Hippo Holdings Inc. (NYSE:HIPO) Q1 2024 Earnings Call Transcript

Hippo Holdings Inc. (NYSE:HIPO) Q1 2024 Earnings Call Transcript May 3, 2024

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Operator: Ladies and gentlemen, welcome to the Hippo Holdings first quarter earnings call. My name is Betsy, and I will be moderating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad. If you are streaming via a web browser, timely press Q&A button and type in your question. I will now hand you over to your host, Mark Olson from Hippo Holdings to begin. Please go ahead.

Mark Olson: Thank you, operator. Good morning and thank you for joining Hippo’s 2024 first quarter earnings call. Earlier today, we issued a shareholder letter announcing its Q1 results, which is available at investors dot Hippo.com. Leading today’s discussion will be hit by President and Chief Executive Officer, Rick McVey, Chairman and Chief Financial Officer, Stuart Ellis. Following management’s prepared remarks, we’ll open the call to questions. Before we begin, we’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 forward looking statements include, but are not limited to those expectations or predictions of financial and business performance and conditions and competitive and industry outlook.

Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and or from our forecast, including those set forth in Hippo’s Form 10 Q filed today for more information please refer to the risks, uncertainties and other factors discussed in Apple’s SEC filings, in particular, the section entitled Risks. All 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 Hippo’s SEC filings do not place undue reliance on forward-looking statements as Hippo is under no obligation and expressly disclaims any responsibility for updating 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 refer to non-GAAP financial measures such as total, generated premium and adjusted EBITDA. Our GAAP results and description of our non-GAAP financial measures with full reconciliation to GAAP can be found in the first quarter 2024 shareholder letter, which has been furnished to the SEC and is available on our website. And with that, I’ll turn the call over to Rick McCathron, our President and CEO.

Richard McCathron: Thank you, Mark, and good morning, everyone. We started off the new year on the right foot building on the momentum gained during a transformative 2023 and are on track to achieve the 2024 operational and financial goals we discussed last quarter. I’m particularly excited to share that during Q1, we were able to continue reducing our cat exposure and streamline our operations without sacrificing overall growth. In fact, we accelerated top line growth compared to last quarter. I mentioned previously that we’ve been focused on meeting our customers’ needs with third party policies while reducing our Hippo home insurance program exposure in areas where we have a lower risk appetite. Our team’s efforts to find the right policy for each customer regardless of carrier have allowed us to maintain high retention rates during this effort, our success helped drive accelerated total generated premium growth in Q1 relative to last quarter by expect this growth to accelerate further towards the end of the year as the benefit of reopening in certain geographies and the expansion of our builder business overtake the short-term growth impact of reducing cat exposure.

Without the effort to rebalance our geographical exposure, our top line could have been even higher, but these efforts are already improving underwriting results and our bottom line, no home insurance company will ever be immune from weather and like others, we experienced losses in March of this year from a large hailstorm that affected Texas and Missouri. Because of our ongoing efforts to reduce policy counts in these areas and to increase deductibles that further reduce our exposure. We estimate the direct losses from this event will be approximately 43% lower than what we would have experienced if the exact same COVID had occurred in March 2023. This is solid progress in a relatively short period of time. And like we discussed last quarter, we feel confident that later this year, after the changes work their way fully through our book, the reduction in expected losses will even be higher.

Finally, towards the end of last year, we took aggressive actions to lower costs and drive efficiencies into our operations. We are now realizing the full benefits of these cost reductions in our Q1 financials, and those improvements contributed to our progress in reducing our adjusted EBITDA loss during the quarter, even though Q1 had seasonally higher weather-related losses than Q4 last year. The critical work that started in 2023 has continued into 2024 and our results from Q1 as to the growing evidence of our ability to efficiently grow our business while marching towards positive adjusted EBITDA. Our teams have worked hard during the quarter. I’m encouraged by the progress and excited to report that there’s more to come now I’d like to turn the call over to our Chief Financial Officer, Stuart Ellis, to walk through the highlights of our Q1 2024 financial results, as well as our expectations for the future.

Stewart Ellis: Thanks, Rick, and good morning, everyone. In Q1, we took another step toward achieving positive adjusted EBITDA later this year. Continuing the trends we’ve been discussing the past few quarters and showing measurable progress compared to our results from last quarter and to those from a year ago. Before I get into the details of the other line items on the P&L. I’d like to take a minute to highlight how good a quarter. It really was for Hippo on the adjusted EBITDA line because it was better than it appears on the surface compared to Q1 of 2023, we improved our adjusted EBITDA loss by $32.3 million, bringing it down from $52.1 million a year ago to $19.8 million in Q1 compared to last quarter, the improvement was only $2.5 million, but we need to keep in mind that Q4 is typically our best seasonal quarter in terms of weather losses for the Hippo program.

So the $2.5 million improvement versus last quarter was achieved despite gross losses on the Hippo program being $19 million higher than they were in that quarter. We were able to accomplish this because of the trends we’ve been discussing over the past year in each of the major line items on our P&L. So I’ll trying to highlight those trends as we go through the numbers and then at the end discuss how each of them contributed to this result starting with total generated premium in Q1, TGP. grew to $294 million, a 20% increase year over year. As Rick mentioned, a few minutes ago. This was an acceleration of growth compared to last quarter, and it was driven primarily by the success we’ve had offering third party policies to our customers through our agency and first Connect platforms.

Our insurance as a service business continued to grow up 25% year over year, while our efforts to reduce cat exposure in our Hippo home insurance program, called TGT. from that segment to shrink by 29%. All of these results were in line with expectations and consistent with the guidance we shared last quarter for the full 2024 calendar year parts of our business that are less exposed to underlying weather and underwriting volatility. Insurance as a service and services rose as a percentage of our total TGP. to 80%, up from 77% last quarter. As a reminder, we expect these trends to continue over the course of the year with the services and insurance as a service segments, collectively representing 85% of total TGP by Q4 of this year, at which point we should be starting to see TGP.

from to have a home insurance program segment beginning to grow again, especially in the builder channel, which will help bolster our total TGP. growth heading into 2025 looking at revenue during the first quarter, we again grew revenue significantly faster than TGP with it rising 114% year over year to $85 million up from $40 million in Q1 2023. As we discussed last quarter, this growth comes from a combination of volume increases at the services and insurance as a Service segment. As well as significantly higher monetization of our TGP. from the Hippo home insurance program. Within HHIP., we were able to retain 58% of gross earned premium up from 7% a year ago and also benefited from a 33% year over year increase in rate on a written basis during the quarter.

Looking at loss and loss adjustment expense, the biggest driver of our consolidated loss and loss adjustment expense. The Hippo home insurance program segment showed strong progress during the quarter. Our HHIP. gross loss ratio improved by 21 percentage points to 80% from 101% in Q1 of last year. His portfolio level improvement combined with the improvements to our reinsurance structure drove the even larger improvement in our HHIP. net loss ratio, which came in at 100% during the quarter, an improvement of 455 percentage points versus Q1 of last year. As I mentioned earlier, our gross losses at HHIP. were $19 million higher than last quarter because of seasonal weather patterns. But because of the increase in earned premium quarter over quarter, we now have the earned premium base to absorb these losses, driven primarily by the improvement in the Hippo program.

Our consolidated gross loss ratio improved 17 percentage points year over year to 59%, and our consolidated net loss ratio improved 186 percentage points year over year to 87%. We think about fixed expenses and operating leverage. As Rick mentioned earlier, Q1 represents the first quarter where we realized the full benefit of the cost reduction actions and efficiency improvements we implemented late last year. These improvements show the substantial operating leverage we are achieving as we scale relative to Q1 of last year. Our GAAP sales and marketing, technology and development and general and administrative expenses collectively declined by 87 percentage points of revenue shrinking month from 135% of revenue last year to 48% of revenue this quarter.

Beyond the improvement relative to revenue, each of our sales and marketing technology and development and general and administrative line items declined in absolute dollar terms during the quarter relative to both Q1 2023 and Q4 2023. Collectively, these improvements drove a year-over-year reduction in expenses of more than 13 million on a GAAP basis, a decrease of 24% in absolute dollar terms, all while revenue grew 114%. Turning now to adjusted EBITDA, as I mentioned at the beginning of my remarks. Our Q1 adjusted EBITDA loss of $19.8 million was a 32.3 million improvement year over year and a 2.5 million improvement quarter over quarter year over year. Improvement in adjusted EBITDA was driven primarily by a 21 percentage point improvement in our HHIP.

gross loss ratio. Our improved reinsurance structure, which brings our retained premium more in line with the risks. We are retaining cost savings initiatives we initiated in Q4 of last year and the growth in our insurance as a service and services segments. The quarter-over-quarter improvement in adjusted EBITDA was driven primarily by realizing the full benefit of the cost saving initiatives in Q1 versus only a partial benefit last quarter, while the benefit of higher earned premium offset seasonally higher weather-related losses. As a reminder, the definition of adjusted EBITDA that we are using and have used historically excludes net investment income, which amounted to 5.9 million in Q1. Looking forward to the full year 2024, we are reiterating the guidance we provided last quarter as a reminder, 41% of our annual PCS cat load is estimated to occur in Q2, historically, our highest weather loss quarter.

When we report Q2 results, we plan to provide updated guidance for the rest of 2024. And finally, before I close and open the floor for questions, I’d like to point out that Q1 was the first quarter in the Company’s history where our cash balance increased for reasons other than raising additional capital, cash equivalents and investments rose by $6.8 million during the quarter. This increase was a function of some working capital changes and other one-time benefits. So I don’t expect that we’ll be cash flow positive in every quarter this year, but it is a significant milestone for the company and a reflection that we are getting closer to a point where we expect to generate consistently positive cash flow. And with that, operator, I’d now like to open the floor to questions.

Operator: [Operator Instructions]. We have our first question coming from Yaron Kinar of Jefferies.

Yaron Kinar: Good morning and congrats on achieving the free-cash-flow milestone. And I guess a few questions, if I could. First on the sales and marketing spend seems seem to come in a little bit lighter than where I had expected it to be is there is seasonality pattern there, or do you think that it will reap remain at relatively these levels and as you continue to achieve this strong level P/T.

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Q&A Session

Stewart Ellis: And Yaron, this is Stewart. I can I can take this one. I think, um, I’m expecting our not only our sales and marketing, but our other kind of fixed cost line items in the P&L to remain roughly at these levels for a while. I think Q1 is a reasonable proxy for the quarterly run rate of this. I think one of the things that’s important to remember about our growth is that not all the dollars of incremental TGP. require us to go out and spend money to acquire new customers, especially in insurance as a Service segment. A lot of the growth is coming from existing programs. And so we do have an ability and to grow efficiently. And I think that we’re showing that in the P&L in Q1.

Richard McCathron: Yaron, I’ll add one quick one here on add one quick thing to what Stuart said the other aspect to remember is in our Services segment, we are doing a better job of cross selling new policies to existing customers in which you see growth related to those efforts yet we don’t have any incremental marketing spend because they’re existing customers.

Yaron Kinar: It makes sense. And while we’re on services, I’m why was the very strong P2P growth there like 37%, why that translates only 16% revenue?

Stewart Ellis: I can take this one. I think it’s a combination of things. The within the Services segment, we do have I think, as we’ve talked about in the past, multiple kinds of businesses. So we have our agency where we’re selling insurance policies, both homeowners and non homeowners policies to consumer customers we also have our first connected platform where we are helping carriers who are looking for incremental demand for their their products and agents who were looking for interest, incremental capacity to sell to their customers. The first Connect platform is a marketplace is a it’s a share of the revenue we had as a share of the commission that is paid from carriers to the independent agents and it monetizes at a lower percentage of TGP.

It is a it’s a high variable contribution margin business, but as a percentage of TGP is lower and the first Connect platform is growing incredibly quickly. So there is a mix shift during the quarter, two to more first Connect premium within that particular segment.

Yaron Kinar: Got it. So it would be reasonable to think of that our conversion rate may be continuing to track a bit lower?

Stewart Ellis: I think that’s right. I think for Connect, we see as continuing to grow quickly and over time will become a larger share of the of the services segment is it. And we’re continuing, as Rick said, within the agency to add new consumer customers and to broaden the share of wallet, if you will, by selling policies more than one policy to consumers through the cross-sell efforts. But the first connects growing really quickly. And I think you’ll see you’ll see it as the flow mix shifts toward and for connected, it continues to grow.

Richard McCathron: This is Rick. I will add, over time as we continue to reopen geographies for our hip, a home insurance program. When we acquire customers for that program, we don’t always place them with Hippo. We look for the best policy to meet the needs of that particular customer. Therefore, we will continue to grow third party policies in our agency or our services business that are not part of the first Connect platform over time as we get into the second half of the year. So I would keep that in mind as well.

Yaron Kinar: Okay. That’s helpful. And last question for me on HHIP. June, excuse me, we saw the attritional loss ratio improved by a point. I think there’s a lot going on underneath that, though, Tom have mix shift away from cat-exposed business, which I would think would drive that attritional loss ratio higher? It seems I have read some impact and maybe other underwriting actions. Can you maybe help us sort through that maybe offer some we points in terms of the the puts and takes there. What was a bad guy by what magnitude just so we have maybe a better sense of of what is truly going on under that improvement and the loss ratio?

Stewart Ellis: I can take this. I think you’re absolutely right that on a like-for-like basis, the attritional loss ratio or the non-PCI loss ratio improved more substantially than one place year over year. But we do, as you said, we do have a mix shift away from higher tax geographies within the portfolio. So all things being equal, lowering the amount of premium in the book that is related to higher volatility. Weather should see an increase in the attritional loss ratio just for mix reasons alone and the fact that we are improving attritional loss ratio despite that headwind on the mix is a testament to the rate that we have earned and we’ve been talking about in our high 20s and low 30s that we’ve been able to achieve on a on a written basis over the past few quarters.

And we’re starting to see some of that benefit on the earnings, which is helping. And we have had in the quarter. We did have some non-weather water issues that contributed to some of the losses there, but I think they’re there. The variation there is within kind of the normal parameters the I don’t know that I can quantify on this call because I don’t think we’ve really spoken at this level of detail about the puts and takes. But with the things that you’re as you’re highlighting are our real. I do think that we will see additional improvements over the course of the rest of the year. As we look at quarter four sorry, year over year, we’ll continue to see the improving trends on both the TCS and a non-GAAP EPS loss ratio. So yes, the trends there are positive.