Hippo Holdings Inc. (NYSE:HIPO) Q3 2023 Earnings Call Transcript

Hippo Holdings Inc. (NYSE:HIPO) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Welcome, everyone, and thank you for attending today’s Hippo Holdings Third Quarter 2023 Earnings Call. My name is Sierra, and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions]. I would now like to pass the conference over to our host, Cliff Gallant, Vice President of Investor Relations.

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 discussion 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 to 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 and competitive 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 to 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 section entitled “Risk Factors.” All cautionary statements are applicable to any forward-looking statements we make whenever they appear. You should carefully consider 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 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 description of our non-GAAP financial measures with a full reconciliation of GAAP can be found in the third quarter 2023 shareholder letter, which has been furnished to the SEC and available on our website. And with that, I’ll turn the call over to Rick McCathron, our President and CEO.

Rick McCathron: Good afternoon. Q3 2023 was Hippo’s best quarter yet. The most predictable and profitable parts of Hippo, our services and Insurance-as-a-service segment continued to drive our growth and now represents 65% of our premiums in force, up from 52% a year ago. The actions we are taking in our homeowners insurance business to lower its volatility and improve its profitability are working. Our Q3 2023 adjusted EBITDA loss was Hippo’s smallest as a public company, and we are on pace to turn positive earlier than previously projected. After a challenging first half of 2023 for the U.S. homeowners’ insurance industry, Hippo has taken bold steps to position itself for a period of extended growth and profitability. In August, we temporarily paused the underwriting of most new business.

We’re assessing our underwriting and risk appetite and only writing new business where we are very confident in its expected profitability and reduced volatility. For our renewal book, we’re raising rates, increasing deductibles and when necessary, non-renewing some policies. While we expect to see a decline in Hippo’s home insurance programs total generated premium in 2024, we expect that to be driven by a disproportionate decline in exposure and volatility and a significant improvement in underwriting profitability. We have already begun to see the benefits of actions taken in 2022 and early 2023 to improve our loss ratio. And we expect significant additional improvement to come. Our consolidated gross loss ratio in the quarter was 59%, a 51 percentage point improvement over a year ago.

And our net loss ratio improved even more significantly year-over-year, declining 112 percentage points to 111. HHIP’s core gross loss ratio in the quarter, which excludes prior year reserve movements and PCS cats improved 13 percentage points to 69%, down from 82% in the prior year quarter. We had another outstanding quarter in our Insurance-as-a-Service segment with positive adjusted operating income of $4 million and exceptional TGP growth of 72%. In a market with highlighted concerns about credit risk exposures, Spinnaker continues to demonstrate strong risk management capabilities and underwriting controls while driving profitable growth. In our fee-based services segment, the success of our builder agency business is providing a repeatable playbook for our entire agency business.

As HHIP’s risk appetite narrowed, our builders’ agency successfully placed business with third-party carriers to keep the premium retention rate at 97% for the quarter. At First Connect, agency appointments are up 3x, and we saw growth of more than 180% in our non-Hippo new business versus the prior year. As we have focused our underwriting footprint and intensified our emphasis on expense control, we are announcing a significant expense reduction initiative, which we expect to take $50 million to $70 million out of our cost structure in 2024. We expect these savings, coupled with further loss ratio improvements and growth in our Insurance-as-a-Service and Services segment, to result in positive adjusted EBITDA before year-end 2024, turning positive earlier than we previously projected.

Finally, I extend our condolences to many Israeli members of our Hippo family and friends and partners impacted by the horrible events over the past several weeks. Thank you. I’ll now turn the call over to Stewart.

Stewart Ellis: Thanks, Rick. Our Q3 2023 adjusted EBITDA loss of $38 million was our best yet as a public company, and we expect even stronger results in the coming periods. These improvements will be driven by continued improvements to the Hippo Home Insurance Program loss ratio; significant operating expense savings; growth in our Insurance-as-a-Service segment, which is already profitable; and growth in our services business, which will turn closer to adjusted operating income positive in 2024. We now expect to be reporting positive adjusted EBITDA earlier than the end of 2024, while affirming our expectation of minimum cash and investments of at least $350 million. On a consolidated basis, year-over-year growth remained strong.

TGP was up 38% to $304 million, driven primarily by our most profitable and most predictable segments, which now represent a significant majority of our total business. Revenue was up 88% over the prior year to $58 million, primarily driven by growth in premiums earned and organic growth in both our Insurance-as-a-Service and Services segments. Additionally, revenue has benefited from an increase in investment income to $6 million from $3 million in the year-ago quarter as its taking advantage of more attractive yields. We will continue to push for growth in our profitable Insurance-as-a-Service segment and view growth as an important lever to driving positive adjusted operating income in our Services segment. Our narrower risk appetite and focus on lowering our exposure to weather will result in lower TGP, and disproportionately, lower loss exposure and volatility in the Hippo Home Insurance Program segment in 2024.

We’ve made great progress on operating expense control during the quarter. Excluding loss and loss adjustment expense, consolidated expenses were $72 million in the quarter, down from $134 million a year ago. Reduced sales and marketing expenses were the major driver, down $19 million from $29 million a year ago, while tech and development costs were $12 million versus $15 million a year ago. We also recently announced our decision to take additional expense savings actions, including a staff reduction of up to 120 employees. We expect these actions to drive additional annualized savings between $50 million and $70 million, partially beginning in Q4 of this year. We ended the quarter in a strong financial position with cash and investments of $558 million, down from $565 million on June 30, 2023, as our Q3 adjusted EBITDA loss was partially offset by favorable changes in working capital.

In our Services segment, our Q3 adjusted operating loss was $10 million, down from $16 million a year ago. Year-over-year growth remained strong, with TGP up 32% to $122 million and revenue up 22% to $12 million. Hippo’s agency continues to have tremendous success in the builder channel, with volumes reaching another all-time high in the quarter, despite the pressures on the broader housing market. Growth was driven by higher numbers of policies placed and higher premium per policy. Our third-party premium retention rate was 97% in the quarter. At First Connect, our digital marketplace for independent agents and carriers, we saw a year-over-year increase of more than 180% in non-Hippo new total generated premium during the quarter despite challenging market conditions.

By the end of this year, non-Hippo TGP will be triple the level it was at the end of 2021. We’ve been consistently adding to our portfolio of carriers to attract agency partners. And in Q3, we had a new record with over 20,000 agency appointments granted, representing 3x growth from a year ago. As we look forward to 2024, we expect continued revenue growth and expense savings to turn our Services segment closer to positive operating income in the second half of 2024, earlier than previously projected. In our Insurance-as-a-Service segment, adjusted operating income was steady at $4 million, up from $2 million in the year-ago quarter. Year-over-year TGP growth remains very strong at 72% and we see many opportunities for further growth in the market.

Revenue grew 94% year-over-year. We continue to expand our Spinnaker platform while maintaining our high standards for due diligence, underwriting, and expense discipline. The Hippo Home Insurance Program, adjusted operating loss of $32 million, was its best quarter since our IPO. Underwriting and pricing actions taken in 2022 and 2023, continued expense control, and improved underwriting performance, and improved reinsurance treaty terms all contributed. Total generated premium in this segment was $95 million, up 1% over the prior year quarter as underwriting and pricing actions we took in 2022, and early 2023, resulted in higher rates that offset an intentional reduction in underlying policy count and exposure. We expect our recent actions to result in additional TGP declines in 2024.

Our aim is to materially reduce our exposure to the hail and storm risk, which has caused a disproportionate percentage of our losses to-date. The Hippo Home Insurance Program’s revenue in the quarter of $29 million was up 77% over the prior year, largely reflecting higher premium retention in our 2023 reinsurance treaty versus our 2022 treaty. In addition, we benefited from organic growth in TGP and higher investment income. HHIP’s Q3 gross loss ratio was 75%. Excluding PCS cats and prior-year development, the core gross loss ratio was 69% versus 82% in the prior-year quarter. The losses from the large hailstorms during the second quarter have been developing favorably. And as a result, we’ve chosen to release $11.8 million of net reserves associated with these storms.

While we’re pleased with the progress, we expect the more aggressive actions we’ve taken in recent months to drive even better results in the future, but significantly lower volatility. HHIP’s adjusted operating expenses, excluding loss and loss adjustment expense were $26 million in the quarter, down from $38 million a year ago. As a percentage of TGP, these operating expenses were 27% versus 40% in the year-ago quarter. While we are pleased with this improvement, we expect even more improvement going forward as a significant portion of our recent expense reduction actions were focused on this segment. I’d now like to update our guidance for 2023. For the full-year, we now expect an adjusted EBITDA loss of between $207 million and $212 million compared with our previous range of between $208 million and $218 million.

We now expect 2023 revenue of between $190 million and $195 million, up from our previous estimates of $178 million. And our 2023 TGP estimate remains $1.1 billion. We expect to provide more detailed 2024 guidance when we report our results for the fourth quarter of this year. Thank you for joining us today. And now I’d like to turn the call back over to the operator for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question today comes from Yaron Kinar with Jefferies. Please proceed.

Yaron Kinar: Thank you. Good afternoon. First, I also want to extend my condolences to Hippo employees, family, and friends in Israel, and to the people of Israel who face the horrors in the last few weeks. And then, with regards to maybe the more mundane, I want to start maybe with the decision to temporarily pause underwriting new homeowners business in August. Rick, I think you called it a bold step. I think one could also possibly be drastic and certainly more drastic than what we’ve seen from, let’s say, other insurers in the past when they decided to retrench or pull out of certain regions or lines. Can you maybe walk through the decision to take such a bold action as opposed to maybe less pronounced measures? And to what extent do you see that as potentially impacting your relationships with partners and agents going forward?

Rick McCathron: Yes. Thanks, Yaron, for the question, and thank you for the condolences to all those impacted. I think first of all, the reason we think it’s a bold decision is our objective is to accelerate the path of profitability as quickly as possible and take the measures we need to do to guarantee the achievement of doing so. So we wanted to make sure we had rate adequacy. We had the appropriate terms and conditions, the appropriate deductibles, understanding the costs associated with our distribution partners and get all of that right before we started either increasing problematic situations and then reopening. So what we have done is we have already begun reopening the builder channel. So we’ve opened it up in most of the states that we do business in.

We’ve also simultaneously increased rates, increased deductibles, changed terms and conditions, changed the way that we are paying our distribution partners. And as those take effect in various states, we are then opening up those states provided that they do not create increased volatility to the portfolio. In fact, every action that we’re doing is to have disproportionate impact on the PML versus the premium. And we’re excited by the progress that we’ve made early on. As we have these conversations with our distribution partners, they recognize this is not a Hippo-only problem, that the industry is suffering, and that we all have to work together to make sure that we have a profitable environment and a healthy market going forward. Certainly, distribution partners wish that there was some consistency and some stability, but consistency and stability can be measured over time and that is what we have provided them thus far.

Yaron Kinar: And do you have any sense of how long it will take till you’re fully back in business?

Rick McCathron: Yes. I do think that we will come back gradually and we will come back gradually as these different actions take effect. But I do think you’re going to see us opening more and more by second half of 2024. But again, I just want to be very clear. We will only open in areas that we have the rate adequacy, the right deductibles, and reduced volatility. We have lots of growth coming from other aspects of our business. One thing to keep in mind, as I mentioned in my opening remarks, that 65% of Hippo’s TGP is coming from the non-HHIP program. And those companies or those divisions are doing very, very well. And we expect to continue to lean on them while we’re improving the volatility and the terms and conditions of the HHIP program.

Yaron Kinar: Got it. And actually the latter half of your response is a good segue to my next question. With regards to Spinnaker, do you view it as a core business? And I ask that because on the one hand, obviously it is part of the profitable segment of the three segments that the company has. And as you point out, it’s a very significant contributor to TGP. On the other hand, we have seen some industry headlines talking about maybe looking to sell the business. And we’ve seen certainly other fronting assets for sale. So would love to hear your thoughts about Spinnaker in particular.