Q2 2021 Hippo Holdings Inc Earnings Call
All right.
Everybody. Thank you got good evening. Thank you for attending the Hippo Holdings Q2, 2021 earnings conference call all lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end.
I would now like to pass the country over to your host Chris Mooney with hip though thank you you May proceed.
Thank you operator, good afternoon, everybody and thank you for joining <unk> second quarter 2021 earnings conference call.
Earlier today, we issued a shareholder letter announcing our second quarter results, which is also available at investors <unk> com.
Leading today's discussion will be about chief Executive officer of thought one President Rickman, Catherine and Chief Financial Officer Stuart Miller.
Boeing management prepared remarks, we will open up the call to questions before we begin.
Like to remind you that our discussion will contain predictions expectations forward looking statements and other information about our business. It is based on management's current expectations as of the date of this presentation forward. Looking statements include but are not limited to <unk> expectations or predictions of financial and business performance and condition and competitive in the 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 ore from our forecast, including those set forth Bose.
8-K filed today.
For more information please refer to the risks uncertainties and other factors.
Our 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 SEC filings 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.
We're running through some of the technicality of associate with the recent public listing event.
<unk> was accounted for as a reverse recapitalization and reinvent technology partner Z will be treated as the acquired company for financial statement reporting purposes.
Hello, holding things prior to the business combination was deemed at the predecessor and hip out after the business combination will be the successor, SEC registrant, meaning that the financial statements for periods prior to the consummation of the business combination will be disclosed in those future periodic reports no goodwill or other intangible assets were recorded.
In accordance with GAAP for more details please see our filings with the SEC. Additionally, during this conference call. We will also refer to non-GAAP financial measures such as total generated premium and adjusted EBITDA. Our GAAP result descriptions of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the <unk>.
Quarter 2021 shareholder letter what had been furnished to the SEC and available on our website and with that I'll turn the call over to our salt wanted CEO of Hippo.
Thank you, Chris and thank you all for joining us today.
We're incredibly proud to report on Q2 financial results for the first time as a public company.
This was a quarter that was not reflective of what we told you we would deal with reflective of where we are.
Our Q2 performance showed it was the lowest strategy coming to life.
We achieved a 101% year on year growth.
In total generated premium during.
During the second quarter, reaching $359 million.
Our Q2 results demonstrate the power of the Hippo platform and the power of our people strategy and I couldnt be proud of the effort and determination of the heap with teams that drives deeper resources.
Looking ahead, we have a growing visibility and confidence that we will not only meet the expectations. We previously set for the year, but to exceed them. Accordingly, we are increasing our full year guidance, while total <unk> as a premium.
544 million to $565 million.
Hey, Paul we are transforming the home insurance market, which fundamentally different experience customers are rapidly embracing it.
I don't want to have policy for people is the better more modern.
The policy for me Paul is customized and designed with the consumer in mind.
Tobias students with Hippo is technology enabled to be the easiest policy purchased on the market.
And he put policies.
Smart home technology, and the proactive partner to help you protect your home.
And lastly, when God forbid something bad happens the heap lithium earn our customer's future business by being there for them with care efficiency and effectiveness in their time of need.
This strategy has allowed us to continue to take share in that $110 billion market.
And to sell back half a billion.
Total generated premiums in force at the end of Q2, and 96% increase over the Pacbio.
Although we are still at the beginning of our journey.
Growth strategy is firing on all cylinders and we believe we are trying to continue sustained growth for the long term.
And this is not just a vision it is our mission.
And it's not just incremental premium that we delivered in Q2.
We also continued to build an increasingly solid foundation for future growth.
We expanded into new markets we.
We signed new partnerships and.
And we launched new products in the home vertical.
Continuing our work to build an escape the industry's first vertically integrated home protection platform.
We executed on our geographic expansion plan launching our products in three new states and we are on track to achieve our goal of 40 states by the end of 2021.
We continued to strengthen our omnichannel distribution strategy by launching new distribution partnerships with two of the top 10 insurance carrier the top 50 homebuilders.
Five loan originated in two leading smart home provider.
Bill will then doubled our MGA underwriting capacity by signing partnerships with ally financial and ink line P&C group to serve as additional carrier.
Thus, reducing the capital that would otherwise be needed to support our future growth.
Finally, we launched two new products inspection protection for homebuyers to protect against issues missed during their home inspections morbid.
Ken.
First ever commercial product offering insurance to homeowners Association in the 350000 communities with HOA is across the U S.
In home insurance. Unlike in other lines, whether it's one of the biggest drivers of short term loss ratio. Therefore, a diversified portfolio of policies enables a more stabilized.
Expansion and diversification proceeds one state at a time as regulators approved new programs like equal.
Just like when you build a diversified portfolio of stocks to reduce volatility as we expand into more states and diversified geographically our loss ratio should become more and more consistent over time.
In a very real way.
Of our dynamic growth strategy.
The way towards using our long term loss ratio and improving bottom line profitability.
Let me conclude by saying that the team in April is very pleased and proud to now be trading as a public company.
While the former ownership has changed the conviction and determination of our team is not.
Growth driven company that is determined to transform the home insurance business.
We will also April policies across the United States, We will drive growth and focus on bottom line metrics. As we go we will carefully deployed more than $900 million that we now have on our balance sheet to enhance our product offering and our goal in order to become a leader in this industry.
As I noted earlier home insurance was the vast $110 billion industry and we have people have now crossed the $500 million Mark while this is a great milestone for the company.
Just the beginning.
And let me now turn it over to our CFO Stewart.
Thanks.
As Al mentioned Q2 results show, our strategy coming to life with balanced growth across channels and across geographies.
Let me start with total generated premium which represents the total amount of new and renewal business in a given period across all our platforms, including Hippo policies agency policies, we sell on behalf of third party carriers and other programs that we support through spinnaker. The carrier we acquired in September of last year.
Total generated premium in Q2 grew 101% year over year to $158.7 million. The enforce version of this metric total generated premium enforce grew 96% year over year to $500.6 million.
Total generated premium is a great indicator of the long term value. We are building in hippo, because it is recurring predictable and unaffected by things like severe weather, which in home insurance can create short term and seasonal fluctuations that impact loss ratio and profitability.
I mentioned that the growth was balanced across channels for the homeowners portion of our business.
Independent agents and other insurance companies represented 58% of our new generated premium.
25% of new generated premium came from our direct to consumer channel and 17% came through partners like homebuilders mortgage Servicers and other players in the real estate and home protection ecosystem.
We also continue to grow and diversify our business across geographies to reduce our concentration in any one area or example, Texas represented only 19% of new generated homeowners premium in Q2 down from 33% in Q2 of last year and from 65% in Q2.
2019.
Expanding distribution channel relationships and increasing geographic coverage are two areas, where our technology platform provides an advantage.
Because our platform allows us to bind a policy via a custom Hippo API customers can purchase a policy from us in many cases without ever leaving the website of one of our partners a capability that presents hippo with unique distribution opportunities.
Because we own and control our own technology stack.
Can also launch in new geographies much more quickly than we otherwise would if we were dependent on a third party policy management system.
One of the key drivers of our long term unit economics customer retention remained strong and continued to improve this quarter.
We measure retention at dollars of premium from a cohort of customers that renewed in the current period divided by dollars of premium generated by that same cohort of customers a year ago.
Our year, one homeowners retention grew to 88% during Q2.
And cohorts and their second and third years continued to improve beyond this level as they aged out.
Revenue, which grew 76% year over year to $20.9 million for the quarter is a mixture of net earned premium for risk we retain on our balance sheet <unk>.
Commission income from premium where we are not the primary bearer of the risks as well as service fee and investment income.
Growth in revenue was driven primarily by the continued growth in our total generated premium.
Our gross loss ratio this quarter was 161% compared to 106% in Q2 of 2020 driven by three main factors.
First we experienced severe hailstorms in parts of Texas, where we have concentration in our book.
We have a normalized catastrophic weather load built into our actuarially predicted loss ratio, but the hailstorms in Q2 were well beyond normal levels.
Turning to industry data Q2 residential cat losses in Texas, where the third highest reported in the past 24 years, which has been property claims services began breaking out losses by line of business.
Second in Q2, we had a small amount of negative development from the anomalous, Texas Winter Storm Yuri.
While this contributed an incremental 14 percentage points to our gross loss ratio. It did not negatively affect our P&L on a net basis underscoring the benefits of our reinsurance strategy.
Finally, like other homeowners carriers, we experienced a significant increase in loss severity year over year due to steep but temporary industry wide disruptions in supply chain increases in building material costs and tightening of labor markets. As a result of the COVID-19 pandemic.
Q2, operating expenses, excluding loss and loss adjustment expenses as well as other noncash interest and other expenses increased 54% from prior year to $47 million.
Of this $22.2 million relates to sales and marketing an increase of $4.9 million or 28% compared to prior year.
The other major reason for the increase is growth in head count as we continue to add new Hippo employees across all core functions.
As of Q2, our head count was 603 up 117% from 278 last year.
Our adjusted EBITDA loss for Q2 was $42.3 million, an increase of $23.5 million compared to Q2 last year driven by the increase in loss ratio and continued investments in our platform and team to support our long term strategy.
Finally, as a soft mentioned above we ended the quarter well capitalized and in a strong position to continue executing on our plan and investing in future opportunities.
Including the net proceeds from taking the company public we had total cash cash equivalents and investments at the end of Q2 of over $900 million.
Looking forward, we remain confident in the execution of our growth strategy and believe we will exceed the forecast we shared previously.
As a soft mentioned earlier, we are increasing our full year guidance for total generated premium from $544 million to between $560 and $570 million with a midpoint of $565 million.
I would now like to turn it over to Rick <unk>, Catherine our president to put Q2's loss ratio in context and to say a bit more about the progress we made in the quarter to bring our actuarially indicated loss ratio down to our long term target level.
Thanks Stuart.
Loss ratio is one of the most important drivers of our long term profitability. This metric will vary year to year and quarter to quarter due to seasonal impacts from weather in particular, given the current geographic distribution of our customers Q2, typically represents the seasonal high for severe.
Other.
This is why a primary focus of ours is on geographic diversification to drive down the volatility of this metric over time.
Beyond geographic diversification, we have been tightening our underwriting model expanding our product portfolio and optimizing our rates to ensure the right price for the right risk.
It is important to recognize that we are trying to build in 10 years, what incumbents have built over decades.
The difference between the average age of hit those customer cohorts and those of legacy players. It makes it challenging to compare their performance with ours.
I am pleased to report that during Q2, despite the unfortunate weather we have made great progress on initiatives that should significantly improve our long term loss ratio.
And we are encouraged by leading indicators that suggest these actions are already having a positive impact on future loss numbers.
I want to highlight three examples of the many concrete steps that we're taking in this area.
First <unk>.
Geographical diversification out of Texas.
As recently as 2019, approximately two thirds of our new homeowners premium was written in Texas.
We have deliberately focused on growth outside of Texas in order to achieve a more geographically balanced portfolio.
Over time, this should dramatically reduce our exposure to the kinds of weather events that we experienced in Q2.
And lower the volatility of our loss ratio.
Second.
The flexibility of our technology platform.
Have the ability to incorporate new data sources, both pricing and underwriting quickly and we have done just that in Q2.
While it will take some time for these actions to positively impact our overall loss ratio early indicators are encouraging.
During the first six months of the year or early term frequency in both Texas, and California have shown significant improvements.
In these two states, where we have been focusing most of our underwriting actions early term loss frequency has improved by 40% and 37% respectively versus 2020.
Third.
We have also been diversifying our product portfolio within the homeowners vertical are 805 product for newly built homes, where we have strategic partnerships with some of the largest homebuilders in the country have been performing exceptionally well with loss ratios at approximately 40% over the past 12 months.
It is a key competitive advantage for us and we have doubled down our efforts to expand its share of our overall book, which has helped this product grow 5% to six times faster than our more mature homeowners products.
Our proprietary Apis enable our technology to integrate with homebuilder sell systems. So our partners can provide their customers a simple personalized insurance offer precisely when their customers are in the market for our policy.
This is an example of how we leverage technology and innovative distribution channels to access better risks.
And fourth we are taking strategic actions to ensure our rates are adequate and aligns with the increased severity and inflationary trends, we've been seeing recently across the industry.
Lastly, we have significantly deepened our bench of top industry talent, adding five leaders in the area of risk.
Underwriting actuarial and insurance product management from respected industry players such as USAA Chubb.
Swiss re and Renren.
We are confident and have early indications that our strategy to reduce loss ratio will get us to our long term targets with growth and diversification, we expect our loss ratio to improve significantly.
Will take time, but given the traction and performance of our growth strategy I am confident that we will get there.
Now, let me turn it back over to a soft for some final words.
Thanks, Rick and thanks to everyone for joining <unk> first earnings call today.
In summary, this is just the beginning for April.
As our Q2 results proudly demonstrate we have the right strategy to my team and the resources to execute our growth strategy.
Now on a path to gain significant share and transform this massive market. We believe eagle is a future home insurance.
With that we'd be happy to take your questions.
We will now begin the Q&A session. If you would.
Like to ask a question. Please press star followed by one on your Touchtone keypad.
Is there any reason you would like to remove a question. Please press star followed by Q.
Again to ask a question. Please press star one we will pause briefly to allow questions to generate.
The first question is from Christopher Martin with <unk>. Please proceed.
Hey, guys congrats on the IPO and hosting your first earnings call.
There seems to be a bit of relief to go through the last few months and get to hear today, but it's probably going to get harder.
The everything as a maturing and growing at the same time, but I've got two questions here and the first one I'd like to begin with is something that the media has picked up and what some investors have been interested in can you comment.
I guess, you would say that seemingly high level of redemptions. After the IPO and does this have any impact on potential growth of the company or strategy that you guys might be implementing.
Hi, Chris This is Stuart here happy to speak to this one.
I think first it's important to understand that we structured the transaction to take us public with a large pipe relative to the size of the cash and trust.
So pro forma for the transaction at the end of the second quarter as we said, we have more than $900 million on the balance sheet.
And the short answer to your question is that the redemptions don't change any of our plans with respect to investing in our business over the next few years to pursue our long term goals.
I would also like to highlight.
One thing that we mentioned in the in the earlier portion of the call.
We have also just signed partnerships with both ally financial an incline.
As carrier partners for our MGA and that in and of itself will also reduce the capital that we otherwise would have needed to support our growth. So while the redemptions werent, obviously, what we'd hoped.
Don't expect that they will have any impact on our ability to invest in the future or to pursue our plan.
Okay, great that makes a lot of sense, especially those announcements last week, which I imagine didn't come online.
13 days ago or whatever it is now.
That's great and then the other one.
<unk>.
Just looking at.
The growth of our premium you're kind of actually have outpaced revenue here.
The significant increase in head count we've seen some commentary in the personal lines players like both by your peers and some of the other top 10 names and even like advertising platforms themselves.
<unk> talked about customer acquisition costs are on the rise.
And kind of either near term hindrance to growth or even scaling back and attempting growth because of what the market is right now on the I think marketing advertising sales and then you had mentioned there the increase in sales and marketing expenses were not aligned necessarily how much growth you've had in <unk>.
What have you sort of seeing in your target markets and what does that kind of mean for broader expansion plan as the personal lines are seeing this type of expense growth.
The acquisition side.
Or is there anything that's been outside of your expectations.
Thanks again, Chris This is Stuart again, I'll take this one as well.
First thing to understand about Hippo as distinct from some other players in the industry is that we've always pursued an omnichannel distribution strategy. It's been our core beliefs to design our entire experience from the very beginning around what is best for our customers and on the distribution side that means that we want customers.
To be able to buy a policy from Hippo, where they want to buy a policy from us from hiccup that might be through our website it might be by calling us on the phone it might be through an existing agent relationship that they already have it might be from the homebuilder that theyre just buying a new home from like Lamar.
A lot of different ways that.
That people might want to buy a policy and we want to be present in all of them.
One of the benefits to us of the Omnichannel distribution strategy is that it is resilient to fluctuations in.
Advertising costs or other things that might be going on in any one component of our channels.
And it's also cash efficient in a way that helps us to expand into new geographies.
The partner in the agent channel in particular are things that we pay for based on collected premium over time so the.
The question about advertising expenses and acquisition cost is.
It's important to keep that in mind, we're always very disciplined as we think about spending money in direct to consumer advertising channel.
That said, we have not seen increases in our own sector.
Our business in need costs or other things in the funnel. So we feel very very strongly about our distribution strategy, we're not scaling back our investment in sales and marketing in fact, because of our strong unit economics and high customer retention, we feel like now is the time to get aggressive.
We want to continue to invest going forward I think youll start to see us spend more building and improving and expanding the nationally recognized brand that we hope to build.
That everyone can start to hear the Hippo story directly from us. So we feel good about our distribution strategy and we feel.
So like we are on track.
Awesome, that's great. Thanks.
Thanks, a lot and I'm sure I'll be talking to a lot more in the future.
Yes, Thank you Chris.
Okay.
Thank you Mr. Martin.
The next question comes from our vendor money with Piper Sandler. Please proceed.
Hey, guys. Thanks for taking my question.
I just wanted to really.
Get your thoughts on on on bundling.
Let me look.
Announced a partnership with the Metro model.
Wanted to get their thinking on.
Why haven't you taken a more.
Purposeful.
<unk> approach to really launching your own auto product versus what's just kind of bundling with mentor of mine.
Thanks, Oliver this is <unk> I'll take this one.
Actually I want to break it down into two components. So does it Michael in a macro component so on the micro level.
Just the living focus and I'll focus has to be the best home production platform in the world.
Now what you realize is there is actually low correlation between some of the different lines for instance, auto is a high frequency low severity and home is.
Low frequency high severity for the there's also some misalignment and so it's not exactly the same claim organization. It's not the same people that need to do it it's not the same underwriting experience. It's just a different line, but it does not enough stimulus. However, we always want to offer our customers the best policies in the market for what they need we do not.
<unk> products, if we don't have enough conviction inside that we can offer our customer something which is utilizing technology better using data in a better way or just giving them a better customer experience.
This case for ortho, we just couldnt get that conviction, hence we partner with some of the best of breed.
<unk> is in the market progressive Safeco metal mines, some of our customers and that's our approach to go out to do everything so our customers are still going to get a bundle. They are just not going to get two products that are being produced by April. So that's on the micro level now I wanted to raise another point, which is how we're thinking about it in the macro level.
What youre seeing in trends in the world, especially in the World of Fintech is that the world is actually unbundling component and you also see that insurance because for every Geico board that is being sold by essence, Youll unbundling someone else's <unk> auto bundle.
Back to the point of this unbundling trend.
Just think about your like before I don't know five to 10 years ago, you used to go to your bank and in the <unk> savings and Youll checking account used to take you a credit card you have to think Youll student loan sale Youll mortgage you used to trading in the bank everything used to be bank centric, but right now moving forward five to 10 years.
Your credit card is with the airline that Youll using Youll think youll student loan from one provider and you take it all mortgage from another provider and Youll trading with another company. The world is moving to an area of best of breed product testing.
Customer centric.
Easier for customers to actually engage with and Thats, what we believe would happen in the insurance and we have a lot of belief that people is going to be one of the biggest benefactor of this trend.
Really appreciate it thank you.
Thanks Avi.
Thank you Mr Armani.
The next question comes from Matt <unk> with JMP Securities. Please proceed.
Hey, Thanks, good afternoon, thanks for taking my questions.
First of all I, just want a follow up on christy's questioning on customer acquisition costs and just ask.
Kind of a follow on in the sense of can you talk a little bit about how you view LTV to CAC by distribution channel are they relatively similar or are there.
Wide variances and kind of which channel a customer comes through to about.
Hi, Matt It's Stuart I'll take that one there are there are some variances and they are.
I think they.
<unk> from the different structural ways that these channels work so in the in the direct to consumer channel. It works like a traditional customer acquisition funnel, where we will spend advertising dollars upfront to bring people to the website or to bring people to the phone.
And some percentage of those.
Leads will turn into customers.
So when you when you have a situation like that you have acquisition costs upfront and then you earn that acquisition costs back over the life of the customer.
Typically customer lifetimes and homeowners insurance are pretty lengthy relative to a lot of other consumer products.
As a service that when people sign up they tend to stay with their home insurance provider and so the average industry customer lifetime.
<unk> is in excess of eight years.
And when we look at our data, we see very high customer satisfaction with the very high net promoter scores and we see very high premium retention and I mentioned, our first year retention.
In this quarter was 88%.
Premium basis, and four cohorts that have entered their second and third year. The numbers just go up from there and so we.
We have.
Upfront acquisition cost in the in the direct channel followed by.
Being able to benefit from the full economics of that customer down the road in the other two channels. The economics works slightly differently, we don't pay anything upfront to external parties to acquire a customer through an independent agent or another insurance company or through a partner.
Sure premium that is collected from those customers over time and so in the purest sense. There is no LTV to CAC, because theres not really any CAC and so the way we think about this internally as we take the first year of premium that we would share with that partner and we.
Treat that as customer acquisition costs, even though it's not marketing capital at risk.
And when you do that math it starts to approximate what you'd see in a traditional technology LTV to CAC ratio.
Reducer in the partner channels.
When crafted on this basis.
A slightly lower LTV to CAC.
Excuse me certainly higher LTV to CAC than the direct to consumer and so the way I tend to think about this is we.
We pay more for a direct to consumer customer and then we get to keep mark because the lifetime value is higher and in the other two channels, because we pay a little bit less the lifetime value is less on a blended basis. We think it's five to six times at our at our long term loss ratio targets.
The direct will be slightly lower than that on a ratio basis.
And the other channels are going to be slightly higher than that on a ratio basis, but all of this the higher and attractive unit economics for us stemmed from the fact that we have very high customer retention relative to some other lines of insurance.
That's really helpful. Thank you.
The next question I want to ask was you commented a little bit about the alloy and inclined partnerships I was hoping that beyond capital leverage can you go back the onion, a little bit on your strategic thinking there.
And then from a from a numbers perspective should we expect any real loss ratio impact or as those come on or any impacts related to some of the other underwriting actions I think Rick spoke about.
Hey, Matt. This is this is Rick I'll go ahead and answer that question as you mentioned Stuart already address sort of that support of our capital light structure, which reduces the amount of capital we need.
And then the use of our own capital to support our growth with the ally on the incline partnership does is it essentially doubles, our underwriting capacity, which certainly makes our capital light structure work well. The question that you were I think driving towards is what does it do from a loss ratio our underwriting perspective.
And the use of multiple carriers.
How's us to further segment our.
Sure underwriting customers, both existing and new customers across multiple underwriting companies. So over time as you have segmented business. Further you generally see a more positive underwriting results because you are placing them with the right carrier the right risk the right underwriting guidelines et cetera. So we built.
Leave that having multi carrier does support improvements in our underwriting model.
Okay. Thanks, and last one if I can just wanted to touch on the loss ratio.
Can you can you break it apart for US can help me with you mentioned a few items, obviously, the hail in the quarter in Texas.
Some adverse development from Yuriy last quarter, which I think that.
Theres a number put on that 14 points and then kind of just general severity problem.
Supply chain and labor shortages and things like that.
Can you help us quantify how much impact the Haile had in the quarter and then your best assessment of kind of how much that severity is impacting things currently.
Okay.
Yes, Thanks, Matt we generally have not broken out the specifics.
Individual storm events or a series of storm events, we did.
Breakout Yuri on a gross basis this quarter the development there simply because we wanted to help people understand a little bit because that was such an anomalous storm.
But on a net basis, you really didn't have any negative development to us.
And so the the impact I think in Texas, it's important to understand for us because our book of business is more concentrated in Texas then.
And then in other areas of the country, because historically, we started in California, and Texas and so.
In 2019, something like 65% of our new premium was coming from Texas, but we've been diversifying away from Texas over the past couple of years, So 33% in Q2 of 2020, 19% in this quarter.
We will have some legacy exposure to severe convective storm risks the hailstorms that happened in Q2.
I can say as I mentioned before is this was truly an unusual year.
In the second quarter was the third worst on record since.
PCF started breaking out the loss ratio.
The growth that we are experiencing in areas outside of Texas, though should bring this down as a as a source of volatility in our overall portfolio going forward and the other things that we're doing on the loss side operationally to add new data sources to bring on new smart home.
<unk> to bring on products within homeowners like DHL five in the HOA products that are not going to be subject to this kind of.
This kind of loss risks.
Think will help us over time.
But it's this is obviously something historically Q2 has been a bit of a seasonal peak for us.
And this was just a bit higher peak than we've experienced in the past.
Okay, and then just a.
Broad severity standpoint is there any way you can help us think about kind of your view there.
What that's driving higher and then obviously I would assume that there's a lot of just pricing to try to combat that going forward.
Yes, Matt This is Rick I'll go ahead and take that one yes, I mean thats clear I think every insurance company in the sector is talking about increase in <unk>.
And severity predominantly because of supply chain issues because of labor shortages.
Covid had a massive impact on that we are seeing that go down. So we think that that was a temporary blips, but we of course monitor that significantly.
We're constantly monitoring both frequency and severity numbers, we're constantly looking at how we can reduce those beyond just pricing actions when Stuart mentioned, the our product expansion and as I mentioned in the opening comments are doubling down on our H O five new construction, our strategic partner with the partnership with <unk>.
We're putting in Iot devices water shutoff valves all of these sorts of things in new construction houses that dramatically improves the loss ratio for those.
Great. Thank you very much for that color very helpful and best of luck.
Thanks, Matt.
Yeah.
Thank you Mr <unk>.
The next question comes from the line of Christopher Martin with <unk>. Please proceed.
Hey, guys. Thanks for taking my call my questions here here again circling back.
Just wanted to see if you can comment on with all the things that are in your numbers, you've given the growth you've shown.
And then with your discussion around the flattening of the loss ratio breakdown of geographic diversification and a tightening of the model for rate optimization looking at the balance sheet approach are able to comment at all on our path to profitability.
EBITDA level or.
Not necessarily obviously explicit guidance, but just a discussion on getting towards that breakeven then where it goes from there in the future.
Yeah. So Kristen Stewart, we did we did put a forecast out.
Publicly earlier this year.
Our direct book.
Due to that for historical reference, but I want to talk for a moment about.
The way, we think about the path to profitability, we know that the.
At scale, a well diversified book of business that is properly priced where we are.
Assigned risk the right the right price to the right risks there is an opportunity to be profitable and home insurance. We also know that by partnering with our customers and using the technology that we have that Rick mentioned and that we've talked about previously it is possible to help our customers avoid.
Losses from happening in the first place.
And when we our belief is that when you combine.
That true customer centric model the technology that we use that gives us access not only to the ability to help our customers avoid lost but to preferred pool of customers through partners like <unk> and other homebuilders through mortgage Servicers, where people arent actively shopping for home insurance that there is an offer.
Kennedy to bring loss ratio to an advantageous level.
What we what we believe internally is that we are at the very beginning of taking share in this incredibly large market and as long as our <unk>.
Return on investment in sales and marketing and customer acquisition is high we should continue to invest aggressively because we are nowhere close to bumping up against market share constraints.
And <unk>.
One of the biggest drivers as we've mentioned of the high return on investment is the fact that our customers are having a good experience with HIPAA and they're staying with us and so when we have strong unit economics, and we have a business that we know and be profitable on a long term basis. It makes sense to invest in scale and so we will continue to be opportunistic.
As I said, we're at the beginning of the journey here. So we think that as long as theres opportunity. It makes sense to continue to invest obviously.
We're very disciplined as we think about spending money on growth, but in a real way as we've talked growth is the path to profitability.
More geographic diversification, we have in our business the less volatile our loss ratio will become and the greater confidence we will have and continuing to make those investments. So we see a very virtuous cycle here.
That will be able to keep going for many years, Rick do you want to say anything addition in addition to this question, yes, Thanks Stewart and Chris. Thanks for the question a couple of other things as I mentioned earlier, the leading indicator of what we're doing is early term losses. The frequency of early term losses and the actions that we have.
Taken clearly show an improvement when youre looking at a reduction of 40% and 30 and 37% respectively, Youre really seeing a reduction in early term losses and one thing to remember is that our cohorts are very young compared to other cohorts as those cohorts age over time and we.
Have a larger book our larger portion of our business. This renewal business that in itself. In addition to the geographical diversification and the growth in other places, we will absolutely get us where we need to be.
Oh.
Really great and thanks, a lot and good luck.
Thank you Chris.
Thank you Mr. Martin.
Thanks, everyone for joining this concludes today's conference you may now disconnect.