |
This Policy supersedes any prior policies covering the aforementioned content, including but not limited to the Company’s September 2019 Code of Conduct and Ethics.
7
Exhibit 16.1
August 16, 2021
Office of the Chief Accountant
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Ladies and Gentlemen:
We have read the statements of Hippo Holdings Inc. (formerly known as Reinvent Technology Partners Z) included under Item 4.01 of its Form 8-K dated August 16, 2021. We agree with the statements concerning our Firm under Item 4.01, in which we were informed of our dismissal on August 16, 2021. We are not in a position to agree or disagree with other statements contained therein.
Very truly yours,
/s/ WithumSmith+Brown, PC
New York, New York
Exhibit 99.1
Part I. Financial Information
Item 1. Financial Statements
HIPPO HOLDINGS INC.
Consolidated Balance Sheets
(In millions, except share and per share data)
| June 30, 2021 |
December 31, 2020 |
|||||||
| (Unaudited) | ||||||||
| Assets |
||||||||
| Investments: |
||||||||
| Fixed maturities available-for-sale, at fair value (amortized cost: $56.9 million and $55.9 million, respectively) |
$ | 56.6 | $ | 56.0 | ||||
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|
|
|
|
|||||
| Total investments |
56.6 | 56.0 | ||||||
| Cash and cash equivalents |
364.1 | 452.3 | ||||||
| Restricted cash |
46.1 | 40.1 | ||||||
| Accounts receivable, net of allowance of $0.4 million and $0.5 million, respectively |
54.0 | 37.1 | ||||||
| Reinsurance recoverable on paid and unpaid losses and LAE |
242.8 | 134.1 | ||||||
| Prepaid reinsurance premiums |
195.3 | 129.4 | ||||||
| Ceding commissions receivable |
34.2 | 21.3 | ||||||
| Deferred policy acquisition costs |
— | 1.9 | ||||||
| Capitalized internal use software |
18.7 | 14.7 | ||||||
| Goodwill |
48.2 | 47.8 | ||||||
| Intangible assets |
34.6 | 33.9 | ||||||
| Other assets |
27.2 | 10.8 | ||||||
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|
|
|
|
|||||
| Total assets |
$ | 1,121.8 | $ | 979.4 | ||||
|
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|
|
|||||
| Liabilities, convertible preferred stock, and stockholders’ deficit |
||||||||
| Liabilities: |
||||||||
| Loss and loss adjustment expense reserve |
$ | 195.2 | $ | 105.1 | ||||
| Unearned premiums |
216.5 | 150.3 | ||||||
| Reinsurance premiums payable |
137.0 | 86.1 | ||||||
| Provision for commission |
13.0 | 28.2 | ||||||
| Fiduciary liabilities |
28.2 | 17.5 | ||||||
| Convertible promissory notes |
299.0 | 273.0 | ||||||
| Derivative liability on notes |
162.6 | 113.3 | ||||||
| Contingent consideration liability |
11.6 | 12.0 | ||||||
| Preferred stock warrant liabilities |
137.5 | 22.9 | ||||||
| Accrued expenses and other liabilities |
46.0 | 25.7 | ||||||
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|
|
|
|
|||||
| Total liabilities |
1,246.6 | 834.1 | ||||||
| Commitments and contingencies (Note 10) |
||||||||
| Convertible preferred stock: |
||||||||
| Preferred stock, $0.000001 par value per share; 46,479,310 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 43,985,178 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively; Liquidation preferences of $359.4 million as of June 30, 2021 and December 31, 2020, respectively |
344.8 | 344.8 | ||||||
| Stockholder’s deficit |
||||||||
| Common stock, $0.000001 par value per share; 83,830,000 shares authorized as of June 30, 2021 and December 31, 2020, respectively; 14,200,750 and 13,307,826 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively |
— | — | ||||||
| Additional paid-in capital |
65.8 | 56.9 | ||||||
| Accumulated other comprehensive (loss) income |
(0.3 | ) | 0.1 | |||||
| Accumulated deficit |
(536.4 | ) | (256.6 | ) | ||||
|
|
|
|
|
|||||
| Total Hippo stockholders’ deficit |
(470.9 | ) | (199.6 | ) | ||||
| Noncontrolling interest |
1.3 | 0.1 | ||||||
|
|
|
|
|
|||||
| Total stockholders’ deficit |
(469.6 | ) | (199.5 | ) | ||||
|
|
|
|
|
|||||
| Total liabilities, convertible preferred stock, and stockholder’s deficit |
$ | 1,121.8 | $ | 979.4 | ||||
|
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|
|
|
|||||
See Notes to the Consolidated Financial Statements
1
HIPPO HOLDINGS INC.
Consolidated Statements of Operations and Comprehensive Loss
(In millions, except share and per share data)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenue: |
||||||||||||||||
| Net earned premium |
$ | 10.2 | $ | 2.5 | $ | 19.0 | $ | 4.0 | ||||||||
| Commission income, net |
6.5 | 8.4 | 11.6 | 15.5 | ||||||||||||
| Service and fee income |
4.1 | 0.8 | 7.1 | 2.1 | ||||||||||||
| Net investment income |
0.1 | 0.2 | 0.2 | 0.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenue |
20.9 | 11.9 | 37.9 | 22.2 | ||||||||||||
| Expenses: |
||||||||||||||||
| Losses and loss adjustment expenses |
21.4 | 3.3 | 38.7 | 5.2 | ||||||||||||
| Insurance related expenses |
8.5 | 4.1 | 16.0 | 8.0 | ||||||||||||
| Technology and development |
7.5 | 3.7 | 14.5 | 7.3 | ||||||||||||
| Sales and marketing |
22.2 | 17.3 | 46.9 | 35.3 | ||||||||||||
| General and administrative |
8.8 | 5.5 | 17.1 | 11.1 | ||||||||||||
| Interest and other expense |
36.0 | 2.9 | 183.1 | 4.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total expenses |
104.4 | 36.8 | 316.3 | 70.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Loss before income taxes |
(83.5 | ) | (24.9 | ) | (278.4 | ) | (48.7 | ) | ||||||||
| Income taxes (benefit) expense |
0.2 | — | 0.3 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss |
(83.7 | ) | (24.9 | ) | (278.7 | ) | (48.7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax |
0.8 | (0.1 | ) | 1.1 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss attributable to Hippo |
$ | (84.5 | ) | $ | (24.8 | ) | $ | (279.8 | ) | $ | (48.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Other comprehensive income: |
||||||||||||||||
| Change in net unrealized gain or loss on investments, net of tax |
0.3 | (0.2 | ) | (0.3 | ) | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Comprehensive loss attributable to Hippo |
$ | (84.2 | ) | $ | (25.0 | ) | $ | (280.1 | ) | $ | (48.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Per share data: |
||||||||||||||||
| Net loss attributable to Hippo - basic and diluted |
$ | (84.5 | ) | $ | (24.8 | ) | $ | (279.8 | ) | $ | (48.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Weighted-average shares used in computing net loss per share attributable to Hippo - basic and diluted |
14,134,399 | 12,360,596 | 13,968,160 | 12,236,471 | ||||||||||||
|
|
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|
|
|
|
|
|
|||||||||
| Net loss per share attributable to Hippo - basic and diluted |
$ | (5.98 | ) | $ | (2.01 | ) | $ | (20.03 | ) | $ | (3.98 | ) | ||||
|
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|
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|
|
|||||||||
See Notes to the Consolidated Financial Statements
2
HIPPO HOLDINGS INC.
Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Deficit
(In millions, except share data)
(Unaudited)
| Convertible Preferred Stock |
Common Stock | Additional Paid-in |
Accumulated Comprehensive |
Accumulated | Total Hippo Stockholders’ |
Non controlling |
Total Stockholders’ |
|||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Income (Loss) | Deficit | Deficit | Interests | Deficit | |||||||||||||||||||||||||||||||
| Balance at January 1, 2021 |
43,985,178 | $ | 344.8 | 13,307,826 | $ | — | $ | 56.9 | $ | 0.1 | $ | (256.6 | ) | $ | (199.6 | ) | $ | 0.1 | $ | (199.5 | ) | |||||||||||||||||||
| Net income (loss) |
— | — | — | — | — | — | (195.2 | ) | (195.2 | ) | 0.3 | (194.9 | ) | |||||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | (0.6 | ) | — | (0.6 | ) | — | (0.6 | ) | |||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | 662,101 | — | 1.9 | — | — | 1.9 | — | 1.9 | ||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | 24,689 | — | 0.2 | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||||||||
| Repurchase of common stock |
— | — | (3,125 | ) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 2.9 | — | — | 2.9 | — | 2.9 | ||||||||||||||||||||||||||||||
| Other |
— | — | — | — | — | — | (0.1 | ) | (0.1 | ) | 0.1 | — | ||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Balance at April 1, 2021 |
43,985,178 | $ | 344.8 | 13,991,491 | $ | — | $ | 61.9 | $ | (0.5 | ) | $ | (451.9 | ) | $ | (390.5 | ) | $ | 0.5 | $ | (390.0 | ) | ||||||||||||||||||
| Net income (loss) |
— | — | — | — | — | — | (84.5 | ) | (84.5 | ) | 0.8 | (83.7 | ) | |||||||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | 0.2 | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | 184,573 | — | 0.6 | — | — | 0.6 | — | 0.6 | ||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | 24,686 | — | 0.2 | — | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 3.1 | — | — | 3.1 | — | 3.1 | ||||||||||||||||||||||||||||||
| Other |
— | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
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|
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|
|
|
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|
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|
|||||||||||||||||||||
| Balance at June 30, 2021 |
43,985,178 | 344.8 | 14,200,750 | — | 65.8 | (0.3 | ) | (536.4 | ) | (470.9 | ) | 1.3 | $ | (469.6 | ) | |||||||||||||||||||||||||
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|
|||||||||||||||||||||
| Balance at January 1, 2020 |
36,035,688 | $ | 190.3 | 12,069,742 | $ | — | $ | 36.7 | $ | 0.1 | $ | (115.1 | ) | $ | (78.3 | ) | $ | — | $ | (78.3 | ) | |||||||||||||||||||
| Net income (loss) |
— | — | — | — | — | — | (23.9 | ) | (23.9 | ) | — | (23.9 | ) | |||||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | — | 0.2 | — | 0.2 | — | 0.2 | ||||||||||||||||||||||||||||||
| Issuance of Series D preferred stock, net of issuance costs |
321,415 | 4.9 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | 82,697 | — | 0.1 | — | — | 0.1 | — | 0.1 | ||||||||||||||||||||||||||||||
| Vesting of early exercised stock options |
— | — | 38,694 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Vesting of restricted stock awards |
— | — | 10,557 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 1.0 | — | — | 1.0 | — | 1.0 | ||||||||||||||||||||||||||||||
| Other |
— | — | — | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
| Balance at March 31, 2020 |
36,357,103 | $ | 195.2 | 12,201,690 | $ | — | $ | 37.8 | $ | 0.3 | $ | (139.0 | ) | $ | (100.9 | ) | $ | 0.1 | $ | (100.8 | ) | |||||||||||||||||||
| Net income (loss) |
— | — | — | — | — | — | (24.8 | ) | (24.8 | ) | (0.1 | ) | (24.9 | ) | ||||||||||||||||||||||||||
| Other comprehensive loss |
— | — | — | — | — | (0.2 | ) | — | (0.2 | ) | — | (0.2 | ) | |||||||||||||||||||||||||||
| Issuance of common stock upon exercise of stock options |
— | — | 258,673 | — | 0.5 | — | — | 0.5 | — | 0.5 | ||||||||||||||||||||||||||||||
| Vesting of restricted stock awards |
— | — | 5,000 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Share-based compensation expense |
— | — | — | — | 1.0 | — | — | 1.0 | — | 1.0 | ||||||||||||||||||||||||||||||
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|||||||||||||||||||||
| Balance at June 30, 2020 |
36,357,103 | 195.2 | 12,465,363 | — | 39.3 | 0.1 | (163.8 | ) | (124.4 | ) | — | $ | (124.4 | ) | ||||||||||||||||||||||||||
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See Notes to the Consolidated Financial Statements
3
HIPPO HOLDINGS INC.
Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
| Six Months Ended June 30, 2021 |
||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (278.7 | ) | $ | (48.7 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
| Depreciation and amortization |
5.0 | 3.0 | ||||||
| Share–based compensation expense |
5.3 | 1.8 | ||||||
| Change in fair value of preferred stock warrant liabilities |
114.6 | 4.1 | ||||||
| Change in fair value of contingent consideration liability |
1.3 | — | ||||||
| Change in fair value of derivative liability on notes |
46.5 | — | ||||||
| Amortization of debt discount |
17.1 | — | ||||||
| Non-cash service expense |
7.0 | — | ||||||
| Other |
5.4 | 0.3 | ||||||
| Changes in assets and liabilities: |
||||||||
| Accounts receivable, net |
(17.0 | ) | (3.8 | ) | ||||
| Reinsurance recoverable on paid and unpaid losses and LAE |
(108.7 | ) | — | |||||
| Deferred policy acquisition costs |
1.9 | (1.8 | ) | |||||
| Ceding commissions receivable |
(12.9 | ) | — | |||||
| Prepaid reinsurance premiums |
(65.9 | ) | (1.2 | ) | ||||
| Other assets |
(12.5 | ) | (3.7 | ) | ||||
| Provision for commission slide and cancellations |
(15.2 | ) | 3.2 | |||||
| Fiduciary liabilities |
10.8 | 8.7 | ||||||
| Accrued expenses and other liabilities |
19.6 | 2.0 | ||||||
| Loss and loss adjustment expense reserves |
90.1 | 1.9 | ||||||
| Unearned premiums |
66.2 | 9.9 | ||||||
| Reinsurance premiums payable |
50.9 | 1.4 | ||||||
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|
|||||
| Net cash used in operating activities |
(69.2 | ) | (22.9 | ) | ||||
| Cash flows from investing activities: |
||||||||
| Capitalized internal use software costs |
(5.5 | ) | (4.3 | ) | ||||
| Purchase of intangible assets |
(3.3 | ) | — | |||||
| Purchases of property and equipment |
— | (0.2 | ) | |||||
| Purchases of investments |
(7.1 | ) | — | |||||
| Maturities of investments |
2.0 | 42.6 | ||||||
| Sales of investments |
3.7 | 26.7 | ||||||
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|
|||||
| Net cash (used in) provided by investing activities |
(10.2 | ) | 64.8 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from Series D preferred stock, net of issuance costs |
— | 4.9 | ||||||
| Proceeds from exercise of options |
2.6 | 0.5 | ||||||
| Payments of contingent consideration |
(1.3 | ) | (2.4 | ) | ||||
| Payments for reverse recapitalization and transaction costs |
(4.1 | ) | — | |||||
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|
|||||
| Net cash (used in) provided by financing activities |
(2.8 | ) | 3.0 | |||||
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|
|||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash |
(82.2 | ) | 44.9 | |||||
| Cash, cash equivalents, and restricted cash at the beginning of the period |
492.4 | 42.1 | ||||||
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| Cash, cash equivalents, and restricted cash at the end of the period |
$ | 410.2 | $ | 87.0 | ||||
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|
|||||
| Supplemental disclosures of non-cash financing and investing activities: |
||||||||
| Convertible promissory notes issued for services |
7.0 | — | ||||||
| Unpaid transaction costs |
1.1 | — | ||||||
See Notes to the Consolidated Financial Statements
4
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Description of Business
Hippo Holdings Inc. (f/k/a Hippo Enterprises Inc.) was originally incorporated under the name Reinvent Technology Partners Z (“RTPZ”) as a blank check company incorporated, a Cayman Islands exempted company, on October 2, 2020 for the purpose of effecting a merger, capital stock-exchange, asset acquisition, share purchase, reorganization, or similar business combination. On August 2, 2021, RTPZ domesticated as a Delaware corporation (the “Domestication”) and consummated the merger of RTPZ Merger Sub Inc. (“Merger Sub”), a Delaware corporation and subsidiary of RTPZ, with and into Hippo Enterprises Inc. (“Hippo”), a Delaware corporation (the “First Merger”), with Hippo surviving the Merger as a wholly owned subsidiary of Hippo Holdings, and, immediately following the First Merger, the merger of Hippo (as the surviving corporation of the First Merger) with and into Hippo Holdings, with Hippo Holdings surviving (the “Second Merger” and, together with the First Merger, the “Mergers”), in each case pursuant to the terms of the Agreement and Plan of Merger, dated as of March 3, 2021, by and among RTPZ, Merger Sub and Hippo.
Hippo Enterprises Inc., the holding company, was incorporated in January 2019 in Delaware (together with its subsidiaries, the “Company”, “Hippo”, “we”, “us”, or “our”). On October 3, 2019, the Company completed a corporate re-organization (a common control transaction) to improve its overall corporate structure, in which it brought under its control Hippo Analytics Inc., which was incorporated in October 2015 in Delaware, along with Hippo Analytics Inc.’s other subsidiaries.
The Company provides property insurance brokerage services and underwrites insurance policies for customers. The Company’s subsidiaries are licensed insurance companies and agencies including a licensed insurance program manager, producers, and insurance carriers. The Company distributes insurance products and services (e.g., claims processing) through its innovative technology platform aiming to provide the best offering in market coverage and pricing. The Company offers its policies direct-to-consumer, or through licensed insurance agents. The insurance products offered through Hippo Analytics Inc. primarily include homeowners’ insurance against risks of fire, wind, and theft. The Company is licensed as an insurance agency in 50 states and the District of Columbia and currently underwrites and distributes policies in 36 states as a managing general agent. The Company’s headquarters are located in Palo Alto, California.
In August 2020, the Company acquired its largest insurance carrier partner, Spinnaker Insurance Company (“Spinnaker”). Spinnaker writes commercial and personal lines products and is a licensed property casualty carrier in all 50 states and the District of Columbia. Beginning in September 2020, in connection with the acquisition of Spinnaker, the Company also retains portions of direct insurance risk for programs underwritten by third parties. The amount of risk retention is varied across the different programs. In January 2020, the Company began assuming insurance risk of policies underwritten by Hippo through a wholly owned Cayman domiciled insurance captive, RH Solutions Insurance Ltd. (“RHS”).
Basis of Presentation and Consolidation
The accompanying interim consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and are consistent in all material respects with those applied in the Company’s financial statements for the year ended December 31, 2020 included in Reinvent Technology Partners Z prospectus on Form S-4/A filed with the Securities and Exchange Commission (the “SEC”) on May 11, 2021. All intercompany transactions have been eliminated in consolidation. The Company bases its estimates on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances.
5
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The interim financial information is unaudited, but reflects all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the information set forth herein. Interim results are not necessarily indicative of the results for a full year.
Reclassifications
Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on previously reported revenue, expenses, net loss or the consolidate balance sheets.
Use of Estimates
The preparation of the Company’s consolidated financial statements in conformity with U.S. GAAP requires management to make estimates that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include, but are not limited to, loss and loss adjustment expense (“LAE”) reserves, provision for commission slide and cancellations, reinsurance recoverable on paid and unpaid losses and LAE, the fair values of investments, common stock, share-based awards, preferred stock warrant liabilities, contingent consideration liabilities, embedded derivative liabilities, acquired intangible assets and goodwill, deferred tax assets and uncertain tax positions, and revenue recognition. The Company evaluates these estimates on an ongoing basis. These estimates are informed by experience and other assumptions that the Company believes are reasonable under the circumstances. Actual results may differ significantly from these estimates.
Recent Accounting Pronouncements
Emerging Growth Company
The Company currently qualifies as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012, and is provided the option to adopt new or revised accounting guidance either (i) within the same periods as those otherwise applicable to non-emerging growth companies or (ii) within the same time periods as private companies.
In certain cases, as indicated below, management has exercised the opt out election when it determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance.
Accounting Pronouncements Recently Adopted
Internal-Use Software
In August 2018, the FASB issued ASU No. 2018-15, Intangibles — Goodwill and Other — Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The intent of this pronouncement is to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software as defined in ASC 350-40. ASU 2018-15 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company adopted this new guidance on a prospective basis on January 1, 2021. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). Lessees will be required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that
6
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
meet the definition of a short-term lease). The liability will be equal to the present value of future lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. For income statement purposes, a dual model was retained, requiring leases to be classified as either operating or finance leases. Operating leases will result in straight-line expense (similar to current operating leases) while finance leases will result in a front-loaded expense pattern (similar to current capital leases). This ASU is effective for annual reporting periods beginning after December 15, 2021, and interim reporting periods beginning after December 15, 2022. The adoption of the new standard is expected to result in the recognition of lease liabilities and right-of-use assets as of January 1, 2022. The Company is evaluating the potential impact of this pronouncement.
In June 2016, the FASB issued ASU No. 2016-13, Financial instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), and subsequent related ASUs, which amends the guidance on the impairment of financial instruments by requiring measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 is effective for fiscal years, and for interim periods within the fiscal years, beginning after December 15, 2022. The Company is currently evaluating the impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and clarifies and amends existing guidance to improve consistent application. This ASU will be effective for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020. ASU 2019-12 will be effective for private entities for annual periods beginning after December 15, 2021, and interim periods beginning after December 15, 2020, with early adoption permitted. The Company expects to adopt ASU 2019-12 under the private company transition guidance beginning January 1, 2022 and does not expect the adoption of this standard to have a material impact on the Company’s consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the timing of adoption and the impact on the consolidated financial statements.
7
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
2. Investments
The amortized cost and fair value of fixed maturities securities are as follows (in millions):
| June 30, 2021 | ||||||||||||||||
| Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | |||||||||||||
| Fixed maturities available-for-sale: |
||||||||||||||||
| U.S. government and agencies |
10.0 | — | — | 10.0 | ||||||||||||
| States, and other territories |
5.9 | — | — | 5.9 | ||||||||||||
| Corporate securities |
18.5 | — | (0.1 | ) | 18.4 | |||||||||||
| Foreign securities |
0.3 | — | — | 0.3 | ||||||||||||
| Residential mortgage-backed securities |
10.7 | — | (0.1 | ) | 10.6 | |||||||||||
| Commercial mortgage-backed securities |
5.1 | — | (0.1 | ) | 5.0 | |||||||||||
| Asset backed securities |
6.4 | — | — | 6.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 56.9 | $ | — | $ | (0.3 | ) | $ | 56.6 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| December 31, 2020 | ||||||||||||||||
| Amortized Cost |
Unrealized Gains |
Unrealized Losses |
Fair Value | |||||||||||||
| Fixed maturities available-for-sale: |
||||||||||||||||
| U.S. government and agencies |
10.1 | — | — | 10.1 | ||||||||||||
| States, and other territories |
5.1 | — | — | 5.1 | ||||||||||||
| Corporate securities |
17.4 | — | — | 17.4 | ||||||||||||
| Foreign securities |
0.8 | — | — | 0.8 | ||||||||||||
| Residential mortgage-backed securities |
12.9 | — | — | 12.9 | ||||||||||||
| Commercial mortgage-backed securities |
5.4 | 0.1 | — | 5.5 | ||||||||||||
| Asset backed securities |
4.2 | — | — | 4.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 55.9 | $ | 0.1 | $ | — | $ | 56.0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of June 30, 2021, no securities have been in a continuous unrealized loss position for greater than 12 months. There were no other-than-temporary impairments recognized for the three month periods ended June 30, 2021 and 2020.
8
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of fixed maturities securities by contractual maturity are as follows (in millions):
| June 30, 2021 | ||||||||
| Amortized Cost | Fair Value | |||||||
| Due to mature: |
||||||||
| One year or less |
$ | 9.3 | $ | 9.3 | ||||
| After one year through five years |
21.1 | 21.1 | ||||||
| After five years |
4.2 | 4.1 | ||||||
| After ten years |
0.1 | 0.1 | ||||||
| Residential mortgage-backed securities |
10.7 | 10.6 | ||||||
| Commercial mortgage-backed securities |
5.1 | 5.0 | ||||||
| Asset backed securities |
6.4 | 6.4 | ||||||
|
|
|
|
|
|||||
| Total fixed maturities available-for-sale |
$ | 56.9 | $ | 56.6 | ||||
|
|
|
|
|
|||||
Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Net realized gains on fixed maturity securities and short-term investments were insignificant for the periods ended June 30, 2021 and 2020, respectively.
The Company’s net investment income is comprised of the following (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Fixed maturities income |
$ | 0.1 | $ | 0.2 | $ | 0.2 | $ | 0.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total gross investment income |
0.1 | 0.2 | 0.2 | 0.6 | ||||||||||||
| Investment expenses |
— | — | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net investment income |
$ | 0.1 | $ | 0.2 | $ | 0.2 | $ | 0.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
9
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Pursuant to certain regulatory requirements, the Company is required to hold assets on deposit with various state insurance departments for the benefit of policyholders. These special deposits are included in fixed maturities, available-for-sale on the consolidated balance sheets. The following table reflects special deposits (in millions):
| June 30, 2021 | ||||||||
| Amortized Cost | Fair Value | |||||||
| State |
||||||||
| Illinois |
$ | 1.6 | $ | 1.6 | ||||
| Colorado |
1.5 | 1.5 | ||||||
| Nevada |
0.2 | 0.2 | ||||||
| North Carolina |
0.3 | 0.3 | ||||||
| Virginia |
0.3 | 0.4 | ||||||
| New Mexico |
0.3 | 0.4 | ||||||
| New York |
3.1 | 3.1 | ||||||
| Vermont |
0.3 | 0.3 | ||||||
| Massachusetts |
0.1 | 0.1 | ||||||
| Florida |
0.3 | 0.3 | ||||||
| Georgia |
0.1 | 0.1 | ||||||
|
|
|
|
|
|||||
| Total states |
$ | 8.1 | $ | 8.3 | ||||
|
|
|
|
|
|||||
3. Cash, Cash Equivalents, and Restricted Cash
The following table sets forth the cash, cash equivalents, and restricted cash (in millions):
| June 30, 2021 |
December 31, 2020 |
|||||||
| Cash and cash equivalents: |
||||||||
| Cash |
$ | 126.2 | $ | 56.7 | ||||
| Money market funds |
237.9 | 372.1 | ||||||
| Treasury bills |
— | 23.5 | ||||||
|
|
|
|
|
|||||
| Total cash and cash equivalents |
364.1 | 452.3 | ||||||
|
|
|
|
|
|||||
| Restricted cash: |
||||||||
| Fiduciary assets |
28.0 | 12.1 | ||||||
| Letters of credit and cash on deposit |
18.1 | 28.0 | ||||||
|
|
|
|
|
|||||
| Total restricted cash |
46.1 | 40.1 | ||||||
|
|
|
|
|
|||||
| Total cash, cash equivalents, and restricted cash |
$ | 410.2 | $ | 492.4 | ||||
|
|
|
|
|
|||||
10
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
4. Fair Value Measurement
The following table summarizes the Company’s fair value hierarchy for its financial assets and liabilities measured at fair value on a recurring basis (in millions):
| June 30, 2021 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: |
||||||||||||||||
| Cash equivalents: |
||||||||||||||||
| Money market funds |
237.9 | $ | — | $ | — | $ | 237.9 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash equivalents |
$ | 237.9 | $ | — | $ | — | $ | 237.9 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fixed maturities available-for-sale: |
||||||||||||||||
| U.S. government and agencies |
$ | 10.0 | $ | — | $ | — | $ | 10.0 | ||||||||
| States, and other territories |
— | 5.9 | — | 5.9 | ||||||||||||
| Corporate securities |
— | 18.4 | — | 18.4 | ||||||||||||
| Foreign securities |
— | 0.3 | — | 0.3 | ||||||||||||
| Residential mortgage-backed securities |
— | 10.6 | — | 10.6 | ||||||||||||
| Commercial mortgage-backed securities |
— | 5.0 | — | 5.0 | ||||||||||||
| Asset backed securities |
— | 6.4 | — | 6.4 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total fixed maturities available-for-sale |
10.0 | 46.6 | — | 56.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial assets |
$ | 247.9 | $ | 46.6 | $ | — | $ | 294.5 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financial liabilities: |
||||||||||||||||
| Derivative liability on convertible promissory notes |
$ | — | $ | — | $ | 162.6 | $ | 162.6 | ||||||||
| Contingent consideration liability |
— | — | 11.6 | 11.6 | ||||||||||||
| Preferred stock warrant liabilities |
— | — | 137.5 | 137.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial liabilities |
$ | — | $ | — | $ | 311.7 | $ | 311.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
11
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
| December 31, 2020 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Financial assets: |
||||||||||||||||
| Cash equivalents: |
||||||||||||||||
| Money market funds |
$ | 372.1 | $ | — | $ | — | $ | 372.1 | ||||||||
| Treasury Bills |
23.5 | — | — | 23.5 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cash equivalents |
$ | 395.6 | $ | — | $ | — | $ | 395.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Fixed maturities available-for-sale: |
||||||||||||||||
| U.S. government and agencies |
$ | 10.1 | $ | — | $ | — | $ | 10.1 | ||||||||
| States, and other territories |
— | 5.1 | — | 5.1 | ||||||||||||
| Corporate securities |
— | 17.4 | — | 17.4 | ||||||||||||
| Foreign securities |
— | 0.8 | — | 0.8 | ||||||||||||
| Residential mortgage-backed securities |
— | 12.9 | — | 12.9 | ||||||||||||
| Commercial mortgage-backed securities |
— | 5.5 | — | 5.5 | ||||||||||||
| Asset backed securities |
— | 4.2 | — | 4.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total fixed maturities available-for-sale |
$ | 10.1 | $ | 45.9 | $ | — | $ | 56.0 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial assets |
$ | 405.7 | $ | 45.9 | $ | — | $ | 451.6 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financial liabilities: |
||||||||||||||||
| Derivative liability on convertible promissory notes |
$ | — | $ | — | $ | 113.3 | $ | 113.3 | ||||||||
| Contingent consideration liability |
— | — | 12.0 | 12.0 | ||||||||||||
| Preferred stock warrant liabilities |
— | — | 22.9 | 22.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total financial liabilities |
$ | — | $ | — | $ | 148.2 | $ | 148.2 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s policy is to recognize transfers into and transfers out of fair value hierarchy levels at the end of each reporting period. During the six months ended June 30, 2021 and December 31, 2020 there were no transfers between levels in the fair value hierarchy.
Preferred Stock Warrant Liabilities
The table below presents changes in the preferred stock warrant liability valued using Level 3 inputs (in millions):
| 2021 | 2020 | |||||||
| Balance as of January 1, |
$ | 22.9 | $ | 6.7 | ||||
| Changes in fair value |
114.6 | 4.1 | ||||||
|
|
|
|
|
|||||
| Balance as of June 30, |
$ | 137.5 | $ | 10.8 | ||||
|
|
|
|
|
|||||
12
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Contingent Consideration
The contingent consideration is re-valued to fair value at the end of each reporting period using the present value of future payments based on an estimate of revenue and customer renewals of the acquiree. There is no limit to the maximum potential contingent consideration as the consideration is based on acquired customer retention. The table below presents the changes in the contingent consideration liability valued using Level 3 inputs (in millions):
| 2021 | 2020 | |||||||
| Balance as of January 1, |
$ | 12.0 | $ | 13.8 | ||||
| Payments of contingent consideration |
(1.7 | ) | (3.2 | ) | ||||
| Changes in fair value |
1.3 | — | ||||||
|
|
|
|
|
|||||
| Balance as of June 30, |
$ | 11.6 | $ | 10.6 | ||||
|
|
|
|
|
|||||
Derivative liability on notes
The embedded derivative liabilities on the issued and outstanding convertible promissory notes are re-valued to the current fair value at the end of each reporting period using the income-based approach based on the with or without 10% discount basis. As of June 30, 2021, the expected time to conversion used in the valuation was 0.1-2.9 years. The table below presents the changes in derivative liability on convertible promissory notes valued using Level 3 inputs (in millions):
| 2021 | ||||
| Balance as of January 1, |
$ | 113.3 | ||
| Initial measurement of new derivative |
2.8 | |||
| Changes in fair value |
46.5 | |||
|
|
|
|||
| Balance as of June 30, |
$ | 162.6 | ||
|
|
|
|||
5. Intangible Assets
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
| Weighted- Average Useful Life Remaining (in years) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||
| Agency and carrier |
7.9 | $ | 13.5 | $ | (0.9 | ) | $ | 12.6 | $ | 13.5 | $ | (0.1 | ) | $ | 13.4 | |||||||||||
| State licenses and domain name |
Indefinite | 10.5 | — | 10.5 | 7.1 | — | 7.1 | |||||||||||||||||||
| Customer relationships |
3.8 | 13.2 | (4.9 | ) | 8.3 | 13.2 | (3.8 | ) | 9.4 | |||||||||||||||||
| Developed technology |
1.3 | 3.6 | (2.0 | ) | 1.6 | 3.6 | (1.4 | ) | 2.2 | |||||||||||||||||
| VOBA |
1.2 | 0.1 | — | 0.1 | 0.1 | — | 0.1 | |||||||||||||||||||
| Other |
7.1 | 1.9 | (0.4 | ) | 1.5 | 1.9 | (0.2 | ) | 1.7 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total intangible assets, net |
$ | 42.8 | $ | (8.2 | ) | $ | 34.6 | $ | 39.4 | $ | (5.5 | ) | $ | 33.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
13
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Amortization expense related to intangible assets was $2.7 million and $1.8 million for the six months ended June 30, 2021 and 2020, respectively, and is included in technology and development expenses for developed technology, sales and marketing expenses for customer relationships, agency relationships, carrier relationships and other. Amortization expense related to value of business acquired (VOBA) is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss.
6. Accrued Expenses and Other Liabilities
| June 30, 2021 |
December 31, 2020 |
|||||||
| (in millions) | ||||||||
| Accrued wages and commissions |
$ | 7.0 | $ | 5.0 | ||||
| Deferred revenue |
7.2 | 1.7 | ||||||
| Advances from customers |
9.6 | 4.4 | ||||||
| Accrued licenses and taxes |
3.0 | 2.5 | ||||||
| Accrued transaction cost |
1.1 | — | ||||||
| Accrued interest |
0.9 | 0.8 | ||||||
| Other |
17.2 | 11.3 | ||||||
|
|
|
|
|
|||||
| Total accrued expenses and other liabilities |
$ | 46.0 | $ | 25.7 | ||||
|
|
|
|
|
|||||
7. Loss and Loss Adjustment Expense Reserves
The reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses, net of reinsurance is summarized as follows for the six months ended June 30, (in millions):
| 2021 | 2020 | |||||||
| Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE as of beginning of the period |
$ | 105.1 | $ | — | ||||
| Reinsurance recoverables on unpaid losses |
(92.1 | ) | — | |||||
|
|
|
|
|
|||||
| Reserve for losses and LAE, net of reinsurance recoverables as of beginning of the period |
13.0 | — | ||||||
| Add: Incurred losses and LAE, net of reinsurance, related to: |
||||||||
| Current year |
39.0 | 5.3 | ||||||
| Prior years |
(0.3 | ) | (0.1 | ) | ||||
|
|
|
|
|
|||||
| Total incurred |
38.7 | 5.2 | ||||||
| Deduct: Loss and LAE payments, net of reinsurance, related to: |
||||||||
| Current year |
(19.5 | ) | (3.3 | ) | ||||
| Prior year |
(5.1 | ) | — | |||||
|
|
|
|
|
|||||
| Total paid |
(24.6 | ) | (3.3 | ) | ||||
| Reserve for losses and LAE, net of reinsurance recoverables at end of period |
27.1 | 1.9 | ||||||
| Add: Reinsurance recoverables on unpaid losses and LAE at end of period |
168.1 | — | ||||||
|
|
|
|
|
|||||
| Reserve for losses and LAE gross of reinsurance recoverables on unpaid losses and LAE as of end of the period |
$ | 195.2 | $ | 1.9 | ||||
|
|
|
|
|
|||||
14
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Included in the Loss and LAE for the six months ended June 30, 2021 are losses related to weather-related loss experience, including the Texas winter storm in February 2021 and the wind and hail storms in April 2021.
Net incurred losses and LAE experienced favorable development of $0.3 million and 0.1 million for the six months ended June 30, 2021 and 2020, respectively. These changes are generally a result of ongoing analysis of recent loss development trends. Loss and LAE are updated as additional information becomes known.
Unpaid loss and LAE includes anticipated salvage and subrogation recoverable. The amount of anticipated salvage and subrogation recoverable is insignificant as of June 30, 2021.
8. Reinsurance
The Company has entered into quota share and excess of loss contracts, which may have catastrophe exposure. The Company is not relieved of its primary obligations to policyholders in the event of a default or the insolvency of its reinsurers, therefore a credit exposure exists to the extent that any reinsurer fails to meet its obligations in the reinsurance agreements. To mitigate this exposure to reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and, in certain circumstances, holds substantial collateral (in the form of letters of credit, trusts and funds withheld) as security under the reinsurance agreements. No amounts have been recorded in the three and six months ended June 30, 2021 and 2020 for amounts anticipated to be uncollectible or for the anticipated failure of a reinsurer to meet its obligations under the contracts.
For its primary reinsurance treaty incepting in 2021, the Company secured quota share reinsurance from a diverse panel of nine third-party reinsurers with A.M. Best ratings of A- or better. A total of approximately 11% of the risk was retained either by Spinnaker or Hippo’s captive, RHS, which aligns interests with third-party reinsurers. Two of the reinsurers, representing approximately one third of the program, are three-year agreements.
The following tables reflect amounts affecting the statements of operations and comprehensive loss for ceded reinsurance for the three and six months ended June 30, 2021 and 2020 (in millions):
| For the Three Months Ended June 30, | ||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||
| Written premiums |
Earned premiums |
Loss and LAE incurred |
Written premiums |
Earned premiums |
Loss and LAE incurred |
|||||||||||||||||||
| Direct |
$ | 129.3 | $ | 83.9 | $ | 135.7 | $ | — | $ | — | $ | — | ||||||||||||
| Assumed |
(0.7 | ) | 3.2 | 4.8 | 5.5 | 3.1 | 3.3 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Gross |
128.6 | 87.1 | 140.5 | 5.5 | 3.1 | 3.3 | ||||||||||||||||||
| Ceded |
(116.4 | ) | (76.9 | ) | (119.1 | ) | — | (0.6 | ) | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net |
$ | 12.2 | $ | 10.2 | $ | 21.4 | $ | 5.5 | $ | 2.5 | $ | 3.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
15
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
| For the Six Months Ended June 30, | ||||||||||||||||||||||||
| 2021 | 2020 | |||||||||||||||||||||||
| Written premiums |
Earned premiums |
Loss and LAE incurred |
Written premiums |
Earned premiums |
Loss and LAE incurred |
|||||||||||||||||||
| Direct |
$ | 224.3 | $ | 154.9 | $ | 276.1 | $ | — | $ | — | $ | — | ||||||||||||
| Assumed |
3.4 | 6.6 | 10.1 | 14.7 | 4.8 | 5.2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Gross |
227.7 | 161.5 | 286.2 | 14.7 | 4.8 | 5.2 | ||||||||||||||||||
| Ceded |
(208.4 | ) | (142.5 | ) | (247.5 | ) | (2.0 | ) | (0.8 | ) | — | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net |
$ | 19.3 | $ | 19.0 | $ | 38.7 | $ | 12.7 | $ | 4.0 | $ | 5.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
9. Convertible Promissory Notes and Derivative Liability
In February 2021, the Company issued an additional convertible promissory note of $7.0 million that matures in February 2024 for management services provided. The convertible promissory notes bear interest at 2.5% compounded semi-annually. If conversion event has not occurred, this annual interest rate will automatically increase by 2.5% up to 7.5% after certain periods specified in the Purchase Agreement. After 15 months from issuance, if a conversion event has not occurred, interest shall accrue at 5% per annum, compounding semi-annually, unless the Company has filed an S-1 or signed a letter of intent or definitive agreements with respect to a qualified private round or public issuer merger, in which case the interest rate increase to 5% shall apply after 21 months from issuance, provided a conversion on event has not occurred. With a prior written consent from the investor, the Company may repay the convertible promissory notes and interest, in whole or in part, any time in cash before the maturity date without a prepayment penalty. The convertible promissory notes contain an embedded derivative.
The fair value of the embedded derivative upon issuance of this note was $2.8 million. Interest expense is accreted on the convertible promissory notes between issuance and maturity dates with the expectation that principal and interest are likely to be settled in shares of common stock of the Company at a variable conversion price calculated at 90% of trade price of common stock of the Company. For additional information on derivative liability, refer to Note 4 of these interim consolidated financial statements.
As of June 30, 2021, the Company had aggregate outstanding convertible promissory notes of $299.0 million, net of $90.2 million of debt discount and issuance costs, with varying maturities. As of December 31, 2020, the Company had aggregate outstanding convertible promissory notes of $273.0 million, net of $104.5 million of debt discount and issuance costs.
10. Commitments and Contingencies
Operating Leases
The Company leases office space under non-cancelable operating leases with various expiration dates through 2029. Rent expense, which is recognized on a straight-line basis over the lease term, for the three and six months ended June 30, 2021 were $0.7 million and $1.5 million, respectively and for the three and six months ended June 30, 2020 were $0.7 million and $1.4 million, respectively.
16
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Litigation
On June 4, 2021, Nicholas Kalair filed a putative class action complaint against Hippo in the U.S. District Court, Northern District of California, alleging violations of the Telephone Consumer Protection Act, individually and on behalf of a putative nationwide class of individuals who received calls or voice messages from Hippo or its agents in the four years prior to the filing of the complaint. Plaintiff voluntarily dismissed the lawsuit without prejudice on July 23, 2021.
11. Convertible Preferred Stock
There was no change in preferred stock during the six month period ended June 30, 2021 (in millions, except for share and per share data).
| June 30, 2021 | ||||||||||||||||||||
| Issuance Price Per Share |
Authorized Shares |
Shares Issued and Outstanding |
Net Carrying Value |
Liquidation Preference |
||||||||||||||||
| Preferred A-1 Stock |
$ | 0.56965 | 5,889,829 | 5,889,829 | $ | 3.4 | $ | 3.4 | ||||||||||||
| Preferred A-2 Stock |
1.57432 | 7,015,787 | 6,987,125 | 10.9 | 11.0 | |||||||||||||||
| Preferred B Stock |
3.59757 | 6,949,142 | 6,949,142 | 24.9 | 25.0 | |||||||||||||||
| Preferred C Stock |
7.04471 | 9,936,529 | 9,936,528 | 56.1 | 70.0 | |||||||||||||||
| Preferred C-1 Stock |
11.74119 | 2,465,454 | — | — | — | |||||||||||||||
| Preferred D Stock |
15.16420 | 6,594,479 | 6,594,479 | 99.8 | 100.0 | |||||||||||||||
| Preferred E Stock |
19.66420 | 7,628,090 | 7,628,075 | 149.7 | 150.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
46,479,310 | 43,985,178 | $ | 344.8 | $ | 359.4 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
Preferred Stock Warrant Liabilities
In connection with obtaining a line of credit in March 2017, the Company issued 28,662 warrants to purchase Series A-2 Preferred Stock. The warrants vested immediately and are exercisable up to March 13, 2027. In case the Company completes its IPO, within the three-year period immediately prior to the expiration date, the expiration date will automatically be extended to three years from the IPO date.
In connection with the issuance of Series C Preferred Stock, in October 2018, the Company issued to an investor 2,465,454 warrants to purchase Series C-1 Preferred Stock. The warrants are exercisable upon vesting. In April 2020, the warrants were fully vested. The warrants will expire at the earliest of a deemed liquidation event, stock sale, IPO, or October 25, 2022.
The preferred stock warrant liability is remeasured at each reporting period end with changes in fair value upon remeasurement being recorded within interest and other expense in the consolidated statements of operations and comprehensive loss. See Note 4 for additional information on the fair value of preferred stock warrant liability.
17
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company used the Black-Scholes-Merton option-pricing model, which incorporates assumptions and estimates, to value the preferred stock warrants. Estimates and assumptions impacting the fair value measurement include the fair value per share of the underlying shares of the Company’s Series A-2 and Series C-1 convertible preferred stock, risk free interest rate, expected dividend yield, expected volatility of the price of the underlying preferred stock, and an expected term of the preferred stock warrants.
The most significant assumption impacting the fair value of the preferred stock warrants is the fair value of the Series A-2 and C-1 Preferred Stock as of each remeasurement date. The Company determined the fair value per share of the underlying preferred stock by taking into consideration the most recent sales of its preferred stock, results obtained from third-party valuations, and additional factors that were deemed relevant.
The following assumptions were used in determining fair value of the convertible preferred stock warrant liabilities:
| June 30, 2021 |
December 31, 2020 |
|||||||
| Fair value of Series A-2 Preferred Stock |
$ | 66.64 | $ | 18.25 | ||||
| Fair value of Series C-1 Preferred Stock |
$ | 66.74 | $ | 20.09 | ||||
| Exercise price A-2 Preferred Stock |
$ | 1.57 | $ | 1.57 | ||||
| Exercise price C-1 Preferred Stock |
$ | 11.74 | $ | 11.74 | ||||
| Expected term (in years) |
1.3-5.7 | 1.8-6.2 | ||||||
| Expected volatility |
26.6%-29.1% | 29.0%-40.7% | ||||||
| Risk-free interest rate |
0.1%-1.1% | 0.1%-0.5% | ||||||
| Expected dividend yield |
— % | — % | ||||||
The following convertible preferred stock warrants were outstanding with the related fair values (in millions, except for share and per share data):
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||
| Series |
Exercise Price Per Share |
Warrant Shares Outstanding |
Fair Value | Warrant Shares Outstanding |
Fair Value | |||||||||||||||
| A-2 |
$ | 1.57 | 28,662 | $ | 1.9 | 28,662 | $ | 0.5 | ||||||||||||
| C-1 |
11.74 | 2,465,454 | 135.6 | 2,465,454 | 22.4 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
2,494,116 | $ | 137.5 | 2,494,116 | $ | 22.9 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
12. Stockholders’ Deficit
Common Stock
The Company’s Certificate of Incorporation, as amended and restated, authorizes the Company to issue up to 83,830,000 shares of common stock with par value of $0.000001 per share. Each share of common stock is entitled to one vote. The holders of the common stock are also entitled to receive dividends whenever funds are legally available and when declared by the board of directors. No dividends have been declared or paid since inception.
18
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company had reserved shares of common stock for future issuance as follows:
| June 30, 2021 | December 31, 2020 | |||||||
| Convertible preferred stock |
43,985,178 | 43,985,178 | ||||||
| Warrants to purchase preferred stock |
2,494,116 | 2,494,116 | ||||||
| Warrants to purchase common stock |
9,476,102 | 9,476,102 | ||||||
| Common stock options outstanding |
9,449,400 | 10,382,771 | ||||||
| Shares available for future grant of equity awards |
2,617,273 | 2,627,921 | ||||||
|
|
|
|
|
|||||
| Total |
68,022,069 | 68,966,088 | ||||||
|
|
|
|
|
|||||
Common Stock Warrants
There was no change in the number of common stock warrants issued during the three and six month period ended June 30, 2021. The following common stock warrants were outstanding as of June 30, 2021:
| Issue Date |
Exercise Price Per Share |
Number of Warrants |
Expiration Date | Outstanding as of June 30, 2021 |
||||||||||
| December 11, 2017 |
$ | 0.01 | 4,738,051 | December 31, 2022 | 4,738,051 | |||||||||
| February 19, 2018 |
$ | 0.01 | 4,738,051 | August 19, 2022 | 4,738,051 | |||||||||
Share-Based Compensation Plan
Adopted in 2019 and replacing the 2016 Stock Option and Grant Plan, the 2019 Stock Option and Grant Plan (“the 2019 Stock Plan”) provides for the direct award or sale of shares, the grant of options to purchase shares and the grant of restricted stock units (“RSUs”) to employees, consultants, and outside directors of the Company. Stock options under the plan may be either incentive stock options (“ISOs”) or non-qualified stock options (“NSOs”), with an exercise price of not less than 100% of fair market value on the grant date, with a term less than or equal to ten years. The vesting period of each option and RSU shall be as determined by a committee of the Company’s board of directors but is generally over four years.
Stock Options
The following table summarizes option activity under the plan:
| Options Outstanding | Weighted-Average Remaining |
Aggregate Intrinsic | ||||||||||||||
| Number of Shares |
Weighted Average Exercise Price |
Contract Term (In Years) |
Value (In Millions) |
|||||||||||||
| Outstanding as of January 1, 2021 |
10,382,771 | $ | 4.88 | 8.90 | $ | 108.9 | ||||||||||
| Granted |
569,350 | 25.44 | ||||||||||||||
| Exercised |
(846,674 | ) | 2.56 | |||||||||||||
| Forfeited |
(649,324 | ) | 6.67 | |||||||||||||
| Expired |
(6,723 | ) | 3.95 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding as of June 30, 2021 |
9,449,400 | $ | 6.20 | 8.55 | $ | 547.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Vested and exercisable as of June 30, 2021 |
1,555,878 | $ | 4.27 | 8.01 | $ | 93.0 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
19
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The aggregate intrinsic value of options exercised during the six months ended June 30, 2021 and 2020 was $52.8 million and $2.0 million, respectively, and is calculated based on the difference between the exercise price and the fair value of the Company’s common stock as of the exercise date. The weighted-average grant date fair value of options granted during the six months ended June 30, 2021 and 2020 was $19.90 and $1.80 per share, respectively.
Total unrecognized compensation cost of $32.1 million as of June 30, 2021 is expected to be recognized over a weighted-average period of 3.1 years.
Valuation Assumptions of Stock Options
The fair value of granted stock options was estimated as of the date of grant using the Black-Scholes-Merton option-pricing model, based on the following inputs:
| June 30, 2021 |
December 31, 2020 |
|||||||
| Expected term (in years) |
5.8 - 6.1 | 5.6 - 6.1 | ||||||
| Expected volatility |
29.7% - 30.1% | 22.6% - 29.9% | ||||||
| Risk-free interest rate |
0.6% - 1.0% | 0.3% - 1.6% | ||||||
| Expected dividend yield |
—% | —% | ||||||
Each of these inputs is subjective and generally requires significant judgment to determine.
Expected Term – The expected term represents the period that the Company’s share-based awards are expected to be outstanding. The Company has opted to use the simplified method for estimating the expected term of options, hereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option (generally 10 years).
Expected Volatility – Due to the Company’s limited operating history and a lack of company specific historical and implied volatility data, the Company has based its estimate of expected volatility on the historical volatility of a group of peer companies that are publicly traded. The historical volatility data was computed using the daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the share-based awards.
Risk-Free Interest Rate – The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S. Treasury notes with maturities approximately equal to the grant’s expected term.
Expected Dividend Yield – The Company has never paid dividends and does not currently expect to pay dividends.
Early Exercises of Stock Options
At June 30, 2021 and December 31, 2020, the Company had $2.5 million and $2.5 million, respectively, recorded in accrued expenses and other liabilities related to early exercises of stock options, and the related number of unvested shares subject to repurchase was 345,625 and 345,000, respectively.
20
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
Total share-based compensation expense, classified in the accompanying consolidated statements of operations and comprehensive loss was as follows (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Losses and loss adjustment expenses |
$ | 0.1 | $ | — | $ | 0.1 | $ | — | ||||||||
| Insurance related expenses |
— | — | 0.1 | 0.1 | ||||||||||||
| Technology and development |
0.5 | 0.2 | 1.0 | 0.4 | ||||||||||||
| Sales and marketing |
1.2 | 0.2 | 2.1 | 0.4 | ||||||||||||
| General and administrative |
1.0 | 0.5 | 2.0 | 0.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total share-based compensation expense |
$ | 2.8 | $ | 0.9 | $ | 5.3 | $ | 1.8 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
13. Income Taxes
The consolidated effective tax rate was (0.1)% and (0.1)% for the six months ended June 30, 2021 and 2020, respectively. The difference between these rates and the U.S. federal income tax rate of 21% was primarily due to a full valuation allowance against the Company’s net deferred tax assets.
The Company did not have an unrecognized tax benefit as of June 30, 2021 and 2020. No interest or penalties were incurred during the six months ended June 30, 2021 and 2020.
14. Net Loss Per Share Attributable to Common Stockholders
Net loss per share attributable to common stockholders was computed as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Numerator: |
||||||||||||||||
| Net loss attributable to Hippo - basic and diluted (in millions) |
$ | (84.5 | ) | $ | (24.8 | ) | $ | (279.8 | ) | $ | (48.7 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Denominator: |
||||||||||||||||
| Weighted-average shares used in computing net loss per share attributable to Hippo — basic and diluted |
14,134,399 | 12,360,596 | 13,968,160 | 12,236,471 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Net loss per share attributable to Hippo — basic and diluted |
$ | (5.98 | ) | $ | (2.01 | ) | $ | (20.03 | ) | $ | (3.98 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
21
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
The potential shares of common stock that were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented because including them would have been antidilutive are as follows:
| As of June 30, | ||||||||
| 2021 | 2020 | |||||||
| Convertible preferred stock (on an as if converted basis) |
43,985,178 | 36,330,613 | ||||||
| Outstanding options |
9,741,833 | 8,141,970 | ||||||
| Warrants to purchase common shares |
4,800,551 | 4,738,051 | ||||||
| Warrants to purchase preferred shares |
2,494,116 | 2,494,116 | ||||||
| Common stock subject to repurchase |
1,713,658 | 1,366,513 | ||||||
| Convertible notes |
21,603,512 | — | ||||||
|
|
|
|
|
|||||
| Total |
84,338,848 | 53,071,263 | ||||||
|
|
|
|
|
|||||
15. Geographical Breakdown of Gross Written Premium
Gross written premium (“GWP”) by state is as follows (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||||||
| Amount | % of GWP | Amount | % of GWP | Amount | % of GWP | Amount | % of GWP | |||||||||||||||||||||||||
| State |
||||||||||||||||||||||||||||||||
| Texas |
$ | 39.9 | 31.0 | % | $ | 4.0 | 72.7 | % | $ | 72.9 | 32.0 | % | $ | 10.9 | 74.1 | % | ||||||||||||||||
| California |
22.8 | 17.7 | % | — | — | % | 41.6 | 18.3 | % | — | — | % | ||||||||||||||||||||
| Florida |
8.6 | 6.7 | % | — | — | % | 14.4 | 6.3 | % | — | — | % | ||||||||||||||||||||
| Georgia |
5.6 | 4.4 | % | 0.2 | 3.6 | % | 9.8 | 4.3 | % | 0.4 | 2.7 | % | ||||||||||||||||||||
| Illinois |
4.5 | 3.5 | % | 0.3 | 5.5 | % | 7.6 | 3.3 | % | 0.7 | 4.8 | % | ||||||||||||||||||||
| Missouri |
3.5 | 2.7 | % | 0.2 | 3.6 | % | 5.9 | 2.6 | % | 0.5 | 3.4 | % | ||||||||||||||||||||
| Colorado |
3.1 | 2.4 | % | — | — | % | 5.7 | 2.5 | % | — | — | % | ||||||||||||||||||||
| Arizona |
2.9 | 2.3 | % | — | — | % | 5.3 | 2.3 | % | — | — | % | ||||||||||||||||||||
| New Jersey |
2.3 | 1.8 | % | — | — | % | 4.5 | 2.0 | % | — | — | % | ||||||||||||||||||||
| Ohio |
2.8 | 2.2 | % | 0.2 | 3.6 | % | 4.8 | 2.1 | % | 0.5 | 3.4 | % | ||||||||||||||||||||
| Other |
32.6 | 25.3 | % | 0.6 | 10.9 | % | 55.2 | 24.2 | % | 1.7 | 11.6 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Total |
$ | 128.6 | 100 | % | $ | 5.5 | 100 | % | $ | 227.7 | 100 | % | $ | 14.7 | 100 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
16. Related Party
Hippo has agreements with multiple Comcast entities and affiliated funds who are beneficial owners of more than 5% of outstanding Hippo stock. Hippo incurred expenses of $1.3 million and $2.3 million, during the three and six months ended June 30, 2021, respectively, and $1.7 million and $3.1 million, during the three and six months ended June 30, 2020, respectively, related to these marketing and consulting agreements.
22
HIPPO HOLDINGS INC.
Notes to Consolidated Financial Statements
(Unaudited)
17. Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through August 16, 2021, the date these consolidated financial statements are available to be issued.
The Company filed a Report on Form 8-K on July 30, 2021, describing subsequent events relating to the shareholders meeting and proposal as presented and voted on July 29, 2021.
On July 29, 2021, 19,261,380 of the RTPZ’s Class A ordinary shares amounting to $192.6 million were presented for redemption in connection with the Business Combination. These redemptions were completed, and amount settled with the shareholders.
On August 2, 2021, RTPZ and Hippo Enterprises Inc. closed Business Combination and on August 3, 2021 Hippo Holdings common stock and warrants begin publicly trading on The New York Stock Exchange under the new symbols “HIPO” and “HIPO.WS”, respectively.
On August 2, 2021, the Company issued, in the aggregate, 55,000,000 shares of its common stock to investors at $10.00 per share for aggregate consideration of $550.0 million (the “PIPE Investment”).
On August 5, 2021, the Company filed a Report on Form 8-K describing subsequent events related to the Business Combination and PIPE Investment.
There were no other items identified in the period subsequent to the consolidated financial statement date that required adjustment or disclosure.
23
Exhibit 99.2
HIPPO MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, references in this “Hippo Management’s Discussion and Analysis of Financial Condition and Results of Operations” to “we”, “our”, “Hippo” and “the Company” refer to the business and operations of Hippo Enterprises Inc. and its consolidated subsidiaries prior to the Business Combination and to Hippo Holdings Inc. and its consolidated subsidiaries, following the consummation of the Business Combination.
Overview
Hippo is a different kind of home protection company, built from the ground up to provide a new standard of care and protection for homeowners. Our goal is to make homes safer and better protected so customers spend less time worrying about the burdens of homeownership and more time enjoying their homes and the life within. Harnessing real-time data, smart home technology, and a growing suite of home services, we have created an integrated home protection platform.
The home insurance industry has long been defined by incumbents that we believe deliver a passive, high-friction experience to policyholders. We view these incumbents as constrained by outdated captive-agent distribution models, legacy technology, and strong incentives not to disrupt their businesses. Accordingly, the industry has not seen meaningful innovation in decades. We believe this results in a flawed customer experience that creates a transactional, adversarial relationship—one that pits insurance companies and their “policyholders” against each other in a zero-sum game. The outcome of this misalignment is an experience that is out of touch with the needs of modern homeowners.
As a digital-first, customer-centric company, we offer an improved customer value proposition and are well-positioned to succeed in this growing, $105 billion market. By making our policies fast and easy to buy, designing coverages around the needs of modern homeowners, and offering a proactive, white-glove claims experience, we have created an active partnership with our customers to better protect their homes, which saves our customers money and delivers a better economic outcome for Hippo.
Beyond a core insurance experience that is simple, intuitive, and human, we focus our resources on Hippo’s true promise: better outcomes for homeowners. Through our unique Smart Home program, customers may detect and address water, fire, and other issues before they become major losses. And we help our customers maintain their homes with on-demand maintenance advice and access to home check-ups designed to reduce the probability of future losses. In short, we have created an integrated home protection platform, which offers a growing suite of proactive features designed to prevent loss and provide greater peace of mind.
Our partnership with our customers is designed to create a virtuous cycle. By making homes safer, we help deliver better risk outcomes and increase customer loyalty, which improves our unit economics and customer lifetime value (“LTV”). This enables us to invest in expanding our product offering, customer value proposition, and marketing programs, which helps attract more customers to the Hippo family. This growth generates more data and insights to fuel further innovation in our product experience and improved underwriting precision. The result is even safer homes and more loyal customers. We believe this virtuous cycle, combined with our significant existing scale, deep partnerships, and compelling unit economics, will propel Hippo to become a trusted household name synonymous with home protection.
Our Business Model
There are four key components in our economic model. First, as a managing general agent (“MGA”), we manage the customer-facing experience of insurance, including sales and marketing, underwriting, policy issuance and administration, and claims administration. In exchange for these services, we earn recurring commission and fees associated with the policies we sell. While we have underwriting authority and responsibility for administering policies and claims, we do not take the bulk of the risk associated with these policies on our own balance sheet. Rather, we work with a diversified panel of highly-rated insurance companies who pay us commission in exchange for the opportunity to take the insurance risk on their own balance sheets.
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We also earn commission income as a licensed insurance agency selling non-Hippo policies to our customers. Today, we earn agency commission income when we cross sell automobile, flood, earthquake, umbrella, and other policies to our homeowners customers, when a customer seeking homeowners insurance is an area where Hippo policies are unavailable in which case we place them with another carrier, or when a particular home does not meet our underwriting criteria in which case we also place these customers with another carrier when possible. As we broaden our agency offerings, we expect to distribute additional types of insurance offered by other carriers, which we expect will contribute to growth of this business. Commission income on these policies recurs as the policies renew allowing us to earn margin relative to our customer acquisition cost.
The third way we generate revenue is through our platform offering insurance-as-a-service to other MGAs who are willing to share economics with a carrier that can provide the capital and regulatory licenses needed for their business, commonly referred to as ‘fronting fees’. The economic benefits to us of providing this service extend beyond profit margins on these premiums and include capital efficiency benefits as the diversity of insurance offered allows us to secure more cost-effective reinsurance coverage. Given our diverse portfolio of homeowners insurance, the regulatory capital we are required to set aside for premium generated by these third parties is lower than these parties would need to set aside if they were to provide their own capital.
Finally, we earn revenue in the form of earned premium when we retain risk on our own balance sheet rather than ceding it to third-party reinsurers.
In the future, we anticipate generating additional revenue through our offering of value-added services such as home monitoring and maintenance.
Our Asset-Light Capital Model and Reinsurance
We have historically pursued an asset-light capital strategy to support the growth of our business. Even though we acquired a licensed carrier in 2020, we generally retain only as much risk on our balance sheet as is necessary to secure attractive terms from the reinsurers who bear the risk of the policies we sell. Those reinsurers usually insist that companies like ours retain some risk to ensure alignment of interests. For policies written in 2021, we expect to retain approximately 10% of the risk associated with Hippo homeowners policies on our own balance sheet and expect to see this increase modestly over time.
This strategy also helps support our growth: third party reinsurance helps decrease the statutory capital required to support new business growth. As a result, we expect to be able to grow at an accelerated pace with lower capital investments upfront than we would otherwise require. We have a successful track record of securing strong reinsurance treaties, providing a solid foundation for a long-term, sustainable model.
Reinsurance
We utilize reinsurance primarily to support the growth of our new and renewal insurance business, to reduce the volatility of our earnings, and to optimize our capital management.
As an MGA, we underwrite homeowners insurance policies on behalf of our affiliated insurer, Spinnaker Insurance Company, and other third-party insurance carriers. These carriers purchase reinsurance from a variety of sources and in a variety of structures. In the basic form of this arrangement, fronting insurance carriers will typically cede a large majority of the total insurance premium they earn from customers, in return for a proportional amount of reinsurance protection. This is known as “ceding” premium and losses through a “quota share” reinsurance treaty.
The fronting carrier and the MGA are paid a share of the ceded premium as compensation for sales and marketing, underwriting, insurance, support, claims administration, and other related services (in totality, known as a ceding commission). As additional protection against natural catastrophes or other large loss events, the fronting carrier frequently purchases additional, non-proportional reinsurance.
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Without reinsurance protection, the insurer would shoulder all the insurance risk itself and would need incremental capital to satisfy regulators and rating agencies. Reinsurance allows a carrier to write more business while reducing its balance sheet exposure and volatility of earnings.
As a result, we believe our acquisition of Spinnaker gives us increased control over reinsurance strategy and purchasing.
Proportional Reinsurance Treaties — Hippo MGA
For our primary reinsurance treaty incepting in 2021, we secured proportional, quota share reinsurance from a diverse panel of nine third-party reinsurers with AM Best ratings of “A-” or better. We retain approximately 11% of the proportional risk through Spinnaker or our captive reinsurance company, RH Solutions Insurance, which aligns our interests with those of our reinsurers. We also seek to further reduce our risk retention through purchases of non-proportional reinsurance described below in the section titled “— Non-Proportional Reinsurance.”
Non-Proportional Reinsurance — Hippo MGA
We also purchase two forms of non-proportional reinsurance: excess of loss (“XOL”) and per-risk. Through our ownership of Spinnaker, we are exposed to the risk of larger losses and natural catastrophe events that could occur on the risks we are assuming from policies underwritten by us or other MGAs. We are also exposed to this risk through our captive reinsurer, which takes on a share of the risk underwritten by our MGA business.
Our XOL program provides protection to us from catastrophes that could impact a large number of insurance policies. The probability of losses exceeding the XOL protection purchased is approximately 0.4%, or equivalent to a 1:250 year return period. This reinsurance also caps losses at a level which protects us from all but the most severe catastrophic events.
Our per-risk program protects us from large, individual claims that are less likely to be associated with catastrophes, such as house fires. The per-risk program will respond to catastrophes on a limited basis. We have historically purchased and expect to continue to purchase this coverage for the benefit of our retained shares for losses on single policies in excess of $500,000.
Other Spinnaker MGA Programs — Reinsurance
As the fronting carrier for other MGAs, Spinnaker has reinsurance in place for several other MGA programs. Those programs are supported by a diversified panel of high-quality reinsurers similar to those on Hippo’s panel. The treaties are a mix of quota share and excess of loss in which 80% to 100% of the risk is ceded. Spinnaker’s catastrophic risk retention for each program is managed to a 1:250 year loss event across all programs.
With all our reinsurance programs, we are not relieved of our primary obligations to policyholders in the event of a default or the insolvency of our reinsurers. As a result, a credit exposure exists to the extent that any reinsurer fails to meet its obligations assumed in the reinsurance agreements. To mitigate this exposure to reinsurance insolvencies, we evaluate the financial condition of our reinsurers and, in certain circumstances, hold substantial collateral (in the form of funds withheld and letters of credit) as security under the reinsurance agreements.
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Business Combination and Public Company Costs
On March 3, 2021, we entered into the Merger Agreement with Merger Sub and RTPZ. The Merger Agreement provides for, among other things, following the Domestication (including the change of RTPZ’s name to “Hippo Holdings Inc.”), (i) the merger of Merger Sub with and into Hippo, with Hippo surviving the merger as a wholly owned subsidiary of RTPZ, immediately followed by (ii) the merger of the surviving corporation of the First Merger with and into RTPZ, with RTPZ surviving the merger, in accordance with the terms and subject to the conditions of the Merger Agreement as more fully described and included or incorporated by reference in our Report on Form 8-K filed on August 5, 2021. Hippo will be deemed the accounting predecessor and Hippo Holdings will be the successor SEC registrant, which means that Hippo’s financial statements for previous periods will be disclosed in Hippo Holdings’ future periodic reports filed with the SEC.
The Business Combination is accounted for as a reverse recapitalization. Under this method of accounting, Hippo Holdings is treated as the acquired company for financial statement reporting purposes. The most significant change in Hippo Holdings’ future reported financial position and results was an increase in net cash of approximately $455 million.
As a consequence of the Business Combination, Hippo became an SEC-registered and NYSE-listed company which requires us to continue to hire additional personnel and implement procedures and processes to satisfy public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
COVID-19 Impact
The COVID-19 pandemic and the measures imposed to contain it severely impacted businesses worldwide, including many in the insurance sector. Insurers of travel, events or business interruption have been directly and adversely affected by claims from COVID-19 or the lock-down it engendered. Other insurance businesses, including property and casualty lines, have also been indirectly impacted in varying ways, ranging from increased claim rates to dependency on in-person inspections during a time when such in-person interactions have been discouraged. In addition, insurance businesses dependent on office-based brokers and teams that are poorly equipped to work from home have been negatively impacted. The broader economic volatility may hurt insurers in other ways. For instance, with interest rates at all-time lows, many insurers have and may continue to see their return on capital drop, while those selling premium or discretionary products may see an increase in churn and a decrease in demand.
The magnitude and duration of the global pandemic and the impact of actions taken by governmental authorities, businesses and consumers, including the availability and acceptance of vaccines, to mitigate health risks continue to create significant uncertainty, particularly as new strains of the virus emerge and create potential challenges to vaccination efforts. We are closely monitoring the impact of the COVID-19 pandemic and related economic effects on all aspects of our business, including how it will impact our production, loss ratios, recoverability of premium, our operations, and the fair value of our investment portfolio.
Production, loss ratios and recoverability of premium:
COVID-19 has reduced our ability to perform interior home inspections on risks we underwrite, may impact loss ratios as time at home has increased, and has impacted collection of premium where moratoriums have been imposed restricting cancellation of policies for non-payment. During 2020, we also witnessed increased cost of labor, and costs associated with materials like timber. These higher costs have a direct impact to the cost of handling claims and result in more than normal loss expenses.
Due to the speed with which the COVID-19 situation has developed over the past year, the global breadth of its spread and the range of governmental and community reactions thereto, uncertainty around its duration and ultimate impact persists, and the related financial impact on our business could change and cannot be accurately predicted at this time.
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Operations:
The COVID-19 pandemic has also had and continues to have a significant impact on our business operations, including with respect to employee availability and productivity, temporary increases in regulatory restrictions on operating activities (e.g. moratoria, rate actions or claim practices) that may impact our profitability, the availability and performance of third party vendors, including technology development, home inspections and repairs, and marketing programs. We may also be impacted by cybersecurity risks related to our new dependency on a remote workforce.
Our investment portfolio:
We seek to hold a high-quality, diversified portfolio of investments. During economic downturns, certain investments may default or become impaired due to deterioration in the financial condition or due to deterioration in the financial condition of an insurer that guarantees an issuer’s payments on such investments. Given the conservative nature of our investment portfolio, we do not expect a material adverse impact on the value of our investment portfolio or a long-term negative impact on our financial condition, results of operations or cash flows as it relates to COVID-19. Despite the COVID-19 pandemic, our business has continued to grow.
| • | We write and place home insurance and other insurance products from our agencies that have so far been largely unaffected by COVID-19. |
| • | Our systems are entirely cloud based and accessible to our teams from any browser anywhere in the world. Customers’ phone calls are routed to our team’s laptops and answered and logged from wherever they happen to be. Internal communication has been via email, Slack and Zoom since our founding. Our teams are able to access systems, support customers and collaborate with each other from anywhere, much as they did before the pandemic. |
| • | Our customers’ experience has also been largely unaffected by the turmoil; |
| • | We have initiated virtual inspections for our underwriting requirements and claims processing to keep our employees, agents, policy holders and potential policy holders safe. |
For more information on our operations and risks related to health epidemics, including the COVID-19 pandemic, please see the section of the proxy statement/consent solicitation statement/prospectus entitled “Risk Factors” included or incorporated by reference in our Report on Form 8-K filed on August 5, 2021.
Key Factors and Trends Affecting our Operating Performance
Our financial condition and results of operations have been, and will likely continue to be, affected by a number of factors, including the following:
Our Ability to Attract New Customers
Our long-term growth will depend, in large part, on our continued ability to attract new customers to our platform. We intend to continue to drive new customer growth by highlighting our consumer-focused approach to homeowners insurance across multiple distribution channels. In particular:
| • | Our growth strategy is centered around accelerating our existing position in markets that we already serve by increasing our direct-to-consumer advertising, increasing the number of agents selling Hippo policies, and growing our network of partners within existing partner channels. |
| • | In addition to efforts in states where we are currently selling insurance, we also expect to drive growth by expanding into new markets across the United States and by continuing to develop new strategic partnerships with key players involved in the real estate transaction ecosystem. |
| • | Finally, we plan to deepen our relationships with our customers by offering value-added services, both directly and through partners, that are not specifically insurance products like home maintenance, home monitoring, and home appliance warranties. |
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Our ability to attract new customers depends on the pricing of our products, the offerings of our competitors, our ability to expand into new markets, and the effectiveness of our marketing efforts. Our ability to attract customers also depends on maintaining and strengthening our brand by providing superior customer experiences through our proactive, tech-enabled strategy.
We face competition from traditional insurers who have more diverse product offerings and longer established operating histories as well as from new, technology-driven entrants who may pursue more horizontal growth strategies. These competitors may mimic certain aspects of our digital platform and offerings and as they have more types of insurance products, can offer customers the ability to “bundle” multiple coverage types together, which may be attractive to many customers.
Our Ability to Retain Customers
Our ability to derive significant lifetime value from our customer relationships depends, in part, on our ability to retain our customers over time. Strong retention allows us to build a recurring revenue base, generating additional premium term over term without material incremental marketing costs. Our customers typically become more valuable to us over time because retention rates have historically increased with the age of customer cohorts and because non-catastrophic loss frequency declines as cohorts mature.
As we expect to broadly retain our customers, we expect our book of business to evolve to be weighted more towards renewals versus new business over time, as is the case with our more mature competitors. We expect that this would enable us to benefit from the higher premium retention rates and inherently lower frequency of losses that characterize renewed premiums.
Our ability to retain customers will depend on a number of factors, including our customers’ satisfaction with our products, offerings of our competitors, and our ability to continue delivering exceptional customer service and support.
Our Ability to Expand Nationally Across the United States
We believe that national expansion will be a key driver of the long-term success of our business. As of June 30, 2021, we were authorized to sell Hippo Homeowners policies in 37 states. We expect to apply our highly scalable model nationally, with a tailored approach to each state that is driven by the regulatory environment and local market dynamics. We hope to expand rapidly and efficiently across different geographies while maintaining a high level of control over the specific strategy within each state.
We expect to benefit from our ability to provide insurance across an increasing number of states in the United States. State expansion should create a broader base from which to grow while increasing the geographic diversity in our base of customers and premium. We expect that this greater diversity will reduce the impact of catastrophic weather events in any one geographic region on our overall loss ratio, improving the predictability of our financial results over time as we scale. We believe that increased geographic diversity will also improve our ability to secure attractive terms from reinsurers, which would improve our overall cost structure and profitability.
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Our Ability to Expand Fee Income and Premium Through Cross-Sales to Existing Customers
Our strategy to increase the value we are providing to our customers is to offer incremental services to assist our customers in better maintaining and protecting their homes. As we roll out these services, we expect to be able to generate incremental, non-risk-based service and fee income from our existing customers. We expect these home protection services not only to generate incremental revenue, but to reduce losses for our customers, and by implication our loss ratios. Our success in expanding revenue and reducing losses by offering these services depends on our ability to market these services, our operational ability to deliver value to our customers, and the ability of these services to reduce the probability of loss for an average homeowner.
We are also in the early stages of cross-selling non-homeowner insurance products across our customer base. Cross-sales allow us to generate additional premium per customer, and ultimately higher revenue and fee income, without material incremental marketing spend. Our success in expanding revenue through cross-sales depends on our marketing efforts with new products, offerings of our competitors, additional expansion into new states, and the pricing of our bundled products.
Our Ability to Manage Risk
We leverage data, technology, and geographic diversity to help manage risk. For instance, we leverage dynamic data sources obtained through various sources and we use advanced statistical methods to model that data into our pricing algorithm. We expect to improve our ability to manage risk and price risk accurately over time as we incorporate new external data sources and utilize the experience gained over time with our own customer base. We expect this to lead to better underwriting, lower loss frequency, and adjusting for weather-related events, lower loss ratios over time. While our current reinsurance framework enhances the stability of our net loss ratio, over time, we need to reduce our overall gross loss ratio. Our success in this area depends on our ability to incorporate new data sources as they become available and to use them to improve our ability to accurately and competitively price risk.
Seasonality of customer acquisition
Seasonal patterns can impact both our rate of customer acquisition and the incurrence of claims losses. Based on historical experience, existing and potential customers move more frequently during the summer months of the year, compared to the rest of the calendar year. As a result, we may see greater demand for new or expanded insurance coverage, and increased engagement resulting in proportionately more growth during the third quarter. We expect that as we grow, expand geographically and launch new products, the impact of seasonal variability on our rate of growth may decrease.
Additionally, seasonal weather patterns impact the level and amount of claims we receive. These patterns include hurricanes, wildfires, and coastal storms in the fall, cold weather patterns and changing home heating needs in the winter, and tornados and hailstorms in the spring and summer. The mix of geographic exposure and products within our customer base impacts our exposure to these weather patterns and as we diversify our base of premium such that our exposure more closely resembles the industry exposure, we should see the impact of these events on our business more closely resemble the impact on the broader industry.
A more diverse and resilient business model
As described in the section entitled “Hippo Management’s Discussion and Analysis of Financial Condition and Results of Operations — Our Business Model” there are four components in our economic model:
| 1. | MGA |
| 2. | Agency |
| 3. | Insurance as a Service |
| 4. | Risk Retention |
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During the three and six months ended June 30, 2020, we were operating primarily as an MGA where most of our economics were driven by our MGA and Agency businesses. Following the acquisition of Spinnaker Insurance Company in August 2020, we now have a more diverse and resilient business model as well as the infrastructure to support our growth trajectory.
This structural evolution of our business model has several implications:
| 1. | Substantive: We are retaining more risk on our balance sheet and accordingly both our net earned premium and our Loss and Loss Adjustment Expenses are expected to be higher. |
| 2. | Financial presentation: The direct acquisition costs associated with the premium written on our carrier will shift from sales and marketing to insurance related expense and will be offset by the corresponding ceding commission and amortized over the lifetime of the policy. Only the excess of ceding commission over our direct acquisition costs will be recognized as revenue. All else being equal, for the exact same amount of premium we expect: |
| a. | our ceding commission will be lower |
| b. | our sales and marketing expense will be lower |
| c. | our bottom line results will be unchanged |
When comparing our financial results year over year, and analyzing the year over year trends, we need to take into consideration these structural changes and their implications. We utilize a non-GAAP measure of Adjusted EBITDA to measure our operating profitability.
Acquisition of Spinnaker Insurance Company
In August 2020, we completed the acquisition of Spinnaker Insurance Company, giving us direct control over this aspect of our business. We believe the Spinnaker acquisition will enable us to maintain a capital-light model while retaining risk in a way that aligns our interests with those of the reinsurance market. We also believe it will benefit our economics; while we expect to continue writing business on third party carriers, we will no longer need to pay a fee to third parties for carrier services on the portion of business we write on Spinnaker. Our financial results in 2021 will reflect the full year of Spinnaker’s operations compared to a partial year in 2020. For more information, see the section titled “—Results of Operations” below.
Prior to the Spinnaker acquisition, Hippo received MGA commission income for the policies placed by Hippo on Spinnaker paper, and we recognized this commission income at the policy effective dates, net of risk retained by Hippo. The expense incurred for third-party sales commissions (i.e., acquisition costs) was presented on a gross basis in the statement of operations for the period January 1, 2020 to August 31, 2020 and the year ended December 31, 2019 and are included in sales and marketing line item and was not offset against the commission revenue.
After the acquisition, we have consolidated the results of Spinnaker which impact our results of operations as follows:
| • | Premium for the risk retained by us is recognized on a pro-rata basis over the policy period. |
| • | Ceding commission on premium ceded to third party reinsurers is deferred as a liability and recognized on a pro-rata basis over the term of the policy, net of acquisition costs. To the extent ceding commission received exceeds direct acquisition costs, the excess is presented as revenue in the Commission income, Net line on our statements of operations and comprehensive loss. The consolidated company (Hippo and Spinnaker) began to earn ceding commission on premium ceded to third party reinsurers in September 2020 and the ceding commission is recognized net of acquisition costs, on a pro-rata basis over the term of the policy. |
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Acquisition costs incurred to acquire the Spinnaker policies are deferred and amortized over the term of the policies. Those costs include sales commissions, premium taxes, and board and bureau fees. The amortization of deferred acquisition costs is included in insurance related expenses on the consolidated statements of operations and comprehensive loss.
Loss and LAE incurred, net of losses ceded to reinsurers, will be reflected in the statement of operations for the risk we retain on the Spinnaker policies.
Investment income, net representing interest earned from fixed maturity securities, short-term securities and other investments, and the gains or losses from the sale of investments is presented as part of revenue.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with GAAP as determined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) and pursuant to the regulations of the U.S. Securities and Exchange Commission (“SEC”).
Key Operating and Financial Metrics and Non-GAAP Measures
We regularly review the following key operating and financial metrics, to evaluate our business, measure our performance, identify trends in our business, prepare financial projections and make strategic decisions.
The non-GAAP financial measure below has not been calculated in accordance with GAAP and should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, GAAP results. In addition, Adjusted EBITDA should not be construed an indicator of our operating performance, liquidity or cash flows generated by operating, investing and financing activities, as there may be significant factors or trends that they fail to address. We caution investors that non-GAAP financial information, by its nature, departs from traditional accounting conventions. Therefore, its use can make it difficult to compare our current results with our results from other reporting periods and with the results of other companies.
Our management uses non-GAAP financial measures, in conjunction with GAAP financial measures, as an integral part of managing our business and to, among other things: (i) monitor and evaluate the performance of our business operations and financial performance; (ii) facilitate internal comparisons of the historical operating performance of our business operations; (iii) review and assess the operating performance of our management team; (iv) analyze and evaluate financial and strategic planning decisions regarding future operating investments; and (v) plan for and prepare future annual operating budgets and determine appropriate levels of operating investments.
The results of Spinnaker Insurance Company since the date of acquisition (August 31, 2020) have been consolidated with ours and are reflected in the following table.
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| ($ in millions) | ||||||||||||||||
| Total Generated Premium |
$ | 158.7 | $ | 79.0 | $ | 281.9 | $ | 144.4 | ||||||||
| Total Revenue |
20.9 | 11.9 | 37.9 | 22.2 | ||||||||||||
| Net Loss attributable to Hippo |
(84.5 | ) | (24.8 | ) | (279.8 | ) | (48.7 | ) | ||||||||
| Adjusted EBITDA |
(42.3 | ) | (18.8 | ) | (78.0 | ) | (40.4 | ) | ||||||||
| Gross Loss Ratio |
161 | % | 106 | % | 177 | % | 108 | % | ||||||||
| Net Loss Ratio |
210 | % | 132 | % | 204 | % | 130 | % | ||||||||
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Total Generated Premium
We define Total Generated Premium (“TGP”) as the aggregate written premium placed across all our business platforms for the period presented. We measure TGP as it reflects the volume of our business irrespective of choices related to how we structure our reinsurance treaties, the amount of risk we retain on our own balance sheet, or the amount of business written in our capacity as an MGA, agency, or as an insurance carrier/reinsurer. We calculate TGP as the sum of:
| i) | Gross written premium (“GWP”) — a GAAP measure defined below; and |
| ii) | Gross placed premium — premium of policies placed with third-party insurance companies, for which we do not retain insurance risk and for which we earn a commission payment, and policy fees charged by us to the policyholders on the effective date of the policy. |
Our Total Generated Premium for the three months ended June 30, 2021 grew 101% year over year to $158.7 million from $79.0 million for the three months ended June 30, 2020. The growth was driven primarily by growth across channels in existing states, expansion into 9 new states, expansion of our independent agent network, launch of new strategic partnerships, maintaining solid premium retention levels and expansion of our insurance as a service platform.
Our Total Generated Premium for the six months ended June 30, 2021 grew 95% year over year to $281.9 million from $144.4 million for the six months ended June 30, 2020. The growth was driven primarily by growth across channels in existing states, expansion into 14 new states, expansion of our independent agent network, launch of new strategic partnerships, maintaining solid premium retention levels, and expansion of our insurance as a service platform.
Our Total Generated Premium for the three and six months ended June 30, 2020 excludes $24.0 million and $47.8 million, respectively, of Spinnaker non-Hippo programs written premium since the Spinnaker acquisition closed on August 31, 2020.
The following table presents Total Generated Premium for the periods presented (in millions):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||
| Gross Written Premium |
$ | 128.6 | $ | 5.5 | $ | 123.1 | $ | 227.7 | $ | 14.7 | $ | 213.0 | ||||||||||||
| Gross Placed Premium |
30.1 | 73.5 | (43.4 | ) | 54.2 | 129.7 | (75.5 | ) | ||||||||||||||||
| Total Generated Premium |
$ | 158.7 | $ | 79.0 | $ | 79.7 | $ | 281.9 | $ | 144.4 | $ | 137.5 | ||||||||||||
The decrease in Gross Placed Premium is a direct result of the Spinnaker acquisition. After the acquisition, premium that would have been placed on Spinnaker and included in Gross Placed Premium is now recognized as Gross Written Premium.
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Total Revenue
For the three months ended June 30, 2021, total revenue was $20.9 million an increase of $9.0 million compared to $11.9 million for the three months ended June 30, 2020. This increase is driven by increases in net earned premium and service and fee income of $7.7 million and $3.3 million, respectively; offset by a decrease in net commission income of $1.9 million as a result of the Spinnaker acquisition.
For the six months ended June 30, 2021, total revenue was $37.9 million an increase of $15.7 million compared to $22.2 million for the six months ended June 30, 2020. This increase is driven by increases in net earned premium and service and fee income of $15.0 million and $5.0 million, respectively; offset by a decrease in net commission income of $3.9 million as a result of the Spinnaker acquisition.
Net Loss attributable to Hippo
Net Loss attributable to Hippo is calculated in accordance with GAAP as total revenue less total expenses and taxes, reduced by net income attributable to non-controlling interests, net of tax.
For the three months ended June 30, 2021, net loss attributable to Hippo was $84.5 million an increase of $59.7 million compared to $24.8 million for the three months ended June 30, 2020. This was primarily driven by an increase in non-cash fair value losses recorded on preferred stock warrants and on the derivative liability on our outstanding convertible promissory notes of $24.7 million, an increase in losses and loss adjustment expense of $18.1 million due to two strong hailstorms in Texas, where we had a high concentration of total insured value, and non-cash interest expense of $11.3 million on the outstanding convertible promissory notes.
For the six months ended June 30, 2021, net loss attributable to Hippo was $279.8 million an increase of $231.1 million compared to $48.7 million for the six months ended June 30, 2020. This was primarily driven by an increase in non-cash fair value losses recorded on preferred stock warrants and on the derivative liability on our outstanding convertible promissory notes of $161.1 million, an increase in losses and loss adjustment expense of $33.5 million due to more risk retained on policies written and abnormally high weather-related losses, including the Texas winter storm in February 2021 (“Uri”), a higher concentration in areas impacted by the weather-related losses, and non-cash interest expense of $21.9 million on the outstanding convertible promissory notes.
Adjusted EBITDA
We define Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (“Adjusted EBITDA”), a Non-GAAP financial measure, as net loss attributable to Hippo excluding interest expense, income tax expense, depreciation, amortization, stock-based compensation, net investment income, other non-cash fair market value adjustments for outstanding preferred stock warrants and derivative liabilities on the convertible promissory notes and contingent consideration for one of our acquisition and other transactions that we consider to be unique in nature.
For the three months ended June 30, 2021, adjusted EBITDA loss was $42.3 million an increase of $23.5 million compared to $18.8 million for the three months ended June 30, 2020, due primarily to an increase in our loss and loss adjustment expense due to more risk retained on policies written, and due to two strong hail storms in Texas, where we had a high concentration of total insured value.
For the six months ended June 30, 2021, adjusted EBITDA loss was $78.0 million an increase of $37.6 million compared to $40.4 million for the six months ended June 30, 2020, due primarily to an increase in our loss and loss adjustment expense due to more risk retained on policies written, abnormally high weather related losses, including Uri, and a higher concentration in areas impacted by the weather-related losses.
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The following table provides a reconciliation from net loss attributable to Hippo to Adjusted EBITDA for the periods presented (in millions):
| Three Months Ended June 30, |
Six Months Ended June 30, |
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| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss attributable to Hippo |
$ | (84.5 | ) | $ | (24.8 | ) | $ | (279.8 | ) | $ | (48.7 | ) | ||||
| Adjustments: |
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| Net investment income |
(0.1 | ) | (0.2 | ) | (0.2 | ) | (0.6 | ) | ||||||||
| Depreciation and amortization |
2.6 | 1.6 | 5.1 | 3.0 | ||||||||||||
| Interest expense |
11.3 | — | 21.9 | — | ||||||||||||
| Stock-based compensation |
2.8 | 0.9 | 5.3 | 1.8 | ||||||||||||
| Fair value adjustments |
24.7 | 3.0 | 161.1 | 4.1 | ||||||||||||
| Contingent consideration charge |
0.7 | 0.7 | 1.3 | — | ||||||||||||
| Other one-off transactions |
— | — | 7.0 | — | ||||||||||||
| Income taxes (benefit) expense |
0.2 | — | 0.3 | — | ||||||||||||
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| Adjusted EBITDA(1) |
$ | (42.3 | ) | $ | (18.8 | ) | $ | (78.0 | ) | $ | (40.4 | ) | ||||
| (1) | In previous disclosures our Adjusted EBITDA calculation included an adjustment for capitalization of internal use software costs. We no longer include this adjustment as we believe the current presentation is more relevant and in-line with our peers and relevant comparable companies. We have adjusted the historical periods accordingly. |
Gross Loss Ratio
Gross Loss Ratio expressed as a percentage, is the ratio of the Gross Losses and LAE, to the Gross Earned Premium (in millions).
| Three Months Ended June 30 |
Six Months Ended June 30 |
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| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Gross Losses and LAE |
$ | 140.5 | $ | 3.3 | $ | 286.2 | $ | 5.2 | ||||||||
| Gross Earned Premium |
87.1 | 3.1 | 161.5 | 4.8 | ||||||||||||
| Gross Loss Ratio |
161 | % | 106 | % | 177 | % | 108 | % | ||||||||
Net Loss Ratio
Net Loss Ratio expressed as a percentage, is the ratio of the Net Losses and LAE, to the Net Earned Premium (in millions).
| Three Months Ended June 30 |
Six Months Ended June 30 |
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| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net Losses and LAE |
$ | 21.4 | $ | 3.3 | $ | 38.7 | $ | 5.2 | ||||||||
| Net Earned Premium |
10.2 | 2.5 | 19.0 | 4.0 | ||||||||||||
| Net Loss Ratio |
210 | % | 132 | % | 204 | % | 130 | % | ||||||||
For the three months ended June 30, 2021, our Gross Loss Ratio was 161% compared with 106% for the three months ended June 30, 2020. For the six months ended June 30, 2021, our Gross Loss Ratio was 177% compared with 108% for the six months ended June 30, 2020. The increase is due primarily to the impact of higher weather-related losses. Excluding the impact of the Texas winter storm Uri, our Gross Loss Ratio for the six months ended June 30, 2021 would have been 119%.
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For the three months ended June 30, 2021, our Net Loss Ratio was 210% compared with 132% for the three months ended June 30, 2020. The increase is due primarily to the impact of higher weather-related losses. For the six months ended June 30, 2021, our Net Loss Ratio was 204% compared with 130% for the six months ended June 30, 2020. The increase is due to the impact of abnormally high weather-related losses, including the Texas winter storm Uri in February 2021.
Key GAAP Financial Terms
Gross Written Premium
Gross written premium is the amount received or to be received for insurance policies written or assumed by us and our affiliates as a carrier, without reduction for policy acquisition costs, reinsurance costs or other deductions. In addition, gross written premium includes amounts received from our participation in our own reinsurance treaty. The volume of our gross written premium in any given period is generally influenced by:
| • | New business submissions; |
| • | Binding of new business submissions into policies; |
| • | Bound policies going effective; |
| • | Renewals of existing policies; and |
| • | Average size and premium rate of bound policies. |
Ceded Written Premium
Ceded written premium is the amount of gross written premium written or assumed by us and our affiliates as a carrier, that we cede to reinsurers. We enter into reinsurance contracts to limit our exposure to losses as well as to provide additional capacity for growth. Ceded written premium is treated as a reduction from gross written premium written during a specific period of time over the reinsurance contract period in proportion to the period of risk covered. The volume of our ceded written premium is impacted by the level of our gross written premium and decisions we make to increase or decrease retention levels.
Gross Earned Premium
Gross Earned Premium (“GEP”) represents the earned portion of our gross written premium. Our insurance policies generally have a term of one year and premium is earned pro rata over the term of the policy.
Components of Results of Operations
Revenue
Net Earned Premium
Net earned premium represents the earned portion of our gross written premium for insurance policies written or assumed by us and less ceded written premium (any portion of our gross written premium that is ceded to third-party reinsurers under our reinsurance agreements). We earn written premiums on a pro-rata basis over the term of the policies.
Commission Income, net includes:
| a. | MGA Commission: We operate as an MGA for multiple insurers. We design and underwrite insurance products on behalf of the insurers culminating in the sale of insurance policies. We earn recurring commission and policy fees associated with the policies we sell. While we have underwriting authority and responsibility for administering claims, we do not take the risk associated with policies on our own balance sheet. Rather, we work with carrier platforms and a diversified panel of highly rated reinsurance companies who pay us |
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| commission in exchange for the opportunity to take that risk on their balance sheets. Our performance obligation associated with these contracts is the placement of the policy, which is met on the effective date. Upon issuance of a new policy, we charge policy fees and inspection fees (see Service and Fee Income below), retain our share of ceding commission, and remit the balance premium to the respective insurers. Subsequent ceding commission adjustments arising from policy changes such as endorsements are recognized when the adjustments can be reasonably estimated. |
| b. | Agency Commission: We also operate licensed insurance agencies that are engaged solely in the sale of policies, including non-Hippo policies. For these policies, we earn a recurring agency commission from the carriers whose policies we sell, which is recorded in the commission income, net line on our statements of operations and comprehensive loss. Similar to the MGA businesses, the performance obligation from the agency contracts is placement of the insurance policies. |
For both MGA and insurance agency activities, we recognize commission received from insurers for the sale of insurance contracts as revenue at a point in time on the policy effective dates. Cash received in advance of policy effective dates is recorded on the consolidated balance sheets, representing our portion of commission and premium due to insurers and reinsurers, and hold this cash in trust for the benefit of the insurers and reinsurers as fiduciary liabilities. The MGA commission is subject to adjustments, higher or lower (commonly referred to as “commission slide”), depending on the underwriting performance of the policies placed by us. We are required to return portion of our MGA commission due to commission slide received on the policies placed by MGA if the underwriting performance varies due to higher Hippo programs loss ratio from contractual performance of the Hippo programs loss ratio or if the policies are cancelled before the term of the policy; accordingly, we reserve for commission slide using estimated Hippo programs loss ratio performance, and a cancellation reserve is estimated as a reduction of revenue for each period presented in our statement of operations and comprehensive loss.
| c. | Ceding Commission: We receive commission based on the premium we cede to third-party reinsurers for the reimbursement for our acquisition and underwriting services. Excess of ceding commission over the cost of acquisition and underwriting expenses is included in the commission income, net line on our statements of operations and comprehensive loss. For the policies that we write on our own carrier as MGA, we recognize this commission as ceding commission on the statement of operations and comprehensive loss. We earn commission on reinsurance premium ceded in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro-rata basis over the terms of the policies reinsured. We record the portion of ceding commission income which represents reimbursement of successful direct acquisition costs related to the underlying policies as an offset to the applicable direct acquisition costs. |
| d. | Carrier Fronting Fees: Through our insurance-as-a-service business we earn recurring fees from the MGA programs we support. We earn fronting fees in a manner consistent with the recognition of the earned premium on the underlying insurance policies, on a pro-rata basis over the terms of the policies. This revenue is included in the Commission income, net line on our statements of operations and comprehensive loss. |
| e. | Claim Processing Fees: As an MGA we receive a fee, that is calculated as a percent of the premium, from the insurers in exchange for providing claims adjudication services. The claims adjudication services are provided over the term of the policy and recognized ratably over the same period. This revenue is included in the Commission income, net line on our statements of operations and comprehensive loss. |
Service and Fee Income:
Service and fee income mainly represents policy fees and other revenue. We directly bill policyholders for policy fees and collect and retain fees per the terms of the contracts between us and our insurers. Similar to the commission revenue, we estimate a cancellation reserve for policy fees using historical information. The performance obligation associated with these fees is satisfied at a point in time upon completion of the underwriting process, which is the policy effective date. Accordingly, we recognize all fees as revenue on the policy effective date.
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Net Investment Income
Net investment income represents interest earned from fixed maturity securities, short-term securities and other investments, and the gains or losses from the sale of investments. Our cash and invested assets primarily consist of fixed-maturity securities, and may also include cash and cash equivalents, equity securities, and short-term investments. The principal factors that influence net investment income are the size of our investment portfolio and the yield on that portfolio. As measured by amortized cost (which excludes changes in fair value, such as changes in interest rates), the size of our investment portfolio is mainly a function of our invested equity capital along with premium we receive from our customers less payments on customer claims.
Net investment income also includes an insignificant amount of net realized gains (losses) on investments, which are a function of the difference between the amount received by us on the sale of a security and the security’s amortized cost, as well as any allowances for credit losses recognized in earnings, if any.
Expenses
Loss and Loss Adjustment Expenses
Loss and loss adjustment expense (LAE) represents the costs incurred for losses net of amounts ceded to reinsurers. We enter into reinsurance contracts to limit our exposure to potential losses as well as to provide additional capacity for growth. These expenses are a function of the size and term of the insurance policies and the loss experience associated with the underlying risks. Loss and LAE are based on actuarial assumptions and management judgements, including losses incurred during the period and changes in estimates from prior periods. Loss and LAE also includes employee compensation, including stock-based compensation and benefits, of our claims processing teams as well as allocated occupancy costs and related overhead based on headcount.
Insurance Related Expenses
Insurance related expenses primarily consist of amortization of direct acquisition commission costs and premium taxes incurred on the successful acquisition of business written on a direct basis, and credit card processing fees not charged to our customers. Insurance related expenses also includes employee compensation, including stock-based compensation and benefits, of the Company’s underwriting teams as well as allocated occupancy costs and related overhead based on headcount, and amortization of capitalized internal use software costs. Insurance related expenses are offset by the portion of ceding commission income which represents reimbursement of successful acquisition costs related to the underlying policies. Additionally, insurance related expenses include the costs of providing bound policies and delivering claims services to our customers. These costs include underwriting technology service costs including software, data services used for performing underwriting, and third-party call center costs in addition to personnel-related costs.
Technology and Development
Technology and development expenses primarily consist of employee compensation, including stock-based compensation and benefits for our technology staff, which includes information technology development, infrastructure support, actuarial, and third-party services. Technology and development also include allocated facility costs and related overhead based on headcount.
We expense development costs as incurred, except for costs related to internal-use software development projects which are capitalized and subsequently depreciated over the expected useful life of the developed software. We expect our technology and development costs to increase for the foreseeable future as we continue to invest in research and develop activities to achieve our technology development roadmap.
Sales and Marketing
Sales and marketing expenses primarily consist of sales commission expense for policies placed on third-party carriers by us as a managing general agent, advertising costs, and marketing expenditures as well as employee compensation, including stock-based compensation and benefits for employees engaged in sales, marketing, data analytics and customer acquisition. We expense advertising costs as incurred. Sales and marketing also include allocated facility costs and related overhead based on headcount.
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We plan to continue to invest in sales and marketing to attract and acquire new customers and to increase our brand awareness. We expect that our sales and marketing expenses will increase over time as we continue to hire additional personnel to scale our business and invest in developing a nationally recognized brand. We expect that sales and marketing costs will increase in absolute dollars in future periods and vary from period-to-period as a percentage of revenue in the near-term. We expect that, in the long-term, our sales and marketing costs will decrease as a percentage of revenue as we continue to drive customer acquisition efficiencies and as the proportion of renewals to our total business increases.
General and Administrative
General and administrative expenses primarily consist of employee compensation, including stock-based compensation and benefits for our finance, human resources, legal, and general management functions, as well as facilities and professional services. We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC and other regulatory bodies, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Interest and Other Expense
Interest and other expense primarily consist of interest expense incurred for the convertible promissory notes, and fair value adjustments on preferred stock warrant liabilities and embedded derivative on convertible promissory notes. The convertible promissory notes will convert into equity immediately prior to the closing of the proposed merger, eliminating the associated interest expense for the future periods after the consummation of the merger.
Income Taxes
We record income taxes using the asset and liability method. Under this method, we record deferred income tax assets and liabilities based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. We measure these differences using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.
We record a valuation allowance to reduce deferred tax assets and liabilities to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.
Results of Operations
The results of operations presented below should be reviewed in conjunction with the consolidated financial statements and notes included in the proxy statement/prospectus included or incorporated by reference in our Report on Form 8-K filed on August 5, 2021. The following table sets forth our consolidated results of operations data for the periods presented (dollars in millions):
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| Three Months Ended June 30 |
Six Months Ended June 30 |
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| 2021 | 2020 | Change | % Change |
2021 | 2020 | Change | % Change |
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| Revenue: |
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| Net earned premium |
$ | 10.2 | $ | 2.5 | $ | 7.7 | 308 | % | $ | 19.0 | $ | 4.0 | $ | 15.0 | 375 | % | ||||||||||||||||
| Commission income, net. |
6.5 | 8.4 | (1.9 | ) | (23 | )% | 11.6 | 15.5 | (3.9 | ) | (25 | )% | ||||||||||||||||||||
| Service and fee income |
4.1 | 0.8 | 3.3 | 413 | % | 7.1 | 2.1 | 5.0 | 238 | % | ||||||||||||||||||||||
| Net investment income |
0.1 | 0.2 | (0.1 | ) | (50 | )% | 0.2 | 0.6 | (0.4 | ) | (67 | )% | ||||||||||||||||||||
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| Total revenue. |
20.9 | 11.9 | 9.0 | 76 | % | 37.9 | 22.2 | 15.7 | 71 | % | ||||||||||||||||||||||
| Expenses: |
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| Loss and Loss Adjustment Expenses |
21.4 | 3.3 | 18.1 | 548 | % | 38.7 | 5.2 | 33.5 | 644 | % | ||||||||||||||||||||||
| Insurance related expenses |
8.5 | 4.1 | 4.4 | 107 | % | 16.0 | 8.0 | 8.0 | 100 | % | ||||||||||||||||||||||
| Technology and development |
7.5 | 3.7 | 3.8 | 103 | % | 14.5 | 7.3 | 7.2 | 99 | % | ||||||||||||||||||||||
| Sales and marketing |
22.2 | 17.3 | 4.9 | 28 | % | 46.9 | 35.3 | 11.6 | 33 | % | ||||||||||||||||||||||
| General and administrative |
8.8 | 5.5 | 3.3 | 60 | % | 17.1 | 11.1 | 6.0 | 54 | % | ||||||||||||||||||||||
| Interest and other expense |
36.0 | 2.9 | 33.1 | 1141 | % | 183.1 | 4.0 | 179.1 | 4478 | % | ||||||||||||||||||||||
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| Total expenses |
104.4 | 36.8 | 67.6 | 184 | % | 316.3 | 70.9 | 245.4 | 346 | % | ||||||||||||||||||||||
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| Loss before income taxes |
(83.5 | ) | (24.9 | ) | (58.6 | ) | 235 | % | (278.4 | ) | (48.7 | ) | (229.7 | ) | 472 | % | ||||||||||||||||
| Income taxes (benefit) expense |
0.2 | — | 0.2 | N/A | 0.3 | — | 0.3 | N/A | ||||||||||||||||||||||||
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| Net loss |
(83.7 | ) | (24.9 | ) | (58.8 | ) | 236 | % | (278.7 | ) | (48.7 | ) | (230.0 | ) | 472 | % | ||||||||||||||||
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| Net income (loss) attributable to noncontrolling interests, net of tax |
0.8 | (0.1 | ) | 0.9 | 900 | % | 1.1 | — | 1.1 | N/A | ||||||||||||||||||||||
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| Net loss attributable to Hippo |
$ | (84.5 | ) | $ | (24.8 | ) | $ | (59.7 | ) | 241 | % | $ | (279.8 | ) | $ | (48.7 | ) | $ | (231.1 | ) | 475 | % | ||||||||||
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| Other comprehensive income: |
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| Change in net unrealized gain on available-for-sale securities, net of tax |
0.3 | (0.2 | ) | 0.5 | (250 | )% | (0.3 | ) | — | (0.3 | ) | N/A | ||||||||||||||||||||
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| Comprehensive loss attributable to Hippo |
$ | (84.2 | ) | $ | (25.0 | ) | $ | (59.2 | ) | 237 | % | $ | (280.1 | ) | $ | (48.7 | ) | $ | (231.4 | ) | 475 | % | ||||||||||
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Comparison of the Three and Six Months Ended June 30, 2021 and 2020
Net earned premium
For the three months ended June 30, 2021, net earned premium was $10.2 million, an increase of $7.7 million compared to $2.5 million for the three months ended June 30, 2020. For the six months ended June 30, 2021, net earned premium was $19.0 million, an increase of $15.0 million compared to $4.0 million for the six months ended June 30, 2020. The three and six months increases are due to year over year growth of our total book of business and our acquisition of Spinnaker, which closed on August 31, 2020.
The following table presents gross written premium, ceded written premium, net written premium, change in unearned premium, and net earned premium for the three and six months ended June 30, 2021 and 2020 (in millions).
| Three Months Ended June 30 |
Six Months Ended June 30 |
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| 2021 | 2020 | Change | 2021 | 2020 | Change | |||||||||||||||||||
| Gross written premium |
$ | 128.6 | $ | 5.5 | $ | 123.1 | $ | 227.7 | $ | 14.7 | $ | 213.0 | ||||||||||||
| Ceded written premium |
116.4 | — | 116.4 | 208.4 | 2.0 | 206.4 | ||||||||||||||||||
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| Net written premium. |
12.2 | 5.5 | 6.7 | 19.3 | 12.7 | 6.6 | ||||||||||||||||||
| Change in unearned premium |
(2.0 | ) | (3.0 | ) | 1.0 | (0.3 | ) | (8.7 | ) | 8.4 | ||||||||||||||
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| Net earned premium |
$ | 10.2 | $ | 2.5 | $ | 7.7 | $ | 19.0 | $ | 4.0 | 15.0 | |||||||||||||
Commission Income, net
For the three months ended June 30, 2021, commission income was $6.5 million, a decrease of $1.9 million, or 23%, compared to $8.4 million for the three months ended June 30, 2020. This is a direct result of the structural change in our business due to the acquisition of Spinnaker, which led to a decrease in our MGA commission income of $6.0 million. This was partially offset by increase in ceding commission and agency commissions of $3.3 million and $0.8 million, respectively.
For the six months ended June 30, 2021, commission income was $11.6 million, a decrease of $3.9 million, or 25%, compared to $15.5 million for the six months ended June 30, 2020. This is a direct result of the structural change in our business due to the acquisition of Spinnaker, which led to a decrease in our MGA commission income of $10.6 million. This was partially offset by increase in ceding commission and agency commissions of $5.6 million and $1.1 million respectively.
Service and Fee Income
For the three months ended June 30, 2021, service and fee income was $4.1 million, an increase $3.3 million, or 413%, compared to $0.8 million for the three months ended June 30, 2020. The increase was due primarily to increased policy fees and other revenue due to an increase in the volume of policies placed by our MGA services.
For the six months ended June 30, 2021, service and fee income was $7.1 million, an increase of $5.0 million, or 238%, compared to $2.1 million for the six months ended June 30, 2020. The increase was due primarily to increased policy fees and other revenue due to an increase in the volume of policies placed by our MGA services.
Net Investment Income
For the three months ended June 30, 2021, net investment income was $0.1 million, a decrease of $0.1 million, compared to $0.2 million for the three months ended June 30, 2020. The decrease was primarily driven by decrease in interest rates compared to the same period in the prior year. We mainly invested in corporate securities, residential mortgage-backed securities and other fixed maturities securities issued by U.S. government and agencies.
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For the six months ended June 30, 2021, net investment income was $0.2 million, a decrease of $0.4 million, compared to $0.6 million for the six months ended June 30, 2020. The decrease was primarily driven by decrease in interest rates compared to the same period in the prior year. We mainly invested in corporate securities, residential mortgage-backed securities and other fixed maturities securities issued by U.S. government and agencies.
Loss and Loss Adjustment Expenses
For the three months ended June 30, 2021, loss and loss adjustment expenses were $21.4 million, an increase of $18.1 million, compared to $3.3 million for the three months ended June 30, 2020. The increase was due primarily to an increase in our loss and loss adjustment expense as a result of more risk retained on policies written, and due to two strong hailstorms in Texas, where we had a high concentration of total insured value.
For the six months ended June 30, 2021, loss and loss adjustment expenses were $38.7 million, an increase of $33.5 million, compared to $5.2 million for the six months ended June 30, 2020. The increase was due to more risk retained on policies written, abnormally high weather-related losses, including the Texas winter storm Uri in February 2021, and a higher concentration in areas impacted by the weather-related losses.
Insurance Related Expenses
For the three months ended June 30, 2021, insurance related expenses were $8.5 million, an increase $4.4 million, or 107%, compared to $4.1 million for the three months ended June 30, 2020. The increase was due primarily to a $0.9 million increase in underwriting costs, $0.8 million increase in employee-related costs, $0.6 million increase in amortization of deferred acquisition costs, and $0.5 million increase in amortization expense attributable to capitalized internal use software. These increases were to support the growth of our business.
For the six months ended June 30, 2021, insurance related expenses were $16.0 million, an increase $8.0 million, or 100%, compared to $8.0 million for the six months ended June 30, 2020. The increase was due primarily to a $1.8 million increase in amortization of deferred acquisition costs, $1.4 million increase in employee-related costs, $1.3 million increase in underwriting costs, and $1.0 million increase in amortization expense attributable to capitalized internal use software. These increases were to support the growth of our business.
Technology and Development Expenses
For the three months ended June 30, 2021, technology and development expense were $7.5 million, an increase of $3.8 million, or 103%, compared to $3.7 million for the three months ended June 30, 2020. The increase was due primarily to an increase in employee-related costs of $3.6 million, including an increase in stock-based compensation of $0.5 million, and partially offset by an increase in capitalized costs for the development of internal-use software of $1.0 million, driven by an increase in headcount to support our growth.
For the six months ended June 30, 2021, technology and development expense were $14.5 million, an increase of $7.2 million, or 99%, compared to $7.3 million for the six months ended June 30, 2020. The increase was due primarily to an increase in employee-related costs of $7.0 million, including an increase in stock-based compensation of $1.0 million, and partially offset by an increase in capitalized costs for the development of internal-use software of $1.9 million, driven by an increase in headcount to support our growth.
Sales and Marketing Expenses
For the three months ended June 30, 2021, sales and marketing expense was $22.2 million, an increase of $4.9 million, or 28%, compared to $17.3 million for the three months ended June 30, 2020. The increase was due primarily due to $3.4 million of employee-related expenses including $1.0 million of stock-based compensation, driven by an increase in headcount to support our growth, $6.3 million in advertising costs, and $0.7 million in consultant costs. These amounts are offset by a decrease in direct acquisition costs of $7.5 million, which have now been deferred and the related amortization included in insurance related expenses after the acquisition of Spinnaker in the third quarter of 2020.
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For the six months ended June 30, 2021, sales and marketing expense was $46.9 million, an increase of $11.6 million, or 33%, compared to $35.3 million for the six months ended June 30, 2020. The increase was due primarily to $7.7 million in advertising costs, $7.0 million in service fees related to the issuance of a convertible promissory note, $6.1 million of employee-related expenses including $1.8 million of stock-based compensation, driven by an increase in headcount to support our growth, $1.3 million in change in fair value of contingent consideration and $1.1 million in licensing fees. These amounts are partially offset by a decrease in direct acquisition costs of $15.0 million, which have now been deferred and the related amortization included in insurance related expenses after the acquisition of Spinnaker in the third quarter of 2020.
General and Administrative Expenses
For the three months ended June 30, 2021, general and administrative expense was $8.8 million, an increase of $3.3 million, or 60%, compared to $5.5 million for the three months ended June 30, 2020. The increase was due primarily to an increase in employee-related expenses of $2.8 million, including stock-based compensation of $0.5 million, driven by an increase in headcount to support our growth.
For the six months ended June 30, 2021, general and administrative expense was $17.1 million, an increase of $6.0 million, or 54%, compared to $11.1 million for the six months ended June 30, 2020. The increase was due primarily to an increase in employee-related expenses of $5.0 million, including stock-based compensation of $1.0 million, driven by an increase in headcount to support our growth.
Interest and Other Expense
For the three months ended June 30, 2021, interest and other expense was $36.0 million, an increase of $33.1 million compared to $2.9 million for the three months ended June 30, 2020. The increase was due primarily to an increase in fair value losses recorded on preferred stock warrants of $17.5 million due to the increase in the fair market value of our outstanding preferred stock and an increase in fair value losses recorded on the derivative liability on our outstanding convertible promissory notes of $7.2 million. We also recorded interest expense on the outstanding convertible promissory notes of $11.3 million.
For the six months ended June 30, 2021, interest and other expense was $183.1 million, an increase of $179.1 million compared to $4.0 million for the six months ended June 30, 2020. The increase was due primarily to an increase in fair value losses recorded on preferred stock warrants of $110.5 million due to the increase in the fair market value of our outstanding preferred stock and an increase in fair value losses recorded on the derivative liability on our outstanding convertible promissory notes of $46.5 million. We also recorded interest expense on the outstanding convertible promissory notes of $21.8 million.
Income Taxes
For the three months ended June 30, 2021, income tax expense was $0.2 million, an increase of $0.2 million, compared to $0 for the three months ended June 30, 2020.
For the six months ended June 30, 2021, income tax expense was $0.3 million, an increase of $0.3 million, compared to $0 for the six months ended June 30, 2020.
20
Liquidity and Capital Resources
Sources of Liquidity
Our capital requirements will depend on many factors, including the volume of issuance of insurance policies, the timing and extent of spending to support research and development efforts, investments in information technology systems, and the expansion of sales and marketing activities. Until we can generate sufficient revenue and other income to cover operating expenses, working capital and capital expenditures, we expect the funds raised in our preferred stock and convertible notes financings, the PIPE, and the Business Combination, to fund cash needs. In the future, we may raise additional funds through the issuance of debt or equity securities or the borrowing of money. We cannot assure that such funds will be available on favorable terms, or at all.
On July 8, 2020, we issued shares of our Series E Convertible Preferred Stock for aggregate proceeds of $150 million.
In November and December 2020, we raised an additional $365.0 million of cash by issuing convertible promissory notes. The convertible promissory notes will convert into shares or our common stock immediately prior to the closing of the Business Combination.
We are a member of the Federal Home Loan Bank (FHLB) of New York, which provides secured borrowing capacity. Our borrowing capacity as of June 30, 2021, is $11.2 million, and there were no outstanding amounts under this agreement.
As of June 30, 2021, we had $410.2 million of cash and restricted cash and $56.6 million of available-for-sale fixed income securities. To date, we have funded operations primarily with issuances of convertible preferred stock and convertible promissory notes and from net proceeds from revenue. Our existing sources of liquidity include cash and cash equivalents and marketable securities.
Subsequently, on August 3, 2021, we completed our business combination with Reinvent Technology Partners Z through a reverse recapitalization. As part of this transaction, we received net proceeds of $455 million.
Since our inception, we have incurred operating losses, including net losses attributable to Hippo of $141.5 million for the year ended December 31, 2020, and $279.8 million for the six months ended June 30, 2021. We had an accumulated deficit of $256.6 million as of December 31, 2020, and $536.4 million as of June 30, 2021. We expect to continue to incur operating losses for the foreseeable future due to continued investments that we intend to make in our business and, as a result, we may require additional capital resources to grow our business. We believe that current cash, cash equivalents, and expected net proceeds from the Business Combination will be sufficient to meet our working capital and capital expenditure needs for the foreseeable future..
Cash Flow Summary
The following table summarizes our cash flows for the periods presented (in millions):
| Six Months Ended June 30 | ||||||||||||
| 2021 | 2020 | Change | ||||||||||
| Net cash provided by (used in): |
||||||||||||
| Operating activities |
$ | (69.2 | ) | $ | (22.9 | ) | $ | (46.3 | ) | |||
| Investing activities |
$ | (10.2 | ) | $ | 64.8 | $ | (75.0 | ) | ||||
| Financing activities |
$ | (2.8 | ) | $ | 3.0 | $ | (5.8 | ) | ||||
Operating Activities
Cash used in operating activities was $69.2 million for the six months ended June 30, 2021, an increase of $46.3 million, from $22.9 million for the six months ended June 30, 2020. This increase was due primarily to the $230.0 million increase in our net loss for the six months ended June 30, 2021, partially offset by non-cash charges and net cash provided by changes in our operating assets and liabilities. Non-cash charges primarily consisted of an increase in the change in fair value of derivative liability on our outstanding preferred stock warrants liabilities of $110.5 million, increase in the change in fair value on the derivative on our convertible promissory notes of $46.5 million, increase amortization of debt discount of $17.1 million, and increase in non-cash service expense of $7.0 million.
21
Investing Activities
Cash used in investing activities was $10.2 million for the six months ended June 30, 2021, primarily due to purchases of intangible assets and investments, partially offset by maturities and sales of investment securities.
Cash provided by investing activities was $64.8 million for the six months ended June 30, 2020 primarily due to maturities and sales of investments.
Financing Activities
Cash used in financing activities was $2.8 million for the six months ended June 30, 2021, which consisted primarily of payments of contingent consideration and transaction related costs, partially offset by proceeds from the exercise of options.
Cash provided by financing activities was $3.0 million for the six months ended June 30, 2020, which consisted primarily of proceeds from the issuance of preferred stock, net of issuance costs, partially offset by payments of contingent consideration.
Commitments and Contractual Obligations
There have been no material changes to our contractual obligations from those described in the Audited Consolidated Financial Statements for the year ended December 31, 2021 included in the proxy statement/prospectus included or incorporated by reference in our Report on Form 8-K filed on August 5, 2021, other than an increase in Unpaid Loss and Loss Adjustment Expense. Unpaid Loss and Loss Adjustment Expense is $195.2 million as of June 30, 2021.
Off-Balance Sheet Arrangements
Certain employees early exercised stock options in exchange for promissory notes. We have accounted for the promissory notes as nonrecourse in their entirety since the promissory notes are not aligned with a corresponding percentage of the underlying shares. We have accounted for the transaction as a stock option grant, the exercise price of this stock option is the principal and interest due on the promissory note. The loan and interest receivables are not recorded in the consolidated balance sheets.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenue, loss and loss adjustment expense reserve, recoverability of our net deferred tax asset, goodwill and intangible assets, business combinations, fair value of common stock, valuation of embedded derivatives and redeemable convertible preferred stock warrant liability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.
Management believes there have been no significant changes for the three and six months ended June 30, 2021 to the items that we disclosed as our critical accounting estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Report on the 8-K filed on August 5, 2021.
Recent Accounting Pronouncements
See Note 1 to Hippo’s consolidated financial statements included elsewhere in this filing for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of June 30, 2021.
22
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. We are primarily exposed to market risk through our fixed maturities investments. We invest our excess cash primarily in money market accounts, corporate and foreign securities, residential and commercial mortgage-backed securities, and other governmental related securities. Our current investment strategy seeks first to preserve principal, second to provide liquidity for our operating and capital needs and third to maximize yield without putting principal at risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to the fluctuation of prevailing interest rates that may reduce the yield on our investments or their fair value. We assess market risk utilizing a sensitivity analysis that measures the potential change in fair values, interest income and cash flows. As our investment portfolio is primarily short-term in nature, management does not expect our results of operations or cash flows to be materially affected to any degree by a sudden change in market interest rates. In the unlikely event that we would need to sell our investments prior to their maturity, any unrealized gains and losses arising from the difference between the amortized cost and the fair value of the investments at that time would be recognized in the condensed consolidated statements of operations.
Emerging Growth Company Status
We currently qualify as an “emerging growth company” under the JOBS Act. Accordingly, we are provided the option to adopt new or revised accounting guidance either (1) within the same periods as those otherwise applicable to non-emerging growth companies or (2) within the same time periods as private companies.
We have elected to adopt new or revised accounting guidance within the same time period as private companies, unless management determines it is preferable to take advantage of early adoption provisions offered within the applicable guidance. Our utilization of these transition periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
23
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Defined terms included below shall have the same meaning as terms defined and included elsewhere in the Current Report on Form 8-K, which was originally filed with SEC on August 5, 2021(as amended by this Current Report on Form 8-K/A) and, if not defined in this Form 8-K/A, the final prospectus and definitive proxy statement, dated July 9, 2021 (the “Proxy Statement/Prospectus”).
The unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of SEC Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses” and is for informational purposes only. The combined financial information presents the pro forma effects of the following transactions, collectively referred to as the “Transactions” for purposes of this section, and other related events as described in Note 1 to the accompanying Notes to the unaudited pro forma condensed combined financial information:
| • | The reverse recapitalization of Hippo Enterprises Inc. (“Hippo”), referred to herein as the “Business Combination,” and the issuance of Hippo Holdings common stock in the PIPE Investment; |
| • | The acquisition of Spinnaker Insurance Company (“Spinnaker”) by Hippo on August 31, 2020 (“Spinnaker Transaction”) |
On August 2, 2021, as contemplated by the Merger Agreement, following the Domestication (including the change of RTPZ’s name to “Hippo Holdings Inc.”), (i) Merger Sub merged with and into Hippo, with Hippo surviving the First Merger as a wholly owned subsidiary of Hippo Holdings, and (ii) immediately following the First Merger, Hippo (as the surviving corporation of the First Merger) merged with and into Hippo Holdings, the separate corporate existence of Hippo ceased, and Hippo Holdings continued as the surviving corporation.
The unaudited pro forma condensed combined balance sheet of Hippo Holdings as of June 30, 2021 combines the historical balance sheet of Hippo as of June 30, 2021 and the historical consolidated balance sheet of RTPZ as of June 30, 2021, adjusted to give pro forma effect to the Business Combination, the PIPE Investment and certain other related events related to the Business Combination between Hippo and RTPZ, in each case, as if the Business Combination, PIPE Investment and other events had been consummated on June 30, 2021. The Spinnaker Transaction was consummated on August 31, 2020 and, accordingly, is reflected within the consolidated balance sheet of Hippo as of June 30, 2021.
The unaudited pro forma condensed combined statement of operations of Hippo Holdings for the six months ended June 30, 2021 combines the historical consolidated statement of operations of Hippo for the six months ended June 30, 2021, and the historical consolidated statement of operations of RTPZ for the six months ended June 30, 2021, on a pro forma basis as if the Business Combination, the PIPE Investment and other related events contemplated by the Merger Agreement, as described below and in the accompanying notes to the unaudited pro forma condensed combined financial statements, had been consummated on January 1, 2020.
The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 combine the historical statement of operations of Hippo for the fiscal year ended December 31, 2020, the historical statement of operations of RTPZ for the period from October 2, 2020 (inception) through December 31, 2020, and the historical statement of operations of Spinnaker for the eight-month period ended August 31, 2020, adjusted to give pro forma effect to the Spinnaker Transaction, the Business Combination, the PIPE Investment and certain other related events, as discussed below, related to the Business Combination between RTPZ and Hippo and, in each case, as if such Transactions and other related events had been consummated on January 1, 2020.
The unaudited pro forma condensed combined balance sheet does not purport to represent, and is not necessarily indicative of, what the actual financial condition of the combined company would have been had the Transactions taken place on June 30, 2021, nor is it indicative of the financial condition of Hippo Holdings as of any future date. The unaudited pro forma condensed combined financial information is for illustrative purposes only and is not necessarily indicative of what the actual results of operations and financial position would have been had the Business Combination and the PIPE Transaction taken place on the dates indicated, nor are they indicative of the future consolidated results of operations or financial position of Hippo Holdings. The unaudited pro forma condensed combined financial information is subject to several uncertainties and assumptions as described in the accompanying notes.
The unaudited pro forma condensed combined financial information should be read in conjunction with the following historical financial statements and the accompanying notes, which are included elsewhere in the Proxy Statement/Prospectus:
| • | the accompanying Notes to the unaudited pro forma condensed combined financial statements; |
| • | the historical unaudited financial statements of RTPZ as of and for the six months ended June 30, 2021 included in RTPZ’s Quarterly Report on Form 10-Q filed with the SEC on August 16, 2021 incorporated herein by reference and the historical audited financial statements of RTPZ as of the year ended December 31, 2020 and for the period from October 2, 2020 (inception) through December 31, on Form 10-K/A filed with the SEC on May 11, 2021 incorporated herein by reference; |
| • | the historical unaudited condensed consolidated financial statements of Hippo as of and for the six months ended June 30, 2021 and the historical audited consolidated financial statements of Hippo as of and for the year ended December 31, 2020, which are included as exhibits to this Form 8-K/A; |
| • | the historical audited financial statements of Spinnaker, as of, and for the year ended, December 31, 2019, included in the proxy statement/prospectus incorporated herein by reference; |
| • | the historical unaudited financial information of Spinnaker, as of, and for the period ended, June 30, 2020, included in the proxy statement/prospectus incorporated herein by reference; and |
| • | other information relating to RTPZ and Hippo included in the proxy statement/prospectus incorporated herein by reference, including the Merger Agreement and the description of certain terms thereof set forth under the section titled “The Business Combination”. |
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2021
(in millions)
| As of June 30, 2021 | As of June 30, 2021 |
|||||||||||||||||
| Hippo (Historical) |
RTPZ (Historical) |
Pro Forma Transaction Accounting Adjustments |
Pro Forma Combined |
|||||||||||||||
| Assets |
||||||||||||||||||
| Investments: | ||||||||||||||||||
| Fixed maturities available-for-sale, at fair value |
$ | 56.6 | $ | — | $ | — | $ | 56.6 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Investments |
56.6 | — | — | 56.6 | ||||||||||||||
| Cash and cash equivalents |
364.1 | 0.1 | 230.0 | 6(a) | 819.5 | |||||||||||||
| (1.4 | ) | 6(b) | ||||||||||||||||
| (8.1 | ) | 6(d) | ||||||||||||||||
| 550.0 | 6(e) | |||||||||||||||||
| (27.6 | ) | 6(f) | ||||||||||||||||
| (95.0 | ) | 6(j) | ||||||||||||||||
| (192.6 | ) | 6(k) | ||||||||||||||||
| Restricted cash |
46.1 | — | 46.1 | |||||||||||||||
| Accounts receivable, net |
54.0 | — | 54.0 | |||||||||||||||
| Reinsurance recoverable on paid and unpaid losses and LAE |
242.8 | — | 242.8 | |||||||||||||||
| Deferred policy acquisition costs |
— | — | — | |||||||||||||||
| Ceding commissions receivable |
34.2 | — | 34.2 | |||||||||||||||
| Prepaid reinsurance premiums |
195.3 | — | 195.3 | |||||||||||||||
| Prepaid expenses |
— | 0.8 | (0.6 | ) | 6(f) | 0.2 | ||||||||||||
| Investments and cash held in Trust Account |
— | 230.0 | (230.0 | ) | 6(a) | — | ||||||||||||
| Property and equipment |
— | — | — | |||||||||||||||
| Capitalized internal use software, net |
18.7 | — | 18.7 | |||||||||||||||
| Goodwill |
48.2 | — | 48.2 | |||||||||||||||
| Intangible assets, net |
34.6 | — | 34.6 | |||||||||||||||
| Other assets |
27.2 | — | (5.2 | ) | 6(f) | 22.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total Assets |
$ | 1,121.8 | $ | 230.9 | $ | 219.5 | $ | 1,572.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Liabilities, convertible preferred stock, and stockholders’ equity (deficit) | ||||||||||||||||||
| Liabilities | ||||||||||||||||||
| Loss and loss adjustment expense reserve |
195.2 | — | 195.2 | |||||||||||||||
| Unearned premiums |
216.5 | — | 216.5 | |||||||||||||||
| Reinsurance premiums payable |
137.0 | — | 137.0 | |||||||||||||||
| Provision for commission |
13.0 | — | 13.0 | |||||||||||||||
| Fiduciary liabilities |
28.2 | — | 28.2 | |||||||||||||||
| Convertible promissory notes |
299.0 | — | (299.0 | ) | 6(c) | — | ||||||||||||
| Derivative liability on notes |
162.6 | — | (162.6 | ) | 6(c) | — | ||||||||||||
| Contingent consideration liability |
11.6 | — | 11.6 | |||||||||||||||
| Preferred stock warrant liabilities |
137.5 | — | (137.5 | ) | 6(g) | — | ||||||||||||
| Due to related party |
— | 0.3 | (0.3 | ) | 6(b) | — | ||||||||||||
| Deferred legal fees |
— | 0.2 | (0.2 | ) | 6(b) | — | ||||||||||||
| Deferred underwriting comissions |
— | 8.1 | (8.1 | ) | 6(d) | — | ||||||||||||
| Accrued expenses and other current liabilities |
46.0 | 0.9 | (0.9 | ) | 6(b) | 44.0 | ||||||||||||
| (0.9 | ) | 6(c) | ||||||||||||||||
| (1.1 | ) | 6(f) | ||||||||||||||||
| Derivative warrant liabilities |
— | 16.6 | — | 16.6 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities |
1,246.6 | 26.1 | (610.6 | ) | 662.1 | |||||||||||||
| Commitments and Contingencies | ||||||||||||||||||
| Class A ordinary shares, subject to possible redemption |
199.8 | (199.8 | ) | 6(h) | — | |||||||||||||
| Preferred stock |
344.8 | — | (344.8 | ) | 6(i) | — | ||||||||||||
| Stockholders’ equity (deficit) | ||||||||||||||||||
| Class A ordinary shares |
— | — | 6(i) | — | ||||||||||||||
| Class B ordinary shares |
— | — | 6(i) | — | ||||||||||||||
| Hippo common stock |
— | — | — | 6(i) | — | |||||||||||||
| Hippo Holdings common stock |
— | 6(c) | — | |||||||||||||||
| — | 6(e) | |||||||||||||||||
| — | 6(g) | |||||||||||||||||
| — | 6(i) | |||||||||||||||||
| Additional paid-in capital |
65.8 | 11.6 | 199.8 | 6(h) | 1,445.5 | |||||||||||||
| 344.8 | 6(i) | |||||||||||||||||
| 462.5 | 6(c) | |||||||||||||||||
| 137.5 | 6(g) | |||||||||||||||||
| (14.4 | ) | 6(i) | ||||||||||||||||
| 550.0 | 6(e) | |||||||||||||||||
| (24.5 | ) | 6(f) | ||||||||||||||||
| (95.0 | ) | 6(j) | ||||||||||||||||
| (192.6 | ) | 6(k) | ||||||||||||||||
| Accumulated other comprehensive income |
(0.3 | ) | — | — | 6(c) | (0.3 | ) | |||||||||||
| Accumulated deficit |
(536.4 | ) | (6.6 | ) | 14.4 | 6(i) | (536.4 | ) | ||||||||||
| (7.8 | ) | 6(f) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total stockholders’ equity (deficit) |
(470.9 | ) | 5.0 | 1,374.7 | 908.8 | |||||||||||||
| Noncontrolling interest |
1.3 | — | — | 1.3 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total stockholders’ equity (deficit) |
(469.6 | ) | 5.0 | 1,374.7 | 910.1 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total liabilities, convertible preferred stock, and stockholders’ equity (deficit) |
$ | 1,121.8 | $ | 230.9 | $ | 219.5 | $ | 1,572.2 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2021
(in millions, except share and per share amounts)
| For the six months ended June 30, 2021 |
For the six months ended June 30, 2021 |
|||||||||||||||||||
| Hippo (Historical) |
RTPZ (Historical) |
Pro Forma Transactions Accounting Adjustment |
Pro Forma Combined |
|||||||||||||||||
| Revenue: |
||||||||||||||||||||
| Net earned premium |
$ | 19.0 | $ | — | $ | — | $ | 19.0 | ||||||||||||
| Commission income, net |
11.6 | — | — | 11.6 | ||||||||||||||||
| Service and fee income |
7.1 | — | — | 7.1 | ||||||||||||||||
| Net investment income |
0.2 | — | — | 0.2 | ||||||||||||||||
| Net realized capital gain on investments |
— | — | — | — | ||||||||||||||||
| Other income |
— | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total revenue |
37.9 | — | — | 37.9 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Expenses: |
||||||||||||||||||||
| Losses and loss adjustment expenses |
38.7 | — | — | 38.7 | ||||||||||||||||
| Insurance related expenses |
16.0 | — | — | 16.0 | ||||||||||||||||
| Technology and development |
14.5 | — | — | 14.5 | ||||||||||||||||
| Sales and marketing |
46.9 | — | — | 46.9 | ||||||||||||||||
| General and administrative |
17.1 | 2.0 | (1.7 | ) | 7(bb) | 17.4 | ||||||||||||||
| Interest and other expense |
183.1 | — | (183.0 | ) | 7(aa) | 0.1 | ||||||||||||||
| Commission Expense |
— | — | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total expenses |
316.3 | 2.0 | (184.7 | ) | 133.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations |
(278.4 | ) | (2.0 | ) | 184.7 | (95.7 | ) | |||||||||||||
| Other income (expense) |
||||||||||||||||||||
| Unrealized gain on investment held in Trust Account |
— | — | — | — | ||||||||||||||||
| Change in fair value of derivative warrant liabilities |
— | (3.1 | ) | — | (3.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total other income (expense) |
— | (3.1 | ) | — | (3.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) before income taxes |
(278.4 | ) | (5.1 | ) | 184.7 | (98.8 | ) | |||||||||||||
| Income taxes (benefit) expense |
0.3 | — | — | 0.3 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) |
(278.7 | ) | (5.1 | ) | 184.7 | (99.1 | ) | |||||||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax |
1.1 | — | — | 1.1 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) attributable to common stockholders |
$ | (279.8 | ) | $ | (5.1 | ) | $ | 184.7 | $ | (100.2 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Weighted-average shares used in computing net loss per share attributable to Hippo - basic and diluted |
13,968,160 | |||||||||||||||||||
| Net loss per share attributable to Hippo - basic and diluted |
$ | (20.03 | ) | |||||||||||||||||
| Weighted average shares outstanding - Class A ordinary shares |
23,000,000 | |||||||||||||||||||
| Class A ordinary shares - basic and diluted |
$ | — | ||||||||||||||||||
| Weighted average shares outstanding - Class B ordinary shares |
5,750,000 | |||||||||||||||||||
| Class B ordinary shares - basic and diluted |
$ | (0.89 | ) | |||||||||||||||||
| Weighted average shares outstanding - Hippo Holdings Common stock |
559,731,226 | |||||||||||||||||||
| Hippo Holdings common stock - basic and diluted |
$ | (0.18 | ) | |||||||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(in millions, except share and per share amounts)
| For the Year Ended December 31, 2020 |
For the period from January 1, 2020 to August 31, 2020 |
For the period from inception October 2, 2020 (date of inception) to December 31, 2020 |
For the Year ended December 31, 2020 |
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| Hippo (Historical) |
Spinnaker (Historical) |
Spinnaker PPA Transaction Accounting Adjustments |
Hippo and Spinnaker Combined (Historical) |
RTPZ (Historical) |
Pro Forma Transactions Accounting Adjustment |
Pro Forma Combined |
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| Revenue: |
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| Net earned premium |
$ | 17.1 | $ | 5.6 | $ | — | $ | 22.7 | $ | — | $ | — | $ | 22.7 | ||||||||||||||||||||||||||
| Commission income, net |
27.1 | — | (7.8 | ) | 7 | (aa) | 19.3 | — | — | 19.3 | ||||||||||||||||||||||||||||||
| Service and fee income |
6.3 | — | — | 6.3 | — | — | 6.3 | |||||||||||||||||||||||||||||||||
| Net investment income |
1.1 | 0.7 | — | 1.8 | — | — | 1.8 | |||||||||||||||||||||||||||||||||
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| Total revenue |
51.6 | 6.3 | (7.8 | ) | 50.1 | — | — | 50.1 | ||||||||||||||||||||||||||||||||
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| Expenses: |
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| Losses and loss adjustment expenses |
25.3 | 5.0 | (0.9 | ) | 7 | (aa) | 29.4 | — | — | 29.4 | ||||||||||||||||||||||||||||||
| Insurance related expenses |
19.3 | — | (0.5 | ) | 7 | (aa) | 18.8 | — | — | 18.8 | ||||||||||||||||||||||||||||||
| Technology and development |
18.0 | — | 0.4 | 7 | (bb) | 18.4 | — | — | 18.4 | |||||||||||||||||||||||||||||||
| Sales and marketing |
69.4 | — | (14.6 | ) | 7 | (aa) | 54.8 | — | — | 54.8 | ||||||||||||||||||||||||||||||
| General and administrative |
36.8 | 7.4 | — | 44.2 | 0.3 | 8.9 | 7 | (ee) | 53.4 | |||||||||||||||||||||||||||||||
| Interest and other expense |
26.0 | — | — | 26.0 | — | (25.8 | ) | 7 | (cc) | 0.2 | ||||||||||||||||||||||||||||||
| Commission Expense |
— | (11.3 | ) | 11.3 | 7 | (aa) | — | — | — | — | ||||||||||||||||||||||||||||||
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| Total expenses |
194.8 | 1.1 | (4.3 | ) | 191.6 | 0.3 | (16.9 | ) | 175.0 | |||||||||||||||||||||||||||||||
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| Income (loss) from operations |
(143.2 | ) | 5.2 | (3.5 | ) | (141.5 | ) | (0.3 | ) | 16.9 | (124.9 | ) | ||||||||||||||||||||||||||||
| Other income (expense) |
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| Financing costs - derivative warrant liabilities |
— | — | — | — | (0.4 | ) | (0.7 | ) | 7 | (ff) | (1.1 | ) | ||||||||||||||||||||||||||||
| Change in fair value of derivative warrant liabilities |
— | — | — | — | (0.8 | ) | — | (0.8 | ) | |||||||||||||||||||||||||||||||
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| Total other income (expense) |
— | — | — | — | (1.2 | ) | (0.7 | ) | (1.9 | ) | ||||||||||||||||||||||||||||||
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| Income (loss) before income taxes |
(143.2 | ) | 5.2 | (3.5 | ) | (141.5 | ) | (1.5 | ) | 16.2 | (126.8 | ) | ||||||||||||||||||||||||||||
| Income taxes (benefit) expense |
(1.8 | ) | 1.1 | (1.1 | ) | 7 | (dd) | (1.8 | ) | — | 7 | (dd) | — | 7 | (dd) | (1.8 | ) | |||||||||||||||||||||||
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| Net income (loss) |
(141.4 | ) | 4.1 | (2.4 | ) | (139.7 | ) | (1.5 | ) | 16.2 | (125.0 | ) | ||||||||||||||||||||||||||||
| Net income (loss) attributable to noncontrolling interests, net of tax |
0.1 | — | — | 0.1 | — | — | 0.1 | |||||||||||||||||||||||||||||||||
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| Net income (loss) attributable to common stockholders |
$ | (141.5 | ) | $ | 4.1 | $ | (2.4 | ) | $ | (139.8 | ) | $ | (1.5 | ) | $ | 16.2 | $ | (125.1 | ) | |||||||||||||||||||||
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| Weighted-average shares used in computing net loss per share attributable to Hippo - basic and diluted |
12,495,509 | |||||||||||||||||||||||||||||||||||||||
| Net loss per share attributable to Hippo - basic and diluted |
$ | (11.32 | ) | |||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - Class A ordinary shares |
23,000,000 | |||||||||||||||||||||||||||||||||||||||
| Class A ordinary shares - basic and diluted |
$ | — | ||||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - Class B ordinary shares |
5,750,000 | |||||||||||||||||||||||||||||||||||||||
| Class B ordinary shares - basic and diluted |
$ | (0.26 | ) | |||||||||||||||||||||||||||||||||||||
| Weighted average shares outstanding - Hippo Holdings Common stock |
559,731,226 | |||||||||||||||||||||||||||||||||||||||
| Hippo Holdings common stock - basic and diluted |
$ | (0.22 | ) | |||||||||||||||||||||||||||||||||||||
Note 1 — Description of the Merger
Merger between RTPZ and Hippo — Business Combination
Pursuant to the Merger Agreement, following the Domestication (including the change of RTPZ’s name to “Hippo Holdings Inc.”), (i) Merger Sub merged with and into Hippo, with Hippo surviving the First Merger as a wholly owned subsidiary of Hippo Holdings, and (ii) immediately following the First Merger, Hippo (as the surviving corporation of the First Merger) merged with and into Hippo Holdings, the separate corporate existence of Hippo ceased, and Hippo Holdings continued as the surviving corporation.
The aggregate consideration paid to Hippo stockholders in connection with the Business Combination, was 552,200,000 shares. The Exchange Ratio was equal to approximately 6.95433.
The Business Combination occurred based on the following transactions contemplated by the Merger Agreement:
| • | the issued and outstanding shares of Hippo preferred stock was canceled and converted into shares of Hippo common stock at the then-effective conversion rate as calculated pursuant to Hippo’s Amended and Restated Certificate of Incorporation; |
| • | the Hippo warrants were exercised in full on a cash or cashless basis or terminated without exercise, as applicable, in accordance with their respective terms; |
| • | the Hippo notes were automatically converted into shares of Hippo common stock in accordance with their respective terms; |
| • | the issued and outstanding share of Hippo common stock (including the Hippo common stock referred to in the above points) as of immediately prior to the Effective Time, was canceled in exchange for the right to receive a number of shares of Hippo Holdings common stock equal to the Exchange Ratio; and |
| • | the outstanding vested and unvested Hippo options as of immediately prior to the Effective Time, was converted into Hippo Holdings options with the same terms except for the number of shares exercisable and the exercise price, each of which was adjusted using the Exchange Ratio. |
Other related events that took place in connection with the Business Combination are summarized below:
| • | Pursuant to the terms of the Sponsor Agreement, the Sponsor subjected the 5,630,000 Sponsor Shares to the following (a) price-based vesting terms over a ten-year period following the Closing and (b) lock-ups. |
Each of the four tranches applies to 25% of the total Sponsor Shares (i.e., each tranche applies to 1,407,500 Sponsor Shares):
| • | Tranche 1 |
| • | Price-Based Vesting Trigger: None; vested at Closing. |
| • | Lockup: 6 months following Closing. |
| • | Tranche 2 |
| • | Price-Based Vesting Trigger: share price above $12.50 based on a standard trailing 20 trading day VWAP (“Trailing VWAP”). |
| • | Lockup: 12 months following Closing. |
| • | Tranche 3 |
| • | Price-Based Vesting Trigger: share price above $15.00 based on the Trailing VWAP. |
| • | Lockup: 18 months following Closing. |
| • | Tranche 4 |
| • | Price-Based Vesting Trigger: share price above $20.00 based on the Trailing VWAP. |
| • | Lockup: 24 months following Closing. |
| • | After ten years, any Sponsor Shares that have not yet met the applicable price-based vesting trigger shall automatically vest. |
| • | If, after Closing, Hippo Holdings completes a transaction that results in a change of control, the Sponsor Shares are released from the vesting and lock-up restrictions immediately prior to such change of control. As RTPZ legally owns the shares and is subject only to transfer restrictions that lapse upon the earlier of (1) meeting one or more specific conditions described above or (2) a stated date, such Sponsor Shares are considered to be outstanding shares of stock. |
| • | Pursuant to the terms of the Sponsor Agreement, the Sponsor agreed, in addition to the existing exercise provisions in the Warrant Agreement, to the mandatory exercise of the private placement warrants if, during the exercise period, (a) Hippo Holdings elects to redeem the public warrants, (b) the last reported sales price of Hippo Holdings common stock for any 20 trading days within a period of 30 consecutive trading days exceeds $25.00 per share, and (c) there is an effective registration statement covering the issuance of shares of Hippo Holdings common stock issuable upon exercise of the private placement warrants, and a current prospectus relating thereto, available at the time of such exercise. |
| • | Following the Closing, Hippo Holdings used $95,000,000 to acquire 9,500,000 shares of Hippo Holdings common stock from certain stockholders of Hippo prior to the Business Combination. |
Spinnaker Transaction
On August 31, 2020, Hippo acquired 100% of the issued and outstanding share capital of Spinnaker, a privately held entity that is an Illinois domiciled property and casualty insurance carrier, in exchange for cash consideration. The total consideration of $90.5 million, which is subject to customary closing adjustments, was paid in cash and transferred as part of the closing of the transaction for all of the outstanding equity interests of Spinnaker.
Note 2 — Basis of Presentation
The unaudited pro forma condensed combined financial statements were prepared in accordance with Article 11 of SEC Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). RTPZ has not elected to present Management’s Adjustments and will only be presenting Transaction Accounting Adjustments in the unaudited pro forma condensed combined financial information. The adjustments presented in the unaudited pro forma condensed combined financial statements have been identified and presented to provide relevant information necessary for an understanding of the combined company upon consummation of the Business Combination.
Management has made significant estimates and assumptions in its determination of the pro forma adjustments based on information available as of the date of filing this Form 8-K/A and is subject to change as additional information becomes available and analyses are performed. As the unaudited pro forma condensed combined financial information has been prepared based on these preliminary estimates, the final amounts recorded may differ materially from the information presented as additional information becomes available. Management considers this basis of presentation to be reasonable under the circumstances.
The unaudited pro forma condensed combined financial information does not give effect to any anticipated synergies, operating efficiencies, tax savings, or cost savings that may be associated with the Transactions. RTPZ has not had any historical relationship with Hippo prior to the Business Combination. Accordingly, no Transaction Accounting Adjustments were required to eliminate activities between the companies. However, as Hippo had a prior relationship with Spinnaker prior to the Spinnaker Transactions, Transaction Accounting Adjustments have been made to eliminate such activities in the unaudited condensed combined statement of operations.
Total one-time direct and incremental transaction costs (i.e. “Transaction costs”) incurred prior to, or concurrent with, the Closing were allocated between common stock issued and other equity instruments currently classified as liabilities (i.e. private placement warrants and public warrants) on a relative fair value basis. Transaction costs allocable to common stock issued are reflected in the unaudited pro forma condensed combined balance sheet as a direct reduction to Hippo’s additional paid-in capital and are assumed to be cash settled. Transaction costs allocable to issued warrants classified as liabilities are charged to the unaudited pro forma condensed combined statement of operations and are assumed to be cash settled.
The following summarizes the pro forma shares of Post-Combination Common Stock issued and outstanding at the Closing:
| Shares (4) | % Ownership |
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| Hippo stockholders (1) (2) |
547,974,660 | 89.5 | % | |||||
| PIPE Investors—Existing Hippo stockholders |
9,900,000 | 1.6 | % | |||||
| PIPE Investors (3)(5) |
45,100,000 | 7.4 | % | |||||
| Class A ordinary shares |
3,738,620 | 0.6 | % | |||||
| Class B ordinary shares (5) |
5,750,000 | 0.9 | % | |||||
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| Pro Forma common stock at the Closing |
612,463,280 | 100 | % | |||||
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| (1) | Includes approximately 52.7 million shares of Hippo common stock underlying rollover options that do not represent legally outstanding shares of Hippo common stock at the Closing. |
| (2) | Includes redemption by Hippo of 9.5 million shares whereby, at the Closing, Hippo Holdings used $95.0 million to repurchase 9.5 million shares of Hippo Holdings common stock from certain stockholders of Hippo. |
| (3) | Includes $10.0 million of investment from Reinvent Capital Fund and remaining $441.0 million from Third Party PIPE investors. |
| (4) | Excludes the outstanding RTPZ warrants issued in connection with its initial public offering as such securities are not exercisable until 30 days after the Closing. |
| (5) | Through the Class B ordinary shares, the Sponsor and its related entities owned 1.027% of Hippo Holdings common stock outstanding immediately following the Closing. |
Note 3 — Accounting Policies
Based on its initial analysis of Hippo and RTPZ’s policies, Hippo Holdings and RTPZ did not identified any differences in accounting policies that would have an impact on the unaudited pro forma condensed combined financial information. As a result, the unaudited pro forma condensed combined financial information does not assume any differences in accounting policies.
Note 4 — Accounting for the Transactions
The Business Combination between Hippo and RTPZ was accounted for as a reverse recapitalization of Hippo who has been determined to be the accounting acquirer based on a number of considerations, including but not limited to: i) Hippo former management making up the majority of the Management Team of Hippo Holdings, ii) Hippo former management nominating or representing the majority of Hippo Holdings’ board of directors and iii) Hippo representing the majority of the continuing operations of Hippo Holdings. Management has also preliminarily determined Hippo to be the predecessor entity to the Merger Agreement based on the same considerations listed above.
The Business Combination between Hippo and RTPZ was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. GAAP. Under this method of accounting, RTPZ was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the reverse recapitalization was treated as the equivalent of Hippo issuing stock for the net assets of RTPZ, accompanied by a recapitalization. Operations prior to the reverse recapitalization was those of Hippo.
The acquisition of Spinnaker has been treated as a business combination and has been accounted for using the acquisition method. Hippo has recorded the fair value of assets and liabilities acquired from Spinnaker.
Note 5 — Shares of RTPZ Common Stock Issued to Hippo Stockholders upon Closing
Based on the Exchange Ratio of 6.95433, RTPZ issued 495.2 million shares of RTPZ common stock in the Business Combination using a reference price of $10.00 per share, net of the Redemption of Hippo Holdings common stock, and an additional 52.7 million Hippo Holdings options as follows:
| Hippo Common Stock outstanding prior to the Closing |
15,940,879 | |||
| Exchange Ratio |
6.95433 | |||
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| 110,858,175 | ||||
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| Less: Redemption of Hippo Holdings common stock immediately after the Closing |
(9,500,000) | |||
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| 101,358,175 | ||||
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| Hippo convertible preferred stock outstanding prior to the Closing |
43,985,178 | |||
| Exchange Ratio |
6.95433 | |||
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| 305,887,553 | ||||
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| Hippo convertible promissory note (including accrued interest) outstanding prior to the Closing |
6,247,807 | |||
| Exchange Ratio |
6.95433 | |||
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| 43,449,329 | ||||
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| Hippo’s common and preferred warrants which converted prior to the Closing |
6,405,726 | |||
| Exchange Ratio |
6.95433 | |||
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| 44,547,549 | ||||
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| Shares of RTPZ Common Stock issued to Hippo Stockholders upon the Closing |
495,242,606 | |||
| Rollover of Hippo’s options to Hippo Holding’s options |
7,582,619 | |||
| Exchange Ratio |
6.95433 | |||
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| 52,732,054 | ||||
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| Total Aggregate Merger Consideration, including rollover options |
547,974,660 | |||
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Note 6 — Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The unaudited pro forma condensed combined balance sheet as of June 30, 2021 has been prepared to illustrate the effect of the Transactions and has been prepared for informational purposes only.
The pro forma transaction accounting adjustments, based on preliminary estimates that could change materially as additional information is obtained, are as follows:
| (a) | Reflects the release of $230.0 million of investments held in the trust account that become available upon the Closing. |
| (b) | Reflects the settlement of RTPZ’s historical liabilities that were settled upon the Closing. |
| (c) | Reflects the automatic conversion of Hippo notes into shares of Hippo common stock as per the original terms of the Hippo notes, and subsequent conversion into Hippo Holdings common stock. Upon the conversion, the carrying value of the debt of $299.0 million, including unamortized debt discount, accrued interest of $0.9 million recorded in accrued liability, and the related derivative liability of $162.6 million were derecognized. The Hippo Holdings shares issued in exchange for the Hippo notes were recorded at fair value to Hippo Holdings common stock in amount of $0 and additional paid in capital in amount of $462.5 million. |
| (d) | Reflects the payment of approximately $8.1 million of deferred underwriters’ fees incurred during RTPZ’s initial public offering and due upon the Closing. |
| (e) | Reflects the proceeds of $550.0 million from the issuance and sale of 55.0 million shares of Hippo Holdings common stock at $10.00 per share pursuant to the Subscription Agreements entered into with the PIPE Investors in connection with the PIPE Investment. |
| (f) | Reflects recording of Hippo’s transaction costs of $25.2 million. These expected transaction costs are in connection with the Closing and related transactions and are deemed to be direct and incremental costs of the Business Combination, $24.5 million of which have been allocable to common stock issued and recorded as a reduction to additional paid-in capital and the remaining $0.7 million allocable to issued warrants classified as liabilities have been charged to the unaudited pro forma condensed combined statement of operations. Necessary adjustments have been made to other assets for deferred offering cost of $5.2 million, accrued liabilities for $1.1 million for unpaid Hippo transaction costs, and cash and cash equivalents for $21.1 million for Hippo’s transaction costs. |
In addition, an adjustment of $7.1 million has been made to accumulated deficit with an offset to cash and cash equivalents and prepaid expenses to reflect RTPZ’s transaction costs in the nature of advisory, legal, accounting and auditing fees and other professional fees pertaining to the Business Combination and related transactions.
| (g) | Reflects the reclassification of Hippo’s convertible preferred stock warrant liability to additional paid in capital as a result of Hippo warrants being converted into Hippo Holdings common stock. |
| (h) | Reflects the reclassification of Class A ordinary shares of $199.8 million to permanent equity immediately prior to the Closing. |
| (i) | Reflects the recapitalization of Hippo through the contribution of all outstanding Hippo common stock and Hippo preferred stock to RTPZ and the issuance of 494.7 million shares of Hippo Holdings common stock and the elimination of the accumulated deficit of RTPZ, the accounting acquiree. As a result of the recapitalization, the carrying value of Hippo’s convertible preferred stock of $344.8 million, common stock of $0, and RTPZ’s accumulated deficit of $14.4 million were derecognized. The shares of Hippo Holdings common stock issued in exchange for Hippo’s capital were recorded to Hippo Holdings common stock in the amount of $0 and additional paid in capital in amount of $344.8 million. The Transaction Accounting Adjustment also includes conversion of outstanding RTPZ Class A and Class B ordinary shares into Hippo Holdings common stock concurrent with the Closing. |
| (j) | Reflects the redemption of Hippo Holdings common stock amounting to $95.0 million at $10.00 per share, following the Closing. |
| (k) | Reflects the cash disbursed to redeem 19.3 million Class A ordinary shares for $192.6 million allocated to Hippo Holdings common stock and APIC, using a par value of $0.0001 per share at a redemption price of approximately $10.00 per share. |
Note 7— Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
The unaudited pro forma basic and diluted net loss per share amounts presented in the unaudited pro forma condensed combined statements of operations are based upon the number of outstanding shares of Hippo Holdings, assuming the Business Combination occurred on January 1, 2020.
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2021 are as follows:
| (aa) | Reflects reversal of $68.4 million interest expense and change in fair value of embedded derivative pertaining to convertible promissory notes. The adjustment also reflects reversal of $114.6 million for changes in fair value of Hippo warrants to purchase Hippo preferred stock. |
| (bb) | Reflects reversal of $1.7 million of RTPZ’s transaction costs that were recorded during the six months ended June 30, 2021 as such costs pertain to the Business Combination. These costs have been shown as a proforma adjustment within the unaudited pro forma condensed combined statement of operations for the year ended December 31,2020. |
The pro forma adjustments included in the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2020 are as follows:
| (aa) | Reflects adjustment to eliminate pre-existing relationship and fair value between Spinnaker and Hippo and fair value adjustments as described below: |
Pre-existing relationship — Represents adjustments to eliminate the pre-existing relationship between Spinnaker and Hippo and to align the accounting policies of the combined company, which includes $2.8 million reversal of revenue, $0.9 million reversal of loss and loss adjustment expenses, $14.6 million reversal of sales and marketing expenses, $0.5 million reversal of insurance related expenses and $11.3 million increase of commission expenses, which eliminated the negative commission expense on Spinnaker historical financial statements. The pre-existing relationship pertains to Hippo serving as MGA and MGU of Spinnaker. Prior to the acquisition, Hippo earned commission income and incurred commission expenses to other agencies, which was included in sales and marketing expenses on the consolidated Hippo financial statements. Upon the acquisition, the combined company would earn ceding commission income in excess of acquisition cost. The commission paid to other agencies by Hippo would be included as a reduction of revenue. Prior to the acquisition, RH Solutions Insurance, a subsidiary of Hippo, assumed a portion of the insurance risk from Spinnaker and incurred fronting fee based on percentage of earned premium from the assumed policies, which was recorded as insurance related expense. Upon acquisition, the fronting fee would be eliminated with Spinnaker’s ceding commission income.
Fair value adjustment — Represent $5.0 million fair value adjustment for amortization of deferred ceding liability, net of the deferred acquisition cost of Spinnaker.
| (bb) | Reflects incremental expense pertaining to amortization of intangibles (including value of business acquired) amounting to $0.4 million. |
| (cc) | Reflects reversal of $9.6 million interest expense and change in fair value of embedded derivative pertaining to convertible promissory notes. The Transaction Accounting Adjustment also includes reversal of $16.2 million for changes in fair value of Hippo warrants to purchase Hippo preferred stock. |
| (dd) | The unaudited pro forma condensed combined statement of operations of Hippo for the year ended December 31, 2020 takes into consideration if recognition of deferred tax assets is appropriate when realization of these assets is more likely than not. Based upon weight of all available evidence, with primary focus on the Hippo’s history of recent losses, Hippo has concluded that it is not more likely than not that the recorded deferred tax assets will be realized. As a result, the tax effect of the Transactions is recorded at no tax expense or benefit to Hippo. The pro forma combined provision for income taxes does not necessarily reflect the amounts that would have resulted had RTPZ and Hippo filed consolidated income tax returns during the period presented. |
| (ee) | Reflects RTPZ’s transaction cost of $8.9 million as part of the Business Combination and related transactions. |
| (ff) | Reflects the transaction costs allocable to RTPZ liability classified warrants. Refer to Note 2 for further details. |
Note 8 — Net Loss per Share
Represents the net loss per share calculated using the historical weighted average shares outstanding and the issuance of additional shares in connection with the Business Combination, the PIPE Investment, and other
related events, assuming such additional shares were outstanding since January 1, 2020. As the Business Combination and PIPE Investment are being reflected as if they had occurred as of January 1, 2020, the calculation of weighted average shares outstanding for basic and diluted net loss per share assumes the shares issued in connection with the Business Combination and PIPE Investment have been outstanding for the entire periods presented. This calculation is retroactively adjusted to eliminate the number of shares redeemed in the Business Combination for the entire period presented.
| (in millions, except share and per share data) |
For the Six Months Ended June 30, 2021 | For the Year Ended December 31, 2020 | ||||||
| Pro forma net loss |
$ | (100.2 | ) | $ | (125.1 | ) | ||
| Weighted average shares outstanding of Hippo Holdings common stock |
559,731,226 | 559,731,226 | ||||||
| Net loss per share (Basic and Diluted) attributable to Hippo Holdings common stockholders |
$ | (0.18 | ) | $ | (0.22 | ) | ||
| Weighted average shares outstanding – basic and diluted |
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| Former Hippo stockholders |
495,242,606 | 495,242,606 | ||||||
| RTPZ Class A stockholders |
3,738,620 | 3,738,620 | ||||||
| RTPZ Class B stockholders |
5,750,000 | 5,750,000 | ||||||
| PIPE Transaction |
55,000,000 | 55,000,000 | ||||||
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| Total |
559,731,226 | 559,731,226 | ||||||
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The following potential outstanding securities were excluded from the computation of pro forma net loss per share, basic and diluted, for the six months ended June 30, 2021 and year ended December 31, 2020, because their effect would have been anti-dilutive or issuance of such shares is contingent upon the satisfaction of certain conditions which were not satisfied by the end of the period:
| For the Six Months Ended June 30, 2021 | For the Year Ended December 31, 2020 | |||||||
| Hippo Holdings Stock Options |
52,732,054 | 52,732,054 | ||||||
| Hippo Holdings Common stock subject to repurchase |
12,003,665 | 12,003,665 | ||||||
| RTPZ - public and private placement warrants |
9,000,000 | 9,000,000 | ||||||