Earnings Call Transcript - HIPO Q3 2021

Operator, Operator

Welcome and thank you for joining the Hippo Third Quarter 2021 Earnings Conference Call. I will now hand it over to your host, the Hippo Management Team. Thank you. You may continue.

Cliff Gallant, Host

Thank you, Operator. Good afternoon, everybody and thank you for joining Hippo's third quarter 2021 earnings conference call. Earlier today, Hippo issued a shareholder letter announcing its third quarter result, which is also available at investors.hippo.com. Leading to today's discussion will be Hippo's Chief Executive Officer, Assaf Wand; President, Rick McCathron; and Chief Financial Officer, Stewart Ellis. Following management’s prepared remarks, we will open up the call to questions. Before we begin, I would like to remind you that our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of the presentation. Forward-looking statements include, but are not limited to, Hippo’s expectations or predictions of financial and business performance and conditions and competitive and industry outlook. Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or from our forecasts, including those set forth in Hippo’s Form 8-K filed today. For more information, please refer to the risks, uncertainties and other factors discussed in Hippo’s SEC filings. All cautionary statements that we make during this call are applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks and uncertainties and other factors discussed in Hippo’s SEC filings. Do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating, altering or otherwise revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, during the conference call, we will also refer to non-GAAP financial measures such as Total Generated Premium and adjusted EBITDA. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the third quarter 2021 Shareholder Letter, which has been furnished to the SEC and is available on our website. And with that, I'll turn the call over to Assaf Wand, Co-Founder and CEO of Hippo.

Assaf Wand, CEO

Thank you, Cliff. Q3 was an incredibly strong quarter for Hippo. Our results demonstrate exciting progress in the areas of our business that matter most. We delivered robust growth, improved our loss ratio and made a number of investments which will strengthen our foundation for the future. Total Generated Premium grew 94% year-over-year, premium retention increased to 89%, and customer satisfaction remained amongst the best in the industry. We are now more convinced than ever that partnering with our customers to proactively protect their homes and prevent losses is setting a new standard for the industry and is positioning Hippo for long-term success. Our omni-channel distribution strategy continues to deliver. In addition to the strong results in our direct, independent agent, and builder channels, I’m excited to report that we launched a major new partnership with national home lender PennyMac, giving us the opportunity to offer quotes to millions of additional homeowners. Reflecting our strong performance in Q3 and our expectations of continued momentum in Q4, we are raising our full year guidance for Total Generated Premium from the $560 million to $570 million we shared last quarter, to $600 million to $605 million now. We also delivered an improved loss ratio during the quarter, coming in at 128% versus 155% a year ago. While we are pleased by the progress, we still have a lot of work to do to reach our long-term targets. In a moment, Rick will talk about how we are using our proprietary technology to learn and implement changes at an accelerated pace to continue our momentum in this area. Another advantage that we now have is a world-class insurance leadership team. In recent months, we have welcomed new leaders of our actuarial, underwriting and risk functions, and announced the future addition of a new leader for our claims organization. This team brings many decades of experience at leading insurance companies and sees the power in the technology platform that we have built to deliver better insurance results for Hippo. I’m personally excited by this rapid operational progress we are making under these new leaders. It will take time for the changes we are making to work their way into our reported results, but early signs are positive and I’m more confident than ever that we will deliver. In an unpredictable environment impacted by the pandemic, climate change, and inflation, we believe that our tech-driven operating agility allows us to act more quickly and decisively than our competitors, and puts us in a better position to win in the long term. Thank you. And I will pass it over to Stewart, our CFO, to discuss our Q3 results in more detail.

Stewart Ellis, CFO

Thank you, Assaf. As Assaf said, our third quarter results highlight the ongoing strong demand from customers for our products and services. Our improving loss ratio and early indications show that we are seeing the benefits of operating leverage as we grow. Total Generated Premium or TGP was up 94% year-over-year, at $162 million in Q3. Pro forma for the acquisition of Spinnaker, TGP was up 51% year-over-year. Additions to our book of business or new Total Generated Premium were up 66% year-over-year to $75 million, which is an acceleration from 53% last quarter. We also continue to geographically diversify led by growth in Colorado and New Jersey; 63% of new Hippo homeowners’ premium in the quarter came from states outside of Texas and California, up from 55% last quarter. As our business grows nationally, we are continuing to develop a much more balanced portfolio of geographic exposure, which should help reduce the volatility of our loss ratio over time. Premium retention remains strong and continues to edge upward, reaching 89% in the quarter. Our high retention rates drive top line growth and because loss frequency declines with customer age, this is a benefit to improving loss ratio over time. Our revenue was up 64% year-over-year to $21 million, driven by the growth in Total Generated Premium. As we highlighted last quarter, geographic concentration in homeowners insurance can result in higher loss ratio volatility. While our concentration in North Texas worked against us in the first half of 2021 due to historically bad weather, it benefited us in Q3. The industry was hit hard by the devastation of Hurricane Ida this quarter, but we managed to improve our gross loss ratio to 128%, down from 155% last year. Prior period reserves remained stable with minor favorable development. Digging deeper into the components of gross loss ratio, catastrophic weather losses contributed 50 percentage points of loss ratio in Q3, versus 75 percentage points a year ago. Our underlying attritional loss ratio was 63%, a 5 percentage point improvement from a year ago. Geographic concentration in homeowners insurance can result in higher loss ratio volatility. While our concentration in North Texas worked against us in the first half of 2021 due to historically bad weather, it benefited us in Q3. Rick will talk more in a moment about the specific actions we have taken and will continue to take to bring the loss ratio down to our long-term targets. As I mentioned earlier, we are starting to see the benefits of operating leverage as we scale with the major components of our operating expenses growing more slowly than our Total Generated Premium. Sales and marketing increased 27% year-over-year to $22.4 million, and we continue to generate more dollars of new TGP for each dollar of sales and marketing we spend. This trend is giving us increased confidence that our message is resonating with potential customers, and as a result, we expect to invest more aggressively in 2022 to build a differentiated and nationally recognized brand in home protection. Technology and development increased 46% year-over-year to $8.3 million as we continue to invest in our platform by integrating new data sources, improving our underwriting model, onboarding new partnerships, expanding into new states, and launching new products. General and administrative expenses decreased 17% to $13.4 million, with the increased costs of operating as a public company being more than offset by reductions year-over-year in stock-based compensation. Our net loss attributable to Hippo for the quarter was $30.9 million or $0.08 per share compared to a net loss of $38.6 million or $0.44 per share in the prior year quarter. We've ended the quarter well capitalized with cash and cash equivalents and investments of $850 million. Looking forward, we remain confident in our ability to execute our growth strategy and believe we will exceed the forecast we shared with you previously. As Assaf mentioned earlier, we are increasing our full year guidance for Total Generated Premium from a range of $560 million to $570 million to $600 million to $605 million.

Rick McCathron, President

Thank you, Stewart. We continue to leverage our technology to improve and rapidly iterate in all aspects of our operations from generating new business, to underwriting, to servicing customers and handling claims. Specific to loss ratio, we've made several enhancements to promote better results. We are beginning to leverage our new carrier relationships, as we implement our multi-carrier strategy. Ally filings have been made in 14 states and Incline have been made in Massachusetts and North Carolina. These will allow us more flexibility in matching the right price to the right customer risk. We incorporated five new data sources during the quarter and added 50 new variables to our data sets, which we expect to introduce in Q4. We have adjusted rates up and down, including a recently approved 24% increase in California. We have also enhanced our home inspection process. In addition, Hippo continues to diversify its portfolio geographically. This will address some of the volatility seen in results over the past two years. Actions to restrict new business in portions of California and Texas, our two largest states have been combined with growth in other strategic states. These states generating this diversifying growth were chosen based on the health of the marketplace and our perception of our ability to adequately price and select business in the state. We expect this change in our geographic footprint will also help to improve our attrition loss results. There are a lot of actions being taken here, and I want to be clear. Our operating model was designed for this kind of continuous improvement and quick execution. As Assaf said, we are living in an unpredictable world and we have an operating model built to adapt. And now let me turn it back over to Assaf for some final words.

Assaf Wand, CEO

Thanks, Rick, and thanks to everyone for joining Hippo's earnings call today. Our Q3 results are just beginning to prove that we have the right strategy, the right team and resources to execute our growth strategy. We are on the path to transform this massive market. We believe Hippo is the future of home insurance. With that, we’ll be happy to take your questions.

Operator, Operator

The first question comes from Matt Carletti with JMP Securities. You may proceed.

Matt Carletti, Analyst

Okay. Thanks. Good afternoon. I start with a premium question. You commented in the opening commentary as well as I saw in the letter that new premium growth has really accelerated from prior quarters. And I was hoping you could peel back the onion there a little bit and maybe give us some color on what you view as the real drivers of that new business growth?

Stewart Ellis, CFO

Yes. Thanks, Matt for the question. This is Stewart, I'll take it. And then others can join in. I'll start by saying we're excited about what we're seeing in each of our distribution channels. Our net growth in the quarter was balanced across the range of ways we go to market. In Q3, we saw particular strength in the builder and partner channels, which represented over 20% of our new Hippo homeowners premium for the first time. And given the launch of our partnership with PennyMac, we expect to see continued strength in this area of our business going forward. Geographically, we also did make progress diversifying our geographic exposure in the quarter; 63% of new Hippo's homeowners’ premium came from outside of California and Texas. So we have states that we've been live in for a while that are starting to accelerate in growth. And that 63% was the highest ever level for us, up from 55% last quarter. I also think that it doesn't relate directly to new premium, but the overall growth, we benefit from increased premium retention that remained strong and went up in the quarter to 89%, which of course is a benefit for us because the higher our premium retention, the smaller the headwind we have to overcome from departing customers.

Assaf Wand, CEO

I want to add a couple of more things. This is Assaf. There's also some aspect that I would put under the title materialization; the longer we are in the market and the market matures, usually conversion improves or the amount improves. We are starting to see the value of being in a market for longer, and it's very effective for us. Longer partnerships that have been with us for a while also perform better. New products that we have started to mature as well. I think last quarter we announced our homeowner association and community association, we are now live in eight states. So we're starting to see the benefit of that. Additionally, we are a technology company and because of that, what we do is to basically have constant iterations and fine-tuning of data components of all kinds of other components. What we're seeing is the longer we are in the market, the more we are iterating. Our conversion is improving, and that also improves our growth. So I think it's a combination of all of these things and customers better leaning into our strategy and product.

Matt Carletti, Analyst

Great. Thank you. And then one more, if I could. The theme, I think across not just insure tech, but more broadly last quarter and definitely this quarter has been elevated marketing costs and particularly in certain performance channels and kind of lower marketing efficiency. Can you comment a little on what you've seen? And specifically I'm wondering if given that you produce a good amount of your business through some of the partnerships you just talked about as well as more traditional agent means, if that is shielding you from some of what some others might be seeing that are relying more on direct mechanisms.

Stewart Ellis, CFO

Yes. Matt, this is Stewart again. I think we talked a bit about this phenomenon last quarter, and I'm happy to report that we are still not seeing this effect in our business. In fact, we're seeing improved marketing efficiency over time, as we are generating more dollars of TGP for every dollar we spend on sales and marketing. I think some of the reasons that we've been less affected, maybe than others, has to do with our business. Home insurance is often an event-driven purchase that centers around the actual purchase of a home. So that's one potential reason why, and then also, I think the way we have historically gone to market hasn't been as reliant on social media as a channel as it really has not been a significant part of our go-to-market strategy. I also think it is actually quite difficult to find a homeowner's policy online in a direct way. There are not very many people out there who do that. And so I think that also may influence the amount of money that's being spent in this channel. And so we have an advantage there. I think that at least for now has been persistent. I think finally, I'll also say that now that we're reaching true nationwide scale, we are planning to launch a national brand campaign next year that we think will further reinforce our differentiated consumer experience and our approach to partnering with our customers, who want to better protect their homes, which as you mentioned, along with our omni-channel strategy, we think has been the right choice for us and for our customers in the beginning, should help insulate us from things like this in the future.

Matt Carletti, Analyst

Great. That makes a lot of sense. Thank you very much for taking my questions and best of luck.

Stewart Ellis, CFO

Absolutely. Thanks, Matt.

Operator, Operator

Thank you, Mr. Carletti. Our next question will come from Alex Scott with Goldman Sachs. You may proceed.

Alex Scott, Analyst

Hey, good afternoon. Thanks for taking the question. I just wanted to maybe dig into the operational changes that were referenced in the letter. Could you provide some more detail on some of those actions you're taking? I mean, and maybe how the Ally and Incline partnerships kind of intertwine with some of those actions and anyway for us to think about how quickly that'll push your loss ratio towards some of your targeted levels?

Rick McCathron, President

This is Rick. I'll happily answer that question. From an operational perspective, we've taken quite a bit of action, as Stewart mentioned earlier, our diversification outside of Texas and California has certainly taken hold and we're doing a better job of managing our non-cat via underwriting leveraging data and technology. As I mentioned, we've got five new data sources that we've integrated this quarter. We have 50 new data variables that we're using. Also, the multi-carrier strategy that you mentioned is certainly allowing us to accelerate by having multiple underwriting companies, multiple price points, and multiple underwriting guidelines that will allow us to accelerate our rate improvement and loss ratio improvement. Certainly, our tech stack also helps that. In fact, we have an open architecture tech stack that enables us to integrate with multiple carriers in a quick way, which will help us accelerate the rate at which we're doing that as well. As you know, we have a capital-light structure, and using Ally and Incline not only makes us more capital efficient but also allows us to accelerate those actions. So we anticipate writing our first business on Ally and Incline in Q1. We've already filed a combination of 16 states on Ally and Incline and we're excited to launch those and write our first policies as I mentioned in Q1.

Alex Scott, Analyst

Thanks. Yes, go ahead.

Stewart Ellis, CFO

Sorry. Alex, this is Stewart. I would also say more generally that we talked a little about this last quarter, but we are experiencing supply chain issues related to COVID and various inflationary pressures affecting remediation costs in the industry. I believe our proprietary platform, which we own and control, allows us to respond more quickly to changing market conditions. So whether it's rate filings or underwriting guidelines, we feel confident that we are well-positioned to adapt to whatever the market conditions may be in the future. This responsiveness is one of the key differentiators of our technology platform.

Alex Scott, Analyst

Got it. Thank you. Maybe just a quick follow-up to that, I mean, when you think through some of the actions you're taking, and you mentioned that the California rate increase in the initial comments. Do you expect to have any impact on the retention? Is there any way for me to think about the way that will trend? Or any sort of early insights that maybe you have on that?

Stewart Ellis, CFO

Yes, no, Alex, that's a good question. I think we're in an inflationary cycle. I think the entire industry is taking rate. It's a combination of increased frequency and severity I think weather changes. So I don't think this is something that is isolated to Hippo. What I think if you look at SNL data, you're going to find that most incumbent carriers are taking rate and we're no different.

Alex Scott, Analyst

Got it. Just in terms of the catastrophe losses, I appreciate that this year has been very active. Every quarter, there have been different things that have impacted. How should we think about that level going forward? And just thinking through you are concentrated in some areas in a more cat exposed right now and maybe that's sort of a more elevated normalized level, kind of eventually giving way to a more normal cap budget that you'd see in other companies with a nationwide distribution. Anyway for us to think through how that'll progress and where it'll be over the near term?

Rick McCathron, President

Yes, I think clearly this has not been a great year for the industry generally because of the catastrophic events that you had mentioned and the PCF event. I think from our perspective, sort of a normalized cat load is a very state-specific situation as we continue to diversify outside of places like California and Texas. You'll see a very different shift in a cat load versus an attrition load over time. I think what's important for us is that we really price each customer based on each state where we believe we will have an underwriting profit. So to us, it's staying ahead of that. Obviously, we have some catch-up work to do, and we've been doing it with all the rate filings. But we're certainly improving that. And I do think you're noticing that the diversification that Stewart mentioned earlier, 63% are out of those high concentrated areas, and that's up from 55% last quarter. So you're certainly seeing that and over time, we want to get to loss ratios in the 60s.

Stewart Ellis, CFO

And this is Stewart, even within, say for example, the state of Texas, we would also consider what we've been doing over the past couple of quarters to be diversification within the state. So our concentration within Texas has historically been in the North Texas area, near the Dallas-Fort Worth area, which is more hail exposed. Texas is a very, very large state. And so even though we're continuing to write business in Texas, the new business that we're bringing into the portfolio is diversifying our cat exposure away from things like hail.

Alex Scott, Analyst

Got it. Thanks for the responses.

Rick McCathron, President

Thanks, Alex.

Operator, Operator

Thank you, Mr. Scott. The next question comes from Christopher Martin with KBW. You may proceed.

Christopher Martin, Analyst

Hey guys, congrats on the quarter and a very positive look on the Total Premium Generated. A quick question on some of the constraints you see on the supply chain in the homebuilder space in those partnerships you have. Have you seen any kind of slowdown in those channels in the recent quarters and how you think about kind of as you’re splitting up your diversification of distribution, that piece of it that could be a little bit constrained versus what you may have thought about six months ago?

Assaf Wand, CEO

Hi Chris, this is Assaf. Stewart mentioned before that the builder is one of our fastest growing categories. What we've seen is, yes, that overall there are several constraints for this industry, but for our partners, what they've seen is growth and our task rate is growing. Our partnership with them is deepening. We launched in more states. I think we're live now in 15 states and selling a unique product, which is our HO5 product. Many people don't know it's actually a dedicated insurance product that was developed very closely with our partners, which has all kinds of features and nuances that caters to their needs. We are starting to see more and more adoption. We're currently working with three out of the top 15 builders and keep on deepening these partnerships with the builders that we have. And we are very open to adding more builders. We are very excited about this product and there's no stopping it, we're seeing just tailwinds for them.

Christopher Martin, Analyst

Great. That makes a lot of sense. Now the deepening of the relationships versus what the constraints may be. That's all I have for now. You guys answered everything else previously. Thank you.

Assaf Wand, CEO

Thanks, Chris.

Operator, Operator

Thank you, Mr. Martin. There are no additional questions waiting at this time, so I'll pass it back to the Hippo Management Team to provide closing remarks.

Assaf Wand, CEO

Thanks, everybody. Just wanted to say thank you for coming in today, and we're looking forward to talking to you in the next quarter.

Operator, Operator

That concludes the Hippo third quarter 2021 earnings call. Thank you for your participation and enjoy the rest of your day.