Hippo Holdings Inc. (NYSE:HIPO) Q3 2022 Earnings Call Transcript

Hippo Holdings Inc. (NYSE:HIPO) Q3 2022 Earnings Call Transcript November 10, 2022

Hippo Holdings Inc. misses on earnings expectations. Reported EPS is $-5.66 EPS, expectations were $-2.87.

Operator: Good evening. Thank you for attending today’s Hippo Third Quarter 2022 Earnings Call. My name is Megan and I’ll be your moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end . I would now like to pass the conference over to your host, Cliff Gallant. Cliff, please go ahead.

Photo by Damir Kopezhanov on Unsplash

Cliff Gallant: Thank you, operator. Good afternoon, everybody. And thank you for joining Hippo’s third quarter earnings conference call. Earlier Hippo issued a shareholder letter announcing its results, which is available at investors.hippo.com. Leading today’s discussions will be Hippo’s Chief Executive Officer and President, Rick McCathron and Chief Financial Officer, Stewart Ellis. Following management’s prepared remarks, we will open up the call to questions. Before we begin, I’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 Hippo’s expectations or predictions of financial and business performance and conditions in competitive and industry outlook.

Forward-looking statements are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from historical results and/or from our forecasts, including both set forth in Hippo’s Form 8-K filed today. For more information, please refer to the risks uncertainties and other factors discussed in Hippo’s SEC filings in particular in the sections entitled Risk Factors. 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, altering or otherwise revise 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 description of our non-GAAP financial measures with a full reconciliation of – to GAAP can be found in the third quarter 2022 shareholder letter, which has been furnished to the SEC and available on our website. And with that, I’ll turn the call over to Rich McCathron, our President and CEO.

Richard McCathron: Good afternoon. And thank you for joining us Hippo’s business model is proving itself and our investments in technology are paying off. We’ve executed on our dual goals of growth and improve loss ratio. Despite this year’s challenges from inflation, supply chain dislocation, and one of the worst hurricane losses in history. We remain confident that we’re building a superior underwriting model and an industry leading technology stack. In Hippo, we strive to help our customers enjoy the homes through enhanced home protection and services. But some events like major hurricanes are unavoidable. At such times we do our best to help customers get through those difficulties and back to enjoying their homes. This quarter, I’m proud of Hippo’s response to the tragedy of Hurricane Ian.

As we speak, well over half of Hurricane Ian reported claims have been paid. We are delivering on our service promise to our customers in a crisis while also executing on improving our financial performance. Our customer base reached 332,000 by quarter’s end. Customer acquisition and retention is driving accelerating net commission revenue and steady total generated premium growth. Included in our customer account our Hippo homeowner’s insurance policyholders as well as Hippo agency customers who still receive the Hippo experience while placed with third-party carriers. Our Hippo blended premium retention across both Hippo policies, and agency customers was 90% in the quarter, up from 89% in Q2. Our customers are happy and are staying with us.

GGP growth accelerated and was up 36% versus the prior year quarter. We continue to see strength in our builder channel, which is our best loss ratio segment. Despite some slowdowns in housing markets, we expect the attractiveness of our model for distribution partnerships will lead to new relationships and continued strong growth. We also increase the geographical diversification of our portfolio with growth in the states where we have entered over the past year, including New York, North Carolina and Massachusetts. We’re having great success in attracting our target customers, a group we call generation better, which we estimate to account for a third of all U.S. homeowners. A key characteristic of generation B is a desire to proactively protect and maintain their homes, and the willingness to use technology to be better homeowners.

Through a, targeted marketing efforts in Q3, 2022, we estimate that over 75% of our new business was generation better customers. With this cohort, we expect higher consumer retention, better loss ratios, and an opportunity to cross-sell as we expand our offering of home care services. Excluding the impact of Hurricane Ian, our gross loss ratio in Q3 was 58%, and improvement of 70 percentage points from Q3 last year, despite challenging market conditions, where inflationary pressures have dampened results across the industry. Our industry leading technology platform leverages rapid data integration and quickly re-underwrite and re-price our book to incorporate inflationary trends into our pricing. In addition, we’ve gotten better at attracting our target market, and have improved our geographical balance.

We expect these improvement trends to continue and the superiority of our underwriting platforms to become increasingly apparent over time. While Stewart, we’ll say more about Hurricane Ian in a moment. I wanted to note that the net losses to Hippo at a consolidated level from this event were only $4.7 million and of that only 900,000 related to Hippo’s homeowners programs. Our small net losses in Florida from Hurricane Ian, was not a simple stroke of luck. We’ve made strategic decisions that limit our exposure in that space. First, we have been cautious about adding Florida exposure to our portfolio due to both the unique weather and legal environments. Second, our Hippo homeowners business in Florida is exclusively through our builders program, new home construction with the latest in design and technology and craftsmanship better able to withstand nature’s fury.

Hippo’s third quarter adjusted EBITDA loss was $54.8 million, including $4.7 million of losses related to Hurricane Ian. When we reported our 2Q 2022 adjusted EBITDA loss of $55.8 million, we said, we expected Q3, 2022 to be our peak loss quarter. We beat that expectation despite one of the worst industry events in history. Because revenue growth and underlying gross loss ratio improvements are accelerating, and that the expense reduction actions we’ve taken are beginning to have their intended effect. Barring unusual whether we expect our Q4, 2022 adjusted EBITDA loss will be below $50 million with continued improvements thereafter. We have also continued to invest in our technology and service capabilities to drive long-term growth and superior customer experience.

In the fourth quarter, we expect to launch our Book a Pro feature for Texas customers via our mobile app. This new feature will connect homeowners who need help from home improvement professionals like plumbers and electricians with a highly rated provider in our network. Additionally, our customers will be able to message our home care experts to get advice via our mobile app. We aim to aggressively scale these capabilities across more locations, services and providers as part of our goal of becoming our customers’ go-to-destination for home care. We’re very proud of what we have achieved this quarter, and of the business we’re building. Thank you. Now I’d like to turn the call over to Stewart, our CFO.

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Stewart Ellis: Thanks, Rick. Our third quarter financial results, demonstrates that we have reached the turning point on our path to profitability. As Rick mentioned, our third quarter EBITDA loss was $54.8 million, which includes $4.7 million of losses and related expenses that are directly the result of Hurricane Ian. As we indicated at our Investor Day in September, we expect improving adjusted EBITDA results going forward, continuing in the fourth quarter and into 2023 with profitability achieved by late 2024. In the third quarter, we had robust growth across our segments and geographies, while also substantially improving our loss ratio. Let me provide a few highlights. Our builder business is thriving, accounting for 26% of total Hippo and agency premiums in the quarter, and nearly half of our new business.

The builder channel remains a highlight of our portfolio, generating agency fees and attractive loss ratios with new homes that are frequently constructed with home monitoring sensors and other safety equipment as standard options. As Rick mentioned, our customer base continues to grow, reaching 332,000 customers during the quarter. Demand for our products and services remain strong and customer retention has continued to improve with Hippo blended premium retention across both Hippo policies and agency customers coming in at 90% in the quarter, up from 89% in Q2. We saw growth throughout our 40 states as we begin to build a presence in the Northeast and mid-Atlantic. In our historically largest markets like Texas and California, we also saw growth, but with a careful eye towards geographic balance within those states.

Spinnaker’s fronting business represented $83 million of non-Hippo TGP in Q3, up from $49 million in the year ago quarter. At Spinnaker, we provide other MGAs access to our balance sheet and insurance licenses in exchange for fronting fees on the premium that they produce. All of these factors supported our revenue reaching $30.7 million in the quarter, which was up 44% from Q3 last year, and an acceleration of our growth relative to Q2. As Rick mentioned earlier, excluding the impact of Hurricane Ian our Q3 gross loss ratio would have been at best ever at 58%. This is highly encouraging, and an early indication of the success of our rate actions and re-underwriting efforts taken in the first half of 2022. Reserves developed favorably again in the quarter, benefitting the loss ratio by 18 percentage points, including eight percentage points from non-PCS events, and 10 percentage points from previous period PCS CAT events.

With respect to Hurricane Ian the Hippo program performed meaningfully better than the industry on both a gross and net basis. At a consolidated level Ian was a $73.1 million gross and $4.7 million net loss event representing 52 percentage points of gross loss ratio, and 44 percentage points of net loss ratio. Importantly, though, of the gross losses, only $7 million or five percentage points of gross loss ratio related to the Hippo Homeowners program. The remaining $66 million of gross losses related to other programs supported by Spinnaker, of which $40 million relates to programs that we’ve previously placed into run-off back in the spring of this year. The net impact Ian from homes covered by Hippo policies was only $900,000 or nine percentage points of net loss ratio.

Even with the full impact of Hurricane Ian at a consolidated level, we are comfortable maintaining our full year gross loss ratio guidance of 90% or less. Sales and marketing costs were $29.4 million versus the prior year quarters $22.4 million and above the run rate for the first half of 2022 as we upped our targeted marketing efforts to take advantage of the opportunity to market in recently approved states. Technology and development expenses were $14.8 million versus the prior year quarter’s $8.3 million. Stock-based compensation of $6.5 million versus $1.1 million in the prior year quarter drove much of the increase. The stock-based compensation increase reflects higher headcount compared to a year ago, some refreshing of stock incentives and the acquisition of our development team in Poland.

General and administrative expenses were $19 million versus the prior year quarter’s $13.4 million, with stock-based compensation expense representing $3.1 million of the increase year-over-year. Our unrestricted cash and investments as of September 30, 2022 were $677 million. While we remain highly conservative in our asset allocation, as interest rates have risen, we have shifted the balance of our cash into short duration highly related securities to capture additional yields. We expect that our cash and investment balance will decline at slower rates going forward. At the end of the quarter, Spinnaker’s policyholder surplus was $132 million. Net loss attributable to Hippo was $129.2 million or $5.66 per share, compared to a loss of $30.9 million or $2 per share in the prior year quarter.

Most significantly, we wrote off a remaining goodwill asset of $53.5 million in the quarter and we had a one-time earning charge of $1.8 million related to our cost reduction actions. I would like to close by reiterating that we are maintaining our 2022 full year guidance. We expect total generated premium will be between $790 million and $810 million up over 30% for the year at the midpoint of the range. We expect our revenues to be between $119 million and $121 million. We expect our gross loss ratio will be below 90%, including the effect of Hurricane Ian. We expect our 2022 full year adjusted EBITDA loss to be between $197 million and $203 million, with further improvement in 2023, before turning positive at the end of 2024. Thank you. And I’ll now turn it over to Rick for closing remarks.

Richard McCathron: Thank you, Stewart. In the toughest of times, we have done what others in the industry have not, execute on fundamental improvement while gaining market share. Our focus is now to achieve adjusted EBITDA profitability, a goal we expect to reach by late 2024. While we add the products and services we offer to American homeowners. We’re very excited and determined to achieve our mission. Now we’d be happy to take any questions.

Q&A Session

Operator: Thank you. My first question comes from the line of with JMP. Your line is now open.

Unidentified Analyst: Yes, thank you. Hi, good evening. Just a question regarding Ian and two part question, basically as a young homeowner insurer – what do you – I mean, how do you think you’ve fared from a customer’s point of view that’s the first part. And then second part is, have you are there any lessons from this event?

Richard McCathron: Hi, Carol, thanks. Thanks for the – question. First of all, I think I cannot be more pleased with the team on how we responded to Ian and multiple facets. First of all, we were very proactive on identifying customers that were within path, having direct conversations with those customers prior to the hurricane happening and then an immediate follow-up of those customers to identify any prospective damage. The feedback that we’ve gotten, we shared a few testimonials and the material had been nothing but positive and I think our team stepped up to make sure that we fulfilled the promise that we would make when somebody took out a new business policy. The other aspect that I think is really important is I do think this demonstrates the discipline we have from an underwriting perspective on how we enter markets, and what product we offer.

So we entered Florida with our home builder’s policy. And I think it demonstrated how we compared to model results. And the very small amount of losses on the Hippo program demonstrated that we made the right decision on how we enter Florida. It also magnifies the difference in quality of policies when they come from new builders like Lennar. And I think when you look at all of the information coming out showing that the new construction, homeowners policies at current codes, more reinforced building really resulted in a positive and a positive way for us. It’s one of the reasons why we’re we continue to be very bullish on the homebuilders channel. And why we are absolutely doing everything we can to increase our portfolio that includes homebuilders.

Unidentified Analyst: Thank you.

Stewart Ellis: And this is Stewart I’ll add one quantitative benefit to that that we’ve seen. I think Rick mentioned that we performed better than expected because of the new construction and you know the rapid response. I think if you look at the standard industry models for expected loss based on our portfolio of coverage in the areas that were effective. We’re performing meaningfully better than what the industry would have assumed based on historical data. And so that is encouraging to us in a quantitative sense as well. We’re about a third below the average model estimate.

Unidentified Analyst: Great, thank you.

Stewart Ellis: Thanks Carol.

Operator: Thank you. Our next question comes from the line of Yaron Kinar with Jefferies. Your line is open.

Yaron Kinar: Thank you, good afternoon everybody. First question more of a number of questions so the 58% growth loss ratio excluding the impact of Ian. Does that include some of the favorable development? I think you call out 18 points in the shareholders letter? And if so, how much of that 18 points, is it only the eight points of non-PCS development that I should be factoring in?

Stewart Ellis: No includes the full 18 points of favorable development. So absent the favorable development, it would have been 70 percentage points or 70% loss ratio.

Yaron Kinar: Okay let me follow-up on?

Stewart Ellis: Sorry 76%, it could be.