Q2 2023 Hippo Holdings Inc Earnings Call
Okay.
Hello, and welcome to the <unk> Holdings Q2 earnings call. My name is Alex there'll be coordinating the call today.
If you'd like to ask a question at the end of the presentation you compress sell side by one on your telephone keypad if.
If you'd like to remove your question you May press star two.
I'll hand, it over to your host Cliff gallant VP of Investor Relations. Please go ahead. Thank you operator, good morning, and thank you for joining <unk> second quarter earnings Conference call earlier April issued a shareholder letter announcing its results, which is available at investors <unk> com.
Today's discussions will be Hippo, Chief Executive Officer, and President Rick Mckenney Chief.
Chief Financial Officer Stuart Ellis.
Following managements prepared remarks, we will open up the call to questions.
Before we begin I'd like to remind you that our discussion will contain predictions expectations forward looking statements and other information about our business that are based on management's current expectations as of the date of this presentation.
Looking statements include but are not limited to <unk> expectations or predictions of financial and business performance conditions. The competitive industry outlook forward looking statements are subject to risks uncertainties and.
And other factors that could cause our actual results to differ materially from historical results <unk> from our forecast, including those set forth in <unk> <unk>.
8-K filed today.
More information please refer to the risks uncertainties and other factors discussed in <unk> SEC filings in particular in the sections entitled risk factors.
Cautionary statements are applicable to any forward looking statements, we make whenever they appear you should carefully consider the risks and uncertainties and other factors discussed in the past SEC filings.
Do not place undue reliance on forward looking statements as CFO is under no obligation and expressly disclaims any responsibility for updating offering or otherwise revising any forward looking statements, whether as a result of new information future events or otherwise except as required by law. During this conference call. We will also refer to non-GAAP financial measures such as total generated premium.
And adjusted EBITDA.
Our GAAP results and a description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter of 2023 shareholder letter, which has been furnished to the SEC and available on our website and with that I will turn the call over to Rick <unk>, our president and CEO .
Good morning, everyone at the beginning of this year, we talked about our three major segments for the first time, presenting our 2023 outlook for each I am encouraged by our progress against key metrics in all three segments during the quarter.
Growth in our total generated premium or GGP and revenue is exceeding expectations and we're holding the line on our fixed costs.
Unfortunately catastrophic losses during Q2 overshadowed continue improvement in our core gross loss ratio. However, I want to be clear we remain confident in our long term vision and that we are on track to be adjusted EBITDA positive by the end of 2024.
In our services segment. We are ahead of plan on PGP and revenue while remaining within our fixed cost budget.
At a time when insurer appointments are tough to come by.
Our first connect platform is using technology to facilitate business between agents and carriers.
Its carrier store, which launched in October already supports over 80 carriers connecting them to thousands of independent agents.
In Q2, 'twenty three we facilitated 14800 agency appointments up over 30% from Q1, 2023 and up over 400% from the prior year quarter.
We also continued to see strength in our Hippo agency, where we sell insurance to consumers on behalf of third party carriers.
Our builder business has continued to grow quickly and our year over year premium retention for third party products rose to 110% up from 98% in the prior year quarter.
And finally with our Hippo Homecare services, we're helping a growing number of homeowners improve their homes health.
Our recently launched home Health App Cross 10000 monthly active users and the team continues to make great progress on an exciting roadmap of products and services designed to help homeowners better protect and maintain their homes.
When we first introduced our insurance as a service segment, we characterized it's earning stream as steady growing and diversifying.
And a quarter of significant earnings volatility for many insurers.
We believe our results validate this characterization.
Adjusted operating income for the second quarter was $5 million as spin acres diverse portfolio of short tail risks and expense discipline continued to deliver adjusted operating income growth.
We're also well ahead of plan for top line growth.
GGP is up 112% versus the prior year quarter, as we expanded capacity with existing partners.
Spin occurs experienced team strong financial ratings and the ability to leverage those tech platform continues to attract potential new partners as well.
Our Hippo home insurance program segment continue to exceed our targets for growth and diversification during the quarter and our core gross loss ratio of 62% year to date is comfortably within the $62, 67% target we communicated at the beginning of the year.
Unfortunately, the broader U S homeowners insurance industry experienced significant catastrophe losses in the quarter, leading insurers have already reported billions of dollars of losses stemming from hail and severe conductive storm events in the Central U S.
These events in Texas, and Colorado also impacted Hippo.
Leading to significantly higher Pcs cat losses than in normal years, and a Hippo home insurance program gross loss ratio of 178%.
Hippo is responding with rate hikes increased deductibles for wind and hail perils.
Slowing policy growth and non renewing policies in certain regions.
We remain committed to achieving underwriting profitability.
For a nimble Tech company like Hippo, these challenges and the resulting market dislocation or an opportunity.
Our technology allows us to make the necessary changes faster than traditional insurers, while also continuing to grow and less cat exposed geographies further adding to our diversity.
For example, in Texas, where our hail losses were severe this quarter, we have already responded with filings to raise rates and deductibles where needed.
As always these filings are subject to regulatory approval.
Excluding the effects of severe weather events during the quarter, our Q2 'twenty three kpis for each of our segments.
Ahead of the expectations, we shared at the beginning of the year.
And the actions we are taking in response to this weather should help reduce the volatility of our future financial results and give us even greater confidence in our path and timeline to profitability.
The long history of insurance is one of innovation and change.
Some opportunities arrive suddenly after major loss events like Hurricane Andrew.
Some came after legislative actions like the passage of prop 103 in California.
Some came when the innovative spirit of great companies lead change in the distribution and pricing of products like auto insurance.
We believe the U S homeowners market is in the early days of a challenging period.
But we see the opportunity for a tech enabled company like Hippo to be the solution for many U S homeowners.
Thank you and now I'd like to turn the call over to Stuart to review, our Q2 financial results in more detail.
Thanks, Rick.
Overall, we've made great progress this year and moving towards our goal of turning adjusted EBITDA positive by late 2024.
Our kpis for growth operating expense management and core gross loss ratio are all ahead of expectation.
Unfortunately, our results were heavily impacted by a series of major hail events in Texas and Colorado.
But we are taking decisive actions to reduce our exposure to these risks and to further improve our ability to hit our long term profitability goals.
On a consolidated basis, our Q2 PGP and revenue growth is ahead of plan up 56% and 66% year over year, respectively to $318 million and $48 million.
Q2 operating expenses, excluding loss and loss adjustment expense grew more slowly than revenue rising to $76 million from $71 million in the prior year quarter and declining year over year as a percentage of revenue to 159% from 248% a year ago.
We've been experimenting with the use of AI tools to further improve the efficiency of our operations and are excited about the potential for more gains here.
Because of the outsized to catastrophic weather losses, our net loss attributable to Hippo was $108 million or $4 61 per share for the quarter compared to a loss of $74 million or $3 25 per share in the prior year quarter.
And our Q2 23, adjusted EBITDA loss was $88 million, an increase from $56 million a year ago.
Despite the higher than expected weather losses, our balance sheet remains strong with cash and investments at the end of the quarter of $565 million.
Statutory surplus in our insurance company spinnaker increased during the quarter to $173 million.
I'll now provide a bit more detail on our Q2 results at a segment level.
In our services segment, we continue to attract new customers and grow in all three of our businesses.
Services <unk> was up 35% year over year during the quarter ahead of our full year guidance of 30% for 2023.
The year over year premium retention rate for third party products that our Hippo agency continued to strengthen coming in at 110% up from 98% in the second quarter of 2022.
While we're still in the early days of development of our HIPAA homecare offering we're seeing some early successes driving user engagement, a leading indicator of adoption and retention growing the number of unique users completing recommended maintenance actions and the Hippo home app by over 60% from March to June .
Our adjusted operating loss in this segment was $10 million, an increase of 17% compared to a loss of $8 million in the prior year quarter, but improved from $11 million in the first quarter of 2023 as we continue to invest in our platforms to provide differentiated services for our customers across all our businesses.
Turning to our insurance as a service segment TTP growth accelerated from a year ago growing 112% year over year due to a combination of new programs and growth at existing program.
Revenue grew 103% versus the prior year quarter.
Both <unk> and revenue results are tracking well ahead of our guidance.
Adjusted operating income was $5 million in this segment compared to a loss of $1 million in the prior year quarter.
Due to the increase in revenue I, just mentioned expense discipline.
And continued program diversification.
And the Hippo home insurance segment, PGP was up 10% versus the prior year quarter with continued growth across all channels and over 90% of new TTP, hitting our target generation better customer profile.
We made progress on geographic diversity, as well with 71% of new TDP coming from outside of our two largest states, Texas and California.
Revenue grew 39% year over year faster than GDP, driven by growth in net earned premium, which grew 100% year over year to $12 million versus $6 million in the prior year quarter as our 2023 reinsurance treaty becomes a more significant driver of our financials.
The segment's adjusted operating expenses, excluding loss and loss adjustment expense declined to $28 million or 124% of revenue from $37 million or 226% of revenue in the year ago quarter.
As Rick mentioned earlier, the most significant driver of our Q2 financial results with our loss and loss adjustment expense Encouragingly, our core gross loss ratio was 63% in the quarter and 62% year to date comfortably in line with our guidance of 60% to 67%.
This was an improvement of 12 percentage points versus the prior year quarter and reflects the substantial progress our team has made on pricing and underwriting improvement.
Unfortunately, we suffered outsides of catastrophic weather losses, along with the rest of the industry that overshadowed these improvements.
Most of the losses were caused by five major wind and hail events in Colorado, and Texas and most of the claims will be linked to our 2022 reinsurance treaty.
The Q2 impact of these Dcs cat losses was $110 million on a gross basis and $51 million on a net basis, and we expect an additional $13 million to $15 million over the remainder of the year due to their impact on the loss participation features embedded in our reinsurance treaties.
While it would be easy to simply chalk this up to bad luck, we are planning to take decisive actions to reduce our future exposure to wind and hail with the explicit goal of reducing the volatility of our financial results going forward.
These actions include increasing deductibles for wind and hail perils selected non renewal policies in high risk regions and increasing the rates we charged for cat exposed property is across our portfolio.
Our goal and expectation is to have a homeowners insurance program that consistently produces underwriting profit and we believe being more aggressive in these areas. During the rest of this year will help accelerate our path to achieving this goal.
In addition to these actions we took steps during the quarter to reduce our dependence on the reinsurance market and the cost associated with not retaining the risk we underwrite on our own balance sheet.
During the quarter, our spinnaker insurance company subsidiary announced the successful sponsorship of our first Cat fund.
The $110 million Cat bond was upsized, 10% from our initial target sites, reflecting strong investor confidence and hippos approach.
The bond provides multi year catastrophe protection to our Hippo home insurance program business written through spinnaker.
I'd like to close by updating our 2023 guidance to reflect the performance and learnings from the first half of the year.
We are increasing our 2023 TTP guidance to $1 1 billion as strong growth in our services and insurance as a service segment will likely only be partially offset by TDP declines at our Hippo home insurance program segment over the second half of 2023, as we take aggressive action to reduce our cat.
Strophic exposure.
We expect revenue to be up 49% for 2023, an increase from our previous guidance as stronger than expected growth at services and insurance as a service is moderated by flat outlook for our hepatic homeowners program segment.
For the HIPAA homeowners program segment based on encouraging progress made during the first half of the year, we expect our full year core gross loss ratio to be at the low end of our previous $60 to 67% guidance.
Reflecting the significantly higher PCF defined cat losses in the first half of the year. We now expect our full year Pcs cat gross loss ratio to fall within the 45% to 50% range up from our previous guidance of 28%.
Turning to adjusted EBITDA.
We now expect our adjusted EBITDA loss to be in the range of $280 million to $218 million versus previous guidance of $147 million, reflecting the impact of weather in Q2, partially offset by better than expected results in other segment.
Finally, we would like to reiterate our expectation of turning adjusted EBITDA positive by the end of 2024.
And now we'd be happy to take your questions.
Operator.
Thank you.
Remind us if you would like to ask a question is compressed style led by one on your telephone keypad.
To withdraw your question you May press Star followed by two.
Please ensure your unmetered Luckily when asking your question.
Our first question for today comes from at your own keynote of Jefferies.
Your line is now open. Please go ahead.
Thank you very much good morning, everybody.
Okay.
I'll just give you a heads up that we have gone ahead with it.
Our chief underwriting officer.
Alright, sorry are you still there.
Yes.
Yes.
Go ahead.
No.
My first question just goes back to the cats, obviously largest cat load. This quarter can you maybe try to quantify it.
Terms of.
What level of tail event or set of events was the short for the company also had a one in 10, one in 'twenty, one and 15 sorry.
Yeah.
Yes.
Right now, we're still evaluating the still developing but I think in the second quarter.
We've seen very much similar to the industry.
Just wanted to kind of events.
Over 80% of those are.
Over 80% of those losses came from five individual events.
The two largest ones happened in DFW, Texas and the other <unk>.
Urban Denver, Colorado, both of those events happened with large large scale over one five inches in diameter.
The losses were incurred in both our Egypt re book of business and also in our builders.
Over the last couple of years, we have been reducing exposure to these losses.
Through.
Stuart and Rick mentioned.
Through reducing exposure in recent hail deductibles, increasing rates aggressively we are looking though to aggressively accelerate those efforts and windows of these events. These are clearly not long tail events. These are events that are happening.
Great.
Quite often within the industry.
So we recognize the need to take aggressive action quickly as Rick had mentioned, we've already made two filings in Texas to address right.
Increasing hail deductibles there we're continuing to review the rest of the book for opportunities to continue to mitigate against the volatility within the book.
Got it and actually.
My second question, but.
The firm so the actions are at the responses that you.
Laid out.
Ultimately are pretty much the actions that you've been talking about for the last several quarters. So it's just is it just a matter of scale.
The degree of aggressiveness in which you are pursuing with the rate increases in the deductible changes and so on.
Yes, you are on it it's Rick good morning.
<unk>.
What we've told everybody since we've been since we went public is that our sort of portfolio improvements and diversification.
<unk> underwriting actions was a multiyear process and we've been and we're sort of in the middle of that multiyear process and we said that last quarter. The difference I think is what we and rest of the industry is recognizing as some of these cat events are happening so frequently with some of them are almost.
Becoming uninsurable and so what we've done is we've said look we've we've missed our number on our capex for the quarter, we need to make sure that we mitigate that type of thing happening when we get into Hell season next year. So the short answer is we are getting more aggressive in pricing more.
Aggressive and location and diversification more aggressive and underwriting actions to really try to isolate the book as much as possible from weather related events. One advantage that Hippo has us even if we are not interested in selling the hippo manufactured product.
We have an agency and non agency has partnered with over 80 carriers to sell a combination of product lines, including E&S and some dicey coverage choices for customers. So we still can provide customers with a holistic home protection opportunity, even if it means selling a <unk>.
Third party insurance portion of that protection and an area that we believe is overly cat exposed. So short answer is more aggressive.
Got it and hence we see.
Lower guidance for HIPAA home insurance program.
Top line and then the increase in services.
Yes.
That's right.
These services and insurance as a service absolutely shining spots for us as a company.
And we also recognize that when we started this journey more than six years ago. We didn't have the full view that we have now what a generation better customer it looks like who's more likely to partner with us in our home care offerings and now we know what those customers look like as Stuart mentioned.
And over 90% of our new business is coming from those types of customers and so there is the sort of legacy book that we've been working on we're just going to work more aggressively on it which means that that will likely be flat to down on the Hippo insurance program, where the others will continue their upward.
Trend.
Got it.
One last one and then I'll go back into the queue.
Can you maybe explain the mechanics, why at the last quarter or so would drive future losses as opposed to showing up in this quarter's losses.
Sure Hi around it.
Sure.
Happy to happy to take that one so.
When we think about the mechanics of the reinsurance treaty.
We do our best to match the recognition of revenue and cost from a timing standpoint.
So we will earn out the corridor over the remainder of the treaty.
And.
If the weather is better than plan.
In <unk>.
In Q3 and Q4.
Then.
That amount that better than flat amount will positively affect the corridors in those periods, but.
The corridor and then the last participation features generally are tied to earned premium over the course of the of the treaty year.
Got it thank you.
Thank you next.
The next question comes from Matt <unk> of JMP.
Please go ahead.
Hey, Thanks, good morning.
Maybe just sticking with the.
The caps for a moment.
Stuart I think you had mentioned that these are going to impact the 'twenty two treaty.
Can you give us a little bit of color on how the outcome might be different.
Either where they are repeat again next year or if they would have been back in the 'twenty three treaty just kind of what the differences might be with the change in reinsurance structure.
Sure.
So I think that the primary difference in the.
Reinsurance structure between 22, and 23 that were retaining more risk on the 'twenty three treaty and we were on the 22 treaty.
That said I think really the biggest reason why we made it a point to note that as the <unk>.
2022 Treaty.
Will.
We will sort of.
Earn out and be over at the end of the 2023 calendar year 2023 treated relates to policies that are written in 2023 and will have an impact on both the 2023 and 2020 for a calendar year. So we'll see.
Some impact in the loss participation features in the second half of this year because it need properties around the 2022 treaty.
The impact in 2023, sorry in 2020 for a calendar year will be significantly smaller.
As most of the properties are not insured on the 23 trillion.
One thing that I'd, just like to add is that I just want to make sure we're very clear.
All of the efforts that we're taking in the Hippo insurance programs segment are to do everything we can within regulatory constraints to try to avoid this thing from happening again. So I think it's very important to recognize that our portfolio will not look the same next year as it does.
This year and in an accelerated fashion.
Okay perfect.
And then just one kind of follow up.
There's been a lot of news in the market.
Regarding best do just want to ask it.
Particularly they are spinnaker, if you guys have any exposure there or what it might be.
Yes, it's a really good question and I'm hearing lots of fronting carriers and program carriers struggling with this.
Unfortunate circumstance, but we have no exposure to what's going on with vest too I think it shows that the high bar, we have in the spinnaker portfolio.
Additive to the core it's not something where we're prepared to take outside risk and thats something that we think diversifies. The total exposure diversifies, our consolidated gross loss ratio adds premium and fee based revenue to the parent and as a result, we have a very high under.
Alrighty and threshold not just on the types of programs excuse me not just the type of products that these programs are offering but also the programs themselves and the support that they have from reinsurance markets.
Great. Thank you for the color I appreciate it.
Okay.
Thank you.
Question comes from tell me about the joint <unk>.
Open. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
What percentage of your retained premium and risk is Texas now.
And do you have an estimate for kind of what the Texas specific state loss ratio was in the quarter.
And then when you talk about going out and pursuing rate increases any way you could quantify how much do you think you need.
Okay.
Texas at this point from an exposure standpoint, it's about a quarter of the book.
It is decreasing as time has gone on and has over the last two years, we will continue to manage that.
Not just.
It's not just amount of exposure that's also.
Deductibles that we apply on that and those have doubled over the last year as well. So if you said it was about a quarter that's down from over over over half of the book a couple of years ago, So significant trend.
Ocean of boat.
Texas decreasing exposure over the last few years, but also the growth of the book in other regions as well.
Just Tony just to reiterate.
This was always part of our plan to reduce the exposure that we have in Texas as a percentage of the whole that's what Chris and his team have been working on for the last couple of years as Chris mentioned deductibles in Texas have doubled.
Our exposure has been reduced 60%. So we're well on the path. The path is just going to accelerate.
And tell me. If this is Stuart I think one more thing to notice it's a bit hard.
To characterize risk retention in our percent of retained risk at a state level because the actual percentage of risks that we retain varies by the nature of the of that so.
We are more exposed to these small cat events, and we would be to a very large cat that would that would.
Benefits in the protection of the ex ol tower.
So.
It's a little bit tough to characterize it by state, but we can look at it kind of in aggregate when you think about the apparel.
It's probably a better way to think about risk retention.
Okay got it. Thanks and then my next question is as we look out to 2024, what is your sort of normalized expectations for a cat load.
Either on a percentage basis.
Or like a like a dollar amount that you think of that as a good base case.
Yes.
Good question I think.
The answer to that question is something we'll talk about at the end of this year beginning of next year. When we gave guidance because the cat load is going to depend on how successful we are at reducing the exposure to some of these perils and as both Rick and Chris have said.
That is a top priority for us as a company it.
It doesn't.
It doesn't do us any good or anyone to.
To have this kind of volatility in the financials and so we're looking to reduce the exposure with the expressed goal of lowering the volatility and therefore, the cat load in in 2024.
Got it and then just my last question.
Cat bond that you guys issued over the quarter.
Mechanically how does that kind of flow through the financials like the kind of financial impact of that.
It'll just be be recognized like reinsurance.
The.
Spinnaker is the sponsor.
But the way the mechanics work is.
We signed a reinsurance deal with.
And ex ol style deal with the.
With the entity that issued the bonds. So it is just the layer in our overall ex ol tower and <unk>.
We will be accounted for that way.
Got it thank you.
Sure.
Thank you.
Our next question comes from Alex Scott of Goldman Sachs.
Open. Please go ahead.
Hey, first.
First one I had is just on one of the comments that was made in the shareholder letter I noticed you said do you believe the U S homeowners markets in the early days of a challenging period I just wanted to see if you could extrapolate on that and sort of unpack what you mean by that what Youre seeing I mean, I think some of the comments you've already made on the call.
I appreciate sort of answer some of it but I just wanted to see if you could elaborate there.
Yes, no happy to Alex.
It's Rick I think there's a couple of major things that are obvious I think climate change is real weather events are becoming more frequent and areas that.
Maybe werent, having them as frequently size of hail in places like Colorado have increased so the industry is going to have to figure out a solution for things like hail and wildfire exposure and it's really going to take the combination of consumers kicking in.
In the industry kicking in the regulators kicking in and frankly some of the people that do things like build roofs, we need to make sure that that <unk>.
<unk> are more hardened against some of these exposures you have a you have a hail loss now.
Only entity, that's getting hurt by the hail loss are the insurance companies because pricing of roofs have gone up dramatically we need to make sure that we all have sort of a dog in this hunt and make sure that we all participate in our solution and it's going to be a creative one we've already got several things that we're working on.
On.
Two to contribute to it but I think thats. The biggest issue is the climate change.
I think inflation trends continue I think the use of data is becoming more pronounced I think AI and underwriting is going to become a larger portion of what the industry does theres already some companies doing the sorts of things.
It's sort of early stage and as I said in the letter.
There were companies that solve some of these things either after Andrew after prop 103 in California that came up with innovative solutions I think homeowners insurance carriers are going to have to do the same thing.
Our view has always been to protect the joy of homeownership and we think home insurance is a portion of that we think we're doing a lot of other proactive steps and measures with our home care offering and we think we're prime we think our tech is quick to react to the changing world is one of the reasons for the last two years.
We've been oversubscribed in our reinsurance treaties. So we think we're well positioned but the industry has challenges as it relates to property exposure.
Got it.
The other thing I wanted to ask you about is just the pricing action and so forth.
Where you are communicating about gross written premiums.
Being more flat could.
Could you talk about.
How you can handle that in terms of trying to leverage the agency channel I mean is there an opportunity to still retain some of these people even if.
Your prices and the best and you can sort of still retain it as total generated premium or do you expect retention to actually.
Come down for the firm overall, how are you thinking through all that.
Yes, I think you I think you've nailed it and I think thats. The advantage that we have at Hippo is we have an agency and so if we are going to exit our risk.
Or our risk becomes or our policy and pricing becomes less attractive to a particular customer we have other options that we can provide back customer. So our goal is to retain every customer even if it's not a manufactured hippo home insurance policy and continue to offer them a home services and home care.
Go along with agency services and placing their home with a third party carrier cross selling auto.
<unk> whatever they may need to meet the needs of the customer.
Homecare actually improves the attritional losses of an exposure because of the proactive nature of what we do with homecare and so yes generation better customers, we absolutely want to retain as many of them as we can whether it's in the agency or through our Hippo insurance program, but.
We also recognize that there has to be solutions on the weather events and so you might have a generation better customer in an area that you are massively over concentrated.
With weather and that's not acceptable to us and so we need to balance the two and we think we found the right balance we just need to execute.
Got it.
If I could ask one more follow up I'd just be interested on the placed premiums written.
I think it went up from around 42 to <unk> 73.
Can you help us think through how much of that is agency growth versus MGA.
Could you talk at all about.
How the MGA business.
It's performing and if there's anything from my catastrophes that we need to think about and like the trajectory of commissions over the next 12 months.
Yes, I can I think I can I can take a stab at that one. This is Stuart I think there are a lot of questions embedded in there.
And so if that doesn't answer your question I'm happy to try to clarify or follow up offline, but yes.
Yes, I think the mixture.
Written premium in place premium has to do with a couple of things first anything that we would sell through our agency as a third party product is going to be in the premium category.
Secondly, as we've talked about in previous quarters, we have started within the MGA writing business on third party carriers.
And instead of spinnaker.
So that would also shift the mix within the MGA from written premium took place premium.
But I think that the specific there are within the MGA are going to be going forward a lot more related to the the nature of the risks that we are writing and whether it makes sense for us to put that risk on the program itself or to try to place that with a third party as opposed to trying to think about which.
Balance sheet, we're writing it on because whether it would be right at on our spinnaker balance sheet or whether it be ride on one of our partner balance sheets.
Written by the MGA.
If its underwritten by the MGA and placed by the MGA or written by the MGA, that's ultimately going to be on the reinsurance and ultimately the risk.
Of that policy will be something that we're going to be participating in some way or the other so I think.
The bigger driver of the economics.
The mix of written in place is indicative of shifting more to selling third party products. The bigger driver of the economics over the next six months and then into 2024 is going to be what we've talked about earlier on this call, which is the aggressive action, we're taking to reduce the exposure to catastrophic events.
And to try to reduce the overall range in which the.
The outcomes due to weather might fall.
Yes. This is Rick I wanted to just add a couple of things because I know it can easily be confused because we use the term third party carriers and a couple of different ways so to be clear.
We're essentially talking about there are third party programs, we sell are third party products we sell.
And then there are third party balance sheets, we used to sell the <unk> home product. So you need to sort of bifurcate those too.
When youre thinking about written versus placed.
Okay.
Understood.
So the business is going into third.
Third party carriers through an MGA and so for US I mean, there is nothing notable in terms of loss sharing that we need to think about sort of coming in through the commission line over the next 12 to 24 months.
Yes.
Beyond what we've already talked about I think.
The loss participation features.
That are in the reinsurance treaties are almost for the most part within our primary homeowners product.
Our carrier neutral, meaning we would ended up experiencing the economics and roughly the same way.
Regardless of whether we write that policy on <unk> balance sheet or on a on a on a partner balance sheet.
Obviously, if it's a policy that is being written by our agency, where third party carriers doing the underwriting.
We're just serving as an agent as opposed to an MGA.
And we don't have any exposure to risk at all.
And when we think about how how to demonstrate that in our financial results.
Best way to think about that is if it's if it's premium that's coming through our services segment.
We are acting as an agent and don't have exposure to risk if it's coming through our.
HIPAA home insurance program segment, we're acting as the underwriter and would therefore have some exposure to risk depending on the amount we retain in the tree.
And then in the middle of the insurance as a service, we have hail exposure and a little bit of risk patient, but mostly as you can see in our results for this quarter.
The results are not as volatile with respect to the weather or other events.
Got it thanks for all the answers.
Thanks Alan.
Our next question comes from <unk> <unk> from JP Morgan. Your line is now open. Please go ahead.
Hi, good morning the.
First question I had is about the services business I was wondering if youre seeing a reduced appetite from third party personal lines underwriters impacting your ability to grow in that business.
Yeah, I think hey, Pablo it's Rick.
I think we sort of mentioned this in the shareholder letter.
The industry anybody that writes property insurance right now in a traditional way is tending to back off but we're also seeing either newer players are E&S player step in to fill that gap a bit and our strategy is to have a combination of.
Our product offerings through third parties.
It is both sort of more or less vanilla type exposures versus cat exposed exposure. So it's harder to get carriers to partner with.
A hard market, but they are there and I do think we're going to see more and more E&S players step into areas that.
That have been.
Problematic over the last several years and I'll just add one thing I think.
As we make progress in our Hippo homecare business, we arent going to be an attractive place for carriers, who are looking for incremental business.
Turn because our customers will be proactively protecting and maintaining their home they will be putting the work and to reduce the risk where possible and those are exactly the kinds of customers that we as Hippo would want on our book, but if we have too much concentration in a given area. We think they're the kinds of customers that any carrier would want on on.
And as we all know home insurance is not an optional products there will be someone whether it's other carriers DNS providers or states, who are stepping up to take the risk and we think that the relationships, we have and the work that our customers are doing to protect their homes will be an attractive policy.
Yes.
I think that's a great add that Stuart made.
Also remember there are markets of last resort that we act as an agent for so whether it's the California Fair plan, whether it's <unk>, whether it's citizens. There are solutions that we can sell in our agency that are either Ron or backed by the states.
Yes understood.
And then shifting to spinnaker I was hoping you could provide more color into growth there.
Looking for.
Hi.
I was looking for you to you to distinguish athene.
Grams in existing programs and how the growth split between that and I. Suppose also how growth is driven across different lines of business.
I Couldnt catch.
The first part of the question, but not the last part of the question you trailed off there.
Yes.
Sorry, just looking for more color on Griffith spinnaker, and I was hoping to get.
Some color on growth between new and programs that you are just renewing right. So new brings that you brought on this year that sort of one split and then secondly, I was hoping to get would be just growth by lines of business.
Yes, Pablo Im going to answer part of your question and then ask Stuart to jump in and answer part of it as well.
When you are trying to differentiate between new programs and existing programs. You also have to add a third category, which is an existing program that is moving from one fronting carrier to another fronting carrier. So most of the growth that we've had at spinnaker and our insurances.
This segment is either existing programs.
We've had for a long time or programs that have left one particular fronting carrier and are coming over to spinnaker. So these are often times well established programs, it's often times because their previous front or didn't have the capital or capacity to support continued growth of those pro.
Grams, and frankly, I think it's prudent for MGA is to diversify their exposure and not put all their eggs in a single fronting carriers basket. So those are the majority of the two we do add new programs that are brand new programs, but I'd like to reemphasize the high bar, we have in our bill.
<unk> that that program is doing the right things to produce a positive underwriting result.
Yeah and then.
<unk>.
The second part of your question, we don't generally break out on a quarterly basis.
Business line specific premium at at Spinnaker.
That information is available in the statutory filings.
Sort of on a less frequent basis, but.
Because the business model at spinnaker.
And sort of.
More program dependent as the line dependent and where.
Primarily a fee based business.
The line of business with less of a driver of the economics and the size of the premium from any given program.
The last thing Pablo that I would add is that.
Rest assured when we are looking at what programs, we want to add to spinnaker, we're looking for those the diversify the overall exposure at the holding company level not ones that add to the overall exposure. So we generally are looking for things that give us more balanced.
<unk> reduced volatility on a quarter by quarter basis as opposed to those that.
That are more.
Layered on are additive to that volatility.
Yes that makes sense and then the last one for me just on the <unk>.
HIPAA homeowners program.
As we think about the actions you are taking so non renewing price increases changing terms.
Which of those do you think it will be the most impactful over the next year or two and I suppose to the bigger question is what gives you the qantas events.
Re underwriting the book fast enough to accommodate the higher reinsurance retention you are picking up.
Yes, so we are.
The most efficient way to reduce exposure, obviously moving it from our balance sheet and as Rick mentioned, there is ways that we can do that.
Nonrenewals one another is actively.
Marketing that business through our agencies.
Those customers within the <unk> brand.
<unk>.
But there are regulatory restrictions within the markets.
Restrictions about what we can do and we wanted to make sure that we are.
We're compliance that we're looking at all other options, including deductible increases, which can be very efficient in reducing exposure as well.
And then.
There are other ways in terms of rate increases that we make sure of the business that we retain is adequately priced and rebuild.
Volatility protection, and just and just an adequate margin on that business as well. So anything we do is going to be a combination of all of those things is going to be heavily driven by each market circumstances in each state.
Inventory or our market environment, but it'll be a state by state yet.
Yes, Pablo one thing I would add too is when we're successful at achieving the reduced volatility and limiting our exposure to weather that actually also improves the reinsurance economics of the business our Pms go down.
Which is a reinsurance treaties are a driver of our financial success. So there's that added benefit of what will our 2020 for treaty look like with reduced <unk>.
That makes sense. Thank you for the answers.
Thanks, Bob.
Our next question is a follow up question from Yaron <unk> from Jefferies.
So open please go ahead.
Tough.
So one.
I think the shareholders' letter you provide the gross prior year development of about $19 million favorable.
That's on a net basis.
Yeah.
That's <unk>.
This is Stuart.
$2 $5 million.
On a net basis.
Hey, Omar.
Okay.
Is that favorable to park.
Yes, yes, yes, sorry favorable and your own I think on a on a gross basis, it's more like $19 million of prior accident year favorable development not 12.
Hey.
I saw this at 19 I apologize.
Yes.
Yes.
Sorry go ahead.
No no.
<unk> that's favorable in both.
Got it got it.
And then.
Moving away from the quarter and circling back on another question that was asked earlier. So if we look at reinsurance arrangements.
Passengers too.
Do does hippo or does spinnaker use reinsurers with LLC as collateral and if so how does the company verify better quality.
The collateral.
Yes.
This was kind of tied to the best to comment as I answered before so just to be clear we have no exposure to what happened there we also.
I'm not aware of any collateralized reinsurance market, we used for third party.
Third party programs, but if we have any.
We absolutely verify funds, we don't just take the letter of credit and and say we're good to go we actually verify funds on a regular basis.
Back to the point when we bought spin occur.
It was a thinly capitalized fronting carrier and the DNA of spin occur is very much one of protecting the capital in that entity and that DNA has not changed.
Yeah.
Understood. Thanks, so much.
Thank you. Thanks, Karl next question as a follow up question from Alex Scott of Goldman Sachs.
Please go ahead.
Hi, Thanks for taking the follow up for me.
The question I had is just on the cash balance on your balance sheet and thinking through some of the challenges you outlined a little bit more cats. This year. Some some additional repricing, maybe that's being communicated.
<unk> since your Investor day et cetera.
Yes.
How does that change.
The trajectory of the cash.
Balance itself I think at the Investor Day, you projected that it would go down in trough out at $400 million.
Certainly theres some necessary amount of cash in spinnaker et cetera, that's needed for the business. So the required capital something less than 400 at the Investor day.
Just given that that is.
Maybe a close enough buffer that people have to keep an eye on it.
That trajectory changed materially as a result of cats in sort of the new view of of where pricing needs to go and so forth.
Yes. Thanks for the question Alex This is Stuart.
I think the short answer is.
The end results has not changed very much but let me walk you through it so.
At the Investor Day, We said, yes, we would we would turn cash flow positive with around $400 million in cash.
And then.
Subsequent to the Investor Day announced a.
$50 million stock buyback program.
We execute that program over the over the next couple of years.
The trough balance would be around $350 million.
In the second quarter when severe weather started.
Resulting in greater losses than what we had had in our in our plan.
We stopped repurchasing shares as part of that program.
We're trying to be somewhat conservative there because we want to maintain its mission cash cushion.
We havent paused the program completely but we only bought 85000.
A little over 85000 shares in the quarter, which is less than a couple of million dollars. So.
We have that as a lever that we can pull if it looks like we want to.
Sort of stay within the $350 million of cash drop that we had talked about before.
And the net impact of these captives.
In the same ballpark as the size of the repurchase program. So.
We will continue to have the ability to buy shares in the market but.
We are going to be more cautious there because of the higher cat events. This quarter, we still are committed to.
Being able to turn cash flow positive with the $350 million minimum.
Thank you. We currently have no further questions for the state.
Now back to Rick Mckenney for any further remarks.
But we appreciate each of you joining us and asking the thoughtful questions. We look forward to executing on our plan and talking again next quarter have a great day.
Thank you for joining today's call you may now disconnect your lines.
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Okay.
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