Q2 2022 Hippo Holdings Inc Earnings Call
Geographic expansion has been a key driver of our growth as we develop a balanced portfolio of risk exposure. With the recent additions of New York, Massachusetts, and North Carolina, we are now live in 40 states. We estimate that our current geographic footprint covers approximately 94% of the US population, but our share of the overall homeowners insurance market is still less than 1%, indicating ample room for share gains and long-term growth, even while optimizing for a profitable underwriting result. Revenue in Q2 with 28.7 million, up 37% over the prior year quarter. As a reminder, revenue includes net premiums earned, growing and steady streams of feeding, MGA, and agency commissions paid to us by other carriers and reinsurers, as well as service and fee income. Also, we're expanding our third-party program administrator business at Spinnaker and taking advantage of higher low-risk yields on our cash balance to grow our investment income. The volume impact of our increased focus on nearer-term profitability and the increased cost of certain kinds of reinsurance, which directly reduce our earned premium, have resulted in a short-term headwind on the earned premium portion of our revenue. As a result, we expect the risk-bearing premium we will earn to come in a little lower than our initial forecast in favor of lower dollar but non risk-bearing and higher margin commission revenue. Therefore, we are lowering our guidance for 2022 revenue.
to $119 to $121 million. Our growth loss ratio in Q2 was 78 percent, an 83 percentage point improvement over Q2 last year. Q2 is typically when our customers face adverse weather events, particularly hail, but our increasingly balanced risk exposures have helped to blunt the overall impact of this kind of weather on our results.
Given the progress we are making in this area, we are comfortable offering improved guidance with full year growth loss ratio, and now believe we will be under 90% for the year, down from our previous guidance of 100%.
Breaking down the loss ratio a bit, losses from PCS catastrophic events represented 22 points of our Q2 loss ratio, net of 12 points of prior period favorable development on PCS events, driven largely by hail and storms in the Central Plains states and northern Texas.
I'd like to highlight the benefits of our recent focus on geographic expansion here.
A year ago, we were more overweight in this geography and would have likely been impacted to a greater degree by this same weather.
Q2 also benefited from 10 percentage points of favorable loss-reserve development on attritional losses from prior years.
Another key driver of our loss ratio improvement is our continued improvements to our rate adequacy and accuracy through the filing and implementation of segmented rate changes. An additional 5 states and 11 product rate changes went live in the quarter, bringing our year-to-date changes to 15 states and 34 products.
On a premium basis, over 80% of the book has seen a rate change filed, approved, and pushed live in 2022. The speed and nimbleness with which we have been able to affect these changes and the substantial improvements to our loss ratio as a result is one example of the power of our technology platform.
We were often asked by investors about the challenge of inflation.
We would highlight that the very core of one of our value propositions to our customers, the prevention of losses, helps avoid these inflation and supply chain problems.
Second, our pricing matches price to real risk, which implicitly considers inflation factors.
Finally, we rerun our underwriting and rebuilding cost models automatically at each renewal, incorporating all accumulated data since the last renewal, including the impact of inflation on estimated rebuilding costs, which allows our premiums to be resilient to these factors without additional rate filings.
We look forward to sharing more about our underwriting and technological strengths at our investor day in September .
marketing expenses for the quarter decreased to $19.4 million from $22.2 million in the prior year quarter.
As we focused on the execution of rate adjustments in the first half of 2022, we were conservative with our marketing spend.
In the second half of the year, and now that many of the planned rate actions are live, we expect to lean more into customer acquisition.
We have recently launched a new brand campaign to better inform our target customers about our unique value proposition.
Technology and development expenses for the quarter.
increased to $16.5 million from $7.5 million in the prior year quarter, in part reflecting recent investments in our claims processing to achieve efficiency and improved service capabilities, as well as additional stock-based compensation.
General and administrative expenses increased to $18.2 million from $8.8 million in the prior year quarter, reflecting additional stock-based compensation and the higher cost of being a public company.
Our cash and investments at the end of the quarter were $732 million.
While our investment strategy remains very conservative with high liquidity, we now hold $454 million in investments, including U.S. T-Bills and high-rated corporate bonds, to capture the benefit of increasing short-term yields. We expect investment income to contribute more towards our bottom line in future years.
Net loss attributable to HIPPO was $73.5 million, or $0.13 per share, in Q2, compared to a net loss of $84.5 million in the prior year quarter.
An adjusted EBITDA was a loss of $55.8 million versus a loss of $42.3 million in the prior year quarter.
To summarize our updated guidance for 2022, we expect a gross loss ratio of below 90%, which has improved from our previous guidance of 100%.
We're lowering our estimate for full year total generated premium.
to between 790 and 810 million, down slightly from between 800 and 820 million.
We're reducing our revenue estimate to a range of between $119 and $121 million.
down from $140 to $142 million.
Thank you very much for listening. We would now be happy to take your questions. In addition to posing questions through the operator, you can also email questions to investors at hippo.com. Thank you.
If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, please press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question.
We will pause here briefly as questions are registered.
The first question comes from Matt Carletti of J&P.
Please proceed.
Thanks. Good afternoon.
My first question centers around the loss ratio. Hey, how are you? First question is around the loss ratio. I mean, great to see the ongoing improvement. It seems clear from your guidance that it's exceeding your expectation, despite what is a pretty inflationary environment. And we've seen pressures the opposite direction at other companies. Stuart, I think you hit on a couple pieces there, but I was hoping you could maybe peel the onion back a little bit on.
kind of what's been allowing you to do that. And also maybe if you need a little more granular, I'd be curious if, you know, are you seeing a big difference in frequency, just avoiding losses because of some of the smart home stuff or kind of break out frequency versus severity if you can.
Thanks, Matt. Thanks for the question. I think you are reading it accurately. We are ahead of the expectations we had at the beginning of the year, and I think that comes from a variety of things that we've been doing. This is an area that's been, as you know and as we've said in prior quarters, a large focus of the company's efforts. And I think we would break down those efforts into a few.
I think we've been leaning hard into trying to grow more, you know, smarter growth, basically, more focused on better segments. I think we've put a lot of energy into figuring out how to find the kinds of customers who resonate with our value proposition. And we're beginning to see some success in targeted messaging and marketing to people who will resonate with our technology-forward approach.
And I think that that has resulted in a mix shift to a better fit in terms of customers for HIPAA's program.
Another way our technology platform has supported the efforts that we've been making in the first half of this year on loss ratio is the high throughput way that we can take pricing action and rating action and also underwriting actions. And we're doing that in a very granular and targeted way. We've also made improvements to claims efficiency and cost efficiency more generally by being proactive about working with our partners in those areas.
And then I think finally, something we've tried to emphasize in prior calls, but we're really starting to see the benefits of that this year is, you know, the areas
that we've been able to grow and to expand our geographic diversity have really benefited us from a volatility standpoint with respect to the loss ratio. We launched in New York, Massachusetts, North Carolina, these states, while still small today, represent big growth opportunities for us. But as we diversify out of North Texas, we are seeing benefits to the volatility that comes from weather events like hail. And I think despite the...
environment, as you mentioned, is getting harder and others are seeing headwinds. We feel like we're, you know, everyone is swimming upstream against those trends, but we feel like we're, we've been able to actually accelerate our progress despite that and to swim faster in the right direction. And I also think there's more to come. We mentioned earlier that the large number of rate actions and filings that we've been doing, those have only partially earned their way into the financial results.
value proposition is what they need. Those are customers that are generally positively selected that really participate either in our smart homes programs, people that want a partner in that particular area. The second component of that is specific segments of our business like our builder channel. These are positively selected new construction properties and we have various distribution techniques that allow us to get more of those positively selected.
exposures. So in our effort to really make sure that we are avoiding claims from them and our customers, that is very much where we are focusing our growth and growth targets.
Very helpful. Thank you. And one quick follow up if I could. I'm looking at page 19 of the investor letter, the geographic diversification, and it looks like a slightly bigger piece of the pie this quarter came from California and Texas. And I know one quarter doesn't make a trend, but just be curious if you could help me through why that might be versus last year.
Yeah, I think one thing to keep in mind is Texas specifically. The Texas is a massively large state. You can fit a half dozen other states within, and it has very different exposure catastrophe. So in areas where we were overly saturated and where we felt like we had inferior pricing, we've for all intents and purposes shut down those particular markets. Areas that we were not overly saturated and where we believe we have pricing adequacy, those are areas that...
than the exposures in Southern California. So we look at geographical diversification not just at a state-by-state basis but also in a more granular way including different exposures that might exist in those specific granular territories.
That makes perfect sense. Thank you for the color.
Thanks, Matt.
Operator, are you there? Operator, we'll take the next question.
Next question comes from Michael Phillips of Morgan Stanley . Please proceed.
Thanks. Good evening, everybody. Guys, I hope you could touch on comments about...
be more selective with underwriting. So obviously that's the impact on your guidance down modestly for the full year versus you know an uptick in and marketing spend for the back half of the year and leaning more into customer acquisition. So which normally what I think would have an uptick in your top line. So sounds like the first one is winning over guidance versus the what you might get from a lift from more marketing spend and customer acquisition. So if you could just kind of talk about those two nuances.
Thanks Mike, happy to talk more about that question. So I think we mentioned this last quarter, but this is a kind of continuing trend. We mentioned we have a large number of rates and underwriting filings that we're rolling out over the course of the country and some of those take time. And so we were cautious in the first half of the year while we were rolling out those things and while they were.
being filed and approved. And at this point, we do feel like we are better positioned to write profitable business in a broader area of the country. And I think if you looked at the growth last quarter and the guidance for the year, you know, it was always going to be the case that we were accelerating growth in the second half of the year. That has not changed. We still are expecting growth to.
to pick up in the second year or the second half of the year as we lean into the broader geographies in the U.S. where we feel like we have great adequacy. In terms of guidance, I would think of that more as a refinement of guidance. If you look from midpoint to midpoint, it's just a 1% reduction. And we felt like it made sense to refine that slightly simply because of
You know, we are erring on the side and we want to send the message to the broader investment community that we're erring on the side of profitability. Even at the new guidance, we're still expecting 30% year over year growth. And so what's going to get us there? I think, you know, we're going to continue to build on the progress we've made in targeting those high value segments with our new brand campaign, which we're planning to roll out in the second half of the year a bit more broadly.
So branding and brand spend, as I'm sure you know, does take a little bit longer to show a positive return on investment as compared to more quantitative marketing spend. We do have higher confidence in our pricing, so we're spending more on the quantitative side as well to bring customers to the website. And as Rick mentioned, we are seeing a lot of success in the builder and other positively elected channels.
from a risk standpoint. And those we expect to be continued, to continue to be the fastest growing. And also now that we're live in New York and Massachusetts, North Carolina, we're starting to see positive traction there at the early stage, but we feel optimistic. And so I think about the guidance as a signal, more on the lines of on the margin, we're gonna focus on making sure we get to cashflow positivity.
But we still feel like growth will be a positive feature for our story. Okay, thank you, Stuart. I guess also in lines with your comments about kind of, you know, those policies that might be on the margin and kind of how you decide whether they get on your HIPAA paper or not from here. What does that imply for, I guess, near-term growth and commissioning development? Whether it's because of that or not, just general comments about how commissioning might kind of change over the next 12 months?
Yeah, I think in areas where we don't feel like we're adequately priced or we're not the best fit or the best policy for a customer, we do have the ability for our agency to sell other people's products. And that is something that we've been doing more of. And I expect that that will be a feature of our business and our customer experience going forward. So we've mentioned over the past few quarters that we do see
service fee and non-risk exposed commission income to be parts of our future growth story and we expect that we will see that become a larger part of our financials. I don't think there's anything that's changed. It is something that we're excited about.
Okay, great. Thank you Stuart, appreciate it.
Yeah, thanks, bye.
Thank you.
The next question comes from the line of Alex Scott of Goldman Sachs.
Please proceed.
Hi, good afternoon. The first question I had was just to see if you could elaborate a bit on the comment in the Charlotte letter around achieving profitability without raising additional capital. Can you just talk a little bit about what that looks like, over what timeframe we should think about that?
I'm happy to take that and if Rick wants to add anything, happy to have him do so.
We've been talking a lot on this call about the fact that our loss ratio results in Q2 represent another quarter of consistent progress and
I think we're also sharpening our focus internally on cost containment and operating efficiencies. And we're doing that and trying to balance that with continuing to make strategic investments in important growth areas for our business, like the builder and the partner channel, that have the potential to deliver positively selected risk.
I think based on our expectations, we think Q3, the quarter we're in right now, will be our peak loss quarter from an adjusted EBITDA standpoint. And as I said earlier, we do expect to reach bottom line profitability without the need to raise additional capital. I think that's a topic that is probably best covered in a bit more detail than we can on a call like this. And so that's going to be a...
the focus of my presentation at the investor day that we're planning on September 6th. So I'd invite everyone who's interested to join us there and we'll have an opportunity to talk more about our growth plans and also the mechanisms by which we see convergence to profitability.
Alex, I just want to make sure we're very clear on this point. Getting to cash flow positive with a cash on hand is our number one priority as a company, and we intend to do so with a cushion. So as Stuart said, we'll have a lot more detail in our investor day, but just to be clear, that is something that we will achieve.
Got it. That was helpful. Next one I had for you all is just on the net loss ratio and your reinsurance agreements. I mean, as you mentioned, we've seen a lot of gross loss ratio improvement over the first half of 2021. And the net loss ratio, though, has continued to go up pretty substantially.
At what point does a gross loss ratio begin translating more to the net? I mean do you have to get to the end of the year and restructure insurance contracts? Are those things that can be restructured annually or is there some sort of longer timeline because of when they come up or how do I think about all that?
Yeah, I'm happy to take the first part of that question and then Rick, please feel free to add. I think you've captured what's going on, which is that…
The terms of our annual re-insurance agreements, as we said, are somewhat lagging related to the performance of the underlying book, which is best represented by the gross loss ratio. And our 2022 Reinsurance Treaty, as we said in prior periods, has some loss participation features that are the result of our loss ratio in 2021, which is abnormally high for reasons related to both.
winter storm yuri, as well as one of the most severe anal seasons on record. Part of the driver of the improvement in loss ratio is the geographic diversity that we've been able to put into the book through the growth. And yet we still have some loss participation features that are impacting our net loss ratio because we're experiencing losses but we're not actually...
able to recognize the earned premium. And so in addition to those lost participation, we also have seen like the rest of the industry, higher XOL costs, which reduce that earned premium. And so the percentage is quite volatile because we're looking at a very small denominator of earned premium that you can see in the financials. But it's one of those things that the annual portion of our insurance treaty, we are exploring.
ways with our re-interest partners to develop structures that are more cost effective going into 2023. We're optimistic about our ability to translate the far, you know, the much improved loss ratio we're delivering in 2022 into better re-interest terms in the next year. So, just to add a few points to that.
Reinsurance is generally backwards looking on the performance of the book and how the book is exposed to weather.
So, historically, we have not had a great loss ratio, and that loss ratio for the business, the book, was very much exposed to catastrophic weather.
So as an example, our 2022 treaty will impact us for 2022 and part of 2023 because they're calendar year treaties.
And we are working with our reinsurance partners to structure the 2023 treaty in one that recognizes both the improvement in our loss ratio and the reduction of exposure to catastrophic weather. So it's lagging, but we're excited that we have strong reinsurance partners. They have a very deep look into the trends and what we're doing. As a reminder, we were oversubscribed.
last year even with a poor historical loss ratio. So I think you're going to see continued improvement in that as time goes on and as we continue to take the actions that produce a much more favorable gross loss ratio.
Thanks.
Thank you. The next question comes from Yaron Kenar of Jeffries.
comes from Yaron Kinnar of Jeffries. Please proceed.
Hey, good afternoon. This is Andrew on for your own. You'd mentioned some of your most attractive risks are seeing rate reductions. Can you help us think about and maybe quantify what percentage of policies are seeing these rate reductions?
Yeah, I think on average, we're seeing rate increase across the book. And I don't know if we can get into quantifying the specific numbers of policies that are in the best risk segments. But our goal generally is to try to match touchline configure
of the policy and the rate of the policy to the underlying risk. And so when you look at the portfolio as a whole, it's a mid-teens rate increase, but there are places where we're getting more precise and where we wanna be able, if we're overpriced for our best segments, we're not getting those customers. And so by being able to lower the price selectively, where we're overpriced in certain areas, that helps us.
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growth and also loss ratio because these are the best customers that we can bring in. So that's an area where, maybe being more refined and more precise with our pricing, we can generate benefits on both sides of that equation. Yeah, Andrew, I think it's really important to note that disproportionate losses are generally created by fewer customers. And as we continue to refine our segmentation, the customer we're going after...
They should deserve a lower price and we are finding those in our existing book and charging them the appropriate price.
Thanks, and I guess lower top line guidance on the one hand and better loss ratio on the other. Do you see your earnings power or EPS going better than planned?
for this year.
I think we'll talk more about bottom line guidance.
probably at our investor day for 2022.
I don't know that we can talk to that today, but it is part of our plan to discuss in September .
Thanks, and maybe one more if I could sneak it in. Certainly been very active filing rates. What has kind of been the reception from regulators both in California and more broadly?
Based on my 30-year history of this, I am finding regulators generally to be more receptive because of both sort of inflationary trends generally and also recognizing that weather has been more pronounced across the board. And I don't think I have found, I don't think I remember a time when regulators have been more active partners with insurance companies to maintain a healthy insurance environment. For more information, visit www.fema.gov
Frankly, we have seen the regulators being very receptive to rate changes and increases, even in places like California. Yeah, and I'll just add, the rates that we're talking about, these rate changes are not only filed, but they have – these are approved by regulators and also live within our system. So these are more than just asks of regulators. These are the things that have already made it through the process.
And so just want to make sure that that's clear.
make sure that that's clear. Great thanks for the answers.
Thank you, Andrew. Absolutely.
Thank you.
The next question comes from the line of Tommy McJoint of KBW.
of Tommy McJoint of KBW. Please proceed.
Hey, guys. Good evening. Thanks for taking my questions. Could you remind us how big the builder channel is for you, and are there any metrics that you can share around attach rates or penetration and then the latest loss ratio of performances there? And then on that same topic, has the slowdown in new home sales or the expected slowdown at least had any impact on the results in the quarter or your growth outlook?
Yeah, so, hey Tommy, I do think it's relevant, there is a slowdown of builders, excuse me, a slowdown of how things start, although keep in mind that it is
We are relatively new in this effort and we are improving and gaining and Stuart can talk to some specifics around attach rates we think that our Penetration within the new construction channel is just sort of at the tip of the iceberg We don't think that the slowdown will impact us. And in fact, we are actually seeing pretty significant increases in those specific channels, so We don't see any negative impacts at all with
fewer housing starts. Yeah, and tell me on the on some of the metrics.
One of the things that we can do that other providers that are out there have a more difficult time doing is to integrate fairly deeply into the builder's own customer experience. Lennar is a good case study on this, and I think we've talked about it publicly before. When we took over the business at Lennar and partnered with them, the attach rates were far lower for their customers than they are.
is around 10% of the HIPPO program, specifically the HIPPO Homeowners program. And that percentage is growing. It's one of the fastest channels that we have in terms of growth. And we're excited about the future there. We've signed a new, we launched new builders. We launched with Mattamy in the quarter. We now have, I think, four or about 20 builders. And we're excited about the prospects for that business.
Thanks for those metrics there. And then how many markets do you have the home, the HIPPO home care available in? And in those markets, what are the actual take-up rates by your customers that actually result in some sort of preventative maintenance plan being given to them?
Yeah, good question, Tommy. I think there's a couple things to consider. I think our HIPPO Home Care, how we utilize IoT devices through our partnerships, has a wide range of what I would consider capabilities. So when you look at customers that participate in HIPPO Home Care generally and have HIPPO's Smart Home program, that number attach rate is north of 70%.
When we talk about total home care, that is sort of the next iteration of that capabilities. And it's in its infancy stage, so I don't think you're seeing meaningful amounts showing on our particular economics related to that. We've had very good progress, very good relationships.
We've done a ton with tele-maintenance with the particular customer. So, I think you're seeing a ton of opportunity in that particular area, and we will talk more about that on our investor day.
Thank you.
Thank you.
There are currently no additional questions registered at this time. As a reminder, it is star 1 on your telephone keypad to ask a question.
Okay, well if there are no further questions, we very much appreciate your time this quarter and we look forward to speaking to you next quarter.
and in September at our investor day.
That concludes the conference call. Thank you for your participation. You may now disconnect your lines.
Goodbye.