Hippo Holdings Inc. (NYSE:HIPO) Q4 2023 Earnings Call Transcript

Hippo Holdings Inc. (NYSE:HIPO) Q4 2023 Earnings Call Transcript March 6, 2024

Hippo Holdings Inc. beats earnings expectations. Reported EPS is $-1.73, expectations were $-2.04. HIPO isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, everyone, and welcome to the Hippo Holdings Fourth Quarter 2023 Earnings Call. My name is Charlie, and I’ll be coordinating the call today. [Operator Instructions] I’ll now hand over to our host, Mark Olson, Director of Corporate Communications to begin. Mark, please go ahead.

Mark Olson: Thank you, Operator. Good morning, and thank you for joining Hippo’s 2023 fourth quarter earnings call. Earlier today, Hippo issued a shareholder letter announcing its Q4 and full year results, which is available at investors.hippo.com. Leading today’s discussion will be Hippo’s President and Chief Executive Officer, 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 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 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 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 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 fourth 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 morning, everyone. The beginning of a new year always presents an opportunity to reflect on past and internalize its lessons before moving forward with renewed enthusiasm and focus. In two short years, we have nearly doubled our total generated premium from $606 million to $1.1 billion and more than doubled our revenue from $91 million to $210 million, all while lowering fixed expenses and improving the gross loss ratio on our Hippo Home Insurance Program by approximately 40 percentage points. Over the past year, we learned that our customers want the ability to buy not just Hippo Home Insurance policies from us, but other kinds of policies from third-party carriers as well. We have taken this to heart and refocused our consumer agency on finding the best policy for each customer regardless of the carrier.

We believe that for our target customer, generation better customers, especially those who are buying a newly built home, a Hippo homeowners’ policy will be the best option. But if a customer is a better fit with another carrier, we will work to find the best option from across our 50 plus carrier partners. We also learned that there is a real need in the market for carrier services focused on servicing MGAs, where much of the innovation in the insurance market is happening. Our Spinnaker Insurance-as-a-Service has an industry leading platform and robust underwriting processes that have allowed us to grow at an accelerating rate in 2023, while avoiding many of the pitfalls experienced by our competitors over the past year. We are especially excited to have achieved this growth while expanding our operating margin in this already profitable portion of our business, truly a win-win for both Spinnaker and its MGA customers.

And finally, we also learned that there are some risks and some geographies to which we prefer less exposure as we seek to improve the predictability and profitability of our Hippo Home Insurance Program. As discussed in the last quarter earnings call, in the second half of 2023, we launched an aggressive program to raise deductibles for wind and hail in certain geographies and began non-renewing policies in higher-cat areas where we had excess concentration. These actions are intended to reduce exposure to the kinds of losses we experienced in the second quarter of 2023. A quick thought-experiment illustrates how those decisions are paying off. If we experience the exact same hailstorms this coming year with the same level of severity, the program of deductible changes and selective non-renewals in cat concentrated areas that is currently in progress would reduce Hippo’s direct losses by approximately 55%.

Moreover, because these changes that began last October take a full year to work their way through the policy renewal dates, the benefits in 2025 would be even greater, an almost 80% reduction in direct losses if the hailstorms from the second quarter of 2023 were to reoccur. These initiatives, when combined with the actions we took in the second half of 2023 to streamline our operations and reduce our fixed expenses give us greater confidence that we are on track to achieve our profitability goals ahead of schedule. With a mix that is shifting towards businesses with lower volatility and higher predictability. As we enter 2024, we believe we are incredibly well positioned to compete for business in our core markets and in our core customer segments.

It’s time for Hippo to go back on offense. Now I’d like to turn the call over to our Chief Financial Officer, Stewart Ellis, to walk through the highlights of our full year and Q4 2023 financial results, as well as our expectations for the future.

Stewart Ellis: Thanks, Rick, and good morning, everyone. 2023 was a remarkable year for Hippo. We doubled down on meeting the needs of our customers, streamlined our operations, focused on segments of the market where we have a significant competitive advantage and simplified our reinsurance structure. We exit the year as a business transformed by these efforts increasingly predictable and with far clearer visibility into both how and when we will achieve profitability. During 2023, we grew TGP from $811 million to more than $1.1 billion, an increase of 40%. More important than the growth itself was how we achieved it. The parts of our business that are less exposed to underlying weather and underwriting volatility grew at an accelerating rate while we significantly reduced our exposure to weather in our primary Homeowners Insurance Program.

During Q4, the most profitable and predictable components of our business, Insurance-as-a-Service and Services collectively represented 77% of our TGP, up from 59% in the fourth quarter of 2021 and 65% a year ago. We expect these trends to continue in the coming year with TGP growing during 2024 to more than $1.3 billion with the Services and Insurance-as-a-Service segment collectively representing 85% of total TGP by the final quarter of the year. During 2023, we grew revenue significantly faster than TGP from $120 million in 2022 to $210 million in 2023, an increase of 75%. This growth was a result of increases in the scale of our Services and Insurance-as-a-Service segments combined with structural changes we made to our program specific reinsurance structure at HHIP.

In 2022, we retained only 12% of the premium associated with our homeowners policies, but approximately 30% of the risk. In 2023, we were able to retain about 40% of the premium, but only 46% of the risk significantly narrowing the gap between risk retention and premium retention, thereby getting paid more fully for the risk we retained. By moving away from our past reinsurance structure and bringing premium more in line with the risk that we are retaining, we are able to monetize the insurance risk more effectively, which is a key driver of both revenue growth and profitability. We expect 2024 revenue to continue to grow at an accelerated rate relative to TGP, rising more than 60% from $210 million this past year to more than $340 million in 2024.

Importantly, we expect to be able to achieve this while lowering our underlying volatility and exposure to the weather that has driven our historical losses as measured by an almost 60% reduction we expect to achieve in our underlying severe weather exposure. Because of our consistent historical track record of attritional loss ratio improvement combined with the expected reduction in underlying volatility and exposure to the weather that Rick discussed earlier, we thought comfortable transitioning to a more traditional excess of loss or XoL reinsurance structure, retaining nearly all the attritional risk and purchasing XoL reinsurance to protect against major catastrophic weather events. This transition to XoL reinsurance will better align our net earned premium with risk retention and will also allow us to further narrow the gap between gross and net loss ratio.

Turning now to loss ratio, our loss and loss adjustment expenses during 2023 were significantly higher than our expectations because of outsized weather losses in the second quarter. The wind and hail losses during that time masked the significant and continued improvement in our non-PCS loss ratio over the course of the year with 2023 non-PCS loss ratio improving 13 percentage points to 63% in 2023 versus 76% in 2022. As Rick mentioned earlier, we responded to the excess weather losses during the year with aggressive actions to raise deductibles in wind and hail exposed geographies and selective policy non-renewals in cat exposed geographies more generally. The combined effect of rate and underwriting actions taken over the past two years, which resulted in a 28% written rate increase in Q4 and the actions taken to structurally reduce our exposure to cat related volatility mean that the expected loss ratio of the business we wrote in Q4 2023 was far better than in Q4 2022.

In 2024, we expect to realize additional benefit to our gross loss ratio as previous rate and underwriting actions earn into our financials as well as significantly lower losses from cat events due to reduced exposure and higher deductibles. In 2024, we expect HHIP gross non-PCS loss ratio to be between 52% and 58% with an expected PCS cat load of 20%. In 2024, we expect HHIP net loss ratio to be between 85% and 90%, down more than 160 percentage points from 2023 due to the improvements in gross loss ratio and more effective use of reinsurance. Similarly to the trend we experienced in 2023, we expect the net loss ratio improvement to happen gradually over the year with Q4 2024 expected net loss ratio under 75%. We expect additional improvements in 2025, when we expect net loss ratio to be less than 75% for the full year.

During 2023, we complemented our robust top line growth with a disciplined and sustained effort to drive efficiency into our operations. The result has been a year-over-year decline in our fixed expenses from $166 million in 2022 to $138 million in 2023. This efficiency improvement is even more impressive when viewed in conjunction with our top line growth, with fixed expenses falling from 138% of 2022 revenue to only 66% of 2023 revenue and more encouraging only a small percentage of the benefit of our late 2023 cost reduction measures are reflected in these numbers. For 2024, we expect fixed expenses to continue to decline by more than 20% in absolute dollar terms and to less than 31% of expected 2024 revenue. During 2023, our top line growth, mix shift toward more predictable and profitable businesses, more effective use of reinsurance, continued rate and underwriting improvements at HHIP and efficiency gains across our organization leave us with a clear line of sight delivering positive adjusted EBITDA earlier than we expected when we entered the year.

We finished Q4 2023 with an adjusted EBITDA loss of $22 million down more than 50% from our adjusted EBITDA loss of $47 million in fourth quarter of 2022. And as mentioned previously, many of the improvements we have made in 2023 are only partially reflected in our Q4 financials. Looking forward, we expect an adjusted EBITDA loss of only $41 million to $51 million for the full year 2024, down more than 75% from 2023 with over 90% of this loss coming in the first half of the year. We expect to turn adjusted EBITDA positive during the second half of the year and for the fourth quarter to be fully adjusted EBITDA positive. We’ve made significant progress during 2023 along our path to profitability. We entered 2024 with increased confidence that we will achieve it sooner and to a greater extent than previously anticipated.

I’d now like to summarize our updated guidance for 2024. We expect TGP to grow to more than $1.3 billion, driven by the components of our business that are less exposed to weather and underwriting volatility. We expect revenue to grow to more than $340 million. We expect the HHIP growth loss ratio to be between 72% and 78%, with 20% related to PCS cat losses and between 52% and 58% related to non-PCS losses. Because of the seasonality of weather in areas where our policies are distributed, we expect our 2024 cat load to be allocated 29% to the first quarter, 41% for the second quarter, 19% for the third quarter, and 11% to the fourth quarter. We expect HHIP net loss ratio to be between 85% and 90%, with Q4 2024 HHIP net loss ratio under 75%.

We expect an adjusted EBITDA loss of between $41 million and $51 million for the full year with more than 90% of the losses coming in the first two quarters and to be adjusted EBITDA positive in Q4. As a reminder, the definition of adjusted EBITDA that we are using and have used historically excludes interest income from the float on premium that we retain. Finally, we expect minimum cash and investments at the time we turn adjusted EBITDA positive to meet more than $400 million, up significantly from our previous guidance. And now, we’d be happy to take your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Tommy McJoynt of KBW. Tommy, your line is open. Please go ahead.

Tommy McJoynt: Hey. Good morning, guys. Thanks for taking our questions. Just from a competitive standpoint, we’re still seeing a lot of the largest competing homeowners insurers out there pushing through accelerating rate increases. Can you just remind us kind of where you guys stand on the rate increases and the adequacy that you have throughout your geographies? And then just how you feel competitively as the competition is seems to be accelerating their rate increases?

Rick McCathron: Yeah. Great. Thanks. Thanks for the question, Tommy. A couple different things, as you all know, we’ve been taking additional rate and underwriting actions for the last couple years. We did that in a far more aggressive stance after Q2 of 2023. Good news is, all of our rate filings are in. Most of them have gone live, but I will point out that going live takes effect for new business and renewal business on their effective date. So we’re still relatively early in getting, the actual portfolio to rate adequacy, which is one of the reasons why these numbers I think are very exciting because we still have lots of positive benefit to work ourselves into the P&L. So, I do think others are taking rate. I think there’s a lot of rate that was needed in the industry.

We feel very good about our current rate level with those things already filed and already in flight, as I mentioned, to get back on offense. So we feel like we’re in good shape competitively to write (ph) profitable business.

Tommy McJoynt: Okay. Got it. And how much of the improvement would you say that you guys have seen in underwriting has come from actual rate, which you can quantify versus the terms and conditions and the higher deductibles that you guys have pushed through? Is there a reasonable way to think about the mix of those contributions?

Rick McCathron: Yeah. It’s an interesting question. So there are three primary factors that impacts our sort of forward-looking statements. First is terms and condition changes predominantly deductibles in high-cat exposed areas. Second, of course, is the rates, and third is, selective non-renewals on business that we are getting out of where we’re overly concentrated. I think all of these things are very, very important for us to reduce that volatility in our portfolio, and that’s been a singular focus of the company over the last six months. I don’t think any one of them specifically is driving the positive results. I think they are all collectively driving the positive results.

Stewart Ellis: And hey, Tommy. This is Stewart. I’ll just add one thing to Rick’s point just to clarify. When we think about our expectations for the future and the confidence we have in the numbers, we look at the expected results and then we look at the spread around the expected results. The changes in the terms and conditions and the selective non-renewals and high-cat areas are going to be things that are going to affect both of those, but predominantly the spread of the results. And the change in the rates are the thing is one of the things that’s going to be driving the expectation sort of where actuarially, where do we think we’re going to come out. So it really is a combination of all three — all three factors.

Tommy McJoynt: Okay. Thanks. And then just last one I’ll sneak in here. I guess, we’re kind of already into March now, so it would be great to get an update on the first quarter, in terms of some of the potential storm activity and losses from that, we’ve seen some headlines around losses and flooding around Texas and maybe you guys have a decent exposure there. So anything you can share with an update on the first quarter?

Stewart Ellis: All right. Thanks, Tommy. I think it’s a little premature for us to be sharing Q1 results. At this point, I think, we’d be happy to talk about Q4 and 2023, but it’s a little early for Q1.

Rick McCathron: Yeah. The one thing I would add is that, when we give guidance for the year, we take all current information that’s available, and we’ve baked in our expectations on what’s been happening with Q1 weather at this point in our current guidance.

Tommy McJoynt: Okay. Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Yaron Kinar of Jefferies. Yaron, your line is open. Please go ahead.

Yaron Kinar: Thank you. Good morning, everybody. I want to start maybe with a couple of questions on the revenue guide. And if we could start maybe with HHIP, you’re talking about switching to offense, but I guess I’m looking at two different numbers here. One, if I look at TGP, the guide there seems to be to downwards movement there like 20%, 30% down, whereas the revenue number I think is up quite significantly in the midpoint of the guidance range. So can you help us maybe sort things out there? How much of the revenue change is driven by change in reinsurance? How much of deploying offense should we expect to see flow through TGP and revenues?

Stewart Ellis: Yaron, thank you for the question. This is Stewart. I think I’m happy to start and then I’m happy to let Rick add. I think you’re right, as we think about TGP, the fastest growing pieces of our business in Q4 anyway, which to the extent that, that influences next year and the trends continue, it’s important to understand that our Insurance-as-a-Service segment and our Services segment were the primary drivers of TGP growth in 2024, excuse me, in Q3. Let me start over. Those two pieces of our business were the primary drivers of growth in the fourth quarter of 2023. That trend is going to continue in 2024 on the TGP side. And that’s important for us because those two pieces of the business are the most profitable and least volatile in the portfolio.

The HHIP business is improving from a revenue standpoint both in Q4 and continuing again in 2024 because of the factors we talked about earlier, the rate improvements and that sort of thing, but also because of the change in the reinsurance structure. And what we’re doing there as the loss ratio has come down, as the attritional loss ratio has come down, as the expected volatility around that number has come down, we are increasingly comfortable retaining more of the premium associated with the attritional risk within HHIP. And so we’ve transitioned almost entirely away from a quota-share reinsurance structure to a more traditional excess of loss reinsurance structure, which means that we’re getting paid for the risk that we are retaining. In 2022 and 2023, we ended up retaining more of the risk functionally than we retained on the premium which was a key contributor to some of the losses from the HHIP program.